NETEGRITY INC, DEF 14A, 1999-03-19

NETEGRITY INC
DEF 14A, 1999-03-19
COMPUTERS & PERIPHERAL EQUIPMENT & SOFTWARE

Previous: NETEGRITY INC, PRER14A, 1999-03-19

Next: LEAR CORP /DE/, 8-K, 1999-03-19

<PAGE>
SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. 1)

Filed by the Registrant / /
Filed by a Party other than the Registrant / /

Check the appropriate box:

/ / Preliminary Proxy Statement/Amendment No. 1

/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))

/X/ Definitive Proxy Statement

/ / Definitive Additional Materials

/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12

NETEGRITY, INC.
- - --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

- - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

/X/ No fee required.

/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.

(1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------

(2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------------

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
-----------------------------------------------------------------------

(4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------

(5) Total fee paid:
-----------------------------------------------------------------------

/ / Fee paid previously with preliminary materials.

/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:
-----------------------------------------------------------------------

(2) Form, Schedule or Registration Statement No.:
-----------------------------------------------------------------------

(3) Filing Party:
-----------------------------------------------------------------------

(4) Date Filed:
-----------------------------------------------------------------------

<PAGE>
NETEGRITY, INC.
245 WINTER STREET
WALTHAM, MA 02451

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

NOTICE OF SPECIAL MEETING IN LIEU OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD
MAY 11, 1999

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

To Our Stockholders:

A Special Meeting in Lieu of the Annual Meeting of Stockholders of
Netegrity, Inc., a Delaware corporation (the "Company" or "Netegrity"), will be
held on Tuesday, May 11, 1999, at 9:00 a.m., local time, at the offices of
Hutchins, Wheeler & Dittmar, A Professional Corporation, Suite 3100, 101 Federal
Street, Boston, Massachusetts 02110 for the following purposes:

1. To elect a Board of Directors as described herein.

2. To consider and act upon a proposal to ratify, confirm and approve an
amendment to the 1997 Stock Option Plan to increase the number of shares
reserved for grant thereunder from 500,000 to 2,500,000.

3. To consider and act upon a proposal to ratify, confirm and approve an
amendment to the Company's Restated Certificate of Incorporation, as
amended, to increase the number of authorized shares of capital stock from
30,000,000 to 45,000,000.

4. To consider and act upon any other business which may properly come before
the Meeting and any adjournments thereof.

The Board of Directors has fixed the close of business on March 31, 1999, as
the record date for the Meeting. All stockholders of record on the books of the
Company at the close of business on March 31, 1999 are entitled to notice of,
and to vote at, the Meeting.

PLEASE COMPLETE AND RETURN THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED
WHETHER OR NOT YOU INTEND TO BE PRESENT AT THE MEETING IN PERSON.

All stockholders are cordially invited to attend the Meeting.

By Order of the Board of Directors,
Barry N. Bycoff,
President and Chief Executive Officer

April 9, 1999

WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE AND SIGN
THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED ENVELOPE IN ORDER TO
ASSURE REPRESENTATION OF YOUR SHARES. THE PROXY MAY BE REVOKED BY THE PERSON
EXECUTING THE PROXY BY FILING WITH THE SECRETARY OF THE COMPANY AN INSTRUMENT OF
REVOCATION OR A DULY EXECUTED PROXY BEARING A LATER DATE, OR BY ELECTING TO VOTE
IN PERSON AT THE MEETING. NO POSTAGE NEED BE AFFIXED IF THE PROXY IS MAILED IN
THE UNITED STATES.
<PAGE>
NETEGRITY, INC.
PROXY STATEMENT
1999 SPECIAL MEETING IN LIEU OF ANNUAL MEETING OF STOCKHOLDERS
MAY 11, 1999

Proxies in the form enclosed with this proxy statement are solicited by the
Board of Directors of Netegrity, Inc., a Delaware corporation (the "Company"),
for use at the Special Meeting in Lieu of Annual Meeting of Stockholders to be
held on May 11, 1999, at 9:00 a.m., local time, at the offices of Hutchins,
Wheeler & Dittmar, A Professional Corporation, Suite 3100, 101 Federal Street,
Boston, Massachusetts 02110, and any adjournments thereof (the "Meeting").

Only stockholders of record as of March 31, 1999 will be entitled to notice
of and to vote at the Meeting and any adjournments thereof.

If the enclosed proxy is properly executed and returned, it will be voted in
the manner directed by the stockholder. If no specification is made, such shares
will be voted for the election of Directors as set forth in this Proxy Statement
and for the proposals set forth in Items 2 and 3. With respect to the election
of directors, any stockholder submitting a proxy has the right to withhold
authority to vote for any individual nominee or group of nominees to the Board
of Directors by writing the name of such individual or group in the space
provided on the proxy. Any person giving the enclosed form of proxy has the
power to revoke it by executing a proxy bearing a later date, by voting in
person at the meeting, or by giving written notice of revocation to the
Secretary of the Corporation at any time before the proxy is exercised. The
persons named as attorneys in the proxies are directors and officers of the
Company.

The representation in person or by proxy of at least a majority of the
outstanding shares of Common Stock is necessary to establish a quorum for the
transaction of business. The election of the nominees for Director will be
decided by a plurality vote. All other matters being submitted to stockholders
require the affirmative vote of the majority of voting shares present in person
or represented by proxy at the Meeting (following the determination of a
quorum). An automated system administered by the Company's transfer agent
tabulates the votes. The vote on each matter submitted to stockholders is
tabulated separately. Both abstentions and broker "non-votes" are counted as
present for the purposes of determining the existence of a quorum for the
transaction of business. However, for purposes of determining the number of
shares voting on a particular proposal, abstentions and broker "non-votes" are
not counted as votes cast or shares voting. A "non-vote" occurs when a broker
holding shares for a beneficial owner votes on one proposal, but does not vote
on another proposal because the broker does not have discretionary voting power
and has not received instructions from the beneficial owner.

An Annual Report to Stockholders, containing financial statements for the
fiscal year ended December 31, 1998, is being mailed with this Proxy Statement
to all stockholders entitled to vote. This proxy statement and the form of proxy
were first mailed to the Company's stockholders on or about April 9, 1999.

The Company's principal executive offices are located at 245 Winter Street,
Waltham, Massachusetts 02451, telephone number (781) 890-1700.

2
<PAGE>
RECORD DATE AND VOTING SECURITIES

Only stockholders of record at the close of business on March 31, 1999 are
entitled to notice of and to vote at the meeting. On March 9, 1999, the Company
had outstanding 10,268,847 shares of Common Stock, par value $.01 per share and
3,333,333 shares of Series D Preferred Stock, convertible into Common Stock on a
one-for-one basis. Each outstanding share of the Company's Common Stock entitles
the record holder to one vote. Each outstanding share of the Company's Series D
Preferred Stock entitles the record holder to the number of votes equal to the
largest number of full shares of Common Stock into which such shares of Series D
Preferred Stock could be converted. The holders of shares of Series D Preferred
Stock and Common Stock will vote together as a single class.

MANAGEMENT AND PRINCIPAL HOLDERS OF VOTING SECURITIES

The following table sets forth as of March 9, 1999, the beneficial ownership
of shares of capital stock of (i) each person known by the Company to own
beneficially more than 5% of the issued and outstanding shares of capital stock
outstanding on that date, (ii) each director or nominee, and (iii) each
executive officer identified in the Summary Compensation Table, and (iv) the
directors, nominees and executive officers as a group, both with respect to the
number of shares owned by each person and the percentage of the outstanding
shares represented thereby.

<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL
BENEFICIAL OWNER OWNERSHIP(1) PERCENT OF CLASS
- - ------------------------------------------------------------------------- ---------------------- -----------------
<S> <C> <C>
Pequot Private Equity Fund L.P.(2)....................................... 4,921,076 36.18%
Pequot Offshore Private Equity Fund Inc.
354 Pequot Avenue
Southport, CT 06490

Fidelity Securities Fund:
Fidelity OTC Portfolio(3)................................................ 700,000 5.15%
c/o Fidelity Management & Research Company
82 Devonshire Street E 20E
Boston, MA 02109
Barry N. Bycoff(4)....................................................... 678,000 4.98%
Milton J. Pappas(5)...................................................... 604,092 4.44%
Euclid Partners III, L.P.(6)............................................. 567,717 4.17%
Euclid Partners Corporation 50
Rockefeller Plaza, Suite 1022
New York, NY 10020
Stephen L. Watson(7)..................................................... 357,625 2.63%
Michael L. Mark(8)....................................................... 100,678 *
Ralph B. Wagner(9)....................................................... 82,087 *
James Rosen(10).......................................................... 80,000 *
James E. Hayden(11)...................................................... 45,000 *
Deepak Taneja(12)........................................................ 43,000 *
James P. McNiel(13)...................................................... 29,190 *
Thomas M. Palka(14)...................................................... 15,000 *
Eric R. Giler(15)........................................................ 10,125 *
All executive officers and directors as a group (12 persons)(16)......... 6,965,843 51.21%
</TABLE>

3
<PAGE>
- - ------------------------

* less than 1%

(1) Except as otherwise noted below, the Company believes each beneficial owner
has the sole voting and investment power with respect to all shares of
Common Stock (or options, warrants or other securities convertible into or
exchangeable for Common Stock) shown as beneficially owned by him. All
numbers and percentages, except as otherwise noted, do not assume the
exercise of outstanding options or warrants. Pursuant to the rules of the
Securities and Exchange Commission, shares of Common Stock which an
individual or group has a right to acquire within 60 days of March 9, 1999
pursuant to the exercise of presently exercisable or outstanding options,
warrants or conversion privileges are deemed to be outstanding for the
purpose of computing the percentage ownership of such individual or group,
but are not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person or group shown in the table.

(2) Includes 3,333,333 shares of Series D Convertible Preferred Stock, 86,956
shares of Common Stock and 1,500,787 Warrants.

(3) Includes 700,000 shares of Common Stock.

(4) Includes 200,000 shares of Common Stock beneficially owned by Mr. Bycoff,
10,000 shares held in trust for the benefit of Mr. Bycoff's children and
non-qualified stock options to purchase 468,000 shares of Common Stock.

(5) Includes non-qualified stock options to purchase 36,375 shares of Common
Stock. Also includes 567,717 shares of Common Stock owned by Euclid of which
Mr. Pappas may be deemed a beneficial owner. Mr. Pappas disclaims beneficial
ownership of such shares. See footnote 6.

(6) Includes 567,717 shares of Common Stock. Mr. Pappas, a director of the
Company, is the president of the sole corporate general partner of Euclid
and may be deemed the beneficial owner of the 567,717 shares beneficially
owned by Euclid. Mr. Pappas disclaims beneficial ownership of such shares.

(7) Includes 90,500 shares of Common Stock and non-qualified stock options to
purchase 267,125 shares of Common Stock.

(8) Includes 69,553 shares of Common Stock and non-qualified stock options to
purchase 31,125 shares of Common Stock.

(9) Includes 28,962 shares of Common Stock and non-qualified stock options to
purchase 53,125 shares of Common Stock.

(10) Includes 22,000 shares of Common Stock and incentive stock options to
purchase 58,000 shares of Common Stock.

(11) Includes incentive stock options to purchase 45,000 shares of Common Stock.

(12) Includes incentive stock options to purchase 43,000 shares of Common Stock.

(13) Includes 29,190 Warrants to purchase Common Stock.

(14) Includes incentive stock options to purchase 15,000 shares of Common Stock.

(15) Includes non-qualified stock options to purchase 10,125 shares of Common
Stock.

(16) Includes the following shares which the specified has the right to acquire
upon the exercise of outstanding options, exercisable currently or within 60
days: Mr. Watson, 267,125 shares;

4
<PAGE>
Mr. Pappas, 36,375 shares; Mr. Wagner, 53,125 shares; Mr. Mark, 31,125
shares; Mr. Giler, 10,125 shares; and Mr. Bycoff, 468,000 shares.

ELECTION OF DIRECTORS

At the meeting, six directors are to be elected, constituting the entire
Board of Directors. The directors of the Company shall hold office for the terms
set forth below and until their successors have been elected and qualified.

No proxy may be voted for more people than the number of nominees listed
below. Shares represented by all proxies received by the Board of Directors and
not so marked as to withhold authority to vote for any individual director (by
writing that individual director's name where indicated on the proxy) or for all
directors will be voted FOR the election of all the nominees named below (unless
one or more nominees are unable or unwilling to serve).

The Board of Directors knows of no reason why any such nominee would be
unable or unwilling to serve, but if such should be the case, proxies may be
voted for the election of some other person.

The Board of Directors held six meetings during the year ended December 31,
1998. Messrs. Bycoff, Giler, Watson, Wagner, Pappas, McNiel and Mark attended
more than 75% of all meetings of the Board of Directors held during the 1998
year during their respective tenures as directors.

The Compensation and Stock Option Committee of the Board of Directors (the
"Compensation Committee"), of which Messrs. Pappas, Wagner and Giler are
currently members, determines who should receive stock options under the
Company's various stock plans and also reviews and recommends officer
compensation, including salary and bonus plans. The Compensation Committee held
six meetings during the year ended December 31, 1998.

The Audit Committee of the Board of Directors at year end was composed of
Messrs. Watson, Pappas and Mark. The principal functions of the Audit Committee
include overseeing the performance and reviewing the scope of the audit function
of the Company's independent auditors. The Audit Committee also reviews, among
other things, audit plans and procedures, various accounting and financial
reporting issues, and changes in accounting policies. The Audit Committee held
two meetings during the calendar year ended December 31, 1998.

Messrs. Watson, Pappas, Giler, Mark, McNiel and Wagner attended more than
75% of all committee meetings held during the 1998 fiscal year of which each was
a member.

Mr. Watson has served on the Board of Directors since March 1986; Mr.
Pappas, since July 1990; Mr. Wagner, since September 1992; Mr. Bycoff, since
April 1993; Mr. Mark, since October 1994; and

5
<PAGE>
Mr. Giler, since December 1996; and Mr. McNiel, since January 1998. Although
there has not been a disagreement with the Company, Mr. Pappas has declined to
stand for re-election.

<TABLE>
<CAPTION>
YEAR FIRST
ELECTED A
NAME OF NOMINEE AGE DIRECTOR
- - ------------------------------------------------------------------------------------------------- --- -----------
<S> <C> <C>
Barry Bycoff..................................................................................... 50 1993
Stephen L. Watson................................................................................ 57 1986
Ralph B. Wagner.................................................................................. 65 1992
Michael L. Mark.................................................................................. 52 1994
Eric R. Giler.................................................................................... 44 1996
James P. McNiel.................................................................................. 36 1998
</TABLE>

OCCUPATIONS AND BIOGRAPHIES OF DIRECTORS AND NOMINEES

BARRY N. BYCOFF was appointed President and Chief Executive Officer and
Director of the Company in April 1993. From December 1991 to December 1992,
during his tenure at MapInfo Corporation, a provider of desktop mapping
software, he held positions as Chief Operating Officer, Senior Vice President of
Sales and Marketing, and Director. From January 1984 to October 1991, he
successfully ran a number of business units for Prime Computer Inc., a
manufacturer of mainframe and minicomputer systems, holding such positions as
Vice President-Marketing in the Computer Systems Business Unit, Vice
President-General Purpose Product Line, Vice President-Prime Information
Business Group, Director-Finance and Administration/Worldwide Sales and
Director-Corporate Planning and Analysis. Prior to that, Mr. Bycoff held various
management positions at Gillette Company from November 1973 to December 1983.
Mr. Bycoff is also a director of Encotone, Ltd.

STEPHEN L. WATSON is currently Chairman of the Board and has served as
Director of the Company since March 1986. He is also currently Chairman and
co-founder of ScanCenters of America, a document imaging and conversion services
company. Mr. Watson previously served as President and Chief Operating Officer
of the Company from March 1991 to April 1993 and served as Chief Executive
Officer from May 1991 until April 1993. From June 1989 to March 1991 he was a
private investor. From July 1988 to June 1989, he was President of California
Micro Solutions, Inc., a franchisee of Computerland Corporation, a retailer of
personal computer systems. From April 1987 to July 1988, he was Senior Vice
President of Computerland Corporation, a retailer of personal computer software
and hardware systems. Mr. Watson is a director of several privately-held
companies.

RALPH B. WAGNER became a Director of the Company in September 1992. He is a
Director and co-founder of Keyfile Corporation, a manufacturer and marketer of
document image software products for use on personal computers. Mr. Wagner is a
principal of Wagner Resources, a consulting and investment firm. Since 1983, Mr.
Wagner has served as a director of several private companies including Alpha
Software, a developer, manufacturer and marketer of software programs, and
PureSpeech, a software developer specializing in speech recognition.

MICHAEL L. MARK became a director of the Company in October 1994. He is
President of Refined Reports, Inc., an electronic publishing software
development company he founded in 1990. Prior to that, he served as Vice
President, System Integration at Interleaf, Inc., an electronic publishing
software developer, and was Vice President and co-founder of Cadmus Computer
Corporation, a workstation

6
<PAGE>
manufacturer. Mr. Mark also serves as a director of Progress Software
Corporation, a manufacturer of software development tools, and two other private
companies.

ERIC R. GILER was nominated as a Director of the Company in December 1996.
Mr. Giler is founder and since 1984 has been President and Director of
Brooktrout Technology, Inc., a leading supplier of advanced software and
hardware products in the electronic messaging market. Prior to founding
Brooktrout, he worked primarily in the area of technical marketing and sales as
a product manager with Teradyne, Inc. and an applications engineer manager for
Intec Corporation. Mr. Giler serves on the boards of the MIT Enterprise Forum,
the Massachusetts Telecommunications Council and the New England-Israel Chamber
of Commerce. Mr. Giler is also a member of both the American Electronics
Association and the Massachusetts Computer Software Council.

JAMES P. MCNIEL was nominated as the Series D Preferred Director of the
Company in January, 1998 pursuant to the Company's Restated Certificate of
Incorporation. Mr. McNiel is currently the President of McNiel Group Ltd., a
professional consultancy. Prior to that Mr. McNiel was the Executive Vice
President for Spike Technologies, Inc., a developer of wireless local loop
communications equipment. From 1990 to 1996, Mr. McNiel was Executive Vice
President of Corporate Development for Cheyenne Software Corporation, now
Computer Associates International, Inc. From 1989 to 1990, Mr. McNiel was
Director of Marketing for Archive Corporation, now Seagate Technology, Inc., and
from 1986 to 1989, he was Senior Manager of Advanced Products for AST Computer,
a developer of desktop, mobile and server PC products. From 1981 to 1986, Mr.
McNiel was Lead Software Engineer and Team Leader for Lucas Film,
Ltd/Convergence Corporation, developers of post-production video editing
equipment and film production.

THE BOARD OF DIRECTORS RECOMMENDS A
VOTE FOR THE ELECTION OF THE ABOVE NOMINEES.

OCCUPATION AND BIOGRAPHY OF EXECUTIVE OFFICER

JAMES E. HAYDEN is 44 years old and was named Vice President of Finance and
Administration, Chief Financial Officer and Treasurer of the Company in April of
1998. From 1994 to 1998, he was with Computervision Corporation, a manufacturer
of mainframe and minicomputer systems, serving as Principal Accounting Officer
(and Acting Chief Financial Officer in 1997) and Director of Finance for
Worldwide Field Operations from 1993 to 1994. From 1989 to 1993, Mr. Hayden
served as Finance Director for Prime Computer/Computervision's Northern European
Region. From 1986 to 1989, he served in various finance management positions for
Prime Computer/Computervision.

JAMES ROSEN is 45 years old and joined the Company in April of 1997 as Vice
President of Marketing & Business Development. Prior to joining the Company,
from 1995 to 1997 Mr. Rosen was Director of Business Alliances at BBN Planet
Corporation, an internet services provider, now GTE Internetworking. From 1991
to 1995, he held various positions at Lotus Development Corporation, including
Director of Strategic Alliances, Senior Manager of Lotus Notes Alliance Partner
Program, and Senior Manager of Notes Product Management. From 1985 to 1991, Mr.
Rosen was a co-founder and held senior management positions, including Executive
Vice President and Vice President and Vice President of Systems Integration for
LanSystems, Inc., a systems integration and software firm.

DEEPAK TANEJA is 38 years old and joined the Company in January of 1998 as
Vice President of Development. From 1996 to 1998, he was Director of Development
for Switchboard, Inc. an Internet

7
<PAGE>
directory services firm. From 1987 to 1996, Mr. Taneja held various positions at
Banyan Systems, Inc., a developer of network software products, including
Director of Development for Messaging Products and Director of Development for
Network and Systems Management products. From June 1983 to November 1987, he was
a Senior Software Engineer with Intel Corporation.

THOMAS PALKA is 57 years old and was named Vice President of Sales and
Services in September of 1998. From 1997 to 1998, he was Vice President of
Worldwide Sales & Consulting Services for VenturCom Software, a developer of
software tools for the embedded and real-time market. From 1991 to 1997, Mr.
Palka was with Ardent Software, a database, data warehouse, and development
tools company, where he served as Vice President of Worldwide Sales from 1991 to
1995 and Vice President of Marketing from 1996 to 1997. From 1990 to 1991, he
was Vice President of North American Sales at Data General Corporation, and from
1981 to 1990, he was Vice President of North American Sales at Prime Computer,
Inc., a manufacturer of mainframe and minicomputer systems.

Under the Company's Amended and Restated By-Laws, officers are elected
annually.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In May, 1996, Barry N. Bycoff, the Company's President and CEO, exercised an
option to purchase 200,000 shares of the Company's Common Stock at a price of
$1.00 per share. The Company's Board of Directors approved a loan to Mr. Bycoff
as payment for this transaction. Mr. Bycoff issued the Company a full recourse
note that is secured by the 200,000 shares of Common Stock. This note has an
interest rate of 7% per annum and is due and payable on demand by the Company in
the discretion of the Board of Directors.

The Board of Directors has adopted a policy that all transactions between
the Company and its officers, directors and principal stockholders or any
affiliates thereof will be on terms no less favorable to the Company than could
be obtained from unaffiliated third parties. Such transactions will also be
approved by a majority of the disinterested, outside directors. All loans to
Company officers will also be approved by a majority of the disinterested,
outside directors.

On January 6, 1998, the Company entered into a Preferred Stock and Warrant
Purchase Agreement (the "Agreement") with Pequot Private Equity Fund, L.P., a
Delaware limited partnership ("PPEF") and Pequot Offshore Private Equity Fund,
Inc., a British Virgin Islands corporation (together with PPEF, the "Pequot
Entities"). On January 7, 1998, the Company sold 1,666,667 shares of Series D
Preferred Stock, at $1.50 per share, and 750,393 Warrants to the Pequot Entities
for an aggregate purchase price of $2,500,000.50. On June 5, 1998, the Company
sold 833,333 shares of Series D Preferred Stock, at $1.50 per share and 375,197
Warrants to the Pequot Entities pursuant to the terms of the Agreement. On June
30, 1998, the Company sold 833,333 shares of Series D Preferred Stock, at $1.50
per share and 375,196 Warrants to the Pequot Entities. The Series D Preferred
Stock is convertible into Common Stock on a one-for-one basis, subject to
adjustment. In addition, the Series D Preferred Stock is subject to mandatory
conversion into Common Stock upon certain circumstances. As part of the
transaction, James McNiel joined the Board of Directors of the Company, as
designee of the Pequot Entities, and has agreed to provide certain consulting
services to the Company. In connection with such service, the Company granted
James McNiel warrants for the purchase of 100,000 shares of Common Stock at a
price of $1.50 per share.

On February 8, 1999, the Company entered into a Stock Purchase Agreement
(the "Stock Purchase Agreement") with the Pequot Entities and the parties named
therein. Pursuant to the terms

8
<PAGE>
of the Stock Purchase Agreement, the Company sold 795,651 shares of Common
Stock, at $5.75 per share.

EXECUTIVE COMPENSATION AND OTHER INFORMATION
CONCERNING DIRECTORS AND OFFICERS

EXECUTIVE COMPENSATION

The following table sets forth the annual and long-term compensation for
services in all capacities to the Company for the Company's most recent three
years ended December 31, 1998, of those persons who (i) served as the Chief
Executive Officer of the Company during any part of the year ended December 31,
1998, and (ii) the other most highly compensated executive officers of the
Company at December 31, 1998 whose annual compensation and bonus exceeded
$100,000 (the "Named Officers"):

<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
AWARDS(2)
ANNUAL COMPENSATION(1) --------------------------------
CALENDAR ------------------------ OPTIONS/ RESTRICTED
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) SARS(#) STOCK AWARDS($)
- - -------------------------------------------------------- ----------- ------------- --------- --------- ---------------------
<S> <C> <C> <C> <C> <C>
Barry N. Bycoff......................................... 1998 $ 166,666.00 $ 0 0 0
Chief Executive Officer, 1997 166,666.00 50,000 0 0
President & Director 1996 156,824.00 40,000 400,000 0
James E. Hayden,........................................ 1998 $ 81,458.22 $ 0 0 0
Vice President of Finance and 1997 0 0 0 0
Administration, Chief Financial 1996 0 0 0 0
Officer and Treasurer
James O'Connor.......................................... 1998 $ 35,467.93 $ 0 0 0
1997 110,000.00 23,000 0 0
1996 112,000.00 20,000 200,000 0
James Rosen............................................. 1998 $ 112,500.00 $ 0 0 0
Vice President of Marketing 1997 80,878.00 0 0 0
and Business Development 1996 0 0 0 0
Deepak Taneja........................................... 1998 $ 123,156.97 $ 35,000 0 0
Vice President of Development 1997 0 0 0 0
1996 0 0 0 0
Thomas Palka............................................ 1998 $ 42,115.38 $ 0 0 0
Vice President of Sales 1997 0 0 0 0
1996 0 0 0 0
</TABLE>

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

(1) Excludes perquisites and other personal benefits, the aggregate annual
amount of which for each officer as less than the lesser of $50,000 or 10%
of the total salary and bonus reported.

(2) The Company did not grant any restricted stock awards or stock appreciation
rights ("SARs") or make any long-term incentive plan payouts during the
three years ended December 31, 1998.

9
<PAGE>
OPTION GRANTS IN THE LAST FISCAL YEAR

The following table sets forth grants of stock options pursuant to the
Company's 1997 Stock Option Plan during the fiscal year ended December 31, 1998
to directors and named officers which are reflected in the Summary Compensation
Table above.

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION
OPTIONS PERCENT OF TOTAL EXERCISE OR FOR OPTION TERM (1)
SAR OPTIONS/SARS GRANTED TO BASE PRICE EXPIRATION ---------------------
NAME GRANTED(#) EMPLOYEES IN FISCAL YEAR $/SHARE) DATE 5%($) 10%($)
- - ------------------------------------ ----------- --------------------------- ------------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Barry N. Bycoff..................... 100,000 8% 3.69 2008 601,062 957,091
30,000 2% 4.13 2008 201,576 320,976

James E. Hayden..................... 180,000 15% 2.13 2008 624,518 994,441
30,000 2% 4.13 2008 201,576 320,976

James Rosen......................... 15,000 1% 3.13 2008 76,477 121,776
25,000 2% 1.94 2008 79,001 125,797
30,000 2% 4.13 2008 210,576 320,976

Deepak Taneja....................... 20,000 2% 3.13 2008 101,969 162,368
50,000 4% 1.94 2008 158,003 251,593
30,000 2% 4.13 2008 201,576 320,976

Thomas Palka........................ 200,000 17% 1.94 2008 632,011 1,006,372
</TABLE>

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

(1) Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their
term assuming the specified compounded rates of appreciation (5% and 10%) on
the Company's Common Stock over the term of the options. These numbers are
calculated based on rules promulgated by the Securities and Exchange
Commission and do not reflect the Company's estimate of future stock price
growth. Actual gains, if any, on stock option exercises and Common Stock
holdings are dependent on the timing of such exercise and the future
performance of the Company's Common Stock. There can be no assurance that
the rates of appreciation assumed in this table can be achieved or that the
amounts reflected will be received by the individuals.

OPTION EXERCISES AND FISCAL YEAR-END VALUES

The following table sets forth information with respect to options to
purchase the Company's Common Stock granted under the 1994 Stock Plan, as
amended, including (i) the number of shares purchased upon exercise of options
in the most recent fiscal year, (ii) the net value realized upon such

10
<PAGE>
exercise, (iii) the number of unexercised options outstanding at December 31,
1998, and (iv) the value of such unexercised options at December 31, 1998:

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
DECEMBER 31, 1998 OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF
UNEXERCISED VALUE OF
OPTIONS AT UNEXERCISED
DECEMBER 31, 1998 IN-THE-MONEY OPTIONS AT
SHARES (#) DECEMBER 31, 1998($)(1)
ACQUIRED ON VALUE -------------------------- -------------------------------
NAME EXERCISE REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - ----------------------- ------------------- ----------- ----------- ------------- ------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
Barry N. Bycoff........ -0- -0- 468,000 397,000 $ 1,486,994 -0-
James E. Hayden........ -0- -0- -0- 210,000 -0- -0-
James O'Connor......... 105,000 62,250 -0- -0- -0- -0-
James Rosen............ -0- -0- 25,000 170,000 73,325 -0-
Deepak Taneja.......... -0- -0- -0- 200,000 -0- -0-
Thomas Palka........... -0- -0- -0- 200,000 -0- -0-
</TABLE>

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

(1) Value is based on the difference between option exercise price and the fair
market value at 1998 fiscal year-end ($4.313 per share, the closing price on
the Nasdaq SmallCap Market on December 31, 1998) multiplied by the number of
shares underlying the option.

COMPENSATION OF DIRECTORS

As compensation for serving on the Board of Directors, each non-employee
director is paid his expenses by the Company for each quarter during which they
attend meetings. In addition, the Company's policy to compensate each
non-employee director at a rate of $1,500 for each quarter.

Each non-employee director of the Company also participates in the Company's
1988 Non-Employee Director Stock Option Plan, 1991 Non-Employee Director Stock
Option Plan, 1993 Non-Employee Director Stock Option Plan, 1994 Non-Employee
Director Plan and 1997 Non-Employee Director Plan (the "Director Plans"). The
Director Plans authorize grants of stock options to each member of the Company's
Board of Directors who is neither an employee or officer of the Company. In
fiscal 1997, Eric R. Giler, Michael L. Mark, Milton J. Pappas, Ralph B. Wagner
and Stephen L. Watson were each granted options to purchase 12,500 shares of
Common Stock at a price of $2.19 per share. Twenty-five percent of each 12,500
share option grant is currently vested, five percent of each 12,500 share option
grant vests on the end of each subsequent calendar quarter over five years.

James McNiel joined the Board of Directors of the Company, as designee of
the holders of the Series D Preferred Stock, and entered into a Consulting
Agreement with the Company pursuant to which Mr. McNiel has agreed to provide
certain consulting services to the Company. In connection with such service, the
Company granted Mr. McNiel warrants for the purchase of 100,000 shares of Common
Stock at a purchase price of $1.50 per share.

11
<PAGE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

The Company's executive compensation program is administered by the
Compensation and Stock Option Committee of the Board of Directors, currently
consisting of Milton Pappas, as Chairman, Ralph Wagner and Eric Giler (the
"Compensation Committee"). All members of the Compensation Committee are
non-employee directors. Pursuant to the authority delegated by the Board of
Directors, the Compensation Committee establishes each year the compensation of
senior management, including approval of annual salaries and bonuses, the review
and approval of bonus plans for executive officers, as well as the grant of
stock options to officers, employees and consultants.

One of the Company's primary business objectives is to maximize long-term
stockholder returns. To achieve this objective, the Company believes it is
necessary to attract, retain and motivate qualified executives in a competitive
industry. The Compensation Committee and the Board of Directors therefore apply
the philosophy that compensation of executive officers, specifically including
that of the Chief Executive Officer and President, should be linked to revenue
growth, profitability, earnings per share performance, and long-term increase in
stock price and quality of earnings.

Establishing compensation programs generally and determining the
compensation of individual executive officers are complex matters involving
numerous issues and a variety of data. The approach of the Compensation
Committee is primarily subjective in nature. The Compensation Committee
identifies relevant factors to be considered, such as the need to be competitive
in the market for executive talent, retain and motivate existing officers with
competitive salary and option programs, and to provide incentives and rewards
for individual and corporate performance. However, the Compensation Committee
maintains a flexible approach that is based on the exercise of judgment and
discretion and reflects the Company's entrepreneurial operating environment and
long-term performance orientation. Precise formulas, targets or goals are not
utilized and specific weights are not assigned to the various factors. The
Compensation Committee focuses on the Company's goal of long-term enhancement of
stockholder value by stressing long-term goals and by using stock-based
incentive programs with extended vesting schedules. The Compensation Committee
believes the use of such incentives to retain and motivate individuals who have
developed the skills and expertise required to lead the Company is key to the
Company's success.

Under the supervision of the Compensation Committee, the Company has
developed and implemented certain compensation policies. The Compensation
Committee's executive compensation policies are designed to (i) enhance
profitability of the Company and shareholder value, (ii) integrate compensation
with the Company's annual and long-term performance goals, (iii) reward
corporate performance, (iv) recognize individual initiative, achievement and
hard work, (v) assist the Company in attracting and retaining qualified
executive officers, and (vi) retain and motivate existing officers to perform.
Compensation is comprised of cash compensation in the form of annual base salary
and performance-based bonuses, and long-term incentive compensation in the form
of stock options.

In setting cash compensation levels for executive officers (including the
Chief Executive Officer), the Compensation Committee prepares a salary review
annually. The base salaries are fixed at levels comparable to the amounts paid
to senior executives with comparable qualifications, experience and
responsibilities at other technology companies located in the northeastern
United States with approximately the same number of employees as the Company and
engaged in similar businesses to that of the Company such as Checkpoint and
Security Dynamics. Nonetheless, since the Company believes that those
organizations that are constituents of the Nasdaq Computer Software Index used
in

12
<PAGE>
the performance graph on page 15 include companies which may not be similar to
the Company, the Company believes it is appropriate to attempt to establish
salaries consistent with those of fewer and more comparable companies, which the
Company nonetheless believes are represented in the performance graph. Although
the Compensation Committee reviews such information for general guidance, it
does not specifically target compensation of the executive officers to
compensation levels at other companies.

The compensation for the Chief Executive Officer and President of the
Company is designed to reward performance that enhances shareholder value.
Financial goals are based on the achievement of significant increases in net
income as specified in the Company's annual operating plan. The plan establishes
milestones for revenue growth and operating expenses. The cash compensation
package is comprised of base pay, which is not related to the performance of the
Company, and with an opportunity for a bonus based on the achievement of certain
profitability milestones. Both components are affected by the Company's revenue
growth, market share growth, profitability, quality of earnings, and growth in
earnings per share. The Compensation Committee did not award cash bonuses to
management, including the Chief Executive Officer in 1998.

The compensation program for the remaining members of the executive group is
based upon the attainment of objectives for profitability similar to the Chief
Executive Officer. Bonus amounts are predicated upon improvement in Company
operating performance as well as attainment of planned objectives. In the past,
the Chief Executive Officer and President has made recommendations to the
Compensation Committee regarding the planned objectives and executive
compensation levels. Although the objectives were not achieved, bonuses were
paid to executive officers based on the Compensation Committee's qualitative
assessment of performance. The Compensation Committee would have awarded higher
bonuses to management if quantitative objectives had been met. The overall plans
and operating performance levels upon which management compensation is based are
approved by the Compensation Committee on an annual basis.

The Compensation Committee relies on incentive compensation in the form of
performance-based bonuses and stock options to retain and motivate executive
officers. Incentive compensation in the form of performance-based bonuses for
the Chief Executive Officer and the Company's other executive officers is based
upon management's success in meeting the Company's financial and strategic
goals. The plan establishes milestones for revenue growth and operating
expenses. Strategic goals focus on increasing market share and Company growth
and improving the Company's strategic position in the market and the quality of
earnings.

Incentive compensation in the form of stock options is designed to provide
long-term incentives to executive officers and other employees, to encourage the
executive officers and other employees to remain with the Company and to enable
optionees to develop and maintain a significant, long-term stock ownership
position in the Company's Common Stock, which in turn motivates the recipient to
focus on long-term enhancement in stockholder value. The Company's 1994 Stock
Plan, as amended and the 1997 Stock Option Plan administered by the Compensation
Committee, are the vehicles for the granting of stock options.

Factors reviewed by the Compensation Committee in determining whether to
grant options are similar to those considered in determining salaries and
bonuses described above. Several other factors, however, such as an employee's
individual initiative, achievement and performance are also considered by the
Compensation Committee. In making specific grants to executives, the
Compensation Committee

13
<PAGE>
evaluates each officer's total equity compensation package. The Compensation
Committee generally reviews the option holdings of each of the executive
officers including vesting and exercise price and the then current value of such
unvested options. The Compensation Committee considers equity compensation to be
an integral part of a competitive executive compensation package, a way to
reinforce the individual's commitment to the Company and an important mechanism
to align the interests of management with those of the Company's stockholders.

The Compensation Committee is satisfied that the executive officers of the
Company are dedicated to achieving significant improvements in the long-term
financial performance of the Company and that the compensation policies and
programs implemented and administered have contributed and will continue to
contribute towards achieving this goal.

This report has been submitted by the members of the Compensation and Stock
Option Committee: Milton J. Pappas, Chairman, Ralph B. Wagner and Eric Giler.

14
<PAGE>
PERFORMANCE GRAPH

The following graph illustrates a five year comparison of cumulative total
stockholder return among the Company, the University of Chicago's Center for
Research in Security Prices ("CRSP") Index for the Nasdaq Stock Market and the
CRSP Index for the Nasdaq Computer Software Industry Index. The comparison
assumes $100 was invested on December 31, 1992 in the Company's Common Stock and
in each of the foregoing indices and assumes reinvestment of dividends, if any.

COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURNS
PERFORMANCE GRAPH FOR
NETEGRITY, INC.

PREPARED BY THE CENTER FOR RESEARCH IN SECURITY PRICES
Produced on 02/26/1999 including data to 12/31/1998
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
NETEGRITY,
INC. NASDAQ STOCK MARKET NASDAQ STOCKS (SIC 7300-7399

<S> <C> <C> <C> <C> <C> <C> <C>
(US Companies) US Companies) Business services
12/31/93 100 100 100
1/31/94 106.25 103.035 105.396
2/28/94 112.5 102.073 106.391
3/31/94 93.75 95.797 101.437
4/29/94 68.75 94.553 101.351
5/31/94 87.5 94.785 105.78
6/30/94 75 91.318 99.559
7/29/94 62.5 93.193 100.125
8/31/94 50 99.135 110.614
9/30/94 62.5 98.881 110.668
10/31/94 75 100.824 121.522
11/30/94 71.875 97.479 119.799
12/30/94 81.25 97.752 121.119
1/31/95 143.75 98.31 118.781
2/28/95 181.25 103.509 127.668
3/31/95 162.5 106.578 136.457
4/28/95 162.5 109.936 142.997
5/31/95 156.25 112.772 144.957
6/30/95 112.5 121.911 160.225
7/31/95 125 130.873 169.937
8/31/95 200 133.526 169.978
9/29/95 162.5 136.596 174.536
10/31/95 231.25 135.807 183.263
11/30/95 268.75 138.996 185.016
12/29/95 175 138.256 183.534
1/31/96 156.25 138.936 182.706
2/29/96 168.75 144.224 193.646
3/29/96 175 144.699 194.082
4/30/96 193.75 156.7 216.793
5/31/96 412.5 163.896 224.104
6/28/96 337.5 156.508 216.885
7/31/96 231.25 142.551 195.619
8/30/96 218.75 150.538 201.145
9/30/96 287.5 162.052 222.97
10/31/96 262.5 160.261 218.073
11/29/96 200 170.169 232.335
12/31/96 193.75 170.015 229.49
1/31/97 300 182.098 248.902
2/28/97 231.25 172.025 228.363
3/31/97 268.75 160.793 210.315
4/30/97 231.25 165.819 234.868
5/30/97 187.5 184.611 261.955
6/30/97 140.625 190.265 267.788
7/31/97 146.875 210.336 294.535
8/29/97 237.5 210.011 286.906
9/30/97 200 222.402 292.361
10/31/97 156.25 210.853 285.885
11/28/97 131.25 211.924 292.658
12/31/97 131.25 208.299 275.994
1/30/98 165.625 214.912 296.205
2/27/98 175 235.137 335.851
3/31/98 193.75 243.772 363.808
4/30/98 218.75 247.861 367.56
5/29/98 215.625 234.131 341.645
6/30/98 253.125 250.543 405.304
7/31/98 300 247.627 391.599
8/31/98 187.5 199.061 318.367
9/30/98 156.25 226.846 381.694
10/30/98 150 236.548 372.752
11/30/98 350 260.073 430.991
12/31/98 431.25 293.52 496.198

15
<PAGE>
APPROVAL OF AMENDMENT OF THE 1997 STOCK OPTION PLAN

There will be presented at the meeting a proposal to approve an amendment of
the Company's 1997 Stock Option Plan (the "1997 Plan") which amendment was
approved by the Board of Directors on March 9, 1999, whereby the number of
shares reserved for issuance under the 1997 Plan was increased from 500,000
shares of Common Stock to 2,500,000 shares of Common Stock. At March 1, 1999,
options for the purchase of 1,517,345 shares of Common Stock were outstanding
under the 1997 Plan.

Set forth below is a summary of the principal provisions of the 1997 Plan, a
copy of which may be obtained from the Secretary of the Company. The Board of
Directors recommends that the stockholder increase the number of shares subject
to the 1997 Plan to 2,500,000.

PURPOSE. The 1997 Plan is intended to encourage ownership of the Common
Stock by employees of the Company to induce qualified personnel to enter and
remain in the employ of the Company. The 1997 Plan provides for the granting of
incentive stock options intended to meet the requirements of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code") as well as for the
granting of options that do not meet those requirements. Shares issued under the
1997 Plan may be either authorized but unissued shares or treasury shares. If
any unexercised option granted under the 1997 Plan lapses or terminates for any
reason, the shares covered thereby may again be optioned thereunder.

ADMINISTRATION. The 1997 Plan will be administered by the Compensation
Committee of the Board of Directors consisting of two or more Directors of the
Company appointed by the Board of Directors. The Committee determines the
employees to whom options shall be granted, the number of shares to be covered
by such options, the terms of such options and the vesting schedule for such
options. Present members of the Committee are Milton Pappas, Ralph Wagner and
Eric Giler. The Board of Directors may at any time terminate, modify or adopt
amendments to the 1997 Plan provided that such termination, modification or
amendments shall not affect existing rights of any participant under an option
previously granted to the participant without participant's consent.
Furthermore, without the approval of the stockholders, no amendment may be made
by the Board to the 1997 Plan which increases the maximum number of shares as to
which options may be granted under the 1997 Plan or increases the maximum number
of shares for which an option may be granted to any optionee. Unless sooner
terminated by the Board, the 1997 Plan terminates on April 9, 2007, the tenth
anniversary of the date on which it was adopted by the Company's stockholders.

NUMBER OF SHARES. The total number of shares of Common Stock subject to the
1997 Plan is 500,000 shares, subject to adjustment in the event of stock
dividends, stock splits, mergers, consolidations or other recapitalizations or
reorganizations of the Company.

ELIGIBILITY TO PARTICIPATE. Options may be granted under the 1997 Plan to
officers, employees, directors or consultants of the Company or any of its
subsidiaries in key positions. Directors who are not otherwise employees of the
Company or any of its subsidiaries shall be eligible to be granted an option
pursuant to the 1997 Plan. In determining the eligibility of an individual to be
granted an option, and the number of shares to be subject to purchase under such
option, the Compensation Committee takes into account the position and
responsibilities of the individual being considered, his or her present and
potential contributions to the success of the Company or its subsidiaries and
such other factors as the Compensation Committee deems relevant. Incentive stock
options may be granted only to an employee who owns stock possessing not more
than 10% of the total combined voting power

16
<PAGE>
of all classes of stock of the Company, unless the purchase price for the stock
under such option is at least 110% of its fair market value at the time such
option is granted and the option, by its terms, is not exercisable more than
five years from the date on which it is granted.

The maximum number of shares with respect to which an incentive option or
options may be granted to any employee in any one taxable year of the Company
shall not exceed shares with a fair market value in excess of $100,000 taking
into account shares granted during such taxable period under options that have
terminated.

TERMS OF OPTIONS. The exercise price of each option granted under the 1997
Plan is determined by the Compensation Committee at the time of granting of the
option but, in the case of an incentive stock option, shall in no event be less
than the fair market value of the Common Stock covered by the option at the time
the option is granted. The Compensation Committee in its sole discretion may
accelerate the exercisability of any option granted under the 1997 Plan.
Notwithstanding the foregoing two sentences, an option granted to any Director
or officer of the Company shall not be exercisable prior to six months and one
day after the date of the grant. The exercise price of each option under the
1997 Plan is determined by the Compensation Committee at the time of grant but,
in the case of an incentive stock option, shall in no event be less than the
fair market value of the Common Stock subject to the option at the time of
grant.

TAX EFFECTS OF PLAN PARTICIPATION

Options granted under the 1997 Plan are intended to be either incentive
stock options, as defined in Section 422 of the Code, or non-qualified stock
options.

INCENTIVE STOCK OPTIONS. Except as provided below with respect to the
alternative minimum tax, the optionee will not recognize taxable income upon the
grant or exercise of an incentive stock option. In addition, if the optionee
holds the shares received pursuant to the exercise of the option for at least
one year after the date of exercise and for at least two years after the option
is granted, the optionee will recognize long-term capital gain or loss upon the
disposition of the stock measured by the difference between the option exercise
price and the amount received for such shares upon disposition.

In the event that the optionee disposes of the stock prior to the expiration
of the required holding periods (a "disqualifying disposition"), the optionee
generally will recognize ordinary income to the extent of the lesser of (i) the
fair market value of the stock at the time of exercise over the exercise price,
or (ii) the amount received for the stock upon disposition over the exercise
price. The basis in the stock acquired upon exercise of the option will equal
the amount of income recognized by the optionee plus the option exercise price.
Upon the eventual disposition of the stock, the optionee will recognize
long-term or short-term capital gain or loss, depending on the holding period of
the stock and the difference between the amount realized by the optionee upon
disposition of the stock and his basis in the stock.

For alternative minimum tax purposes, the excess of the fair market value of
stock on the date of the exercise of the incentive stock option over the
exercise price of the option is included in alternative minimum taxable income
for alternative minimum tax purposes. If the alternative minimum tax does apply
to the optionee, an alternative minimum tax credit may reduce the regular tax
upon eventual disposition of the stock.

The Company will not be allowed an income tax deduction upon the grant or
exercise of an incentive stock option. Upon a disqualifying disposition by the
optionee of shares acquired upon

17
<PAGE>
exercise of the incentive stock option, the Company will be allowed a deduction
in an amount equal to the ordinary income recognized by the optionee.

Under proposed regulations issued by the Internal Revenue Service, the
exercise of an option with previously acquired stock of the Company will be
treated as, in effect, two separate transactions. Pursuant to Section 1036 of
the Code, the first transaction will be a tax-free exchange of the previously
acquired shares for the same number of new shares. The new shares will retain
the basis and, except, as provided below, the holding periods of the previously
acquired shares. The second transaction will be the issuance of additional new
shares being having a value equal to the difference between the aggregate fair
market value of all of the new shares being acquired and the aggregate option
exercise price for those shares. Because the exercise of an incentive stock
option does not result in the recognition by the optionee of income, this
issuance will also be tax-free (unless the alternative minimum tax applies, as
described above). The optionee's basis in these additional shares will be zero
and the optionee's holding period for these shares will commence on the date on
which the shares are transferred. For purposes of the one and two-year holding
period requirements which must be met for favorable incentive stock option tax
treatment to apply, the holding periods of previously acquired shares are
disregarded.

NON-QUALIFIED STOCK OPTIONS. As in the case of incentive stock options, no
income is recognized by the optionee on the grant of a non-qualified stock
option. On the exercise by an optionee of a non-qualified option, generally the
excess of the fair market value of the stock when the option is exercised over
its cost to the optionee will be (a) taxable to the optionee as ordinary income
and (b) generally deductible for income tax purposes by the Company. The
optionee's tax basis in his stock will equal his cost for the stock plus the
amount of ordinary income he had to recognize with respect to the non-qualified
stock option plan.

The Internal Revenue Service will treat the exercise of a non-qualified
stock option with already owned stock of the Company as two transactions. First,
there will be a tax-free exchange of the old shares for a like amount of new
shares under Section 1036 of the Code, with the new shares retaining the basis
and holding periods of the old shares. Second, the issuance of additional new
shares (representing the spread between the fair market value of all the new
shares and the option price) is taxable to the employee as ordinary income under
Section 83 of the Code, as is the case with any non-qualified option. The new
shares will have a basis equal to the spread between the fair market value of
the new shares and the option price.

Accordingly, upon a subsequent disposition of stock acquired upon the
exercise of a non-qualified option, the optionee will recognize short-term or
long-term capital gain or loss, depending upon the holding period of the stock
equal to the difference between the amount realized upon disposition of the
stock by the optionee and his basis in the stock.

THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSED AMENDMENT.
AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION.

On March 9, 1999, the Board of Directors adopted an amendment to the
Restated Certificate of Incorporation (the "Charter Amendment"), subject to
approval by the stockholders, to increase the number of authorized shares of
capital stock from 30,000,000 shares to 45,000,000. The Board of Directors has
determined it is advisable and in the best interests of the stockholders of the
Company to increase the number of authorized shares of capital stock and the
Common Stock, $.01 par value per

18
<PAGE>
share (the "Common Stock") to accomodate future corporate transactions. The
Board of Directors also directed that the Charter Amendment be submitted for
action at the Special Meeting in lieu of Annual Meeting of Stockholders to be
held on May 11, 1999.

INCREASE THE NUMBER OF SHARES OF COMMON STOCK. The Company's Restated
Certificate of Incorporation currently authorizes the issuance of a total of
30,000,000 shares, consisting of 25,000,000 shares of Common Stock, par value
$.01 per share, and 5,000,000 shares of Preferred Stock, par value $.01 per
share. The Charter Amendment will increase the total number of authorized shares
to 45,000,000, and the number of shares of Common Stock authorized to
40,000,000. The Charter Amendment will modify the first paragraph of Article
FOURTH of the Restated Certificate of Incorporation to read as follows:

FOURTH: THE TOTAL NUMBER OF SHARES OF ALL CLASSES OF CAPITAL STOCK WHICH
THE CORPORATION SHALL HAVE AUTHORITY TO ISSUE IS 45,000,000 SHARES,
CONSISTING OF 40,000,000 SHARES OF COMMON STOCK WITH A PAR VALUE OF $.01 PER
SHARE (HEREIN CALLED THE "COMMON STOCK"), AND 5,000,000 SHARES OF PREFERRED
STOCK WITH A PAR VALUE OF $.01 PER SHARE (HEREIN CALLED THE "PREFERRED
STOCK").

The Charter Amendment will not change the currently authorized number of
shares of Preferred Stock, which will remain set at 5,000,000, of which
3,333,333 shares of Series D Preferred Stock are outstanding. On March 9, 1999,
an aggregate of 10,268,847 shares of Common Stock had been issued. As of March
9, 1999, there were 8,244,147 shares of Common Stock authorized but unissued
shares that are reserved for issuance under the Company's various stock plans
and upon conversion and exercise of the Company's preferred stock and warrants.
On March 9, 1999, there were 6,487,006 shares of Common Stock authorized,
unissued and unreserved shares. Upon approval of the Charter Amendment, there
will be an aggregate of 9,176,462 authorized, unissued and reserved shares of
Common Stock and an aggregate of 20,554,691 authorized, unissued and unreserved
shares of Common Stock.

The additional shares of Common Stock for which authorization is sought
would be identical to the shares of Common Stock now authorized. Adoption of the
proposed amendment and the issuance of Common Stock would not affect the rights
of holders of currently outstanding Common Stock, except for effects incidental
to increasing the number of shares of Common Stock outstanding. Holders of
Common Stock do not have preemptive rights to subscribe to additional securities
that may be issued by the Company, which means that current stockholders do not
have a prior right to purchase any new issue of capital stock of the Company in
order to maintain their proportionate ownership thereof. If the Charter
Amendment is adopted, it will become effective upon the filing of the Charter
Amendment with the Delaware Secretary of State.

All such additional shares could be issued by the Board of Directors of the
Company, without the necessity of any stockholder action, except to the extent
otherwise required by the Delaware General Corporation Law (the "DCGL") or the
rules of The Nasdaq Stock Market. The Nasdaq rules, in the case of a merger,
generally require stockholder approval if more than 20% of the outstanding
common stock of a company is to be issued in a single transaction or group of
related transactions. The management of the Company is not aware of any specific
effort to accumulate the Company's securities or to obtain control of the
Company by means of a merger, tender offer, solicitation in opposition to
management or otherwise. However, the availability of additional, unreserved
shares might give the Board of Directors greater power to take actions in
opposition to an actual or threatened attempt to acquire control of the Company
and in certain respects may have the effect of limiting the ability of a third
party to effect a change in control of the Company. For example, additional
shares of Common

19
<PAGE>
Stock could be issued to make attempts to gain control of the Company or the
Board of Directors more difficult or time-consuming.

The Company does not currently have any plans for the additional shares,
however, the Board of Directors of the Company believes that it is in the best
interests of the Company and its stockholders to have available a significant
number of shares of Common Stock, which would be available to be issued in
connection with public and private equity financings, mergers or acquisitions or
other corporate transactions, including benefit programs (such as the 1997
Non-Employee Director Stock Option Plan and the 1997 Stock Option Plan), or
stock splits or stock dividends.

APPRAISAL RIGHTS IN RESPECT OF THE PROPOSED AMENDMENT. Under the applicable
provisions of the DGCL, the Company's stockholders have no appraisal rights with
respect to the Charter Amendment.

INDEPENDENT PUBLIC ACCOUNTANTS

The Board of Directors has appointed PricewaterhouseCoopers LLP as
independent auditors to examine the consolidated financial statements of the
Corporation and its subsidiaries for the fiscal year ended December 31, 1998.

A representative of PricewaterhouseCoopers LLP is expected to be present at
the meeting. We will have the opportunity to make a statement if he or she so
desires and to respond to appropriate questions. The engagement of
PricewaterhouseCoopers LLP was approved by the Board of Directors at the
recommendation of the Audit Committee of the Board of Directors.

SECTION 16 REQUIREMENTS

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors, executive officers, and persons who own more than 10%
of a registered class of the Company's equity securities (collectively,
"Reporting Persons"), to file initial reports of ownership and reports of
changes in ownership of Common Stock of the Company with the Securities and
Exchange Commission (the "SEC"). Such persons are required by SEC regulations to
furnish the Company with copies of all Section 16(a) forms they file.

Based solely on its review of the copies of such forms received by it with
respect to fiscal 1998, or written representations from certain reporting
persons, the Company believes that all Reporting Persons complied with all
Section 16(a) filing requirements in fiscal 1998.

BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Based upon a review of the forms submitted to the Company during fiscal
1998, Jim Rosen, Vice President of Marketing and Business Development, James
Hayden, Vice President of Finance and Administration, Chief Financial Officer
and Treasurer, Deepak Taneja, Vice President of Development and Thomas Palka,
Vice President of Sales each failed to file on a timely basis a Form 3 in
connection with their then recent appointment as executive officers of the
Company in 1998.

STOCKHOLDER PROPOSALS

Proposals of stockholders intended for inclusion in the proxy statement to
be furnished to all stockholders entitled to vote at the next annual meeting of
the Company must be received at the Company's principal executive offices not
later than December 15, 1999. In order to curtail controversy

20
<PAGE>
as to the date on which a proposal was received by the Company, it is suggested
that proponents submit their proposals by Certified Mail, Return Receipt
Requested.

OTHER BUSINESS

The Board of Directors knows of no business that will be presented for
consideration at the Meeting other than those items stated above. If any other
business should before the Meeting, votes may be cast pursuant to proxies in
respect to any such business in the best judgment of the person or persons
acting under the proxies.

EXPENSES AND SOLICITATION

The cost of solicitation of proxies will be borne by the Company, and in
addition to soliciting stockholders by mail through its regular employees, the
Company may request banks, brokers and other custodians, nominees and
fiduciaries to solicit their customers who have stock of the Company registered
in the names of a nominee and, if so, will reimburse such banks, brokers and
other custodians, nominees and fiduciaries for their reasonable out-of-pocket
costs. Solicitation by officers and employees of the Company may also be made of
some stockholders in person or by mail, telephone or telegraph following the
original solicitation.

10-K REPORT

THE COMPANY WILL PROVIDE EACH BENEFICIAL OWNER OF ITS SECURITIES WITH A COPY OF
ITS ANNUAL REPORT ON FORM 10-K, INCLUDING THE FINANCIAL STATEMENTS AND SCHEDULES
THERETO, REQUIRED TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION FOR
THE COMPANY'S MOST RECENT FISCAL YEAR WITHOUT CHARGE UPON RECEIPT OF A WRITTEN
REQUEST FROM SUCH PERSON. SUCH REQUESTS SHOULD BE DIRECTED TO BARRY N. BYCOFF,
PRESIDENT AND CHIEF EXECUTIVE OFFICER, NETEGRITY, INC., 245 WINTER STREET,
WALTHAM, MASSACHUSETTS 02451.

By Order of the Board of Directors,
BARRY N. BYCOFF
PRESIDENT AND CHIEF EXECUTIVE OFFICER

21
<PAGE>
NETEGRITY, INC.
1997 STOCK OPTION PLAN, AS AMENDED

1. PURPOSE OF THE PLAN.

This stock option plan (the "Plan") is intended to provide incentives: (a)
to the employees of Netegrity, Inc. (the "Company") and any present or future
subsidiaries of the Company by providing them with opportunities to purchase
stock in the Company pursuant to options granted hereunder which qualify as
"incentive stock options" under Section 422 of the Internal Revenue Code of
1986, as amended (the "Code") ("ISO" or "ISOs"); and (b) to officers, employees,
consultants and directors of the Company and any present or future subsidiaries
by providing them with opportunities to purchase stock in the Company pursuant
to options granted hereunder which do not qualify as ISOs ("Non-Qualified
Option" or "Non-Qualified Options"). As used herein, the terms "parent" and
"subsidiary" mean "parent corporation" and "subsidiary corporation,"
respectively, as those terms are defined in Section 424 of the Code and the
Treasury Regulations promulgated thereunder (the "Regulations").

2. STOCK SUBJECT TO THE PLAN.

(a) The initial maximum number of shares of common stock, par value $.01 per
share, of the Company ("Common Stock") available for stock options granted under
the Plan through the end of the Company's fiscal year ending December 31, 1997
shall be 2,500,000 shares of Common Stock. The maximum number of shares of
Common Stock available for grants shall be subject to adjustment in accordance
with Section 11 thereof. Shares issued under the Plan may be authorized but
unissued shares of Common Stock or shares of Common Stock held in treasury.

(b) To the extent that any stock option shall lapse, terminate, expire or
otherwise be canceled without the issuance of shares of Common Stock, the shares
of Common Stock covered by such option(s) shall again be available for the
granting of stock options.

(c) Common Stock issuable under the Plan may be subject to such restrictions
on transfer, repurchase rights or other restrictions as shall be determined by
the Committee (as defined in Section 3 below).

3. ADMINISTRATION OF THE PLAN.

(a) The Plan shall be administered by a committee (the "Committee")
consisting of two or more members of the Company's Board of Directors. The Board
of Directors may from time to time appoint a member or members of the Committee
in substitution for or in addition to the member or members then in office and
may fill vacancies on the Committee however caused. The Committee shall choose
one of its members as Chairman and shall hold meetings at such times and places
as it shall deem advisable. A majority of the members of the Committee shall
constitute a quorum and any action may be taken by a majority of those present
and voting at any meeting. Any action may also be taken without the necessity of
a meeting by a written instrument signed by a majority of the Committee. The
decision of the Committee as to all questions of interpretation and application
of the Plan shall be final, binding and conclusive on all persons. The Committee
shall have the authority to adopt, amend and rescind such rules and regulations
as, in its opinion, may be advisable in the administration of the Plan. The
Committee may correct any defect or supply any omission or reconcile any
inconsistency in the Plan or in any option agreement granted hereunder in the
manner and to the extent it shall deem

A-1
<PAGE>
expedient to carry the Plan into effect and shall be the sole and final judge of
such expediency. No Committee member shall be liable for any action or
determination made in good faith. Prior to the date of the registration of an
equity security of the Company under Section 12 of the Exchange Act, the Plan
may be administered by the Board of Directors and in such event all references
in this Plan to the Committee shall be deemed to mean the Board of Directors.

(b) Subject to the terms of the Plan, the Committee shall have the authority
to (i) determine the employees of the Company and its subsidiaries (from among
the class of employees eligible under Section 4 to receive ISOs) to whom ISOs
may be granted, and to determine (from the class of individuals eligible under
Section 4 to receive Non-Qualified Options) to whom Non-Qualified Options may be
granted; (ii) determine the time or times at which options may be granted; (iii)
determine the option price of shares subject to each option which price shall
not be less than the minimum price specified in Section 6; (iv) determine
whether each option granted shall be an ISO or a Non-Qualified Option; (v)
determine (subject to Section 9) the time or times when each option shall become
exercisable and the duration of the exercise period; (vi) determine whether
restrictions such as repurchase options are to be imposed on shares subject to
options and the nature of such restrictions; and (vii) determine the size of any
Options under the Plan, taking into account the position or office of the
optionee with the Company, the job performance of the optionee and such other
factors as the Committee may deem relevant in the good faith exercise of its
independent business judgment.

4. ELIGIBILITY.

Options designated as ISOs may be granted only to employees of the Company
or any present or future subsidiary. Non-Qualified Options may be granted to any
officer, employee, consultant or director of the Company or of any of its
present or future subsidiaries.

In determining the eligibility of an individual to be granted an option, as
well as in determining the number of shares to be optioned to any individual,
the Committee shall take into account the position and responsibilities of the
individual being considered, the nature and value to the Company or its
subsidiaries of his or her service and accomplishments, his or her present and
potential contribution to the success of the Company or its subsidiaries, and
such other factors as the Committee may deem relevant.

No option designated as an ISO shall be granted to any employee of the
Company or any subsidiary if such employee owns, immediately prior to the grant
of an option, stock representing more than 10% of the value of all classes of
stock of the Company or a parent or a subsidiary, unless the purchase price for
the stock under such option shall be at least 110% of its fair market value at
the time such option is granted and the option, by its terms, shall not be
exercisable more than five years from the date it is granted. In determining the
stock ownership under this paragraph, the provisions of Section 424(d) of the
Code shall be controlling. In determining the fair market value under this
paragraph, the provisions of Section 6 hereof shall apply.

The maximum number of shares of the Company's Common Stock with respect to
which an option or options may be granted to any employee in any one taxable
year of the Company shall not exceed 500,000 shares, taking into account shares
subject to options granted and terminated, or repriced, during such tax year.

A-2
<PAGE>
5. OPTION AGREEMENT.

Each option shall be evidenced by an option agreement (the "Agreement") duly
executed on behalf of the Company and by the optionee to whom such option is
granted, which Agreement shall comply with and be subject to the terms and
conditions of the Plan. The Agreement may contain such other terms, provisions
and conditions which are not inconsistent with the Plan as may be determined by
the Committee, provided that options designated as ISOs shall meet all of the
conditions for ISOs as defined in Section 422 of the Code. The date of grant of
an option shall be as determined by the Committee. More than one option may be
granted to an individual.

6. OPTION PRICE.

The option price or prices of shares of the Company's Common Stock for
options designated as Non-Qualified Options shall be as determined by the
Committee, but in no event shall the option price be less than the minimum legal
consideration required therefor under the laws of the State of Delaware or the
laws of any jurisdiction in which the Company or its successors in interest may
be organized. The option price or prices of shares of the Company's Common Stock
for ISOs shall be at least the fair market value of such Common Stock at the
time the option is granted as determined by the Committee in accordance with the
Regulations promulgated under Section 422 of the Code. If such shares are then
listed on any national securities exchange, the fair market value shall be the
mean between the high and low sales prices, if any, on such exchange on the date
of the grant of the option or, if none, shall be determined by taking a weighted
average of the means between the highest and lowest sales prices on the nearest
date before and the nearest date after the date of grant in accordance with
Treasury Regulations Section 25.2512-2. If the shares are not then listed on any
such exchange, the fair market value of such shares shall be the mean between
the high and low sales prices, if any, as reported in the National Association
of Securities Dealers Automated Quotation System National Market System
("NASDAQ/NMS") for the date of the grant of the option, or, if none, shall be
determined by taking a weighted average of the means between the highest and
lowest sales on the nearest date before and the nearest date after the date of
grant in accordance with Treasury Regulations Section 25.2512-2. If the shares
are not then either listed on any such exchange or quoted in NASDAQ/NMS, the
fair market value shall be the mean between the average of the "Bid" and the
average of the "Ask" prices, if any, as reported in the National Daily Quotation
Service for the date of the grant of the option, or, if none, shall be
determined by taking a weighted average of the means between the highest and
lowest sales prices on the nearest date before and the nearest date after the
date of grant in accordance with Treasury Regulations Section 25.2512-2. If the
fair market value cannot be determined under the preceding three sentences, it
shall be determined in good faith by the Committee.

7. MANNER OF PAYMENT; MANNER OF EXERCISE.

(a) Options granted under the Plan may provide for the payment of the
exercise price by delivery of (i) cash or a check payable to the order of the
Company in an amount equal to the exercise price of such options, (ii) shares of
Common Stock of the Company owned by the optionee having a fair market value
equal in amount to the exercise price of the options being exercised, or (iii)
any combination of (i) and (ii), provided, however, that payment of the exercise
price by delivery of shares of Common Stock of the Company owned by such
optionee may be made only if such payment does not result in a change of
earnings for the Company or its subsidiaries for financial reports purposes.

A-3
<PAGE>
The fair market value of any shares of the Company's Common Stock which may be
delivered upon exercise of an option shall be determined by the Committee in
accordance with Section 6 hereof.

(b) To the extent that the right to purchase shares under an option has
accrued and is in effect, options may be exercised in full at one time or in
part from time to time, by giving written notice, signed by the person or
persons exercising the option, to the Company, stating the number of shares with
respect to which the option is being exercised, accompanied by payment in full
for such shares as provided in subparagraph (a) above. Upon such exercise,
delivery of a certificate for paid-up non-assessable shares shall be made at the
principal office of the Company to the person or persons exercising the option
at such time, during ordinary business hours, after ten business days from the
date of receipt of the notice by the Company, as shall be designated in such
notice, or at such time, place and manner as may be agreed upon by the Company
and the person or persons exercising the option.

8. EXERCISE OF OPTIONS.

Subject to the provisions of paragraphs 9 through 11, each option granted
under the Plan shall be exercisable as follows:

(a) VESTING. The Option shall not be exercisable until the anniversary of
the date of grant, after which the option shall be exercisable in accordance
with the option agreement evidencing the grant thereof.

(b) FULL VESTING OF INSTALLMENTS. Once an installment becomes exercisable
it shall remain exercisable until expiration or termination of the option,
unless otherwise specified by the Committee.

(c) PARTIAL EXERCISE. Each option or installment may be exercised at any
time or from time to time, in whole or in part, for up to the total number of
shares with respect to which it is then exercisable.

(d) ACCELERATION OF VESTING. The Committee shall have the right to
accelerate the date of exercise of any installment or any option.

9. TERM OF OPTIONS; EXERCISABILITY.

(a) TERM. Each option shall expire not more than ten (10) years from the
date of the granting thereof, but shall be subject to earlier termination as may
be provided in the Agreement.

(b) EXERCISABILITY. Except as otherwise provided in the Agreement, an
option granted to an employee optionee who ceases to be an employee of the
Company or one of its subsidiaries shall be exercisable only to the extent that
the right to purchase shares under such option has accrued and is in effect on
the date such optionee ceases to be an employee of the Company or one of its
subsidiaries.

10. OPTIONS NOT TRANSFERABLE.

The right of any optionee to exercise any option granted to him or her shall
not be assignable or transferable by such optionee otherwise than by will or the
laws of descent and distribution, any such option shall be exercisable during
the lifetime of such optionee only by him. Any option granted under the Plan
shall be null and void and without effect upon the bankruptcy of the optionee to
whom the option is granted, or upon any attempted assignment or transfer, except
as herein provided, including without limitation any purported assignment,
whether voluntary or by operation of law, pledge, hypothecation or other
disposition, attachment, divorce, trustee process or similar process, whether
legal or equitable, upon such option.

A-4
<PAGE>
11. ADJUSTMENTS. Upon the occurrence of any of the following events, an
optionee's rights with respect to options granted to him or her hereunder shall
be adjusted as hereinafter provided, unless otherwise specifically provided in
the written agreement between the optionee and the Company relating to such
option:

(a) STOCK DIVIDENDS AND STOCK SPLITS. If the shares of Common Stock shall
be subdivided or combined into a greater or smaller number of shares or if the
Company shall issue any shares of Common Stock as a stock dividend on its
outstanding Common Stock, the number of shares of Common Stock deliverable upon
the exercise of options shall be appropriately increased or decreased
proportionately, and appropriate adjustments shall be made in the purchase price
per share to reflect such subdivision, combination or stock dividend.

(b) CONSOLIDATIONS OR MERGERS. If the Company is to be consolidated with
or acquired by another entity in a merger, sale of all or substantially all of
the Company's assets, stock sale or issuance or otherwise (an "Acquisition"),
the Committee or the board of directors of any entity assuming the obligations
of the Company hereunder (the "Successor Board"), shall, as to outstanding
options, either (i) make appropriate provision for the continuation of such
options by substituting on an equitable basis for the shares then subject to
such options the consideration payable with respect to the outstanding shares of
Common Stock in connection with the Acquisition; or (ii) upon written notice to
the optionees, provide that all options must be exercised, to the extent then
exercisable, within a specified number of days of the date of such notice, at
the end of which period the options shall terminate; or (iii) terminate all
options in exchange for a cash payment equal to the excess of the fair market
value of the shares subject to such options (to the extent then exercisable)
over the exercise price thereof.

(c) RECAPITALIZATION OR REORGANIZATION. In the event of a recapitalization
or reorganization of the Company (other than a transaction described in
subparagraph (b) above) pursuant to which securities of the Company or of
another corporation are issued with respect to the outstanding shares of Common
Stock, an optionee upon exercising an option shall be entitled to receive for
the purchase price paid upon such exercise the securities he would have received
if he had exercised his option prior to such recapitalization or reorganization.

(d) DISSOLUTION OR LIQUIDATION. In the event of the proposed dissolution
or liquidation of the Company, each option will terminate immediately prior to
the consummation of such proposed action or at such other time and subject to
such other conditions as shall be determined by the Committee.

(e) ISSUANCES OF SECURITIES. Except as expressly provided herein, no
issuance by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of shares
subject to options. No adjustments shall be made for dividends paid in cash or
in property other than securities of the Company.

(f) FRACTIONAL SHARES. No fractional shares shall be issued under the Plan
and the optionee shall receive from the Company cash in lieu of such fractional
shares.

(g) ADJUSTMENTS. Upon the happening of any of the events described in
subparagraphs (a), (b) or (c) above, the class and aggregate number of shares
set forth in Section 2 hereof that are subject to options which previously have
been or subsequently may be granted under the Plan shall also be appropriately
adjusted to reflect the events described in such subparagraphs. The Committee or
the

A-5
<PAGE>
Successor Board shall determine the specific adjustments to be made under this
paragraph 11 and, subject to Section 3, its determination shall be conclusive.

If any person or entity owning restricted Common Stock obtained by exercise
of an option made hereunder receives shares or securities or cash in connection
with a corporate transaction described in subparagraphs (a), (b) or (c) above as
a result of owning such restricted Common Stock, such shares or securities or
cash shall be subject to all of the conditions and restrictions applicable to
the restricted Common Stock with respect to which such shares or securities or
cash were issued, unless otherwise determined by the Committee or the Successor
Board.

12. NO SPECIAL EMPLOYMENT RIGHTS.

Nothing contained in the Plan or in any option granted under the Plan shall
confer upon any option holder any right with respect to the continuation of his
employment by the Company (or any subsidiary) or interfere in any way with the
right of the Company (or any subsidiary), subject to the terms of any separate
employment agreement to the contrary, at any time to terminate such employment
or to increase or decrease the compensation of the option holder from the rate
in existence at the time of the grant of an option. Whether an authorized leave
of absence, or absence in military or government service, shall constitute
termination of employment shall be determined by the Committee at the time.

13. WITHHOLDING.

The Company's obligation to deliver shares upon the exercise of any option
granted under the Plan or to make payment under Section 11 hereunder, shall be
subject to the option holder's satisfaction of all applicable Federal, state and
local income, excise and employment tax withholding requirements.

14. RESTRICTIONS ON ISSUE OF SHARES.

(a) Notwithstanding the provisions of Section 7, the Company may delay the
issuance of shares covered by the exercise of an option and the delivery of a
certificate for such shares until one of the following conditions shall be
satisfied:

(i) The shares with respect to which such option has been exercised are
at the time of the issue of such shares effectively registered or qualified
under applicable Federal and state securities acts now in force or as
hereafter amended; or

(ii) Counsel for the Company shall have given an opinion, which opinion
shall not be unreasonably conditioned or withheld, that such shares are
exempt from registration and qualification under applicable Federal and
state securities acts now in force or as hereafter amended.

(b) It is intended that all exercises of options shall be effective, and the
Company shall use its best efforts to bring about compliance with the above
conditions within a reasonable time, except that the Company shall be under no
obligation to qualify shares or to cause a registration statement or a
post-effective amendment to any registration statement to be prepared for the
purpose of covering the issue of shares in respect of which any option may be
exercised, except as otherwise agreed to by the Company in writing.

15. PURCHASE FOR INVESTMENT; RIGHTS OF HOLDER ON SUBSEQUENT REGISTRATION.

A-6
<PAGE>
Unless the shares to be issued upon exercise of an option granted under the
Plan have been effectively registered under the Securities Act of 1933, as now
in force or hereafter amended, the Company shall be under no obligation to issue
any shares covered by any option unless the person who exercises such option, in
whole or in part, shall give a written representation and undertaking to the
Company which is satisfactory in form and scope to counsel for the Company and
upon which, in the opinion of such counsel, the Company may reasonably rely,
that he or she is acquiring the shares issued pursuant to such exercise of the
option for his or her own account as an investment and not with a view to, or
for sale in connection with, the distribution of any such shares, and that he or
she will make no transfer of the same except in compliance with any rules and
regulations in force at the time of such transfer under the Securities Act of
1933, or any other applicable law, and that if shares are issued without such
registration, a legend to this effect may be endorsed upon the securities so
issued. In the event that the Company shall, nevertheless, deem it necessary or
desirable to register under the Securities Act of 1933 or other applicable
statutes any shares with respect to which an option shall have been exercised,
or to qualify any such shares for exemption from the Securities Act of 1933 or
other applicable statutes, then the Company may take such action and may require
from each optionee such information in writing for use in any registration
statement, supplementary registration statement, prospectus, preliminary
prospectus or offering circular as is reasonably necessary for such purpose and
may require reasonable indemnity to the Company and its officers and directors
and controlling persons from such holder against all losses, claims, damages and
liabilities arising from such use of the information so furnished and caused by
any untrue statement of any material fact therein or caused by the omission to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances under which
they were made.

16. LOANS.

The Company may make loans to optionees to permit them to exercise options.
If loans are made, the requirements of all applicable Federal and state laws and
regulations regarding such loans must be met.

17. MODIFICATION OF OUTSTANDING OPTIONS.

The Committee may authorize the amendment of any outstanding option with the
consent of the optionee when and subject to such conditions as are deemed to be
in the best interests of the Company and in accordance with the purposes of this
Plan.

18. APPROVAL OF SHAREHOLDERS.

The Plan shall be subject to approval by the vote of shareholders holding at
least a majority of the voting stock of the Company voting in person or by proxy
at a duly held shareholders' meeting, or by written consent of shareholders
holding at least a majority of the voting stock of the Company, within twelve
(12) months after the adoption of the Plan by the Board of Directors and shall
take effect as of the date of adoption by the Board of Directors upon such
approval. The Committee may grant options under the Plan prior to such approval,
but any such option shall become effective as of the date of grant only upon
such approval and, accordingly, no such option may be exercisable prior to such
approval.

19. TERMINATION AND AMENDMENT.

Unless sooner terminated as herein provided, the Plan shall terminate ten
(10) years from the date upon which the Plan was duly adopted by the Board of
Directors of the Company. The Board of

A-7
<PAGE>
Directors may at any time terminate the Plan or make such modification or
amendment thereof as it deems advisable; provided, however, that except as
provided in this Section 19, the Board of Directors may not, without the
approval of the shareholders of the Company obtained in the manner stated in
Section 18, increase the maximum number of shares for which options may be
granted or change the designation of the class of persons eligible to receive
options under the Plan, or make any other change in the Plan which requires
shareholder approval under applicable law or regulations, including any approval
requirement which is a prerequisite for exemptive relief under Section 16 of the
Exchange Act. The Committee may grant options to persons subject to Section
16(b) of the Exchange Act after an amendment to the Plan by the Board of
Directors requiring shareholder approval under Section 19, but any such option
shall become effective as of the date of grant only upon such approval and,
accordingly, no such option may be exercisable prior to such approval. The
Committee may terminate, amend or modify any outstanding option without the
consent of the option holder, provided, however, that, except as provided in
Section 11, without the consent of the optionee, the Committee shall not change
the number of shares subject to an option, nor the exercise price thereof, nor
extend the term of such option.

20. COMPLIANCE WITH RULE 16B-3.

It is intended that the provisions of the Plan and any option granted
hereunder to a person subject to the reporting requirements of Section 16(a) of
the Exchange Act shall comply in all respects with the terms and conditions of
Rule 16b-3 under the Exchange Act, or any successor provisions, to the extent
the Company has any equity security registered pursuant to Section 12 of the
Exchange Act. Any agreement granting options shall contain such provisions as
are necessary or appropriate to assure such compliance. To the extent that any
provision hereof is found not to be in compliance with such Rule, such provision
shall be deemed to be modified so as to be in compliance with such Rule, or if
such modification is not possible, shall be deemed to be null and void, as it
relates to a recipient subject to Section 16(a) of the Exchange Act.

21. RESERVATION OF STOCK.

The Company shall at all times during the term of the Plan reserve and keep
available such number of shares of stock as will be sufficient to satisfy the
requirements of the Plan and shall pay all fees and expenses necessarily
incurred by the Company in connection therewith.

22. LIMITATION OF RIGHTS IN THE OPTION SHARES.

An optionee shall not be deemed for any purpose to be a shareholder of the
Company with respect to any of the options except to the extent that the option
shall have been exercised with respect thereto and, in addition, a certificate
shall have been issued theretofore and delivered to the optionee.

23. NOTICES.

Any communication or notice required or permitted to be given under the Plan
shall be in writing, and mailed by registered or certified mail or delivered by
hand, if to the Company, to its principal place of business, attention:
President, and, if to an optionee, to the address as appearing on the records of
the Company.

A-8
<PAGE>
Approved by the Directors: February 12, 1997
Approved by the Stockholders: May 22, 1997

A-9
<PAGE>

/X/ PLEASE MARK VOTES AS IN THIS EXAMPLE

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS. THE BOARD
RECOMMENDS AN AFFIRMATIVE VOTE ON ALL PROPOSALS SPECIFIED. SHARES WILL BE VOTED
AS SPECIFIED. IF NO SPECIFICATION IS MADE, THE SHARES REPRESENTED WILL BE VOTED
FOR THE ELECTION OF DIRECTORS AS SET FORTH IN THE PROXY STATEMENT AND FOR
PROPOSALS 2 AND 3.

With- For all
1. Election of Directors: For hold Except
Nominees: / / / / / /

Stephen L. Watson, Barry N. Bycoff, Ralph B. Wagner, Michael L.
Mark, Eric R. Giler and James McNiel.

INSTRUCTION: To withhold authority to vote for any individual nominee, mark
"For All Except" and write that nominee's name in the space provided for
below.

2. Approval of an amendment to the Netegrity, Inc. 1997 Stock Option Plan to
increase the number of shares reserved for grant thereunder from 500,000 to
2,500,000.

FOR AGAINST ABSTAIN

/ / / / / /

3. Approval of an amendment to the Restated Certificate of Incorporation, as
amended, of Netegrity, Inc. to increase the number of authorized shares of
capital stock from 30,000,000 to 45,000,000.

FOR AGAINST ABSTAIN

/ / / / / /

4. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the Meeting.

PLEASE DATE AND SIGN THIS PROXY IN THE SPACE PROVIDED AND RETURN IT IN THE
ENCLOSED ENVELOPE WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING IN
PERSON.

Please sign exactly as your name(s) appear(s) on the Proxy. When shares are
held by joint tenants, both should sign. When signing as attorney,
executor, administrator, trustee or guardian, please give the full title as
such. If a corporation, please sign in full corporate name by President or
other authorized officer. If a partnership, please sign in partnership name
by authorized person.

MARK HERE IF / /
YOU PLAN TO
ATTEND THE
MEETING

MARK HERE / /
FOR ADDRESS
CHANGE AND
NOTE BELOW