SECURITY DYNAMICS TECHNOLOGIES INC /DE/, 10-Q, 1998-08-14

SECURITY DYNAMICS TECHNOLOGIES INC /DE/
10-Q, 1998-08-14
COMPUTER PERIPHERAL EQUIPMENT, NEC

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 000-25120

SECURITY DYNAMICS TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C>
DELAWARE 04-2916506
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
20 CROSBY DRIVE
BEDFORD, MA 01730
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (781) 687-7000
</TABLE>

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes [X] No [ ]

As of July 31, 1998, there were 40,924,242 shares of the Registrant's
Common Stock, $.01 par value per share, outstanding.
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SECURITY DYNAMICS TECHNOLOGIES, INC.
FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997....................................... 3
Condensed Consolidated Statements of Income for the three
and six months ended June 30, 1998 and 1997................. 4
Condensed Consolidated Statements of Cash Flows for the
three and six months ended June 30, 1998 and 1997........... 5
Notes to Condensed Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 19
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders......... 20
Item 5. Other Events................................................ 20
Item 6. Exhibits and Reports on Form 8-K............................ 21
Signature................................................... 22
</TABLE>

2
<PAGE> 3

PART I. FINANCIAL INFORMATION

SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)

ITEM 1. FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents...................................... $ 29,003 $ 96,595
Marketable securities..................................... 129,319 68,064
Accounts receivable (less allowance for doubtful accounts
of $705 in 1998 and $742 in 1997)...................... 29,961 27,551
Inventory................................................. 7,981 3,035
Prepaid expenses and other................................ 6,313 9,338
Prepaid income taxes...................................... -- 2,562
Deferred taxes............................................ 1,062 1,426
-------- --------
Total current assets.............................. 203,639 208,571
-------- --------
Property and equipment -- net............................... 23,114 17,515
-------- --------
Other assets:
Investments............................................... 20,158 3,699
Purchased technology and capitalized software costs,
net.................................................... 41 86
Deferred taxes............................................ -- 3,371
Other..................................................... 1,050 733
-------- --------
Total other assets................................ 21,249 7,889
-------- --------
Total....................................................... $248,002 $233,975
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 8,299 $ 11,137
Accrued payroll and related benefits...................... 5,594 5,254
Accrued expenses and other................................ 4,154 4,071
Income taxes payable...................................... 1,865 159
Deferred revenue.......................................... 8,269 9,602
-------- --------
Total current liabilities......................... 28,181 30,223
-------- --------
Deferred taxes............................................ 950 --
-------- --------
Minority interests........................................ 2,641 3,099
-------- --------
Commitments and contingencies: (notes 4 and 7)
Stockholders' equity:
Common stock, $.01 par value; authorized 80,000,000
shares; issued, 40,921,042 and 40,467,118 shares in
1998 and 1997; outstanding, 40,920,533 and 40,466,609
shares in 1998 and 1997................................ 409 405
Additional paid-in capital................................ 168,575 165,751
Retained earnings......................................... 48,525 35,284
Deferred stock compensation............................... (79) (116)
Treasury stock, common, at cost, 509 and 296 shares in
1998 and 1997.......................................... -- --
Accumulated other comprehensive income.................... (1,200) (671)
-------- --------
Total stockholders' equity........................ 216,230 200,653
-------- --------
Total....................................................... $248,002 $233,975
======== ========
</TABLE>

See notes to condensed consolidated financial statements.

3
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SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue............................................. $43,372 $34,255 $83,618 $63,574
Cost of revenue..................................... 11,893 6,787 20,509 13,243
------- ------- ------- -------
Gross profit........................................ 31,479 27,468 63,109 50,331
------- ------- ------- -------
Costs and expenses:
Research and development.......................... 7,525 4,998 14,638 8,946
Purchased research and development................ -- -- 210 --
Marketing and selling............................. 14,774 10,301 28,254 19,170
General and administrative........................ 4,941 4,619 9,660 8,209
Merger and integration............................ -- -- 2,600 --
------- ------- ------- -------
Total..................................... 27,240 19,918 55,362 36,325
------- ------- ------- -------
Income from operations.............................. 4,239 7,550 7,747 14,006
Interest income and other........................... 2,082 1,459 4,492 2,760
Gain on sale of marketable securities............... -- 222 -- 197
Gain from increase in market value of equity
investment........................................ 11,976 -- 11,976 --
Equity in loss from operations of equity
investment........................................ (1,173) -- (1,173) --
------- ------- ------- -------
Income before provision for income taxes............ 17,124 9,231 23,042 16,963
Provision for income taxes.......................... 6,661 3,355 9,863 6,218
Minority interests.................................. 210 -- 458 --
------- ------- ------- -------
Net income.......................................... $10,673 $ 5,876 $13,637 $10,745
======= ======= ======= =======
Basic earnings per share:
Per share amount.................................. $ 0.26 $ 0.15 $ 0.33 $ 0.28
======= ======= ======= =======
Weighted average shares........................... 40,907 38,656 40,815 38,425
======= ======= ======= =======
Diluted earnings per share:
Per share amount.................................. $ 0.25 $ 0.15 $ 0.32 $ 0.27
======= ======= ======= =======
Weighted average shares........................... 40,907 38,656 40,815 38,425
Effect of dilutive options........................ 968 1,655 1,186 1,661
------- ------- ------- -------
Adjusted weighted average shares.................... 41,875 40,311 42,001 40,086
======= ======= ======= =======
</TABLE>

See notes to condensed consolidated financial statements.

4
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SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1998 1997
--------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 13,637 $10,745
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain from increase in market value of equity
investment............................................ (11,976) --
Loss from operations of equity investment.............. 1,173 --
Deferred taxes......................................... 4,685 224
Purchased research and development..................... 210 --
Depreciation and amortization.......................... 2,841 1,461
Stock compensation..................................... 597 621
License write off...................................... 3,000
Minority interests..................................... (458) --
Increase (decrease) in cash from changes in:
Accounts receivable.................................. (2,405) (3,719)
Inventory............................................ (4,947) (583)
Prepaid expenses and other........................... (272) (773)
Accounts payable..................................... (3,151) (503)
Accrued payroll and related benefits................. 332 725
Accrued expenses and other........................... 64 882
Prepaid and income taxes payable..................... 4,351 (914)
Deferred revenue..................................... (1,334) (416)
--------- -------
Net cash provided by operating activities......... 6,347 7,750
--------- -------
Cash flows from investing activities:
Purchases of marketable securities........................ (140,993) (48,027)
Proceeds from sale and maturities of marketable
securities............................................. 79,651 55,628
Purchases of property and equipment....................... (8,389) (4,000)
Investments and other..................................... (5,971) 211
--------- -------
Net cash provided by (used for) investing
activities...................................... (75,702) 3,812
--------- -------
Cash flows from financing activities:
Proceeds from exercise of stock options................... 2,298 --
Proceeds from sales of common stock, net of issuance costs
and other.............................................. -- (369)
Payment to Acquisition shareholders....................... -- 1,704
Minority interests........................................ -- 1,389
--------- -------
Net cash provided by financing activities......... 2,298 2,724
--------- -------
Effects of exchange rate changes on cash and equivalents.... (535) (346)
--------- -------
Net increase (decrease) in cash and equivalents........... (67,592) 13,940
Cash and equivalents, beginning of period................... 96,595 11,688
--------- -------
Cash and equivalents, end of period......................... $ 29,003 $25,628
========= =======
</TABLE>

See notes to condensed consolidated financial statements.

5
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SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements
include the accounts of Security Dynamics Technologies, Inc. (the "Company") and
its wholly owned subsidiaries and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission regarding interim
financial reporting. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the audited
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997, as amended.

In the opinion of management, the accompanying unaudited condensed
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements, and include all adjustments,
consisting only of normal recurring adjustments, necessary for fair presentation
of the results of the interim periods presented. The operating results for the
interim periods presented are not necessarily indicative of the results expected
for the full year.

On July 15, 1997, the Company completed an acquisition of DynaSoft AB
("DynaSoft") (the "DynaSoft Acquisition"). On March 26, 1998, the Company
completed an acquisition of Intrusion Detection Inc. ("IDI") (the "IDI
Acquisition"). The DynaSoft Acquisition and the IDI Acquisition have been
accounted for as poolings of interests and therefore the consolidated financial
statements for all periods prior to the respective acquisitions have been
restated to include the accounts and operations of DynaSoft and IDI with those
of the Company.

2. EARNINGS PER COMMON SHARE

In the fourth quarter of 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings per
Share." The Company changed the method used to compute earnings per share and
restated all prior periods in accordance with SFAS No. 128. 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 by requiring the presentation of
basic and fully diluted earnings per share. The Company's only dilutive stock
equivalents are stock options.

3. INCOME TAXES

The Company provides for income taxes at the end of each interim period
based on the estimated effective tax rate for the full year. Cumulative
adjustments to the tax provision are recorded in the interim period in which a
change in the estimated annual effective rate is determined.

Cash payments for income taxes were approximately $551 and $678 for the
three and six months ended June 30, 1998, respectively, and $3,956 and $7,277
for the three and six months ended June 30, 1997, respectively.

4. CONTINGENCIES

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

During the second quarter of 1998, the Company reached a favorable
settlement in lawsuits relating to certain of its intellectual property rights.
The settlement was recorded as revenue and represented less than 5% of
consolidated second quarter revenue.

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SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. INVESTMENTS

VERISIGN

In January 1998, VeriSign, Inc. ("VeriSign") had an initial public offering
of three million shares of its common stock. The VeriSign series A and B
convertible preferred stock held by the Company converted to common stock in
connection with the offering. The offering diluted the Company's ownership to
approximately 22% but increased the value of the Company's equity in VeriSign.
The market value of the Company's investment in VeriSign was approximately
$168,100 at June 30, 1998.

As a result of VeriSign's initial public offering, in accordance with the
equity method of accounting, the Company recognized as a gain the increase in
the amount of its investment in VeriSign, representing its proportionate share
of VeriSign's equity as of December 31, 1997, after considering VeriSign's net
proceeds from the offering. The Company recorded the increase in its investment
of $11,376 and its proportionate share of VeriSign's first quarter net loss of
$1,173 in the second quarter of 1998. The Company recognizes its proportionate
interest in VeriSign's operating results one quarter in arrears. On July 27,
1998, VeriSign announced it had incurred a net loss of $4,900 and $10,100 for
the three and six months ended June 30, 1998, respectively, and at June 30, 1998
had total assets and liabilities of $61,400 and $14,900, respectively. An
officer of the Company serves as Chairman of the Board of VeriSign.

VPNET

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 $1,500. VPNet was organized to develop and
market products and technologies for implementing high-performance virtual
private networks. In January 1998, the Company purchased $120 of VPNet 8%
convertible debt. The debt is convertible into preferred stock which is
convertible into common stock. The Company also received a warrant to purchase
VPNet Common Stock. The Company's investment in VPNet represents a minority
interest of less than 10% of VPNet's capitalization. An officer of the Company
serves as a director of VPNet.

TRINTECH

On March 31, 1998 the Company purchased, in a non-cash transaction, 482,756
ordinary shares of Trintech Group ("Trintech") for $2,000. Trintech Group is an
Irish development company organized to develop and market software products
designed to enable secure payment in the electronic marketplace. In June 1998,
the Company purchased 500,000 shares of Trintech's Series A Convertible
Preferred Shares for $3,000 cash. The Company's investment represents a minority
interest of less than 10% of Trintech's capitalization. An officer of the
Company serves as a director of Trintech.

nCIPHER

In October 1997, the Company purchased 175,285 Ordinary Shares of nCipher
Corporation Limited ("nCipher") for an aggregate purchase price of $512. nCipher
is located in the United Kingdom and develops products designed to accelerate
cryptographic processes in Internet security, electronic commerce and other
applications. In January 1998, the Company purchased 93,896 Ordinary Shares of
nCipher for an aggregate purchase price of $336. In July 1998, the Company
purchased 563,910 Ordinary Shares of nCipher for an aggregate purchase price of
$2,500. The Company's investment in nCipher represents a minority interest of
less than 20% of nCipher's capitalization. An officer of the Company serves as a
director of nCipher.

C2NET

In June 1998, the Company made a bridge loan to C2Net, Inc. ("C2Net") in
the amount of $200. The debt is convertible at the Company's option into equity
of C2Net or may be used to offset any financial obligation which may arise from
future licensing agreements between the Company and C2Net. C2Net was

7
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SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

organized to develop commercial Internet security software.

FINJAN

In August 1997, the Company purchased 877,193 Series C Preferred Shares of
Finjan Software Ltd. ("Finjan") for an aggregate purchase price of $1,000.
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.

6. ACQUISITIONS

In connection with the IDI Acquisition, the Company issued approximately
784,000 shares of common stock in exchange for all of IDI's outstanding common
stock. IDI develops and markets intrusion detection software. Merger and
integration expenses incurred in connection with the IDI acquisition were
approximately $2,600. No adjustments were required to conform accounting
policies of the Company and IDI.

Revenue and net income (loss) for each of the previously separate companies
for the following periods were:

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, JUNE 30, DECEMBER 31,
------------------- ----------------- ------------
1998 1997 1998 1997 1997
-------- -------- ------- ------- ------------
<S> <C> <C> <C> <C> <C>
REVENUE
Security Dynamics(a)........................ $43,372 $32,955 $82,718 $61,374 $135,930
IDI......................................... -- 1,300 900 2,220 4,700
------- ------- ------- ------- --------
Total............................... $43,372 $34,255 $83,618 $63,574 $140,630
======= ======= ======= ======= ========
NET INCOME (LOSS)
Security Dynamics(a)........................ $10,673 $ 5,515 $13,774 $10,076 $ 16,368
IDI......................................... -- 361 (137) 669 680
------- ------- ------- ------- --------
Total............................... $10,673 $ 5,876 $13,637 $10,745 $ 17,048
======= ======= ======= ======= ========
</TABLE>

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

(a) For periods subsequent to the acquisitions, includes revenues and net income
for IDI and DynaSoft.

7. COMMITMENTS

Effective April 1, 1998, the Company amended its agreement with Progress
Software Corporation ("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 agreed to prepay $6,000 in
installments over the remaining three quarters of 1998. Installments of $3,300
have been paid as of June 30, 1998. The prepaid royalty is recorded as a
component of cost of sales as the related products are sold.

In June 1998 the Company entered into an agreement with Aventail
Corporation ("Aventail") under which the Company will distribute Aventail's
products. The Company prepaid license and maintenance fees aggregating $1,200 in
July 1998 in connection with the agreement.

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SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. COMPREHENSIVE INCOME

Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." Comprehensive income, presented in
accordance with SFAS No. 130, was as follows for the three and six months ended
June 30, 1998 and 1997:

<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
---------------- -----------------
1998 1997 1998 1997
------- ------ ------- -------
<S> <C> <C> <C> <C>
Net income................................................. $10,673 $5,876 $13,637 $10,745
Other comprehensive income, net of tax:
Unrealized holding (loss) gain on securities arising
during period......................................... 14 (55) (87) (1,353)
Foreign currency translation adjustments................. (270) (448) (443) (687)
------- ------ ------- -------
Comprehensive income....................................... $10,417 $5,373 $13,107 $ 8,705
======= ====== ======= =======
</TABLE>

Accumulated other comprehensive income consists of the following:

<TABLE>
<CAPTION>
UNREALIZED
FOREIGN HOLDING ACCUMULATED
CURRENCY (LOSS) OTHER
TRANSLATION GAIN ON COMPREHENSIVE
ADJUSTMENTS SECURITIES INCOME
----------- ---------- -------------
<S> <C> <C> <C>
Balance, December 31, 1997................................. $ (750) $ 79 $ (671)
Period change.............................................. (173) (102) (275)
------- ----- -------
Balance, March 31, 1998.................................... (923) (23) (946)
Current period change...................................... (270) 14 (254)
------- ----- -------
Balance, June 30, 1998..................................... $(1,193) $ (8) $(1,200)
======= ===== =======
</TABLE>

9. RECENT ACCOUNTING PRONOUNCEMENTS

In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 97-2, "Software Revenue
Recognition", which supersedes SOP No. 91-1. The Company adopted SOP No. 97-2
prospectively on January 1, 1998. SOP No. 97-2 generally requires revenue earned
on software arrangements involving multiple elements to be allocated to each
element based on the relative fair values of the elements. In March 1998, AICPA
postponed the adoption date of certain provisions of SOP No. 97-2. The adoption
of SOP No. 97-2 did not have a material effect on the Company's revenues and
operating results for the three and six months ended June 30, 1998.

In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". The
Company will be required to adopt the provisions of this statement in its annual
financial statements for fiscal 1998. SFAS No. 131 establishes new standards for
reporting information about operating segments. The Company believes the segment
information required to be disclosed under SFAS No. 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 the operating segments on which it
will report.

10. 1994 STOCK OPTION PLAN

On January 22, 1998 and March 8, 1998, the Board of Directors adopted, and
on April 30, 1998 the stockholders approved, an amendment and restatement of the
1994 Stock Option Plan, as amended (the "Plan") increasing the number of shares
of Common Stock authorized for issuance thereunder from 6,570,000 to 9,570,000
shares in the aggregate.

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SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company) of an outstanding stock option granted under the Plan during the period
commencing on January 1, 1996 and ending on June 30, 1998 (collectively, the
"Old Options"), could elect to receive a new stock option (collectively, "New
Options") granted on August 12, 1998 under the Plan in exchange for cancellation
of each Old Option. The Company repriced the options because the exercise prices
of such options were significantly higher than the fair market value of the
Company's common stock, and therefore did not provide the desired incentive to
employees. The Company believes that stock options are a valuable tool in
retaining employees. Each New Option is, among other things, (i) exercisable for
the number of shares of the Company's Common Stock covered by the outstanding
unexercised portion of the Old Option cancelled in exchange therefor; (ii) has
an exercise price of $12.125 (equal to the closing price of the Common Stock on
the Nasdaq National Market on August 12, 1998 and the fair market value of the
Common Stock on such date); and (iii) has the identical vesting schedule as the
Old Option, provided, however, that each such New Option shall not be
exercisable prior to February 12, 1999, with such prohibition on exercise
expiring at a rate of 25% at the end of each three-month period thereafter. New
Options to purchase an aggregate of approximately 5.3 million shares of Common
Stock were granted in exchange for Old Options with exercise prices ranging from
$19.00 to $44.125.

11. LICENSE AGREEMENT

During the second quarter of 1998 and in connection with a refinement of
its product offering strategy, the Company determined it will no longer actively
market secure email products obtained from a third party under a license
agreement. Prepaid license fees paid under the license agreement with the third
party of $3,000 were determined to have no future value and were charged to cost
of revenue in the second quarter of 1998.

10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PERCENTAGE DATA)

OVERVIEW

This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended. 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. There are a
number of factors that could cause the Company's actual results to differ
materially from those indicated by such forward-looking statements. These
factors include, without limitation, those set forth below under the caption
"Certain Factors That May Affect Future Results."

The IDI Acquisition was completed on March 26, 1998 and has been accounted
for as a pooling of interests. Accordingly, the results of operations for all
periods discussed below have been restated to include the financial results of
IDI. See Notes 1 and 6 of Notes to Condensed Consolidated Financial Statements.

RESULTS OF OPERATIONS

The following table sets forth income and expense items as a percentage of
total revenue, and the percentage change in dollar amounts of such items, for
the three and six months ended June 30, 1998 and 1997.

<TABLE>
<CAPTION>
PERCENTAGE OF PERIOD-TO- PERCENTAGE OF PERIOD-TO-
TOTAL PERIOD TOTAL PERIOD
REVENUE CHANGE REVENUE CHANGE
---------------- ---------- -------------- ----------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ ----------------------------
1998 1997 1998 1997
------ ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Revenue............................... 100.0% 100.0% 26.6% 100.0% 100.0% 31.5%
Cost of revenue....................... 27.4 19.8 75.2 24.5 20.8 54.9
------ ------ ------ ----- ----- ------
Gross profit.......................... 72.6 80.2 14.6 75.5 79.2 25.4
------ ------ ------ ----- ----- ------
Costs and expenses:
Research and development............ 17.3 14.6 50.6 17.5 14.1 63.6
Purchased research and
development...................... -- -- -- .3 -- (100.0)
Marketing and selling............... 34.1 30.1 43.4 33.7 30.2 47.4
General and administrative.......... 11.4 13.5 7.0 11.6 12.9 17.7
Merger and integration.............. -- -- -- 3.1 -- 100.0
------ ------ ------ ----- ----- ------
Total....................... 62.8 58.2 36.8 66.2 57.2 52.4
------ ------ ------ ----- ----- ------
Income from operations................ 9.8 22.0 (43.9) 9.3 22.0 (44.7)
Interest income and other............. 4.8 4.3 42.7 5.4 4.4 62.8
Gain on sale of marketable
securities.......................... -- .6 (100.0) -- .3 (100.0)
Gain from increase in market value of
equity investment................... 27.6 -- 100.0 14.3 -- 100.0
Equity in loss from operations of
equity investment................... (2.7) -- 100.0 (1.4) -- (100.0)
------ ------ ------ ----- ----- ------
Income before provision for income
taxes............................... 39.5 26.9 85.5 27.6 26.7 35.8
Provision for income taxes............ 15.4 9.8 98.5 11.8 9.8 58.6
Minority interests.................... .5 -- 100.0 .5 -- 100.0
------ ------ ------ ----- ----- ------
Net income............................ 24.6% 17.1% 81.6% 16.3% 16.9% 26.9%
====== ====== ====== ===== ===== ======
</TABLE>

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<PAGE> 12

REVENUE

The Company's revenue is derived principally from the sales of SecurID
tokens; licensing of ACE/ Server, BoKS and SecurPC software; licensing of BSAFE,
JSAFE, TIPEM, S/PAY and S/MAIL encryption engines; licensing of patents;
licensing of Kane Security Analyst and Kane Security Monitor software and
revenues from maintenance and professional services.

Total revenue increased 26.6% in the second quarter of 1998 to $43,372 from
$34,255 in the second quarter of 1997. Total revenue increased 31.5% in the
first six months of 1998 to $83,618 from $63,574 in the first six months of
1997. The increases in revenue reflected increases in unit sales of all of the
Company's products, except ACM/400 and ACM/1600 hardware products. During the
second quarter and first six months of 1998, approximately 41% and 51%,
respectively, of the increase in revenue was attributable to increased sales of
SecurID tokens, approximately 24% and 24%, respectively, of the increase in
revenue was attributable to increased sales of ACE/Server and ACM software
products, and approximately 23% and 18%, respectively, of the increase in
revenue was attributable to increased sales of encryption engine licenses and
patent licensing. The balance of the increase in revenue during the second
quarter and the first six months of 1998 resulted from increased sales of BoKS
software products, Kane Security Analyst and Kane Security Monitor products, and
maintenance and professional services revenue offset by decreased hardware and
SecurPC revenue. The Company believes that the overall increase in sales was
attributable in part to growth of the information security market, with the
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 21.6% in the second
quarter of 1998 to $10,700 from $8,800 in the second quarter of 1997 and
increased 43.5% in the first six months of 1998 to $21,100 from $14,700 in the
first six months of 1997. International revenue accounted for 24.7% and 25.7% of
total revenue in the second quarters of 1998 and 1997, respectively, and 25.2%
and 23.1% of total revenue in the first six months of 1998 and 1997,
respectively. The increases in international revenue were 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.

During the second quarter of 1998, the Company reached a favorable
settlement in lawsuits relating to certain of its intellectual property rights.
This settlement was recorded as revenue and represented less than 5% of
consolidated second quarter revenue.

COST OF REVENUE AND GROSS PROFIT

The Company's cost of revenue consists primarily of costs associated with
the manufacture and delivery of SecurID tokens and hardware products. The
Company's 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.

The Company's gross profit increased 14.6% in the second quarter of 1998 to
$31,479 from $27,468, in the second quarter of 1997 and increased 25.4% in the
first six months of 1998 to $63,109 from $50,332, in the first six months of
1997. Gross profit as a percentage of revenue declined, however, in the second
quarter and the first six months of 1998 to 72.6% and 75.5% of revenues,
respectively, compared to 80.2% and 79.2% of revenue, respectively for the
second quarter and first six months of 1997. The decline was primarily
attributable to the write-off in the second quarter to cost of revenue of
prepaid license fees of $3,000 under a license agreement with a third party
determined to have no further value. Excluding the effects of this write-off,
gross profit as a percentage of revenue was 79.5% and 79.1% during the second
quarter and first six months of 1998, respectively. During the second quarter
and first six months of 1998 and excluding the effect of the license write-off,
approximately 43% and 53%, respectively, of the increase in gross profit were
attributable to increased unit sales of SecurID tokens and hardware,
approximately 25% and 21%, respectively of the increases in gross profit were
attributable to increased licensing sales of encryption engine technology and
patent licensing, and approximately 37% and 26%, respectively of the increases
in gross profit were attributable

12
<PAGE> 13

to increased licensing sales of ACE/Server software. In addition, gross profit
increased due to increased maintenance revenue.

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 increases in material costs associated with the manufacture
of SecurID tokens and hardware products and any software license fees or
royalties payable by the Company) and other factors.

RESEARCH AND DEVELOPMENT

Research and development expenses consist primarily of personnel costs as
well as fees for development services provided by consultants.

Research and development expenses increased 50.6% in the second quarter of
1998 to $7,525 from $4,998 in the second quarter of 1997, and increased 63.6% in
the first six months of 1998 to $14,638 from $8,946 in the first six months of
1997. Research and development expenses increased as a percentage of revenue to
17.3% and 17.5%, respectively, in the second quarter and the first six months of
1998 from 14.6% and 14.1%, respectively, in the second quarter and the first six
months of 1997 primarily due to increased payroll costs associated with the
employment of additional staff.

MARKETING AND SELLING

Marketing and selling expenses consist primarily of salaries, commissions
and travel expenses of direct sales and marketing personnel and marketing
program expenses.

Marketing and selling expenses increased 43.4% in the second quarter of
1998 to $14,774 from $10,301 in the second quarter of 1997, and increased 47.4%
in the first six months of 1998 to $28,254 from $19,170 in the first six months
of 1997. Marketing and selling expenses increased as a percentage of revenue to
34.1% and 33.7%, respectively, in the second quarter and first six months of
1998 from 30.1% and 30.2%, respectively, in the second quarter and first six
months of 1997. Approximately 59% and 68%, respectively of the increase in
marketing and selling expenses during the second quarter and the first six
months of 1998 were attributable to increased payroll costs associated with the
employment of additional staff. Approximately 15% and 19%, respectively, of the
increases in marketing and selling expenses during the second quarter and the
first six months of 1998 resulted from increased travel expenses and marketing
program expenses.

GENERAL AND ADMINISTRATIVE

General and administrative expenses consist primarily of personnel costs
for administration, finance, human resources, general management and legal and
accounting fees.

General and administrative expenses increased 7.0% and 17.7%, respectively
during the second quarter and the first six months of 1998 to $4,941, and
$9,660, respectively or 11.4% and 11.6%, respectively of revenue, from $4,619,
and $8,209, respectively or 13.5% and 12.9%, respectively of revenue, in the
during the second quarter and the first six months of 1997. The increases in
general and administrative expenses were primarily due to increased payroll
costs associated with the employment of additional staff.

MERGER AND INTEGRATION EXPENSES

Merger and integration expenses, consisting of legal, accounting,
investment banking and other expenses, incurred in connection with the IDI
Acquisition were $2,600 in the first six months of 1998.

INTEREST INCOME AND OTHER

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

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<PAGE> 14

Interest income increased 42.7% and 62.8%, respectively in the second
quarter and the first six months of 1998 to $2,082 and $4,492, respectively from
$1,459 and $2,760, respectively in the second quarter and the first six months
of 1997 due to interest earned on higher cash and marketable securities
balances.

GAIN ON SALE OF MARKETABLE SECURITIES

Gains on sale of marketable securities were $222,000 and $197,000 in the
three and six months ended June 30, 1998, respectively.

EQUITY INVESTMENT INCOME AND LOSS

The Company recorded a non-recurring gain of $12,000 resulting from the
write-up under the equity method of its investment in VeriSign, Inc. during the
second quarter of 1998. The gain was partially offset by the Company's
proportionate share of VeriSign's loss for the first quarter of 1998. See Note 5
of Notes to Condensed Consolidated Financial Statements.

PROVISION FOR INCOME TAXES

The provision for income taxes increased to $6,661 and $9,863,
respectively, during the second quarter and the first six months of 1998 from
$3,355 and $6,218, respectively, in the second quarter and the first six months
of 1997, primarily due to higher income subject to taxation and to higher
effective tax rates. The Company's effective tax rate was 38.9% and 42.8%,
respectively, for the second quarter and the first six months of 1998 compared
to 36.3% and 36.7%, respectively, for the second quarter and the first six
months of 1997. The effective tax rate increases were due to non-deductible
merger and integration expenses incurred in correction with the IDI Acquisition,
partially offset by benefits resulting from the Company's foreign tax strategy.

MINORITY INTERESTS

Minority interests in the consolidated net income were $210 and $458,
respectively, during the second quarter and the first six months of 1998. An
aggregate of 26% of RSA's Japanese subsidiary is owned by minority interest
stockholders.

NET INCOME

As a result of the above factors, net income in the second quarter and the
first six months of 1998 increased to $10,673 and $13,637, respectively or 24.6%
and 16.3% of revenue, respectively, from $5,876 and $10,745, respectively, or
17.1% and 16.9% of revenue, in the second quarter and the first six months of
1997.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

At June 30, 1998, the Company had cash, cash equivalents and marketable
securities of $158,300 and working capital of $175,500. The Company has
historically funded its operations primarily from cash generated from its
operating activities. During the first six months of 1998 the Company used the
cash provided by operations principally for working capital needs and to finance
certain costs in connection with the IDI Acquisition. The Company believes that
working capital will be sufficient to meet its anticipated cash requirements
through at least 1999.

Mergers and Acquisitions

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 $6,000 in cash to certain of stockholders of
DynaSoft in exchange for the remaining outstanding shares and options. The
DynaSoft Acquisition costs were approximately $5,700, which included integration
costs, primarily severance, of $300.

14
<PAGE> 15

On March 26, 1998, a wholly owned subsidiary of the Company acquired IDI.
The Company issued approximately 784,000 shares of Common Stock of the Company
in exchange for all of IDI's outstanding common stock. The IDI Acquisition costs
were approximately $2,600. The DynaSoft Acquisition and the IDI Acquisition were
accounted for as poolings of interests. See Note 6 of Notes to the Company's
Consolidated Financial Statements.

The Company intends to seek acquisitions of businesses, strategic
investments, 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.

Sales of Common Stock

In October 1997, the Company sold 1,626,000 shares of Common Stock in a
follow-on public offering, which generated $61,100 of net cash proceeds to the
Company.

The Company generated $2,300 of cash from employees exercising stock
options during the first six months of 1998.

Strategic Investments

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. 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 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. VeriSign introduced its first products and
services in June 1995; as such, it has a limited operating history and through
December 31, 1997 has incurred significant net losses in each year since its
inception. There can be no assurance that VeriSign will achieve profitability in
the foreseeable future. The Company's voting interest in VeriSign was
approximately 27% and 26% at December 31, 1996 and 1997, respectively. The
Company uses the equity method to account for its investment in VeriSign. The
market value of the Company's investment in VerSign was approximately $168,100
at June 30, 1998. In January 1998, VeriSign had an initial public offering which
diluted the Company's ownership to approximately 22% but increased the Company's
equity in VeriSign.

As a result of VeriSign's initial public offering, in accordance with the
equity method of accounting, the Company recognized an increase in the amount of
its investment in VeriSign, representing its proportionate share of VeriSign's
equity as of December 31, 1997, after considering VeriSign's net proceeds from
the offering. The increase in the investment was recorded with a corresponding
increase to additional paid in capital, net of deferred income taxes payable.
The Company recorded the increase in its investment of $11,376 and its
proportionate share of VeriSign's first quarter net loss of $1,173 in the second
quarter of 1998 when the Company recognized its proportionate interest in
VeriSign's operating results one quarter in arrears. On July 27, 1998, VeriSign
announced it had incurred a net loss of $4,900 for the second quarter and
$10,100 the first six months of 1998 and at June 30, 1998 had total assets and
liabilities of $61,400 and $14,900, respectively. An officer of the Company
serves as Chairman of the Board of VeriSign.

15
<PAGE> 16

to purchase VPNet common stock. The Company's investment in VPNet represents a
minority interest of less than 10% of VPNet's capitalization. An officer of the
Company serves as a director of VPNet.

On March 31, 1998 the Company purchased, in a non-cash transaction, 482,756
ordinary shares of Trintech Group ("Trintech") for $2,000. Trintech Group is an
Irish development company organized to develop and market software products
designed to enable secure payment in the electronic marketplace. In June 1998
the Company purchased 500,000 shares of Trintech's Series A Convertible
Preferred Shares for $3,000 cash. The Company's investment represents a minority
interest of less than 10% of Trintech's capitalization. An officer of the
Company serves as a director of Trintech.

In October 1997, the Company purchased 175,285 Ordinary Shares of nCipher
Corporation Limited ("nCipher") for an aggregated purchase price of $512.
nCipher is located in the United Kingdom and develops products designed to
accelerate cryptographic processes in Internet security, electronic commerce and
other applications. In January 1998, the Company purchased 93,896 Ordinary
Shares of nCipher for an aggregate purchase price of $336. In July 1998, the
Company purchased 563,910 Ordinary Shares of nCipher for an aggregate purchase
price of $2,500. The Company's investment in nCipher represents a minority
interest of less than 20% of nCipher's capitalization. An officer of the Company
serves as a director of nCipher.

In June 1998, the Company made a bridge loan to C2Net in the amount of
$200. The debt is convertible at the Company's option into equity of C2Net or
may be used to offset any financial obligation which may arise from future
licensing agreements between the Company and C2Net. C2Net was organized to
develop commercial Internet security software.

Capital Expenditures

The Company's capital expenditures during the first six months of 1998 were
$8,400 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. During the fourth quarter
of 1997, the Company commenced implementation of an information system which is
designed to better meet the Company's growing world-wide information and
business process needs. The Company expects the system, which is represented by
the manufacturer to be Year 2000 compliant, to be operational in 1998 and
estimates the total cost at approximately $5,000, of which approximately $3,500
will be spent in 1998 ($2,500 was spent in the first six months of 1998).

Leasing Expenditures

In March 1998, the Company entered into an amendment to its noncancelable
operating lease for facilities in Bedford, Massachusetts. The facilities leased
under the amended agreement provide for approximately 183,000 square feet of
office space, and the annual base rent is approximately $2,600 per year through
February 2008.

In August and December 1997, the Company entered into two noncancelable
ten-year leases expiring in 2008 for RSA offices in San Mateo, California. The
first facility consists of approximately 27,000 square feet of office space, and
the annual base rent is approximately $1,000. The second facility consists of
approximately 31,000 square feet of office space, and the annual base rent is
approximately $912 and annual operating expenses of approximately $245. Both
leases have rent escalation provisions covering years two through ten based on
the Consumer Price Index.

License Agreements, Royalty Arrangements, and Purchased Research and
Development

Effective April 1, 1998, 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

16
<PAGE> 17

favorable pricing, the Company agreed to prepay $6,000 in installments over the
remaining three quarters of 1998. Installments of $3,300 have been paid as of
June 30, 1998. The prepaid royalty is recorded as a component of cost of sales
as products are sold.

During the second quarter of 1998 and in connection with a refinement of
its product offering strategy, the Company determined it will no longer actively
market secure email products obtained from a third party under a license
agreement. Prepaid license fees paid under the license agreement with the third
party of $3,000 were determined to have no further value and were charged to
cost of revenue in the second quarter of 1998.

In June 1998, the Company entered into an agreement with Aventail under
which the Company will distribute Aventail's products. The Company prepaid
license and maintenance fees aggregating $1,200 in connection with the
agreement.

The Company expended approximately $210 for purchased research and
development technology during the first six months of 1998.

Stock Option Repricing

On July 24, 1998 and August 6, 1998, the Board of Directors of the Company
approved a stock option repricing program pursuant to which each holder (other
than certain executive officers and the directors of the Company) of an
outstanding stock option granted under the Plan during the period commencing on
January 1, 1996 and ending on June 30, 1998 (collectively, the "Old Options"),
could elect to receive a new stock option (collectively, "New Options") granted
on August 12, 1998 under the Plan in exchange for cancellation of each Old
Option. The Company repriced the options because the exercise prices of such
options were significantly higher than the fair market value of the Company's
common stock, and therefore did not provide the desired incentive to employees.
The Company believes that stock options are a valuable tool in retaining
employees. Each New Option is, among other things, (i) exercisable for the
number of shares of the Company's Common Stock covered by the outstanding
unexercised portion of the Old Option cancelled in exchange therefor; (ii) has
an exercise price of $12.125 (equal to the closing price of the Common Stock on
the Nasdaq National Market on August 12, 1998 and the fair market value of the
Common Stock on such date); and (iii) has the identical vesting schedule as the
Old Option, provided, however, that each such New Option shall not be
exercisable prior to February 12, 1999, with such prohibition on exercise
expiring at a rate of 25% at the end of each three-month period thereafter. New
Options to purchase an aggregate of approximately 5.3 million shares of Common
Stock were granted in exchange for Old Options with exercise prices ranging from
$19.00 to $44.125.

YEAR 2000 COMPLIANCE

Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, software and computer systems may need to be
upgraded or replaced in order to comply with such "Year 2000" requirements.
Although the Company believes that its products and systems are or will be made
Year 2000 compliant in the ordinary course of business, the Company utilizes
third-party equipment and software that may not be Year 2000 compliant. Failure
of such third-party equipment or software to operate properly with regard to the
year 2000 and thereafter could require the Company to incur unanticipated
expenses to remedy any problems, which could have a material adverse effect on
the Company's business, financial condition, and results of operations.

Furthermore, the purchasing patterns of customers or potential customers
may be affected by Year 2000 issues as companies expend significant resources to
correct their current systems for Year 2000 compliance. These expenditures may
result in reduced funds available to implement the infrastructure needed to
conduct trusted and secure communications and commerce over information networks
or to purchase products and services such as those offered by the Company, which
could have a material adverse effect on the Company's business, operating
results, financial condition, and results of operations.

The Company has formed a Year 2000 task force. The task force consists of
employees world-wide with expertise in areas the Company believes could be
affected if not Year 2000 compliant. The task force has
17
<PAGE> 18

established a Year 2000 compliance plan. The scope of the plan is to (i)
identify the third-party equipment, software, vendors, systems and suppliers
used by the Company which are not Year 2000 compliant, (ii) replace
non-compliant third party equipment and software with compliant equipment and
software and find alternatives to non-compliant vendors, systems and suppliers,
and (iii) work with Company customers to overcome questions and concerns they
may have about the impact of Year 2000 compliance on the Company and its
products. The task force has almost completed the identification phase of the
project and anticipates completion of the replacement phase of the project in
1998. The task force has approached the plan from a risk priority perspective.
For systems identified as having a high risk of Year 2000 non-compliance, the
task force has completed the identification phase of the project and has made
significant progress in the replacment phase. Significant process has also been
made in communicating with customers and vendors about Year 2000 concerns.
Except for the previously described worldwide business and information system,
the Company does not believe the identification and replacement of third party
equipment and software will have a material cost to the Company.

RECENT ACCOUNTING PRONOUNCEMENTS

In October 1997, the AICPA issued SOP No. 97-2, "Software Revenue
Recognition", which supersedes SOP No. 91-1. The Company adopted SOP No. 97-2
prospectively on January 1, 1998. SOP No. 97-2 generally requires revenue earned
on software arrangements involving multiple elements to be allocated to each
element based on the relative fair values of the elements. In March 1998, the
AICPA postponed the adoption date of certain provisions of SOP No. 97-2. The
adoption of SOP No. 97-2 did not have a material effect on the Company's
revenues and operating results for the six months ended June 30, 1998.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

This Quarterly Report on Form 10-Q 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. The following important
factors, among others, could cause actual results to differ materially from
those indicated by forward-looking statements made in this report and presented
elsewhere by management from time to time. Such forward-looking statements
represent management's current expectations and are inherently uncertain.
Investors are warned that actual results may differ from management's
expectations.

A number of uncertainties exist that could affect the Company's future
operating results, including, without limitation, general economic conditions,
the Company's continued ability to develop and introduce products, the
introduction of new products by competitors, pricing practices of competitors,
expansion of the Company's sales distribution capability, the cost and
availability of components and the Company's ability to control costs.

The Company's success is dependent in part on its ability to complete its
integration of the operations of IDI and DynaSoft in an efficient and effective
manner. The successful combination of the Company, IDI, and DynaSoft in a
rapidly changing high technology industry may be more difficult to accomplish
than in other industries. The combination of these companies and any future
acquisitions 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
18
<PAGE> 19

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 these
companies could have a material adverse effect on the business and results of
operations of the Company.

The Company's success is also dependent on the success of its SecurSight
strategy, which is a family of enterprise security solutions being developed by
the Company that would enable organizations to support and manage the growing
use of public and private keys, digital signatures and digital certificates for
assuring confidentiality and privacy on an enterprise-wide scale. The success of
SecurSight is dependent on a number of factors, including without limitation
delays in product development, undetected software errors or bugs, competitive
pressures, technical difficulties, market acceptance of new technologies,
including without limitation the use and implementation of various certificate
management and key management technologies, changes in customer requirements and
government regulations, delays in developing strategic partnerships and general
economic conditions.

The Company's success is highly dependent on its ability to enhance its
existing products and to develop and introduce new products in a timely manner.
If the Company were to fail to introduce new products on a timely basis, the
Company's operating results could be adversely affected. To date, substantially
all of the Company's revenues have been attributable to 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 could have a material adverse effect on the
Company's financial condition and results of operations.

Certain components of the Company's products are currently purchased from a
single or limited sources and any interruption in the supply of such components
could adversely affect the Company's operating results.

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, changes in the Company's
operating expenses, personnel changes, mix of products sold, changes in product
pricing, development of the Company's direct and indirect distribution channels
and general economic conditions.

International sales have represented a significant portion of the Company's
sales. The international business and financial performance of the Company may
be affected by general economic conditions abroad, fluctuations in foreign
exchange rates, difficulties in managing accounts receivable, tariff regulations
and difficulties in obtaining export licenses.

All of the Company's products are subject to export controls under U.S. law
and applicable foreign government restrictions, including without limitation
restrictions on the export of encryption technology. 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. In addition, the Company 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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

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<PAGE> 20

PART II. OTHER INFORMATION

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At the 1998 Annual Meeting of Stockholders of the Company (the "Annual
Meeting") held on April 30, 1998, the following matters were acted upon by the
stockholders of the Company:

1. The election of Joseph B. Lassiter, III and Charles R. Stuckey,
Jr. as Class I Directors for the ensuing three years;

2. The approval of the amendment and restatement of the Company's
1994 Stock Option Plan to (i) increase from 6,570,000 to 9,570,000 the
number of shares of Common Stock authorized thereunder; and (ii) provide
for the grant by the Company of restricted stock and other stock-based
awards thereunder; and

3. Ratification of the appointment of Deloitte & Touche LLP as
independent auditors of the Company for the current year.

The number of shares of Common Stock outstanding and entitled to vote at
the Annual Meeting was 39,265,833. The other directors of the Company, whose
terms of office as directors continued after the Annual Meeting, are D. James
Bidzos, Richard L. Earnest, Sanford M. Sherizen, George M. Middlemas and James
K. Sims. The results of the voting on each of the matters presented to
stockholders at the Annual Meeting are set forth below:

<TABLE>
<CAPTION>
VOTES VOTES VOTES BROKER
FOR WITHHELD AGAINST ABSTENTIONS NON-VOTES
---------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
1. Election of Class I Directors:
Joseph B. Lassiter, III................... 32,584,610 2,587,551 N.A. N.A. N.A.
Charles R. Stuckey, Jr.................... 32,584,610 2,587,551 N.A. N.A. N.A.
2. Amendment and Restatement of 1994 Stock
Option Plan............................... 16,746,977 N.A. 14,204,959 32,158 4,188,067
3. Ratification of Independent Auditors.. 32,723,879 N.A. 2,433,996 14,286 N.A.
</TABLE>

ITEM 5. OTHER EVENTS

Stockholder Proposals for 1999 Annual Meeting

Any proposal that a stockholder of the Company wishes to be considered for
inclusion in the Company's proxy statement and proxy card for the Company's 1999
Annual Meeting of Stockholders (the "1999 Annual Meeting") must be submitted to
the Secretary of the Company at its offices, 20 Crosby Drive, Bedford,
Massachusetts 01730, no later than December 2, 1998.

If a stockholder of the Company wishes to present a proposal before the
1999 Annual Meeting, but does not wish to have the proposal considered for
inclusion in the Company's proxy statement and proxy card, such stockholder must
also give written notice to the Secretary of the Company at the address noted
above. The Secretary must receive such notice not less than 60 days nor more
than 90 days prior to the 1999 Annual Meeting; provided that, in the event that
less than 70 days' notice or prior public disclosure of the date of the 1999
Annual Meeting is given or made, notice by the stockholder must be received not
later than the close of business on the 10th day following the date on which
such notice of the date of the meeting was mailed or such public disclosure was
made, whichever occurs first. If a stockholder fails to provide timely notice of
a proposal to be presented at the 1999 Annual Meeting, the proxies designated by
the Board of Directors of the Company will have discretionary authority to vote
on any such proposal.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(A) EXHIBITS

The Exhibits listed in the Exhibit Index immediately preceding such
Exhibits are filed as part of or are included in this Quarterly Report on Form
10-Q.

20
<PAGE> 21

(B) REPORTS ON FORM 8-K:

On April 3, 1998, the Company filed a Current Report on Form 8-K, dated
April 2, 1998, announcing under Item 5 (Other Events) that results for the first
quarter of 1998 would fall short of the Company's operating plan. No financial
statements were required to be filed with such report.

On April 22, 1998, the Company filed a Current Report on Form 8-K, dated
April 2, 1998, announcing under Item 5 (Other Events) the Company's financial
results for the first quarter of 1998. No financial statements were required to
be filed with such report.

On May 22, 1998, the Company filed a Current Report on Form 8-K, dated May
20, 1998, filing under Item 5 (Other Events) the Company's Selected Consolidated
Financial Data, Management's Discussion and Analysis of Financial Condition and
Results of Operations and Consolidated Financial Statements as of December 31,
1996 and 1997 and for the years ended December 31, 1995, 1996 and 1997, each
restated for the IDI Acquisition, which was accounted for as a pooling of
interests.

21
<PAGE> 22

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

SECURITY DYNAMICS TECHNOLOGIES, INC.

/s/ MARIAN G. O'LEARY

---------------------------------------
Marian G. O'Leary
Senior Vice President,
Finance, Chief Financial Officer and
Treasurer
(Principal Financial and Accounting
Officer)

Dated: August 13, 1998

22
<PAGE> 23

EXHIBIT INDEX

<TABLE>
<CAPTION>
ITEM DESCRIPTION
- ---- -----------
<S> <C>
*10.1 Fourth Amendment to Progress Software Application Partner
Agreement, dated as of April 1, 1998, between the Registrant
and Progress Software Corporation.
11 Computation of Income Per Common and Common Equivalent
Share.
27 Financial Data Schedule.
</TABLE>

- ---------------
* Confidential treatment requested as to certain portions, which portions have
been omitted and filed separately with the Securities and Exchange Commission.

<PAGE> 1
EXHIBIT 10.1

Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

FOURTH AMENDMENT TO PROGRESS
SOFTWARE APPLICATION PARTNER AGREEMENT

FOURTH AMENDMENT to the Progress Software Corporation Application
Partner Agreement is effective as of April 1, 1998 ("Effective Date"), by and
between Progress Software Corporation, a Massachusetts corporation with its
principal place of business at 14 Oak Park, Bedford, Massachusetts 01730 ("PSC")
and Security Dynamics Inc., a Massachusetts corporation with its principal place
of business at 20 Crosby Drive, Bedford, Massachusetts 01730 ("AP").

WHEREAS, PSC and AP entered into a Progress Software Application
Partner Agreement effective as of December 5, 1994 (the "Agreement"); and

WHEREAS, PSC and AP previously amended the Agreement by entering into
the Progress Software Application Partner Agreement Addendum effective as of
December 5, 1994 (the "Addendum") and a subsequent amendment to the Agreement
dated as of October 19, 1995 (the "Amendment");

WHEREAS, PSC and AP entered into a Second Amendment to the Agreement
dated as of November 29, 1995 (the "Second Amendment") which completely
superseded the terms and conditions of the earlier Addendum and Amendment and
specified new special pricing and distribution terms and conditions in an
Attachment A relating to certain PSC products distributed by AP or AP's
distributors in conjunction with AP's PROGRESS(R)-based applications; and

WHEREAS, PSC and AP entered into a Third Amendment to the Agreement
dated as of November 15, 1996 (the "Third Amendment") specifying certain
additional modifications to the terms and conditions of the Agreement and
replacing the Attachment A incorporated by reference into the Second Amendment
with a new Attachment A including modified special pricing and distribution
terms and conditions relating to certain PSC products distributed by AP or AP's
distributors in conjunction with AP's PROGRESS(R)-based applications;

WHEREAS, PSC and AP desire to make additional modifications to the
terms and conditions of the Agreement and to the special pricing and
distribution terms and conditions set forth in Attachment A to the Third
Amendment;

NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the parties hereto agree as follows:

1. The terms and conditions of Attachment A to the Third Amendment
(hereinafter referred to as "Attachment A") shall continue in force
during the term of this Fourth Amendment subject to the following:

A. The purpose of Section 1 of Attachment A is to specify the PSC
products which AP has the right to distribute to accomplish
the AP customer configuration for AP's PROGRESS-based
application. The

<PAGE> 2
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

identification of the PSC products included in the AP customer
configuration was omitted from Section 1 of Attachment A.

AP represents that the PSC products AP has been deploying as
part of the AP customer configuration for AP's PROGRESS-based
application during the term of the Third Amendment consists of
the following PSC products: ProVISION, E/SQL, Enterprise
Database Server, Server Networking, Client Networking, or
subset thereof. During the term of this Fourth Amendment, the
PSC products which AP may deploy as part of the AP customer
configuration will continue to be limited to the PSC products
referenced above.

As part of PSC's development project code named "Sky Walker,"
PSC is developing a new version of the Enterprise Database
Server product. Section 1 of Attachment A specifies that AP
will be entitled to receive updates of the PSC products
included in the AP customer configuration as they become
available. The new version of the Enterprise Database Server,
once generally available, will be considered an "update" for
the purposes of Section 1 of Attachment A. If AP offers to
upgrade existing ACE Server application licenses by offering
to replace the Enterprise Database Server product with the new
version (once generally available), or otherwise offers to
upgrade the ACE Server application, and charges its AP
customers an upgrade fee for such upgrades, the upgrade fees
will be subject to the percentage royalty provisions set forth
in Sections 3 and 4 of Attachment A, as modified by paragraphs
(F) and (G) below, respectively.

B. During the term of this Fourth Amendment, the special pricing,
production, and distribution terms and conditions set forth in
Attachment A shall apply solely with respect to the PSC
products listed in paragraph (A) above distributed only in
conjunction with AP's ACE Server application or any future
releases of the ACE Server application known by any other name
which contain substantially the same functionality as the ACE
Server application.

C. Section 7 of Attachment A provided that PSC would grant AP a
development license, as defined therein, for the SINIX
operating system platform subject to a license fee of [**],
and a maintenance fee of [**] of such license fee. AP did not
purchase such development license for the SINIX operating
system platform during the term of the Third Amendment. PSC no
longer supports the development license on the SINIX operating
system platform, therefore, this option will no longer be
available to AP during the term of the Fourth Amendment.

-2-

<PAGE> 3
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

D. Exhibit A to Attachment A specifies the generally available
operating system environments for the PSC products identified
in paragraph (A) above. The PSC products specified in
paragraph (A) above are no longer supported on the SINIX
operating system platform. The SINIX operating system shall be
deemed to be stricken from said Exhibit A.

E. The price list for AP's ACE Server application as set forth in
Section 2 of Attachment A has been updated by AP. A copy of
the current price list in effect as of January 1, 1998 is
attached hereto. All prices in the price list attached hereto
are in U.S. dollars. Section 2 of Attachment A also refers to
an Exhibit B containing AP's discount schedule for the ACE
Server application. AP has eliminated the discount schedule
set forth in said Exhibit B, and no longer has a standard
discount schedule for the ACE Server application. AP shall
notify PSC in writing of any changes made by AP to the ACE
Server price list and/or any new discount schedule(s)
established by AP from time to time during the term of this
Fourth Amendment.

F. Section 3 of Attachment A specifies the method for calculating
the license fee owed to PSC for each ACE Server license
deployed with certain PSC products, as described in paragraph
(A) above. The formula for calculating PSC's license fee shall
remain the same as set forth in Section 3 of Attachment A,
except that the royalty rate of [**] referenced in the first
paragraph of Section 3 of Attachment A shall be reduced to
[**]. Also, the royalty rate increase referenced at the end of
Section 3 of Attachment A as being an increase from [**] to
[**] shall be modified to reflect an increase from [**] to
[**]. The effective date of the license royalty rate reduction
described above shall be subject to the terms and conditions
set forth in paragraph (I) below.

G. Section 4 of Attachment A specifies the method for calculating
the maintenance fees due to PSC for each AP customer obtaining
a license to use PSC products in conjunction with AP's ACE
Server application, as well as certain terms and conditions
pertaining to the scope of maintenance services to be provided
by PSC in consideration of such maintenance fees. The terms
and conditions of Section 4 of Attachment A shall remain the
same except that the maintenance royalty rate of [**]
referenced in Section 4 of Attachment A shall be reduced to
[**]. The effective date of the maintenance royalty rate
reduction described above shall be subject to the terms and
conditions set forth in paragraph (I) below.

-3-

<PAGE> 4
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

H. Section 5 of Attachment A specifies AP's reporting
requirements. The terms and conditions contained in said
Section 5 shall remain the same except that AP shall be
required to provide PSC with the required reports on a monthly
basis rather than a quarterly basis. The reports for each
month will be due by the thirtieth (30th) day of the following
month and shall cover copies of the ACE Server application
licensed, upgraded and/or maintenance collected directly by AP
or one of its authorized distributors or value-added resellers
during the month which is the subject of the report. Payment
in full for license and maintenance fees owed to PSC for the
prior month is due with these reports.

I. In accordance with Section 12 of Attachment A, AP paid to PSC
a non-refundable advance payment of $3.75 million. In exchange
for such payment, PSC provided AP with a $3.75 million
allowance to be used against license and initial maintenance
fees for deployment licenses incurred on or after the
effective date of Attachment A. Pursuant to said Section 12,
once AP completely used the $3.75 million allowance, the
royalty percentage rate used to calculate the deployment
license fees owed to PSC pursuant to Section 3 of Attachment A
was to increase from [**] to [**].

The above-mentioned royalty increase shall not occur upon
exhaustion of the $3.75 million allowance. AP shall pay to PSC
another nonrefundable advance payment in the amount of $6
million in accordance with the following payment schedule:

$1,650,000 due by May 31, 1998
$1,650,000 due by June 30, 1998
$1,700,000 due by July 31, 1998
$1,000,000 due by November 1, 1998

In exchange for such payment, PSC will provide AP with a $6
million allowance against license and maintenance fees for
deployment licenses subject to the following conditions:

(i) If AP has a remaining balance of the $3.75 million
allowance as of the Effective Date of this Fourth
Amendment, then the license royalty rate of [**] and
the maintenance royalty rate of [**] originally
referenced in Sections 3 and 4 of Attachment A
respectively shall remain in effect until the $3.75
million allowance is completely exhausted.
Immediately thereafter, the $6 million allowance
shall be used to offset license and maintenance fees
for deployment licenses and the license royalty rate
referenced in Section 3 of Attachment A shall, in
accordance with paragraph (F) above, be reduced from
[**]

-4-

<PAGE> 5
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

[**] to [**] and the maintenance royalty rate
referenced in Section 4 of Attachment A shall, in
accordance with paragraph (G) above, be reduced from
[**] to [**].

(ii) If AP exhausted the $3.75 million allowance prior to
the Effective Date of this Fourth Amendment, PSC
shall, rather than invoicing AP for any excess
license and maintenance fees, reduce AP's $6 million
allowance by the amount of such fees. Notwithstanding
the foregoing, any license and maintenance fees owed
to PSC for copies of the ACE Server application
licensed or upgraded, or for maintenance collected,
prior to the Effective Date of this Fourth Amendment
shall be calculated using the license royalty rate of
[**] and the maintenance royalty rate of [**]
originally referenced in Sections 3 and 4 of
Attachment A, respectively. If AP exhausted the $3.75
million allowance as described in this subparagraph
(ii), then, as of the Effective Date of this Fourth
Amendment, the license royalty rate referenced in
Section 3 of Attachment A shall, in accordance with
paragraph (F) above, be reduced from [**] to [**] and
the maintenance royalty rate referenced in Section 4
of Attachment A shall, in accordance with paragraph
(G) above, be reduced from [**] to [**].

Once AP has completely used all of the $6 million allowance
mentioned above, the royalty percentage rate used to calculate
the deployment license fees owed to PSC under Section 3 of
Attachment A shall be increased from [**] to [**] for the
remainder of the term of this Fourth Amendment.

J. The provision set forth in Section 14 of Attachment A allowing
AP to use up to [**] of the pre-paid product/maintenance
allowance for paying the education service fees described in
said Section 14 shall not apply with respect to the prepayment
described in paragraph (I) above.

2. The terms and conditions pertaining to the limit on PSC's liability
under the Agreement shall remain the same as specified in Section 4 of
the Third Amendment, except that the cap on PSC's aggregate liability
under the Agreement shall be increased such that the limit is the
greater of (a) [**] or (b) the total amount of royalties reported by AP
to PSC for PSC products delivered to AP customers during the ninety day
period immediately prior to the date the claim is made by AP.

-5-

<PAGE> 6
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.

3. The terms and conditions pertaining to the limit on AP's liability
under the Agreement shall remain the same as specified in the second
paragraph of Section 6 of the Second Amendment, except that the cap on
AP's aggregate liability under the Agreement shall be increased such
that the limit is the lesser of (a) the sum of the aggregate amounts
paid by AP under this Agreement and any outstanding amounts owed by AP
to PSC under this Agreement or (b) [**].

4. The term of this Fourth Amendment shall commence as of the Effective
Date defined above, and shall continue in force until the expiration
date as specified in Section 6 of the Third Amendment.

5. Except as may be modified or amended by this Fourth Amendment, the
terms and conditions of the Agreement (as previously amended by the
Third and Second Amendments thereto) shall remain in effect until the
termination of the Agreement. No other modifications or additions are
made to the Agreement. The Agreement, Second Amendment, Third Amendment
and this Fourth Amendment constitutes the entire agreement between the
parties with respect to the subject matter hereof. In the event of
conflict among the terms and conditions of the Agreement, the Second
Amendment, the Third Amendment or this Fourth Amendment, the order of
precedence shall be: first, this Fourth Amendment, second, the Third
Amendment, third, the Second Amendment (which completely superseded the
earlier Addendum and Amendment) and fourth and finally, the Agreement.

IN WITNESS WHEREOF, this Fourth Amendment has been executed under seal
for and on behalf of each of the parties hereto by their duly authorized
representative as of the date first set forth above.

PROGRESS SOFTWARE CORPORATION SECURITY DYNAMICS, INC.

By: /s/ DAVID P. VESTY By: /s/ A.W. COVIELLO JR.
----------------- ---------------------
Name: David P. Vesty Name: A.W. Coviello Jr.

Title: Vice President Title: COO

-6-

<PAGE> 1
EXHIBIT 11

SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
COMPUTATION OF INCOME PER COMMON AND COMMON EQUIVALENT SHARE
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
1998 1997 1998 1997
------- -------- ------- -------
<S> <C> <C> <C> <C>
Basic earnings per share (1):
Net income per common share $ 0.26 $ 0.15 $ 0.33 $ 0.28
======= ======= ======= =======
Weighted average number of
share outstanding 40,907 38,656 40,815 38,425
======= ======= ======= =======

Diluted earnings per share (1):
Net income per common share $ 0.25 $ 0.15 $ 0.32 $ 0.27
======= ======= ======= =======

Shares:
Weighted average number of
shares outstanding 40,907 38,656 40,815 38,425
Effect of dilutive options 968 1,655 1,186 1,661
------- -------- -------- --------
Adjusted weighted average number
of shares outstanding 41,875 40,311 42,001 40,086
======= ======== ======== ========
</TABLE>

(1) Results for all periods prior to March 26, 1998 and July 15, 1997,
respectively, have been restated for the acquisitions of Intrusion
Detection Inc. and DynaSoft AB, respectively, which acquisitions
have been accounted for as pooling of interests.

<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 29,003
<SECURITIES> 129,319
<RECEIVABLES> 29,961
<ALLOWANCES> 705
<INVENTORY> 7,981
<CURRENT-ASSETS> 203,639
<PP&E> 23,114
<DEPRECIATION> 11,585
<TOTAL-ASSETS> 248,002
<CURRENT-LIABILITIES> 28,181
<BONDS> 0
0
0
<COMMON> 409
<OTHER-SE> 215,821
<TOTAL-LIABILITY-AND-EQUITY> 216,230
<SALES> 83,618
<TOTAL-REVENUES> 83,618
<CGS> 20,509
<TOTAL-COSTS> 73,271
<OTHER-EXPENSES> 2,600<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 23,042
<INCOME-TAX> 9,863
<INCOME-CONTINUING> 13,637
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,637
<EPS-PRIMARY> .33
<EPS-DILUTED> .32

<FN>
<F1>Other expenses refers to expenses incurred in conjuction
with the acquisition and integration of Intrusion Detection Inc.
</FN>

</TABLE>