SECURITY DYNAMICS TECHNOLOGIES INC /DE/, 424B1, 1997-10-16

SECURITY DYNAMICS TECHNOLOGIES INC /DE/
424B1, 1997-10-16
COMPUTER PERIPHERAL EQUIPMENT, NEC

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<PAGE> 1
Filed Pursuant to Rule 424(b)1
Registration Number 333-35035

3,000,000 SHARES

[SECURITYDYNAMICS LOGO]
COMMON STOCK
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Of the 3,000,000 shares of Common Stock offered hereby, 1,176,000 shares
are being sold by Security Dynamics Technologies, Inc. (the "Company") and
1,824,000 shares are being sold by the Selling Stockholders. See "Selling
Stockholders." The Company will not receive any proceeds from the sale of shares
by the Selling Stockholders. The Common Stock is traded on the Nasdaq National
Market under the symbol "SDTI." On October 15, 1997, the last reported sale
price of the Common Stock on the Nasdaq National Market was $39.50 per share.
See "Price Range of Common Stock and Dividend Policy."

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THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.

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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
=====================================================================================================
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS
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<S> <C> <C> <C> <C>
Per Share.................... $39.50 $1.86 $37.64 $37.64
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Total(2)..................... $118,500,000 $5,580,000 $44,264,640 $68,655,360
=====================================================================================================
</TABLE>

(1) Before deducting estimated expenses of $450,000, all of which will be
payable by the Company.

(2) The Company has granted to the Underwriters a 30-day option to purchase up
to 450,000 additional shares of Common Stock solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions, Proceeds to Company
and Proceeds to Selling Stockholders will be $136,275,000, $6,417,000,
$61,202,640 and $68,655,360, respectively. See "Underwriting."
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The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of BT Alex. Brown Incorporated, Baltimore, Maryland, on or about October 21,
1997.

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BT ALEX. BROWN
BANCAMERICA ROBERTSON STEPHENS
COWEN & COMPANY

THE DATE OF THIS PROSPECTUS IS OCTOBER 16, 1997.
<PAGE> 2

Security Dynamics' products, including the Company's SecurID Card shown below,
are used to authenticate the identity of users accessing enterprise networks.

[Narrative description of graphic material omitted in electronically filed
document:

Photograph of an open laptop computer with the right hand of the operator
entering on the keyboard a PASSCODE that has been generated by a SecurID Card
held in the left hand of the operator.]

Each of the Company's SecurID Cards automatically generates a unique
sequence of pseudo-random codes at set intervals, typically every 60 seconds. To
log-in, a user is prompted to enter both a personal identification number and
the code which appears on the user's SercurID Card at that time.
------------------------

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK IN
CONNECTION WITH THE OFFERING, INCLUDING OVER-ALLOTMENT, STABILIZING AND
SHORT-COVERING TRANSACTIONS IN SUCH SECURITIES, AND THE IMPOSITION OF PENALTY
BIDS. IN ADDITION, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS, IF ANY) MAY
ALSO ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE
NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE
SECURITIES EXCHANGE ACT OF 1934. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
------------------------

SecurityDynamics, SecurID and ACE/Server are registered trademarks, and
ACE/Agent, PASSCODE, Enterprise Security Services, RSA SecurPC, SoftID, WebID
and PINPAD are trademarks, of Security Dynamics Technologies, Inc. RC2 and RC4
are registered trademarks, and BSAFE, JSAFE, TIPEM, BCERT, S/PAY, SecureONE,
S/MAIL and RC5 are trademarks, of RSA Data Security, Inc. BoKS is a trademark of
DynaSoft AB. All other trademarks or trade names referred to in this Prospectus
are the property of their respective owners.
<PAGE> 3

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Company's Supplemental
Consolidated Financial Statements and the Notes thereto, appearing elsewhere in
this Prospectus. Unless otherwise indicated, all information contained in this
Prospectus (i) gives effect to the Company's two-for-one splits of its Common
Stock in the form of stock dividends, which became effective as of October 30,
1995 and November 15, 1996, and (ii) assumes no exercise of the Underwriters'
over-allotment option. This Prospectus contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus. As used in this Prospectus, the term "the Company"
refers to Security Dynamics Technologies, Inc. ("SDI") and its subsidiaries,
including without limitation RSA Data Security, Inc. ("RSA") and DynaSoft AB
("DynaSoft"), unless the context otherwise requires.

THE COMPANY

The Company is the leading provider of enterprise network and data security
solutions. The Company's products help organizations conduct business securely,
protect corporate information assets and facilitate business-to-business and
business-to-consumer electronic commerce. Historically, the Company has
delivered security solutions that provide secure remote access to corporate
networks. Through its Enterprise Security Services ("ESS") framework,
partnerships and acquisitions, the Company intends to expand its addressable
market by delivering solutions that provide secure access to information
wherever it resides in an enterprise.

The Company has built its business through the development and delivery of
security solutions, partnerships with leading industry vendors and acquisitions
of companies delivering complementary technologies and products. In July 1996,
the Company acquired RSA, a leading provider of cryptographic technology, and in
July 1997, the Company acquired DynaSoft, a leading security company providing
solutions for secure access to information. Through the combination of SDI, RSA
and DynaSoft, the Company believes that it is well positioned to take advantage
of the range of opportunities in the market for enterprise network security
products.

The Company's products include: (i) its remote access security solution,
including SecurID "tokens" and ACE/Server software, which authenticates the
identity of users accessing networked or stand-alone computer resources, (ii)
RSA encryption products used to implement cryptographic data security
applications for assuring the confidentiality and integrity of users' data and
(iii) the BoKS product family, which provides a broad range of security
solutions for accessing applications and information.

SDI is a world leader in user identification and authentication, having
sold more than two million SecurID tokens to over 2,000 customers worldwide.
SDI's customers include Fortune 500 companies and financial institutions as well
as academic institutions, research laboratories, hospitals and federal, state
and foreign government organizations. SDI's products are sold or licensed
primarily through its direct sales force, which is supported by a number of
strategic marketing relationships, as well as through value added resellers
("VARs") and dealers. A significant portion of the Company's revenue has
historically been attributable to follow-on sales to existing customers, either
to support additional users or platforms or to replace SecurID tokens at the
expiration of their programmed lives.

Through its wholly owned subsidiary, RSA, the Company also develops,
markets and supports cryptographic data security products and related consulting
services. RSA is the leading brand name for cryptography, with millions of
copies of RSA encryption and data authentication technologies installed and in
use worldwide. RSA's encryption security software components ("encryption
engines") and other software products are used to implement cryptographic data
security applica-

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tions targeted at secure electronic commerce, secure electronic mail,
communications privacy, client/server data security, smart cards and other key
information technologies. RSA licenses its encryption engine products to
original equipment manufacturers ("OEMs"), which incorporate RSA encryption
technology into their products, and also licenses its products directly to
certain customers that incorporate RSA products and technologies into their
business, financial and electronic commerce networks. RSA's encryption
technology is embedded in current versions of Microsoft Corporation
("Microsoft") Windows NT, Netscape Communications Corporation ("Netscape")
Navigator, Quicken by Intuit, Inc. ("Intuit"), Lotus Development Corporation
("Lotus") Notes and numerous other products. RSA technologies are part of
existing and proposed standards for the Internet and World Wide Web, CCITT, ISO,
ANSI and IEEE.

DynaSoft is a leading provider of security solutions for protecting access
to corporate information and applications. Based in Stockholm, Sweden, DynaSoft
offers a broad range of security solutions through its flagship product family,
BoKS, and sells through direct and indirect distribution channels, as well as
through its recent licensing agreements with Sun Microsystems, Inc. ("Sun
Microsystems") and Hewlett-Packard Company ("Hewlett-Packard"). The Company
plans to integrate the technologies, products and staff of SDI and DynaSoft,
rather than operate DynaSoft as a separate division.

ACQUISITION OF DYNASOFT

On July 15, 1997, the Company acquired DynaSoft by issuing or reserving for
issuance approximately 2.7 million shares of Common Stock in exchange for
approximately 95% of the outstanding shares and certain of the outstanding
options to acquire shares of DynaSoft. The Company also paid approximately $6.0
million in cash to certain stockholders of DynaSoft in exchange for the
remaining outstanding shares and options. After the release of financial
statements that include the date of consummation of the DynaSoft acquisition
(the "DynaSoft Acquisition"), the DynaSoft Acquisition will be accounted for as
a pooling of interests in the Company's historical consolidated financial
statements. All financial information in this Prospectus has been restated to
include the results of DynaSoft for all periods presented.

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company............................. 1,176,000 shares
Common Stock offered by the Selling Stockholders................ 1,824,000 shares
Common Stock to be outstanding after the offering............... 39,046,907 shares(1)
Use of proceeds................................................. General corporate purposes
Nasdaq National Market symbol................................... SDTI
</TABLE>

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(1) Based on the number of shares of Common Stock outstanding as of September
30, 1997. Excludes an aggregate of 5,630,028 shares of Common Stock issuable
upon the exercise of outstanding options as of September 30, 1997.
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SUMMARY SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
JUNE 30, 1997
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ACTUAL AS ADJUSTED(4)
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<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities................. $110,753 $154,568
Working capital.................................................. 119,658 163,473
Total assets..................................................... 157,068 200,883
Stockholders' equity(5).......................................... 134,539 178,354
</TABLE>

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(1) On July 15, 1997, the Company acquired DynaSoft in exchange for
approximately 2.7 million shares of Common Stock and approximately $6.0
million in cash. After the release of financial statements that include the
date of consummation of the DynaSoft Acquisition, the DynaSoft Acquisition
will be accounted for as a pooling of interests in the Company's historical
consolidated financial statements. All financial information in this
Prospectus has been restated to include the results of DynaSoft for all
periods presented. See Note 2 of Notes to the Company's Supplemental
Consolidated Financial Statements.

(2) Effective January 1, 1993, the Company adopted, prospectively, the
provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." See Note 6 of Notes to the Company's
Supplemental Consolidated Financial Statements.

(3) Per share and share data for periods prior to 1995 are presented on a pro
forma basis. See Note 1 of Notes to the Company's Supplemental Consolidated
Financial Statements.

(4) Adjusted to give effect to the sale by the Company of 1,176,000 shares of
Common Stock offered hereby after deducting the underwriting discounts and
commissions and estimated offering expenses payable by the Company. See "Use
of Proceeds."

(5) Excludes DynaSoft Acquisition expenses and cash payments to certain
stockholders of DynaSoft recognized during the quarter ended September 30,
1997. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 2 of Notes to the Company's Supplemental
Consolidated Financial Statements.
------------------------

The Company was organized as a Massachusetts corporation in 1984 and
reincorporated in Delaware in 1986. The Company's principal office is located at
20 Crosby Drive, Bedford, Massachusetts 01730 and its telephone number is (781)
687-7000.
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5
<PAGE> 6

RISK FACTORS

This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. For this purpose, any statements contained
herein that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"believes," "anticipates," "plans," "expects" and similar expressions are
intended to identify forward-looking statements. Actual results could differ
materially from those indicated by such forward-looking statements as a result
of certain of the risk factors set forth below and elsewhere in this Prospectus.
In addition to the other information contained in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the Common
Stock offered by this Prospectus.

Dependence on Principal Products. The Company currently derives
substantially all of its revenue from sales of its enterprise network and data
security products, the licensing of encryption engines and the provision of
related services, and existing and new versions of such products are expected to
continue to represent a high percentage of the Company's revenue for the
foreseeable future. As a result, any factor adversely affecting sales of these
products and services, or any factor impeding or delaying the Company's ability
to diversify its product offerings to lessen its dependency on those products,
would have a material adverse effect on the Company's financial condition and
results of operations. See "Business -- Products."

Risks Associated with Enterprise Network and Data Security Market. The
rapid development of enterprise-wide and remote computing as well as increased
use of the Internet, intranets and extranets has enhanced the ability of users
to access proprietary information and resources and has in recent years
increased demand for enterprise network and data security products. Declines in
demand for the Company's products, whether as a result of competition,
technological change, the public's perception of the need for security products,
developments in the hardware and software environments in which these products
operate, general economic conditions or other factors, could have a material
adverse effect on the Company's financial condition or results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."

A well-publicized actual or perceived breach of enterprise network or data
security could trigger a heightened awareness of computer abuse, resulting in an
increased demand for security products such as those offered by the Company.
Similarly, an actual or perceived breach of enterprise network or data security
at one of the Company's customers, regardless of whether such breach is
attributable to the Company's products, could adversely affect the market's
perception of the Company and the Company's financial condition or results of
operations. In addition, although the effectiveness of the Company's
identification and authentication products is not dependent upon the secrecy of
its proprietary algorithm, the public disclosure or "breaking" of this algorithm
could result in a perception of breached security which could have an adverse
effect on the Company's financial condition or results of operations.

In February 1997, the Company announced ESS, a framework designed to
deliver enterprise-wide security solutions to businesses. As part of the ESS
framework, the Company intends to introduce products and form partnerships that
are expected to enable delivery of security services such as certificate
management, key management and privilege management. There can be no assurance,
however, that the certificate management, key management and privilege
management technologies under consideration by the Company will be adopted by
the marketplace, that the Company will find appropriate partners for developing
and marketing its products or that the Company will successfully market any
products developed as part of the ESS framework. See "Business -- Security
Dynamics Solution."

Technological Change and New Products. The market for security products,
especially in the Internet, intranet and extranet markets, is characterized by
rapidly changing technology, emerging and evolving industry standards, new
product introductions, relatively short product life cycles and rapid and
constant changes in customer requirements and preferences. To the extent that
specific

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methods other than those employed by the Company are adopted as standards for
implementing enterprise network and data security, sales of the Company's
existing and planned products in those market segments may be adversely
impacted, which could have a material adverse effect on the Company's financial
condition or results of operations. The Company's future success will depend in
part upon its customers' and end users' demand for enterprise network and data
security products and upon the Company's ability, on a timely and cost-effective
basis, to enhance its existing products and to introduce new products with
features that meet changing customer requirements and with competitive prices.
There can be no assurance that the Company will be successful in doing so.
Delays in product enhancement and development or the failure of the Company's
new products or enhancements to gain market acceptance would have a material
adverse effect on the Company's financial condition and results of operations.
Despite testing, new products may be affected by quality, reliability or
security failure problems, which could result in returns, delays in collecting
accounts receivable, unexpected service or warranty expenses, reduced orders and
a decline in the Company's competitive position.

Software products may also contain undetected errors or bugs when first
introduced or as new versions are released, and software products or media may
contain undetected viruses. Errors or bugs may also be present in software
licensed by the Company from third parties and incorporated into the Company's
products. Errors, bugs or viruses may result in loss of or delay in market
acceptance, recalls of hardware products incorporating the software or loss of
data. Delays or difficulties associated with new product introductions or
product enhancements could have a material adverse effect on the Company's
financial condition or results of operations.

Potential Fluctuations in Quarterly Performance; Seasonality. The
Company's quarterly operating results may vary significantly depending on a
number of factors, including the timing of the introduction or enhancement of
products by the Company or its competitors, the sizes, timing and shipment of
individual orders, market acceptance of new products, seasonality of revenue,
customer order deferrals in anticipation of new products, changes in the
Company's operating expenses, personnel changes, foreign currency exchange
rates, mix of products sold, changes in product pricing, development of the
Company's direct and indirect distribution channels and general economic
conditions. There can be no assurance that the Company will be able to grow or
sustain its profitability on a quarterly basis. Because the Company's operating
expenses are based on anticipated revenue levels and a high percentage of the
Company's expenses are fixed, a small variation in the time of recognition of
revenue can cause significant variations in operating results from quarter to
quarter. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Supplemental Quarterly Operating Results."

The Company has experienced, and may experience in the future, significant
seasonality in its business, and the Company's financial condition or results of
operations may be affected by such trends in the future. Revenue has
historically increased at higher rates in the last quarter of the year and at
lower rates in the next succeeding quarter. The Company believes that revenue
tends to increase at higher rates in the last quarter due to the Company's
quota-based compensation plans, year-end budgetary pressures on the Company's
customers and the tendency of certain of the Company's customers to implement
changes in enterprise network or data security prior to the end of the calendar
year. In addition, revenue tends to increase at lower rates in the summer
months, particularly in Europe, when businesses defer purchase decisions.

Risks Relating to Cryptographic Technology. Any significant advance in
techniques for attacking cryptographic systems could render some or all of RSA's
existing products obsolete or unmarketable. RSA's cryptographic systems depend
in part on the application of certain mathematical principles. The security
afforded by RSA's encryption products is predicated on the assumption that the
"factoring" of the composite of large prime numbers is difficult. Should an
"easy factoring method" be developed, then the security afforded by RSA's
encryption products would be reduced or eliminated. There can be no assurance
that such a development will not occur. Moreover, even if no breakthroughs in
factoring are discovered, factoring problems can theoretically be solved by a

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computer system significantly faster and more powerful than those presently
available. If such improved techniques for attacking cryptographic systems are
ever developed, it could have a material adverse impact on the Company's
business or results of operations.

Management of Growth. The Company is currently experiencing a period of
rapid growth that could place a significant strain on its management and other
resources. A component of the Company's business strategy is to seek the
acquisition of businesses, products and technologies that complement or augment
the Company's existing businesses, products and technologies. Acquisitions are
difficult to identify and complete for a number of reasons, including
competition among prospective buyers and the need for regulatory approvals,
including antitrust approvals. There can be no assurance that the Company will
be able to complete future acquisitions or that the Company will be able to
successfully integrate any acquired business. In order to finance such
acquisitions, it may be necessary for the Company to raise additional funds
through public or private financings. Any equity or debt financings, if
available at all, may be on terms which are not favorable to the Company and, in
the case of equity financings, may result in dilution to the Company's
stockholders. There can be no assurance that the Company will be able to operate
acquired businesses profitably or otherwise implement its growth strategy
successfully. The successful combination of companies in a rapidly changing high
technology industry may be more difficult to accomplish than in other
industries. The Company's ability to manage its growth and integrate any newly
acquired entities will require it to continue to improve its operational,
financial and management information systems, and to motivate and effectively
manage its employees. If the Company's management is unable to manage growth
effectively, the quality of the Company's products, its ability to identify,
hire and retain key personnel and its results of operations could be materially
and adversely affected.

Challenges of DynaSoft Integration. On July 15, 1997, the Company acquired
DynaSoft, a leading provider of security solutions for protecting access to
corporate information and applications. Achieving the anticipated benefits of
the DynaSoft Acquisition will depend in part upon whether the integration of
DynaSoft's business is accomplished in an efficient and effective manner, and
there can be no assurance that this will occur. The combination of the two
companies will require, among other things, integration of the companies'
respective product offerings and coordination of their sales and marketing and
research and development efforts. There can be no assurance that such
integration will be accomplished smoothly or successfully. The difficulties of
such integration may be increased by the necessity of coordinating
geographically separated organizations. The integration of certain operations
will require the dedication of management resources which may temporarily
distract attention from the day-to-day business of the combined company. The
inability of management to successfully integrate the operations of the two
companies could have a material adverse effect on the business and results of
operations of the Company.

The Company recognized approximately $7.0 million of expenses during the
third quarter of 1997, the quarter in which the DynaSoft Acquisition was
consummated, to reflect direct transaction costs, primarily for investment
banking, legal and accounting fees, and costs associated with combining the
operations of the two companies. Additional unanticipated expenses may be
incurred relating to the integration of the businesses of the Company and
DynaSoft, including the integration of certain product lines and distribution
and administrative functions.

Dependence on Proprietary Technology. The Company's success and ability to
compete is dependent in part upon its proprietary technology. The Company relies
on a combination of patent, trade secret, copyright and trademark laws, software
licenses, nondisclosure agreements and technical measures to establish and
protect its proprietary technology. The Company generally enters into
confidentiality and/or license agreements with its employees, distributors and
strategic partners as well as with its customers and potential customers seeking
proprietary information, and limits access to and distribution of its software,
documentation and other proprietary information. There can be no assurance that
the steps taken by the Company in this regard will be adequate to deter
misappropriation or independent third-party development of its technology.

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The Company's 15 issued U.S. patents expire at various dates ranging from
2005 to 2016. Upon expiration of the Company's patents, competitors may develop
and sell products based on technologies similar or equivalent to those currently
covered by the Company's patents. In addition, a patent developed at the
Massachusetts Institute of Technology ("MIT") (U.S. Patent No. 4,405,829) and
licensed to RSA (the "RSA/MIT Patent"), the claims of which cover significant
elements of RSA's products, will expire on September 20, 2000, which may enable
competitors to thereafter market competing products which previously would have
infringed the RSA/MIT Patent. In addition, two U.S. Patents (Nos. 4,200,770 and
4,218,582) covering encryption technology developed by Stanford University (the
"Stanford Patents"), which have been licensed to RSA, expired in 1997. As a
result of the expiration of the Stanford Patents, competitors may develop and
sell products based on technologies covered by such patents, including products
that may be positioned as competitive with products covered by the RSA/MIT
Patent, thereby adversely impacting sales of RSA's products. There can be no
assurance that any patent owned or held by the Company or its licensors will not
be invalidated, circumvented, challenged or terminated, that any of the
Company's pending or future patent applications will be within the scope of
claims sought by the Company, if at all, or that the steps taken by the Company
to protect its rights will be adequate to prevent misappropriation of the
Company's technology or to preclude competitors from developing products with
features similar to the Company's products. Further, there can be no assurance
that others will not develop technologies that are similar or superior to the
Company's technologies or duplicate the Company's technologies. In addition, the
laws of certain countries in which the Company's products are or may be
developed or sold may not protect the Company's products and intellectual
property rights to the same extent as the laws of the United States. The
inability of the Company to protect its intellectual property adequately could
have a material adverse effect on its financial condition and results of
operations.

The Company has from time to time received correspondence alleging that its
products may infringe patents held by third parties. The Company is not
presently aware of any claims that its products infringe third-party rights, and
the Company believes that its products and other proprietary rights do not
infringe the proprietary rights of third parties. There can be no assurance,
however, that third parties will not assert infringement claims against the
Company in the future. The encryption industry is highly litigious, and RSA is
and has been involved in litigation relating to its intellectual property rights
and those of its competitors. See "Business -- Proprietary Rights." Any
litigation, whether or not resolved in favor of the Company, could result in
significant expense to the Company and could divert management and other
resources. In the event of an adverse ruling in any litigation involving
intellectual property, the Company might be required to discontinue the use of
certain processes, cease the manufacture, use and sale of infringing products,
expend significant resources to develop non-infringing technology or obtain
licenses to the infringing technology and may suffer significant monetary
damages, which could include treble damages. There can be no assurance that
under such circumstances a license would be available to the Company on
reasonable terms or at all. In the event of a successful claim against the
Company and the Company's failure to develop or license a substitute technology
on commercially reasonable terms, the Company's financial condition and results
of operations would be materially adversely affected.

Dependence on Suppliers and Third-Party Manufacturers. Although the
Company generally uses standard parts and components for its products, certain
components are currently available only from a single source or from limited
sources. For example, the microprocessor chips contained in the Company's
SecurID tokens are currently purchased only from Sanyo Electric Co., Ltd.
("Sanyo"), a Japanese computer chip manufacturer, the lithium batteries
contained in the Company's SecurID tokens are purchased from one supplier
located in the United States, Gould Electronics ("Gould"), and the Company's
SecurID Key Fob is manufactured only by Pemstar, Inc. ("Pemstar"), an assembly
subcontractor located in the United States. The inability to obtain sufficient
manufactured goods or sole or limited source components as required, or to
obtain or develop alternative sources at competitive prices and quality if and
as required in the future, could result in delays in product shipments or
increase the Company's material costs, either of which

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would adversely affect the Company's financial condition or results of
operations. See "Business -- Manufacturing and Suppliers."

The relational database management software contained in the Company's
ACE/Server software is licensed by the Company from Progress Software
Corporation ("Progress Software"). The Company relies on Progress Software for
ongoing maintenance and support for such licensed software.

Need to Establish and Maintain Strategic Relationships. A significant
business strategy of the Company is to enter into strategic marketing alliances
or other similar collaborative relationships. There can be no assurance that the
Company's existing strategic relationships will be commercially successful, that
the Company will be able to negotiate additional strategic relationships, that
such additional relationships will be available to the Company on acceptable
terms or that any such relationships, if established, will be commercially
successful. In addition, there can be no assurance that parties with whom the
Company has established strategic relationships will not pursue alternative
technologies or develop alternative products in addition to or in lieu of the
Company's products either on their own or in collaboration with others,
including the Company's competitors. The Company's financial condition or
results of operations may also be affected by the success of its collaborators
in marketing any successfully developed products. See "Business -- Security
Dynamics Strategy," "-- Products" and "-- Sales and Marketing."

Competition. The market for enterprise network and data security products
is highly competitive and subject to rapid change. The Company believes that the
principal competitive factors affecting the market for enterprise network and
data security products include technical features, ease of use,
quality/reliability, level of security, customer service and support,
distribution channels and price. The Company's competitors and potential
competitors include organizations that provide or may seek to provide enterprise
network and data security products based upon approaches similar to and
different from those employed by the Company, and could in the future include
operating system or network suppliers not currently offering competitive
enterprise-wide security products. There can be no assurance that the market for
enterprise network and data security products will not ultimately be dominated
by approaches other than the approach marketed by the Company. See
"Business -- Industry Background" and "-- Competition."

Certain of the Company's potential competitors have significantly greater
financial, marketing, technical and other competitive resources than the
Company. As a result, they may be able to leverage an installed customer base
and/or other existing or future enterprise-wide products, adapt more quickly to
new or emerging technologies and changes in customer requirements, or devote
greater resources to the promotion and sale of their products than can the
Company. Competition could increase if new companies enter the market or if
existing competitors expand their product lines. Any reduction in gross margins
resulting from competitive factors could have a material adverse effect on the
Company's financial condition or results of operations. Although the Company
believes it has certain technological and other advantages over its competitors,
maintaining such advantages will require continued investment by the Company in
research and development and sales and marketing. There can be no assurance that
the Company will have sufficient resources to make such investments or that the
Company will be able to make the technological advances necessary to maintain
such competitive advantages. In addition, current and potential competitors have
established or may in the future establish collaborative relationships among
themselves or with third parties, including third parties with whom the Company
has strategic relationships, to increase the ability of their products to
address the security needs of the Company's prospective customers. Accordingly,
it is possible that new competitors or alliances may emerge and rapidly acquire
significant market share. If this were to occur, the financial condition and
results of operations of the Company would be materially adversely affected. See
"Business -- Competition."

10
<PAGE> 11

Dependence on Key Personnel. The Company's success depends to a
significant extent upon a number of key employees, including members of senior
management. The loss of the services of one or more of these key employees could
have a material adverse effect on the Company. The Company believes that its
future success will depend in part on its ability to attract, motivate and
retain highly skilled technical, managerial and marketing personnel. Competition
for such personnel is intense and there can be no assurance that the Company
will be successful in attracting, motivating and retaining key personnel. See
"Management."

Risks Associated with International Sales. Sales outside the United States
accounted for approximately 27.3%, 24.2%, 28.9% and 31.5% of the Company's
revenue in the years ended December 31, 1994, 1995 and 1996 and the six months
ended June 30, 1997, respectively. While the Company believes its current
products are designed to meet the regulatory standards of foreign markets, any
inability to obtain foreign regulatory approvals on a timely basis could have an
adverse effect on the Company's financial condition or results of operations. In
addition, the Company's international business may be subject to a variety of
risks, including delays in establishing international distribution channels,
difficulties in collecting international accounts receivable, and increased
costs associated with maintaining international marketing efforts. The Company's
direct sales in Canada, the United Kingdom, France, Germany, Norway, Sweden and
Japan are denominated in the local currency, and the Company is subject to the
risks associated with fluctuations in currency exchange rates. A decrease in the
value of any of these foreign currencies relative to the U.S. dollar could
affect the profitability in U.S. dollars of the Company's products sold in these
markets. In addition, the Company is subject to the usual risks of doing
business abroad, including increases in duty rates, the introduction of
non-tariff barriers and difficulties in enforcement of intellectual property
rights.

Industry Regulation. All of the Company's products are subject to export
controls under U.S. law and applicable foreign government restrictions. The
Company believes it has obtained necessary export approvals for the export of
the products it currently exports. There can be no assurance, however, that the
list of products and countries for which export approval is required, and the
regulatory policies with respect thereto, will not be revised from time to time,
or that the Company will be able to obtain necessary regulatory approvals for
the export of future products. The inability of the Company to obtain required
approvals under these regulations could adversely affect the ability of the
Company to make international sales.

Exports of RSA's encryption products, or third-party products bundled with
the encryption technology of RSA, are expected to continue to be restricted by
the U.S. and various foreign governments. All cryptographic products require
export licenses from either the U.S. State Department, acting under the
authority of the International Traffic in Arms Regulation, or the U.S. Commerce
Department, acting under the authority of the Export Administration Regulations.
Regulations issued by these departments define cryptographic devices, including
software, as both defense articles and dual-use commodities. The U.S. government
generally limits the export of software with encryption capabilities to mass
marketed software with limited key sizes, which significantly constrains the
security effectiveness of RSA products available for export. As a result, RSA
may be at a disadvantage in competing for international sales compared to
companies located outside the United States that are not subject to such
restrictions.

The Director of the U.S. Federal Bureau of Investigation has recently asked
Congress to enact legislation that would require manufacturers of encryption
products to incorporate key escrow and recovery capabilities into their products
for both domestic and international use, thereby allowing law enforcement
officials to gain access to decryption keys for the purposes of decoding
messages relating to illegal activities, subject to constitutional due process
safeguards. There can be no assurance that this or other similar measures will
not in the future become law in the United States or other countries, and the
Company cannot predict what effect any such law would have on its domestic or
international competitive position or on its results of operations.

11
<PAGE> 12

Third-Party Claims. Customers rely on the Company's information security
products for critical electronic security applications. Failure of the Company's
products to work as designed could result in tort or warranty claims. Although
the Company attempts to reduce the risk of losses resulting from such claims
through warranty disclaimers and liability limitation clauses in its sales
agreements, there can be no assurance that such measures will be effective in
limiting the Company's liability. Any liability for damages resulting from any
such failure could be substantial and could have a material adverse effect on
the Company's business and results of operations.

Possible Volatility of Share Price. The market price of the Company's
Common Stock, which is traded on the Nasdaq National Market, may be subject to
significant fluctuations in response to operating results, announcements of
technological innovations or new products by the Company or its competitors,
patent or proprietary rights developments and market conditions for computer
industry stocks in general. In addition, the stock market in recent years has
experienced extreme price and volume fluctuations that often have been unrelated
or disproportionate to the operating performance of individual companies. These
market fluctuations, as well as general economic conditions, may adversely
affect the market price of the Common Stock. The trading prices of many high
technology companies' stocks are at or near their historical highs and reflect
price/earnings ratios substantially above historical norms. There can be no
assurance that the trading price of the Common Stock will remain at or near its
current level. See "Price Range of Common Stock and Dividend Policy."

Dividends. No cash dividends have been paid on the Common Stock to date
and the Company does not anticipate paying cash dividends in the foreseeable
future. See "Price Range of Common Stock and Dividend Policy."

Unallocated Net Proceeds. The Company has not as yet identified specific
uses for the net proceeds to be received by it from this offering, and, pending
such uses, the Company expects that it will invest such net proceeds in
short-term, investment grade, interest-bearing instruments. The Company will
have discretion over the use and investment of such proceeds. See "Use of
Proceeds."

Antitakeover Provisions. The Company's Third Restated Certificate of
Incorporation, as amended (the "Restated Certificate of Incorporation"),
requires that any action required or permitted to be taken by stockholders of
the Company must be effected at a duly called annual or special meeting of
stockholders and may not be effected by any consent in writing, and requires
reasonable advance notice by a stockholder of a proposal or director nomination
which such stockholder desires to present at any annual or special meeting of
stockholders. Special meetings of stockholders may be called only by the
Chairman of the Board, the Chief Executive Officer or, if none, the President of
the Company or by the Board of Directors. The Restated Certificate of
Incorporation provides for a classified Board of Directors, and members of the
Board of Directors may be removed only for cause upon the affirmative vote of
holders of at least two-thirds of the shares of capital stock of the Company
entitled to vote. These provisions, and other provisions of the Restated
Certificate of Incorporation, may have the effect of deterring hostile takeovers
or delaying or preventing changes in control or management of the Company,
including transactions in which stockholders might otherwise receive a premium
for their shares over then current market prices. In addition, these provisions
may limit the ability of stockholders to approve transactions that they may deem
to be in their best interests.

12
<PAGE> 13

USE OF PROCEEDS

The net proceeds to the Company from the sale of shares of Common Stock
offered by the Company hereby are estimated to be approximately $43,815,000
($60,753,000 if the Underwriters' over-allotment option is exercised in full)
after deducting the underwriting discounts and commissions and estimated
offering expenses payable by the Company. The Company will not receive any of
the net proceeds from the sale of shares by the Selling Stockholders. See
"Selling Stockholders."

The Company expects to use the net proceeds from this offering for general
corporate purposes. The Company has not as yet identified specific uses for such
proceeds and will have discretion over their use and investment. See "Risk
Factors -- Unallocated Net Proceeds."

The Company intends to seek acquisitions of businesses, products and
technologies that are complementary to those of the Company, and a portion of
the net proceeds may also be used for such acquisitions. The Company is
continuing to identify and prioritize additional security technologies which it
may wish to develop, either internally or through the licensing or acquisition
of products from third parties. While the Company engages from time to time in
discussions with respect to potential acquisitions, the Company has no plans,
commitments or agreements with respect to any such acquisitions as of the date
of this Prospectus, and there can be no assurances that any such acquisitions
will be made. Pending such uses, the Company intends to invest the net proceeds
from this offering in short-term, investment grade, interest-bearing
instruments.

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

The Company's Common Stock has been trading on the Nasdaq National Market
under the symbol "SDTI" since the Company's initial public offering on December
14, 1994. The following table sets forth for the fiscal periods indicated the
high and low sales prices per share of Common Stock (as adjusted for stock
splits) as reported on the Nasdaq National Market.

<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1995
First Quarter....................................... $ 9.44 $ 4.41
Second Quarter...................................... 11.56 7.75
Third Quarter....................................... 12.44 8.81
Fourth Quarter...................................... 29.13 11.44

1996
First Quarter....................................... $33.75 $21.25
Second Quarter...................................... 54.50 23.13
Third Quarter....................................... 48.38 25.63
Fourth Quarter...................................... 43.50 29.75

1997
First Quarter....................................... $39.25 $21.00
Second Quarter...................................... 38.25 22.75
Third Quarter....................................... 44.38 32.63
Fourth Quarter (through October 15, 1997)........... 41.25 34.44
</TABLE>

On October 15, 1997, the last reported sale price of the Company's Common
Stock on the Nasdaq National Market was $39.50 per share. As of October 15,
1997, there were 322 stockholders of record of the Company's Common Stock.

The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain earnings, if any, to support its
growth strategy and does not anticipate paying cash dividends in the foreseeable
future. Payment of future dividends, if any, will be at the discretion of the
Company's Board of Directors after taking into account various factors,
including the Company's financial condition, operating results, current and
anticipated cash needs and plans for expansion.

13
<PAGE> 14

CAPITALIZATION

The following table sets forth the capitalization of the Company at June
30, 1997 (i) on an actual basis (after giving effect to the DynaSoft
Acquisition) and (ii) as adjusted to reflect the issuance and sale by the
Company of 1,176,000 shares of Common Stock offered hereby, after deducting the
underwriting discounts and commissions and estimated offering expenses payable
by the Company. See "Use of Proceeds." This table should be read in conjunction
with the Company's Supplemental Consolidated Financial Statements and the Notes
thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------
AS
ACTUAL ADJUSTED
-------- --------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Stockholders' equity(1):
Common stock, $.01 par value; 80,000,000 shares authorized;
37,903,380 shares issued and outstanding (actual); 39,079,380
shares issued and outstanding (as adjusted)(2)..................... $ 379 $ 391
Additional paid-in capital........................................... 104,607 148,410
Retained earnings.................................................... 27,761 27,761
Deferred stock compensation.......................................... (141) (141)
Treasury stock, at cost, 509 shares.................................. -- --
Cumulative translation adjustment.................................... (194) (194)
Unrealized gain on marketable securities, net........................ 2,127 2,127
-------- --------
Total stockholders' equity................................. 134,539 178,354
-------- --------
Total capitalization....................................... $134,539 $178,354
======== ========
</TABLE>

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

(1) Excludes DynaSoft Acquisition expenses and cash payments to certain
stockholders of DynaSoft recognized during the quarter ended September 30,
1997. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 2 of Notes to the Company's Supplemental
Consolidated Financial Statements.

(2) Excludes an aggregate of 4,855,852 shares of Common Stock reserved for
issuance upon the exercise of options outstanding as of June 30, 1997 and an
aggregate of 51,530 shares of Common Stock reserved for issuance upon the
exercise of options granted to DynaSoft optionholders in connection with the
DynaSoft Acquisition. See Note 1 of Notes to the Company's Supplemental
Consolidated Financial Statements.

14
<PAGE> 15

SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA

The following selected supplemental consolidated financial data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Supplemental Consolidated
Financial Statements included elsewhere in this Prospectus, and with the
consolidated financial statements and related notes included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996 and the
Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997
and June 30, 1997, which reports are incorporated by reference in this
Prospectus.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.............................. $12,574 $16,590 $23,866 $49,412 $83,817 $36,111 $61,374
Cost of revenue...................... 2,987 3,707 4,837 8,920 18,207 7,451 13,147
------- ------- ------- ------- ------- ------- -------
Gross profit....................... 9,587 12,883 19,029 40,492 65,610 28,660 48,227
Costs and expenses:
Research and development........... 2,658 2,817 4,314 6,292 12,382 5,533 8,646
Purchased research and
development...................... -- -- -- 648 1,000 -- --
Marketing and selling.............. 4,437 5,506 8,931 14,263 24,429 10,824 18,770
General and administrative......... 1,672 2,208 3,368 10,375 13,403 6,061 7,609
Merger expenses.................... -- -- -- -- 6,100 -- --
------- ------- ------- ------- ------- ------- -------
Total....................... 8,767 10,531 16,613 31,578 57,314 22,418 35,025
------- ------- ------- ------- ------- ------- -------
Income from operations............... 820 2,352 2,416 8,914 8,296 6,242 13,202
Interest income and other............ 185 90 166 1,843 5,004 2,500 2,717
Gain on sale of marketable securities
and other income (expense)......... 253 73 99 62 10,872 (141) 197
------- ------- ------- ------- ------- ------- -------
Income before provision for income
taxes, extraordinary item and
cumulative effect of change in
accounting......................... 1,258 2,515 2,681 10,819 24,172 8,601 16,116
Provision for income taxes(1)........ 505 908 1,453 3,369 10,997 3,147 6,040
------- ------- ------- ------- ------- ------- -------
Income before extraordinary item and
cumulative effect of change in
accounting(1)...................... 753 1,607 1,228 7,450 13,175 5,454 10,076
Extraordinary item................... 407 -- -- -- -- -- --
Cumulative effect of change in
accounting(1)...................... -- 564 -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income........................... $ 1,160 $ 2,171 $ 1,228 $ 7,450 $13,175 $ 5,454 $10,076
======= ======= ======= ======= ======= ======= =======
Per share data(2):
Income before cumulative effect of
change in accounting............. $ 0.06 $ 0.05 $ 0.22 $ 0.34 $ 0.14 $ 0.26
Cumulative effect of change in
accounting....................... 0.03 -- -- -- -- --
------- ------- ------- ------- ------- -------
Net income......................... $ 0.09 $ 0.05 $ 0.22 $ 0.34 $ 0.14 $ 0.26
======= ======= ======= ======= ======= =======
Weighted average number of common and
common equivalent shares
outstanding(2)..................... 25,015 25,231 34,115 38,877 38,398 39,418
======= ======= ======= ======= ======= =======
</TABLE>

15
<PAGE> 16

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------------------------- --------
1992 1993 1994 1995 1996 1997
------- ------- ------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities............................... $ 3,894 $ 3,860 $27,828 $112,367 $106,495 $110,753
Working capital............................ 4,791 6,070 29,007 104,349 109,202 119,658
Total assets............................... 9,109 11,511 37,691 128,659 145,975 157,068
Redeemable convertible preferred stock..... 9,016 8,527 -- -- -- --
Stockholders' equity (deficiency).......... (2,796) (2,001) 29,660 109,026 124,178 134,539
</TABLE>

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

(1) Effective January 1, 1993, the Company adopted, prospectively, the
provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." See Note 6 of Notes to the Company's
Supplemental Consolidated Financial Statements.

(2) Per share and share data for years prior to 1995 are presented on a pro
forma basis. See Note 1 of Notes to the Company's Supplemental Consolidated
Financial Statements.

16
<PAGE> 17

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

OVERVIEW

The Company is the leading provider of enterprise network and data security
solutions. The Company was founded in 1984, began shipping its SecurID tokens
and Access Control Module ("ACM") hardware products in 1986, and introduced its
first ACM software products for minicomputers and mainframe computers in 1988.
Prior to 1986, the Company was primarily engaged in research and development
activities. In December 1991, the Company introduced its ACE/Server software
products for enterprise information protection using client/server architecture.
The Company believes that its growth has historically been driven by the
emergence of local and wide area networks and a corresponding increase in users
with direct access to core enterprise systems and confidential data. The Company
also believes that the number of users with such direct access is increasing
because of the growth of the Internet and corporate intranets and extranets.

On July 26, 1996, the Company completed a merger with RSA (the "RSA
Merger") and on July 15, 1997, the Company completed the DynaSoft Acquisition.
The RSA Merger has been accounted for as a pooling of interests and, after the
release of financial statements that include the date of consummation of the
DynaSoft Acquisition, the DynaSoft Acquisition will be accounted for as a
pooling of interests in the Company's historical consolidated financial
statements. All financial information included in the discussion which follows
has been restated to include the results of RSA and DynaSoft for all periods
presented. See the Company's Supplemental Consolidated Financial Statements and
the Notes thereto included elsewhere in this Prospectus.

RSA, located in Redwood City, California, is a recognized leader in
cryptography and develops, markets and supports cryptographic data security
products and provides cryptographic consulting services. Products are licensed
to OEMs that incorporate the technology into their products. Developer toolkits
and other products are used to implement cryptographic data security
applications such as electronic mail, communications privacy, client/server data
security, smart cards and other key information technologies.

DynaSoft is based in Stockholm, Sweden and offers a range of software
security solutions, including secure single sign-on solutions, through its BoKS
product family. DynaSoft markets its products worldwide through subsidiaries and
also through OEM licensing agreements with Sun Microsystems, Hewlett-Packard and
other companies.

The Company's revenue is derived primarily from sales of SecurID tokens;
licensing of ACE/Server, BoKS and SecurPC software; licensing of BSAFE, TIPEM,
BCERT, S/PAY and S/MAIL encryption engines; licensing of patents; and revenues
from maintenance and professional services. Historically, the Company's growth
has been attributable to sales to new customers as well as to existing
customers. Sales to existing customers include sales of SecurID tokens and
ACE/Server software for use by different branches or divisions, sales of
replacement tokens (which are programmed at the request of the customer to
operate for a fixed period of up to four years) and sales of additional tokens
for use by vendors, suppliers, customers and clients of the Company's customers.
Sales to existing ACE/Server and BoKS customers are typically associated with an
increase in the number of users authorized under a license, and the sales of
additional functionality that can be added to the customer installation.
ACE/Server and BoKS software license fee prices are typically based on the
number of users authorized under a license. Sales to existing customers also
include revenue associated with amendments to encryption engine and patent
licensing agreements, usually in order to accommodate licensing of new software
or technology to the customer, to increase the field of use rights of the
customer, or both. Encryption engine software licensing terms vary by product,
and are typically composed of both initial fees plus ongoing royalties paid as a
percentage of the OEM's product or service revenues. Sales of ACM hardware and
software products have been decreasing relative to sales of ACE/Server software
for several years due to increased

17
<PAGE> 18

emphasis by the Company on sales to customers with larger security needs better
met by client/server software solutions such as ACE/Server software. The Company
believes that this trend will continue.

The Company's direct sales to customers in countries outside of the United
States are denominated in the local currency. As a result, fluctuations in
currency exchange rates could affect the profitability in U.S. dollars of the
Company's products sold in these markets. See Note 9 of Notes to the Company's
Supplemental Consolidated Financial Statements.

The Company's cost of revenue consists primarily of costs associated with
the manufacture and delivery of SecurID tokens and hardware products. The
Company utilizes assembly contractors for most manufacturing. Cost of revenue
also includes royalty fees incurred on the sale of ACE/Server software, royalty
fees payable on the licensing of patent technology and royalties payable under
certain OEM agreements. Cost of revenue includes customer support costs and
production costs, which include labor costs associated with the programming of
SecurID tokens, inspection and quality control functions and shipping costs. In
the future, gross profit may be affected by several factors, including changes
in product mix and distribution channels, price reductions (resulting from
volume discounts or otherwise), competition, increases in the cost of revenue
(including any software license fees or royalties payable by the Company) and
other factors.

Operating expenses are incurred for research and development, marketing and
selling and general and administrative activities. Research and development
expenses consist primarily of personnel costs as well as fees for development
services provided by consultants. From time to time the Company has also
purchased, and expensed, research and development technology. Marketing and
selling expenses consist primarily of salaries, commissions and travel expenses
of direct sales and marketing personnel and marketing program expenses. General
and administrative expenses consist primarily of personnel costs for
administration, finance, human resources, general management and legal and
accounting fees.

Interest and other income consists primarily of interest earned on the
Company's cash balances and marketable securities.

The Company has been profitable for each of the years in the seven-year
period ended December 31, 1996 and for the six months ended June 30, 1997.

RECENT OPERATING RESULTS

On October 14, 1997, the Company announced its financial results for the
three and nine months ended September 30, 1997. Total revenue increased 64.9% in
the three months ended September 30, 1997 to $34.8 million from $21.1 million in
the three months ended September 30, 1996. Net income for the three months ended
September 30, 1997 was $2.3 million, or $0.06 per share, compared to a net loss
of $(0.2) million, or $0.00 per share, for the same period in 1996. The average
number of common equivalent shares outstanding for the three months ended
September 30, 1997 and 1996 was 39.7 million and 39.2 million, respectively.

Total revenue increased 67.9% in the nine months ended September 30, 1997
to $96.2 million from $57.3 million in the nine months ended September 30, 1996.
Net income for the nine months ended September 30, 1997 was $12.4 million, or
$.31 per share, compared to $5.3 million, or $0.14 per share, for the same
period in 1996. The average number of common equivalent shares outstanding for
the nine months ended September 30, 1997 and 1996 was 39.5 million and 38.7
million, respectively.

Net income for the three months ended September 30, 1997 included expenses
incurred in connection with the DynaSoft Acquisition of $7.0 million, gains on
sales of marketable securities of $4.4 million and purchased research and
development expense of $3.2 million. Net loss for the three months ended
September 30, 1996 included expenses incurred in connection with the RSA Merger
of $6.1 million and gains on sales of marketable securities of $4.6 million.
Excluding the effects of these transactions, net income and net income per share
were $5.9 million and $0.15, respectively, for the three months ended September
30, 1997 and $2.8 million and $0.07, respec-

18
<PAGE> 19

tively, for the three months ended September 30, 1996. Excluding the effects of
these transactions, net income and net income per share were $15.9 million and
$0.40, respectively, for the nine months ended September 30, 1997 and $8.4
million and $0.22, respectively, for the nine months ended September 30, 1996.

RESULTS OF OPERATIONS

The following table sets forth certain supplemental consolidated financial
data as a percentage of revenue for the years ended December 31, 1994, 1995 and
1996 and the six months ended June 30, 1996 and 1997:

<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------- ---------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue................................. 20.3 18.1 21.7 20.6 21.4
----- ----- ----- ----- -----
Gross profit.................................. 79.7 81.9 78.3 79.4 78.6
Costs and expenses:
Research and development...................... 18.1 12.7 14.8 15.3 14.1
Purchased research and development............ -- 1.3 1.2 -- --
Marketing and selling......................... 37.4 28.9 29.1 30.0 30.6
General and administrative.................... 14.1 21.0 16.0 16.8 12.4
Merger expenses............................... -- -- 7.3 -- --
----- ----- ----- ----- -----
Total...................................... 69.6 63.9 68.4 62.1 57.1
----- ----- ----- ----- -----
Income from operations.......................... 10.1 18.0 9.9 17.3 21.5
Interest income and other....................... 0.7 3.7 5.9 6.9 4.4
Gain on sale of marketable securities and other
income (expense).............................. 0.4 0.2 13.0 (0.4) 0.3
----- ----- ----- ----- -----
Income before provision for income taxes........ 11.2 21.9 28.8 23.8 26.2
Provision for income taxes...................... 6.1 6.8 13.1 8.7 9.8
----- ----- ----- ----- -----
Net income...................................... 5.1% 15.1% 15.7% 15.1% 16.4%
===== ===== ===== ===== =====
</TABLE>

Six Months Ended June 30, 1997 Compared With Six Months Ended June 30, 1996

Revenue. Total revenue increased 70.0% in the first six months of 1997 to
$61.4 million from $36.1 million in the first six months of 1996. This increase
in revenue reflected increases in unit sales of all of the Company's products,
except ACM/400 and ACM/1600 hardware products. During the first six months of
1997, approximately 42% of the increase in revenue was attributable to increased
sales of SecurID tokens, approximately 26% of the increase was attributable to
increased sales of encryption engine licenses and approximately 17% of the
increase was attributable to increased sales of ACE/Server software licenses.
The balance of the increase in revenue primarily resulted from sales of BoKS
software licenses, patent licenses and maintenance revenue, offset by decreased
hardware revenue. The Company believes that the overall increase in sales was
attributable in part to growth of the information security market, with
increased use of the Internet and corporate intranets and extranets continuing
to play significant roles in developing new opportunities for the Company.

International revenue (excluding Canada) increased 83.0% in the first six
months of 1997 to $15.7 million from $8.6 million in the first six months of
1996. International revenue accounted for 25.6% and 23.7% of total revenue in
the first six months of 1997 and 1996, respectively. The increase in
international revenue was primarily attributable to the continuing expansion of
the Company's international direct sales force and increased market penetration
of the Company's products in foreign markets.

19
<PAGE> 20

Cost of Revenue and Gross Profit. The Company's gross profit increased
68.3% in the first six months of 1997 to $48.2 million, from $28.7 million in
the first six months of 1996, and remained relatively constant as a percentage
of revenue at 78.6% in 1997 compared to 79.4% in 1996. Approximately 40% of the
increase in gross profit during the first six months of 1997 was attributable to
increased unit sales of SecurID tokens, approximately 30% to increased licensing
sales of encryption engine technology, approximately 19% to increased licensing
sales of ACE/Server software and approximately 4% to sales of BoKS software
products. In addition, gross profit increased due to increased patent licensing
sales, royalties and maintenance revenue, offset by reduced sales of ACM/400 and
ACM/1600 hardware products.

Research and Development. Research and development expenses increased
56.3% in the first six months of 1997 to $8.6 million from $5.5 million in the
first six months of 1996. Research and development expenses decreased as a
percentage of revenue in the first six months of 1997 to 14.1% from 15.3% in the
first six months of 1996. During the first six months of 1997, approximately 82%
of the increase in research and development expenses resulted from an increase
in payroll costs associated with the employment of additional staff. The
remainder of the increase in research and development was attributable to
purchases of computer equipment, resulting in higher depreciation charges,
occupancy expenses and consulting expenses.

Marketing and Selling. Marketing and selling expenses increased 73.4% in
the first six months of 1997 to $18.8 million from $10.8 million in the first
six months of 1996. Marketing and selling expenses increased as a percentage of
revenue in the first six months of 1997 to 30.6% from 30.0% in the first six
months of 1996. During the first six months of 1997, approximately 42% of the
increase in marketing and selling expenses resulted from an increase in payroll
costs associated with the employment of additional staff, approximately 11% of
the increase was attributable to sales commissions on increased revenues, and
approximately 16% of the increase resulted from increased travel expenses and
marketing program expenses.

General and Administrative. General and administrative expenses increased
25.5% in the first six months of 1997 to $7.6 million, from $6.1 million in the
first six months of 1996, but decreased as a percentage of revenue to 12.4% in
1997 compared to 16.8% in 1996. The increase in general and administrative
expenses was due to the employment of additional staff offset by reduced legal
expenses. Legal expenses decreased approximately $1.3 million from the first six
months of 1996 compared to the first six months of 1997 due to the settlement of
certain of the Company's legal proceedings in 1996.

Interest Income and Other. Interest income increased 8.7% in the first six
months of 1997 to $2.7 million from $2.5 million in the first six months of 1996
due to interest earned on higher cash and marketable securities balances.

Provision for Income Taxes. The provision for income taxes increased to
$6.0 million during the first six months of 1997 from $3.1 million in the first
six months of 1996 due to higher pre-tax income and a higher effective tax rate
during the first six months of 1997. The Company's estimated effective tax rate
increased to 37.5% in the first half of 1997 from 36.6% in the first half of
1996 due to higher tax rates associated with certain foreign income, which
increased relative to domestic income.

Net Income. As a result of the above factors, net income in the first six
months of 1997 increased to $10.1 million, or 16.4% of revenue, from $5.5
million, or 15.1% of revenue, in the first six months of 1996.

1996 Compared With 1995

Revenue. Total revenue increased 69.6% in 1996 to $83.8 million from $49.4
million in 1995. This increase in revenue reflected increases in unit sales and
licensed use of substantially all of the Company's products. Approximately 42%,
22% and 11% of the increase in revenue was attributable

20
<PAGE> 21

to the increases in unit sales of SecurID tokens, the increase in unit sales of
ACE/Server software licenses and the issuance of additional encryption engine
and patent licenses, respectively.

International revenue (excluding Canada) increased 114.0% in 1996 to $19.7
million from $9.2 million in 1995 and accounted for 23.5% and 18.6% of total
revenue in 1996 and 1995, respectively. This increase in international revenue
was primarily attributable to the continuing expansion of the Company's
international direct sales force and increased market penetration of the
Company's products in foreign markets.

Cost of Revenue and Gross Profit. The Company's gross profit increased
62.0% in 1996 to $65.6 million, or 78.3% of revenue, from $40.5 million, or
81.9% of revenue, in 1995. Approximately 46% of the increase in gross profit was
attributable to an increase in the unit sales and gross margin from the sale of
SecurID tokens. Approximately 26% of the increase in gross profit was
attributable to increased sales of ACE/Server software licenses. Approximately
9% of the increase in gross profit was attributable to increased sales of patent
and encryption engine licenses. Overall, gross margins were lower due primarily
to the higher royalty costs associated with the ACE/Server software and patent
license products and additional investment in the Company's customer support
infrastructure.

In December 1994, the Company entered into an agreement with Progress
Software, a vendor of commercial database software, for the right to use certain
of Progress Software's software to enhance the functionality of the Company's
ACE/Server software. The Company began incurring royalties, which are charged to
cost of revenue, under the Progress Software agreement upon the commercial
introduction of ACE/Server software version 2.0 in October 1995. These royalties
have decreased gross margins.

Research and Development. Research and development expenses increased
96.8% in 1996 to $12.4 million from $6.3 million in 1995, and increased as a
percentage of revenue to 14.8% in 1996 from 12.7% in 1995. Approximately 54% of
the increase in research and development expenses resulted from an increase in
compensation costs associated primarily with the employment of additional staff.
Approximately 15% of the increase in research and development expenses in 1996
was related to general overhead costs. Approximately 9% of the increase was
attributable to increases in consulting services contracted to develop
enhancements to the Company's ACE/Server software line.

Purchased Research and Development. During the fourth quarter of 1996, the
Company purchased, and recorded as purchased research and development expense,
technology from Worldtalk Corporation for $1.0 million. The technology was
incorporated into the Company's S/MAIL developer kit, a standards-based secure
messaging solution for third-party software developers designed to provide a
secure messaging infrastructure based on the S/MIME protocol.

During 1995, the Company purchased, and recorded as purchased research and
development expense, SecurADM technology for $0.6 million. The technology was
incorporated into products designed to provide secure single sign-on capability
in heterogeneous networked data processing environments.

Marketing and Selling. Marketing and selling expenses increased 71.3% in
1996 to $24.4 million from $14.3 million in 1995, and increased as a percentage
of revenue to 29.1% in 1996 from 28.9% in 1995. Approximately 36% of the
increase in marketing and selling expenses was due to an increase in payroll
costs associated primarily with the employment of additional direct sales and
marketing personnel. Approximately 16% of the increase in marketing and selling
expenses was attributable to the increase in commissions on products sold by the
Company's direct sales force. Approximately 15% of the increase in marketing and
selling expenses was due to an increase in travel-related costs and marketing
programs, such as direct mail and seminar activities, trade shows and public
relations campaigns. Approximately 12% of the increase in marketing and selling
expenses in 1996 was related to general overhead costs.

21
<PAGE> 22

During 1996, international sales expenses increased due to the continued
development of the Company's sales offices in Europe and Asia.

General and Administrative. General and administrative expenses increased
29.2% in 1996 to $13.4 million, or 16.0% of revenue, from $10.4 million, or
21.0% of revenue, in 1995. Approximately 29% of the increase was due to an
increase in payroll and recruitment costs associated primarily with the growth
in the Company's staff needed to support the continuing expansion of operations.
Approximately 17% of the increase in general and administrative expense was from
an increase in consulting and temporary administrative services. In addition,
approximately 10% of the increase in general and administrative expenses
consisted of moving costs incurred in relocating to the Company's new corporate
offices.

Merger Expenses. Merger expenses incurred in connection with the RSA
Merger were $6.1 million in the third quarter of 1996. See Note 2 of Notes to
the Company's Supplemental Consolidated Financial Statements.

Interest Income and Other. Interest income increased to $5.0 million in
1996 from $1.8 million in 1995. This increase was due primarily to higher
average daily balances in invested cash resulting from the Company's follow-on
public offering in November 1995.

Gain on Sale of Marketable Securities. The Company realized a gain of
approximately $11.0 million in 1996 on the sale of marketable securities.

Provision for Income Taxes. The provision for income taxes increased to
$11.0 million in 1996 from $3.4 million in 1995. This increase was primarily the
result of higher pre-tax income during 1996. The Company's effective tax rate
increased to 45.5% in 1996 from 31.1% in 1995. The increase in the effective tax
rate was caused principally by the non-deductibility of certain RSA Merger
expenses in the third quarter of 1996. For the year ended December 31, 1995, the
valuation allowance was reduced by approximately $0.9 million, which resulted in
a decrease in the provision for income taxes for 1995. See Notes 1 and 6 of
Notes to the Company's Supplemental Consolidated Financial Statements.

Net Income. As a result of the above factors, net income in 1996 increased
to $13.2 million, or 15.7% of revenue, from $7.5 million, or 15.1% of revenue,
in 1995.

1995 Compared With 1994

Revenue. Total revenue increased 107.0% in 1995 to $49.4 million from
$23.9 million in 1994. This increase in revenue reflected increases in unit
sales of all of the Company's products except the ACM/1600 hardware product.
Approximately 39%, 32% and 22% of the increase in revenue was attributable to
the increases in unit sales of SecurID tokens, encryption engine and patent
licenses and sales of ACE/Server software licenses, respectively, offset by a
decrease in unit sales of ACM/1600 hardware products.

International revenue (excluding Canada) increased 74.0% in 1995 to $9.2
million from $5.3 million in 1994 and accounted for 18.6% and 22.2% of total
revenue in 1995 and 1994, respectively. This increase in international revenue
was primarily attributable to expansion of the Company's direct sales force and
increased market acceptance of the Company's products.

Cost of Revenue and Gross Profit. The Company's gross profit increased
112.8% in 1995 to $40.5 million, or 81.9% of revenue, from $19.0 million, or
79.7% of revenue, in 1994. Approximately 36% of the increase in gross profit was
attributable to an increase in the unit sales of SecurID tokens. Approximately
36% of the increase in gross profit was attributable to an increase in the
number of patent and encryption engine licenses sold. Approximately 25% of the
increase in gross profit was attributable to an increase in the number of
ACE/Server software licenses sold. These factors, which contributed to an
improvement in the gross margin in 1995, were partially offset by ongoing

22
<PAGE> 23

increases in production costs associated with quality management programs and
continued increases in customer support costs in Europe.

Research and Development. Research and development expenses increased
45.9% in 1995 to $6.3 million from $4.3 million in 1994, but decreased as a
percentage of revenue to 12.7% in 1995 from 18.1% in 1994. Approximately 69% of
the increase in research and development expenses resulted from an increase in
payroll costs associated primarily with the employment of additional staff.
Approximately 20% of the increase was attributable to increases in consulting
expenses to develop enhancements to the Company's product lines, primarily the
Company's ACE/Server software and encryption engine product lines.

Purchased Research and Development. During 1995, the Company purchased,
and recorded as purchased research and development expense, SecurADM technology
for $0.6 million. The technology was incorporated into products designed to
provide secure single sign-on capability in heterogeneous networked data
processing environments.

Marketing and Selling. Marketing and selling expenses increased 59.7% in
1995 to $14.3 million from $8.9 million in 1994, but decreased as a percentage
of revenue to 28.9% in 1995 from 37.4% in 1994. Approximately 36% of the
increase in marketing and selling expenses was due to an increase in payroll
costs associated primarily with the employment of additional direct sales and
marketing personnel. Approximately 27% of the increase in marketing and selling
expenses was attributable to the increase in commissions on products sold by the
Company's direct sales force. Approximately 14% of the increase in marketing and
selling expenses was due to an increase in marketing programs, such as direct
mail and seminar activities, trade shows and public relations campaigns.

During 1995, international sales expenses increased due to the continued
development of the Company's United Kingdom, German, French and Swedish sales
offices and the opening of the Company's office in Singapore.

General and Administrative. General and administrative expenses increased
208.0% in 1995 to $10.4 million, or 21.0% of revenue, from $3.4 million, or
14.1% of revenue, in 1994. Approximately 52% of the increase in general and
administrative expenses was attributable to increases in legal costs and also
accounting and investor relations expenses resulting from the additional costs
incurred in connection with being a public company. Approximately 29% of the
increase was due to increases in executive compensation and to increased payroll
expenses associated with the growth in the Company's staff to support increased
operations.

Interest Income and Other. Interest income increased to $1.8 million in
1995 from $0.2 million in 1994. This increase was due primarily to higher
average daily balances in invested cash resulting from the Company's initial
public offering in December 1994 and its follow-on public offering in November
1995.

Provision for Income Taxes. The provision for income taxes increased to
$3.4 million in 1995 from $1.5 million in 1994. This increase was primarily the
result of higher pre-tax income during 1995. The Company's effective tax rate
decreased to 31.1% in 1995 from 54.2% in 1994. The decrease in the effective tax
rate resulted primarily from the change in the recorded valuation allowance and
a decrease in state taxes. For 1995, the valuation allowance was reduced by
approximately $0.9 million and for 1994 the valuation allowance was increased by
approximately $0.3 million. See Notes 1 and 6 of Notes to the Company's
Supplemental Consolidated Financial Statements.

Net Income. As a result of the above factors, net income in 1995 increased
to $7.5 million, or 15.1% of revenue, from $1.2 million, or 5.1% of revenue, in
1994.

23
<PAGE> 24

SUPPLEMENTAL QUARTERLY OPERATING RESULTS

The following table sets forth unaudited supplemental quarterly results of
operations of the Company for each of the quarters in the years ended December
31, 1995 and 1996 and the six months ended June 30, 1997. The Company believes
that this information has been prepared on the same basis as the Company's
audited Supplemental Consolidated Financial Statements and that all necessary
adjustments, consisting only of normal recurring adjustments, have been included
in the amounts stated below to present fairly, in accordance with generally
accepted accounting principles, the quarterly information when read in
conjunction with the Company's audited Supplemental Consolidated Financial
Statements and the Notes thereto included elsewhere in this Prospectus. The
quarterly operating results are not necessarily indicative of future results of
operations.

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1995 1995 1996 1996 1996 1996 1997 1997
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue............ $7,387 $11,698 $14,849 $15,478 $16,290 $19,821 $21,143 $26,563 $28,419 $32,955
Cost of revenue.... 1,373 2,111 2,357 3,079 3,671 3,780 5,283 5,473 6,417 6,730
------ ------- ------- ------- ------- ------- ------- ------- ------- -------
Gross
profit..... 6,014 9,587 12,492 12,399 12,619 16,041 15,860 21,090 22,002 26,225
Costs and expenses:
Research and
development..... 1,348 1,595 1,509 1,840 2,342 3,191 3,134 3,715 3,848 4,798
Purchased research
and
development..... -- -- 648 -- -- -- -- 1,000 -- --
Marketing and
selling......... 3,084 3,445 3,495 4,239 5,004 5,820 5,988 7,617 8,669 10,101
General and
administrative... 1,629 2,650 2,307 3,789 2,901 3,160 3,208 4,134 3,389 4,220
Merger expenses... -- -- -- -- -- -- 6,100 -- -- --
------ ------- ------- ------- ------- ------- ------- ------- ------- -------
Total....... 6,061 7,690 7,959 9,868 10,247 12,171 18,430 16,466 15,906 19,119
------ ------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations........ (47) 1,897 4,533 2,531 2,372 3,870 (2,570) 4,624 6,096 7,106
Interest income and
other............. 396 447 379 621 1,274 1,226 1,119 1,385 1,271 1,446
Gain on sale of
marketable
securities and
other income
(expense)......... 86 (157) 46 87 1 (142) 4,553 6,460 (25) 222
------ ------- ------- ------- ------- ------- ------- ------- ------- -------
Income before
provision for
income taxes...... 435 2,187 4,958 3,239 3,647 4,954 3,102 12,469 7,342 8,774
Provision for
income taxes...... 667 1,134 338 1,230 1,304 1,843 3,284 4,566 2,781 3,259
------ ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income
(loss)............ $ (232) $ 1,053 $ 4,620 $ 2,009 $ 2,343 $ 3,111 $ (182) $ 7,903 $ 4,561 $ 5,515
====== ======= ======= ======= ======= ======= ======= ======= ======= =======
Net income (loss)
per equivalent
share............. $ (0.01) $ 0.03 $ 0.14 $ 0.06 $ 0.06 $ 0.08 $ (0.00) $ 0.20 $ 0.12 $ 0.14
====== ======= ======= ======= ======= ======= ======= ======= ======= =======
Weighted average
number of common
and common
equivalent shares
outstanding....... 32,411 33,699 33,951 35,445 37,777 39,039 39,168 39,563 39,299 39,527
====== ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>

24
<PAGE> 25

The following table sets forth supplemental consolidated financial data as
a percentage of revenue for each of the quarters in the years ended December 31,
1995 and 1996 and the six months ended June 30, 1997.

The Company's total revenue and operating results have varied substantially
from quarter to quarter and should not be relied upon as an indication of future
results. Quarterly revenue and operating results can be difficult to forecast
because the Company's sales cycle can be relatively long and depends on factors
such as the size and timing of individual transactions, changes in customer
budget authorizations, the level of research and development expenditures and
general economic conditions. The Company has historically allowed customers to
place large order commitments to secure volume price discounts with deliveries
specified at a later time, typically within a 12-month period. As a result, it
is difficult to forecast when the customer will request delivery of these
orders. Gross profit levels are affected by sales volume and mix, and gross
margins are different for SecurID tokens, software licenses, patent licenses and
maintenance and professional services.

The Company's revenue has increased in each of the quarters in the period
January 1, 1995 to June 30, 1997. Future revenue, however, may not increase on a
quarterly basis or may not increase at the same rate in comparison to prior
quarters. The Company has experienced, and expects to continue to experience,
significant seasonality in its business, and the Company's financial condition
or results of operations may be affected by such trends in the future. Revenue
has historically increased at higher rates in the last quarter of the year and
at lower rates in the next succeeding quarter. The Company believes that revenue
tends to increase at higher rates in the last quarter due to the Company's
quota-based compensation policies, year-end budgetary pressures on the Company's
customers and the tendency of certain of the Company's customers to implement
changes in enterprise network or data security prior to the end of the calendar
year. In addition, revenue tends to increase at lower rates in the summer
months, particularly in Europe, when businesses defer purchase decisions.
Because the Company's operating expenses are based on anticipated revenue levels
and a high percentage of the Company's expenses are fixed, a small variation in
the time of recognition of revenue can cause significant variations in operating
results from quarter to quarter.

25
<PAGE> 26

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 1997, the Company had cash and marketable securities of $110.8
million and working capital of $119.7 million. The Company has historically
funded its operations primarily from cash generated from its operating
activities. During 1996 and 1997, the Company used the cash provided by
operations principally for working capital needs and to finance certain costs in
connection with the RSA Merger. The Company believes that working capital will
be sufficient to meet its anticipated cash requirements through at least 1998.

On July 15, 1997, the Company acquired approximately 95% of the outstanding
shares and certain of the outstanding options to acquire shares of DynaSoft in
exchange for approximately 2.7 million shares of the Company's Common Stock. The
Company also paid approximately $6.0 million in cash to certain stockholders of
DynaSoft in exchange for the remaining outstanding shares and options. The
DynaSoft Acquisition costs recognized during the quarter ended September 30,
1997 were approximately $7.0 million. On July 26, 1996, a wholly owned
subsidiary of the Company acquired RSA. The RSA Merger costs were approximately
$6.1 million. The RSA Merger has been accounted for as a pooling of interests
and, after the release of financial statements that include the date of
consummation of the DynaSoft Acquisition, the DynaSoft Acquisition will be
accounted for as a pooling of interests in the Company's historical consolidated
financial statements. See Note 2 of Notes to the Company's Supplemental
Consolidated Financial Statements.

In December 1994, the Company sold 6,000,000 shares of Common Stock in its
initial public offering, which generated $21.6 million of net cash proceeds to
the Company. In January 1995, the Company sold 1,020,000 shares of Common Stock
under the terms of an over-allotment option granted to the underwriters as part
of the initial public offering, generating an additional $3.8 million in net
cash proceeds. In November 1995, the Company sold an additional 3,120,000 shares
of Common Stock in a follow-on offering, which generated $55.9 million of net
cash proceeds to the Company.

In October 1997, the Company purchased 175,285 Ordinary Shares of nCipher
Corporation Limited ("nCipher") for an aggregate purchase price of $502,000.
nCipher is a company organized under the laws of England and Wales that develops
products designed to accelerate cryptographic processes in Internet security,
electronic commerce and other applications. The Company's investment in nCipher
represents a minority interest of less than 5% of nCipher's capitalization.

In August 1997, the Company purchased 877,193 Series C Preferred Shares of
Finjan Software Ltd. ("Finjan") for an aggregate purchase price of $1.0 million.
Finjan is an Israeli software company organized to develop and market products
for the Java Internet security market. The Company's investment in Finjan
represents a minority interest of less than 5% of Finjan's capitalization.

In December 1996, the Company purchased 250,000 shares of Series B
Preferred Stock of VPNet Technologies, Inc. ("VPNet") of San Jose, California,
for an aggregate purchase price of $1.5 million. VPNet was organized to develop
and market products and technologies for implementing high-performance virtual
private networks. The Company's investment in VPNet represents a minority
interest of less than 10% of VPNet's capitalization.

On April 17, 1995 and February 20, 1996, the Company purchased 425,000
shares of Series A and 72,091 shares of Series B Convertible Preferred Stock,
respectively, of VeriSign, Inc. ("VeriSign") of Redwood City, California for an
aggregate purchase price of $687,000. VeriSign was organized to provide digital
certificates and related services that use public-key cryptography to ensure
essential privacy and authentication features. During 1995, RSA granted certain
rights and privileges in certain technology to VeriSign in connection with
VeriSign's incorporation and received 4,000,000 shares of VeriSign common stock.
The Company's voting interest in VeriSign was approximately 44%, 24% and 24% at
December 31, 1995 and 1996 and June 30, 1997, respectively.

26
<PAGE> 27

Two of the companies in which the Company has equity positions had initial
public offerings in 1996. The Company now considers these investments to be
available for sale marketable securities and the investment cost of $737,000 is
classified with marketable securities at June 30, 1997. See Note 1 of Notes to
the Company's Supplemental Consolidated Financial Statements.

The Company's capital expenditures for the first six months of 1997 were
$4.0 million and were for additional leasehold improvements, office furniture
and equipment, as well as computer equipment for product development, testing
and support to accommodate the Company's continued growth. The Company generated
$1.7 million of cash from the exercise of stock options and generated $1.4
million of cash from the sale of minority interests in RSA's Japan subsidiary in
the first six months of 1997. The Company expended approximately $3.2 million
for purchased research and development during the quarter ended September 30,
1997.

In March 1996, the Company entered into a noncancelable operating lease
expiring in 2006 for corporate executive offices in Bedford, Massachusetts. The
Company commenced its tenancy in August 1996. The facility consists of
approximately 75,000 square feet of office space, and the annual base rent for
the first year is $956,000 increasing annually up to $1.2 million for years five
through ten. In June 1997, the Company entered into a noncancelable operating
lease expiring in 2006 for additional facilities in Bedford, Massachusetts. The
Company commenced its tenancy in August 1997. The new facility consists of
approximately 32,000 square feet of office space, and the annual base rent for
the first four years is $599,000, increasing up to $662,000 for years five
through ten.

In September 1997, the Company announced its SecurMessage email security
solution, which incorporates technology from Worldtalk Corporation ("Worldtalk")
and VeriSign for securing already-deployed enterprise email and groupware
applications. In connection therewith, in September 1997, the Company entered
into an agreement with Worldtalk pursuant to which the Company paid to Worldtalk
in October 1997 a one-time prepaid, nonrefundable license fee of $3.0 million in
order to obtain favorable pricing.

In November 1996, the Company amended its agreement with Progress Software
for the right to use certain of its software to enhance the functionality of the
Company's ACE/Server software. In order to obtain favorable pricing the Company
pre-paid $1.5 million and $1.25 million during the first and fourth quarters of
1996, respectively, and pre-paid $2.5 million during the first quarter of 1997.

The Company intends to seek acquisitions of businesses, products and
technologies that are complementary to those of the Company. The Company is
continuing to identify and prioritize additional security technologies which it
may wish to develop, either internally or through the licensing or acquisition
of products from third parties. While the Company engages from time to time in
discussions with respect to potential acquisitions, there can be no assurances
that any such acquisitions will be made or that the Company will be able to
successfully integrate any acquired business. In order to finance such
acquisitions, it may be necessary for the Company to raise additional funds
through public or private financings. Any equity or debt financings, if
available at all, may be on terms which are not favorable to the Company and, in
the case of equity financings, may result in dilution to the Company's
stockholders.

RECENT ACCOUNTING PRONOUNCEMENTS

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share,"
which is required to be adopted in the fourth quarter of 1997. At that time, the
Company will be required to change the method currently used to compute earnings
per share and to restate all prior periods. SFAS 128 supersedes Accounting
Principles Board Opinion No. 15 and is intended to simplify the computation of
earnings per share and to make the U.S. computations more comparable with
international computations. See Note 1 of Notes to the Company's Supplemental
Consolidated Financial Statements.

27
<PAGE> 28

In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards Nos. 130 and 131, "Reporting Comprehensive
Income" and "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 130" and "SFAS 131," respectively). The Company will be
required to adopt the provisions of these statements in fiscal 1998. SFAS 130
provides standards for reporting items considered to be "comprehensive income"
and uses the term "other comprehensive income" to refer to revenues, expenses,
gains and losses that are included in comprehensive income under generally
accepted accounting principles but excluded from net income. Currently the only
items presented in the Company's consolidated financial statements that would be
considered other comprehensive income as defined in SFAS 130 are the unrealized
gains and losses on marketable securities and cumulative translation
adjustments, which are recorded as components of stockholders' equity. SFAS 131
establishes new standards for reporting information about operating segments.
The Company believes the segment information required to be disclosed under SFAS
131 will be more comprehensive than previously provided, including expanded
disclosure of income statement and balance sheet items for each reportable
operating segment. The Company has not yet completed its analysis of which
operating segments it will report on. The Company believes that the provisions
of SFAS 130 will not, when adopted, have a material impact on the Company's
financial statements.

ACCOUNTING FOR CERTAIN STOCK OPTIONS

On October 18, 1995, January 24, 1996, April 1, 1996 and April 24, 1996,
the Company's Board of Directors or the Compensation Committee of the Company's
Board of Directors granted stock options to employees to purchase 32,000,
605,600, 200,000 and 38,900 shares of the Company's Common Stock at exercise
prices of $14.25, $24.76, $24.30 and $38.20, respectively, subject to
stockholder approval (obtained on May 22, 1996) of an increase in the number of
shares available for grant. The exercise prices represented the fair market
value on the dates of grant. As permitted by Statement of Financial Accounting
Standard No. 123, which became effective on January 1, 1996, the Company has
elected to continue to apply the intrinsic value method of Accounting Principles
Board Opinion No. 25 for stock-based compensation to employees.

For options granted prior to April 1, 1996, because approval of the
stockholders was required and considered perfunctory, the Company measured
compensation expense on the date of grant by the Board of Directors or the
Compensation Committee of the Board of Directors. As a result of discussions
with the staff of the Securities and Exchange Commission, the Company changed
its accounting policy on options requiring stockholder approval to measure
compensation expense on the approval date. This change is effective for options
granted on or after April 1, 1996. This change resulted in an aggregate
compensation expense of approximately $4.5 million relating to the April 1, 1996
and April 24, 1996 option grants, which the Company will recognize over the
remainder of the four-year vesting period of the options from May 22, 1996. The
effect of this change was to reduce income from operations by approximately $0.7
million in 1996.

28
<PAGE> 29

BUSINESS

The Company is the leading provider of enterprise network and data security
solutions. The Company's products help organizations conduct business securely,
protect corporate information assets and facilitate business-to-business and
business-to-consumer electronic commerce. Historically, the Company has
delivered security solutions that provide secure remote access to corporate
networks. Through its ESS framework, partnerships and acquisitions, the Company
intends to expand its addressable market by delivering solutions that provide
secure access to information wherever it resides in an enterprise.

INDUSTRY BACKGROUND

Historically, computer and enterprise network security has been the focus
of businesses engaged in security-conscious industries such as banking,
telecommunications, aerospace and defense. However, a number of factors have
contributed to an increased awareness of, and need for, enterprise security
solutions for companies that use and rely on network-based information
resources. These factors include the growing complexity of enterprise networks
and a shift in network security requirements driven by increased use of the
Internet and corporate intranets and extranets.

Enterprise computing has evolved over the past three decades from
host-based systems to a distributed model where individuals are accessing
corporate resources from virtually anywhere inside or outside of an
organization. Enterprise computing environments today consist of heterogeneous
computer resources coupled with converging public and private networks. As such,
they require comprehensive, flexible products and solutions that can be deployed
to a large number of users in a consistent, manageable and secure fashion.

In addition, the traditional security model of network perimeter defense is
being expanded in light of increased use of the Internet. The growth of the
Internet as a business tool has led to a rapid increase in corporate intranets,
where employees share information, and extranets, where companies share
information with their suppliers, partners and customers. Companies that have
traditionally relied solely on static password protection or on corporate
firewalls are now seeking to adopt more sophisticated, comprehensive security
strategies to protect corporate information assets and to conduct business
securely. Companies today require scaleable enterprise security solutions that
can be easily integrated, deployed and managed across complex, heterogeneous
enterprise environments.

Classes of Enterprise Network and Data Security

The Company believes that enterprise network and data security requirements
can be grouped into the following four classes: (i) user identification and
authentication, (ii) access control and privilege management, (iii) data
privacy, integrity and authentication (encryption) and (iv) security
administration and audit.

User Identification and Authentication. Reliable authentication of the
identity of users is necessary to prevent unauthorized access to computer and
network resources. There are three generally accepted methods of user
identification: (i) something secret the user knows, such as a word, phrase,
PIN, code or fact; (ii) something physical the user possesses, such as a key,
smart card, badge or other form of discrete "token," which is resistant to
counterfeiting and (iii) something unique to the user, such as a fingerprint,
signature, retinal pattern, voice print or other measurable personal
characteristic or "biometric." The Company believes that the use of a two-factor
authentication system, combining two of the three generally accepted methods of
user identification, is required for reliable enterprise network and data
security.

Access Control and Privilege Management. One of the key challenges facing
organizations is the proliferation of passwords required for users to access
disparate operating systems, applications and databases. Products addressing
access control and privilege management must protect and

29
<PAGE> 30

manage access to corporate information and applications and control user
privileges at multiple levels within the enterprise, including the network,
application and data levels. Single sign-on ("SSO") represents the ability to
provide authenticated users with transparent access to a variety of services,
thereby improving user productivity and reducing the frustration caused by users
having to enter multiple passwords. Early SSO solutions did not require
authentication from a security server; data centers could establish trust
between two devices through a direct connection in a static environment. With
the growth in distributed networks and the variety of operating systems and
client/server applications, reliable SSO now requires authentication, encryption
and key exchange to ensure secure communication between the desktop and the
application. Together with traditional SSO solutions, user authentication and
application session encryption capabilities make up a more complete solution
called secure single sign-on ("SSSO").

Data Privacy, Integrity and Authentication (Encryption). In addition to
authenticating the identity of users and ensuring that only authorized users can
access, view or modify certain data, a comprehensive security solution must
ensure that the data transmitted over a network are not disclosed to
unauthorized persons (data privacy), have not been altered or compromised by
unauthorized manipulation (data integrity) and were actually transmitted by the
purported sender (data authentication). Such data privacy, integrity and
authentication are provided by encryption and data authentication technologies.

Encryption. In traditional cryptography, known as secret key or
symmetric cryptography, the sender and receiver of a message know and use
the same secret keys. The sender uses the secret key to encrypt a message
by transforming data into a form unreadable by anyone without a secret
decryption key. The receiver uses the same secret key to decrypt the
message by transforming the encrypted data into the original readable
message. A key is a value or series of bits used by the cryptographic
system to convert the original text into an encrypted text or to decrypt
the encrypted text back into the original text.

The principal problem with secret key cryptography is communicating
the secret key between the sender and receiver without anyone else
discovering it. If the sender and receiver are in separate physical
locations, they must trust a courier, a phone system or some other
transmission medium to prevent the disclosure of the secret key being
communicated. Anyone who overhears or intercepts the key in transit can
later read, modify and forge messages encrypted or authenticated using that
key. Because all keys in a secret key cryptosystem must remain secret,
secret key cryptography often has difficulty providing secure key
management, especially in open systems like the Internet with a large
number of users.

The concept of public key cryptography attempts to solve the key
management problem by giving each person a pair of keys, one called the
public key and the other called the private key. Each person's public key
is published while the private key is kept secret. The sender encrypts a
message using the public key of the intended recipient and communicates it
via a public mode of communication. If implemented properly, the message
can only be decrypted with the recipient's private key, which is in the
sole possession of the intended recipient. All communications involve only
public keys, and no private key is ever transmitted or shared. With public
key cryptography, it is not necessary to trust a communications channel to
be secure against eavesdropping or betrayal. In general, public key
cryptography requires only that public keys be associated with their users
in a trusted manner, for instance, by maintaining the key in a trusted
directory, and that the private key not be disclosed.

Data Authentication. Data authentication is a process whereby the
receiver of a digital message can be confident of the identity of the
sender and/or the integrity of the message. In public key cryptosystems,
authentication is enabled by the use of digital signatures. Digital
signatures play in the digital world a function similar to that played by
handwritten signatures for printed documents. The signature is an authentic
piece of data asserting that a named person wrote or otherwise agreed to
the document to which the signature is attached. The recipient, as

30
<PAGE> 31

well as a third party, can verify both that the document originated from
the person whose signature is attached and that the document has not been
altered since it was signed. Secure digital signatures may be used to
refute a claim by the signer of a document that it was forged.

Security Administration and Audit. With the growth of distributed
computing environments, including those utilizing the Internet, organizations
are increasingly concerned about various administrative issues relating to
network security, including the scaleability of their security solutions and the
ability of the solutions to cover multiple geographic regions. Security
administration and audit solutions must also monitor user activity for purposes
of detection and deterrence and in order to ensure that the network or data have
not been compromised.

Enterprise Security

The Company believes that there is an emerging market for enterprise-wide
security solutions and, increasingly, for extranet security solutions, where
companies exchange information with their suppliers, partners and customers.
These enterprise security solutions must incorporate elements of all four
classes of security and address the need for: (i) ease of use; (ii)
interoperability within heterogeneous enterprise environments; (iii)
scaleability; (iv) integrated network security administration; (v) integration
with existing customer applications; (vi) secure access to information,
including secure remote access; (vii) information privacy, integrity and
authentication; and (viii) system reliability and availability.

To date, most approaches to network security have been limited in scope and
have failed to address one or more of these requirements. The Company believes
that, in order to compete effectively in this market, network security vendors
must develop comprehensive network security services that can accommodate a
large number of local and remote users and integrate security management across
heterogeneous computing resources.

SECURITY DYNAMICS SOLUTION

Security Dynamics is the leading provider of enterprise network and data
security solutions. The Company's products help companies conduct business
securely, protect information assets and facilitate business-to-business and
business-to-consumer electronic commerce. The Company's solutions employ a
patent-protected combination of super smart card technology, access control and
privilege management products, public key encryption technology and security
administration software to protect information wherever it resides in an
enterprise.

A key element of the Company's strategy has been and continues to be the
expansion of its product offerings to address each of the four classes of
enterprise network and data security and deliver integrated solutions for
protecting information resources. Since its inception, the Company has focused
on the fundamental need for user identification and authentication, with an
emphasis on solutions for secure remote access to enterprise networks. In
furtherance of its strategy to expand product offerings within the security
classes, in July 1996 the Company acquired RSA, a leader in cryptography, to
address the need for data privacy, integrity and authentication.

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<PAGE> 32

[Under the heading 'Secure Information Access,' a schematic diagram of the
Company's products is presented. On the left side, above the caption 'Secure
Remote Access,' is a picture of a laptop computer next to a SecurID Card and the
words 'BoKS Desktop' and 'RSA SecurPC.' The laptop computer is connected to a
labelled picture of a remote access server by telephone lines and to a labelled
picture of a firewall by a cloud labelled 'Internet' and two lightning bolts. On
the right side, below the caption 'Enterprise Network,' lines exiting the remote
access server and the firewall join and enter, in succession, labelled pictures
of BoKS Manager and ACE/Server software. Lines exiting a picture of a computer
terminal next to a SecurID Card and the words 'BoKS Desktop' and 'RSA SecurPC'
and a labelled picture of an application server and database next to the words
'BoKS Connect' join the line exiting the labelled picture of ACE/Server
software.]

The Company's solutions have historically focused on addressing secure
remote access through: (i) SecurID tokens for user identification and
authentication, (ii) ACE/Server administration software and (iii) ACE/Agent code
embedded in remote access devices such as remote access servers and firewalls.
The RSA SecurPC product and RSA encryption engines have contributed to secure
remote access by allowing customers to control access to the network and by
providing data privacy, integrity and authentication.

As businesses expand their networks to make use of the Internet, intranets
and extranets, companies have begun to realize that the internal network is
becoming more vulnerable and that there is a critical need for products and
services that allow system administrators to control user privileges at multiple
levels within an enterprise and encrypt information within an internal network.
Through its ESS framework, the Company intends to address these needs by moving
beyond secure remote access to secure information access, thereby providing
security across an enterprise. The ESS framework is intended to combine products
and technologies developed or acquired by the Company with solutions gained
through partnerships with leading vendors and is designed to assist in the
development of systems and applications that facilitate and control secure
access to information.

In support of its ESS framework, in July 1997 the Company acquired
DynaSoft, a leading vendor of platform-independent security solutions for
distributed client/server networks. The DynaSoft BoKS product family includes
technologies for access control and privilege management which the Company
intends to incorporate into the ESS framework.

Through the ESS framework, the Company intends to provide additional
security applications, including certificate management (certificates which
attest to the authenticity of the owners of public keys) and key management
(services such as generation, distribution, validation, replacement, termination
and recovery of keys). The Company intends to provide these and other
applications as modular add-ons to its ACE/Server and BoKS Manager software,
thereby protecting customers' investments and ensuring backwards compatibility.
As part of the ESS framework, the Company also plans to provide a broader
administrative framework to manage security services and to add access control
agents to support application access control and smart cards as an additional
form factor for user authentication.

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<PAGE> 33

SECURITY DYNAMICS STRATEGY

The Company's objective is to continue as the leading provider of
enterprise network and data security solutions. Key elements of the Company's
strategy to achieve this objective include the following:

- Deliver Enterprise Security Services. The Company's strategy has been
and continues to be to expand the depth and breadth of its product
offerings across the classes of enterprise network and data security to
meet the evolving requirements for the protection of its customers'
information assets. Through its ESS framework, the Company plans to
develop and deliver scaleable, reliable enterprise security solutions
that enable companies to conduct business securely, protect corporate
information assets and facilitate electronic commerce. For instance, the
Company intends to introduce or acquire products and technologies and
form partnerships that are expected to enable delivery of security
services such as certificate management and key management. In addition,
through partnerships the Company plans to expand its agent roster to
include application-specific agents and add additional authentication
form factors, including smart cards.

- Maintain Technological Leadership. The Company plans to continue to add
new capabilities and features to its enterprise network and data security
products to meet its customers' identification and authentication needs
within the context of evolving enterprise environments. The Company also
plans to continue to establish RSA's proprietary technology as a de facto
encryption standard. Through its RSA Laboratories division, RSA maintains
a leading role in basic cryptographic research, develops new encryption
technologies and maintains close working relationships with leading
academic centers and custom development teams.

- Expand Market Opportunities. The Company intends to expand its market
opportunities through strategic partnerships, industry initiatives and
marketing designed to heighten awareness of security issues. The Company
has strategic partnerships with approximately 50 industry-leading vendors
and plans to continue to foster and leverage these partnerships and enter
into additional relationships with companies that can provide
complementary technologies for its ESS framework. In July 1997, SDI, RSA,
McAfee Associates, Inc. and VeriSign announced the formation of the
SecureONE framework, a network security environment designed to link the
authentication, encryption, anti- virus and digital certificate products
and technologies of the four firms. The Company also seeks to heighten
awareness regarding enterprise network and data security issues through
marketing programs such as the annual RSA Data Security Conference.

- Expand Indirect Sales and Support Channel. The Company currently sells
its products through a direct sales force and through relationships with
a significant number of OEMs, VARs and distributors. The Company recently
announced a program designed to develop and expand its indirect sales and
support channel through the establishment of two-tier distribution of the
Company's solutions. The Company believes that an expanded indirect sales
and support channel will enable it to enter new markets and gain access
to a larger installed base of potential customers in a cost-effective
manner.

- Expand International Presence. The Company believes that international
markets present a large, relatively new market for enterprise network and
data security products. Sales outside the United States and Canada
represented approximately 23.4% and 25.6% of the Company's total revenue
for 1996 and the six months ended June 30, 1997, respectively. The
Company plans to continue to expand its business outside North America
through the hiring of sales personnel, the establishment of additional
distribution arrangements, primarily in Europe and the Far East, and the
development of local presence in key markets.

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<PAGE> 34

PRODUCTS

The Company offers products designed to address all classes of enterprise
network and data security. The Company's products interoperate with a wide
variety of operating systems, network environments and third-party hardware and
software products, thus enabling customers to select optimal configurations for
the installation of the Company's computer and enterprise network security
products.

User Identification and Authentication

The Company's user identification and authentication products combine two
methods of user identification -- something secret the user knows (a PIN) and
something the user possesses (the SecurID token). To gain access to a protected
resource, a user enters his or her PIN and the token code automatically computed
and displayed on the liquid crystal display ("LCD") of the user's SecurID token.
The PIN and the token code together form the user's "PASSCODE." With a valid
PASSCODE, the authorized user is identified, authenticated and granted access to
appropriate information resources.

Each SecurID token contains the Company's proprietary algorithm and is
programmed with a secret, randomly generated seed number which is unique to the
token. The algorithm uses the seed number and Greenwich Mean Time to produce a
sequence of token codes at set intervals (typically every 60 seconds). The
Company's ACE/Server software uses the same algorithm, seed number and Greenwich
Mean Time to generate a token code corresponding to the token code generated by
the user's SecurID token.

The Company currently offers the following user identification and
authentication products:

<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
- ------------------------------ ------------------------------------------
<S> <C> <C>
SecurID Tokens - Three form factors -- SecurID Card,
SecurID PINPAD and SecurID Key Fob -- that
can be programmed to function for between
one and four years
SoftID - Authentication software that can be
deployed on a PC
</TABLE>

The Company's SecurID tokens and SoftID software work in conjunction with
the Company's ACE/Server software to provide user identification and
authentication services.

Access Control and Privilege Management

The Company's access control and privilege management products provide a
modular set of security services for protecting and managing access to corporate
information and applications. These services are delivered through a flexible
framework designed to control user privileges at multiple levels within the
enterprise, including at the network, application and data levels. The Company's
BoKS products can be used together to form a comprehensive security solution or
independently for use with other system components. BoKS software also employs
encryption to protect application data transiting the network, as well as for
the protection of local files and data used within the security management
system.

34
<PAGE> 35

The Company's access control and privilege management products include the
following:

<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
- ------------------------------ ------------------------------------------
<S> <C> <C>
BoKS Desktop - Manages a user's security credentials,
providing security for PCs as well as SSO
functionality to host systems, database
applications and network domains
- Supports Windows 3.1, Windows for
Workgroups 3.11, Windows 95, Windows NT
3.51 and 4.0
BoKS Connect - Application access control solution that
operates with BoKS Desktop to secure
database sessions, Telnet sessions and
other TCP/IP-based client/server
connections
ToolBoKS - Toolkit that allows developers to
implement SSSO functionality and create
secure applications, including secure
mail, secure remote access, secure
Internet services and secure electronic
commerce
</TABLE>

Each of the foregoing products works in conjunction with the Company's BoKS
Manager software to provide access control and privilege management services.

Data Privacy, Integrity and Authentication (Encryption)

RSA's toolkit products, built around the RSA public key cryptographic
technology (or "cryptosystem"), enable the Company's customers to develop
applications that are designed to provide secure data communication. The RSA
public key cryptosystem uses a pair of large prime numbers to generate private
keys and public keys. The size of the keys determines the degree of security
provided. The Company believes that RSA's public key cryptosystem is one of the
most secure cryptographic techniques commercially available to encrypt, and to
verify the authenticity and integrity of, electronic data.

The Company believes that the RSA cryptosystem is a de facto standard for a
number of data security applications. RSA's encryption technology is embedded in
current versions of Microsoft Windows NT, Netscape Navigator, Quicken by Intuit,
Lotus Notes and numerous other products. RSA technology is also used in secure
telephones, on Ethernet network cards and on smart cards, and is incorporated
into major protocols for secure Internet communications, including SSL, S-HTTP,
S/MIME, PCT, PKCS, SET and PEM. It is also used internally in many institutions,
including financial institutions, major corporations, U.S. governmental
agencies, national laboratories and universities. RSA's technology has also
become widely selected as a standard for various electronic banking
applications.

35
<PAGE> 36

The Company currently offers the following data privacy, integrity and
authentication (encryption) products:

<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
- ------------------------------ ------------------------------------------
<S> <C> <C>
BSAFE - RSA's flagship encryption engine and
developer toolkit that allows programmers
to integrate encryption and data
authentication features into a wide range
of applications, including digitally
signed electronic forms and virtual
private networks
JSAFE - RSA's newest encryption engine and
developer toolkit that allows Java
developers to integrate encryption and
data authentication features into
applications
TIPEM - Developer toolkit providing flexible,
secure electronic messaging foundation for
a variety of messaging protocols,
including PEM, MOSS and S/MIME; used in
products or services offered by Lotus,
Netscape and America Online Inc.
BCERT - Developer toolkit designed to allow
developers to incorporate public key
certificates into their applications and
containing all cryptographic support
necessary to generate certificate
requests, sign certificates and create and
distribute certificate revocation lists
(CRLs)
S/MAIL - Standards-based secure messaging engine
and toolkit for providing a secure
messaging infrastructure based on the
S/MIME protocol
S/PAY - Standards-based secure transaction engine
and developer toolkit suite for providing
a secure payment card (including credit
cards) transaction infrastructure based on
the SET standard
RSA SecurPC - Encryption software based on RSA public
key and RC4 symmetric key cryptosystem
that protects and encrypts data in transit
via email and protects data on local hard
drives, network drives and laptop PCs
</TABLE>

The Company also believes that RSA's RC series of symmetric, or secret key,
encryption technologies are among the highest performance and most secure
techniques of their class available to encrypt electronic data. RC2 and RC4 are
designed to handle block and streaming data types, respectively, and are
designed to provide for easy adjustment of key size for exportability, as well
as high performance without specialized hardware.

Security Administration and Audit

The Company offers highly scaleable network security solutions that are
easy to deploy and provide system administrators with the ability to administer
the entire global authentication network from any location, delegate
administrative roles and privileges, write customized reports on security-
related activities on the network, and perform other administrative functions
with a high degree of granularity and flexibility. The Company's security
administration and audit products include its ACE/Server and BoKS Manager
software products.

The Company's ACE/Server software manages access to network resources via
the Internet, public gateways, remote dial-up modems, leased lines,
workstations, terminals, personal computers

36
<PAGE> 37

or direct connection. It permits centralized user authentication and security
administration for all customer resources protected on a TCP/IP network.
ACE/Server software is currently available for most popular UNIX-based operating
systems and Windows NT.

BoKS Manager is the administration framework for the BoKS product family.
BoKS Manager provides customers with centralized user, security and public key
administration through Web-based graphical interfaces. Its primary functions are
to provide UNIX platform security and to create and administer security domains,
including UNIX systems, with BoKS Desktop.

As part of its ESS framework, the Company intends to integrate the
functionality of its ACE/Server and BoKS Manager software into a unified server
platform.

Pricing

Subject to volume discounts and other licensing terms and conditions, the
suggested U.S. list prices for the Company's products range as follows: SecurID
tokens from $34 to $86 per token; ACE/Server software products from $2,850 to
$172,500; RSA encryption engine and toolkit licenses from $25,000 to $50,000;
and BoKS products from $50 to $200 per user for BoKS Desktop and from $1,000 to
$2,000 per server for BoKS Manager. The Company continually reviews and adjusts
its product pricing policies in light of factors such as relative value,
industry standards and demand.

STRATEGIC PARTNERS

To enhance its enterprise network and data security solutions, the Company
has established relationships with approximately 50 vendors of remote access
products, Internet firewalls, network and applications software and virtual
private network ("VPN") products. Most of these vendors integrate the Company's
client software into one or more of their products to provide compatibility
between their product offerings and the Company's ACE/Server software. Other
vendors build call routines, software hooks or APIs into their products to
provide compatibility with the Company's ACE/Server software. The Company has
also entered into strategic relationships with vendors that share technical
information with the Company to enable it to develop products which will be
interoperable with the vendors' products. The Company's strategic partners
include the following:

<TABLE>
<CAPTION>
REMOTE ACCESS INTERNET FIREWALLS NETWORK AND APPLICATIONS VPN
- ------------------------------------------ ------------------- ------------------------ ------------
<S> <C> <C> <C> <C>
Access Beyond Lanoptics ANS Apple Computer Ascend
ACT Networks Lantronix Check Point Cisco Aventail
ADTRAN Livingston CyberGuard CyberSAFE Check Point
Apple Computer Microcom IBM Gradient VPNet
Ascend Microsoft Milkyway IBM
Attachmate MultiLink Raptor Systems Lucent Technologies
Bay Networks Network General Secure Computing McAfee
Cisco NNTI SOS Netscape
Digital Equipment Osicom Technologic Network Express
Emulex Shiva Trusted Information NIT
Gandalf Telebit Systems Novell
Hewlett-Packard 3COM V-ONE Oracle
IBM U.S. Robotics OTG
Kasten Chase Xyplex PLATINUM technologies
Sun Microsystems
Utimaco
</TABLE>

SALES AND MARKETING

The Company has established a multi-channel distribution and sales network
to serve the enterprise network and data security market. The Company sells and
licenses its products directly to end users through its direct sales force and
indirectly through a network of OEMs, VARs and distributors. In addition, the
Company supports its direct and indirect sales efforts through strategic
marketing relationships and public relations programs, trade shows and other
marketing activities.

37
<PAGE> 38

During the fourth quarter of 1997, the Company announced a program designed to
enhance its indirect channel through the establishment of two-tier distribution.

Sales

The Company's direct sales staff focuses on major accounts, provides
technical advice and support with respect to the Company's products and works
closely with the Company's customers, OEMs, VARs and distributors. As of August
31, 1997, the Company's direct sales organization consisted of 156 sales and
technical support personnel located throughout the world. The Company's revenue
from direct sales efforts for the years ended December 31, 1994, 1995 and 1996
and the six months ended June 30, 1997 was approximately 88%, 95%, 90% and 82%
of total revenue, respectively.

The Company also markets, sells and licenses its products indirectly
through OEMs, VARs and distributors. As of August 31, 1997, the Company
(excluding RSA) had relationships with approximately 250 OEMs, VARs and
distributors, and RSA had relationships with more than 300 OEMs. DynaSoft has
traditionally complemented its direct sales force with VARs and distributors and
recently entered into OEM agreements with Sun Microsystems and Hewlett-Packard.

International sales (excluding Canada) accounted for approximately 22.2%,
18.6%, 23.5% and 25.6% of the Company's total revenue in the years ended
December 31, 1994, 1995 and 1996 and the six months ended June 30, 1997,
respectively.

Marketing

In support of its sales efforts, the Company conducts sales training
courses, comprehensive targeted marketing programs, including direct mail,
public relations, advertising, seminars, trade shows and telemarketing, and
ongoing customer and third-party communications programs. The Company also seeks
to stimulate interest in enterprise network and data security through its public
relations program, speaking engagements, white papers, technical notes and other
publications.

The Company has entered into strategic marketing relationships with various
vendors of operating systems and network operating systems, remote access
products, Internet-related products and application software. The Company has
also entered into strategic relationships with vendors that share technical
information with the Company to enable it to develop products which will be
interoperable with the vendors' products. The Company has developed a separate
program, the SecurID Ready strategic partner program, to market the
compatibility between the vendors' products and the Company's ACE/Server
software. The end-user customers of all of these vendors must purchase tokens
and license ACE/Server software directly from the Company. The Company believes
that these relationships help the Company and its customers to expand their
enterprise network coverage and assist the Company in increasing its installed
customer base and SecurID token usage.

To enhance demand for its products, RSA has participated in the development
of various industry-specific protocols that rely on RSA's cryptographic data
security technologies. RSA also hosts its own annual industry conference and
participates in others to increase demand for its products. Through its RSA
Laboratories division, RSA maintains a leading role in basic cryptographic
research, develops new encryption technologies and maintains close working
relations with leading academic centers and customer development teams.

CUSTOMERS

As of August 31, 1997, SDI had sold or licensed more than 4,600 ACE/Server
products and over two million SecurID tokens to more than 2,000 customers
worldwide. Historically, SDI's principal customers have been in the
telecommunications, pharmaceutical, financial and healthcare industries as well
as academic institutions, research laboratories and government organizations.
These custom-

38
<PAGE> 39

ers are generally sophisticated and knowledgeable purchasers of security systems
and work with highly confidential information. The Company believes that as
corporate networks proliferate and become more complex, the number of industries
concerned with system security and access to information will grow.

As of August 31, 1997, RSA had licensed its encryption engine and patent
technology to more than 300 OEMs that typically incorporate RSA's encryption
technology into their products. RSA's encryption technology is embedded in
current versions of Microsoft Windows NT, Netscape Navigator, Quicken by Intuit,
Lotus Notes and numerous other products. RSA also licenses its encryption
technology directly to customers for incorporation into customers' business,
financial and electronic commerce networks. RSA technologies are part of
existing and proposed standards for the Internet and World Wide Web, ITU, ISO,
ANSI and IEEE.

As of August 31, 1997, DynaSoft had sold or licensed its BoKS systems to
more than 130 customers worldwide, representing more than 80,000 users.
Historically, DynaSoft's principal customers have been government organizations
and businesses in the healthcare, telecommunications and financial services
industries.

In the year ended December 31, 1996 and in the six months ended June 30,
1997, no customer accounted for more than 5% of the Company's total revenue.

CUSTOMER SERVICE AND SUPPORT

The Company maintains a customer support help desk and technical support
organization at its headquarters in Bedford, Massachusetts and at other
locations throughout the world and offers telephone support for certain of its
products 24 hours a day, seven days a week. The Company continues to add
advanced technical support personnel to its support staff to address anticipated
additional demands arising from the deployment of the Company's security
solutions into larger and more complex user environments. The Company also has
field technical support personnel that work directly with the Company's direct
sales force, distributors and customers. As of August 31, 1997, the Company's
customer support organization consisted of an aggregate of 55 full-time
employees located in Massachusetts, California, New Jersey, the United Kingdom,
Germany, France and Sweden.

The Company's standard practice is to provide a warranty on all SecurID
tokens for the customer-selected programmed life of the token and to replace any
damaged tokens (other than tokens damaged by a user's negligence or alteration)
free of charge. The Company generally sells each of its other products to
customers with a warranty for specified periods. After the expiration of the
applicable warranty period, customers may elect to purchase a maintenance
contract for 12-month renewable periods. Under these contracts, the Company
agrees to provide (i) corrections for documented program errors, (ii) version
upgrades for both software and, if appliable, firmware and (iii) telephone
consultation.

PRODUCT DEVELOPMENT

The Company's product development efforts are focused on enhancing the
functionality, reliability, performance and flexibility of its existing
products, and in integrating the BoKS product family with SDI's core products.
As part of its ESS framework, the Company is developing technology to enhance
the administrative capabilities and scaleability of its ACE/Server products and
to increase interoperability with additional network operating systems and
directory services. The Company also is developing tools to assist customers,
strategic marketing partners and other third-party integrators in integrating
the Company's products with custom and other third-party network or system
applications.

RSA plans to increase its competitive position by strengthening its core
cryptography toolkit and developing standards, protocols and applications that
address the needs of specific market segments

39
<PAGE> 40

and build on RSA's proprietary technology. In the latter case, RSA may choose to
partner with other parties to develop and/or market the products. RSA is
currently developing enhanced toolkits to enable emerging new applications. Each
of these value-added toolkits is being designed to address the needs of a
specific market segment.

In addition to enhancing its existing products, the Company continues to
identify and prioritize various technologies for potential future product
offerings. The Company may develop these products internally or enter into
arrangements to license or acquire products or technologies from third parties.
There can be no assurance, however, that the Company will be successful in
enhancing or developing existing products or identifying and successfully
acquiring new technologies. See "Risk Factors -- Technological Change and New
Products."

As of August 31, 1997, the Company's product development staff consisted of
157 full-time employees engaged in engineering and development, including
software and hardware engineering, testing and quality assurance and technical
documentation. The Company also engages outside contractors where appropriate to
supplement the Company's in-house expertise or expedite projects based on
customer or market demand. The Company's total research and development expenses
(including purchased research and development) for the years ended December 31,
1994, 1995 and 1996 and the six months ended June 30, 1997 were approximately
$4.3 million, $6.9 million, $13.4 million and $8.6 million, respectively.

MANUFACTURING AND SUPPLIERS

Manufacturing

SecurID Tokens. The Company contracts for the manufacture of its SecurID
tokens with two suppliers in the United States, only one of which, Pemstar, has
been qualified to manufacture the Company's SecurID Key Fob. The Company has
generally been able to obtain adequate supplies of SecurID tokens in a timely
manner and believes that alternate vendors can be identified if current vendors
are unable to fulfill its needs. However, delays or failure to identify
alternate vendors, if required, or a reduction or interruption in supply or a
significant increase in the manufacturing costs could adversely affect the
Company's financial condition or results of operations and could impact customer
relations.

SecurPC and ACE/Server Software Products. The Company's SecurPC and
ACE/Server software products are distributed on standard magnetic diskettes,
compact disks and tapes, together with printed documentation. The Company
contracts with media duplication subcontractors for the majority of its media
duplication. The Company has the capability to do all media duplication in-house
but limits its use to small production runs such as beta programs.

Suppliers

Although the Company generally uses standard parts and components for its
products, certain components are currently available only from a single source
or from limited sources. For example, the microprocessor chips contained in the
Company's SecurID tokens are currently purchased only from Sanyo, a Japanese
computer chip manufacturer, and the lithium batteries contained in the Company's
SecurID tokens are purchased from Gould, a supplier located in the United
States. The inability to obtain sufficient sole or limited source components as
required, or to obtain or develop alternative sources at competitive prices and
quality if and as required in the future, could result in delays in product
shipments or increase the Company's material costs, either of which would
adversely affect the Company's financial condition or results of operations. See
"Risk Factors -- Dependence on Suppliers and Third-Party Manufacturers."

The Company believes that it would take approximately six months to
identify and commence production of suitable replacements for the microprocessor
chip or lithium battery used in the

40
<PAGE> 41

Company's SecurID tokens. The Company attempts to maintain a three-month supply
of SecurID tokens in inventory.

COMPETITION

The market for enterprise network and data security products is highly
competitive and subject to rapid technological change. The Company believes that
competition in this market is likely to intensify as a result of increasing
demand for security products. The Company currently experiences competition from
a number of sources, including (i) software operating systems suppliers and
application software vendors that incorporate a single-factor static password
security system into their products; (ii) token-based password generator vendors
promoting challenge/response technology; (iii) smart card security device
vendors; (iv) biometric security device vendors; (v) public key infrastructure
and cryptographic software firms and (vi) SSO providers. In some cases, these
vendors also support the Company's products and those of its competitors. The
Company may also face competition from these and other parties in the future
that develop enterprise network and data security products based upon approaches
similar to or different from those employed by the Company, including operating
system or network suppliers not currently offering competitive enterprise-wide
security products. There can be no assurance that the market for enterprise
network and data security products will not ultimately be dominated by
approaches other than the approaches marketed by the Company. RSA has agreed, in
connection with the April 1995 formation of VeriSign, not to engage, directly or
indirectly, in the business of issuing public key certificates acting in the
capacity of a certificate authority for a period of five years from the date of
such formation.

The Company believes that the principal competitive factors affecting the
market for enterprise network and data security products include technical
features, ease of use, quality/reliability, level of security, customer service
and support, distribution channels and price. Although the Company believes that
its products currently compete favorably with respect to such factors, there can
be no assurance that the Company can maintain its competitive position against
current and potential competitors, especially those with significantly greater
financial, marketing, service, support, technical and other competitive
resources. See "Risk Factors -- Competition."

PROPRIETARY RIGHTS

The Company relies on a combination of patent, trade secret, copyright and
trademark laws, software licenses, nondisclosure agreements and technical
measures to establish and protect its proprietary technology. The Company
generally enters into confidentiality and/or license agreements with its
employees and distributors, as well as with its customers and potential
customers seeking proprietary information, and limits access to and distribution
of its software, documentation and other proprietary information. Despite these
precautions, it may be possible for unauthorized third parties to copy aspects
of the Company's products or to obtain and use information that the Company
regards as proprietary.

41
<PAGE> 42

within the scope of claims sought by the Company, if at all, or that the steps
taken by the Company to protect its rights will be adequate to prevent
misappropriation of the Company's technology or to preclude competitors from
developing products with features similar to the Company's products. Further,
there can be no assurance that others will not develop technologies that are
similar or superior to the Company's technology or duplicate the Company's
technology. In addition, the laws of certain countries in which the Company's
products are or may be developed or sold may not protect the Company's products
and intellectual property rights to the same extent as the laws of the United
States. The inability of the Company to protect its intellectual property
adequately could have a material adverse effect on its financial condition and
results of operations. See "Risk Factors -- Dependence on Proprietary
Technology."

GOVERNMENT REGULATION AND EXPORT CONTROLS

All of the Company's products are subject to export controls under U.S. law
and applicable foreign government restrictions. The Company believes it has
obtained necessary approvals for the export of the products it currently
exports. There can be no assurance, however, that the list of products and
countries for which export approval is required, and the regulatory policies
with respect thereto, will not be revised from time to time or that the Company
will be able to obtain necessary regulatory approvals for the export of future
products. The inability of the Company to obtain required approvals under these
regulations could adversely affect the ability of the Company to make
international sales.

Exports of RSA's encryption products, or third-party products bundled with
the encryption technology of RSA, are expected to continue to be restricted by
the United States and various foreign governments. All cryptographic products
need export licenses from either the U.S. State Department, acting under the
authority of the International Traffic in Arms Regulation, or the U.S. Commerce
Department, acting under the authority of the Export Administration Regulations.
Regulations issued by these departments define cryptographic devices, including
software, as both defense articles and dual-use commodities. The U.S. government
generally limits the export of software with encryption capabilities to mass
marketed software with limited key sizes, which significantly constrains the
security effectiveness of RSA products available for export. There can be no
assurance that the U.S. government will ease its export restrictions on
encryption technology in any significant manner in the near future. As a result,
RSA may be at a disadvantage in competing for international sales compared to
companies located outside the United States that are not subject to such
restrictions. See "Risk Factors -- Industry Regulation."

EMPLOYEES

At August 31, 1997, the Company employed 553 employees. Of these employees,
157 were involved in research and development, 261 in sales, marketing and
customer support, 53 in production and information technology, and 82 in
administration and finance. No employees are covered by any collective
bargaining agreements. The Company believes that its relationships with its
employees are good.

FACILITIES

The Company's principal administrative, sales and marketing, research and
development and support facilities consist of approximately 107,000 square feet
of office space in Bedford, Massachusetts. The Company occupies these premises
under two leases expiring in August 2006. As of August 31, 1997, the annual base
rent for this facility was approximately $1,555,000. In support of its field
sales and support organization, the Company also leases facilities and offices
in 30 other locations in the United States, four locations in Canada and one
location in each of the United Kingdom, France, Germany, Norway, Singapore, Hong
Kong and Japan.

42
<PAGE> 43

RSA leases approximately 15,000 square feet of office space in Redwood
City, California under a lease expiring in October 1999. As of July 31, 1997,
the annual base rent for this facility was approximately $375,000. RSA also
leases office space in Virginia and Japan.

DynaSoft leases approximately 13,000 square feet of office space in
Stockholm, Sweden under a lease expiring in March 1999. As of July 31, 1997, the
annual base rent for this facility was approximately $204,000. In support of its
field sales and support organization, DynaSoft also leases facilities and
offices in four other locations in the United States, Sweden and the United
Kingdom.

LEGAL PROCEEDINGS

The Company is not a party to any litigation that it believes could have a
material adverse effect on the Company or its business.

43
<PAGE> 44

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY

The executive officers and directors of the Company and their respective
ages as of August 31, 1997 are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------- --- --------------------------------------------------
<S> <C> <C>
Charles R. Stuckey, Jr.(1)........ 55 Chairman of the Board, President and Chief
Executive Officer
D. James Bidzos................... 42 Executive Vice President and Director
Arthur W. Coviello, Jr............ 44 Executive Vice President, Chief Operating Officer
and Secretary
John Adams....................... 56 Senior Vice President, Engineering
Gary A. Rogers.................... 42 Senior Vice President, World Wide Sales and Field
Operations
W. David Power.................... 44 Senior Vice President, Marketing and Corporate
Development
Marian G. O'Leary................. 42 Senior Vice President, Finance, Chief Financial
Officer and Treasurer
Linda E. Saris.................... 45 Vice President, Customer Support and Operations
and Chief Information Officer
Richard L. Earnest(2)............. 55 Director
Joseph B. Lassiter, III(1)(3).... 49 Director
George M. Middlemas(3)............ 51 Director
Marino R. Polestra(1)(2).......... 40 Director
Sanford M. Sherizen(3)............ 57 Director
</TABLE>

- ---------------
(1) Member of the Nominating Committee.

(2) Member of the Audit Committee.

(3) Member of the Compensation Committee.

Mr. Stuckey joined the Company as President in January 1987, was appointed
Chief Executive Officer and elected a director of the Company in March 1987 and
appointed Chairman of the Board in July 1996. From 1984 to January 1987, Mr.
Stuckey served as Vice President of Scientific Information Services, a systems
and commercial data service company and a division of Control Data Corporation.

Mr. Bidzos joined SDI as an Executive Vice President in July 1996. He
joined RSA in 1986 and has served as RSA's President and Chief Executive Officer
and as a director since 1988. Mr. Bidzos also is Chairman and a founder of
VeriSign, a company specializing in providing public-key certificates and
related products and services, and a founder of Terisa Systems, Inc., a company
specializing in security protocols for the World Wide Web that has been recently
acquired by SPYRUS Inc. He also is a director of the Electronic Privacy
Information Center. Mr. Bidzos became a director of SDI following the
acquisition of RSA by SDI in July 1996.

Mr. Coviello joined the Company as Executive Vice President in September
1995 and was appointed Treasurer in October 1995 and Chief Operating Officer in
January 1997. From October 1995 to August 1997, Mr. Coviello also served as the
Company's Chief Financial Officer. From January 1994 to August 1995, Mr.
Coviello served as Chief Operating Officer and from March 1992 to January 1994,
Mr. Coviello served as Vice President, Finance and Administration, Chief
Financial Officer and Treasurer of CrossComm Corporation, a developer of
inter-networking products.

44
<PAGE> 45

Dr. Adams joined the Company as Senior Vice President, Engineering, in
March 1996 after over twenty years of management, engineering and network
service for Digital Equipment Corporation ("Digital"). From 1976 to 1996, Dr.
Adams served in a number of positions with Digital, including Vice President and
Technical Director of Digital's Network Operating Systems Division from 1991 to
1996. Prior to joining Digital, Dr. Adams served as a structural engineer for
Mitchell Systems.

Mr. Rogers joined the Company as Senior Vice President, World Wide Sales
and Field Operations in February 1997. From 1994 to 1996, Mr. Rogers served as
Vice President, International Sales and Operations with Bay Networks, Inc. From
1992 to 1994, Mr. Rogers was Vice President, Sales and Operations -- Europe with
Wellfleet Communications, Inc., a predecessor to Bay Networks, Inc. Prior to
joining Wellfleet Communications, Inc., Mr. Rogers served in a number of
positions with several other organizations, including managerial-level sales and
marketing positions.

Mr. Power joined the Company as Vice President, Marketing in November 1996
and was appointed Senior Vice President, Marketing and Corporate Development in
April 1997. In 1995 and 1996, Mr. Power was Vice President and General Manager
of the AT&T New Media Services division, which was combined with Industry.Net to
form Nets, Inc. From 1992 to 1995, Mr. Power served as Vice President and
General Manager for two Sun Microsystems business units: SunSoft PC Desktop
Integration Products and SunSelect. Before joining Sun Microsystems, Mr. Power
was a Vice President at Mercer Management Consulting, a marketing and strategic
consulting firm, from 1980 to 1992.

Ms. O'Leary joined the Company as Senior Vice President, Finance, Chief
Financial Officer and Treasurer in August 1997. From 1987 to 1997, Ms. O'Leary
held a number of positions with Digital, including Vice President, Finance for
the Systems Business Unit from 1994 to 1997. Prior to joining Digital, Ms.
O'Leary held several positions with General Electric Company, including Senior
Vice President of Finance for GE Mortgage Insurance, a business unit of GE
Capital.

Ms. Saris joined the Company as Vice President, Finance and Operations,
Treasurer and Chief Financial Officer in June 1989, and has served as Vice
President, Customer Support and Operations since January 1997 and as Chief
Information Officer since August 1997. From October 1995 to January 1997, Ms.
Saris served as the Company's Vice President, Operations. From 1980 to 1989, Ms.
Saris served in a number of positions, including Senior Vice President and
General Manager and Vice President of Finance, with Clinical Data, Inc., a
medical technology and services company.

Mr. Earnest has served on the Board of Directors of the Company since
October 1993. Since April 1995, Mr. Earnest has served as the Chief Executive
Officer of Tudor Publishing Company in San Diego, California. From June 1994 to
March 1995, Mr. Earnest provided consulting services to several start-up
companies. From June 1993 to June 1994, Mr. Earnest served as Chief Executive
Officer of DEMAX Software, a provider of centralized security management
software. From April 1991 to June 1993, Mr. Earnest was the Chief Executive
Officer of Advant Edge Systems Group, a software company.

Dr. Lassiter has served on the Board of Directors of the Company since July
1996. Dr. Lassiter joined the Harvard University Graduate School of Business
Administration in September 1996, where he currently is Professor of Management.
From July 1994 to February 1996, Dr. Lassiter was President of Wildfire
Communications, Inc., a venture-backed telecommunications software company. From
January 1974 to February 1994, Dr. Lassiter was Vice President of Teradyne,
Inc., a manufacturer of automatic test equipment. Dr. Lassiter serves on the
Board of Directors of Advanced Magnetics, Inc., a developer of organ-specific
contrast agents.

Mr. Middlemas has served on the Board of Directors of the Company from May
1986 to June 1991 and since July 1992. Since January 1991, Mr. Middlemas has
been a General Partner of Apex Management Partnership, which is the General
Partner of Apex Investment Fund II, L.P. ("Apex"), a venture capital fund. Mr.
Middlemas serves on the Board of Directors of Pure Cycle Corporation, a

45
<PAGE> 46

manufacturer and marketer of water recycling technologies, and American
Communications Services, Inc., a provider of integrated voice and data
communications services.

Mr. Polestra has served on the Board of Directors of the Company since July
1993. Since February 1996, Mr. Polestra has been a General Partner of Alta
Partners, a venture capital firm. From February 1989 to December 1996, Mr.
Polestra was a Vice President and Partner of Burr, Egan, Deleage & Co., a
venture capital firm. Mr. Polestra is a director of Premisys Communications
Holdings, Inc., a telecommunications equipment supplier, and of Individual Inc.,
a provider of customized information services.

Mr. Sherizen has served on the Board of Directors of the Company since
October 1989. Since 1983, Mr. Sherizen has served as President of Data Security
Systems, Inc., a computer security consulting firm.

46
<PAGE> 47

SELLING STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of shares of Common Stock as of July 31, 1997, and as adjusted to
reflect the sale of the shares of Common Stock offered hereby, by each of the
Selling Stockholders.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES TO BE
SHARES BEING BENEFICIALLY OWNED
PRIOR TO OFFERING(1) OFFERED AFTER OFFERING(1)(2)
------------------------- ------------ ------------------------
NAME OF SELLING STOCKHOLDER NUMBER PERCENTAGE NUMBER NUMBER PERCENTAGE
- ---------------------------------- --------- ---------- ------------ ------- ----------
<S> <C> <C> <C> <C> <C>
D. James Bidzos(3)................ 1,145,936 3.0% 220,000 925,936 2.3%
Charles R. Stuckey, Jr.(4) ....... 868,272 2.3% 150,000 718,272 1.8%
Rolf Ljung(5)..................... 757,981 2.0% 350,000 407,981 1.0%
Hans Tholander(6)................. 317,201 * 190,000 127,201 *
Bjorn Oste(7)..................... 226,222 * 100,000 126,222 *
Arthur W. Coviello, Jr.(8) ....... 221,090 * 45,000 176,090 *
Khris Loux(9)..................... 198,194 * 109,006 89,188 *
Peter C. Loux(10)................. 198,193 * 109,200 88,993 *
Peter Rostin(11).................. 148,827 * 131,000 17,827 *
Kairdos L.L.C.(12)................ 147,752 * 30,000 117,752 *
Linda E. Saris(13)................ 131,606 * 5,794 125,812 *
Johan Borendal(14)................ 112,303 * 98,000 14,303 *
John Adams(15).................... 60,600 * 20,000 40,600 *
Tomas Brostrom(16)................ 55,903 * 47,000 8,903 *
George M. Middlemas(17)........... 52,482 * 5,000 47,482 *
Elin Kempegard(5)................. 31,056 * 27,500 3,556 *
Sara Kempegard(5)................. 31,056 * 27,500 3,556 *
Eva Ljung(5)...................... 31,056 * 27,500 3,556 *
Lotta Ljung(5).................... 31,056 * 27,500 3,556 *
Agnes Ljung-Lindberg(5)........... 31,056 * 27,500 3,556 *
Fanny Ljung-Lindberg(5)........... 31,056 * 27,500 3,556 *
Fredrik Tholander(6).............. 31,056 * 18,000 13,056 *
Jacob Tholander(6)................ 31,056 * 18,000 13,056 *
Mervi Brostrom(16)................ 15,528 * 13,000 2,528 *
</TABLE>

- ---------------
* Less than 1%

(1) The number of shares beneficially owned by each stockholder is determined
under rules promulgated by the Securities and Exchange Commission (the
"SEC"), and the information is not necessarily indicative of beneficial
ownership for any other purpose. Under such rules, beneficial ownership
includes any shares as to which the individual or entity has sole or shared
voting power or investment power and also any shares which the individual
or entity has the right to acquire within 60 days of July 31, 1997 through
the exercise of any stock option or other right. The inclusion herein of
such shares, however, does not constitute an admission that the named
stockholder is a direct or indirect beneficial owner of such shares. Unless
otherwise indicated, each person or entity named in the table has sole
voting power and investment power (or shares such power with his or her
spouse) with respect to all shares of capital stock listed as owned by such
person or entity.

(2) Assumes no exercise of the Underwriters' over-allotment option.

(3) The number of shares beneficially owned by Mr. Bidzos prior to this
offering (i) includes 147,752 shares held by Kairdos L.L.C., a Delaware
limited liability company ("Kairdos") of which Mr. Bidzos is the General
Manager and a member, and 570,771 shares which may be acquired pursuant to
stock options exercisable within 60 days of July 31, 1997 and (ii) excludes
225,000 shares covered by stock options not exercisable within 60 days of
July 31, 1997. The number of shares beneficially owned by Mr. Bidzos after
this offering includes 117,752 shares held by Kairdos and 570,771 shares
which may be acquired pursuant to stock options exercisable within 60 days
of July 31, 1997 and excludes 225,000 shares covered by stock options not
exercisable within 60 days of July 31, 1997. Mr. Bidzos disclaims
beneficial ownership of the shares held by Kairdos except to the extent of
his proportionate pecuniary interest therein.

(4) The number of shares beneficially owned by Mr. Stuckey prior to this
offering includes 50,000 shares held by the Stuckey Family Charitable
Remainder Unitrust (the "Stuckey Trust") and 375,000 shares which may be
acquired pursuant to stock options exercisable within 60 days of July 31,
1997 and excludes 125,000 shares covered by stock options not exercisable
within 60 days of July 31, 1997. The number of shares being offered hereby
by Mr. Stuckey includes 40,000 shares held by the Stuckey Trust. The number
of shares beneficially owned by Mr. Stuckey after this offering includes
10,000 shares held by the Stuckey Trust and 375,000 shares which may be
acquired pursuant to stock options exercisable within 60 days of July 31,
1997 and excludes 125,000 shares covered by stock options not exercisable
within 60 days of July 31, 1997.

47
<PAGE> 48

(5) Mr. Ljung served as Chairman of the Board of DynaSoft until its acquisition
by the Company in July 1997, and currently serves as a consultant to the
Company. Eva Ljung and Lotta Ljung are daughters of Mr. Ljung, and Elin
Kempegard, Sara Kempegard, Agnes Ljung-Lindberg and Fanny Ljung-Lindberg
are granddaughters of Mr. Ljung.

(6) The number of shares beneficially owned by Mr. Tholander prior to and after
the offering excludes 25,000 shares covered by stock options not
exercisable within 60 days of July 31, 1997. Mr. Tholander is President and
a member of the Board of Directors of DynaSoft. He also served as a member
of the Board of Directors and as President of Securix, Inc., a California
corporation and a wholly owned subsidiary of DynaSoft ("Securix"), until
its acquisition by the Company in July 1997. Frederik Tholander and Jacob
Tholander are sons of Mr. Tholander.

(7) The number of shares beneficially owned by Mr. Oste prior to and after the
offering excludes 100,000 shares covered by stock options not exercisable
within 60 days of July 31, 1997. Mr. Oste is Chief of Marketing and Sales
of DynaSoft. He also served as a member of the Board of Directors of
DynaSoft until its acquisition by the Company in July 1997. Mr. Oste is
Vice President, Product Management of the Company.

(8) The number of shares beneficially owned by Mr. Coviello prior to and after
the offering includes 220,000 shares which may be acquired pursuant to
stock options exercisable within 60 days of July 31, 1997 and excludes
270,000 shares covered by stock options not exercisable within 60 days of
July 31, 1997.

(9) The number of shares beneficially owned by Khris Loux prior to and after
the offering excludes 100,000 shares covered by stock options not
exercisable within 60 days of July 31, 1997. Khris Loux has served as Vice
President of Sales and Marketing of Securix since July 1993. He served on
the Board of Directors of DynaSoft from July 1996 until its acquisition by
the Company in July 1997. He also served as a member of the Board of
Directors of Securix from July 1993 until its acquisition by the Company in
July 1997. Since July 1997, he has served as Vice President, Corporate
Development of the Company. Khris Loux is the nephew of Peter C. Loux.

(10) The number of shares beneficially owned by Peter C. Loux prior to the
offering includes 61,043 shares held by The Peter C. Loux Charitable
Remainder Unitrust (the "Loux Trust"), the sole trustee of which is Peter
C. Loux. The number of shares being offered hereby by Peter C. Loux
includes 7,200 shares held by the Loux Trust. The number of shares
beneficially owned by Peter C. Loux after the offering includes 53,843
shares held by the Loux Trust. Peter C. Loux served as the Chairman of the
Board and Chief Executive Officer of Securix from July 1993 until its
acquisition by the Company in July 1997. From July 1993 to August 1996, he
also served as President of Securix. He also served on the Board of
Directors of DynaSoft from July 1996 until its acquisition by the Company
in July 1997. He currently serves as a consultant to the Company. Peter C.
Loux is the uncle of Khris Loux.

(11) The number of shares beneficially owned by Mr. Rostin prior to and after
the offering excludes 70,000 shares covered by stock options not
exercisable within 60 days of July 31, 1997. He also served as a member of
the Board of Directors of DynaSoft until its acquisition by the Company in
July 1997. Mr. Rostin is Senior Officer of Research and Technology of
DynaSoft.

(12) Mr. Bidzos is the General Manager and a member of Kairdos. Mr. Bidzos
disclaims beneficial ownership of the shares held by Kairdos except to the
extent of his proportionate pecuniary interest therein.

(13) The number of shares beneficially owned by Ms. Saris prior to and after the
offering includes 12,917 shares held jointly by Ms. Saris and Brian T.
Watson and 11,248 shares which may be acquired pursuant to stock options
exercisable within 60 days of July 31, 1997 and excludes 18,750 shares
covered by stock options not exercisable within 60 days of July 31, 1997.

(14) The number of shares beneficially owned by Mr. Borendal prior to and after
the offering excludes 100,000 shares covered by stock options not
exercisable within 60 days of July 31, 1997. Mr. Borendal is Vice President
of Engineering of DynaSoft. He also served as a member of the Board of
Directors of DynaSoft until its acquisition by the Company in July 1997.

(15) The number of shares beneficially owned by Dr. Adams prior to and after the
offering includes 60,600 shares which may be acquired pursuant to stock
options exercisable within 60 days of July 31, 1997 and excludes 137,500
shares covered by stock options not exercisable within 60 days of July 31,
1997.

(16) Mr. Brostrom is Vice President of Finance of DynaSoft. Mervi Brostrom is
the wife of Mr. Brostrom.

(17) The number of shares beneficially owned by Mr. Middlemas prior to and after
the offering includes 24,500 shares which may be acquired pursuant to stock
options exercisable within 60 days of July 31, 1997 and excludes 12,000
shares covered by stock options not exercisable within 60 days of July 31,
1997.

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<PAGE> 49

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, BT Alex.
Brown Incorporated, BancAmerica Robertson Stephens and Cowen & Company (the
"Underwriters") have severally agreed to purchase from the Company and the
Selling Stockholders the following respective numbers of shares of Common Stock
at the public offering price less the underwriting discounts and commissions set
forth on the cover page of this Prospectus:

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
------------------------------------------------------------------------ ---------
<S> <C>
BT Alex. Brown Incorporated............................................. 1,000,000
BancAmerica Robertson Stephens.......................................... 1,000,000
Cowen & Company......................................................... 1,000,000
---------
Total......................................................... 3,000,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all shares of the Common Stock offered hereby if any
such shares are purchased.

The Company and the Selling Stockholders have been advised by the
Underwriters that the Underwriters propose to offer the shares of Common Stock
to the public at the public offering price set forth on the cover page of this
Prospectus, and to certain dealers at such price less a concession not in excess
of $1.08 per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $0.10 per share to certain other dealers. After the
public offering, the public offering price and other selling terms may be
changed by the Underwriters.

The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to 450,000
additional shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it shown in the above table bears to 3,000,000, and the Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of the Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 3,000,000 shares are being offered.

The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Stockholders against certain civil
liabilities, including liabilities under the Securities Act of 1933.

The Company has agreed, subject to certain exceptions, not to offer, sell
or otherwise dispose of any shares of Common Stock for a period of 90 days after
the date of this Prospectus, except that the Company may issue, and grant
options to purchase, shares of Common Stock under its current stock option and
purchase plans and other currently outstanding options. In addition, the Company
may issue shares of Common Stock in connection with any acquisition of another
company if the terms of such issuance provide that such Common Stock shall not
be resold prior to the expiration of the 90-day period referenced in the
preceding sentence. Each of the Company's directors and executive

49
<PAGE> 50

officers and certain of its securityholders have agreed, subject to certain
exceptions, not to offer, sell or otherwise dispose of (i) any shares of Common
Stock beneficially owned by them prior to the 50th day after the date of this
Prospectus, (ii) no more than an aggregate of approximately 669,736 shares on or
after such 50th day, but prior to the 90th day after the date of this Prospectus
and (iii) no more than an aggregate of approximately 669,736 additional shares
(for a total of approximately 1,339,472 additional shares) on or after the 70th
day, but prior to the 90th day after the date of this Prospectus.

In connection with this offering, the Underwriters and other persons
participating in this offering may engage in transactions that stabilize,
maintain or otherwise affect the price of Common Stock. Specifically, the
Underwriters may over-allot in connection with this offering, creating a short
position in Common Stock for their own account. To cover over-allotments or to
stabilize the price of the Common Stock, the Underwriters may bid for, and
purchase, shares of Common Stock in the open market. The Underwriters may also
impose a penalty bid whereby they may reclaim selling concessions allowed to an
Underwriter or a dealer for distributing Common Stock in this offering, if the
Underwriters repurchase previously distributed Common Stock in transactions to
cover their short position, in stabilization transactions or otherwise. Finally,
the Underwriters may bid for, and purchase, shares of Common Stock in market
making transactions. These activities may stabilize or maintain the market price
of the Common Stock above market levels that may otherwise prevail. The
Underwriters are not required to engage in these activities and may end any of
these activities at any time.

As permitted by Rule 103 of Regulation M under the Securities Exchange Act
of 1934 (the "Exchange Act"), Underwriters or prospective Underwriters that are
market makers (passive market makers) in the Common Stock may make bids for or
purchases of shares of Common Stock in the Nasdaq National Market until such
time, if any, when a stabilizing bid for such securities has been made. Rule 103
generally provides that (i) a passive market maker's net daily purchases of the
Common Stock may not exceed 30% of its average daily trading volume in such
securities for the two full consecutive calendar months (or any 60 consecutive
days ending within the 10 days) immediately preceding the filing date of the
registration statement of which this Prospectus forms a part, (ii) a passive
market maker may not effect transactions or display bids for the Common Stock at
a price that exceeds the highest independent bid for shares of Common Stock by
persons who are not passive market makers and (iii) bids made by passive market
makers must be identified as such.

BancAmerica Robertson Stephens and BT Alex. Brown Incorporated provided
financial advisory services to the Company in connection with the Company's
acquisition of RSA in July 1996, and BancAmerica Robertson Stephens provided
financial advisory services to the Company in connection with the acquisition of
DynaSoft in July 1997. In each case, the Company paid customary financial
advisory fees to BancAmerica Robertson Stephens and BT Alex. Brown Incorporated
for such services.

LEGAL MATTERS

The validity of the shares of Common Stock offered by the Company hereby
will be passed upon for the Company by Hale and Dorr LLP, Boston, Massachusetts,
and for the Underwriters by Ropes & Gray, Boston, Massachusetts.

50
<PAGE> 51

EXPERTS

The supplemental and historical consolidated financial statements of the
Company as of December 31, 1995 and 1996 and for each of the three years in the
period ended December 31, 1996, except as they relate to the consolidated
financial statements of RSA as of December 31, 1995 and for each of the two
years in the period ended December 31, 1995, included in, or incorporated by
reference in, this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports with respect to (i) the
Supplemental Consolidated Financial Statements dated July 15, 1997 (which
expresses an unqualified opinion and includes explanatory paragraphs relating to
the restatement of the historical consolidated financial statements for a
pooling of interests and a change in the Company's method of accounting for
option grants requiring stockholder approval in 1996) included herein and (ii)
the Company's historical consolidated financial statements and schedule dated
January 22, 1997 (the report on the historical consolidated financial statements
expresses an unqualified opinion and includes an explanatory paragraph referring
to a change in the Company's method of accounting for option grants requiring
stockholder approval in 1996) incorporated by reference herein. The consolidated
financial statements of RSA as of December 31, 1995 and for each of the two
years in the period ended December 31, 1995 (not presented separately herein)
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon appearing elsewhere herein and incorporated by reference
herein and are included and incorporated by reference in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing. The supplemental and historical financial statements of the Company
have been so included and incorporated by reference in reliance upon the reports
of Deloitte & Touche LLP given upon its authority as experts in accounting and
auditing.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Exchange
Act and in accordance with the Exchange Act files reports, proxy statements and
other information with the SEC. The Company has filed a registration statement
on Form S-3 (the "Registration Statement") under the Securities Act of 1933, as
amended, with the SEC with respect to the Common Stock offered hereby. This
Prospectus, which constitutes part of the Registration Statement, does not
contain all the information set forth in the Registration Statement and
reference is made to the Registration Statement and the exhibits thereto for
further information with respect to the Company and the Common Stock. Such
reports, proxy statements, Registration Statement and exhibits and other
information omitted from this Prospectus can be inspected and copied at the
public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549 and at the SEC's Regional Offices located at
Seven World Trade Center, Suite 1300, New York, N.Y. 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, IL 60661-2511. Copies of such
material can be obtained at prescribed rates from the Public Reference Section
of the SEC, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Such
reports, proxy statements and other information concerning the Company can be
inspected at the Nasdaq Stock Market at 1735 K Street, N.W., Washington, D.C.
20006. In addition, the Company is required to file electronic versions of these
documents with the SEC through the SEC's Electronic Data Gathering, Analysis,
and Retrieval (EDGAR) system. The SEC maintains a World Wide Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC.

51
<PAGE> 52

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1996, the Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1997 and June 30, 1997, the Company's Current Report on Form 8-K dated
July 15, 1997, including the amendments thereto on Form 8-K/A filed with the SEC
on July 31, 1997 and August 4, 1997, and the description of the Common Stock
contained in the Company's Registration Statement on Form 8-A filed by the
Company with the SEC on November 15, 1994, are incorporated by reference in this
Prospectus. All documents filed by the Company pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the offering made hereby shall be deemed to be
incorporated by reference into this Prospectus and to be made a part hereof from
the respective dates of filing of such documents. Any statement in any document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of the Registration Statement and this
Prospectus to the extent that a statement contained herein or in any
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of the Registration Statement or this Prospectus.

Copies of the above documents (other than exhibits to such documents unless
such exhibits are specifically incorporated by reference in such documents) may
be obtained upon written or oral request without charge from the Company, 20
Crosby Drive, Bedford, Massachusetts 01730, Attention: Investor Relations,
telephone (781) 687-7000.

52
<PAGE> 53

SECURITY DYNAMICS TECHNOLOGIES, INC.

INDEX TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Deloitte & Touche LLP, independent auditors................................. F-2
Report of Ernst & Young LLP, independent auditors..................................... F-3
Supplemental Consolidated Balance Sheets as of December 31, 1995 and 1996 and
(Unaudited) June 30, 1997........................................................... F-4
Supplemental Consolidated Statements of Income for the Years Ended December 31, 1994,
1995 and 1996 and (Unaudited) the Six Months Ended June 30, 1996 and 1997........... F-5
Supplemental Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1994, 1995 and 1996 and (Unaudited) the Six Months Ended June 30,
1997................................................................................ F-6
Supplemental Consolidated Statements of Cash Flows for the Years Ended December 31,
1994, 1995 and 1996 and (Unaudited) the Six Months Ended June 30, 1996 and 1997..... F-7
Notes to Supplemental Consolidated Financial Statements............................... F-8
</TABLE>

F-1
<PAGE> 54

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Security Dynamics Technologies, Inc. and Subsidiaries:

We have audited the accompanying supplemental consolidated balance sheets
of Security Dynamics Technologies, Inc. (the "Company") and subsidiaries as of
December 31, 1995 and 1996, and the related supplemental consolidated statements
of income, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The supplemental
consolidated financial statements give retroactive effect to the merger of the
Company and RSA Data Security, Inc., which has been accounted for as a pooling
of interests as described in Note 2 of notes to the supplemental consolidated
financial statements. We did not audit the consolidated balance sheet of RSA
Data Security, Inc. as of December 31, 1995, or the related consolidated
statements of income, stockholders' equity, and cash flows of RSA Data Security,
Inc. for the years ended December 31, 1994 and 1995, which consolidated
statements reflect total assets of $24,793,000 as of December 31, 1995, and
total revenues of $3,077,000 and $11,600,000 for the years ended December 31,
1994 and 1995, respectively. Those consolidated statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for RSA Data Security, Inc. for 1994 and 1995,
is based solely on the report of such other auditors.

The supplemental consolidated financial statements also give retroactive
effect to the acquisition of DynaSoft AB as of July 15, 1997, which has been
accounted for as a pooling of interests as described in Note 2 of notes to the
supplemental consolidated financial statements. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling of interests method in financial statements that do
not cover the date of consummation. These supplemental consolidated financial
statements do not extend through the date of consummation; however, they will
become the historical consolidated financial statements of the Company after
financial statements covering the date of consummation of the business
combination are issued.

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

In our opinion, based on our audits and the report of the other auditors,
the supplemental consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Security Dynamics
Technologies, Inc. and subsidiaries as of December 31, 1995 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles for financial statements that are issued for a period
which includes the date of consummation of the DynaSoft AB business combination.

As discussed in Note 5 of the notes to the supplemental consolidated
financial statements, in 1996 the Company changed its method of accounting for
option grants requiring stockholder approval in 1996.

DELOITTE & TOUCHE LLP
Boston, Massachusetts
July 15, 1997

F-2
<PAGE> 55

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

To the Board of Directors
RSA Data Security, Inc.

We have audited the consolidated balance sheet of RSA Data Security, Inc.
as of December 31, 1995, and the related statements of operations, shareholders'
equity and cash flows for the years ended December 31, 1995 and 1994 (none of
which are presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of RSA Data
Security, Inc. as of December 31, 1995, and the consolidated results of its
operations and its cash flows for the years ended December 31, 1995 and 1994 in
conformity with generally accepted accounting principles.

ERNST & YOUNG LLP

Palo Alto, California
April 8, 1996

F-3
<PAGE> 56

SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents.......................................... $ 50,730 $ 11,175 $ 24,316
Marketable securities......................................... 61,637 95,320 86,437
Accounts receivable (less allowance for doubtful accounts of
$724 in 1995, $527 in 1996 and $802 in 1997)................ 8,633 16,500 19,519
Inventory..................................................... 1,445 2,606 3,189
Prepaid expenses and other.................................... 1,537 4,204 6,069
Deferred taxes................................................ -- -- 79
-------- -------- --------
TOTAL CURRENT ASSETS................................... 123,982 129,805 139,609
-------- -------- --------
PROPERTY AND EQUIPMENT
Customer support equipment.................................... 187 294 294
Office furniture and equipment................................ 4,147 11,007 14,562
Leasehold improvements........................................ 309 2,863 3,179
-------- -------- --------
TOTAL PROPERTY AND EQUIPMENT........................... 4,643 14,164 18,035
Less accumulated depreciation and amortization................ (1,998) (3,596) (5,151)
-------- -------- --------
PROPERTY AND EQUIPMENT -- NET.......................... 2,645 10,568 12,884
-------- -------- --------
OTHER ASSETS:
Investments................................................... 872 2,924 2,187
Purchased technology and capitalized software costs -- net.... 446 197 247
Deferred taxes................................................ 414 1,026 1,026
Other......................................................... 300 1,455 1,115
-------- -------- --------
TOTAL OTHER ASSETS..................................... 2,032 5,602 4,575
-------- -------- --------
TOTAL........................................................... $128,659 $145,975 $ 157,068
======== ======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.............................................. $ 2,860 $ 5,119 $ 4,481
Accrued payroll and related benefits.......................... 3,187 4,829 5,520
Accrued expenses and other.................................... 2,618 4,269 5,098
Income taxes payable.......................................... 349 51 --
Deferred revenue.............................................. 4,520 5,503 4,852
Deferred taxes................................................ 6,099 832 --
-------- -------- --------
TOTAL CURRENT LIABILITIES.............................. 19,633 20,603 19,951
-------- -------- --------
MINORITY INTERESTS.............................................. -- 1,194 2,578
-------- -------- --------
COMMITMENTS AND CONTINGENCIES (NOTES 8 AND 10)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized, 80,000,000 shares;
issued, 35,137,771, 37,220,893 and 37,903,889 shares in
1995, 1996 and 1997; outstanding, 35,137,475, 37,220,597,
and 37,903,380 shares in 1995, 1996 and 1997................ 351 372 379
Additional paid-in capital.................................... 94,452 102,322 104,607
Retained earnings............................................. 4,510 17,685 27,761
Deferred stock compensation................................... (292) (174) (141)
Treasury stock, common, at cost, 296 shares in 1995 and 1996,
509 shares in 1997.......................................... -- -- --
Cumulative translation adjustment............................. 95 493 (194)
Unrealized gain on marketable securities -- net............... 9,910 3,480 2,127
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY............................. 109,026 124,178 134,539
-------- -------- --------
TOTAL........................................................... $128,659 $145,975 $ 157,068
======== ======== ========
</TABLE>

See notes to supplemental consolidated financial statements.

F-4
<PAGE> 57

SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES

SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------- -------------------
1994 1995 1996 1996 1997
--------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE............................ $ 23,866 $49,412 $83,817 $36,111 $61,374
COST OF REVENUE.................... 4,837 8,920 18,207 7,451 13,147
------- ------- ------- ------- -------
GROSS PROFIT....................... 19,029 40,492 65,610 28,660 48,227
COSTS AND EXPENSES:
Research and development......... 4,314 6,292 12,382 5,533 8,646
Purchased research and
development................... -- 648 1,000 -- --
Marketing and selling............ 8,931 14,263 24,429 10,824 18,770
General and administrative....... 3,368 10,375 13,403 6,061 7,609
Merger expenses.................. -- -- 6,100 -- --
------- ------- ------- ------- -------
Total.................... 16,613 31,578 57,314 22,418 35,025
------- ------- ------- ------- -------
INCOME FROM OPERATIONS............. 2,416 8,914 8,296 6,242 13,202
Interest income and other.......... 166 1,843 5,004 2,500 2,717
Gain on sale of marketable
securities and other income
(expense)........................ 99 62 10,872 (141) 197
------- ------- ------- ------- -------
Income before provision for income
taxes............................ 2,681 10,819 24,172 8,601 16,116
Provision for income taxes......... 1,453 3,369 10,997 3,147 6,040
------- ------- ------- ------- -------
NET INCOME......................... $ 1,228 $ 7,450 $13,175 $ 5,454 $10,076
======= ======= ======= ======= =======
Pro Forma
Net income per common and common
equivalent share................. $ 0.05 $ 0.22 $ 0.34 $ 0.14 $ 0.26
======= ======= ======= ======= =======
Weighted average number of common
and common equivalent shares
outstanding...................... 25,231 34,115 38,877 38,398 39,418
======= ======= ======= ======= =======
</TABLE>

See notes to supplemental consolidated financial statements.

F-5
<PAGE> 58

SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES

SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED DEFERRED TREASURY STOCK CUMULATIVE
------------------- PAID-IN EARNINGS STOCK ---------------- TRANSLATION
SHARES AMOUNT CAPITAL (DEFICIT) COMPENSATION SHARES AMOUNT ADJUSTMENT
---------- ------ ---------- -------- ------------ ------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994............. 11,831,489 $118 $ 1,778 $(3,750) $ -- 90,296 $ (1) $ (146)
Common and Treasury stock
issued for services............... 52,032 -- 21 -- -- (90,000) 1 --
Exercise of stock options........... 152,376 1 41 -- -- -- -- --
Deferred stock compensation......... -- -- 360 -- (360) -- -- --
Amortization of deferred stock
compensation...................... -- -- -- -- 85 -- -- --
Issuance of common stock............ 6,276,854 63 22,041 -- -- -- -- --
Translation adjustment.............. -- -- -- -- -- -- -- (347)
Dividends accrued on preferred
stock............................. -- -- -- (418) -- -- -- --
Conversion of preferred stock to
common stock...................... 11,288,756 113 8,832 -- -- -- -- --
Net income.......................... -- -- -- 1,228 -- -- -- --
---------- ---- -------- ------- ----- ------- --- -----
Balance, December 31, 1994.......... 29,601,507 295 33,073 (2,940) (275) 296 -- (493)
Exercise of stock options........... 957,434 10 632 -- -- -- -- --
Tax benefit arising from exercise
of stock options.................. -- -- 225 -- -- -- -- --
Deferred stock compensation......... -- -- 157 -- (157) -- -- --
Amortization of deferred stock
compensation...................... -- -- -- -- 140 -- -- --
Issuance of common stock............ 4,578,830 46 60,365 -- -- -- -- --
Translation adjustment.............. -- -- -- -- -- -- -- 588
Change in unrealized gain on
marketable securities............. -- -- -- -- -- -- -- --
Net income.......................... -- -- -- 7,450 -- -- -- --
---------- ---- -------- ------- ----- ------- --- -----
Balance, December 31, 1995........... 35,137,771 351 94,452 4,510 (292) 296 -- 95
Exercise of stock options........... 817,123 8 2,598 -- -- -- -- --
Tax benefit arising from exercise
of stock options.................. -- -- 3,702 -- -- -- -- --
Compensation expense................ -- -- 1,049 -- -- -- -- --
Amortization of deferred stock
compensation...................... -- -- -- -- 118 -- -- --
Issuance of common stock............ 1,265,999 13 521 -- -- -- -- --
Translation adjustment.............. -- -- -- -- -- -- -- 398
Change in unrealized gain on
marketable securities............. -- -- -- -- -- -- -- --
Net income.......................... -- -- -- 13,175 -- -- -- --
---------- ---- -------- ------- ----- ------- --- -----
Balance, December 31, 1996........... 37,220,893 372 102,322 17,685 (174) 296 -- 493
Unaudited:
Settlement of RSA escrow.......... (36,037) -- -- -- -- 213 -- --
Exercise of stock options......... 719,033 7 1,697 -- -- -- -- --
Compensation expense.............. -- -- 588 -- -- -- -- --
Amortization of deferred stock
compensation.................... -- -- -- -- 33 -- -- --
Translation adjustment............ -- -- -- -- -- -- -- (687)
Change in unrealized gain
on marketable securities........ -- -- -- -- -- -- -- --
Net income........................ -- -- -- 10,076 -- -- -- --
---------- ---- -------- ------- ----- ------- --- -----
Balance, June 30, 1997 (unaudited)... 37,903,889 $379 $104,607 $27,761 $ (141) 509 $ -- $ (194)
========== ==== ======== ======= ===== ======= === =====

<CAPTION>
UNREALIZED
GAIN ON STOCKHOLDERS'
MARKETABLE EQUITY
SECURITIES (DEFICIENCY)
---------- -------------
<S> <<C> <C>
Balance, January 1, 1994............. $ -- $ (2,001)
Common and Treasury stock
issued for services............... -- 22
Exercise of stock options........... -- 42
Deferred stock compensation......... -- --
Amortization of deferred stock
compensation...................... -- 85
Issuance of common stock............ -- 22,104
Translation adjustment.............. -- (347)
Dividends accrued on preferred
stock............................. -- (418)
Conversion of preferred stock to
common stock...................... -- 8,945
Net income.......................... -- 1,228
------- --------
Balance, December 31, 1994.......... -- 29,660
Exercise of stock options........... -- 642
Tax benefit arising from exercise
of stock options.................. -- 225
Deferred stock compensation......... -- --
Amortization of deferred stock
compensation...................... -- 140
Issuance of common stock............ -- 60,411
Translation adjustment.............. -- 588
Change in unrealized gain on
marketable securities............. 9,910 9,910
Net income.......................... -- 7,450
------- --------
Balance, December 31, 1995........... 9,910 109,026
Exercise of stock options........... -- 2,606
Tax benefit arising from exercise
of stock options.................. -- 3,702
Compensation expense................ -- 1,049
Amortization of deferred stock
compensation...................... -- 118
Issuance of common stock............ -- 534
Translation adjustment.............. -- 398
Change in unrealized gain on
marketable securities............. (6,430) (6,430)
Net income.......................... -- 13,175
------- --------
Balance, December 31, 1996........... 3,480 124,178
Unaudited:
Settlement of RSA escrow.......... -- --
Exercise of stock options......... -- 1,704
Compensation expense.............. -- 588
Amortization of deferred stock
compensation.................... -- 33
Translation adjustment............ -- (687)
Change in unrealized gain
on marketable securities........ (1,353) (1,353)
Net income........................ -- 10,076
------- --------
Balance, June 30, 1997 (unaudited)... $ 2,127 $ 134,539
======= ========
</TABLE>

See notes to supplemental consolidated financial statements.

F-6
<PAGE> 59

SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES

SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEARS ENDED DECEMBER 31, 30,
--------------------------------- ---------------------
1994 1995 1996 1996 1997
------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................. $ 1,228 $ 7,450 $ 13,175 $ 5,454 $ 10,076
Adjustments to reconcile net income to
net cash provided by (used for)
operating activities:
Gain on sale of marketable
securities......................... -- -- (11,027) -- --
Deferred taxes........................ 57 (746) (1,548) (50) 224
Purchased research and development.... -- 648 1,000 -- --
Depreciation and amortization......... 633 1,085 1,815 845 1,465
Provision for notes receivable........ -- 200 -- -- --
Stock compensation.................... 48 181 1,167 166 621
Equity in (profits) losses of
investees and minority interest.... (97) 20 (19) -- --
Increase (decrease) in cash from
changes in:
Accounts receivable................ (182) (3,281) (7,950) (3,979) (3,563)
Inventory.......................... (629) (309) (1,161) (920) (583)
Prepaid expenses and other......... (539) (1,125) (2,666) (1,721) (777)
Accounts payable................... 1,021 1,553 2,260 2,392 (611)
Accrued payroll and related
benefits......................... 494 1,808 1,652 (805) 764
Accrued expenses and other......... 99 824 1,938 589 877
Income taxes payable............... 101 265 (298) (373) (946)
Deferred revenue................... 899 2,320 1,000 (764) (573)
------- -------- -------- -------- --------
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES........... 3,133 10,893 (662) 834 6,974
------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities....... (7,966) (64,730) (119,619) (75,052) (48,027)
Sales and maturities of marketable
securities............................ -- 27,842 85,975 36,382 55,628
Expenditures for property and
equipment............................. (981) (1,891) (9,418) (2,597) (4,018)
Notes receivable........................ (228) (274) -- -- --
Capitalized software costs and purchased
technology............................ (118) (924) (1,061) 20 (112)
Investments and other................... 9 (734) (3,224) (1,477) 323
------- -------- -------- -------- --------
NET CASH PROVIDED BY (USED FOR)
INVESTING ACTIVITIES........... (9,284) (40,711) (47,347) (42,724) 3,794
------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net
of issuance costs..................... 22,104 60,411 534 536 133
Proceeds from exercise of stock options
and from stock purchase plans......... 42 642 2,606 541 1,704
Tax benefit from exercise of stock
options............................... -- 225 3,702 -- --
Minority interests...................... -- -- 1,213 -- 1,384
Other................................... (81) (786) 537 (111) (502)
------- -------- -------- -------- --------
NET CASH PROVIDED BY FINANCING
ACTIVITIES..................... 22,065 60,492 8,592 966 2,719
------- -------- -------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND EQUIVALENTS......................... 88 195 (138) (35) (346)
------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
EQUIVALENTS............................. 16,002 30,869 (39,555) (40,959) 13,141
CASH AND EQUIVALENTS, BEGINNING OF
PERIOD.................................. 3,859 19,861 50,730 50,730 11,175
------- -------- -------- -------- --------
CASH AND EQUIVALENTS, END OF PERIOD....... $19,861 $ 50,730 $ 11,175 $ 9,771 $ 24,316
======= ======== ======== ======== ========
</TABLE>

See notes to supplemental consolidated financial statements.

F-7
<PAGE> 60

SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS

(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF BUSINESS -- Security Dynamics Technologies, Inc. ("SDI," which,
together with its subsidiaries, is referred to as the "Company") is a leading
provider of enterprise network and data security solutions. The Company's
products help companies conduct business securely, protect corporate information
assets and facilitate business-to-business electronic commerce. The Company's
products include its SecurID "tokens" and ACE/Server software, which
authenticate the identity of users accessing networked or stand-alone computer
resources, RSA developer toolkits and other products used to implement
cryptographic data security applications and the BoKS product family, which
provides a broad range of security solutions, including secure single sign-on
solutions.

The principal markets for the Company's products are the United States,
Canada, Latin America, Europe and the Far East, with the United States, Europe
and Canada currently being the largest.

BASIS OF PRESENTATION -- The supplemental consolidated financial statements
have been prepared to give retroactive effect to the acquisition of DynaSoft AB
("DynaSoft") on July 15, 1997 (see Note 2), which has been accounted for as a
pooling of interests ("pooling"). Generally accepted accounting principles
proscribe giving effect to a merger or business combination accounted for as a
pooling in financial statements that do not include the date of consummation.
Although these supplemental consolidated financial statements do not extend
through the date of consummation, they will become the Company's historical
consolidated financial statements after financial statements including the
consummation date are issued.

PRINCIPLES OF CONSOLIDATION -- The supplemental consolidated financial
statements include all accounts of SDI and its subsidiaries. Strategic equity
investments for which the Company does not have the ability to exercise
significant influence are carried at cost. Investments in partnerships are
accounted for in accordance with the allocation of profits and losses under the
partnership agreements.

In the fourth quarter of 1996 and the first half of 1997, RSA sold minority
interests, which aggregate 24% as of June 30, 1997, in its Japanese subsidiary
to third parties for $1,213 and $1,384, respectively. The minority interests in
the subsidiary's profits and losses since the purchase dates are not material
and are included in interest income and other income in the supplemental
consolidated statements of income.

INTERIM RESULTS (UNAUDITED) -- In the opinion of management, the
accompanying interim unaudited supplemental consolidated financial statements as
of June 30, 1997 and for the six-month periods ended June 30, 1996 and 1997 have
been prepared on the same basis as the audited supplemental consolidated
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
position and operating results of the Company for such periods.

STOCK SPLITS -- In October 1995 and October 1996, the Board of Directors
declared two-for-one splits of the Company's common stock effected in the form
of stock dividends. All share and per share data have been adjusted to reflect
the two-for-one stock splits of the Company's common stock.

REVENUE RECOGNITION -- Revenue from software license fees, developer
toolkits, patent license fees and the sale of hardware products is recognized
upon shipment of the product, provided that no significant obligations remain
and collection of the receivable is considered probable. Shipments to
distributors are based upon receipt of a purchase order from end users by the

F-8
<PAGE> 61

SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

distributor. Revenue from charges for maintenance services is deferred and
recognized ratably over the maintenance period, generally twelve months. No
customer accounted for 10% or more of the Company's revenue in any period
reported.

WARRANTY POLICY -- The Company's standard practice is to provide a warranty
on all SecurID tokens for the customer-selected programmed life of the token and
to replace any damaged tokens (other than tokens damaged by a user's negligence
or alteration) free of charge. The Company generally sells each of its other
products to customers with a warranty for a specified period. The Company
provides a reserve for warranties based upon historical experience.

INVENTORY -- Inventory consists primarily of finished SecurID tokens and
ACM hardware products and is stated at the lower of cost (first-in, first-out
method) or market.

PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets (two to five years).

RESEARCH AND DEVELOPMENT, CAPITALIZED SOFTWARE AND PURCHASED TECHNOLOGY
COSTS -- Research and development costs, including purchased research and
development, are expensed as incurred. The Company capitalizes certain software
costs after technological feasibility has been established. Capitalized amounts
are reported at the lower of unamortized cost or net realizable value and are
amortized to cost of revenue over the estimated useful lives (two to three
years) starting at the general release of the software product to customers.
Purchased technology consists of acquired software and is recorded at cost.
Amortization is provided over estimated lives of two years. Amortization expense
for capitalized software and purchased technology approximated $176, $298 and
$330 for 1994, 1995 and 1996, respectively, and $135 and $166 for the six months
ended June 30, 1996 and 1997, respectively.

CASH EQUIVALENTS -- The Company considers all highly liquid investments
purchased with a remaining maturity of three months or less to be cash
equivalents.

MARKETABLE SECURITIES -- The Company classifies its marketable securities
as "available for sale," and, accordingly, carries such securities at aggregate
fair value. Unrealized gains and losses are included as a component of
stockholders' equity, net of tax effect. The Company's marketable securities
consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1995 1996 JUNE 30, 1997
-------------------- -------------------- --------------------
AGGREGATE AGGREGATE AGGREGATE
FAIR VALUE COST FAIR VALUE COST FAIR VALUE COST
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government
obligations.......... $ 43,796 $43,632 $ 88,171 $88,161 $ 69,710 $69,672
Corporate equity
securities........... 16,680 60 5,809 20 4,512 983
Tax-exempt
securities........... 1,013 1,013 -- -- -- --
Corporate debt
securities........... 148 145 1,340 1,340 12,215 12,227
------- ------- ------- ------- ------- -------
Total......... $ 61,637 $44,850 $ 95,320 $89,521 $ 86,437 $82,882
======= ======= ======= ======= ======= =======
</TABLE>

At December 31, 1996 and June 30, 1997, substantially all of the Company's
U.S. Government obligations and corporate debt securities had contractual
maturities of two years or less. There were no sales of marketable securities
for 1994, 1995 or the six months ended June 30, 1997. Proceeds from the sale of
marketable securities for 1996 amounted to $11,067. The specific identified cost

F-9
<PAGE> 62

SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

basis of the securities was used to determine the gain. Unrealized gross gains
at December 31, 1995, 1996 and June 30, 1997 were $16,687, $5,799 and $3,555,
respectively.

ADVERTISING -- Advertising costs are expensed as incurred. Total
advertising expense was approximately $424, $501 and $561 for 1994, 1995 and
1996, respectively, and $218 and $145 for the six months ended June 30, 1996 and
1997, respectively.

INCOME TAXES -- The Company utilizes the liability method of accounting for
income taxes. Deferred taxes are determined based on the estimated future tax
effects of differences between the financial statement and tax bases of assets
and liabilities given the provisions of the enacted tax laws. The Company
provides for taxes on the undistributed earnings of foreign subsidiaries which
are ultimately expected to be remitted to the parent company. Unrecognized
provisions for taxes on undistributed earnings of foreign subsidiaries which are
considered permanently invested are not material to the Company's consolidated
financial position or results of operations.

FOREIGN CURRENCY -- The Company considers the local currencies of the
countries in which the Company's branches and subsidiaries are domiciled to be
the functional currencies. Translation adjustments are accumulated in a separate
component of equity.

NET INCOME PER SHARE -- Net income per share is based on the weighted
average number of common shares outstanding which assumes on a pro forma basis
for 1994 that all series of convertible preferred stock had been converted to
common stock as of the original issuance dates. All series of the Company's
preferred stock were converted into shares of common stock on December 21, 1994.
Common equivalent shares are not included in the per share calculations where
the effect of their inclusion would be antidilutive, except in accordance with
Securities and Exchange Commission Staff Accounting Bulletin No. 83 (the
"Bulletin"). The Bulletin requires all shares of common stock issued and options
to purchase shares of common stock granted by the Company during the
twelve-month period prior to the filing of an initial public offering be
included in the calculation as if they were outstanding for all periods. For
1994, historical income per share, which excludes the assumed conversions of the
convertible preferred, was $0.01.

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share," which
is required to be adopted in the fourth quarter of 1997. At that time, the
Company will be required to change the method currently used to compute earnings
per share and to restate all prior periods. SFAS No. 128 supersedes Accounting
Principles Board Opinion No. 15 and is intended to simplify the computation of
earnings per share and to make the U.S. computations more comparable with
international computations. The pro forma basic and diluted earnings per share
(as defined by SFAS No. 128) would have been as follows:

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------- ---------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Basic................................... $0.05 $0.23 $0.36 $0.15 $0.27
Diluted................................. 0.05 0.22 0.34 0.14 0.26
</TABLE>

FINANCIAL INSTRUMENTS -- The carrying values of cash and equivalents,
accounts receivable and accounts payable approximate fair value due to the
short-term nature of these instruments. Marketable securities are carried at
aggregate fair value. The Company's 24% interest in VeriSign, Inc. ("VeriSign")
(Note 3) is accounted for under the equity method. Other investments represent
strategic equity positions in companies and are stated at cost. It is not
practicable to measure the estimated fair value of such investments.

F-10
<PAGE> 63

SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Two of the companies in which the Company has equity positions had initial
public offerings in 1996. In April 1997, an amendment to Rule 144 under the
Securities Act of 1933, became effective, which, among other things, shortened
the holding periods for sales of restricted securities under Rule 144. As a
result of this amendment, the Rule 144 holding-period requirements for certain
restricted securities (including shares of common stock of the two companies
which completed initial public offerings in 1996) currently held by the Company
will be met in 1997. Accordingly, these restricted securities, which have a cost
of $737, have been reclassified in 1997 from investments to marketable
securities as of June 30, 1997.

USE OF ESTIMATES -- The preparation of the Company's supplemental
consolidated financial statements in conformity with generally accepted
accounting principles necessarily requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates.

CONCENTRATION OF CREDIT RISK -- The Company licenses its ACE/Server and
BoKS software and token technology to various customers in a diverse industry
range. Toolkit and patent licenses are issued primarily to companies in the
computer and software industries. The Company performs ongoing credit
evaluations of its customers and maintains allowances for potential credit
losses. The Company generally requires no collateral from its customers.

STOCK-BASED COMPENSATION -- The Company applies Accounting Principles Board
Opinion No. 25 and related interpretations in accounting for stock option grants
to employees (and non-employees prior to January 1, 1996). Since January 1,
1996, the Company applies SFAS No. 123, "Accounting for Stock-Based
Compensation" and related interpretations for accounting for stock option grants
to non-employees.

LONG-LIVED ASSETS -- Effective January 1, 1996, the Company adopted the
provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," for 1996. The adoption of SFAS No.
121 did not have an impact on the Company's supplemental consolidated financial
statements.

RECENT ACCOUNTING PRONOUNCEMENTS -- In June 1997, the Financial Accounting
Standards Board issued Statements of Financial Accounting Standards Nos. 130 and
131, "Reporting Comprehensive Income" and "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 130" and "SFAS 131", respectively).
The Company will be required to adopt the provisions of these statements in
fiscal 1998. SFAS 130 provides standards for reporting items considered to be
"comprehensive income" and uses the term "other comprehensive income" to refer
to revenue, expenses, gains and losses that are included in comprehensive income
under generally accepted accounting principles but excluded from net income.
Currently the only items considered other comprehensive income, as defined in
SFAS 130 are the unrealized gains and losses on marketable securities and
cumulative translation adjustments, which are recorded as components of
stockholders' equity. SFAS 131 establishes new standards for reporting
information about operating segments. The Company believes the segment
information required to be disclosed under SFAS 131 will be more comprehensive
than previously provided, including expanded disclosure of income statement and
balance sheet items for each reportable operating segment. The Company has not
yet completed its analysis of which operating segments it will report on. The
Company believes that the provisions of SFAS 130 will not, when adopted, have a
material impact on the Company's financial statements.

F-11
<PAGE> 64

SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. MERGER AND ACQUISITION

On July 15, 1997, SDI acquired DynaSoft AB (the "Acquisition" and
"DynaSoft," respectively). On July 26, 1996, SDI completed a merger with RSA
Data Security, Inc. (the "Merger" and "RSA," respectively). The Acquisition and
the Merger have been accounted for as poolings of interests and therefore the
supplemental consolidated financial statements for all periods prior to the
Merger and the Acquisition have been restated to include the accounts and
operations of RSA and DynaSoft with those of SDI. Expenses related to these
transactions for investment banking, professional fees and other direct expenses
are recorded at the respective dates of the Acquisition and Merger.

RSA, located in Redwood City, California, is a leader in cryptography and
develops, markets and supports cryptographic data security products and provides
related consulting services. Products are licensed to original equipment
manufacturers ("OEMs"), which incorporate the technology into their products.
Developer toolkits and other products are used to implement cryptographic data
security applications such as electronic mail, communications privacy,
client/server data security, smart cards and other key information technologies.

DynaSoft is based in Stockholm, Sweden and offers a range of software
security solutions, including secure single sign-on ("SSSO") solutions, through
its BoKS product family. Products are sold worldwide through direct sales and
through OEM licensing agreements with Sun Microsystems, Hewlett-Packard, and
other companies.

Under the terms of the Merger, each share of RSA common stock was exchanged
for 1.66112 shares of the Company's common stock and the Company issued a total
of 6,683,078 shares of its common stock to RSA stockholders and options to
purchase a total of 1,316,922 shares of the Company's common stock to option
holders of RSA.

Under the terms of the Acquisition, the Company issued approximately 2.7
million shares of common stock in exchange for approximately 95% of the
outstanding shares and certain of the outstanding options to acquire shares of
DynaSoft. The Company paid $6,035 to certain stockholders of DynaSoft in
exchange for the remaining outstanding shares and options.

Investment banking, professional fees and other direct expenses incurred in
connection with the Merger were approximately $6,100 in 1996. The Company
anticipates expenses in connection with the Acquisition will approximate $7,000
and will be expensed in the third quarter of 1997.

No adjustments to conform accounting policies of the Company and RSA were
required. Adjustments to conform accounting policies of DynaSoft to those of the
Company were not material.

Revenue and net income (loss) for the previously separate companies were:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------- -------------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
REVENUE
SDI............................ $17,572 $33,804 $70,105 $26,240 $56,097
RSA............................ 3,077 11,600 6,043(a) 6,043(a) --
DynaSoft....................... 3,217 4,008 7,669 3,828 5,277
------- ------- ------- ------- -------
Total.................. $23,866 $49,412 $83,817 $36,111 $61,374
======= ======= ======= ======= =======
NET INCOME (LOSS)
SDI............................ $ 2,315 $ 5,812 $13,428 $ 5,435 $10,231
RSA............................ (1,727) 950 (383)(a) (383)(a) --
DynaSoft....................... 640 688 130 402 (155)
------- ------- ------- ------- -------
Total.................. $ 1,228 $ 7,450 $13,175 $ 5,454 $10,076
======= ======= ======= ======= =======
</TABLE>

- ---------------
(a) Revenue and net loss of RSA for 1996 include only the six month period prior
to the consummation of the Merger.

F-12
<PAGE> 65

SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Pursuant to escrow agreements entered into with the Company by certain of
the stockholders of DynaSoft and by RSA in connection with the Acquisition and
the Merger, respectively, 10.0% of the shares of the Company's common stock
issued to holders of DynaSoft's stock and 12.5% of the shares of the Company's
common stock issued to holders of RSA stock and issuable to holders of RSA
options were placed in escrow, pending settlement of any breaches of
representations, warranties or covenants to the Acquisition and Merger
agreements. In June 1997, the Company and the holders of the RSA shares reached
settlement with respect to claims against the escrow shares and 36,250 shares
were distributed to the Company and 837,957 shares were distributed to the
holders of the RSA shares. Of the shares received by the Company, 213 shares
were accounted for as treasury stock and the remainder were canceled.

3. INVESTMENTS

Investments were as follows:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------- --------
1995 1996 1997
---- ------ --------
<S> <C> <C> <C>
VeriSign, Inc............................................... $510 $ 687 $ 687
VPNet Technologies, Inc..................................... -- 1,500 1,500
Other....................................................... 362 737 --
---- ------ ------
Total............................................. $872 $2,924 $2,187
==== ====== ======
</TABLE>

Prior to 1997, other investments were carried at the lower of cost or
estimated realizable value (See Note 1, "Financial Instruments".)

VeriSign, Inc. -- On April 17, 1995, and February 20, 1996, SDI purchased
425,000 shares of Series A and 72,091 shares of Series B Convertible Preferred
Stock, respectively, of VeriSign of Redwood City, California for an aggregate
purchase price of $687. VeriSign was organized to provide digital certificates
and related services that use public-key cryptography to ensure essential
privacy and authentication features. During 1995, RSA granted certain rights and
privileges in certain technology to VeriSign in connection with VeriSign's
incorporation and received 4,000,000 shares of VeriSign common stock. The
Company's voting interest was approximately 44% and 24%, at December 31, 1995
and 1996, respectively and 24% at June 30, 1997.

VPNet Technologies, Inc. -- On December 2, 1996, the Company purchased
250,000 shares of Series B Preferred Stock of VPNet Technologies, Inc. ("VPNet")
of San Jose, California, for an aggregate purchase price of $1,500. VPNet was
organized to develop and market products and technologies for implementing
high-performance virtual private networks. The Company's investment in VPNet
represents a minority interest of less than 10% of VPNet's voting stock and is
carried at cost.

4. PREFERRED STOCK

In accordance with the Company's Second Restated Certificate of
Incorporation, as in effect immediately prior to the Company's initial public
offering (the "IPO"), all shares of the Company's Series A, B and C preferred
stock were converted into 11,288,756 shares of common stock upon the closing of
the IPO on December 21, 1994. At December 31, 1994, all shares of preferred
stock had been canceled and retired.

F-13
<PAGE> 66

SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. STOCK OPTION AND PURCHASE PLANS

1986 STOCK OPTION PLAN ("1986 PLAN") -- The Company's 1986 Plan terminated
by its terms in 1996 although options remain outstanding at June 30, 1997. In
general, options granted under the 1986 Plan become exercisable in equal annual
installments over four years and expire ten years from the date of grant.

1994 STOCK OPTION PLAN ("1994 PLAN") -- In October 1994, the Board of
Directors adopted the Company's 1994 Plan. The 1994 Plan authorizes (i) the
grant of options to purchase common stock intended to qualify as incentive stock
options and (ii) the grant of options that do not so qualify (non-statutory
options) to employees, officers, directors and consultants of the Company.
Option exercise prices for incentive stock options granted under the 1994 Plan
may not be less than 100% of the fair market value of the shares. In general,
options granted under the 1994 Plan become exercisable in equal annual
installments over four years and expire ten years from the date of grant. On
April 24, 1997, at the Annual Meeting of Stockholders of the Company, the
stockholders adopted an amendment increasing the number of shares authorized for
issuance under the 1994 Plan from 4,820,000 to 6,570,000. Shares of common stock
available for option grants were 1,801,185 at June 30, 1997.

1994 DIRECTOR STOCK OPTION PLAN ("DIRECTOR PLAN") -- In October 1994, the
Board of Directors adopted the Company's Director Plan. The Director Plan
permits the granting of options to purchase up to a maximum of 300,000 shares of
common stock to non-employee members of the Board of Directors. The exercise
price of the options may not be less than 100% of the fair market value on the
date of the grant. Options granted under the Director Plan become exercisable at
the earlier of the date of the next Annual Meeting of Stockholders or one year
from the date of grant and expire ten years from the date of grant. Shares of
common stock available for option grant were 103,000 at June 30, 1997.

1994 EMPLOYEE STOCK PURCHASE PLAN ("PURCHASE PLAN") -- In October 1994, the
Board of Directors adopted the Company's Purchase Plan. The Purchase Plan
provides for sales to participating employees of up to 400,000 shares of common
stock, at prices of not less than 85% of the closing price on either the first
day or the last day of the offering period, whichever is lower. Shares purchased
under the Plan were 35,716, and 91,408 and 119,779 at December 31, 1995 and 1996
and at June 30, 1997, respectively.

RSA OPTIONS -- At the effective date of the Merger, the then-outstanding
options to purchase shares of RSA common stock, issued under RSA's 1987 Stock
Option Plan (the "RSA Option Plan"), were exchanged for options to purchase an
aggregate of 1,316,922 shares of the Company's common stock. All option activity
data has been retroactively adjusted to the earliest period presented to give
effect to the conversion of the RSA options. Incentive stock options and
non-statutory stock options were awarded to employees, officers, directors,
consultants and independent contractors and were generally immediately
exercisable for a term of five years. In the event of termination of employment
or consulting services, the Company has the option to repurchase at the original
exercise price any unvested shares. At June 30, 1997, options as to 955,108
shares were subject to repurchase rights, and a total of 69,844 shares were
subject to repurchase which were previously issued upon the exercise of stock
options.

DYNASOFT OPTIONS -- In connection with the Acquisition of DynaSoft, the
Company exchanged options to purchase 44,931 shares of the Company's common
stock for all of the then outstanding options to purchase shares of DynaSoft.

F-14
<PAGE> 67

SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

A summary of stock option activity under all plans, including converted RSA
and DynaSoft options, is as follows:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE
SHARES PRICE PER SHARE
--------- ----------------
<S> <C> <C>
OUTSTANDING AT JANUARY 1, 1994.......................... 2,181,990 $ 0.29
Granted............................................... 666,082 1.11
Exercised............................................. (152,376) 0.06
---------
OUTSTANDING AT DECEMBER 31, 1994........................ 2,695,696 0.47
Granted............................................... 1,485,486 5.25
Exercised............................................. (921,718) 0.47
Canceled.............................................. (80,269) 0.95
---------
OUTSTANDING AT DECEMBER 31, 1995........................ 3,179,195 2.69
Granted............................................... 2,332,212 29.12
Exercised............................................. (761,633) 2.33
Canceled.............................................. (27,317) 21.57
---------
OUTSTANDING AT DECEMBER 31, 1996........................ 4,722,457 15.71
Granted............................................... 957,383 29.35
Exercised............................................. (690,662) 1.45
Canceled.............................................. (81,796) 26.10
---------
OUTSTANDING AT JUNE 30, 1997............................ 4,907,382 20.26
=========
Exercisable at December 31, 1994...................... 2,293,266 0.31
=========
Exercisable at December 31, 1995...................... 2,261,327 0.40
=========
Exercisable at December 31, 1996...................... 2,127,928 1.69
=========
Exercisable at June 30, 1997.......................... 1,851,971 6.16
=========
</TABLE>

The following table sets forth information regarding stock options
outstanding at December 31, 1996 under all plans:

<TABLE>
<CAPTION>
WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGE OF NUMBER WEIGHTED REMAINING EXERCISE PRICE
NUMBER OF EXERCISE CURRENTLY AVERAGE CONTRACTUAL LIFE FOR CURRENTLY
OPTIONS PRICES EXERCISABLE EXERCISE PRICE (YEARS) EXERCISABLE
- ---------- --------------- ---------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
324,800... $0.05-0.06 324,800 $ 0.05 1.1 $ 0.05
384,000... 0.10 384,000 0.10 3.3 0.10
28,000.... 0.25-0.35 -- 0.29 5.8 --
76,800.... 0.45 15,200 0.45 7.0 0.45
59,656.... 0.76 27,718 0.76 9.9 0.76
985,414... 0.85-0.90 975,874 0.90 7.8 0.90
39,450.... 1.75-2.55 11,650 2.25 7.6 2.28
197,185... 2.95-4.22 187,185 3.32 8.9 3.34
23,252.... 6.62 23,252 6.62 9.2 6.62
546,000... 9.97-14.31 178,249 10.26 8.6 10.27
1,315,600.. 24.30-35.63 -- 27.91 9.3 --
742,300... 38.00-44.21 -- 40.34 9.7 --
--------- ---------
4,722,457.. 0.05-44.21 2,127,928 15.71 7.8 1.69
========= =========
</TABLE>

F-15
<PAGE> 68

SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ACCOUNTING FOR STOCK OPTIONS

For certain options and stock awards granted in 1994, 1995, 1996 and 1997,
the Company is recognizing compensation expense based on the excess of fair
market value over the option exercise or award prices at dates of grant.
Compensation is being recognized ratably over the vesting periods.

On April 1, 1996 and April 24, 1996, options to purchase 200,000 shares and
38,900 shares of common stock were granted at exercise prices of $24.30 and
$38.20, respectively, subject to stockholder approval of an amendment to the
1994 Plan increasing the number of shares available for grant to 4,820,000
shares. On May 22, 1996, the stockholders approved the amendment to the 1994
Plan.

For options granted prior to April 1, 1996, because approval of the
stockholders was required and considered perfunctory, the Company measured
compensation expense on the date of grant by the Board of Directors or the
Compensation Committee of the Board of Directors. As a result of discussions
with the Staff of the Securities and Exchange Commission, the Company changed
its accounting policy on options requiring stockholder approval to measure
compensation expense on the approval date. This change resulted in an aggregate
compensation expense of approximately $4,500 relating to the April 1, 1996 and
April 24, 1996 option grants, which the Company is recognizing over the
remainder of the four-year vesting period of the options from May 22, 1996. The
effect of this change was to reduce income from operations by $667 in the year
ended December 31, 1996. Total compensation expense relating to certain options
and stock awards amounted to $48, $181 and $1,167 for the years ended December
31, 1994, 1995 and 1996, respectively, and $166 and $621 for the six months
ended June 30, 1996 and 1997, respectively.

PRO FORMA DISCLOSURE -- Had the Company recognized compensation costs for
the employee and director stock option and purchase plans based on the fair
value for awards under those plans after January 1, 1995, in accordance with
SFAS No. 123 "Accounting for Stock Based Compensation," net income and net
income per share would have been as follows:

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------
1995 1996
------ -------
<S> <C> <C>
Net income
As reported........................................... $7,450 $13,175
Pro forma............................................. 7,026 10,745
Net income per share
As reported........................................... $0.22 $0.34
Pro forma............................................. 0.21 0.28
</TABLE>

F-16
<PAGE> 69

SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The fair values used to compute pro forma net income and net income per
share were estimated fair value at grant date using the Black-Scholes
option-pricing model with the following weighted average assumptions:

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------
1995 1996
---- ----
<S> <C> <C>
STOCK OPTION PLANS
Risk-free interest rate................................... 6.0% 6.0%
Expected life of option grants (years).................... 4.4 4.4
Expected volatility of underlying stock................... 57.5% 57.5%
Expected dividend payment rate............................ 0.0% 0.0%
Expected forfeiture rate.................................. 4.1% 4.1%
EMPLOYEE STOCK PURCHASE PLAN
Risk-free interest rate................................... 5.9% 5.2%
Expected life of option grants (years).................... 0.5 0.5
Expected volatility of underlying stock................... 57.5% 57.5%
Expected dividend payment rate............................ 0.0% 0.0%
</TABLE>

The weighted average fair value of stock options granted, calculated using the
Black-Scholes option-pricing model, was $2.74 and $15.67 during the years ended
December 31, 1995 and 1996, respectively. The weighted fair value of stock
options granted under the Purchase Plan, calculated using the Black-Scholes
option-pricing model was $6.72 and $25.26 during 1995 and 1996, respectively.

6. INCOME TAXES

The provision for income taxes consisted of the following:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
------ ------ -------
<S> <C> <C> <C>
Current:
Federal............................................. $ 882 $3,049 $ 7,359
State............................................... 281 781 930
Foreign............................................. 265 302 399
------- ------- --------
Total....................................... 1,428 4,132 8,688
Deferred:
Federal............................................. (256) (93) (1,219)
State............................................... (15) (26) (174)
Change in valuation allowance....................... 296 (869) --
------- ------- --------
Total....................................... 25 (988) (1,393)
Tax benefit from exercise of stock options:
Federal............................................. -- 179 3,452
State............................................... -- 46 250
------- ------- --------
Total....................................... -- 225 3,702
------- ------- --------
Total................................................. $1,453 $3,369 $10,997
======= ======= ========
</TABLE>

F-17
<PAGE> 70

SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Significant components of the Company's deferred tax assets and liabilities
were as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-----------------------
1995 1996
------- -------
<S> <C> <C>
Deferred tax assets (liabilities) -- current:
Marketable securities.................................... $(6,877) $(2,319)
Deferred revenue......................................... 98 854
Allowance for doubtful accounts.......................... 293 211
Compensation............................................. 146 205
Inventory reserves....................................... 66 66
Warranty obligation...................................... 42 42
Commissions.............................................. 80 42
Net operating loss carryforwards......................... 81 --
Other.................................................... (28) 67
------- -------
Net deferred tax liabilities -- current.................... $(6,099) $ (832)
======= =======
Deferred tax assets (liabilities) -- non current:
Acquisition of technology................................ 249 733
Compensation............................................. -- 326
Capitalized software development costs................... (89) (79)
Net operating loss carryforwards......................... -- 32
Other.................................................... 254 14
------- -------
Net deferred tax assets -- non current..................... $ 414 $ 1,026
======= =======
</TABLE>

A reconciliation between the statutory and effective income tax rates
follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Statutory tax rate......................................... 34.0% 34.0% 35.0%
State income taxes net of federal benefit.................. 10.5 5.4 3.2
Merger expenses............................................ -- -- 8.3
Foreign income taxes....................................... (13.0) (0.3) 0.3
Change in valuation allowance.............................. 16.5 (8.8) --
Foreign expenses without tax benefit....................... 8.5 -- --
Other...................................................... (2.3) 0.8 (1.3)
----- ----- -----
Effective income tax rate.................................. 54.2% 31.1% 45.5%
===== ===== =====
</TABLE>

The income tax provision for the six months ended June 30, 1996 and 1997 is
based upon the estimated effective tax rates of 36.6% and 37.5%, respectively,
for the full years.

Cash payments for income taxes were approximately $1,323, $4,140 and $8,384
for 1994, 1995 and 1996, respectively, and $3,801 and $7,099 for the six months
ended June 30, 1996 and 1997, respectively.

7. RETIREMENT AND SAVINGS PLAN

The Company has a 401(k) retirement and savings plan (the "Plan")
established in 1986 covering substantially all domestic employees. The Plan
allows each participant to defer up to 15% of annual earnings up to an amount
not to exceed an annual statutory maximum. Subject to the

F-18
<PAGE> 71

SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

approval of the Board of Directors on an annual basis, the Company may make, at
its discretion, profit-sharing contributions and/or match employee deferrals. At
December 31, 1995 and 1996, the Company had accrued, and the Board of Directors
had approved, profit-sharing contributions approximating $78 and $305,
respectively. The Board of Directors also approved for 1995 and 1996 matching
contributions in an amount equal to one-third of the employee deferrals up to 6%
of annual earnings (or a total of 2%), subject to certain eligibility
requirements. Matching contributions amounted to $88, $112 and $261 for 1994,
1995 and 1996, respectively.

8. COMMITMENTS

The Company leases office facilities and automobiles under non-cancelable
operating leases expiring through 2006. Future minimum rental payments are as
follows for years ending December 31:

<TABLE>
<S> <C>
1997........................................................ $2,306
1998........................................................ 2,126
1999........................................................ 2,025
2000........................................................ 1,256
2001........................................................ 1,300
Balance thereafter.......................................... 5,934
</TABLE>

Net rent expense for 1994, 1995 and 1996 was approximately $618, $1,026 and
$2,004, respectively, and for the six months ended June 30, 1996 and 1997 was
approximately $788 and $1,359, respectively. Rent collected from a sublease of
the Company's former headquarters was $0, $0 and $108 in 1994, 1995 and 1996,
respectively, and $0 and $216 for the six months ended June 30, 1996 and 1997,
respectively.

During 1996, the Company issued an unsecured irrevocable standby letter of
credit in the amount of $750 to the landlord of its corporate headquarters in
lieu of a security deposit.

As of June 30, 1997, DynaSoft had approximately $673 due to a bank. The
amount, payable upon demand, bears interest at 13% and is included in accrued
expenses and other.

In December 1994, the Company entered into an agreement with Progress
Software Corporation ("Progress Software"), a vendor of commercial database
software, for the right to use certain of Progress Software's software to
enhance the functionality of the Company's ACE/Server software. The Company
began incurring royalties under the Progress Software agreement in the fourth
quarter of 1995 as a result of the commercial introduction of ACE/Server v2.0 in
October 1995. The Company renewed this agreement in November 1996, and at
December 31, 1996, the Company had prepaid $1,040 under this agreement. In the
first quarter of 1997, in accordance with the terms of the agreement, and in
order to obtain favorable pricing, the Company prepaid a further $2,500.

RSA has a license for cryptographic communication technology and devices
from the Massachusetts Institute of Technology ("MIT") which granted to RSA,
through September 2000, an exclusive right to use, lease or sell technology,
subject to payment of royalties.

Royalty expense was $118, $706 and $2,009 for 1994, 1995 and 1996,
respectively, and $1,047 and $2,370 for the six months ended June 30, 1996 and
1997, respectively.

F-19
<PAGE> 72

SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. SEGMENT INFORMATION

The Company operates in only one industry segment. Export sales are
summarized as follows:

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------- ------------------
1994 1995 1996 1996 1997
------ ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Europe..................................... $2,005 $5,116 $11,616 $4,963 $ 9,205
Canada..................................... 1,230 2,772 4,511 2,038 3,636
Asia/Pacific............................... 176 571 2,518 921 2,574
Latin America.............................. -- -- 198 -- 204
------ ------ ------- ------ -------
$3,411 $8,459 $18,843 $7,922 $15,619
====== ====== ======= ====== =======
</TABLE>

10. LITIGATION

THE CYLINK SETTLEMENT -- Since 1994, RSA had been involved in arbitration
and litigation proceedings (collectively, the "Litigation") relating, among
other things, to (i) the validity of a U.S. patent (the "RSA/MIT Patent")
developed at MIT and licensed to RSA; (ii) the rights of Cylink Corporation
("Cylink") and its subsidiary Caro Kann Corporation ("CKC"), competitors of RSA,
to use and sub-license the RSA/MIT Patent; (iii) the validity and scope of
certain U.S. patents (the "Stanford Patents") which cover Cylink's fundamental
encryption technology and have been licensed to Cylink by the Board of Trustees
of the Leland Stanford Junior University; and (iv) the liability, if any, of RSA
for infringing or contributing to the infringement of the Stanford Patents. On
December 31, 1996, RSA, Cylink and CKC entered into a comprehensive settlement
relating to the Litigation. As part of the settlement, (a) the parties agreed to
dismiss all claims relating to the Litigation, (b) Cylink granted to RSA all
necessary rights to the Stanford Patents and (c) RSA granted to Cylink a license
to RSA's cryptographic software toolkit.

THE ACTIVCARD SETTLEMENT -- In December 1995, the Company, together with
co-plaintiff Vasco Data Security, Inc. ("Vasco"), filed suit in the U.S.
District Court for the Northern District of California against ActivCard, Inc.
and ActivCard S.A. (together, "ActivCard") alleging infringement of certain
patents of the Company and Vasco that collectively cover a range of technology
used to secure data access. The suit sought monetary damages and an injunction
against further infringement. In February 1996, in response to the Company's
repeated infringement allegations and prior to the serving of the Company's
complaint on ActivCard, ActivCard filed a complaint against the Company in the
same court seeking a declaratory judgment of non-infringement, invalidity and
unenforceability of the Company's patents asserted in the suit brought with
Vasco. In October 1996, Vasco, the Company and ActivCard entered into a
settlement agreement with respect to this litigation. Pursuant to the terms of
the settlement agreement, the Company and Vasco agreed to dismiss with prejudice
their claims against ActivCard and ActivCard similarly agreed to dismiss with
prejudice its claims against the Company and Vasco. In connection with this
settlement, ActivCard agreed to license certain patents from the Company and
Vasco.

The Company has been named as a defendant in other legal actions arising
from its normal business activities. The Company carries insurance against
liability for certain types of risks. Although the amount of liability that
could result from any litigation cannot be predicted, in the opinion of
management, after consulting with legal counsel, the Company's potential
liability on all known claims would not have a material adverse effect on the
consolidated financial position or results of operations of the Company.

11. RELATED PARTY TRANSACTIONS

A stockholder provides consulting services to the Company and received $81,
$91 and $97 in 1994, 1995 and 1996, respectively, and $41 and $56 during the six
months ended June 30, 1996 and 1997, respectively. As of June 30, 1997, DynaSoft
had approximately $25 due to a stockholder payable upon demand.

F-20
<PAGE> 73

ENTERPRISE-WIDE SECURITY SOLUTIONS

[Narrative description of graphic material omitted in electronically filed
document:

Photograph of the Company's SecurID Key Fob, SecurID PINPAD and SecurID Card.]

The Company's SecurID tokens include its SecurID Card, its SecurID Key Fob and
its SecurID
PINPAD Card. Used in conjunction with the Company's Ace/Server software, the
SecurID
tokens provide security solutions for a variety of enterprise computing
environments.
<PAGE> 74

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

NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR
ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 13
Price Range of Common Stock and
Dividend Policy..................... 13
Capitalization........................ 14
Selected Supplemental Consolidated
Financial Data...................... 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Business.............................. 29
Management............................ 44
Selling Stockholders.................. 47
Underwriting.......................... 49
Legal Matters......................... 50
Experts............................... 51
Available Information................. 51
Incorporation of Certain Documents by
Reference........................... 52
Index to Supplemental Consolidated
Financial Statements................ F-1
</TABLE>

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

3,000,000 SHARES

[SECURITYDYNAMICS LOGO]

COMMON STOCK

--------------------
PROSPECTUS
--------------------

BT ALEX. BROWN

BANCAMERICA ROBERTSON STEPHENS

COWEN & COMPANY

OCTOBER 16, 1997

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