CYBERGUARD CORP, 10-K405/A, 1997-10-22

CYBERGUARD CORP
10-K405/A, 1997-10-22
ELECTRONIC COMPUTERS

Previous: SCUDDER PATHWAY SERIES /NEW/, 497, 1997-10-22

Next: PAULA FINANCIAL, S-1/A, 1997-10-22

<PAGE> 1

================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------

FORM 10-K/A
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

<TABLE>
<S> <S>
(MARK ONE)
[X] ANNUAL REPORT PURSUANT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
</TABLE>

COMMISSION FILE NUMBER: 0-24544
---------------------
CYBERGUARD CORPORATION
(Exact name of Registrant as specified in its charter)

<TABLE>
<S> <C>
FLORIDA 65-0510339
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2000 WEST COMMERCIAL BOULEVARD
SUITE 200
FORT LAUDERDALE, FLORIDA 33309
(Address of principal executive offices) (Zip Code)
</TABLE>

Registrant's telephone number, including area code: (954) 958-3900

Securities Registered Pursuant to Section 12(b) of the Act: NONE

Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, PAR
VALUE $.01 PER SHARE

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes [X] No [ ]

The aggregate market value of voting stock held by nonaffiliates of the
Registrant was approximately $73,233,207 (based upon the closing sale price of
$9.13 per share on the Nasdaq National Market System on October 16, 1997).

As of October 16, 1997 8,025,557 shares of the Registrant's $0.01 par value
Common Stock were outstanding.

================================================================================
<PAGE> 2

PART II

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth, for the twelve months ended June 30, 1997
and the nine months ended June 30, 1996, and for the fiscal years ended
September 30, 1995, and June 30, 1994 and 1993, selected historical consolidated
financial data for the Company, which combines the Trusted Systems Division (the
operations of which continue to be carried on by the Company) and the Real-time
Business (which, effective June 30, 1996, was sold to Concurrent). The financial
data for the fiscal year ended June 30, 1997, nine-months ended June 30, 1996
and the fiscal year ended September 30, 1995 have been derived from audited
financial statements of the Company for such periods audited by KPMG Peat
Marwick LLP. Such data have been derived from, and should be read in conjunction
with, the audited financial statements and other financial information,
including the notes thereto, appearing elsewhere in this Annual Report. The
consolidated financial data that relate to the year ended June 30, 1994 has been
derived from consolidated financial statements audited by Ernst & Young LLP.
Financial data for the nine months ended June 1995 and the fiscal years ended
June 30, 1994 and 1993 have been derived from unaudited consolidated financial
statements that include all adjustments that the Company considers necessary for
a fair presentation of the financial data set forth therein, in accordance with
generally accepted accounting principles. Because the Company did not become an
independent entity until October 1994, the historical financial statements do
not necessarily reflect

19
<PAGE> 3

the results of operations or financial position that would have been attained if
the Company had been a separate, independent company.

<TABLE>
<CAPTION>
FISCAL YEAR NINE MONTHS FISCAL YEAR ENDED
ENDED ENDED ---------------------------------------
JUNE 30, JUNE 30, SEPTEMBER 30, JUNE 30, JUNE 30,
1997 1996(B) 1995(A) 1994 1993
----------- ----------- ------------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues........................ $ 15,621 $ 37,411 $ 45,111 $64,640 $55,540
Cost of Sales................... 7,240 21,022 25,764 31,236 29,863
-------- -------- -------- ------- -------
Gross Profit.................... 8,381 16,389 19,347 33,404 25,677
Selling, General and
Administrative expenses....... 11,410 18,021 22,984 19,791 19,770
Research and development........ 4,723 5,360 7,903 6,725 6,850
Other operating expenses........ 262(C) 4,253(C) -- -- --
-------- -------- -------- ------- -------
Operating Income (loss)......... (8,014) (11,245) (11,540) 6,888 (943)
Interest Income (expense),
net........................... 646 180 456 (4) --
Other Income (expense), net..... (5,122)(D) 103 (4) (1,271) (1,074)
Loss on Sale of Real-time
Business...................... -- (15,160) -- -- --
-------- -------- -------- ------- -------
Net income (loss) before income
tax........................... (12,490) (26,122) (11,088) 5,613 (2,017)
Income tax expense (benefit).... -- -- -- 1,086 (1,560)
-------- -------- -------- ------- -------
Net income (loss) before
cumulative effect of change in
accounting principal.......... (12,490) (26,122) (11,088) 4,527 (457)
Cumulative effect of change in
accounting principal.......... -- -- -- (135) --
-------- -------- -------- ------- -------
Net income (loss)............... $(12,490) $(26,122) $(11,088) $ 4,392 $ (457)
======== ======== ======== ======= =======
Loss per share.................. $ (1.76) $ (4.32) $ (1.88) --(E) --(E)
======== ======== ======== ======= =======
</TABLE>

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

(A) During fiscal year 1995, the Company changed its fiscal year end from June
30 to September 30.
(B) Coinciding with the sale of the Real-time Business to Concurrent on June 26,
1996, the Company elected to change its fiscal year end from September 30 to
June 30.
(C) In 1997, represents the write-off of purchased in-process research and
development. In 1996, represents the write-off of capitalized software
($3,244) and costs associated with a canceled secondary offering ($1,009).
(D) Includes a loss of $4,414 on the sale of investments.
(E) Because the Company operated as a division of Harris Corp. prior to October
1994, loss per share data for the fiscal years ended June 30, 1994 and 1993
have been excluded.

The Company's audited financial statements included in Item 8 are as of and
for the year ended June 30, 1997, as of and for the nine months ended June 30,
1996, and as of for the year ended September 30, 1995. To facilitate
comparability between periods and for the purposes of this Item 7, management
has prepared the following table to effectively annualize the nine months ended
June 30, 1996 to the year ended June 30, 1996. Such annualization was
accomplished by adding the results of operations for the three months ended
September 30, 1995 (which three month period is unaudited but, in the opinion of
management, contains all adjustments necessary to present the information
fairly) to the nine months ended June 30, 1996.

<TABLE>
<CAPTION>
TWELVE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1997 1996 1996 1995
-------- -------- -------- --------
(DOLLARS IN THOUSANDS EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Revenues.............................................. $ 15,621 $ 46,118 $ 37,411 $ 36,404
Cost of sales......................................... 7,240 26,177 21,022 20,609
-------- -------- -------- --------
Gross profit.......................................... 8,381 19,941 16,389 15,795
Selling, general and administrative expenses.......... 11,410 25,266 18,021 15,739
Research and development.............................. 4,723 7,293 5,360 5,970
Transaction expense................................... -- 1,009 1,009 --
Write-off Capitalized software........................ 262 3,244 3,244 --
-------- -------- -------- --------
Operating income (loss)............................... (8,014) (16,871) (11,245) (5,914)
Interest income (expense), net........................ 646 275 180 361
</TABLE>

20
<PAGE> 4

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

(a) Unaudited Statements-Information represented for the twelve months ended
June 30, 1996 are derived from audited information.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following information contains forward-looking statements that involve
risks and uncertainties. The Company's actual results may differ significantly
from the results discussed in the forward-looking statements. A more complete
statement of information regarding forward looking statements is contained at
the end of this item 7. References to the Company's results of operations from
October 7, 1994 are to the Company's Trusted Systems Division and, prior to such
time, to the Company's network security business and operations as part of the
Computer Systems Division of Harris Corporation. The following information
should be read in conjunction with the financial statements of the Company's
appearing elsewhere in this Report.

OVERVIEW

The Company is a leading developer and marketer of commercial network
security products designed to protect data on computer networks from
unauthorized users. The Company began marketing its CX/SX secure operating
system in 1989 and its LAN/SX secure networking software in 1990. In 1993, these
products received a B1 rating from the NCSC, which qualified the products for a
number of government and civilian applications and resulted in increased
marketability of such products. Until the introduction of the CyberGuard
Firewall during the first quarter of fiscal year 1995, the Company's sales were
attributable exclusively to sales of its secure operating system and secure
networking software on Night Hawk computer platforms, and largely to government
customers. During fiscal year 1993 and 1994, the Company derived substantial
revenues from two contracts: a multi-unit government contract with the British
Ministry of Defense ("British MOD") and a secure operating system porting
contract with IBM.

In May 1995, in response to initial and anticipated market acceptance of
the CyberGuard Firewall, the Company established a sales force separate from the
sales force of its former Real-time Business to focus on the Company's network
security products. At the same time, the Company began an aggressive expansion
of indirect sales channels to market its products in the United States and
internationally and since May 1995 has formed relationships with more than 45
VARs, distributors and manufacturers' representatives. As a result of these and
other efforts since such time, which coincided with greater market acceptance of
firewall products in general, sales of the Company's network security products
have shown strong quarter-to-quarter increases. However, given the Company's
short operating history in the commercial network security market, the Company
believes that period-to-period comparisons of its financial results are not
necessarily meaningful and should not be relied upon as an indicator of future
performance. The Company intends to increase its marketing staff to promote its
products and also to continue to invest a significant amount of resources in the
continued development of the CyberGuard technologies, including Windows NT based
products and products that support interoperability with industry standard
communication protocols, computer platforms and networks. The Company's planned
levels of investment are based on an expectation of higher revenue from
increased product sales. As a result, net income for a given period could be
disproportionately affected by any reductions in sales.

Prior to June 30, 1996, the Company's operations included the Real-time
Business, which provided significant cash flows and certain economies of scale
with respect to sales, general and administrative costs. Many of the Company's
sales and administrative personnel and facilities were transferred to Concurrent
in connection with the Real-time Sale. As a result, the Company incurred
significant costs during fiscal year

21
<PAGE> 5

1997 to establish the administrative, logistical, and support groups necessary
to operate the Company as a stand-alone entity.

The Company reported certain non-recurring charges for the fiscal year
ended June 30, 1997 and the nine months ended June 30, 1996. During fiscal year
1997, the Company recognized a loss of approximately $4.4 million on the sale of
securities of Concurrent which were originally received in June 1996 as
consideration for the sale of the Company's Real-time Business operations. Other
non-recurring transactions for the current fiscal year included a write-off of
$.5 million for accumulated transaction adjustment of foreign currency-based
assets relating to the Company's former international subsidiaries sold to
Concurrent in June 1996, and $.3 million in expensed Research and Development
related to the purchase of the Company's TradeWave operations from SunRiver
Corp. in April 1997. For the nine months ended June 30, 1996, the Company
incurred a loss of approximately $15.2 million on the sale of the Real-time
Business (based on a market price of Concurrent Common Stock of $1.70 per
share); approximately $3.2 million for the write-off of certain capitalized
software; and approximately $1.0 million in additional expenses related to the
Company's canceled public stock offering.

In July 1996, the Company changed its fiscal year end to June. Accordingly,
the information contained herein relating to the nine-month period ended June
30, 1996 represents the Company's 1996 fiscal year. Such period, along with the
current fiscal year ended June 30, 1997 have been audited by the Company's
independent auditors and the financial statements related thereto are attached
to this Annual Report. The information contained herein relating to the
unaudited twelve months ended June 30, 1996 and the nine months ended June 30,
1995 are derived from audited information.

RESULTS OF OPERATIONS

Twelve-month Period Ended June 30, 1997 Compared to the twelve-month Period
Ended June 30, 1996

Net Revenues. For the 12 months ended June 30, 1997 net revenues were
derived solely from the sale of the Company's firewall systems, add-on security
products, and service and support related to security products. For the 12
months ended June 30, 1996, a substantial portion of the net revenues of the
company were related to the sale of the Real-time computer systems and services,
a segment of the business which was sold to Concurrent Computer Corporation on
June 26, 1996. Specifically, net revenues for the 12 months ended June 30, 1997
were $15.6 million compared to $46.1 million for the 12 months ended June 30,
1996. This represents a decrease of $30.5 million or 66.1%. Of the $46.1 million
in net revenues for the 12 month period ended June 30, 1996, approximately $38.0
million or 82.4% represented sales and services for Real-time products. Net
revenues from the sales and service of security products increased by $7.4
million or 90.2% from $8.2 million for the 12 months ended June 30, 1996 to
$15.6 million for the 12 months ended June 30, 1997. The increase in net
revenues from security products for 1997 is the result of continued customer
acceptance of firewall technology as an adequate safeguard for electronic data
and increased customer awareness of the CyberGuard Firewall based upon numerous
positive reviews from leading-industry publications of the company's software
only Version 3 firewall introduced in October 1996. Net product and services
revenues for the 12 months ended June 30, 1997 include the operations of the
company's TradeWave subsidiary which was established in April 1997. The
TradeWave subsidiary accounted for $.4 million in total revenues or 2.6% of
total revenues for the 12 months ended June 30, 1997. Additionally, the company
realized strong growth internationally during the 12 months ended June 30, 1997.
International revenues for security products and services were $9.1 million , up
$5.4 million or 144.0% compared to $3.7 million for the same 12 month period in
1996. This increase in International security products revenues is attributable
to (1) the expansion of the company's reseller channels in the Pacific-Rim
region, most notably Japan, Korea and Taiwan, and (2) to the increase in
customer orders in the United Kingdom and Western Europe following the formal
award of the ITSEC E3 certification standard to the CyberGuard Firewall in March
1997.

For the year ended June 30, 1997 the Company shipped a total of 667
firewall units compared to 203 for the 12 months ended June 30, 1996. One
customer, Hucom, Inc. accounted for 11% of the revenues during the 12 months
ended June 30, 1997. There were no other customer that accounted for more than
10% of the revenues during the 12 months ended June 30, 1996.

22
<PAGE> 6

CyberGuard provides its customer base with a comprehensive service offering
which includes the installation of its firewall and TradeWave products, customer
support including hotline assistance, and product training and consulting. For
the 12 month period ended June 30, 1997 the Company reported service revenue for
its security products of $1.0 million an increase of $.6 million or 150%
compared to the like-type revenues of $.4 million for the 12 months ending June
30, 1996. As a percentage of total security revenues, service revenues accounted
for 6.7% in 1997 compared to 1% in 1996. The increase in net revenues from
services is attributable to a larger base of customers under maintenance
agreements in 1997 stemming from increased product shipments.

Gross Profit. CyberGuard's Cost of sales includes license fees to third
parties, media and packaging costs, equipment costs, and certain presales,
post-sales and contract labor support costs. The Company's overall gross profit
declined by $11.6 million from $19.9 million for the 12 months ended June 30,
1996 to $8.4 million for the 12 months ended June 30, 1997. The results for 1996
include the operations of the Real-time Division which accounted for $17.0
million or 85% of the total gross profit. Comparing only the sales of security
products and services, gross profits increased by $5.5 million or 189% from $2.9
million for the 12 months ended June 30, 1996 to $8.4 million for the 12 months
ended June 30, 1997. Gross margin percentages for security products and services
also increased during 1997. For the 12 months ended June 30, 1997 gross margin
percentage for security products was 53.6% compared to 35.6% for the 12 month
period ended June 30, 1996. The increase in both gross profit and gross margin
percentages for 1997 is attributable to an overall increase in unit volume
shipments and the transition of product line revenues towards the version 3
(software only) CyberGuard Firewall. Introduced in October 1996, the version 3
CyberGuard Firewall is a software-based product with substantially higher gross
margin percentages than the Company's historical Firewall products which were
only available as a combined hardware/software product. The Company has
recognized continued gross margin percentage improvements for each successive
quarter of fiscal year 1997 as a result of higher percentage shipments of the
version 3 CyberGuard Firewall as compared to the previous product versions.

Gross profit for security-related services, as measured in dollars and as a
percentage of service revenues, was $.47 million and 45% respectively for the 12
months ended June 30, 1997 compared to $.24 million or 55% respectively for the
12 months ended June 30, 1996. The increase in service related gross profit is
the result of a greater number of customers under firewall maintenance support
contracts and the addition of OASIS customer support contracts through the
Company's TradeWave subsidiary. The decline in gross margin percentage for
security services is attributable to increased staffing of CyberGuard's customer
support operations to support the larger installed based of end-customers and
authorized CyberGuard distributors and resellers.

Operating Expenses. The primary operating expenses of the Company are
research and development costs and sales, general and administration costs.
Research and development costs consist primarily of personnel-related costs
including salaries, benefits, payments to third-party or contract labor
development firms, travel, training and other personnel-related expenses to
determine the technical feasibility of products, develop the necessary product
features/functions for marketability, and maintain the product after customer
installation. The Company expenses all research and development costs as
incurred. Sales, general and administrative costs consist of personnel costs
including commissions, bonuses, and benefits, travel, communication including
MIS-related costs, marketing-related costs such as advertising, trade shows,
seminars, finance and accounting expenses, legal, insurance, company general
management, and other professional services.

CyberGuard currently anticipates that both Research and Development, and
Sales, General and Administrative expenses may increase in absolute dollars in
the future as the Company commits substantial resources to develop complementary
security products and features, and to garner a greater market percentage of
world-wide security product procurements.

For the 12 months ended June 30, 1997 the Company reported total operating
expenses of $16.4 million compared to $36.8 million for the 12 months ended June
30, 1996. For the 12 months ended June 30, 1996, $23.4 million or 64% of the
total operating expenses related to the operations of the Company's Real-time
Business which was sold to Concurrent in June 1996. The operating expenses for
both 12-month periods

23
<PAGE> 7

include certain non-recurring charges. For the 12 months ended June 30, 1997,
the Company expensed $0.3 million of in-process research and development work
related to the purchase of the TradeWave business assets from SunRiver
Corporation in April 1997. The operating expenses for the 12 months ended June
30, 1996 include a provision for $1.0 million in costs associated with the
Company's canceled public stock offering in July 1996, and a charge to write off
approximately $3.2 million in previously capitalized Software Development costs.
Excluding these one-time charges and the operating expenses for the Real-time
Business in 1996, total operating expenses for the 12 months ended June 30, 1997
would be $16.1 million compared to $9.1 million for the same 12-month period in
1996. This increase of $7.0 million is the result of expanded world-wide sales
and marketing efforts to promote the Company's Firewall products during 1997,
and increased costs incurred in the 4th fiscal quarter of 1997 to operate the
TradeWave subsidiary. Additionally, the operational expenses for the 12 months
ended June 30, 1997 include expenditures to develop an NT-based firewall, and to
co-develop the Safenet Enterprise Firewall Product with Information Resource
Management Corp. No similar expenses were incurred during the 12 months ended
June 30, 1996.

Net Loss. For the 12 months ended June 30, 1997 the Company recognized a
net loss of $12.5 million compared to a net loss of $31.4 million for the 12
months ended June 30, 1996. The net loss for the 12 months ended June 30, 1997
included a non-recurring charge of $4.4 million on the disposition of the common
stock of Concurrent Computer Corporation received in June 1996 in exchange for
assets of the Real-time Business of the Company. An additional non-cash charge
of $0.5 million was taken during the 12 months ended June 30, 1997 to write-off
the cumulative translation adjustment of the former European subsidiaries of the
Company which were sold to Concurrent in June 1996. The net loss for the 12
months ended June 30, 1996 includes a $15.2 million provision for the loss on
the sale of the Real Time Operating Division to Concurrent.

Nine-month Period Ended June 30, 1996 Compared to Nine-month Period Ended
June 30, 1995

Net Revenues. Net revenues consist primarily of Firewall Systems,
Real-time Computer Systems, system integration and support services and sales
relating to third party security products. Overall revenue increased by $1
million to $37.4 million for the nine months ended June 30, 1996 compared to the
nine months ended June 30, 1995. This overall increase in net sales is
attributable to an increase in firewall product sales for the Trusted Systems
Division which offset lower sales for Real-time related products. Specifically,
the Company shipped 184 turn-key firewall systems during the nine months ended
June 30, 1996 compared to 72 units for the same period in 1995. Firewall and
related security products revenues increased by 86% during the nine months ended
June 30, 1996 when compared to the nine months ended June 30, 1995. The nine
months ended June 30, 1995 included a $1.9 million sale (or 48% of total secure
revenues) to one government related customer for 43 units; the nine months ended
June 30, 1996 included sales to a single international customer of approximately
$.6 million or 8% of total secure revenues. There were no sales in the year
ended June 30, 1996 for more than five units to any one customer. The increase
in product sales is the result of increased acceptance in the commercial
marketplace for the CyberGuard Firewall. The Company also experienced a strong
increase in sales leads during the nine months ended June 30, 1996 as several
prominent periodicals and industry-based magazines rated the CyberGuard Firewall
highly based upon their published testing results. During the nine months ended
June 30, 1996, 71% of the Company's sales were to commercial customers, compared
to 39% for the same period in 1995.

Compared to the corresponding prior year period international secure
product revenues increased $2.2 million to $3.3 million for the nine months
ended June 30, 1996, and domestic sales increased $1.2 million to $4.0 million.
The domestic sales figure for the year ended September 30, 1995 includes $1.9
million in sales to one domestic customer.

Gross Profit. The Company's overall gross profit increased $.6 million to
$16.4 million for the nine months ended June 30, 1996 from the nine months ended
June 30, 1995. The Company's overall gross margin percentages remained constant
at approximately 43.5% for both periods. The gross margin percentages for the
CyberGuard and related security product sales remained constant at 37% for the
nine months ended June 30, 1995 and 1996.

24
<PAGE> 8

Net Loss. The Company experienced a net loss of approximately $26.1
million for the nine-month period ended June 30, 1996, compared to a loss of
$5.8 million for nine-month period ended June 30, 1995. The Company's operating
expenses increased by $5.9 million from $21.7 million for the nine months ended
June 30, 1995 to $27.6 million for the nine months ended June 30, 1996. The 1996
results include several significant non-recurring charges, including the
write-off of approximately $3.2 million in previously capitalized software
developments costs (see Note 16 to the accompanying consolidated financial
statements) and a provision of approximately $1.0 million for costs associated
with the Company's canceled secondary stock offering (see Note 4 to the
accompanying consolidated financial statements). In addition to these one-time
charges, the Company also recognized a loss of $15.2 million on the sale of the
Real-time Business during the nine months ended June 30, 1996. The major
components of this loss were the change, between the date that the Real-time
Sale was approved by the Company and the transaction closing date, in the value
of the Company's common stock issued by the Company to Concurrent; the transfer
to Concurrent of $5.6 million-worth of capitalized software at a minimal cost to
Concurrent, and approximately $2.7 million in transaction-related expenses.
Reducing the June 30, 1996 net loss by these non-recurring charges results in an
adjusted net loss of $6.7 million compared to $5.8 million for the same period
in 1995. The increased net loss of $0.9 million for nine months ended June 30,
1996 is attributable to an increase in expenses to enhance the marketability of
the CyberGuard Firewall and to increase its features and functionality.
Additionally, the results for the nine-month period ended June 30, 1996 include
costs associated with the product definition, technical feasibility study, and
efforts related to the "porting" of the Company's Secure UNIX Operating System
to an Intel-based P.C. running a secure version of UNIX. No similar expenses
were incurred for the nine months ended June 30, 1995.

Fiscal Year Ended September 30, 1995 Compared to Fiscal Year Ended June 30, 1994

During fiscal year 1995, the Company operated both its Real-time Business
(which has been sold to Concurrent) and the Trusted System Division, the
operations of which are continued by the Company. During the fiscal year ended
September 30, 1995, the Company's principal products were the Night Hawk
Real-time computer (the "Real-time system"), the Power UX Real-time operating
systems as sold on Motorola's Power PC 604 CPU boards or computers, the Night
Hawk Real-time computer as enhanced with either the Company's CX/SX or Power UX
secure Real-time operating system (the "trusted system"), the commercial
CyberGuard Firewall product and maintenance and support of its installed
computer systems.

Net Sales, consolidated. During the year ended September 30, 1995, the
Company's net sales decreased to $45.1 million for fiscal year 1995 from $64.6
million for fiscal year 1994. Net product sales for fiscal year 1995 were $31.2
million as compared to $50.1 million for fiscal year 1994. Fiscal year 1995 net
sales attributable to Real-time open systems were $26.4 million as compared to
$37.0 million for fiscal year 1994. Management believes that approximately $5.7
million of the decrease in revenue from Real-time open systems was the result of
the implementation of the Company's income-recognition policies related to
Real-time systems that were ordered in fiscal year 1994 but, due to delays in
receiving acceptable Motorola 88110 microprocessor chips, were not shipped until
fiscal year 1995. During fiscal year 1995, the Company also experienced a slow
down in Real-time product sales due to the inability of IBM Corporation to
complete a secondary cache chip critical to the Company's Real-time product.
Also, the Company was not successful in moving its Real-time products to a more
commercial focus and as such experienced the delays inherent in the government
markets. Fiscal year 1995 net sales attributable to Real-time proprietary
systems, reflecting sales for replacement or add-on parts for the Company's
installed base of proprietary systems, were $3.3 million as compared to $4.3
million for fiscal year 1994.

Maintenance revenue decreased to $13.6 million for fiscal year 1995 from
$14.5 million for fiscal year 1994. This decrease was principally a result of
the shift in market demand to open systems. The Company's Real-time open systems
required less maintenance as compared to proprietary systems, and open systems
could, in many cases, be serviced by the customers themselves. Maintenance
revenues also declined as the Company's installed base of proprietary systems
reached the end of its useful life.

During fiscal year 1995, the Company's net product sales to agencies of the
United States government and their prime contractors were $14.6 million and
maintenance revenue was $8.4 million. During fiscal year

25
<PAGE> 9

1994, the comparable net product sales were $25.7 million and the comparable
maintenance revenue was $7.4 million.

International net sales decreased to $11.9 million for fiscal year 1995
from $16.8 million for fiscal year 1994. This decrease is attributable
principally to the completion during fiscal year 1994 of a trusted systems
contract with a government contractor in the U.K., which had resulted in $4.9
million of revenue during fiscal year 1994.

Net Sales, Trusted Systems Division. The Trusted System Division's net
sales decreased to $4.8 million for fiscal year 1995 compared to $8.5 million
for fiscal year 1994. Sales in fiscal year 1994 included $5.4 million in sales
of the Company's secure operating system to the British MOD for a single project
involving the deployment of secure office automation systems and $1.6 million in
sales of the Company's secure operating system to IBM. Sales in fiscal year 1995
included sales of $1.9 million (or 39% of total sales) to a government-related
customer and sales of approximately $0.7 million (or 14% of total sales) related
to porting the Company's secure operating system to Groupe Bull S.A.'s Escala
workstation. Sales of CyberGuard Firewalls, introduced during the first quarter
of fiscal year 1995, represented $2.5 million in sales (including sales of $1.9
million to the government-related customer). During the fiscal year ended
September 30, 1995, sales to customers in commercial markets accounted for 42%
of the Division's sales.

For the Company's Trusted Systems Division, overall domestic sales were
$3.3 million and $3.0 million for the fiscal years 1995 and 1994, respectively.
International sales decreased $3.9 million to $1.5 million for fiscal year 1995.
The higher international sales for fiscal year 1994 were attributable to the
contract with the British MOD for sales of the Company's secure operating
system. International sales in fiscal year 1995 related primarily to sales of
the CyberGuard Firewall. International sales represented approximately 31% of
total sales, compared to approximately 64% in fiscal year 1994; the decrease is
attributable to the British MOD contract that ended during fiscal year 1994.

Gross Margin, consolidated. Gross margin for sales and rentals decreased
to 40.5% in fiscal year 1995 from 54.4% in fiscal year 1994 as a result of
decreased sales of Night Hawk Series computers and $2.4 million of inventory
reserve taken. Service and maintenance gross margins increased to 48.2% from
42.1% as a result of decrease in expenses as the product mix of service moves
more to the open system Night Hawk computer. Open systems are generally more
reliable and therefore require less service. International maintenance revenue
increased, which also resulted in improved gross margins.

Gross Margin, Trusted Systems Division. The Company's gross profit for its
Trusted Systems Division decreased $2.9 million to $1.7 million in fiscal year
1995. The corresponding gross margin decreased to 34.8% for fiscal year 1995
from 54.6% for fiscal year 1994. This decrease is the result of lower sales and
significantly lower profit margins for commercial CyberGuard Firewalls when
compared to sales of secure operating systems and secure networking software
installed separately as an added feature on Real-time-oriented computer systems.

Indirect Expenses. Research, development, marketing, administrative and
general expenses for fiscal year 1995 increased by $4.4 million as the Company
invested to introduce its trusted product in the commercial market. The Company
also booked a reserve of $1.3 million for a shipment made to Lukon, a Russian
corporation, and the Company's joint venture partner.

Net Income (Loss), consolidated. Net loss for fiscal year 1995 was $11.1
million compared to a profit of $4.4 million for fiscal year 1994. The decrease
was principally the result of the decrease in revenue experienced during fiscal
year 1995. Additions to the reserves for inventory and doubtful accounts
accounted for $4.0 million of the loss. See "Fiscal Year Ended June 30, 1995
Compared to Fiscal Year Ended June 30, 1994 -- Net Sales." The Company received
interest income of $0.5 million on its cash and marketable securities compared
to a slight charge for fiscal year 1994. The Company paid no income taxes during
fiscal year 1995 and is currently operating with a tax loss carry forward in all
of its operations.

Net Income, Trusted Systems Division. The Company experienced a net loss
of $3.1 million for fiscal year 1995, compared to net income of $0.1 million for
fiscal year 1994. The net loss is the result of lower product sales and gross
margins and increased operating expenses incurred to establish sales and
marketing programs for the commercial introduction of the CyberGuard Firewall.

Change in Fiscal Year. The Company changed its fiscal year end from June
30 to September 30 effective the year beginning October 1, 1994. Revenue for the
three months ending September 30, 1994 was

26
<PAGE> 10

$7.7 million. Sales were lower than expected due in part to the protracted
nature of the spin-off from Harris Corporation and its effects on product sales
focus by management. The loss after tax for the period was $7.6 million compared
to a profit of $375,000 for the quarter ending September 30, 1993. The loss for
the period was impacted by a $1.3 million charge for restructuring, $2.5 million
pre-tax and $2.4 million of after-tax charges for expenses relating to the
spin-off from Harris Corporation and a $1.7 million charge in connection with
the repatriation of cash from the Company's German subsidiary.

LIQUIDITY AND CAPITAL RESOURCES

The Company's historical uses of cash have been to fund net losses from
operations, establish adequate inventory stocking levels, and fund capital
expenditures for property, equipment and software. Capital expenditures for the
fiscal year ended June 30, 1997 and the 9 month period ended June 30, 1996 were
$1.0 million and $1.8 million respectively.

Prior to the Real-time Sale, the Company funded its cash requirements from
its working capital and cash flows generated, primarily, by the Real-time
Business. Subsequent to the Real-time sale in June 1996, the Company canceled
its proposed secondary public stock offering, and elected instead to liquidate
the majority of its holdings in Concurrent common and preferred stock received
as consideration for the sale of the Real-time assets to Concurrent. Sales of
Concurrent securities throughout the course of fiscal year 1997 generated
approximately $12.4 million in proceeds. These funds were used to pay off the
Company's outstanding line of credit balance of $3.2 million in July 1996. The
remaining funds were used to establish the necessary working capital to support
the operations of the Company. At June 30, 1997, the Company had cash, cash
equivalents and short term securities totaling $4.2 million.

On May 15, 1997, the Company entered into a Subscription Agreement pursuant
to which the Company may issue up to $7,500,000 worth of Common Stock at the
Closing Bid Price over a period preceding a "call for proceeds" by the Company.
Pursuant to the Subscription Agreement, the Company must make a call for all of
the proceeds by November 15, 1998 or issue to the purchaser warrants with
respect to a maximum of 170,000 shares of the Company's common stock at an
exercise price equal to the market price of common stock on the target dates for
these minimum calls. As of June 30, 1997 no sales of common stock were made
pursuant to the Subscription Agreement. Subsequent to June 30, 1997, the Company
has sold pursuant to the Subscription Agreement 464,524 shares of common stock
in exchange for proceeds of $3,917,057 in reliance on an exemption from
registration contained in Section 4(2) of the Act.

There can be no assurance that the Company will make the minimum calls for
proceeds under the Subscription Agreement, that the various conditions to
closing following each call for proceeds will be met, or that the funds received
by the Company pursuant to the Subscription Agreement will be adequate to fund
the Company's ongoing cash requirements.

The future liquidity of the Company will be affected by numerous factors,
including sales volumes, gross margins, the levels of selling, general and
administrative expenses required to fully implement product sales to commercial
customers, levels of required capital expenditures and access to external
sources of financing. The Company expects expenditures to increase commensurate
with increased development and marketing of CyberGuard Firewalls and other
network security products. The Company may elect to sell the remaining Preferred
Stock of Concurrent that the Company received in the Real-time Sale. The timing
of such sale and the price at which such stock may be sold may be affected by
other factors beyond the Company's control, such as the absence of a trading
market of such stock, the value of the underlying Concurrent common stock, and
changes in the business, operations or prospects of Concurrent. The Company is
currently negotiating with a commercial lender to provide a revolving line of
credit that will utilize certain current and intangible assets as collateral.

If adequate funds are not available, the Company may be required to curtail
certain activities, including product development, marketing and sales
activities. There can be no assurance that additional financing will be
available to the Company on acceptable terms.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1997 the Financial Accounting Standards Board ("FASB") Issued SFAS
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997 and establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. SFAS No. 130 requires all
items to be

27
<PAGE> 11

reported in a separate financial statement. The Company does not believe that
adoption of SFAS No. 130 will have a significant impact on its financial
reporting.

In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 is effective
for financial statements for periods beginning after December 15, 1997. SFAS 131
establishes standards for the way the public business enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. The Company does not believe that adoption of SFAS No.
131 will have a significant impact on its financial reporting.

In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share" (SFAS
No. 128). SFAS No. 128 specifies new standards designed to improve the earnings
per share ("EPS") information provided in statements by simplifying the existing
computational guidelines, revising the disclosure requirements and increasing
the comparability of EPS data on an international basis. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods. The Company does not believe that adoption of
SFAS No. 128 will have a significant impact on its financial reporting.

Forward Looking Statements

Statements regarding future products, future prospects, business plans and
strategies, future revenues and revenue sources, future liquidity and capital
resources, computer network security market directions, future acceptance of the
Company's products, possible growth in markets, as well as other statements
contained in this Report on Form 10-K that address activities, events or
developments that the Company expects, believes or anticipates will or may occur
in the future, and similar statements are forward looking statements. These
statements are based upon assumptions and analyses made by the Company in light
of current conditions, future developments and other factors the Company
believes are appropriate in the circumstances, or information obtained from
third parties and are subject to a number of assumptions, risks and
uncertainties. Readers are cautioned that forward looking statements are not
guarantees of future performance and that the actual results might differ
materially from those suggested or projected in the forward looking statements.
Some of the factors that might cause future actual events to differ from those
predicted or assumed include: future advances in technologies and computer
security; risks related to the early stage of the Company's existence and its
products' development; the Company's ability to execute on its business plans;
the Company's dependence on outside parties such as its key customers and
alliance partners; competition from major computer hardware, software, and
networking companies; risk and expense of Government regulation and effects on
changes in regulation; the limited experience of the company in marketing its
products; uncertainties associated with product performance liability; risks
associated with growth and expansion; risks associated with obtaining patent and
intellectual property right protection; uncertainties in availability of
expansion capital in the future and other risks associated with capital markets.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following items are attached and incorporated into this Item 8.

<TABLE>
<S> <C>
Independent Auditors' Report................................ F-1
Consolidated Balance Sheets as of June 30, 1997 and June 30,
1996...................................................... F-2
Consolidated Statements of Operations for the year ended
June 30, 1997, the nine-months ended June 30, 1996, and
the year ended September 30, 1995......................... F-3
Statement of Cash Flows for the year ended June 30, 1997,
nine-months ended June 30, 1996, and the year ended
September 30, 1995........................................ F-4
Consolidated Statements of Shareholders' Equity for the year
ended June 30, 1997, the nine months ended June 30, 1996,
and the year ended September 30, 1995..................... F-5
Notes to Financial Statements............................... F-6
</TABLE>

28
<PAGE> 12

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) 1. and 2. The Financial Statements filed as part of this report are
listed separately in the index to Financial Statements beginning on page F-1 of
this report.

(b) During its fourth fiscal quarter of 1997, the Company filed two reports
on Form 8-K (dated April 9, and June 23, 1997) to provide information regarding
the acquisition of the assets of TradeWave Corp. These reports contained
information under Items 2 and 7, and also contained financial statements of
TradeWave Corp. and pro forma financial information for CyberGuard to reflect
the TradeWave assets acquisition.

The following exhibits are included in this Report.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <C> <S>
2.01 -- Restated Purchase and Sale Agreement between Concurrent
Computer Corporation and the Company dated May 23, 1996(i)
3.01 -- Articles of Incorporation of the Company, as amended(viii)
3.02 -- Bylaws of the Company(ii)
4.01 -- Form of Common Stock Certificate(iv)
4.02 -- Form of Stockholder Rights Plan(ii)
10.01 -- Employment Agreement dated March 5, 1996 between the Company
and Robert L. Carberry(viii)
10.02 -- Employment Agreement dated July 1, 1996 between the Company
and Patrick O. Wheeler(viii)
10.03 -- Employment Agreement dated April 21, 1997 between the
Company and Robert Lawten(iii)
10.04 -- Employment Agreement dated July 1, 1996 between the Company
and Katherine K. Hutchison(viii)
10.05 -- Employment Agreement dated July 1, 1996 between the Company
and Rick A. Siebenaler(viii)
10.06 -- Employment Agreement dated October 1, 1994 between the
Company and Bradley C. Lesher(viii)
10.07 -- Employment Agreement dated July 24, 1997 between the Company
and Thomas Patterson
10.08 -- Joint Development and Marketing Agreement between the
Company and Information Resource Engineering, Inc. (viii)
10.09 -- Employee Stock Incentive Plan(vi)
10.10 -- Amendment to Employee Stock Incentive Plan(vii)
10.11 -- Employee Savings Plan(v)
10.12 -- Form of Non-Statutory Stock Option Agreement dated as of
February 4, 1996 between the Company and the following
executive officers: Patrick O. Wheeler; Katherine K.
Hutchison; Robert Perks; Rick Siebenaler(vi)
10.13 -- Form of Incentive Stock Option Agreement dated as of
February 4, 1996 between the Company and the following
executive officers: Patrick O. Wheeler; Katherine K.
Hutchison; Robert Perks; and Rick Siebenaler(vi)
10.14 -- Non-Statutory Stock Option Agreement dated as of March 5,
1996 between the Company and Robert L. Carberry(vi)
10.15 -- Incentive Stock Option Agreement dated as of July 23, 1996
between the Company and Robert L. Carberry(vi)
</TABLE>

30
<PAGE> 13
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ------- -------------------
<C> <C> <S>
10.16 -- Form of Non-Statutory Stock Option Agreement between the
Company and non-executive officers(vi)
10.17 -- Form of Incentive Stock Option Agreement between the Company
and non-executive officers(vi)
10.18 -- Form of Stock Option Agreement between the Company and
non-employee directors(vi)
10.19 -- TradeWave Asset Purchase Agreement(ix)
10.20 -- Agreement (regarding noncompetition, nonsolicitation and
confidentiality)(ix)
10.21 -- Private Securities Subscription Agreement dated May 15, 1997
between the Company and Capital Ventures International(x)
10.22 -- Registration Rights Agreement dated May 15, 1997 between the
Company and Capital Ventures International(x)
10.23 -- Consulting agreement with David Proctor dated March 18, 1997
23.01 -- Consent of KPMG Peat Marwick LLP, Independent Certified
Public Accountants
27.01 -- Financial Data Schedule (for SEC use only)
</TABLE>

- ---------------
(i) Incorporated by reference to Annex A of the Registrant's Definitive Proxy
Statement as filed with the Commission on May 24, 1996
(ii) Filed with Post-Effective Amendment No. 1 to the Company's Registration
Statement on Form 10, dated September 29, 1994, File No. 0-24544 and
incorporated herein by reference.
(iii)Filed with the Company's Annual Report on Form 10-K for the period ended
June 30, 1997.
(iv) Filed with the Company's Registration Statement on Form S-3 dated May 23,
1996 (File No. 333-04407) and incorporated herein by reference.
(v) Incorporated by reference from Exhibit 4.1 to the Company's Registration
Statement on Form S-8 (Commission File Number 33-88446) filed on January
13, 1995.
(vi) Incorporated by reference from Exhibit 4.1 to the Company's Registration
Statement on Form S-8 (Commission File Number 33-88448) filed on January
13, 1995.
(vii)Incorporated by reference to Annex E of the Registrant's Definitive Proxy
Statement as filed with the Commission on May 24, 1996.
(viii)
Incorporated by reference to Company's Annual Report on Form 10-K for
fiscal year ended June 30, 1996.
(ix) Incorporated by reference to the Company's Current Report on Form 8-K dated
April 9, 1997.
(x) Incorporated by reference to the Company's Registration Statement on Form
S-3 (Commission File Number 333-28693) filed on June 12, 1997.

31
<PAGE> 14

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
behalf of the undersigned, thereunto duly authorized.

CYBERGUARD CORPORATION

By: /s/ ROBERT L. CARBERRY
------------------------------------
Robert L. Carberry
Chairman, President and
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>

/s/ ROBERT L. CARBERRY Chairman, President and October 16, 1997
- ----------------------------------------------------- Chief Executive Officer and
Robert L. Carberry Director (Principal
Executive Officer)

/s/ PATRICK O. WHEELER Vice President Finance and October 16, 1997
- ----------------------------------------------------- Chief Financial Officer
Patrick O. Wheeler (Principal Financial and
Principal Accounting
Officer)

/s/ C. SHELTON JAMES Director October 16, 1997
- -----------------------------------------------------
C. Shelton James

/s/ MICHAEL F. MAGUIRE Director October 16, 1997
- -----------------------------------------------------
Michael F. Maguire

/s/ RICHARD P. RIFENBURGH Director October 16, 1997
- -----------------------------------------------------
Richard P. Rifenburgh

/s/ DAVID PROCTOR Director October 16, 1997
- -----------------------------------------------------
David Proctor
</TABLE>

32
<PAGE> 15

INDEPENDENT AUDITORS' REPORT

The Board of Directors
CyberGuard Corporation:

We have audited the accompanying consolidated balance sheets of CyberGuard
Corporation and subsidiaries as of June 30, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year ended June 30, 1997, the nine months ended June 30, 1996 and the year
ended September 30, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted audited
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 financial position of CyberGuard
Corporation and subsidiaries as of June 30, 1997 and 1996, and the results of
their operations and their cash flows for the year ended June 30, 1997, the nine
months ended June 30, 1996 and the year ended September 30, 1995 in conformity
with generally accepted accounting principles.

KPMG Peat Marwick LLP

Miami, Florida
September 23, 1997

F-1
<PAGE> 16

CYBERGUARD CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 2,975 $ 3,617
Accounts and notes receivable, less allowance for
uncollectible accounts of $547 and $318 at June 30, 1997
and June 30, 1996, respectively (Note 5).................. 6,642 3,668
Inventories................................................. 1,588 134
Prepaid expenses............................................ 520 285
Securities available for sale (Note 7)...................... 1,268 13,600
-------- --------
Total current assets.............................. 12,993 21,304
Property and equipment, net (Note 6)........................ 1,706 1,152
Investment in Concurrent preferred stock (Note 7)........... -- 3,853
Non-compete agreements (Note 15)............................ 1,120 1,400
Other assets................................................ 155 3
-------- --------
Total Assets...................................... $ 15,974 $ 27,712
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable............................................ $ 1,144 --
Deferred revenue............................................ 1,277 44
Accrued expenses and other liabilities (Note 8)............. 3,636 6,223
Loan payable (Note 9)....................................... -- 3,200
-------- --------
Total liabilities (all current)................... 6,057 9,467
-------- --------
Shareholders' equity (Note 12)
Common stock par value $0.01 authorized 20,000,000 shares;
issued and outstanding 7,452,314 shares and 6,709,371
shares at June 30, 1997 and June 30, 1996,
respectively........................................... 74 67
Additional paid in capital................................ 59,507 56,152
Accumulated deficit....................................... (49,700) (37,210)
Unrealized gain on securities available for sale.......... 173 --
Cumulative foreign currency translation adjustment........ (137) (764)
-------- --------
Total shareholders' equity........................ 9,917 18,245
-------- --------
Total liabilities and shareholders' equity........ $ 15,974 $ 27,712
======== ========
</TABLE>

See notes to the accompanying consolidated financial statements.

F-2
<PAGE> 17

CYBERGUARD CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
JUNE 30, JUNE 30, SEPTEMBER 30,
1997 1996 1995
---------- ----------- -------------
<S> <C> <C> <C>
Revenues
Products................................................. $ 14,574 $ 6,898 $ 4,534
Services................................................. 1,047 371 283
Real Time Business....................................... -- 30,142 40,294
-------- -------- --------
15,621 37,411 45,111
Cost of Revenues
Products................................................. 6,669 4,427 3,001
Services................................................. 571 162 139
Real Time Business....................................... -- 16,433 22,624
-------- -------- --------
7,240 21,022 25,764
-------- -------- --------
Gross Profit............................................... 8,381 16,389 19,347
Operating Expenses
Research and development................................. 4,723 5,360 7,903
Selling, general and administrative...................... 11,410 18,021 22,984
Write-off of capitalized computer software development
costs (Note 16)....................................... -- 3,244 --
Costs relating to canceled secondary offering............ -- 1,009 --
In process research and development (Note 2)............. 262 -- --
-------- -------- --------
Total operating expenses......................... 16,395 27,634 30,887
Operating loss............................................. (8,014) (11,245) (11,540)
Interest income, net....................................... 646 180 456
Other income (expense), net................................ (708) 103 (4)
Loss on sale of securities available for sale.............. (4,414) -- --
Loss on sale of Real-time Business (Note 1)................ -- (15,160) --
-------- -------- --------
(4,476) (14,877) 452
-------- -------- --------
Net loss................................................... $(12,490) $(26,122) $(11,088)
======== ======== ========
Loss per common share...................................... $ (1.76) $ (4.32) $ (1.88)
======== ======== ========
Weighted average number of shares outstanding.............. 7,100,014 6,046,182 5,911,437
======== ======== ========
</TABLE>

See notes to the accompanying consolidated financial statements.

F-3
<PAGE> 18

CYBERGUARD CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR NINE MONTHS
ENDED ENDED YEAR ENDED
JUNE 30, JUNE 30, SEPTEMBER 30,
1997 1996 1995
-------- ----------- -------------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss................................................. $(12,490) $(26,122) $(11,088)
Adjustment to reconcile net loss to net cash provided by
operating activities:
Depreciation.......................................... 540 2,121 3,446
Amortization.......................................... 800 1,735 1,305
In process research and development written-off....... 262 -- --
Loss on disposal of assets............................ 169 -- --
Compensation and benefits............................. 125 500 --
Write-off of capitalized software development costs... -- 3,244 --
Loss on sale of securities available for sale......... 4,414 -- --
Loss on sale of Real-time Computing Business
(Non-cash).......................................... -- 12,490 --
Changes in assets and liabilities net of effect of sale
of Real-time Computing Business and acquisitions
Receivables........................................... (2,894) (3,569) 1,393
Due from Harris Corporation........................... -- -- 6,369
Inventories........................................... (1,438) 3,537 4,998
Accounts payable...................................... 1,144 (2,049) (1,201)
Accrued expenses...................................... (1,302) 2,675 (1,051)
Deferred revenue...................................... 1,073 392 (383)
Deferred income taxes................................. -- -- (166)
Prepaid expenses and other assets..................... (147) (265) 827
Other................................................. (529) (227) 391
-------- -------- --------
Net cash provided (used) by operating
activities..................................... (10,273) (5,538) 4,840
-------- -------- --------
Cash flows from investing activities
Additions to property and equipment...................... (969) (1,818) (1,900)
Purchase of business, net of cash acquired............... (400) -- --
Cash included with sale of Real-time Computing
Business.............................................. -- (420) --
Software development costs -- capitalized................ -- (3,688) (2,324)
-------- -------- --------
Net cash used by investing activities...................... (1,369) (5,926) (4,224)
-------- -------- --------
Cash flows from financing activities
Proceeds (repayments) from short term borrowings......... (3,200) 3,200 --
Proceeds from sale of Concurrent stock................... 12,363 3,400 --
Equity contributions..................................... 1,837 216 --
-------- -------- --------
Net cash provided by financing activities.................. 11,000 6,816 --
-------- -------- --------
Net increase (decrease) in cash and cash equivalents....... (642) (4,648) 616
-------- -------- --------
Cash and cash equivalents at beginning of the period....... 3,617 8,265 7,649
-------- -------- --------
Cash and cash equivalents at end of the period............. $ 2,975 $ 3,617 $ 8,265
======== ======== ========
</TABLE>

See notes to the accompanying consolidated financial statements.

F-4
<PAGE> 19

CYBERGUARD CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED JUNE 30, 1997, NINE MONTHS ENDED JUNE 30, 1996
AND YEAR ENDED SEPTEMBER 30, 1995
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN
COMMON STOCK ADDITIONAL UNREALIZED GAIN CURRENCY
------------------ PAID IN ACCUMULATED ON SECURITIES TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT AVAILABLE FOR SALE ADJUSTMENT TOTAL
--------- ------ ---------- ----------- ------------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance September 30,
1994.................... 5,911,437 $59 $43,662 -- $ -- $(928) $ 42,793
Net Loss.................. -- -- -- (11,088) -- -- (11,088)
Translation adjustment.... -- -- -- -- -- 391 391
--------- --- ------- -------- ----- ----- --------
Balance September 30,
1995.................... 5,911,437 59 43,662 (11,088) -- (537) 32,096
Net Loss.................. -- -- -- (26,122) -- -- (26,122)
Translation adjustment.... -- -- -- -- -- (227) (227)
Issuance of common stock
relating to the sale of
the Real-time Computing
Business................ 683,178 7 11,778 -- -- -- 11,785
Issuance of common stock,
other................... 114,756 1 712 -- -- -- 713
--------- --- ------- -------- ----- ----- --------
Balance June 30, 1996..... 6,709,371 67 56,152 (37,210) -- (764) 18,245
Net Loss.................. -- -- -- (12,490) -- -- (12,490)
Change in market value of
Preferred Stock
available for sale...... -- -- -- -- 173 -- 173
Translation adjustment.... -- -- -- -- -- 627 627
Issuance of common stock,
for the non compete
agreement............... 91,800 1 1,399 -- -- -- 1,400
Issuance of common
stock................... 651,143 6 1,956 -- -- -- 1,962
--------- --- ------- -------- ----- ----- --------
Balance June 30, 1997..... 7,452,314 $74 $59,507 $(49,700) $173 $(137) $ 9,917
========= === ======= ======== ===== ===== ========
</TABLE>

See notes to the accompanying consolidated financial statements.

F-5
<PAGE> 20

CYBERGUARD CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

1. BUSINESS OVERVIEW

CyberGuard Corporation and Subsidiaries (the "Company"), is a leading
developer and marketer of commercial network security products designed to
protect data on computer networks from access by unauthorized users. The Company
was among the first companies to establish a business unit devoted to developing
and marketing network security products. As early as 1989, the Company had
developed and begun to market an integrated secure operating system and secure
networking software solution. With the announcement of its firewall application
in 1994, the Company began offering multi-level network security solutions to
the commercial market through its CyberGuard Firewall suite of products.

In May 1995, the Company separated its business operation into two units;
Real-time Business and the Trusted Systems Division, which developed network
security products. On March 26, 1996, the Company and Concurrent Computer
Corporation ("Concurrent") signed a Purchase and Sale Agreement effective as of
that date and amended and restated as of May 23, 1996 ("Agreement"). This
Agreement was approved by the shareholders of both companies on June 27, 1996
and the transaction was closed effective June 30, 1996. In connection with this
sale, the Company changed its fiscal year end from September 30 to June 30,
effective in the year beginning October 1, 1995. Under the Agreement, the
Company sold the net assets of its Real-time computing business with a book
value of $21,561 and issued 683,178 shares of its common stock valued at $11,785
to Concurrent (the Transaction) in exchange for (i) 10 million newly issued
shares of Concurrent common stock, par value $0.01 per share valued at $17,000,
and (ii) convertible exchangeable preferred stock of Concurrent paying a 9%
cumulative annual dividend quarterly in arrears with a liquidation preference of
approximately $6,264. The Preferred Stock is redeemable by Concurrent when the
current market price exceeds $3.75, and is mandatorily redeemable on June 27,
2006, at the liquidation preference plus accrued and accumulated unpaid
dividends. The conversion ratio is at a rate equal to the liquidation preference
divided by the conversion price, which is initially $2.50, but can be adjusted
in certain circumstances. The Preferred Stock at June 30, 1996 is reflected at
its estimated market value of $3,853 which was calculated using a discount rate
of 14% and that no dividends will be paid until the mandatory redemption date.
Since the Company has been actively selling the Preferred Stock, it has been
reclassified as securities available for sale. The Preferred Stock at June 30,
1997 is reflected at current market price, inclusive of all cumulative dividends
earned (See Note 7 for further details).

2. ACQUISITIONS

On April 9, 1997, the Company purchased substantially all the assets of
TradeWave Corporation, a wholly owned subsidiary of SunRiver Corporation.
CyberGuard created a new wholly owned subsidiary, TradeWave Corporation, a
Florida corporation to which it contributed all the assets purchased. The
transaction was accounted for as a purchase and, accordingly, TradeWave
Corporation results are included in the consolidated financial statements since
the date of acquisition. The aggregate purchase price was approximately $400.
The fair value of net assets acquired was approximately $138. The balance of
excess of cost over net assets acquired was allocated to in-process research and
development for projects that had not reached technical feasibility and had no
probable alternative future uses, which the Company expensed at the date of
acquisition. On the basis of a pro forma consolidation of the results of
operations, as if the acquisition had taken place at October 1, 1995
consolidated net sales would have been $16,551 and $39,054 for the year ended
June 30, 1997 and for the nine months ended June 30, 1996, respectively. The net
loss and net loss per common share would have been $18,646 and $2.62 per share
for the year ended June 30, 1997 and $29,177 and $4.81 per share for the nine
months ended June 30, 1996, respectively. Such pro forma amounts are unaudited
and are not necessarily indications of what the actual consolidated results of
operations might have been if the acquisition had been effective at October 1,
1995.

F-6
<PAGE> 21

CYBERGUARD CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. LIQUIDITY

The Company's historical uses of cash have been to fund net losses from
operations, property, and equipment acquisitions and software development costs.
Capital expenditures for the fiscal year ended June 30, 1997 and nine months
ended June 30, 1996 were $969 and $1,818 respectively. Software development
costs were $4,723 and $5,360 respectively for the same periods.

Prior to the Transaction, the Company funded its cash requirements from its
working capital and cash flow provided from the Real time business. The Company
sold all its investment in the common stock of Concurrent and substantially all
its investment in the preferred stock of Concurrent to pay off its line of
credit and to fund operations for the fiscal year 1997.

On May 19, 1997, the Company entered into an equity financing arrangement
as filed with the Securities and Exchange Commission under the S-3 to sell
privately up to a maximum 1,470,085 shares of the Company's common stock. Under
this private placement equity offering, the Company has the right, subject to
certain conditions, to sell common stock for up to $7.5 million. Pursuant to the
Subscription Agreement, the Company either (i) must make a call for proceeds of
at least $3,750 by May 14, 1998 and for all of the proceeds by November 15, 1998
or (ii) issue to the purchaser warrants with respect to a maximum of 170,000
shares of the Company's common stock at an exercise price equal to the market
price of common stock on November 15, 1998.

If the Company determines additional equity and/or debt financing is
necessary to support its on-going or strategic requirements, it may need to
pledge certain working capital assets. Although there can be no assurance that
external sources of financing will be available or that, if available, such
financing will be on acceptable terms, the Company believes that such funding
should be available if required.

4. SIGNIFICANT ACCOUNTING POLICIES

Consolidation -- The consolidated financial statements include those of
CyberGuard Corporation and its wholly-owned subsidiaries. All significant
intercompany balances and transactions between entities have been eliminated.

Inventories -- are carried at the lower of cost, determined by the
First-In-First-Out (FIFO) method, or market.

Long-Lived Assets -- property and equipment is carried on the basis of
cost. Depreciation is computed by the straight-line method using the estimated
useful lives of the assets.

The Company implemented the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of", effective July 1, 1996. The Company
reviews its long-lived assets (property and equipment) for impairment whenever
events or circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected cash flows, undiscounted and without
interest, is less than the carrying amount of the asset, an impairment loss is
recognized as the amount by which the carrying amount of the asset exceeds its
fair value. The adoption of Statement No. 121 had no impact on the Company's
financial position or results of operations.

Software Development Costs -- The Company capitalized costs related to the
development of certain software products. Capitalization began when
technological feasibility had been established and ended when the product was
available for general release to customers. Software development costs incurred
prior to technological feasibility were considered research and development
costs and are expensed as incurred. Capitalized costs were amortized as the
greater of the amount computed using the ratio that current gross revenues for a
product bear to the total current and anticipated future gross revenues for that
product or the straight-line method over five years. There were no software
development costs capitalized for the year ended

F-7
<PAGE> 22

CYBERGUARD CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

June 30, 1997, $3,688 for the nine months ended June 30, 1996 and $2,324 for the
year ended September 30, 1995. Software amortization expense was $0 for the year
ended June 30, 1997, $1,414 for the nine months ended June 30, 1996 and $1,305
for the year ended September 30, 1995. Effective June 30, 1996, the Company sold
its Real-time computing business to Concurrent. As a result of this transaction,
management made the decision to move from the Night Hawk based platform to an
Intel PC-based platform and accordingly, wrote-off the related software
development costs. See Note 16 for further details.

Revenue Recognition -- The Company accounts for software revenues in
accordance with the American Institute of Certified Public Accountants Statement
of Position 91-1, Software Revenue Recognition. Revenues earned under software
license agreements with end users are generally recognized when the software has
been shipped, payment is due within one year, collectibility is probable, and
there are no significant obligations remaining. Unearned income on service
contracts is amortized by the straight-line method over the term of the
contracts. Revenue from long-term software contracts is accounted for by the
percentage of completion method whereby income is recognized based on the
estimated stage of completion of individual contracts using costs incurred as a
percentage of total estimated costs at completion. Losses on long-term contracts
are recognized in the period in which such losses are determined.

Foreign Currency Translation -- The assets and liabilities of the foreign
operations are translated using the local currency as the functional currency.

Income Taxes -- The Company files a consolidated Federal income tax return.

The Company follows the asset and liability method of accounting for income
taxes. Under the asset and liability method, a deferred tax asset or liability
is recognized for temporary differences between financial reporting and income
tax bases of assets and liabilities, tax credit carryforwards and operating loss
carryforwards. A valuation allowance is established to reduce deferred tax
assets if it is more likely than not that such deferred tax assets will not be
realized.

Cash Equivalents -- The Company considers all investments purchased with an
original maturity of three months or less at the time of purchase to be cash
equivalents.

Marketable Securities -- The Company accounts for marketable securities in
accordance with the Statement of Financial Accounting Standards No. 115 ("SFAS
No. 115"), Accounting for Certain Investments in Debt and Equity Securities. In
accordance with the provisions of SFAS No. 115, marketable securities, which
have been classified by the Company as available for sale, are carried at market
value, with the unrealized gains or losses, net of tax, reported as a separate
component of shareholders' equity. The Company sold all its investment in common
stock of Concurrent Computer Corporation at June 30, 1997 and the majority of
its investment in Preferred Stock in Concurrent Computer Corporation during the
fiscal year ended June 30, 1997. (See Note 7).

Loss per Common Share -- Loss per common share is calculated by dividing
the net loss by the weighted-average number of common shares outstanding during
the period. Common stock equivalents are excluded due to their anti-dilutive
effect.

Stock Option Plan -- Prior to January 1, 1996, the Company accounted for
its stock option plan in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock exceeded
the exercise price. On July 1, 1996, the Company adopted SFAS No. 123,
Accounting for Stock-Based Compensation, which permits entities to recognize as
expense over the vesting period the fair value of all stock-based awards on the
date of grant. Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma net income and
pro forma earnings per share disclosures for employee stock option grants made
in 1995 and future years as if the fair-value-based method defined in SFAS No.
123 had

F-8
<PAGE> 23

CYBERGUARD CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

been applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.

Use of Estimates -- Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.

Cancellation of the Secondary Public Offering -- On August 5, 1996, The
Company decided to withdraw a secondary offering of common stock due to
unfavorable market conditions. Expenditures associated with the cancellation of
this stock offering amounting to approximately $1 million were written off and
appear on the Company's consolidated statement of operations in the year ended
June 30, 1997.

Reclassifications -- Certain items previously reported in specific
financial statement captions have been reclassified to conform with the 1996
presentation.

5. ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS

Changes in the allowance for uncollectible accounts follows:

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS YEAR ENDED
JUNE 30, JUNE 30, SEPTEMBER 30,
1997 1996 1995
---------- ----------- -------------
<S> <C> <C> <C>
Balance at beginning of year....................... $318 $ 1,513 $ 213
Additions charged to expense....................... 327 421 1,660
Less net write off of uncollectible accounts....... (98) (355) (360)
Less allowance transferred in the sale of the real
time business.................................... -- (1,261) --
---- ------- ------
Balance at end of year............................. $547 $ 318 $1,513
==== ======= ======
</TABLE>

Bad debt expense is included in "Selling, general, and administrative expenses"
on the consolidated statement of operations.

6. PROPERTY AND EQUIPMENT, NET

Property and equipment, net is summarized as follows:

<TABLE>
<CAPTION>
JUNE 30, JUNE 30, ESTIMATED
1997 1996 USEFUL LIFE
-------- -------- -----------
(IN YEARS)
<S> <C> <C> <C>
Property and equipment................................... $ 2,645 $ 1,553 5-10
Loan equipment and service parts......................... 418 634 1-5
Software................................................. 198 -- 3
Leasehold improvements................................... 27 -- 3-5
------- -------
Gross property and equipment............................. 3,288 2,187
Less: accumulated depreciation........................... (1,582) (1,035)
------- -------
Net property and equipment............................... $ 1,706 $ 1,152
======= =======
</TABLE>

7. SECURITIES AVAILABLE FOR SALE

As part of the sale of the Real-time Computing Business, the Company
received 10,000,000 shares of Common Stock of Concurrent valued at $17,000 and
1,000,000 shares of 9% cumulative dividend, convertible Preferred Stock at a
liquidation preference of $6,264. At June 30, 1996 the Preferred Stock was
recorded at its

F-9
<PAGE> 24

CYBERGUARD CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

estimated market value which was calculated using a discount rate of 14%, and
the assumption that no dividends would be paid until the mandatory redemption
date. The Preferred Stock was considered a non current asset, as the Company's
intention was to hold the investment until maturity at June 26, 2006. However,
during the course of the year, the Company decided to sell the majority of the
Preferred Stock and use its proceeds to fund operations. As such, these
securities, which are convertible into Common Stock have been reclassified as
securities available-for-sale and valued at their market value as of June 30,
1997 which is calculated by taking the number of common share equivalents times
the price per common share at June 30, 1997.

Securities available for sale is summarized below:

<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST APPRECIATION DEPRECIATION VALUE
--------- ------------ ------------ ---------
<S> <C> <C> <C> <C>
June 30, 1997:
Concurrent Computer Corp.
Preferred Stock........................... $ 1,095 $173 $-- $ 1,268
Common Stock.............................. -- -- -- --
------- ---- --- -------
Total............................. $ 1,095 $173 $-- $ 1,268
======= ==== === =======
June 30, 1996:
Concurrent Computer Corp.
Preferred Stock........................... $ 3,853 $ -- -- $ 3,853
Common Stock.............................. 13,600 -- -- 13,600
------- ---- --- -------
Total............................. $17,453 $ -- $-- $17,453
======= ==== === =======
</TABLE>

8. ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued expenses and other liabilities consists of the following:

<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1996
-------- --------
<S> <C> <C>
Salaries, wages and other compensation...................... $1,167 $ 656
Accrued interest and sundry taxes........................... 168 180
Other....................................................... 1,627 1,462
Royalties payable(a)........................................ 674 285
Secondary offering expenses................................. -- 398
Non-compete agreement (Note 15)............................. -- 1,400
Expenses for the sale of Real-time computing business....... -- 1,842
------ ------
$3,636 $6,223
====== ======
</TABLE>

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

(a) Represents various software license royalty payments due to third-parties
for products sold by the company.

9. LOAN PAYABLE

On April 1, 1996, the Company entered into a loan and security agreement
with Foothill Capital Corporation ("Foothill") pursuant to which Foothill agreed
to make revolving advances to the Company on an amount of up to $5,000,000
subject to certain borrowing base requirements and at an interest rate equal to
the prime or reference rate announced by Norwest Bank Minnesota, National
Association, plus two percent. On June 27, 1996, this agreement was amended to,
among other things, extend the maturity date to the earlier

F-10
<PAGE> 25

CYBERGUARD CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of (a) September 30, 1996 or (b) the date on which the Company consummates a
secondary common stock offering. As collateral for the loan, the Company granted
Foothill a security interest in its assets (including 7,000,000 shares of the
Concurrent common and all of the preferred stock received by the Company in
connection with the Transaction).

In addition, the Company granted Foothill warrants to purchase 100,000
shares of common stock at a price equal to the lower of the price of a share of
common stock issued to the public pursuant to a registration statement or $17.00
per share. The warrant is exercisable in whole or in part from the date that is
the earlier of August 1, 1996 and five days after the closing of a public
offering through June 27, 2001.

In August 1996, the Foothill loan was repaid. As of June 30, 1997, there
are no outstanding amounts due on the loan.

10. STOCK SPLIT

On March 5, 1996, the Board of Directors declared a three-for-one common
stock split distributable on March 29, 1996 to shareholders of record at the
close of business on March 18, 1996. All applicable share and per share data
have been retroactively restated for the stock split.

11. INCOME TAXES

There is no provision for income taxes due to the loss carryforward.

The components of deferred income tax assets (liabilities) are as follows:

<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1997 1996
-------- --------
<S> <C> <C>
Charitable contributions.................................... $ 279 $ 275
Inventory valuations........................................ 21 2
Depreciation................................................ (149) (16)
Capitalized software........................................ -- --
Restructuring costs......................................... -- 19
Accrued vacation............................................ 76 62
Net operating losses available carryforwards................ 12,727 11,043
Capital loss carryforwards.................................. 2,291 --
All other -- net............................................ 727 154
Valuation allowance......................................... (15,972) (11,539)
-------- --------
Net deferred income tax liability........................... $ -- $ --
======== ========
</TABLE>

F-11
<PAGE> 26

CYBERGUARD CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A reconciliation of the effective income tax rate and the statutory United
States income tax rate follows:

<TABLE>
<CAPTION>
NINE
YEAR MONTHS
ENDED ENDED YEAR ENDED
JUNE 30, JUNE 30, SEPTEMBER 30,
1997 1996 1995
-------- -------- -------------
<S> <C> <C> <C>
Statutory U.S. income tax rate...................... (34.0)% (34.0)% (34.0)%
State taxes......................................... -- -- (1.9)
Capitalized restructuring costs..................... -- -- --
Operating loss carryforwards........................ 33.5 28.9 32.2
Payment of tax to Former Parent on German
dividend.......................................... -- -- 21.8
Contributions....................................... -- --
Other items......................................... .5 5.1 1.8
----- ----- -----
Effective income tax rate........................... -- -- --
===== ===== =====
</TABLE>

United States income taxes have not been provided on the undistributed
earnings of international subsidiaries because the Company has intended to
reinvest these earnings. If the Company distributes international earnings, a
U.S. tax would be provided in future periods. As of June 30, 1997, the Company
does not intend to distribute international earnings, therefore no US tax has
been projected. The determination of the amount of these undistributed earnings
and any related unrecognized deferred US tax liability is not practicable.

As of June 30, 1997, the Company has U.S. net operating loss carryforwards
of approximately $37 million. The Company's net operating loss carryforwards
begin to expire in 2010. As of June 30, 1997, the Company has a U.S. net capital
loss carryforward of approximately $6,740. The Company may utilize these capital
loss carryforwards only to offset future capital gains.

Pretax loss from European operations was ($55) for the twelve months ended
June 30, 1997; ($998) for the nine months ended June 30, 1996; and ($3,136) for
the year ended September 30, 1995.

12. SHAREHOLDERS' EQUITY

Each share of the Company's common stock has attached to it one right. Each
right entitles its registered holder to purchase from the Company after the
"Separation Time", as hereinafter defined, one-hundredth of a share of
Participating Preferred Stock, par value $.01 per share, for an amount
calculated in accordance with the Agreement. The rights will not trade
separately from the common stock unless and until the Separation Time. The
Separation Time is defined as the earlier of the tenth business day after the
date on which any person commences a tender or exchange offer which, if
consummated, would result in an acquisition, and the first date of public
announcement by the Company of such offering. In the event of any voluntary, or
involuntary liquidation of the Company, the holders of the Preferred Stock shall
be paid an amount as calculated in accordance with the Preferred Stock
Agreement.

Effective October 8, 1994, the Company adopted a Stock Incentive Plan which
permits the issuance of stock options, stock appreciation rights, performance
awards, restricted stock and/or other stock based awards to directors and
salaried employees. On February 4, 1996, the Board of Directors approved an
amendment to the plan to reserve 2,025,000 shares of common stock for grant. The
option price shall be determined by the Board Committee effective on the Grant
Date. The option price shall not be less than one hundred percent of the Fair
Market Value of a share of common stock on the Grant Date. If Incentive Stock
Options are granted to a participant who on the Grant Date is a ten percent
holder, such price shall not be less than one hundred and ten percent of the
Fair Market Value of a share of common stock on the Grant Date. All options
become immediately exercisable upon the occurrence of a Change in Control of the
Company. Vesting of these options

F-12
<PAGE> 27

CYBERGUARD CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

occurs based on years of service. It begins at 33% after one year, 66% after two
years, and 100% after the third year of service.

The Company also elected to have non-qualified stock options for key
executives as part of their compensation plan. The Board of Directors has the
authority to determine to whom options may be granted, period of exercise, the
option price at the date of grant, and what other restrictions, if any, should
apply.

Pro forma information regarding net loss and loss per common share is
required by FAS 123, which also requires that the information be determined as
if the Company has accounted for its employee stock options granted subsequent
to September 30, 1995 under the fair value method of FAS 123. The fair value
method for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for 1997 and 1996, respectively: risk-free interest rates ranged
from 5.8% to 6.3% and 4.9% to 5.8%, expected dividend yield of 0% and 0%,
volatility factors of the expected market price of the Company's common stock
ranged from .87 to .90 and .76 to .93, and a weighted average expected life of
the option of 3 years and 1.9 years, respectively.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

The adoption of FAS 123 under the fair value based method would have
increased compensation expense by $1,728 for the year ended June 30, 1997 and
$681 for the nine months ended June 30, 1996. The effect of FAS 123 under the
fair value based method would have effected net loss and loss per share as
follows:

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
JUNE 30, JUNE 30,
1997 1996
---------- -----------
<S> <C> <C>
Net loss.................................................... $(12,490) $(26,122)
======== ========
Pro forma................................................... $(14,218) $(26,803)
======== ========
Loss per common share as reported........................... $ ( 1.76) $ ( 4.32)
======== ========
Pro forma................................................... $ ( 2.00) $ (4.43)
======== ========
</TABLE>

F-13
<PAGE> 28

CYBERGUARD CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Information relating to the Company's stock option plan is as follows:

<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Shares under option at September 30, 1994................ -- --
Granted................................................ 715,200 $2.60
Exercised.............................................. -- --
Forfeited.............................................. -- --
--------- ------
Shares under option at September 30, 1995................ 715,200 $2.60
========= ======
Shares exercisable at September 30, 1995................. -- --
========= ======
Shares under option at September 30, 1995................ 715,200 $2.60
Granted................................................ 984,300 7.17
Exercised.............................................. (84,630) 2.87
Forfeited.............................................. (25,206) 2.60
--------- ------
Shares under option at June 30, 1996..................... 1,589,664 $5.46
========= ======
Shares exercisable at June 30, 1996...................... 803,163 $3.50
========= ======
Shares under option at June 30, 1996..................... 1,589,664 $3.50
Granted................................................ 947,850 9.37
Exercised.............................................. (636,559) 3.00
Forfeited.............................................. (75,033) 8.75
--------- ------
Shares under option at June 30, 1997..................... 1,825,922 $7.77
========= ======
Shares exercisable at June 30, 1997...................... 594,442 $6.43
========= ======
</TABLE>

At June 30, 1997, 739,605 stock options outstanding have exercise prices
ranging from $2.58 to $5.50. The weighted average exercise price of these
options is $4.88 and weighted remaining contractual life of these options is
3.38 years. Of these options, 397,905 are exercisable at a weighted average
price of $4.35.

At June 30, 1997, 747,317 stock options outstanding have exercise prices
ranging from $8.87 to $10.75. The weighted average exercise price of these
options is $9.31 and weighted remaining contractual life of these options is
4.45 years. Of these options, 84,667 are exercisable at a weighted average price
of $10.62.

At June 30, 1997, 339,000 stock options outstanding has an exercise price
of $10.67. The remaining contractual life of these options is 8.7 years. Of
these options, 111,870 are currently exercisable.

As of June 30, 1997 there were 100,000 warrants outstanding to Nissin
Electric Company, granted as a part of a joint sales and marketing agreement to
address the Japanese Firewall market. These warrants are exercisable based upon
Nissin fulfilling certain minimum purchase obligations at predetermined dates
through December 31, 1998. The price of the options are exercisable at $15.00
per common share.

13. EMPLOYEE BENEFIT PLANS

The Company has a 401(k) Savings Plan ("the Plan") which covers the
eligible employees of CyberGuard Corporation, and any related company. An
employee is eligible to participate in the Plan on the date of hire The amount
of profit-sharing contributions made by the Company into the Plan is
discretionary and shall be determined based on a percentage of the Company's
adjusted net income before taxes. Each participant may contribute up to 12% of
compensation into the Plan. The Company makes a matching contribution on behalf
of each participant for the first 6% of their individual contribution.
Participant's profit-sharing and matching contribution vests over a seven year
period. The Company contributions to the Plan

F-14
<PAGE> 29

CYBERGUARD CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

were $221 for the year ended June 30, 1997; $738 for the nine months ended June
30, 1996 and $966 for the year ended September 30, 1995.

14. CONTINGENCIES

Certain claims have been filed or are pending against the Company. It is
management's opinion that all matters are without merit or are of such kind, or
involve such amounts, as would not have a material effect on the consolidated
financial position of the Company if disposed of unfavorably.

15. NON-COMPETE AGREEMENTS

In connection with the sale of the Real-time computing business, the
Company entered into non-compete agreements for a period of five years with two
former officers of the Company. In consideration for the these non-compete
agreements, these officers received 91,800 shares of the Company's Common Stock.
These shares were valued at market price as of the date of the agreement, June
28, 1996, and were accrued for as of June 30, 1996. These amounts will be
amortized over the life of the agreement. The amortization expense for the year
ended June 30, 1997 is $280.

16. WRITE OFF OF CAPITALIZED COMPUTER SOFTWARE DEVELOPMENT COSTS

After the sale of the Real-time Computing Division to Concurrent Computer
Corporation, a decision was made by new management of the Company to move from
the Night Hawk based platform to an Intel-PC based platform running on the
UnixWare operating system which the Company licenses from Santa Cruz Operations
The Company had capitalized computer software development costs, which relate to
the Night Hawk based systems. As a result of new management's decision to move
to a different platform, such capitalized computer software development costs of
approximately $3,244 became worthless and accordingly have been charged to
operations during the year ended June 30, 1996.

17. LEASE COMMITMENTS

Rent expense was $231 for the year ended June 30, 1997; $1,382 for the nine
months ended June 30, 1996, $1,814 for the year ended September 30, 1995.

On June 10, 1997, the Company entered into a ten year term office lease for
its corporate office located in a commercial building in Fort Lauderdale,
Florida. The lease provides for a 5 year renewal option.

Total future minimum rental commitments under non-cancelable operating
leases, primarily for buildings and equipment, for the years following June 30,
1997 are: 1998 -- $648; 1999 -- $710; 2000 -- $711; 2001 -- $477; and 2002 and
thereafter -- $450.

18. CONCENTRATIONS OF CREDIT RISK AND RELATED PARTY TRANSACTIONS

Financial instruments which potentially subject the Company to a
concentration of credit risk principally consist of cash, cash equivalents and
trade receivables. The Company holds any excess cash in short-term investments
consisting of commercial paper. Concentrations of credit risk with respect to
receivables are limited due to the Company's large number of customers. Credit
risk with respect to securities consist of Concurrent stock received in
connection with the sale of the Real-time Computing Business and is limited due
to the fact that the Company sold all its ownership in the common stock and the
majority of its ownership in the preferred stock at June 30, 1997.

F-15
<PAGE> 30

CYBERGUARD CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

19. GEOGRAPHIC INFORMATION

The Company operates exclusively in the computer systems industry.
Substantially all revenues result from the sale of computer systems and related
software and services. Major customers during 1997, 1996, and 1995 include the
United States Government, Hucom, Inc., and Boeing Company. In many cases,
agencies of the United States Government are the ultimate purchasers of the
Company's products. Sales to the United States Government combined with sales
for which the Company acted as subcontractor on government projects have
represented approximately 9%, 51%, and 43% of total sales for the year ended
June 30, 1997, the nine months ended June 30, 1996 and the year ended September
30, 1995, respectively. Sales made to Hucom represented 11% in 1997. Sales made
to Boeing Company as a percentage of total sales were 0%, 7% and 4%, for the
year ended June 30, 1997, the nine months ended June 30, 1996 and the year ended
September 30, 1995, respectively. During the year ended September 30, 1995, the
Company's largest customer was Lockheed Martin Corporation. Sales made to
Lockheed Martin Corporation as a percentage of total sales were 11% for the year
ended September 30, 1995.

All intercompany revenues and expenses are eliminated in computing revenues
and operating income.

A summary of the Company's operations by geographic area is summarized
below:

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
JUNE 30, JUNE 30, SEPTEMBER 30,
1997 1996 1995
---------- ----------- -------------
<S> <C> <C> <C>
United States Operations
Net sales........................................ $ 11,257 $ 31,402 $36,138
Net loss......................................... (12,435) (25,124) (7,952)
Identifiable assets.............................. 15,606 22,756 33,658
European Operations
Net sales........................................ 4,364 6,009 8,973
Net loss......................................... (55) (998) (3,136)
Identifiable assets.............................. 368 4,956 8,186
</TABLE>

US Export Sales were $5,209 for the year ended June 30, 1997; $3,812 for
the nine months ended June 30, 1996; $2,945 for the year ended September 30,
1995.

20. SHARED SERVICE AGREEMENT

On June 30, 1996, the Company entered into an agreement with Concurrent to
provide certain administrative and personnel-related services for the Company.
The Company was billed monthly for these services which totaled $461 for the
year ended June 30, 1997. Effective June 30, 1997 the only service provided was
for rental of facilities.

CYBERGUARD RESELLER AGREEMENT:

A reseller agreement exists, effective June 27, 1996, between The Company
and Concurrent to act as a reseller of CyberGuard products. For each CyberGuard
Product sold by Concurrent, Concurrent shall pay to CyberGuard a predetermined
fee. The initial term of this agreement shall be for a period of twelve months
beginning with the effective date of this agreement and may be renewed for two
additional terms of twelve months each with the written consent of both the
Company and Concurrent. During the current fiscal year, the Company elected to
extend the reseller agreement to Concurrent for an additional twelve month
period.

Sales to Concurrent Computer Corporation and its subsidiaries were $60 for
the year ended June 30, 1997.

F-16
<PAGE> 31

CYBERGUARD CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NIGHTHAWK SUPPLIER AGREEMENT:

A supplier agreement exists, effective June 27, 1996 between the Company
and Concurrent. During the term of this agreement, the Company shall pay
Concurrent a fee of $5 per month. The initial term of this agreement shall be
for a period of twelve months beginning with the effective date of this
agreement and may be renewed for two additional terms of twelve months each with
the written consent of both the Company and Concurrent . During the current
fiscal year the NightHawk Supplier Agreement with Concurrent was renegotiated
with new pricing established and an extension of the agreement until December
31, 1997.

21. RESELLER AGREEMENTS

On August 6, 1996, the Company entered into a Joint Development and
Marketing Agreement with Information Resources Engineering, Inc. (IRE) whereas
the Company and IRE will jointly develop and market a product offering
consisting of a combination of the CyberGuard Firewall and IRE SafeNet products
in an interoperable centrally managed system configured for use with a virtual
private network (VPN). In connection with this Agreement IRE paid CyberGuard $1
million in prepaid licenses of which approximately $.85 million remains as
deferred revenue as of June 30, 1997.

Subject to the terms and conditions of this Joint Agreement, the Company
and IRE agree to cooperate with and assist each other in the joint design and
development of any product.

The Company entered into a Master Software Licensing Agreement with Data
General on June 23, 1997. The agreement calls for mutual software development,
sales, and support toward a strategic alliance that fully integrates the
CyberGuard Firewall with Data General's Secureline hardware servers. In
connection with this agreement, the Company has agreed to pay Data General $.5
million of prepaid royalties. Prepaid royalties of $166,000 have been accrued as
of June 30, 1997.

22. NEW ACCOUNTING PRONOUNCEMENTS

In February 1997, the FASB issued SFAS No. 128," Earnings Per Share" (SFAS
No. 128"). SFAS No. 128 specifies new standards designed to improve the earnings
per share ("EPS") information provided in statements by simplifying the existing
computational guidelines, revising the disclosure requirements and increasing
the comparability of EPS data on an international basis. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods. The Company does not believe that adoption of
SFAS No. 128 will have a significant impact on its financial reporting.

F-17
<PAGE> 32

CYBERGUARD CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

23. SUBSEQUENT EVENTS

In the months of July, August and September of 1997, the Company elected to
sell 464,524 shares of common stock under the private placement equity agreement
with Capital Ventures, Inc. that raised net proceeds of approximately $3.9
million. As of June 30, 1997 this represents a dilution of 5.8% to the existing
shareholders.

On September 4, 1997, the Company sold 250,000 shares of Concurrent
Computer Corp. common stock. This represented approximately 35% of the
outstanding Investment in Concurrent Preferred Stock (Securities
available-for-sale) at June 30, 1997. The gain realized on this sale was $47.

F-18

<PAGE> 1
EXHIBIT 23.01

INDEPENDENT AUDITORS' CONSENT

The Board of Directors
CyberGuard Corporation

We consent to incorporation by reference in the following registration
statements: Form S-8 (No. 333-88446); Form S-8 (No. 333-28813); Form S-3 (No.
333-06253); Form S-3 (No. 333-09211); and Form S-3 (No. 333-28693) of
CyberGuard Corporation of our report dated September 23, 1997, relating to the
consolidated balance sheets of CyberGuard Corporation and subsidiaries as of
June 30, 1997 and 1996, and the related consolidated statements of operations,
shareholders' equity, and cash flows for the year ended June 30, 1997, the nine
months ended June 30, 1996, and the year ended September 30, 1995, which report
appears in the June 30, 1997 Form 10-K/A of CyberGuard Corporation.

KPMG Peat Marwick LLP

Miami, Florida
October 22, 1997

<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED BALANCE SHEET AT JUNE 30, 1997 AND CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED JUNE 30, 1997, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<CASH> 2,975
<SECURITIES> 1,268
<RECEIVABLES> 7,189
<ALLOWANCES> 517
<INVENTORY> 1,588
<CURRENT-ASSETS> 12,993
<PP&E> 3,288
<DEPRECIATION> 1,582
<TOTAL-ASSETS> 15,974
<CURRENT-LIABILITIES> 6,057
<BONDS> 0
0
0
<COMMON> 74
<OTHER-SE> 9,843
<TOTAL-LIABILITY-AND-EQUITY> 15,974
<SALES> 14,574
<TOTAL-REVENUES> 15,621
<CGS> 6,669
<TOTAL-COSTS> 7,240
<OTHER-EXPENSES> 16,395
<LOSS-PROVISION> 327
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (8,014)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,490)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,490)
<EPS-PRIMARY> (1.76)
<EPS-DILUTED> (1.76)

</TABLE>