SECURITY DYNAMICS TECHNOLOGIES INC /DE/, 10-Q, 1999-08-16

SECURITY DYNAMICS TECHNOLOGIES INC /DE/
10-Q, 1999-08-16
COMPUTER PERIPHERAL EQUIPMENT, NEC

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<PAGE> 1

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

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, 1999

[ ] 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)

DELAWARE 04-2916506
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

36 CROSBY DRIVE
BEDFORD, MA 01730
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (781) 301-5000

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

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, 1999, there were 38,864,440 shares of the Registrant's
Common Stock, $.01 par value per share, outstanding.

================================================================================
<PAGE> 2
SECURITY DYNAMICS TECHNOLOGIES, INC.
FORM 10-Q
FOR THE SIX MONTHS ENDED JUNE 30, 1999

TABLE OF CONTENTS

PAGE
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1999
and December 31, 1998 ...................................... 3
Condensed Consolidated Statements of Income for the three
and six months ended June 30, 1999 and 1998 ................ 4
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1999 and 1998 .................... 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 ....................................................... 23

PART II OTHER INFORMATION
Item 1. Legal Proceedings ............................................ 24
Item 4. Submission of Matters to a vote of Security Holders .......... 24
Item 6. Exhibits and Reports on Form 8-K ............................. 25
Signature ............................................................ 26
</TABLE>

2
<PAGE> 3

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

JUNE 30, DECEMBER 31,
1999 1998
--------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 82,561 $ 33,178
Marketable securities......................................................... 159,508 125,058
Accounts receivable (less allowance for doubtful
accounts of $747 in 1999 and $710 in 1998)................................... 36,840 36,712
Inventory..................................................................... 4,420 7,025
Prepaid expenses and other.................................................... 7,685 10,596
Prepaid income taxes.......................................................... -- 3,930
--------- ---------
Total current assets..................................................... 291,014 216,499
--------- ---------
Property and equipment, net........................................................ 31,720 29,568
--------- ---------
Other assets:
Investments................................................................... 21,179 14,248
Deferred taxes................................................................ 19,852 19,285
Other......................................................................... 1,489 1,255
--------- ---------
Total other assets....................................................... 42,520 34,788
--------- ---------
Total.............................................................................. $ 365,254 $ 280,855
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 4,448 $ 8,169
Accrued payroll and related benefits.......................................... 11,081 9,695
Accrued expenses and other.................................................... 7,049 4,659
Income taxes payable.......................................................... 32,339 --
Deferred taxes................................................................ 1,878 2,120
Deferred revenue.............................................................. 13,410 10,971
--------- ---------
Total current liabilities................................................ 70,205 35,614
--------- ---------
Minority interests............................................................ 2,584 2,521
--------- ---------
Commitments and contingencies:
Stockholders' equity:
Common stock, $.01 par value; authorized 150,000,000 shares in 1999 and
80,000,000 shares in 1998; issued, 42,180,613 shares in 1999 and
41,534,359 shares in 1998; outstanding, 38,795,104 shares in 1999
and 40,475,850 shares in 1998 ............................................... 422 415
Additional paid-in capital.................................................... 199,857 191,185
Retained earnings............................................................. 148,287 64,302
Deferred stock compensation................................................... (68) (74)
Treasury stock, common, at cost, 3,385,509 shares in
1999 and 1,058,509 shares in 1998............................................ (54,644) (12,135)
Accumulated other comprehensive loss.......................................... (1,389) (973)
--------- ---------
Total stockholders' equity............................................... 292,465 242,720
--------- ---------
Total.............................................................................. $ 365,254 $ 280,855
========= =========
</TABLE>

See notes to condensed consolidated financial statements.

<PAGE> 4

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

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- ------------------------
1999 1998 1999 1998
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Revenue ........................................... $ 51,809 $ 43,372 $ 100,481 $ 83,618
Cost of revenue ................................... 10,382 11,893 21,820 20,509
-------- -------- --------- --------
Gross profit ...................................... 41,427 31,479 78,661 63,109
-------- -------- --------- --------
Costs and expenses:
Research and development ..................... 9,150 7,525 17,378 14,848
Marketing and selling ........................ 19,243 14,774 37,186 28,254
General and administrative ................... 6,181 4,941 12,114 9,660
Merger and integration ....................... -- -- -- 2,600
Exit costs ................................... -- -- 6,550 --
-------- -------- --------- --------
Total ................................... 34,574 27,240 73,228 55,362
-------- -------- --------- --------

Income from operations ............................ 6,853 4,239 5,433 7,747
Interest income and other ......................... 1,905 2,082 3,948 4,492
Gain on sale of VeriSign common stock ............. 54,802 -- 129,291 --
Gain from increase in investment value ............ 12,576 11,976 12,576 11,976
Equity in loss from operations of equity investment (167) (1,173) (525) (1,173)
-------- -------- --------- --------
Income before provision for income taxes .......... 75,969 17,124 150,723 23,042
Provision for income taxes ........................ 32,844 6,661 66,676 9,863
Minority interests ................................ (130) 210 (63) 458
-------- -------- --------- --------
Net income ........................................ $ 42,995 $ 10,673 $ 83,984 $ 13,637
======== ======== ========= ========
Basic earnings per share:
Per share amount ............................. $ 1.11 $ 0.26 $ 2.14 $ 0.33
======== ======== ========= ========

Weighted average shares ...................... 38,789 40,907 39,254 40,815
======== ======== ========= ========
Diluted earnings per share:
Per share amount ............................. $ 1.05 $ 0.25 $ 2.03 $ 0.32
======== ======== ========= ========

Weighted average shares ...................... 38,789 40,907 39,254 40,815
Effect of dilutive options ................... 1,967 968 2,175 1,186
-------- -------- --------- --------
Adjusted weighted average shares .................. 40,756 41,875 41,429 42,001
======== ======== ========= ========
</TABLE>

See notes to condensed consolidated financial statements.

<PAGE> 5

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

SIX MONTHS ENDED
JUNE 30,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income ......................................... $ 83,984 $ 13,637
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain from sale of VeriSign common stock .......... (129,291) --
Gain from increase in investment value ........... (12,576) (11,976)
Equity in loss from operations of equity
investment ...................................... 524 1,173
Deferred taxes ................................... (825) 4,685
Depreciation and amortization .................... 4,502 2,841
Stock compensation ............................... 564 597
License write off ................................ -- 3,000
Minority interests ............................... 63 (458)
Increase (decrease) in cash from changes in:
Accounts receivable ........................... (1,372) (2,405)
Inventory ..................................... 2,606 (4,947)
Prepaid expenses and other .................... 2,876 (272)
Accounts payable .............................. (3,718) (2,941)
Accrued payroll and related benefits .......... 2,124 332
Accrued expenses and other .................... 2,404 64
Prepaid and income taxes payable .............. 35,820 4,351
Deferred revenue .............................. 3,264 (1,334)
--------- ---------
Net cash provided by operating activities ... (9,051) 6,347
--------- ---------
Cash flows from investing activities:
Purchases of marketable securities ................. (253,517) (140,993)
Proceeds from sale and maturities of marketable
securities ........................................ 353,337 79,651
Purchases of property and equipment ................ (6,648) (8,389)
Proceeds from sale of VeriSign common stock ........ -- --
Investments ........................................ (219) (5,971)
--------- ---------
Net cash provided by (used for) investing
activities ............................... 92,953 (75,702)
--------- ---------
Cash flows from financing activities:
Proceeds from exercise of stock options and purchase
plans ............................................. 7,847 2,298
Share repurchase program ........................... (42,509) --
--------- ---------
Net cash provided by (used for) financing
activities ............................... (34,662) 2,298
--------- ---------
Effects of exchange rate changes on cash and cash
equivalents ........................................... 143 (535)
--------- ---------
Net increase (decrease) in cash and cash equivalents .. 49,383 (67,592)
Cash and cash equivalents, beginning of period .......... 33,178 96,595
--------- ---------
Cash and cash equivalents, end of period ................ $ 82,561 $ 29,003
========= =========
</TABLE>

See notes to condensed consolidated financial statements.

5
<PAGE> 6

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, 1998.

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 a 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.

The Company's principal markets for its products are, in order of
significance, the United States, Europe, Canada, Asia/Pacific and Latin America.

2. EARNINGS PER COMMON SHARE

The Company computes earnings per share in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 128 "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 $29,507 and $29,532 for
the three and six months ended June 30, 1999, respectively, and $551 and $678
for the three and six months ended June 30, 1998, respectively.

4. CONTINGENCIES

On or about December 11, 1998, a purported class action was filed in the
United States District Court for the District of Massachusetts on behalf of all
purchasers of the Company's Common Stock during the period from and including
September 30, 1997 through July 15, 1998: Fitzer v. Security Dynamics
Technologies, Inc., Charles R. Stuckey, Jr., D. James Bidzos, Arthur W.
Coviello, Jr., John Adams, Marian G. O'Leary and Linda B. Saris, Civil Action
No. 98-CV-12496-WGY. The plaintiff subsequently dismissed without prejudice the
claims against Ms. Saris. The plaintiff filed an amended complaint on May 4,
1999. The amended complaint in the action asserts that the defendants misled the
investing public concerning demand for the Company's products, the strengths of
its technologies, and certain trends in the Company's business. Plaintiffs seek
unspecified damages, interest, costs and fees of their attorneys, accountants
and experts. On July 30, 1999, the Company served its Motion to Dismiss the
amended complaint on the plaintiff. The Company intends to defend the lawsuit
vigorously. Although the amounts claimed may be substantial, the Company cannot
predict the ultimate outcome or estimate the potential loss, if any, related to
the lawsuit. The Company believes that the disposition of this matter will not
have a material adverse effect on the Company's consolidated financial position.
However, the adverse resolution of the lawsuit could materially affect the
Company's results of operations or liquidity in any one annual or quarterly
reporting period.

<PAGE> 7

by refusing to release certain assignments of patents. The Company believes that
Mr. Weiss' claims are without merit, and intends to defend the matter
vigorously. On July 26, 1999, the Company filed, with the American Arbitration
Association, an answering statement and counterclaim to Mr. Weiss' demand.

5. INVESTMENTS

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 but
increased the value of the Company's equity in VeriSign.

As a result of VeriSign's initial public offering, and in accordance with
the equity method of accounting, the Company recognized as a gain the increase
in the amount of its investment in VeriSign of $12.0 million, representing its
proportionate share of VeriSign's equity as of December 31, 1997, after
considering VeriSign's net proceeds from the offering. During 1998, the Company
sold 895,500 shares of its VeriSign common stock for a gain of $31.3 million. In
January 1999, VeriSign completed a secondary offering of 3.2 million shares of
its common stock, including the sale of 1.0 million shares held by the Company.
The Company realized a gain of $74.5 million on the sale in January 1999.

In the second quarter of 1999, the Company recognized, as a gain, the
increase in the amount of its investment in VeriSign of $12.6 million,
representing its proportionate share of VeriSign's net increase in equity from
this offering. In addition, the Company sold 510,000 shares of common stock for
a gain of $54.8 million during the second quarter of 1999. As of June 30, 1999,
the Company owned approximately 4.2 million shares of VeriSign common stock, an
approximate ownership percentage of 8%, with a market value of approximately
$362 million. The Company recognizes its proportionate interest in VeriSign's
operating results one quarter in arrears. The Company's proportionate share of
VeriSign's 1999 first quarter net loss was $167. On July 22, 1999, VeriSign
announced it had incurred a net loss of $2 million for the six months ended June
30,1999 and at June 30, 1999 had total assets, liabilities and equity of $197
million, $32 million and $164 million respectively. A director of the Company
serves as Chairman of the Board of VeriSign.

In June 1999, the Company's ownership percentage in VeriSign decreased below
10%. Beginning July 1, 1999, the Company will classify its VeriSign investment
as an available for sale marketable security.

6. EXIT COSTS

During the first quarter of 1999, the Company commenced and substantially
completed consolidation of certain operations in order to promote operational
efficiency. The Company incurred costs of $6,550 which consisted of severance
costs of $3,800, facility exit costs of $2,000 and legal and other direct costs
of completing the consolidation plan of $750. The consolidation involved the
termination of 36 employees, as well as placing for sublet, for the remainder of
the lease terms, excess facilities in Bedford, Massachusetts, New York, New
York, and San Mateo, California. The Company vacated the excess facilities in
San Mateo, California and New York, New York during the first quarter of 1999
and plans to vacate the excess facility in Bedford, Massachusetts in September
1999. The Company has engaged real estate brokers to seek sublease tenants for
the vacated facilities. An initial sublease agreement has been entered for the
San Mateo facility. Facility exit costs consist primarily of estimated
shortfalls of sublease rental income compared to minimum lease payments due
under the lease agreements. Costs of approximately $2,300 were accrued and
unpaid at June 30, 1999 and consisted of facility exit costs of $2,000 and
termination benefits of $300, payable through the first quarter of 2000.

The Company anticipates that it may incur additional costs in connection
with severance.

7
<PAGE> 8

7. COMPREHENSIVE INCOME

The Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive
Income" effective January 1, 1998. For the three and six months ended June 30,
1999 and 1998, comprehensive income was:

THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
--------------------- -----------------------
1999 1998 1999 1998
------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income .................................. $42,995 $ 10,673 $ 83,984 $ 13,637
Other comprehensive income, net of tax:
period ................................ 84 14 (135) (87)

Foreign currency translation adjustments (24) (270) (281) (443)
------- -------- -------- --------
Comprehensive income ........................ $43,055 $ 10,417 $ 83,568 $ 13,107
======= ======== ======== ========
</TABLE>

Accumulated other comprehensive income consists of the following:

UNREALIZED
FOREIGN HOLDING ACCUMULATED
CURRENCY (LOSS) OTHER
TRANSLATION GAIN ON COMPREHENSIVE
ADJUSTMENTS SECURITIES INCOME
----------- ---------- ------------

<S> <C> <C> <C>
Balance, December 31, 1998...................... $ (1,175) $ 202 $ (973)
Period change................................... (257) (219) (476)
-------- ------ -------
Balance, March 31, 1999......................... $ (1,432) $ (17) $(1,449)
======== ====== =======
Period change................................... (24) 84 60
-------- ------ -------
Balance, June 30, 1999.......................... $ (1,456) $ 67 $(1,389)
======== ====== =======
</TABLE>

Unrealized holding gains (losses) were $140 and ($225) for the three and
six months ended June 30, 1999, respectively, and $27 and ($143) for the three
and six months ended June 30, 1998, respectively. Unrealized holding gains
(losses) net of related tax benefits were $84 and ($135) for the three and six
months ended June 30, 1999 and $14 and ($87) for the three and six months ended
June 30, 1998, respectively.

8. STOCKHOLDERS' EQUITY

Common Stock

On January 27, 1999, the Board of Directors adopted, and on May 5, 1999 the
stockholders approved, an amendment to the Company's Third Restated Certificate
of Incorporation to increase the number of authorized shares of Common Stock
available for issuance from 80,000,000 to 150,000,000 shares.

1994 Stock Option Plan

On January 27, 1999, the Board of Directors adopted, and on May 5, 1999 the
stockholders approved, amendments to the Company's 1994 Stock Option Plan, as
amended (the "1998 Restatement"), which, among other things, increased the
aggregate number of shares of Common Stock authorized for issuance thereunder
from 9,570,000 to 11,570,000 shares.

1994 Director Stock Option Plan

On January 27, 1999, the Board of Directors adopted, and on May 5, 1999 the
stockholders approved, an amendment to the Company's 1994 Director Stock Option
Plan increasing the number of shares of Common Stock authorized for issuance
thereunder from 300,000 to 500,000 shares.

8
<PAGE> 9

Share Repurchase Program

On October 12, 1998, the Company announced that its Board of Directors had
authorized the Company to repurchase up to four million shares of its Common
Stock during the 12-month period ending October 11, 1999. The timing and amount
of shares repurchased will be determined by the Company's management based on
its evaluation of market and economic conditions. Repurchased shares will be
used for the Company's stock option plans, employee stock purchase plan and
other stock benefit plans, and for general corporate purposes. As of June 30,
1999, the Company had repurchased 3,385,000 shares of its Common Stock, for an
aggregate purchase price of $54,644.

Employee Stock Purchase Plan

On July 2, 1999, the Board of Directors adopted, and on July 30, 1999 the
stockholders approved, an amendment to the Company's 1994 Employee Stock
Purchase Plan, as amended (the "Purchase Plan"), which, among other things,
increased the aggregate number of shares of Common Stock authorized for issuance
thereunder from 400,000 to 1,000,000 shares.

Stockholders Rights Plan

On July 20, 1999 the Company announced that its Board of Directors had
adopted a Stockholder Rights Plan in which common stock purchase rights will be
distributed as a dividend at the rate of one Right for each share of the
Company's Common Stock outstanding as of the close of business on July 30, 1999.

Each Right will entitle Company stockholders to purchase one share of Common
Stock of the Company at a purchase price of $125.00. The Rights will be
exercisable if another party acquires, or obtains the right to acquire,
beneficial ownership of 15% or more of the Company's Common Stock, or upon the
commencement of a tender or exchange offer that, if consummated, would result in
another party acquiring 15% or more of the Company's Common Stock.

In the event of such an acquisition or similar event as described in the
Rights Plan, each Right, except those owned by the acquiring party, will enable
the holder of the Right to purchase that number of shares of the Company's
Common Stock which equals the purchase price of the Right divided by one-half of
the market price of such Common Stock.

In addition, if the Company is involved in a merger or other transaction
with another company in which it is not the surviving corporation, or it sells
or transfers 50% or more of its assets or earning power to another company, each
Right will entitle its holder to purchase that number of shares of common stock
of the acquiring company which equals the purchase price of such company's
common stock. The Company will generally be entitled to redeem the Rights at
$0.001 per Right at any time until the tenth business day following the later of
a public announcement that an acquiring party has acquired, or obtained the
right to acquire 15% or more of the Company's Common Stock or the actual
knowledge by an executive officer of the Company of such acquisition. Unless the
Rights are redeemed or exchanged earlier, they will expire on July 20, 2009.

9. SEGMENTS

The following is presented in accordance with SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." This statement
establishes new standards for defining and disclosing information about a
company's business segments and requires a company to define its segments along
its internal structure and reporting methodology. The Company has identified
only one distinct and reportable segment that meets the criteria established
under SFAS No. 131: Enterprise network and data security solutions. The segment
generates revenue from two distinct product lines: Enterprise solutions (which
includes sales of SecurID(R) tokens, licensing of ACE/Server(R) software,
Keon(TM) (formerly known as BoKS)software, Kane Security Analyst(TM) and Kane
Security Monitor(TM)(R) software, RSA SecurPC(R) software and maintenance and
professional services) and OEM solutions (which includes licensing of BSAFE(R)
cryptography toolkits and protocol products, TIPEM and S/MIME products, KEON(TM)
components, and maintenance and professional services). The Company's chief
operating decision makers (determined to be the Chief Executive Officer and the
President) and the Board of Directors do not manage any part of the Company
separately, and the allocation of resources and assessment of performance is
based solely on the Company's consolidated operations and operating results.

9
<PAGE> 10

The Company's operations are conducted throughout the world. Operations in
the United States represent individually more than 10% of revenues or income
from operations. The Company's operations in other countries are individually
insignificant and have been included in "Rest of world" below. The following
table presents information about the Company's operating segments:

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
PRODUCTS AND SERVICES 1999 1998 1999 1998
--------------------- ------- ------- -------- -------
<S> <C> <C> <C> <C>
Enterprise solutions.................................... $39,674 $33,211 $ 75,891 $65,195
OEM solutions........................................... 12,135 10,161 24,590 18,423
------- ------- -------- -------
Total.............................................. $51,809 $43,372 $100,481 $83,618
======= ======= ======== =======
</TABLE>

GEOGRAPHIC AREAS

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
REVENUES 1999 1998 1999 1998
-------- ------- ------- -------- -------
<S> <C> <C> <C> <C>
United States........................................... $36,186 $32,672 $ 69,921 $62,518
Rest of world........................................... 15,623 10,700 30,560 21,100
======= ======= ======== =======
Total.............................................. $51,809 $43,372 $100,481 $83,618
======= ======= ======== =======
</TABLE>

10
<PAGE> 11

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE, PER SHARE, PERCENTAGE AND SQUARE
FOOTAGE 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 Company is a leading provider of enterprise network and data security
solutions to corporate end users ("Enterprise") and original equipment
manufacturer ("OEM") customers. The Company was founded in 1984, began shipping
its SecurID(R) 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.

The Company's revenue is derived primarily from two distinct product lines:
Enterprise solutions (which includes sales of SecurID(R) tokens, licensing of
ACE/Server(TM) software, Keon (formerly known as BoKS) software, Kane Security
Analyst(TM) and Kane Security Monitor(TM) software, RSA SecurPC(R) software and
maintenance and professional services) and OEM solutions (which includes
licensing of BSAFE cryptography toolkits and protocol products, TIPEM, S/MIME
products, KEON components, and maintenance and professional services). Sales to
existing customers typically 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 Keon 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, Keon,
Kane Security Analyst and Kane Security Monitor software license fees 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 and protocol 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
emphasis by the Company on sales to customers with larger security needs better
met by client/server software solutions such as ACE/Sever 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
Condensed Consolidated Financial Statements. The Company's sales through
indirect distribution channels are generally denominated in U.S. dollars.

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 in connection with the sale of ACE/Server
software and KEON 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, changes in the cost of revenue (including any software license fees
or royalties payable by the Company) and other factors.

11
<PAGE> 12

Operating expenses are incurred for research and development, marketing and
selling and general and administrative activities. Research and development
expenses consist primarily of personnel expenses 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 personnel expenses, commissions and travel
expenses of direct sales and marketing personnel and marketing program expenses.
General and administrative expenses consist primarily of personnel expenses 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.

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, 1999 and 1998.

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,
---------------------------------- -------------------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Revenue......................................... 100.0% 100.0% 19.5% 100.0% 100.0% 20.2%
Cost of revenue................................. 20.0 27.4 (12.7) 21.7 24.5 6.4
----- ----- ------ ----- ----- ------
Gross profit.................................... 80.0 72.6 31.6 78.3 75.5 24.6
----- ----- ------ ----- ----- ------
Costs and expenses:
Research and development...................... 17.7 17.3 21.6 17.3 17.8 17.0
Marketing and selling......................... 37.1 34.1 30.2 37.0 33.7 31.6
General and administrative.................... 11.9 11.4 25.1 12.1 11.6 25.4
Merger and integration........................ -- -- -- -- 3.1 (100.0)
Exit costs.................................... -- -- -- 6.5 -- 100.0
----- ----- ------ ----- ----- ------
Total................................. 66.7 62.8 26.9 72.9 66.2 32.3
----- ----- ------ ----- ----- ------
Income (loss) from operations................... 13.3 9.8 61.7 5.4 9.3 (29.9)
Interest income and other....................... 3.7 4.8 (8.5) 3.9 5.4 (12.1)
Gain on sale of VeriSign common stock........... 105.8 -- 100.0 128.7 -- 100.0
Gain from increase in market value of equity
investment .................................... 24.3 27.6 5.0 12.5 14.3 5.0
Equity in loss from operations of equity
investment..................................... (.3) (2.7) (85.8) (.5) (1.4) (55.2)
------ ----- ------ ------ ----- ------
Income before provision for income taxes........ 146.8 39.5 343.6 150.0 27.6 554.1
Provision for income taxes...................... 63.4 15.4 393.1 66.4 11.8 576.0
Minority interests.............................. (.3) 5 (161.9) (.1) .5 (113.8)
----- ----- ------ ------ ----- ------
Net income...................................... 83.1% 24.6% 302.8% 83.5% 16.3% 515.2%
===== ===== ====== ====== ===== ======
</TABLE>

REVENUE

Total revenue increased 19.5% in the second quarter of 1999 to $51,809 from
$43,372 in the second quarter of 1998. Total revenue increased 20.2% in the
first six months of 1999 to $100,481 from $83,618 in the first six months of
1998. Approximately 77% and 63%, of the increase in revenue during the second
quarter and first six months of 1999, respectively, was attributable to
increased sales from the Enterprise product line, primarily SecurID tokens and
AceServer software. The remaining increase in revenue during the second quarter
and the first six months of 1999 was primarily attributable to increased sales
from the OEM product line, primarily licensing of BSAFE cryptography products.

International revenue (outside of the United States) increased 46.0% in the
second quarter of 1999 to $15,623 from $10,700 in the second quarter of 1998 and
increased 44.8% in the first six months of 1998 to $30,560 from $21,100 in the
first six months of 1998. International revenue accounted for 30.2% and 24.7% of
total revenue in the second quarters of 1999 and 1998, respectively, and 30.4%
and 25.2% of total revenue in the first six months of 1999 and 1998,
respectively. The increase in international revenue was primarily attributable
to the continuing expansion of the Company's international sales force and
increased market penetration of the Company's products in foreign markets.

12
<PAGE> 13

COST OF REVENUE AND GROSS PROFIT

The Company's gross profit increased 31.6% in the second quarter of 1999 to
$41,427 from $31,479 in the second quarter of 1998 and increased 24.6% in the
first six months of 1999 to $78,661 from $63,109 in the first six months of
1998. Gross profit as a percentage of revenue increased in the second quarter
and the first six months of 1999 to 80.0% and 78.3% of revenues, respectively,
compared to 72.6% and 75.5% of revenues for the second quarter and first six
months of 1998, respectively. The percentage increase in the second quarter and
first six months of 1999 was due primarily to increased revenue with lower
material costs in the Enterprise product line. In addition, the Company
wrote-off, in the second quarter of 1998, a prepaid license fee of $3,000 under
a license agreement with a third party.

RESEARCH AND DEVELOPMENT

Research and development expenses increased 21.6% in the second quarter of
1999 to $9,150 from $7,525 in the second quarter of 1998, and increased 17.0% in
the first six months of 1999 to $17,378 from $14,848 in the first six months of
1998. The majority of the increase in research and development expenses resulted
from increased payroll and overhead expenses associated with the employment of
additional staff. During the first six months of 1998, the Company purchased and
recorded as purchased research and development certain technology from a third
party for $210.

MARKETING AND SELLING

Marketing and selling expenses increased 30.2% in the second quarter of 1999
to $19,243 from $14,774 in the second quarter of 1998, and increased 31.6% in
the first six months of 1999 to $37,186 from $28,254 in the first six months of
1998. Marketing and selling expenses increased as a percentage of revenue to
37.1% and 37.0% in the second quarter and first six months of 1999,
respectively, from 34.1% and 33.7%, in the second quarter and first six months
of 1998, respectively. Approximately 63% and 55% of the increase in marketing
and selling expenses during the second quarter and the first six months of 1999,
respectively, were attributable to increased payroll costs associated with the
employment of additional staff. Approximately 26% and 33% of the increase in
marketing and selling expenses during the second quarter and the first six
months of 1999, respectively, were attributable to increased sales commission
due to increased revenue. The remainder of the increase during the second
quarter and the first six months of 1999 resulted primarily from increased
marketing program expenses.

GENERAL AND ADMINISTRATIVE

General and administrative expenses increased 25.1% in the second quarter of
1999 to $6,181 from $4,941 in the second quarter of 1998, and increased 25.4% in
the first six months of 1999 to $12,114 from $9,660 in the first six months of
1998. General and administrative expenses increased as a percentage of revenue
to 11.9% and 12.1% in the second quarter and the first six months of 1999,
respectively from 11.4% and 11.6% in the second quarter and first six months of
1998, respectively. Approximately 47% and 37% of the increase in general and
administration expenses during the second quarter and the first six months of
1999, respectively were primarily due to an increase in professional fees.
Approximately 28% and 21% of the increase in general and administration expenses
during the second quarter and the first six months of 1999, respectively,
resulted from increased payroll and overhead costs. The remainder of the
increase during the second quarter and the first six months of 1999 were
primarily due to an increase in legal expenses associated with patent
infringement lawsuits.

MERGER AND INTEGRATION EXPENSE

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

13
<PAGE> 14

EXIT COSTS

During the first six months of 1999, the Company commenced and substantially
completed consolidation of certain operations in order to promote operational
efficiency. In the first quarter of 1999, the Company incurred costs, primarily
severance and facility exit costs, of $6,550 in connection with this effort
costs of approximately $2,300 were accrued and unpaid at June 30, 1999 and
consisted of facility exit costs of $2,000 and termination benefits of $300,
payable through the first quarter of 2000.

The Company anticipates that it may incur additional costs in connection
with severance.

INTEREST INCOME AND OTHER

Interest income and other decreased 8.5% and 12.1% in the second quarter and
the first six months of 1999, respectively to $1,905 and $3,948 from $2,082 and
$4,492 in the second quarter and the first six months of 1998, respectively. The
decrease in interest income and other was primarily due to movement of a portion
of the Company's marketable securities portfolio from taxable investments to tax
exempt obligations.

GAIN ON SALE OF VERISIGN COMMON STOCK

During the second quarter of 1999, the Company sold 510,000 shares of its
VeriSign common stock for a gain of $54,802. The Company sold 1,510,000 shares
of its VeriSign common stock for a gain of $129,291 during the first six months
of 1999. See Note 5 of Notes to Condensed Consolidated Financial Statements.

GAIN FROM INCREASE IN MARKET VALUE OF EQUITY INVESTMENT

The Company recorded a gain of $12,576 and $11,976 resulting from the
write-up under the equity method of its investment in VeriSign during the second
quarter of 1999 and the second quarter of 1998, respectively.

EQUITY IN LOSS FROM OPERATIONS OF EQUITY INVESTMENT

The Company recorded a loss from its proportionate share of VeriSign's
operating results of $167 and $525 in the second quarter and the first six
months of 1999, respectively, from $1,173 in the second quarter and first six
months of 1998.

PROVISION FOR INCOME TAXES

The provision for income taxes increased to $32,844 and $66,676, during the
second quarter and the first six months of 1999, respectively from $6,661 and
$9,863 in the second quarter and the first six months of 1998, respectively,
primarily due to higher income subject to taxation. The Company's effective tax
rates were 43.2% and 44.2% for the second quarter and the first six months of
1999, respectively compared to 38.9% and 42.8% for the second quarter and the
first six months of 1998. The effective tax rate for the second quarter of 1999
decreased compared to the effective tax rate for the second quarter of 1998
primarily due to benefits resulting from the Company's investment strategies
which include the migration of the marketable securities portfolio from taxable
investments to tax exempt obligations. In addition, the Company's tax rate for
the first six months of 1998 also reflected non-deductible expenses associated
with the acquisition of IDI.

MINORITY INTERESTS

A 26% interest of the Company's RSA Japan subsidiary is held by minority
interest shareholders. Minority interests in the subsidiary's net income was
$130 and $63 during the second quarter and the first six months of 1999,
respectively and minority interests in the subsidiary's net loss was $210 and
$458 in the second quarter and the first six months of 1998, respectively.

NET INCOME

As a result of the above factors, net income in the second quarter and the
first six months of 1999 increased to $42,995 and $83,984, respectively, or
83.1% and 83.5% of revenue, respectively, from $10,673 and $13,637,
respectively, or 24.6% and 16.3% of revenue, respectively, in the second quarter
and first six months of 1998.

14
<PAGE> 15

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

At June 30, 1999, the Company had cash, cash equivalents and marketable
securities of $242,069 and working capital of $220,809. The Company has
historically funded its operations primarily from cash generated from its
operating activities. The Company believes that working capital will be
sufficient to meet its anticipated cash requirements through at least 2001.

Mergers and Acquisitions

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.

Capital Expenditures

The Company's capital expenditures during the first six months of 1999 were
$6,297, which related to additional leasehold improvements, as well as the
purchase of office furniture and equipment, 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 a
management information system, which is designed to better meet the Company's
worldwide information and business process needs. The system, which is
represented by the manufacturer to be Year 2000 compliant, became operational in
October 1998. See "Year 2000 Issues". The Company incurred costs of
approximately $5,300 in connection with the implementation of the system, of
which $500 was spent in the first six months of 1999. The Company does not
anticipate any additional spending of significant amounts on the system, for the
remainder of 1999.

Leasing Expenditures

The Company's principal administrative, sales and marketing, research and
development and support facilities are located in Bedford, Massachusetts under
non-cancelable ten-year leases expiring in August 2008. The facilities aggregate
approximately 183,000 square feet of office space, and the annual base rents
aggregate approximately $3,000, including certain operating expenses. The
Company also leases facilities for research and development and sales and
marketing in San Mateo, California under non-cancelable ten-year leases expiring
in 2008. The facilities aggregate approximately 58,000 square feet of office
space, and the annual base rents aggregate approximately $2,000 including
certain operating expenses. Annual rent escalation provisions for all of theses
leases are based on the Consumer Price Index. The Company also leases facilities
for administration, field sales and customer support throughout the United
States, Canada, Asia, Japan and Europe at annual base rents aggregating
approximately $1,400.

In connection with the consolidation of certain operations that commenced in
January 1999, the Company sublet approximately 10,000 square feet of its San
Mateo, California facility and is actively seeking to sublet approximately
40,000 square feet of facilities at various locations including Bedford,
Massachusetts. The successful sublet of all of these facilities will reduce the
Company's annual rental payment obligations by approximately $100 per month.

15
<PAGE> 16

Certain Agreements

The Company has an 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 and Keon software. The agreement has
been amended several times. In order to obtain favorable pricing, the Company
has, from time to time, prepaid Progress Software royalties due under the
agreement. In 1998, the Company prepaid an aggregate of $6,000 in three
installments. The prepaid royalty is recorded as a component of cost of sales as
the related products are sold. Un-amortized prepaid royalties were $3,300 at
June 30, 1999.

During September 1998, the Company entered into Employment Agreements with
substantially all of the Company's management team, including most of the
Company's executive officers. The Board of Directors determined that such
Employment Agreements were necessary to effectively incent and retain key
management team members in a competitive employment marketplace. The Employment
Agreements generally provide for minimum annual salaries aggregating $1,900 and,
among other things, that during the period commencing on September 1, 1998 and
ending on March 1, 2000, the Company may terminate the employee only for
nonperformance of his or her duties, or for cause, subject to criteria and
definitions set forth therein.

In December 1998, the Company amended its Development Agreement with
VeriSign (the "Amendment") to appoint the Company the exclusive distributor of
VeriSign's certificate authority software. The Amendment provides, among other
things, that each year during the first five years following the date of the
Amendment, the Company may elect to retain its exclusive status, subject to
payment by the Company of certain prepaid license fees each year during that
five-year period. In addition to $500 paid at the execution of the agreement,
prepaid license fees are due in minimum quarterly installments and aggregate
$1,100 in 1999, of which $522 was paid in the first six months of 1999, $2,300
in 2000, $3,000 in 2001, $4,000 in 2002, and $4,000 in 2003.

Equity Investments

VeriSign

Sales of Common Stock

The Company generated $6,910 of cash from employees exercising stock options
and employee stock purchase plan purchases during the first six months of 1999.

16
<PAGE> 17

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 such holder's
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 canceled in exchange therefore; (ii) has
an exercise price of $12.062525 (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.

Share Repurchase Program

17
<PAGE> 18

Stockholders' Rights Plan

18
<PAGE> 19

YEAR 2000 ISSUES

Overview

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
must 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.

State of Readiness

Company Products

The Company has implemented a testing program designed to ensure that its
products continue to operate after December 31, 1999. The testing program has
been completed for the most recent versions of all of the Company's software
products, and substantially completed with respect to the Company's hardware
products.

In measuring Year 2000 readiness, the Company has applied the following
specifications: "Year 2000 Ready" means that: (1) no value for current date will
cause any interruption in operation; (2) date-based functionality must be
consistent for dates prior to, during and after Year 2000; (3) in all interfaces
and data storage, the century in any date must be specified either explicitly or
by unambiguous algorithms or inferencing rules; and (4) Year 2000 must be
recognized as a leap year.

The Company's SecurID Tokens are Year 2000 Ready. Assuming that a customer
is utilizing the Company's software products in conjunction with a Year 2000
Ready operating system, then the Company's most recent software releases,
ACE/Server v3.3, Kane Security Analyst v4.5, Kane Security Monitor v3.2, Keon
Security Server v4, Keon Desktop v4, Keon Agents v4, Keon Agent SDK, Keon UNIX
Platform Security v4, (Keon software products were formerly known as BoKS), KEON
Certificate Server V5.0, SoftID, RSA SecurPC, BSAFE-Crypto-C, BSAFECrypto-J,
BSAFE Cert-C, BSAFE SSL-C and BSAFE SSL-J, are Year 2000 Ready. The Company's
ACE/Sentry hardware products are Year 2000 Ready. Certain prior versions of the
Company's software products, as well as the Company's ACM 100, 400 and 1600
hardware products, are not fully Year 2000 Ready, and customers have been
informed of the status of the Company's products in the ordinary course of
business. In certain circumstances, the Company may make available to customers
who have implemented prior releases of the Company's software products software
patches to make the products Year 2000 Ready.

While the Company has created and implemented what it believes to be an
effective Year 2000 Readiness testing program for its products, the Company's
products may contain undetected errors or defects associated with Year 2000 date
functions. Such errors or defects in the Company's products could result in
delay or loss of revenue and diversion of development resources, which might
materially adversely affect the Company's business, financial condition or
results of operations.

Company Systems

The Company has established a Year 2000 task force to determine the state of
readiness of all Company information technology ("IT") and non-IT systems,
including the microprocessors contained in infrastructure products, such as
card-swipe entry devices, which are used at the Company's facilities. The task
force consists of employees with expertise in areas the Company believes could
be affected if any system is not Year 2000 Ready. The task force has 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 Ready, and (ii) replace non-Year 2000 Ready
third-party equipment and software with Year 2000 Ready equipment and software.

The Year 2000 compliance plan is divided into the following phases: (1) the
Inventory Phase, in which the Company identifies all products and systems which
are created or used by the Company in the course of its operations; (2) the
Analysis Phase, in which the Company determines what, if any, Year 2000
Readiness issues may exist with respect to any product or system; (3) the
Solution Development Phase, in which the Company designs and/or obtains from
third-party vendors methods to correct any Year 2000 Readiness issues which were
identified in the prior phase; and (4) the Implementation Phase, in which the
Company deploys solutions for the identified problems.

The Company's Year 2000 task force has substantially completed the
Inventory, Analysis, Solution Development and Implementation phases for all of
the Company's IT and non-IT systems. The task force has identified certain
remaining projects to be completed in the Implementation Phase and the Company
expects those tasks to be substantially completed by October 30, 1999.

19
<PAGE> 20

The Year 2000 task force has identified certain IT systems licensed by the
Company's Customer Support and Engineering groups that must be upgraded in order
to make the systems Year 2000 Ready. In each case, the Company has purchased
maintenance and support from those application vendors, and has received or
expects to receive upgrades from the vendors at no additional cost. With respect
to certain other business applications and systems licensed by the Company from
third parties (including but not limited to the Company's PBX and the Company's
management information system installed in 1998), the Company is relying on
those licensors' written representations that the applications are Year 2000
Ready.

Costs to Address Year 2000 Issues

The Company has incurred and anticipates that it will continue to incur
direct costs to modify or replace existing systems used by the Company in the
operation of its business to ensure that all systems will become Year 2000
Ready. Except for the implementation of the worldwide management information
system described above, the Company believes that total amounts spent by it to
date and which it expects to spend during the remainder of 1999 addressing this
issue are not material. See "Capital Expenditures."

In addition, the Company has spent substantial time and effort testing and
evaluating its own products to determine Year 2000 Readiness of those products.
In the case of prior product releases which are not Year 2000 Ready, the Company
expects to devote internal engineering and customer support resources to
resolving issues for existing customers of those products. This effort may
result in a longer development cycle for new Company products.

Risks to the Company

In the event of a failure of some or all of the Company's IT and non-IT
systems on January 1, 2000, the Company's operations may be substantially
curtailed until the Company or its third-party suppliers develop a solution to
address each system's failure. In such event, the Company might be unable to:
(a) produce SecurID tokens, (b) track development of Company software products,
(c) book orders for products, (d) access customer support records, (e) operate
its Internet site, (f) receive email, or (g) prepare its financial statements
for fourth quarter 1999 or periods thereafter.

In addition, the Company has made representations and warranties, both in
contracts and in written communications, to certain of its customers regarding
the Year 2000 Readiness of its products. The Company has reviewed all of those
representations to determine the accuracy of those statements, given the ongoing
Year 2000 testing of the Company's products. The Company has determined that it
made Year 2000 Readiness representations in fewer than 10% of its customer
contracts; many of those customers have requested, and received, Year 2000 Ready
versions of the Company products.

In the event that any contractual representation made by the Company
regarding Year 2000 Readiness is not accurate, the Company will seek to upgrade
the affected customer to the Company's current, Year 2000 Ready, version of the
product(s) being used by that customer. In the event any affected customer
chooses not to upgrade to the most recent versions of the Company's products,
the Company will seek to amend the affected license agreement to address the
error. In the event that the Company: (i) has made a materially inaccurate
statement regarding Year 2000 Readiness of its products, and (ii) is not able to
amend the contract to address the error, the Company may face the risk of one or
more lawsuits from its customers alleging breach of representation.

Contingency Plans

As described above, the Company has identified potential vulnerabilities
associated with the change of the century, both in its own product offerings and
in the systems utilized by the Company in the ordinary course of business. The
Company is devoting resources to resolving the issues inherent in its own
product offerings, as well as working with providers of systems to the Company
to ensure that business is not substantially interrupted as a result of the date
change. However, given the possibility of system failure as a result of the
century change, the Company is currently in the process of formulating one or
more contingency plans. The Company anticipates implementing contingency plans
on or before October 30, 1999.

The foregoing shall be considered a Year 2000 readiness disclosure to the
maximum extent allowed under the Year 2000 Information and Readiness Disclosure
Act.

20
<PAGE> 21

Conversion to Euro

Certain of the common member countries of the European Union have agreed to
adopt a new currency, the euro, as their legal currency. On January 1, 1999, the
countries established fixed conversion rates between their existing currencies
and the euro. The Company's systems are configured to process euro denominated
transactions. The Company does not believe the euro will have a significant
effect on its business, financial position, cash flows or the results of its
operations.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

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 on the success of its Keon(TM) product
line, 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
verifying user identities and establishing information access privileges for
such users in an enterprise. The success of the Keon software 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. 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 materially adverse effect on the
Company's financial condition and results of operations.

Certain components of the Company's products are currently purchased from
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 receivables, tariff
regulations and difficulties in obtaining export licenses.

All of the Company's products are subject to U.S. export control laws and
applicable foreign government import, export, and/or use restrictions. Minimal
U.S. export restrictions apply to all products, whether or not they perform
encryption. Current U.S. export regulations require export licenses, or at least
a one-time technical review, before most encryption products may be exported to
countries other than Canada. The Company believes that 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 requiring government
approvals and the applicable regulatory policies 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.

21
<PAGE> 22

Exports of RSA's encryption products, or third-party products bundled with
RSA encryption technology, are expected to continue to be restricted by the
United States and various foreign governments. Exports of commercial encryption
products are regulated by the Export Administration Regulations of the U.S.
Commerce Department, while exports of encryption products designed or adapted
for military use require export licenses under the International Traffic in Arms
Regulations of the U.S. State Department. Until recently, the U.S. government
generally prohibited exports of encryption products with key lengths of greater
than 40 bits. Under new regulations issued in 1996 and 1998, commercial
encryption products with key lengths of up to 56 bits may be widely exported
after a one-time technical review by the U.S. Commerce Department. "Key
recovery" encryption products which enable authorized law enforcement agencies
to obtain readable text without the knowledge or cooperation of the end-user may
be exported, regardless of key length, after a one-time technical review.
Certain non-recovery products of any key length are eligible for export to
limited classes of end-users in certain countries, following a one-time
technical review and subject to various post-shipment reporting requirements;
eligible recipients include subsidiaries of U.S. companies, banks and financial
institutions, health and medical organizations, and online merchants. Other
non-recovery encryption products may be exported to other countries and
end-users under special Encryption Licensing Agreements or individual export
licenses which may be issued at the discretion of the U.S. Commerce Department.
These regulations may be modified at any time, and there can be no assurance
that RSA will be authorized to export encryption products from the United States
in the 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.

In the fourth quarter of 1998, the Company established a subsidiary in
Australia which developed a protocol-level encryption technology known as "SSL"
without using any export-controlled U.S.-origin encryption technologies or
software and without "technical assistance" from any U.S. persons. Accordingly,
the Company obtained a written opinion from the U.S. Commerce Department that
this technology is not subject to the jurisdiction of the U.S. export laws. The
technology, however, is subject to the export laws of Australia, and the Company
has received a license from the Australian Government to export object code
versions of the SSL technology to specified countries, including the United
States. In order to remain outside of U.S. export control jurisdiction, the
Company has implemented policies and procedures to ensure that U.S. personnel
working for the Company do not inadvertently provide technical assistance to the
Company's Australian subsidiary which is developing future versions of the SSL
technology. However, there can be no assurance that the U.S. government will not
deem the SSL technology to be subject to U.S. export laws in the future, or that
the applicable Australian export restrictions will not be modified in the
future, or that the Company will continue to receive the required Australian
export authorizations.

22
<PAGE> 23

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

The Company does not use derivative financial instruments. The Company
generally places its marketable security investments in high credit quality
instruments, primarily U.S. Government and Federal Agency obligations,
tax-exempt municipal obligations and corporate obligations with contractual
maturities of ten years or less. The Company does not expect any material loss
from its marketable security investments and therefore believes that its
potential interest rate exposure is not material. The Company also makes
strategic equity investments determined by the Board of Directors which are
strategically synergistic to the Company. The Company routinely evaluates the
realizable value of these investments using qualitative and quantitative factors
including discounted cash flow analysis and liquidation value assessments. Based
on these evaluations the Company reduced investments by $3.6 million in December
1998.

The Company invoices customers primarily in U.S. Dollars and in local
currency in those countries in which the Company has branch and subsidiary
operations. The Company is exposed to foreign exchange rate fluctuations from
when customers are invoiced in local currency until collection occurs. The
Company does not enter into foreign currency hedge transactions. Through June
30, 1999, foreign currency fluctuations have not had a material impact on the
Company's financial position or results of operation, and therefore the Company
believes that its potential foreign currency exchange rate exposure is not
material.

The forgoing risk management discussion and the effects thereof are
forward-looking statements. Actual results in the future may differ materially
from these projected results due to actual developments in global financial
markets. The analytical methods used by the Company to assess and mitigate risk
discussed above should not be considered projections of future events or losses.

23
<PAGE> 24

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On or about December 11, 1998, a purported class action was filed in the
United States District Court for the District of Massachusetts on behalf of all
purchasers of the Company's Common Stock during the period from and including
September 30, 1997 through July 15, 1998: Fitzer v. Security Dynamics
Technologies, Inc., Charles R. Stuckey, Jr., D. James Bidzos, Arthur W.
Coviello, Jr., John Adams, Marian G. O'Leary and Linda B. Saris, Civil Action
No. 98-CV-12496-WGY. The plaintiff subsequently dismissed without prejudice the
claims against Ms. Saris. The plaintiff filed an amended complaint on May 4,
1999. The amended complaint in the action asserts that the defendants misled the
investing public concerning demand for the Company's products, the strength of
its technologies, and certain trends in the Company's business. Plaintiffs seek
unspecified damages, interest, costs and fees of their attorneys, accountants
and experts. On July 30, 1999, the Company served its Motion to Dismiss the
Amended Complaint on the plaintiffs. An amended complaint, to which the
defendants will respond, has not yet been filed. The Company intends to defend
the lawsuit vigorously. Although the amounts claimed may be substantial, the
Company cannot predict the ultimate outcome or estimate the potential loss, if
any, related to the lawsuit. The Company believes that the disposition of this
matter will not have a material adverse effect on the Company's consolidated
financial position. However, the adverse resolution of the lawsuit could
materially affect the Company's results of operations or liquidity in any one
annual or quarterly reporting period.

On or about May 20, 1999, Kenneth P. Weiss, the founder and a former
director, officer and employee of the Company, filed a demand for arbitration
alleging that: (a) the Company constructively terminated Mr. Weiss in May 1996
in violation of his Employment Agreement with the Company, and (b) the Company
breached its obligations under Mr. Weiss' Employment Agreement by refusing to
release certain assignments of patents. The Company believes that Mr. Weiss'
claims are without merit, and intends to defend the matter vigorously. On July
26, 1999, the Company filed, with the American Arbitration Association, an
answering statement and counterclaim to Mr. Weiss' demand.

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

At the 1998 Annual Meeting of Stockholders of the Company (the "Annual Meeting")
on April 22, 1999 which was convened and adjourned to May 5, 1999, the following
matters were acted upon by the stockholders of the Company:

1. The election of three Class II Directors for the ensuing three years;

2. The approval of the amendment to the Company's Third Restated Certificate
of Incorporation, as amended, to increase the number of authorized shares
of Common Stock from 80,000,000 to 150,000,000 shares;

3. The approval of the amendment of the Company's 1994 Stock Option Plan, as
amended - 1998 Restatement to (i) increase from 9,570,000 to 11,570,000 the
number of shares of Common Stock authorized thereunder; and (ii) increase
the maximum number of shares of Common Stock that may be issued in any
calendar year to a participant thereunder from 300,000 to 400,000 shares;

4. The approval of the amendment to the Company's 1994 Director Stock Option
Plan, as amended, to increase the number of shares of Common Stock
authorized for issuance thereunder from 300,000 to 500,000 shares; and

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

24
<PAGE> 25

The number of shares of Common Stock issued, outstanding and eligible to
vote as of the record date of March 4, 1999 were 41,508,349. The other directors
of the Company, whose terms of office as directors continued after the Annual
Meeting, are Arthur W. Coviello, Jr., George M. Middlemas, Joseph B. Lassiter,
III, Charles R. Stuckey, Jr. 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:

VOTES VOTES VOTES BROKER
FOR WITHHELD AGAINST ABSTENTIONS NON-VOTES
---------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1. Election of three Class II Directors:
D. James Bidzos.............................. 38,088,042 451,068 N.A. N.A. N.A.
Richard L. Earnest........................... 36,415,534 2,123,576 N.A. N.A. N.A.
Taher Elgamal................................ 37,713,266 825,844 N.A. N.A. N.A.

2. Amendment of the Third Restated
Certificate of Incorporation................... 31,059,501 N.A. 7,340,537 139,072 N.A.

3. Amendment of the 1994 Stock Option Plan,
as amended - 1998 restatement.................. 14,551,526 N.A. 13,245,003 158,905 10,583,676

4. Amendment of the 1994 Director
Stock Option Plan.............................. 15,589,528 N.A. 12,201,868 164,038 10,583,676

5. Ratification of Independent Auditors........... 35,139,229 N.A. 3,267,434 132,447 N.A.

</TABLE>

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.

(b) REPORTS ON FORM 8-K:

The Company filed no Current Reports on Form 8-K during the quarter for
which this report is filed.

25
<PAGE> 26

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/ JOHN F. KENNEDY
----------------------------------------------
John F. Kennedy
Senior Vice President,
Finance, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)

Dated: August 16, 1999

26
<PAGE> 27

EXHIBIT INDEX

ITEM DESCRIPTION
- ----- -----------
3.1 Third Restated Certificate of Incorporation, as amended.
10.1 Sublease Agreement, dated as of April 12, 1999, by and between
the Registrant and netDialog Incorporated
10.2 1994 Stock Option Plan, as amended - 1998 Restatement,
as amended, is incorporated herein by reference to Appendix A
to the Registrant's Preliminary Schedule 14A filed
March 5, 1999 (File No. 000-25120).
10.3 1994 Director Stock Option Plan, as amended.
11 Computation of Income Per Common and Common Equivalent
Share.
27 Financial Data Schedule.

<PAGE> 1

EXHIBIT 3.1

THIRD RESTATED

CERTIFICATE OF INCORPORATION

SECURITY DYNAMICS TECHNOLOGIES, INC.

Security Dynamics Technologies, Inc., a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, does hereby certify as follows:

1. The Corporation filed its original Certificate of Incorporation with
the Secretary of State of Delaware on May 23, 1986. A Second Restated
Certificate of Incorporation was filed with the Secretary of State of the State
of Delaware on September 7, 1988, which Second Restated Certificate of
Incorporation was amended by a Certificate of Amendment of Second Restated
Certificate of Incorporation filed on April 27, 1990, a Second Certificate of
Amendment of Second Restated Certificate of Incorporation filed on September 21,
1990, a Third Certificate of Amendment of Second Restated Certificate of
Incorporation filed on March 19, 1991, a Fourth Certificate of Amendment of
Second Restated Certificate of Incorporation filed on July 13, 1993, a Fifth
Certificate of Amendment of Second Restated Certificate of Incorporation filed
on October 28, 1993, a Sixth Certificate of Amendment of Second Restated
Certificate of Incorporation filed on October 24, 1994, and a Certificate of
Retirement of Stock filed on even date herewith.

2. At a meeting of the Board of Directors of the Corporation, a
resolution was duly adopted, pursuant to Sections 141(f) and 245 of the General
Corporation Law of the State of Delaware, setting forth a Third Restated
Certificate of

<PAGE> 2

Incorporation of the Corporation and declaring said Third Restated Certificate
of Incorporation advisable. The stockholders of the Corporation duly approved
said proposed Third Restated Certificate of Incorporation by written consent in
accordance with Sections 228, 242 and 245 of the General Corporation Law of the
State of Delaware, and written notice of such consent has been given to all
stockholders who have not consented in writing to said restatement. The
resolution setting forth the Third Restated Certificate of Incorporation is as
follows:

RESOLVED: That the Second Restated Certificate of Incorporation of the
Corporation, as amended, be and hereby is amended and restated in
its entirety so that the same shall read as follows:

FIRST. The name of the Corporation is:

Security Dynamics Technologies, Inc.

SECOND. The address of its registered office in the State of Delaware
is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington,
County of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.

THIRD. The nature of the business or purposes to be conducted or
promoted by the Corporation is as follows:

To engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of Delaware.

FOURTH. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is Thirty Million (30,000,000) shares
of Common Stock, $.10 par value per share ("Common Stock").

The following is a statement of the designations and the powers,
privileges and rights, and the qualifications, limitations or restrictions
thereof in respect of the Common Stock.

1. VOTING. The holders of the Common Stock are entitled to one
vote for each share held at all meetings of stockholders. There shall be no
cumulative voting.

<PAGE> 3

The number of authorized shares of Common Stock may be increased or
decreased (but not below the number of shares thereof then outstanding) by the
affirmative vote of the holders of a majority of the stock of the Corporation
entitled to vote, irrespective of the provisions of Section 242(b)(2) of the
General Corporation Law of Delaware.

2. DIVIDENDS. Dividends may be declared and paid on the Common
Stock from funds lawfully available therefor as and when determined by the Board
of Directors.

3. LIQUIDATION. Upon the dissolution or liquidation of the
Corporation, whether voluntary or involuntary, holders of Common Stock will be
entitled to receive all assets of the Corporation available for distribution to
its stockholders.

FIFTH. The Corporation shall have a perpetual existence.

SIXTH. In furtherance of and not in limitation of powers conferred by
statute, it is further provided that the Board of Directors is expressly
authorized to adopt, amend or repeal the By-Laws of the Corporation.

SEVENTH. Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof, or on the
application of any receiver or receivers appointed for this corporation under
the provisions of section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this corporation under the provisions of section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, agree to any compromise or arrangement and to
any promise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of this corporation, as the case
may be, and also on this corporation.

EIGHTH. Except to the extent that the General Corporation Law of the
State of Delaware prohibits the elimination or limitation of liability of
directors for breaches of fiduciary duty, no director of the Corporation shall
be personally liable to the Corporation or its stockholders for monetary damages
for any breach of fiduciary

<PAGE> 4

duty as a director, notwithstanding any provision of law imposing such
liability. No amendment to or repeal of this provision shall apply to or have
any effect on the liability or alleged liability of any director of the
Corporation for or with respect to any acts or omissions of such director
occurring prior to such amendment.

NINTH. 1. ACTION, SUITS AND PROCEEDINGS OTHER THAN BY OR IN THE RIGHT
OF THE CORPORATION. The Corporation shall indemnify each person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation), by
reason of the fact that he is or was, or has agreed to become, a director or
officer of the Corporation, or is or was serving, or has agreed to serve, at the
request of the Corporation, as a director, officer or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan) (all such persons being
referred to hereinafter as an "Indemnitee"), or by reason of any action alleged
to have been taken or omitted in such capacity, against all expenses (including
attorneys' fees) judgment, fines and amounts paid in settlement actually and
reasonably incurred by him or on his behalf in connection with such action, suit
or proceeding and any appeal therefrom, if he acted in good faith and in a
manner he reasonably believed to be in, or not opposed to, the best interests of
the Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction or upon a
plea of NOLO CONTENDERE or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in, or not opposed to, the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful. Notwithstanding
anything to the contrary in this Article, except as set forth in Section 6
below, the Corporation shall not indemnify an Indemnitee seeking indemnification
in connection with a proceeding (or part thereof) initiated by the Indemnitee
unless the initiation thereof was approved by the Board of Directors of the
Corporation.

2. ACTIONS OR SUITS BY OR IN THE RIGHT OF THE CORPORATION. The
Corporation shall indemnify any Indemnitee who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he is or was, or has agreed to become, a director or
officer of the Corporation, or is or was serving, or has agreed to serve, at the
request of the Corporation, as a director, officer or trustee of, or in a
similar capacity with, another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan), or by reason of any
action alleged to have been taken or omitted in such capacity, against all
expenses (including attorneys' fees) and amounts paid in settlement actually and
reasonably incurred by him or on his behalf in connection with such action, suit
or

<PAGE> 5

proceeding and any appeal therefrom, if he acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of the
Corporation, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Court of
Chancery of Delaware shall determine upon application that, despite the
adjudication of such liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
(including attorneys' fees) which the Court of Chancery of Delaware shall deem
proper.

3. INDEMNIFICATION FOR EXPENSES OF SUCCESSFUL PARTY. Notwithstanding
the other provisions of this Article, to the extent that an Indemnitee has been
successful, on the merits or otherwise, in defense of any action, suit or
proceeding referred to in Sections 1 and 2 of this Article, or in defense of any
claim, issue or matter therein, or on appeal from any such action, suit or
proceeding, he shall be indemnified against all expenses (including attorneys'
fees) actually and reasonably incurred by him or on his behalf in connection
therewith. Without limiting the foregoing, if any action, suit or proceeding is
disposed of, on the merits or otherwise (including a disposition without
prejudice), without (i) the disposition being adverse to the Indemnitee, (ii) an
adjudication that the Indemnitee was liable to the Corporation, (iii) a plea of
guilty or NOLO CONTENDERE by the Indemnitee, (iv) an adjudication that the
Indemnitee did not act in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Corporation, and (v) with
respect to any criminal proceeding, an adjudication that the Indemnitee had
reasonable cause to believe his conduct was unlawful, the Indemnitee shall be
considered for the purposes hereof to have been wholly successful with respect
thereto.

4. NOTIFICATION AND DEFENSE OF CLAIM. As a condition precedent to his
right to be indemnified, the Indemnitee must notify the Corporation in writing
as soon as practicable of any action, suit, proceeding or investigation
involving him for which indemnity will or could be sought. With respect to any
action, suit, proceeding or investigation of which the Corporation is so
notified, the Corporation will be entitled to participate therein at its own
expense and/or to assume the defense thereof at its own expense, with legal
counsel reasonably acceptable to the Indemnitee. After notice from the
Corporation to the Indemnitee of its election so to assume such defense, the
Corporation shall not be liable to the Indemnitee for any legal or other
expenses subsequently incurred by the Indemnitee in connection with such claim,
other than as provided below in this Section 4. The Indemnitee shall have the
right to employ his own counsel in connection with such claim, but the fees and
expenses of such counsel incurred after notice from the Corporation of its
assumption of the defense thereof shall be at the expense of the Indemnitee
unless (i) the employment of counsel by the Indemnitee has been authorized by
the Corporation, (ii) counsel to the Indemnitee shall have reasonably concluded
that there may be a conflict of interest or position on any significant issue
between the Corporation and the

<PAGE> 6

Indemnitee in the conduct of the defense of such action or (iii) the Corporation
shall not in fact have employed counsel to assume the defense of such action, in
each of which cases the fees and expenses of counsel for the Indemnitee shall be
at the expense of the Corporation, except as otherwise expressly provided by
this Article. The Corporation shall not be entitled, without the consent of the
Indemnitee, to assume the defense of any claim brought by or in the right of the
Corporation or as to which counsel for the Indemnitee shall have reasonably made
the conclusion provided for in clause (ii) above.

5. ADVANCE OF EXPENSES. Subject to the provisions of Section 6 below,
in the event that the Corporation does not assume the defense pursuant to
Section 4 of this Article of any action, suit, proceeding or investigation of
which the Corporation receives notice under this Article, any expenses
(including attorneys' fees) incurred by an Indemnitee in defending a civil or
criminal action, suit, proceeding or investigation or any appeal therefrom shall
be paid by the Corporation in advance of the final disposition of such matter;
PROVIDED, HOWEVER, that the payment of such expense incurred by an Indemnitee in
advance of the final disposition of such matter shall be made only upon receipt
of an undertaking by or on behalf of the Indemnitee to repay all amounts so
advanced in the event that it shall ultimately be determined that the Indemnitee
is not entitled to be indemnified by the Corporation as authorized in this
Article. Such undertaking shall be accepted without reference to the financial
ability of the Indemnitee to make such repayment.

6. PROCEDURE FOR INDEMNIFICATION. In order to obtain indemnification or
advancement of expenses pursuant to Section 1, 2, 3 or 5 of this Article, the
Indemnitee shall submit to the Corporation a written request, including in such
request such documentation and information as is reasonably available to the
Indemnitee and is reasonably necessary to determine whether and to what extent
the Indemnitee is entitled to indemnification or advancement of expenses. Any
such indemnification or advancement of expenses shall be made promptly, and in
any event within 60 days after receipt by the Corporation of the written request
of the Indemnitee, unless with respect to requests under Section 1, 2 or 5 the
Corporation determines, by clear and convincing evidence, within such 60-day
period that the Indemnitee did not meet the applicable standard of conduct set
forth in Section 1 or 2, as the case may be. Such determination shall be made in
each instance by (a) a majority vote of the directors of the Corporation
consisting of persons who are not at that time parties to the action, suit or
proceeding in question ("disinterested directors"), even though less than
quorum, (b) a majority vote of a quorum of the outstanding shares of stock of
all classes entitled to vote for directors, voting as a single class, which
quorum shall consist of stockholders who are not at that time parties to the
action, suit or proceeding in question, (c) independent legal counsel (who may
be regular legal counsel to the Corporation), or (d) a court of competent
jurisdiction.

<PAGE> 7

7. REMEDIES. The right to indemnification or advances as granted by
this Article shall be enforceable by the Indemnitee in any court of competent
jurisdiction if the Corporation denies such request, in whole or in part, or if
no disposition thereof is made within the 60-day period referred to above in
Section 6. Unless otherwise provided by law, the burden of proving that the
Indemnitee is not entitled to indemnification or advanced of expenses under this
Article shall be on the Corporation. Neither the failure of the Corporation to
have made a determination prior to the commencement of such action that
indemnification is proper in the circumstances because the Indemnitee has met
the applicable standard of conduct, nor an actual determination by the
Corporation pursuant to Section 6 that the Indemnitee has not met such
applicable standard of conduct, shall be a defense to the action or create a
presumption that the Indemnitee has not met the applicable standard of conduct.
The Indemnitee's expenses (including attorneys' fees) incurred in connection
with successfully establishing his right to indemnification, in whole or in
part, in any such proceeding shall also be indemnified by the Corporation.

8. SUBSEQUENT AMENDMENT. No amendment, termination or repeal of this
Article or of the relevant provisions of the General Corporation Law of Delaware
or any other applicable laws shall affect or diminish in any way the rights of
any Indemnitee to indemnification under the provisions hereof with respect to
any action, suit, proceeding or investigation arising out of or relating to any
actions, transactions or facts occurring prior to the final adoption of such
amendment, termination or repeal.

9. OTHER RIGHTS. The indemnification and advancement of expenses
provided by this Article shall not be deemed exclusive of any other rights to
which an Indemnitee seeking indemnification or advancement of expenses may be
entitled under any law (common or statutory), agreement or vote of stockholders
or disinterested directors or otherwise, both as to action in his official
capacity and as to action in any other capacity while holding office for the
Corporation, and shall continue as to an Indemnitee who has ceased to be a
director or officer, and shall inure to the benefit of the estate, heirs,
executors and administrators of the Indemnitee. Nothing contained in this
Article shall be deemed to prohibit, and the Corporation is specifically
authorized to enter into, agreements with officers and directors providing
indemnification rights and procedures different from those set forth in this
Article. In addition, the Corporation may, to the extent authorized from time to
time by its Board of Directors, grant indemnification rights to other employees
or agents of the Corporation or other persons serving the Corporation and such
rights may be equivalent to, or greater or less than, those set forth in this
Article.

10. PARTIAL INDEMNIFICATION. If an Indemnitee is entitled under any
provision of this Article to indemnification by the Corporation for some or a
portion of the expenses (including attorneys' fees), judgments, fines or amounts
paid in

<PAGE> 8

settlement actually and reasonably incurred by him or on his behalf in
connection with any action, suit, proceeding or investigation and any appeal,
therefrom but not, however, for the total amount thereof, the Corporation shall
nevertheless indemnify the Indemnitee for the portion of such expenses
(including attorneys' fees), judgments, fines or amounts paid in settlement to
which the Indemnitee is entitled.

11. INSURANCE. The Corporation may purchase and maintain insurance, at
its expense, to protect itself and any director, officer, employee or agent of
the Corporation or another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan) against any expense,
liability or loss incurred by him in any such capacity, or arising out of his
status as such, whether or not the Corporation would have the power to indemnify
such person against such expense, liability or loss under the General
Corporation law of Delaware.

12. MERGER OR CONSOLIDATION. If the Corporation is merged into or
consolidated with another corporation and the Corporation is not the surviving
corporation, the surviving corporation shall assume the obligations of the
Corporation under this Article with respect to any action, suit, proceeding or
investigation arising out of or relating to any actions, transactions or facts
occurring prior to the date of such merger or consolidation.

13. SAVINGS CLAUSE. If this Article or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each Indemnitee as to any expenses
(including attorneys' fees) judgments, fines and amounts paid in settlement in
connection with any action, suit, proceeding or investigation, whether civil,
criminal or administrative, including an action by or in the right of the
Corporation, to the fullest extent permitted by any applicable portion of this
Article that shall not have been invalidated and to the fullest extent permitted
by applicable law.

14. DEFINITIONS. Terms used herein and defined in Section 145(h) and
Section 145(i) of the General Corporation Law of Delaware shall have the
respective meanings assigned to such terms in such Section 145(h) and Section
145(i).

15. SUBSEQUENT LEGISLATION. If the General Corporation Law of Delaware
is amended after adoption of this Article to expand further the indemnification
permitted to Indemnitees, then the Corporation shall indemnify such persons to
the fullest extent permitted by the General Corporation Law of Delaware, as so
amended.

TENTH. The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Third Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute and this
Third Restated Certificate of Incorporation, and all rights conferred upon
stockholders herein are granted subject to this reservation.

<PAGE> 9

ELEVENTH. This Article is inserted for the management of the business
and for the conduct of the affairs of the Corporation.

1. NUMBER OF DIRECTORS. The number of directors of the Corporation
shall not be less than three. The exact number of directors within the
limitations specified in the preceding sentence shall be fixed from time to time
by, or in the manner provided in, the Corporation's By-Laws.

2. CLASSES OF DIRECTORS. The Board of Directors shall be and is divided
into three classes: Class I, Class II and Class III. No one class shall have
more than one director more than any other class. If a fraction is contained in
the quotient arrived at by dividing the designated number of directors by three,
then, if such fraction is one-third, the extra director shall be a member of
Class I, and if such fraction is two-thirds, one of the extra directors shall be
a member of Class I and one of the extra directors shall be a member of Class
II, unless otherwise provided from time to time by resolution adopted by the
Board of Directors.

3. ELECTION OF DIRECTORS. Elections of directors need not be by written
ballot except as and to the extent provided in the By-Laws of the Corporation.

4. TERMS OF OFFICE. Each director shall serve for a term ending on the
date of the third annual meeting following the annual meeting at which such
director was elected; PROVIDED, that each initial director in Class I shall
serve for a term ending on the date of the annual meeting in 1995; each initial
director in Class II shall serve for a term ending on the date of the annual
meeting in 1996; and each initial director in Class III shall serve for a term
ending on the date of the annual meeting in 1997; and PROVIDED FURTHER, that the
term of each director shall be subject to the election and qualification of his
successor and to his earlier death, resignation or removal.

5. ALLOCATION OF DIRECTORS AMONG CLASSES IN THE EVENT OF INCREASES OR
DECREASES IN THE NUMBER OF DIRECTORS. In the event of any increase or decrease
in the authorized number of directors, (i) each director then serving as such
shall nevertheless continue as a director of the class of which he is a member
and (ii) the newly created or eliminated directorships resulting from such
increase or decrease shall be apportioned by the Board of Directors among the
three classes of directors so as to ensure that no one class has more than one
director more than any other class. To the extent possible, consistent with the
foregoing rule, any newly created directorships shall be added to those classes
whose terms of office are to expire at the latest dates following such
allocation, and any newly eliminated directorships shall be subtracted from
those classes whose terms of offices are to expire at the earliest dates
following such allocation, unless otherwise provided from time to time by
resolution adopted by the Board of Directors.

<PAGE> 10

6. QUORUM; ACTION AT MEETING. A majority of the directors at any time
in office shall constitute a quorum for the transaction of business. In the
event one or more of the directors shall be disqualified to vote at any meeting,
then the required quorum shall be reduced by one for each director so
disqualified, provided that in no case shall less than one-third of the number
of directors fixed pursuant to Section 1 above constitute a quorum. If at any
meeting of the Board of Directors there shall be less than such a quorum, a
majority of those present may adjourn the meeting from time to time. Every act
or decision done or made by a majority of the directors present at a meeting
duly held at which a quorum is present shall be regarded as the act of the Board
of Directors unless a greater number is required by law, by the By-Laws of the
Corporation or by this Third Restated Certificate of Incorporation.

7. REMOVAL. Directors of the Corporation may be removed only for cause
by the affirmative vote of the holders of at least two-thirds of the shares of
the capital stock of the Corporation issued and outstanding and entitled to
vote.

8. VACANCIES. Any vacancy in the Board of Directors, however occurring,
including a vacancy resulting from an enlargement of the board, shall be filled
only by a vote of a majority of the directors then in office, although less than
a quorum, or by a sole remaining director. A director elected to fill a vacancy
shall be elected to hold office until the next election of the class for which
such director shall have been chosen, subject to the election and qualification
of his successor and to his earlier death, resignation or removal.

9. STOCKHOLDER NOMINATIONS AND INTRODUCTION OF BUSINESS, ETC. Advance
notice of stockholder nominations for election of directors and other business
to be brought by stockholders before a meeting of stockholders shall be given in
the manner provided by the By-Laws of the Corporation.

10. AMENDMENTS TO ARTICLE. Notwithstanding any other provisions of law,
this Third Restated Certificate of Incorporation or the By-Laws of the
Corporation, each as amended, and notwithstanding the fact that a lesser
percentage may be specified by law, the affirmative vote of the holders of at
least seventy-five percent (75%) of the shares of capital stock of the
Corporation issued and outstanding and entitled to vote shall be required to
amend or repeal, or to adopt any provision inconsistent with, this Article
ELEVENTH.

TWELFTH. Stockholders of the Corporation may not take any action by
written consent in lieu of a meeting. Notwithstanding any other provisions of
law, the Third Restated Certificate of Incorporation or the By-Laws of the
Corporation, each as amended, and notwithstanding the fact that a lesser
percentage may be specified by law, the affirmative vote of the holders of at
least seventy-five percent (75%) of the shares of capital stock of the
Corporation issued and outstanding and

<PAGE> 11

entitled to vote shall be required to amend or repeal, or to adopt any provision
inconsistent with, this Article TWELFTH.

THIRTEENTH. Special meetings of stockholders may be called at any time
by only the Chairman of the Board of Directors, the Chief Executive Officer (or
if there is no Chief Executive Officer, the President) or the Board of
Directors. Business transacted at any special meeting of stockholders shall be
limited to matters relating to the purpose or purposes stated in the notice of
meeting. Notwithstanding any other provision of law, this Third Restated
Certificate of Incorporation or the By-Laws of the Corporation, each as amended,
and notwithstanding the fact that a lesser percentage may be specified by law,
the affirmative vote of the holders of at least seventy-five percent (75%) of
the shares of capital stock of the Corporation issued and outstanding and
entitled to vote shall be required to amend or repeal, or to adopt any provision
inconsistent with, this Article THIRTEENTH.

IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
affixed hereto and this Third Restated Certificate of Incorporation to be signed
by its President this 21st day of December, 1994.

SECURITY DYNAMICS TECHNOLOGIES, INC.

By: /s/ Charles R. Stuckey, Jr.
--------------------------------
President

<PAGE> 12

CERTIFICATE OF AMENDMENT
OF
THIRD RESTATED CERTIFICATE OF INCORPORATION
OF
SECURITY DYNAMICS TECHNOLOGIES, INC.

Pursuant to Section 242 of the General Corporation Law of the State of
Delaware, Security Dynamics Technologies, Inc., a corporation organized and
existing under the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify:

FIRST: That the Board of Directors of the Corporation, at a meeting
of the Board of Directors held on April 24, 1996, duly adopted resolutions
proposing and declaring advisable the following amendment to the Third Restated
Certificate of Incorporation of the Corporation:

RESOLVED: That the Third Restated Certificate of Incorporation of the
Corporation be amended by deleting the first paragraph of
Article FOURTH in its entirety and inserting the following in
lieu thereof:

"FOURTH. The total number of shares of all classes of
stock which the Corporation shall have authority to issue is
Eighty Million (80,000,000) shares of Common Stock, $.01 par
value per share ("Common Stock")."

SECOND: That the stockholders of the Corporation, at a Special Meeting
of Stockholders held on July 26, 1996, duly approved said proposed Certificate
of Amendment of Third Restated Certificate of Incorporation in accordance with
Section 242 of the General Corporation Law of the State of Delaware.

<PAGE> 13

IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be signed by its President this 31st day of July, 1996.

SECURITY DYNAMICS TECHNOLOGIES, INC.

By: /s/ Charles R. Stuckey, Jr.
--------------------------------
President

<PAGE> 14

CERTIFICATE OF AMENDMENT
OF
THIRD RESTATED CERTIFICATE OF INCORPORATION
OF
SECURITY DYNAMICS TECHNOLOGIES, INC.

FIRST: That the Board of Directors of the Corporation, by written
action in lieu of a meeting dated March 12, 1999 pursuant to Sections 141(f) and
242 of the General Corporation Law of the State of Delaware, duly adopted
resolutions proposing and declaring advisable the following amendment to the
Third Restated Certificate of Incorporation, as amended, of the Corporation:

RESOLVED: That the Third Restated Certificate of Incorporation, as
amended, of the Corporation be amended by deleting the first
paragraph of Article FOURTH in its entirety and inserting the
following in lieu thereof:

"FOURTH. The total number of shares of all classes of
stock which the Corporation shall have authority to issue is One
Hundred Fifty Million (150,000,000) shares of Common Stock, $.01
par value per share ("Common Stock")."

SECOND: That the stockholders of the Corporation, at the Annual
Meeting of Stockholders held on May 5, 1999, duly approved said proposed
Certificate of Amendment of Third Restated Certificate of Incorporation in
accordance with Section 242 of the General Corporation Law of the State of
Delaware.

<PAGE> 15

IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be signed by its Chairman of the Board and Chief Executive Officer
this 5th day of May, 1999.

SECURITY DYNAMICS TECHNOLOGIES, INC.

By: /s/ Marian G. O'Leary
----------------------------------
Marian G. O'Leary
Senior Vice President and
Chief Financial Officer

<PAGE> 1
EXHIBIT 10.1

SUBLEASE AGREEMENT

BETWEEN

SECURITY DYNAMICS TECHNOLOGIES, INC.

AND

NETDIALOG INCORPORATED
APRIL 12, 1999

<PAGE> 2

SUBLEASE AGREEMENT

THIS SUBLEASE AGREEMENT (hereinafter referred to as "Sublease"), entered
into as of April 12, 1999, is made by and between Security Dynamics
Technologies, Inc. (herein called "Sublandlord") and netDialog Incorporated
(herein called "Subtenant"), with reference to the following facts:

A. Pursuant to that certain Lease dated December 19, 1997 (the "Master
Lease"), Peninsula Office Park Associates ("Landlord"), as Landlord, leased to
Sublandlord, as tenant, certain space (the "Master Lease Premises") in the
Building located at 2755 Campus Drive, San Mateo, California 94403 (the
"Building").

B. Subtenant wishes to sublease from Sublandlord, and Sublandlord wishes to
sublease to Subtenant, a portion of the third floor of the Building, as more
particularly shown on the floor plan attached hereto as EXHIBIT A (hereinafter
called the "Subleased Premises").

NOW, THEREFORE, in consideration of the foregoing, and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged by the parties, Sublandlord and Subtenant hereby agree as follows:

1. SUBLEASE. Sublandlord hereby subleases to Subtenant and Subtenant hereby
subleases from Sublandlord for the term, at the rental, and upon all of the
conditions set forth herein, the Subleased Premises.

2. TERM.

2.1 TERM. The term of this Sublease ("Term") shall commence on May 1,
1999 (the "Commencement Date") and end on the date that is 12 months following
the Commencement Date (the "Expiration Date"), unless sooner terminated pursuant
to any provision hereof. In the event that Subtenant is not allowed occupancy of
the Subleased Premises as of May 1, 1999, Subtenant shall have the right to
terminate the Sublease by providing written notice to Sublandlord by May 4,
1999.

2.2 RIGHT OF FIRST NEGOTIATION. At any time following the third month
of the Term, Sublandlord may give written notice to Subtenant if the balance of
the third floor of the Master Lease Premises is available. In the event
Sublandlord provides such notice, Subtenant shall have a one time first right to
negotiate with Sublandlord to lease such space and extend the term of the
Sublease. Any such agreement to lease additional space and extend the term shall
remain in the parties sole discretion; provided, however, if the parties agree
on such terms to extend and lease such additional space, Subtenant shall not be
obligated to pay rent on such additional space until after the 12th month of the
Term for the initial Subleased Premises.

1
<PAGE> 3

3. RENT.

3.1 RENT PAYMENTS. From and after the Commencement Date, Subtenant
shall pay to Sublandlord as Base Rent for the Subleased Premises during the Term
the following sums on or before the first day of each calendar month:

PERIOD BASE RENT
------ ---------
Months 1-9: $35,000 per month
Months 10-12: $40,155.50 per month

If the Term does not end on the last day of a month, the Base Rent and
Additional Rent (hereinafter defined) for that partial month shall be prorated
by multiplying the monthly Base Rent and Additional Rent by a fraction, the
numerator of which is the number of days of the partial month included in the
Term and the denominator of which is the total number of days in the full
calendar month. All Rent (hereinafter defined) shall be payable in lawful money
of the United States, by regular bank check of Subtenant, to Sublandlord at the
address stated herein or to such other persons or at such other places as
Sublandlord may designate in writing. Upon execution of this Sublease, Subtenant
shall pay the rent for the first month of the term in the amount of $35,000.

4. USE AND OCCUPANCY.

4.1 USE. The Subleased Premises shall be used and occupied for general
office use, and for no other purpose.

4.2 COMPLIANCE WITH MASTER LEASE.

(a) Subtenant agrees that it will occupy the Subleased Premises in
accordance with the terms of the Master Lease and will not suffer to be done or
omit to do any act which will result in a violation of or a default under any of
the terms and conditions of the Master Lease, including, without limitation,
surrendering possession of the Subleased Premises to Sublandlord no later than
the expiration or termination date of the Master Lease, or render Sublandlord
liable for any damage, charge or expense thereunder. Subtenant further covenants
and agrees to indemnify Sublandlord against and hold Sublandlord harmless from
any claim, demand, action, proceeding, suit, liability, loss, judgment, expense
(including attorneys fees) and damages of any kind or nature whatsoever arising
out of, by reason of, or resulting from, Subtenant's failure to perform or
observe any of the terms and conditions of the Master Lease (to the extent that
Subtenant is obligated hereby to perform such matters) or this Sublease. Any
other provision in this Sublease to the contrary notwithstanding, Subtenant
shall pay to Sublandlord as Rent hereunder any and all sums which Sublandlord
may be required to pay the Landlord arising out of a request by Subtenant for
additional Building services from Landlord (e.g. charges associated with
after-hour HVAC usage and overstandard electrical charges).

(b) Subtenant agrees that Sublandlord shall not be required to
perform any of the covenants, agreements and/or obligations of Landlord under
the Master Lease and, insofar as any of the covenants, agreements and
obligations of Sublandlord hereunder are required to be performed under the
Master Lease by Landlord thereunder, Subtenant acknowledges and agrees that
Sublandlord shall be entitled to look to Landlord for such performance.
Sublandlord shall not be responsible for any failure or interruption, for any
reason

2
<PAGE> 4

whatsoever, of the services or facilities that may be appurtenant to or
supplied at the Building by Landlord or otherwise, including, without
limitation, heat, air conditioning, ventilation, life-safety, water,
electricity, elevator service and cleaning service, if any; and no failure to
furnish, or interruption of, any such services or facilities shall give rise to
any (i) abatement, diminution or reduction of Subtenant's obligations under this
Sublease, or (ii) liability on the part of Sublandlord. Notwithstanding the
foregoing, Sublandlord shall promptly take such action as may reasonably be
indicated, under the circumstances, to secure such performance upon Subtenant's
request to Sublandlord to do so and shall thereafter diligently prosecute such
performance on the part of Landlord.

5. MASTER LEASE AND SUBLEASE TERMS.

5.1 Subtenant acknowledges that Subtenant has reviewed and is familiar
with all of the terms, agreements, covenants and conditions of the Master Lease.

5.2 This Sublease is and shall be at all times subject and subordinate
to the Master Lease.

5.3 The terms, conditions and respective obligations of Sublandlord
and Subtenant to each other under this Sublease shall be the terms and
conditions of the Master Lease except for those provisions of the Master Lease
which are directly contradicted by this Sublease in which event the terms of the
Sublease document shall control over the Master Lease. Therefore, for the
purposes of this Sublease, wherever in the Master Lease the word "Landlord" is
used it shall be deemed to mean the Sublandlord herein and wherever in the
Master Lease the word "Tenant" is used it shall be deemed to mean the Subtenant
herein. The time limits contained in the Master Lease for the giving of notices,
making of demands or performing of any act, condition or covenant on the part of
the tenant thereunder, or for the exercise by the tenant thereunder of any
right, remedy or option, are changed for the purposes of incorporation herein by
reference by shortening the same in each instance by two days, so that in each
instance Subtenant shall have two days less time to observe or perform hereunder
than Sublandlord has as the tenant under the Master Lease. The time limits
contained in the Master Lease for the giving of notices, making of demands or
performing of any act, condition or covenant on the part of Landlord, or for the
exercise by Landlord of any right, remedy or option, are changed for the
purposes of incorporation herein by reference by adding fifteen (15) days in
each instance, so that in each instance Sublandlord shall have fifteen days more
to observe or perform hereunder than Landlord has under the Master Lease. Any
non-liability, release, indemnity or hold harmless provision in the Master Lease
for the benefit of Landlord that is incorporated herein by reference, shall be
deemed to inure to the benefit of Sublandlord, Landlord, and any other person
intended to be benefitted by said provision, for the purpose of incorporation by
reference in this Sublease. Any right of Landlord under the Master Lease of
access or inspection and any right of Landlord under the Master Lease to do work
in the Master Lease Premises or in the Building and any right of Landlord under
the Master Lease in respect of rules and regulations, which is incorporated
herein by reference, shall be deemed to inure to the benefit of Sublandlord,
Landlord, and any other person intended to be benefitted by said provision, for
the purpose of incorporation by reference in this Sublease.

3
<PAGE> 5

5.4 For the purposes of incorporation herein, the terms of the Master
Lease are subject to the following additional modifications:

(a) In all provisions of the Master Lease (under the terms thereof
and without regard to modifications thereof for purposes of incorporation into
this Sublease) requiring the approval or consent of Landlord, Subtenant shall be
required to obtain the approval or consent of both Sublandlord and Landlord
(subject to the duties assumed hereunder on the part of Sublandlord to obtain or
participate in obtaining consent from Landlord).

(b) In all provisions of the Master Lease requiring Tenant to
submit, exhibit to, supply or provide Landlord with evidence, certificates, or
any other matter or thing, Subtenant shall be required to submit, exhibit to,
supply or provide, as the case may be, the same to both Landlord and
Sublandlord. In any such instance, Sublandlord shall determine in its reasonable
good faith if such evidence, certificate or other matter or thing shall be
satisfactory.

(c) Sublandlord shall have no obligation to restore or rebuild any
portion of the Sublease Premises after any destruction or taking by eminent
domain.

(d) In all provisions of the Master Lease requiring Tenant to
designate Landlord as an additional or named insured on its insurance policy,
Subtenant shall be required to so designate Landlord and Sublandlord on its
insurance policy.

5.5 Notwithstanding the terms of Section 5.3 above, Subtenant shall
have no rights nor obligations under the following parts, Sections and Exhibits
of the Master Lease: 4, 11.2, 14.3, Exhibit B, Exhibit D and Exhibit E.

5.6 During the Term and for all periods subsequent thereto with respect
to obligations which have arisen prior to the termination of this Sublease,
Subtenant agrees to perform and comply with, for the benefit of Sublandlord and
Landlord, the obligations of Sublandlord under the Master Lease which pertains
to the Subleased Premises and/or this Sublease, except for those provisions of
the Master Lease which are directly contradicted by or in contravention of this
Sublease, in which event the terms of this Sublease document shall control over
the Master Lease. Notwithstanding the foregoing, Subtenant's financial
responsibilities hereunder shall be determined wholly by the terms and
conditions of this Sublease, and Subtenant shall not under any circumstances
become liable or responsible for meeting Sublandlord's financial or other
obligations under the Master Lease.

6. TERMINATION OF MASTER LEASE. If for any reason the term of the Master
Lease shall terminate prior to the scheduled Expiration Date, this Sublease
shall thereupon be terminated and Sublandlord shall not be liable to Subtenant
by reason thereof unless (i) Subtenant shall not then be in default hereunder
beyond any applicable notice and cure period and (ii) such termination shall
have been effected because of the breach or default of Sublandlord under the
Master Lease or by reason of the voluntary termination or surrender of the
Master Lease by Sublandlord.

7. INDEMNITY.

7.1 Subtenant shall indemnify, defend and hold harmless Sublandlord
from and against all losses, costs, damages, expenses and liabilities,
including, without limitation, reasonable attorneys' fees and disbursements,
which Sublandlord may incur or pay out (including, without limitation, to the
landlord under the Master Lease) by reason of (i) any

4
<PAGE> 6

accidents, damages or injuries to persons or property occurring in the Subleased
Premises (unless the same shall have been caused by Sublandlord's negligence or
wrongful act or the negligence or wrongful act of the landlord under the Master
Lease), (ii) any breach or default hereunder on Subtenant's part (provided, that
any applicable notice has been given, and any applicable cure period has expired
without cure by Subtenant), (iii) any work done after the date hereof in or to
the Subleased Premises except if done by Sublandlord or the landlord under the
Master Lease, or (iv) any act, omission or negligence on the part of Subtenant
and/or its officers, partners, employees, agents, Clients, invitees, or any
person claiming through or under Subtenant.

7.2 Sublandlord shall not be liable for personal injury or property
damage to Subtenant, its officers, agents, employees, invitees, guests, Clients,
licensees or any other person which takes place in the Sublease Premises, unless
such injury or damage is caused by or results from Sublandlord's negligence,
willful wrongdoing, or breach of the provisions of this Sublease. Any property
of Subtenant kept or stored in the Sublease Premises shall be kept or stored at
the sole risk of Subtenant.

8. CONSENTS.

8.1 Under the Master Lease, Sublandlord must obtain the consent of
Landlord to any subletting. This Sublease shall not be effective unless, on or
before April 22, 1999, Landlord signs and delivers to Sublandlord and Subtenant
a consent to this Sublease thereby giving Landlord's consent to this subletting.
Sublandlord shall use its best efforts to obtain such consent as soon as
possible.

8.2 In the event that Sublandlord defaults under its obligations to be
performed under the Master Lease, Sublandlord agrees to deliver to Subtenant a
copy of any such notice of default. Subtenant shall have the right to cure any
monetary default of Sublandlord described in any notice of default within ten
(10) days after service of such notice of default on Subtenant. If such default
is cured by Subtenant then Sublandlord shall reimburse Subtenant for such
amounts, within ten (10) days after notice and demand therefor from Subtenant to
Sublandlord, together with interest and a late fee at the interest rate and late
fee percentage specified in the Master Lease.

8.3 In any instance when Sublandlord's consent or approval is required
under this Sublease, Sublandlord's refusal to consent to or approve any matter
or thing shall be deemed reasonable if, among other matters, such consent or
approval is required under the provisions of the Master Lease incorporated
herein by reference but has not been obtained from Landlord. Except as otherwise
provided herein, Sublandlord shall not unreasonably withhold, or delay its
consent to or approval of a matter if such consent or approval is required under
the provisions of the Master Lease and Landlord has consented to or approved of
such matter.

9. ATTORNEY'S FEES. If Sublandlord or Subtenant brings an action to enforce
the terms hereof or to declare rights hereunder, the prevailing party shall be
entitled to its reasonable attorney's fees to be paid by the losing party as
fixed by the Court.

10. SUBTENANT'S WORK.

10.1 GENERALLY. Sublandlord shall deliver, and Subtenant shall accept,
possession of the Subleased Premises separately demised from the remainder of
the Master

5
<PAGE> 7

Lease Premises in their "AS IS" condition as the Subleased Premises exists
on the date hereof, for purposes of Subtenant's general contractor
constructing Subtenant's improvements. Provided, however That Sublandlord, at
its sole expense, will (1) secure Subleased Premises with card-key accessed
doors and (2) terminate office network drops at patch panels and telco
connections at punch down blocks in a room of subtenant choosing. Such delivery
shall be no later than ten (10) days after execution hereof and Landlord has
provided its consent thereto, shall be for the purpose of allowing Subtenant to
install fixtures, and construct tenant improvements (but not operate its
business) shall be subject to all of the terms and conditions hereof.
Sublandlord shall have no obligation to furnish, render or supply any work,
labor, services, materials, furniture, fixtures, equipment, decorations or other
items to make the Subleased Premises ready or suitable for Subtenant's
occupancy. In making and executing this Sublease, Subtenant has relied solely on
such investigations, examinations and inspections as Subtenant has chosen to
make or has made and has not relied on any representation or warranty concerning
the Subleased Premises or the Building, except as expressly set forth in this
Sublease. Subtenant acknowledges that Sublandlord has afforded Subtenant the
opportunity for full and complete investigations, examinations and inspections
of the Subleased Premises and the common areas of the Building. Subtenant
acknowledges that it is not authorized to make or do any alterations or
improvements in or to the Subleased Premises except as permitted by the
provisions of this Sublease and the Master Lease and that upon termination of
this Sublease, Subtenant shall deliver the Subleased Premises to Sublandlord in
the same condition as the Subleased Premises were at the commencement of the
Term hereof, reasonable wear and tear excepted, with the exception that any
improvements constructed by Subtenant pursuant to the requisite approvals may
remain and need not be removed or restored, unless required under the Master
Lease.

10.2 CODE-REQUIRED WORK. If the performance of the Subtenant
Improvements within the Subleased Premises "triggers" a requirement for
code-related upgrades to or improvements of the Master Lease Premises or any
common areas, Sublandlord and Subtenant agree that Subtenant shall be
responsible for the additional cost of such code-required upgrade or
improvements.

11. PARKING. During the Term hereof Subtenant, its agents, servants,
employees, Clients, and the agents, servants, and employees of Subtenant's
Clients shall be permitted to use 49% of the parking spaces that are attributed
to the Master Lease Premises.

12. SECURITY DEPOSIT. Concurrently with execution of this Sublease by
Subtenant, Subtenant shall deliver to Sublandlord as security for the faithful
performance of all of its obligations under this Sublease an unconditional and
irrevocable letter of credit ("Letter of Credit") in the amount of $136,500 for
the benefit of Sublandlord and any successor in interest of Sublandlord, issued
by a financial institution acceptable to Sublandlord, and providing for partial
drawings. All costs incurred in obtaining the Letter of Credit shall be borne by
Subtenant. Sublandlord shall be entitled to draw upon the Letter of Credit if an
event of default shall occur under the Sublease, to the extent of the default.
Subtenant shall maintain the Letter of Credit in effect in accordance with the
terms of this paragraph until 30 days after the later of (i) the expiration of
the term of the Sublease, or (ii) vacation of the Premises by Subtenant. If the
stated term of the Letter of Credit would expire prior to such time as Subtenant
is no longer required to maintain the Letter of Credit in effect under the
Sublease, prior to its stated expiration Subtenant shall renew the Letter of
Credit for a period of not less than one year or shall deliver to Sublandlord a
new Letter of Credit in accordance with the terms hereof. If Subtenant fails
either

6
<PAGE> 8

to give Sublandlord satisfactory evidence confirming such renewal of the
Letter of Credit or to deliver a new Letter of Credit to Sublandlord at least 7
days prior to the stated expiration of the Letter of Credit in effect,
Sublandlord shall be entitled to draw down the full amount of the Letter of
Credit prior to the expiration thereof, and the amount so drawn shall be treated
in the manner described in below.

Any cash proceeds drawn under the Letter of Credit and not applied by
Sublandlord as provided in paragraph above plus such additional amount as shall
be necessary to restore the amount so held by Sublandlord to the amount of the
Letter of Credit shall be held by Sublandlord as security for the faithful
performance by Subtenant of all of the provisions of the Sublease to be
performed or observed by Subtenant (the "deposit"). If Subtenant fails to pay
rent or other charges due under the Sublease, or otherwise defaults with respect
to any provision of the Sublease, and does not cure default within the
applicable cure period, Sublandlord may at its sole option apply or retain all
or any portion of the Letter of Credit for the payment of any rent or other
charges in default or the payment of any other sum to which Sublandlord may
become entitled by Subtenant's default, or to compensate Sublandlord for any
loss or damage which Sublandlord may suffer thereby. If Sublandlord so uses or
applies all or any portion of the deposit (including draws under the Letter of
Credit), then within thirty (30) days after demand therefor Subtenant shall
deposit cash with Sublandlord in an amount sufficient to restore the amount
thereof, and Subtenant's failure to do so shall be a material breach of the
Sublease. Sublandlord's application or retention of the deposit shall not
constitute a waiver of Subtenant's default to the extent that the deposit does
not fully compensate Sublandlord for all losses or damages incurred by
Sublandlord in connection with such default and shall not prejudice any other
rights or remedies available to Sublandlord under the Sublease or by law.
Sublandlord shall not be required to keep the deposit separate from its general
accounts. If Subtenant performs all of Subtenant's obligations under the
Sublease, the deposit, or so much thereof as has not theretofore been applied by
Sublandlord, shall be returned, without payment of interest or other increment
for its use, to Subtenant (or, at Sublandlord's option, to the last assignee, if
any, of Subtenant's interest under the Sublease) within thirty (30) days after
the later of (i) expiration of the term of the Sublease, or (ii) vacation of the
Premises by Subtenant. No trust relationship is created herein between
Sublandlord and Subtenant with respect to the deposit.

13. NOTICES: Any notice by either party to the other required, permitted or
provided for herein shall be valid only if in writing and shall be deemed to be
duly given only if (a) delivered personally, or (b) sent by means of Federal
Express, UPS Next Day Air or another reputable express mail delivery service
guaranteeing next day delivery, or (c) sent by United States Certified or
registered mail, return receipt requested, addressed (i) if to Sublandlord, at
the following addresses:

Security Dynamics Technologies, Inc.
20 Crosby Drive
Bedford, MA 01730
Attn: Mr. Richard White

7
<PAGE> 9

and (ii) if the Subtenant, at the following addresses:

netDialog Incorporated
2755 Campus Drive
San Mateo, CA
Attn: Mr. Joe Fantuzzi

or at such other address for either party as that party may designate by notice
to the other. A notice shall be deemed given and effective, if delivered
personally, upon hand delivery thereof (unless such delivery takes place after
hours or on a holiday or weekend, in which event the notice shall be deemed
given on the next succeeding business day), if sent via overnight courier, on
the business day next succeeding delivery to the courier, and if mailed by
United States certified or registered mail, three (3) business days following
such mailing in accordance with this Section.

14. COMPLETE AGREEMENT. There are no representations, warranties,
agreements, arrangements or understandings, oral or written, between the parties
or their representatives relating to the subject matter of this Sublease which
are not fully expressed in this Sublease. This Sublease cannot be changed or
terminated nor may any of its provisions be waived orally or in any manner other
than by a written agreement executed by both parties.

15. INTERPRETATION. Irrespective of the place of execution or performance,
this Sublease shall be governed by and construed in accordance with the laws of
the State of California. If any provision of this Sublease or the application
thereof to any person or circumstance shall, for any reason and to any extent,
be invalid or unenforceable, the remainder of this Sublease and the application
of that provision to other persons or circumstances shall not be affected but
rather shall be enforced to the extent permitted by law. The table of contents,
captions, headings and titles, if any, in this Sublease are solely for
convenience of reference and shall not affect its interpretation. This Sublease
shall be construed without regard to any presumption or other rule requiring
construction against the party causing this Sublease or any part thereof to be
drafted. If any words or phrases in this Sublease shall have been stricken out
or otherwise eliminated, whether or not any other words or phrases have been
added, this Sublease shall be construed as if the words or phrases so stricken
out or otherwise eliminated were never included in this Sublease and no
implication or inference shall be drawn from the fact that said words or phrases
were so stricken out or otherwise eliminated. Each covenant, agreement,
obligation or other provision of this Sublease shall be deemed and construed as
a separate and independent covenant of the party bound by, undertaking or making
same, not dependent on any other provision of this Sublease unless otherwise
expressly provided. All terms and words used in this Sublease, regardless of the
number or gender in which they are used, shall be deemed to include any other
number and any other gender as the context may require. The word "person" as
used in this Sublease shall mean a natural person or persons, a partnership, a
corporation or any other form of business or legal association or entity.

16. COUNTERPARTS. This Sublease may be executed in separate counterparts,
each of which shall constitute an original and all of which together shall
constitute one and the same instrument. This Sublease shall be fully executed
when each party whose signature is required has signed and delivered to each of
the parties at least one counterpart, even though no single counterpart contains
the signatures of all parties hereto.

8
<PAGE> 10

17. SUBLEASING AND ASSIGNMENT. Subtenant shall not sublease, assign, or
transfer its interest in this Sublease (a "Transfer") without Sublandlord's
consent, which shall not be unreasonably withheld, delayed or conditioned.
Sublandlord will use its best efforts to obtain for Subtenant, to the extent
required under the Master Lease, the consent of Landlord to any Transfer. Any
and all profits resulting from a Transfer, after first deducting Subtenant's
reasonable costs, shall be paid to Sublandlord.

18. CONFERENCE/TRAINING ROOMS. Sublandlord, at no additional charge or
cost, shall have the right to the occasional use on a pre-scheduled basis of the
large conference room and the large training room located adjacent to the third
floor lobby.

19. SIGNAGE. Subtenant, at its sole cost and expense, will be allowed to
have building standard signage on the existing ground floor lobby directory, and
will be allowed non-exclusive wall signage in the third floor elevator lobby.

20. DAMAGE AND DESTRUCTION. Notwithstanding anything to the contrary
contained in this Sublease or the Master Lease, in the event that the Premises
are damaged by a fire or other casualty, and Landlord estimates that such damage
will take longer than ninety (90) days from the date of such damage to repair,
Subtenant shall have the right to terminate this Sublease by providing written
notice of such termination within ten (10) days of receipt of such estimate. In
the event Landlord estimates that the repairs shall take less than ninety (90)
days, but fails to complete such repairs within 120 days, Subtenant shall have
the right to terminate this Sublease by providing written notice of such
termination to Sublandlord by such 120th day.

21. BROKERS. The parties warrant and represent to each other than no party
has negotiated or brought about this transaction other than Colliers
International and BT Commercial, whose commission shall be paid by Sublandlord.
Each of Sublandlord and Subtenant shall defend, indemnify and save harmless the
other party from and against any claim which may be asserted against the other
party by any person or entity if the claim (a) is made in connection with this
transaction and (b) arises out of conversations or dealings between the
indemnifying party and any claiming person or entity other than a person or
entity employed by the indemnifying party for this transaction, or (c) results
from a fraud committed or misrepresentation made by the indemnifying party or
any person or entity employed by the indemnifying party. The indemnifying party
shall reimburse the other party for reasonable expenses, losses, costs and
damages (including reasonable attorneys' fees and court costs if the
indemnifying party fails or refuses to defend as herein required) incurred by
the other party in connection with such claims. This Section shall survive the
expiration or earlier termination of this Sublease.

9
<PAGE> 11

IN WITNESS WHEREOF, the parties hereto hereby execute this Sublease as of
the day and year first above written.

SUBLANDLORD: SUBTENANT:
- ------------ ----------

Security Dynamics Technologies, Inc. netDialog Incorporated

By: By:
- ------------------------------------ -------------------------------------

Print Name: Print Name:
- ------------------------------------ -------------------------------------

Title: Title:
- ------------------------------------ -------------------------------------

<PAGE> 1
EXHIBIT 10.1

SECURITY DYNAMICS TECHNOLOGIES, INC.

1994 DIRECTOR STOCK OPTION PLAN

1. PURPOSE.

The purpose of this 1994 Director Stock Option Plan (the "Plan") of
Security Dynamics Technologies, Inc. (the "Company") is to encourage ownership
in the Company by outside directors of the Company whose continued services are
considered essential to the Company's future progress and to provide them with a
further incentive to remain as directors of the Company.

2. ADMINISTRATION.

The Board of Directors shall supervise and administer the Plan. Grants
of stock options under the Plan and the amount and nature of the awards to be
granted shall be automatic in accordance with Section 5. However, all questions
concerning interpretation of the Plan or any options granted under it shall be
resolved by the Board of Directors and such resolution shall be final and
binding upon all persons having an interest in the Plan.

3. PARTICIPATION IN THE PLAN.

Directors of the Company who are not full-time employees of the Company
or any subsidiary of the Company ("outside directors") shall be eligible to
receive options under the Plan.

4. STOCK SUBJECT TO THE PLAN.

(a) The maximum number of shares of the Company's Common Stock,
par value $.01 per share ("Common Stock"), which may be issued under the Plan
shall be 75,000 shares (after giving effect to the Company's one-for-two reverse
stock split effective as of October 24, 1994), subject to adjustment as provided
in Section 7.

(b) If any outstanding option under the Plan for any reason
expires or is terminated without having been exercised in full, the shares
covered by the unexercised portion of such option shall again become available
for issuance pursuant to the Plan.

(c) All options granted under the Plan shall be non-statutory
options not entitled to special tax treatment under Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code").

<PAGE> 2

5. TERMS, CONDITIONS AND FORM OF OPTIONS.

Each option granted under the Plan shall be evidenced by a written
agreement in such form as the Board of Directors shall from time to time
approve, which agreements shall comply with and be subject to the following
terms and conditions:

(a) OPTION GRANT DATES. Options shall automatically be granted to
all eligible outside directors as follows:

(i) each person who is an eligible outside director on the
closing date (the "Closing Date") of the Company's initial public offering of
Common Stock pursuant to an effective registration statement under the
Securities Act of 1933, as amended, shall be granted an option to purchase the
Pro Rata Number of shares of Common Stock calculated pursuant to Section 5(b) on
the Closing Date;

(ii) each person who first becomes an eligible outside
director after the Closing Date shall be granted an option to purchase the Pro
Rata Number of shares of Common Stock calculated pursuant to Section 5(b) on the
date of his or her initial election to the Board of Directors, provided that
such eligible director is elected on a date other than the date of an Annual
Meeting of Stockholders; and

(iii) each eligible outside director shall be granted an
additional option to purchase 3,000 shares of Common Stock on the date of each
Annual Meeting of Stockholders of the Company commencing with the 1995 Annual
Meeting of Stockholders, provided that he or she continues to serve as a
director immediately following such Annual Meeting.

(b) SHARES SUBJECT TO OPTION. Each option described in clauses (i)
and (ii) of Section 5(a) shall be for such number (and if such number is not a
whole number, rounded up to the nearest whole number) of shares of Common Stock
(the "Pro Rata Number"), if any, as is determined by multiplying (x) 3,000 by
(y) the quotient of (A) the number of whole calendar months between the
applicable Option Grant Date and the date of the next Annual Meeting of
Stockholders (which, for purposes of the Plan, shall be assumed to occur in the
month of May) and (B) 12. For example, if an eligible outside director were
first elected on October 15th, he or she would receive an option to purchase
1,500 shares of Common Stock (3,000 x (6 (the number of whole calendar months
between the Option Grant Date and May (i.e., November through April)) / 12)).

(c) OPTION EXERCISE PRICE. The option exercise price per share for
each option described in clause (i) of Section 5(a) shall be equal to the
reported last sale price of the Common Stock on the Nasdaq National Market on
the Closing Date. The option exercise price per share for each option described
in clauses (ii) and (iii) of Section 5(a) shall be determined as follows: (i) if
the Common Stock is listed on the Nasdaq National Market or another nationally
recognized exchange or trading system as of the Option

-2-

<PAGE> 3

Grant Date, the option exercise price shall be deemed to be the lesser of (x)
the reported last sale price per share of Common Stock thereon on such date (or
if no such price is reported on such date, such price on the nearest preceding
date on which such a price is reported) or (y) the average of the reported last
sales prices per share of Common Stock, as published in The Wall Street Journal,
for a period of ten consecutive trading days prior to such date; and (ii) if the
Common Stock is not listed on the Nasdaq National Market or another nationally
recognized exchange or trading system as of the Option Grant Date, the exercise
price per share shall be deemed to be the fair market value of the Common Stock
as of the Option Grant Date as determined in good faith by the Board of
Directors.

(d) OPTIONS NON-TRANSFERABLE. To the extent required to qualify
for the exemption provided by Rule 16b-3 under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), any option granted under the Plan to an
optionee shall not be transferable by the optionee other than by will or the
laws of descent and distribution or pursuant to a qualified domestic relations
order as defined by the Code or Title I of the Employee Retirement Income
Security Act, or the rules thereunder, and shall be exercisable during the
optionee's lifetime only by the optionee or the optionee's guardian or legal
representative.

(e) VESTING PERIOD.

(i) GENERAL. Each option described in clauses (i) and (ii) of
Section 5(a) shall become exercisable on the first anniversary of the Option
Grant Date, and each option described in clause (iii) of Section 5(a) shall
become exercisable on the earlier of (x) the first anniversary of the Option
Grant Date or (y) the day prior to the fist Annual Meeting of Stockholders
following the Option Grant Date; provided, however, that in each instance
described herein the optionee continue to serve as a director on such dates.

(ii) ACCELERATION UPON CHANGE IN CONTROL. Notwithstanding the
foregoing, each outstanding option granted under the Plan shall immediately
become exercisable in full in the event a Change in Control (as defined in
Section 8) of the Company occurs.

(f) TERMINATION. Each option shall terminate, and may no longer be
exercised, on the earlier of the (i) the date 10 years after the Option Grant
Date or (ii) the date 60 days after the optionee ceases to serve as a director
of the Company; provided that, in the event an optionee ceases to serve as a
director due to his or her death or disability (within the meaning of Section
22(e)(3) of the Code or any successor provision), then the exercisable portion
of the option may be exercised, within the period of 180 days following the date
the optionee ceases to serve as a director (but in no event later than 10 years
after the Option Grant Date), by the optionee or by the person to whom the
option is transferred by will, by the laws of descent and distribution, or by
written notice pursuant to Section 5(h).

-3-

<PAGE> 4

(g) EXERCISE PROCEDURE. An option may be exercised only by written
notice to the Company at its principal office accompanied by payment in cash of
the full consideration for the shares as to which the option is exercised.

(h) EXERCISE BY REPRESENTATIVE FOLLOWING DEATH OF DIRECTOR. An
optionee, by written notice to the Company, may designate one or more persons
(and from time to time change such designation), including his or her legal
representative, who, by reason of the optionee's death, shall acquire the right
to exercise all or a portion of the option. If the person or persons so
designated wish to exercise any portion of the option, they must do so within
the term of the option as provided herein. Any exercise by a representative
shall be subject to the provisions of the Plan.

6. LIMITATION OF RIGHTS.

(a) NO RIGHT TO CONTINUE AS A DIRECTOR. Neither the Plan, nor the
granting of an option nor any other action taken pursuant to the Plan, shall
constitute or be evidence of any agreement or understanding, express or implied,
that the Company will retain the optionee as a director for any period of time.

(b) NO STOCKHOLDERS' RIGHTS FOR OPTIONS. An optionee shall have no
rights as a stockholder with respect to the shares covered by his or her option
until the date of the issuance to him or her of a stock certificate therefor,
and no adjustment will be made for dividends or other rights (except as provided
in Section 7) for which the record date is prior to the date such certificate is
issued.

7. ADJUSTMENT PROVISIONS FOR MERGERS, RECAPITALIZATIONS AND RELATED
TRANSACTIONS.

If, through or as a result of any merger, consolidation,
reorganization, recapitalization, reclassification, stock dividend, stock split,
reverse stock split (other than the Company's one-for-two reverse stock split
effective as of October 24, 1994), or other similar transaction, (i) the
outstanding shares of Common Stock are exchanged for a different number or kind
of securities of the Company or of another entity, or (ii) additional shares or
new or different shares or other securities of the Company or of another entity
are distributed with respect to such shares of Common Stock, the Board of
Directors shall make an appropriate and proportionate adjustment in (x) the
maximum number and kind of shares reserved for issuance under the Plan, (y) the
number and kind of shares or other securities subject to then outstanding
options under the Plan, and/or (z) the price for each share subject to any then
outstanding options under the Plan (without changing the aggregate purchase
price for such options), to the end that each option shall be exercisable, for
the same aggregate exercise price, for such securities as such optionholder
would have held immediately following such event if he had exercised such option
immediately prior to such event. No fractional shares will be issued under the
Plan on account of any such adjustments.

-4-

<PAGE> 5

8. CHANGE IN CONTROL.

For purposes of the Plan, a "Change in Control" shall be deemed to have
occurred only if any of the following events occurs: (i) any "person", as such
term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the
Company, any trustee or other fiduciary holding securities under an employee
benefit plan of the Company, or any corporation owned directly or indirectly by
the stockholders of the Company in substantially the same proportion as their
ownership of stock of the Company), is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 50% or more of the combined voting power
of the Company's then outstanding securities; (ii) the stockholders of the
Company approve a merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) more than 50% of the combined
voting power of the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation; (iii) the
stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets; or (iv) individuals who, on the date
on which the Plan was adopted by the Board of Directors, constituted the Board
of Directors of the Company, together with any new director whose election by
the Board of Directors or nomination for election by the Company's stockholders
was approved by a vote of at least a majority of the directors then still in
office who were directors on the date on which the Plan was adopted by the Board
of Directors or whose election or nomination was previously so approved, cease
for any reason to constitute at least a majority of the Board of Directors.

9. MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS.

The Board of Directors shall have the power to modify or amend
outstanding options; provided, however, that no modification or amendment may
(i) have the effect of altering or impairing any rights or obligations of any
option previously granted without the consent of the optionee, or (ii) modify
the number of shares of Common Stock subject to the option (except as provided
in Section 7).

10. TERMINATION AND AMENDMENT OF THE PLAN.

The Board of Directors may suspend, terminate or discontinue the Plan
or amend it in any respect whatsoever; provided, however, that without approval
of the stockholders of the Company, no amendment may (i) increase the number of
shares subject to the Plan (except as provided in Section 7), (ii) materially
modify the requirements as to eligibility to receive options under the Plan, or
(iii) materially increase the benefits accruing to participants in the Plan; and
provided further that the Board of

-5-

<PAGE> 6

Directors may not amend the provisions of Sections 3, 5(a), 5(b) or 5(c) more
frequently than once every six months, other than to comply with changes in the
Code or the rules thereunder.

11. NOTICE.

Any written notice to the Company required by any of the provisions of
the Plan shall be addressed to the Controller of the Company and shall become
effective when it is received.

12. GOVERNING LAW.

The Plan and all determinations made and actions taken pursuant hereto
shall be governed by the laws of the State of Delaware.

13. STOCKHOLDER APPROVAL.

The Plan is conditional upon stockholder approval of the Plan within
one year from its date of adoption by the Board of Directors. No option under
the Plan may be exercised until such stockholder approval is obtained, and the
Plan and all options granted under the Plan shall be null and void if the Plan
is not so approved by the Company's stockholders.

Adopted by the Board of Directors on October 4, 1994
Approved by the stockholders on October 24, 1994

-6-

<PAGE> 7

SECURITY DYNAMICS TECHNOLOGIES, INC.

AMENDMENT NO. 1

1994 DIRECTOR STOCK OPTION PLAN

1. That the 1994 Director Stock Option Plan be amended to delete
subsection 5(d) thereof and replace such subsection in its entirety
with the following:

"(d) TRANSFERABILITY OF OPTIONS. Except as the Board of Directors may
otherwise determine or provide in the applicable option agreement,
options shall not be sold, assigned, transferred, pledged or otherwise
encumbered by the optionee to whom they are granted, either voluntarily
or by operation of law, except by will or the laws of descent and
distribution, and, during the life of the optionee, shall be
exercisable only by the optionee. References to an optionee, to the
extent relevant in the context, shall include references to authorized
transferees."

2. That the Director Plan be further amended to delete the phrase

"; and provided further that the Board of Directors may not amend the
provisions of Sections 3, 5(a), 5(b) or 5(c) more frequently than once
every six months, other than to comply with changes in the Code or the
rules thereunder"

appearing at the end of Section 10 of the Director Plan.

Adopted by the Board of Directors on February 12, 1997

<PAGE> 8

SECURITY DYNAMICS TECHNOLOGIES, INC.

AMENDMENT NO. 2

1994 DIRECTOR STOCK OPTION PLAN, AS AMENDED

The 1994 Director Stock Option Plan, as amended (the "Plan"), is hereby
amended to delete subsection 4(a) thereof and replace such subsection in its
entirety with the following:

"The maximum number of shares of the Company's Common Stock, par value
$.01 per share ("Common Stock"), which may be issued under the Plan
shall be 500,000 shares, subject to adjustment as provided in Section
7."

Except as aforesaid, the Plan shall remain in full force and effect.

Adopted by the Board of Directors on January 27, 1999
Approved by the stockholders on May 5, 1999

<PAGE> 9

SECURITY DYNAMICS TECHNOLOGIES, INC.

AMENDMENT NO. 3

1994 DIRECTOR STOCK OPTION PLAN, AS AMENDED

1. The 1994 Director Stock Option Plan, as amended (the "Plan"), is hereby
amended to delete subsection 5(e) thereof and replace such subsection in its
entirety with the following:

"(e) VESTING PERIOD. Each option granted under the Plan shall be
exercisable in full immediately upon the Option Grant Date."

2. The Plan is hereby amended to delete section 8 thereof and replace such
section in its entirety with the following:

"8. Intentionally deleted."

3. Except as aforesaid, the Plan shall remain in full force and effect.

Adopted by the Board of Directors on April 14, 1999

<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, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
------------------ ------------------
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic earnings per share:
Net income per common share ..................... $ 1.11 $ 0.26 $ 2.14 $ 0.33
====== ====== ====== ======
Weighted average number of shares outstanding ... 38,789 40,907 39.254 40,815
====== ====== ====== ======
Diluted earnings per share:
Net income per common share ..................... $ 1.05 $ 0.25 $ 2.03 $ 0.32
====== ====== ====== ======
Shares:
Weighted average number of shares outstanding ... 38,789 40,907 39,254 40,815
====== ====== ====== ======
Effect of dilutive options ...................... 1,967 968 2,175 1,186
====== ====== ====== ======
Adjusted weighted average number of shares outstanding 40,756 41,875 41,429 42,001
====== ====== ====== ======
</TABLE>

<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 82,561
<SECURITIES> 159,508
<RECEIVABLES> 37,587
<ALLOWANCES> 747
<INVENTORY> 4,420
<CURRENT-ASSETS> 291,014
<PP&E> 50,247
<DEPRECIATION> (18,527)
<TOTAL-ASSETS> 365,254
<CURRENT-LIABILITIES> 70,205
<BONDS> 0
0
0
<COMMON> 422
<OTHER-SE> 292,043
<TOTAL-LIABILITY-AND-EQUITY> 365,254
<SALES> 100,481
<TOTAL-REVENUES> 100,481
<CGS> 21,820
<TOTAL-COSTS> 66,678
<OTHER-EXPENSES> 6,550<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 150,723
<INCOME-TAX> 66,676
<INCOME-CONTINUING> 83,894
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 83,894
<EPS-BASIC> 2.14
<EPS-DILUTED> 2.03
<FN>
<F1>OTHER EXPENSES REFERS TO EXPENSES OF $6,550 INCURRED IN CONJUNCTION WITH
CERTAIN EXIT COSTS INCURRED IN 1999.
</FN>

</TABLE>