<PAGE>
 
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
 
                      SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, DC 20549
 
                               ----------------
 
                                   FORM 10-K
               ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
                      THE SECURITIES EXCHANGE ACT OF 1934
 
                               ----------------
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
 
                        COMMISSION FILE NUMBER 0-27538
 
                             RAPTOR SYSTEMS, INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
                               ----------------
 
               DELAWARE                              51-0337926
    (STATE OR OTHER JURISDICTION OF               (I.R.S. EMPLOYER
    INCORPORATION OR ORGANIZATION)               IDENTIFICATION NO.)
 
                             RAPTOR SYSTEMS, INC.
                               69 HICKORY DRIVE
                         WALTHAM, MASSACHUSETTS 02154
                   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
 
                                (617) 487-7700
             (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
 
                               ----------------
 
  SECURITIES REGISTERED PURSUANT TO SECTION 12 (B) OF THE ACT: NONE
  SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT: COMMON STOCK,
  $.01 PAR VALUE
 
  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
 
  Indicate by a check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
 
  On March 1, 1997, the aggregate market value of the voting stock of the
registrant held by nonaffiliates of the registrant was $89,116,000. Reference
is made to Part III of this report for the assumptions on which this
calculation is based.
 
  As of March 1, 1997, there were 13,251,974 outstanding shares of the
issuer's Common Stock, par value $.01 per share.
 
                               ----------------
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
  Certain portions of the registrant's definitive proxy statement for its 1997
annual meeting of stockholders (which is expected to be filed with the
Commission not later than April 30, 1997) are incorporated by reference into
Part III of this report.
 
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>
 
                                    PART I
 
ITEM 1. BUSINESS:
 
                                   BUSINESS
 
  Raptor Systems, Inc. (the "Company" or "Raptor") develops, markets, licences
and supports a family of integrated network security software products that
provide comprehensive, enterprise-wide security for organizational networks,
including networks that are connected to the Internet. The Company's
application-level Eagle firewall and EagleConnect virtual private network
technology form the basis of a network security solution that enables an
organization to protect its network from unauthorized access by internal and
external users and to secure organizational communications over the Internet
and internal networks, including "Intranets." The Company's integrated
enterprise-wide network security solution consists of individual product
modules that secure organizational networks, including networks connected to
the Internet, LANs (local area networks) and Intranets, mobile PC users and
remote sites. The Company's product modules interact seamlessly, are easy-to-
use and are supported by a common management and monitoring capability that
enables a network administrator to manage the security of a large,
geographically dispersed organizational network from a single location.
Raptor's network security solutions are designed to enable organizations to
protect valuable data, extend the boundaries of organizational networks
without compromising network integrity and capitalize on the emergence of the
Internet as a medium of communications and commerce.
 
INDUSTRY BACKGROUND
 
 The Internet
 
  The Internet is a global web of computer networks that enables commercial
organizations, educational institutions, government agencies and individuals
to communicate, access and share information as well as conduct business
remotely. The networks that comprise the Internet are connected in a variety
of ways, including by the public switched telephone network and by high speed,
dedicated leased lines. Open communications on the Internet are enabled by
TCP/IP, an internetworking standard that facilitates communications across the
Internet regardless of the hardware and software used.
 
  While there has been significant media interest in the consumer potential of
the Internet, business and professional organizations also account for a
significant percentage of Internet usage. The recent growth in commercial
usage of the Internet has been driven primarily by the increasing popularity
of two applications: the World-Wide Web (the "Web") and e-mail. The emergence
of the Web, which allows commercial enterprises to publish multi-media
documents and other information for public access, has created a number of new
market opportunities. Customer service, electronic commerce, advertising and
market data generation are all being conducted across the Web. The growth of
e-mail usage on the Internet is being driven by ease-of-use and
standardization. Today, there are a number of commercially available e-mail
programs that an organization or individual may use to facilitate Internet
communications.
 
  Organizations increasingly are recognizing that the Internet can enhance
communications, both among their geographically distributed locations and
employees, and with their business partners and customers. In addition,
businesses are realizing that the Internet can enable many applications which
were previously unavailable or cost-prohibitive. For example, small and
medium-sized businesses can use the Internet to establish and maintain a
nationwide presence and market and distribute their products and services
electronically.
 
 Enterprise Networks and Intranets
 
  As network technology has advanced, enterprise networking has evolved.
Organizations have developed LANs and have connected together LANs, including
geographically dispersed networks, into wide area networks ("WANs"). Many LANs
employ proprietary communications software, such as Novell Corporation's IPX
protocol. Today, an increasing number of businesses are using the non-
proprietary TCP/IP protocol for
 
                                       2
<PAGE>
 
communications rather than a proprietary protocol. TCP/IP facilitates
corporate communications over internal networks using Internet tools and
applications, and internal networks that employ TCP/IP as a network protocol
are known as "Intranets." Based upon industry estimates, the Company believes
that the installed base of computers with TCP/IP capabilities will grow from
9.5 million in 1994 to 22 million in 1997, and is expected to reach 40 million
in 2001. In addition, all copies of Windows 95 are now shipping with TCP/IP
capabilities.
 
  Organizations are increasingly dependent on electronic communications among
geographically dispersed internal operations, customers, suppliers and other
partners. Accordingly, enterprise networks increasingly connect multiple LANs
and WANs, including remote networks, and mobile PCs. Traditional LANs and WANs
running TCP/IP can support remote access from other private networks to
provide customer support bulletin board services, electronic data interchange
("EDI") and database sharing. TCP/IP also enables organizations to use the
Internet as a low-cost communications backbone for a WAN, thereby extending
internal information systems and enterprise applications to geographically
dispersed facilities, remote offices and mobile employees. In addition,
computers are increasingly used to assist travelers, mobile salespersons and
other workers and small workgroups in their daily work routines. Portable and
other non-networked computers are a large and fast-growing segment of the
computing industry, and full-featured, remote, real-time access to enterprise
networks has become a business requirement in today's global economy. Examples
of these applications are remote order entry by traveling salespersons and
shipment tracking by express delivery services.
 
 Enterprise Network Security
 
  As a result of the increased use of the Internet and Intranets, unauthorized
access to enterprise networks and corporate data is an increasingly costly
business problem. Sensitive data that require protection from unauthorized use
include financial results, medical records, personnel files, research and
development projects, marketing plans and other business information.
Unauthorized access to these data may go undetected by the computer user or
network administrator, especially if the information is not altered by the
unauthorized party. Organizations are vulnerable not only to unauthorized
access to information resources by outsiders, but also to abuse by employees
within their own organizations. In order for an organization to provide a
"zone of trust" around its extended enterprise network, the Company believes
that an organization must address security issues in the following five
network environments, which the Company refers to as the five domains of
network security.
 
  Internet. Despite the growing interest in the many commercial uses of the
Internet, a significant barrier to the growth in commercial use of the
Internet is the unsecure nature of data and information available on or moving
across the Internet. As organizations take advantage of the low-cost and
global connectivity of the Internet, they often put an important asset--
information--at risk. As a public network, the Internet passes data through
many routing locations and the user never knows which machines its message
will pass through or whose eyes may see it. The inherent insecurity of
Internet routing, coupled with deliberate network hacking (the unauthorized
access to ostensibly secure networks), results in significant costs to
organizations and has created significant security risks for network
administrators. Once connected to the Internet, an organization's network is
potentially accessible by millions of users, including hackers.
 
  LANs and Intranets. Protecting vital information within workgroups and at
the desktop is a critical link in a tightly integrated network security
strategy. The increasing number of authorized users having direct access to
expanding networks and the data contained on such networks has increased the
need to provide protection for financial results, personnel files, research
and development projects and other sensitive data on such networks from
unauthorized users with general access to a system. The growing use of
standard network protocols, such as TCP/IP, has increased the vulnerability of
LANs and Intranets to unauthorized access. Groupware and shared workgroup or
departmental servers exacerbate the problem. Accordingly, the network
administrator faces a challenge: creating accessible, shared LANs and
Intranets while protecting the integrity and confidentiality of the
information being shared.
 
 
                                       3
<PAGE>
 
  Mobile PC Users. The growing use of portable and other non-networked
computers in business today has created a unique set of network security
issues. Corporate executives, sales representatives, telecommuters and other
workers are increasingly using the Internet and other public networks to
communicate on a real-time basis with the home office, customers and other
participants in the chain of commerce. Based upon industry estimates, the
Company believes that there will be 50 million users who will require mobile
access to organizational networks by the end of 1998. The challenge that
network administrators face is providing a high level of integrated security
without impeding network access.
 
  Remote Sites. Business organizations are increasingly utilizing enterprise
networks that include connections to networks in remote locations. Security
issues for remote access computing include both authentication of remote sites
as well as the protection of data from unauthorized access. The physical
connection for most remote access users is usually through a public carrier, a
private leased line or the Internet. Transmitted information may be vulnerable
to "snooping" by unauthorized users. As network connections to remote sites,
including EDI partners, branch offices and outsourcing vendors, grow in number
and complexity, the need for remote site security escalates. Branch offices,
corporate divisions, and field offices share the same security requirements as
corporate headquarters.
 
  Enterprise Security Management. In order for an organization to provide a
"zone of trust" around its extended enterprise network, the organization must
tie its network security solution for each of the other four domains together
through the fifth domain--a central point of control. Centralized network
security management enables an enterprise to configure, monitor and manage all
the network security points within the organization.
 
  The concept behind integrated network security is that no single product
alone can provide the overall security required by today's internetworked
enterprise. The Company believes that enterprise-wide network security can be
most effectively achieved by adopting a comprehensive approach that addresses
the specific security needs for Internet access, workgroup LANs, mobile PC
users and remote sites.
 
THE RAPTOR SOLUTION
 
  Raptor's network security solution is a family of award winning integrated
software products that provide comprehensive, enterprise-wide security for
organizational networks, including networks that are connected to the
Internet, LANs and Intranets. The Company's family of network security
solutions can establish a zone of trust around an organization by protecting
its network from unauthorized access by internal and external users and by
securing organizational communications over the Internet and internal
networks. The Company's product family consists of individual product modules
that address distinct needs but that are integrated to provide a seamless,
enterprise-wide network security solution. At the core of the Company's
product family is the Eagle firewall, which protects an organization's
internal network from unauthorized Internet access and can be integrated with
other individual product modules that address the security needs of LAN
workgroups, mobile users and remote sites. An additional key element of the
Company's integrated solution to enterprise-wide security is the Company's
EagleConnect virtual private networking technology, which creates encrypted,
authenticated "tunnels" of communication over a public network, such as the
Internet, and within an organization's internal network, protecting the
integrity and confidentiality of data transmitted over such networks. The
Company's products are easy-to-use and are supported by a common management
and monitoring capability that enables a network administrator to manage the
security of a large, geographically dispersed organizational network from a
single location.
 
                                       4
<PAGE>
 
  The following graphic depicts the five domains of enterprise network
security and the Company's product offerings in each domain:
 
                                    [GRAPH]
 
  The Company's products address network security for each of the five domains
of Raptor's network security paradigm: the Internet, LANs and Intranets,
mobile PC users, remote sites and enterprise security management. The
Company's Eagle firewall secures the interface between an internal network and
the Internet, protecting an organization's internal network from unauthorized
Internet access. Raptor's EagleDesk and EagleLAN focus on internal network
security issues. The Company's EagleMobile protects the integrity of
communications among users of portable and non-networked PCs and an internal
network. Raptor's EagleRemote secures communications between an internal
network and networks located at remote sites, such as branch offices and
customer and supplier locations. Finally, the Company's Hawk and EagleConnect
technologies integrate the Company's modular security products with a common
management and monitoring capability across all modules and all security
domains. The Company's EagleNetwatch product provides data graphing and 2D/3D
visualization of network activity. See "Products"
 
  Raptor recently announced a product named THE WALL to address the growing
number of small businesses, schools and municipalities that desire to have
Internet access. Based upon the award winning Eagle firewall technology, THE
WALL is a Domain 1 security solution. It was designed to provide smaller
organizations with the same level of protection demanded by Fortune 500
companies, in a very simple and highly affordable configuration. Raptor also
announced an expanded version of THE WALL, which is expected to ship in the
second quarter of 1997. This next version of THE WALL will feature an
integrated Web and e-mail server, and allow for an expanded number of users.
These two products form the basis of a new, low-end product line which Raptor
will continue to expand in the future. There is a clear upgrade path from THE
WALL to the Eagle family of products, providing Raptor with what it believes
to be the broadest range of price offerings and performance capabilities in
the industry.
 
                                       5
<PAGE>
 
  The following graphic depicts the upgrade path from THE WALL to the full
featured Eagle NT product Family:
 
                                    [GRAPH]
 
STRATEGY
 
  Raptor's objective is to provide the industry's most comprehensive family of
integrated network security solutions. The key elements of the Company's
strategy to achieve this objective are:
 
  . Provide Enterprise-Wide Security Solutions. The Company's approach to
    providing network security solutions is to develop, market and support a
    family of network security software products that collectively address
    the security concerns faced by organizations that employ networks.
    Raptor's comprehensive network security solution is an integration of
    modular product solutions that are supported by a common management and
    monitoring capability. This modular design enables an organization to
    adopt a building-block approach to address network security issues as
    they evolve. The Company believes that its integrated network security
    product family provides a more comprehensive security solution than the
    single product offerings marketed by many of its competitors. The Company
    intends to exploit the advantages of its comprehensive enterprise-wide
    solutions and continue to develop additional product modules to address
    the evolving enterprise-wide security needs of its customers.
 
  . Provide focused security solutions to the mainstream market. With the
    recent introduction of THE WALL, Raptor has begun to deliver a Windows NT
    product line designed to address the needs of small businesses, schools
    and municipalities. In the United States alone, there are 8 million small
    businesses, 115 thousand school districts, and 87 thousand county and
    local government agencies (Source: IDC\ Link). These small organizations,
    along with their counterparts in Europe, Asia and the rest of the world,
    must take advantage of the Internet to remain competitive. They are
    connecting in increasing numbers. This market represents a very large
    volume opportunity in the security market. The Company intends to
    leverage its award winning Eagle code base, its leadership role in
    developing Windows NT-based security solutions, its relationship with
    Compaq, and its distribution network, to meet the needs of this market
 
  . Leverage and Expand Multiple Distribution Channels. The Company has a
    targeted distribution model, consisting of direct sales, strategic value
    added resellers ("VARs"), regional VARs and international VARs, that is
    designed to enable the Company to penetrate the broad market of network
    users and to establish the Company's solutions as an industry standard.
    The Company has an experienced direct sales force that focuses on the
    network security needs of large organizations. In addition, the Company's
    Business Development Group is charged with developing and managing
    strategic VAR relationships with
 
                                       6
<PAGE>
 
   companies such as Bell Atlantic Network Integration Services, Bell South
   Network Services, Data General Corporation, Digex Express Group, Inc.,
   Hewlett-Packard Company, Intergraph Corporation, PSINet, Inc., Siemens
   Nixdorf Information Systems and Sprint Corporation. These strategic VARs
   market and sell the Company's products to their customers under the Raptor
   brand name. Finally, the Company has built a complementary network of
   regional VARs that focus on small and middle-market companies. The Company
   has existing relationships with approximately 250 regional VARs in the
   United States which operate in distinct regions. In addition, the Company
   has recently expanded its distribution channels overseas, forming VAR
   relationships in Europe, Asia, Australia and Latin America.
 
  . Penetrate and Leverage Accounts with Modular Product Offerings. The
    increased visibility and use of the Internet has highlighted the need for
    network security solutions. For most organizations, however, Internet
    security is just the beginning of their network security needs. The
    Company's marketing strategy is to establish broad initial market
    penetration of its Eagle firewall and subsequently pursue follow-on sales
    of additional offerings in Raptor's Eagle family of products to provide
    robust security solutions across all domains of its customers' enterprise
    networks. THE WALL provides additional opportunities to Raptor to further
    develop accounts because of high volume seeding opportunity that it
    represents, coupled with a simple upgrade path to an extended version of
    THE WALL or Eagle firewall.
 
  . Maintain and Extend Technological Leadership. From its inception, the
    Company has been a leader in developing products that address the network
    security needs of an enterprise. The Eagle has won numerous product
    reviews in prestigious industry publications. In addition, Raptor has
    been a leader in introducing new solutions to the security issues
    resulting from changing business practices, such as mobile PC security,
    central configuration of remote sites, virtual private networking, and
    real time monitoring of suspicious network activity. The Company was the
    first to market with a Windows NT based firewall and the first with a
    2D/3D management console. The Company intends to maintain a leadership
    position in technological innovation.
 
  . Promote and Support Leading Platforms and Open Standards. The Company
    believes that it offers products for the broadest range of UNIX platforms
    in the industry, including Sun OS and Sun Solaris, Hewlett-Packard's HP-
    UX and Siemens Nixdorf's Reliant UNIX (formerly SINIX). The Company
    introduced the first firewall on the Microsoft Windows NT platform and it
    continues to develop a suite of other products for Windows NT, including
    products for LANs and Internets, mobile PC users and remote sites. The
    Company also participates in industry standards organizations such as the
    Internet Engineering Task Force, the National Computer Security
    Association and the Secure Wide Area Networking Task Force, as it
    believes that industry standards will accelerate growth of the network
    security market. The Company intends to continue to support additional
    platforms and seek out opportunities to define critical industry
    standards.
 
                                       7
<PAGE>
 
TECHNOLOGY
 
  Raptor's technology is based upon a distributed security architecture, which
was designed to address the growing needs of the enterprise in a modular and
scaleable fashion. Raptor has developed specific software modules that address
distinct security domains in the enterprise. A customer can elect to protect
as few as one domain and as many as all five domains as security policy
requirements dictate by choosing the appropriate modules. The various modules
are integrated through Raptor's EagleConnect and Hawk technologies. The
following graphic depicts the architecture of the Company's multi-domain
solution to enterprise-wide network security needs:
 
                                    [GRAPH]
 
  The basis of the Company's network security solution is its Eagle firewall.
Firewalls provide a single point of control from which network access can be
controlled and audited. Basic firewall technology falls into two broad
categories: packet filters and application-level firewalls. The Company has
chosen to base its security solution on an application-level firewall
architecture. The Company believes that application-level firewall technology
offers a number of key advantages over packet filters, including:
 
  . Prohibiting all message packets that are not expressly permitted as
    opposed to permitting everything that is not expressly prohibited. This
    gives the network administrator considerable flexibility and control over
    network access.
 
  . Hiding all internal IP addresses through proxy services, which prevents
    unauthorized users from disguising themselves as valid network entities
    (or "spoofing").
 
  . Enabling full security for common TCP applications, including Gopher,
    Telnet, FTP and NNTP.
 
  . Enabling extensive real-time logging, auditing, monitoring and reporting
    functions to ensure that an electronic "fingerprint" of an unauthorized
    user is obtained.
 
  . Security for filtering Java applets.
 
  . Security to prevent denial of service attacks.
 
                                       8
<PAGE>
 
  . Integrated URL blocking based upon the industry's leading filter and
    subscription service.
 
  . 2D/3D data graphing and visualization.
 
  . The ability to precisely filter IP services within VPN tunnels.
 
  The Company believes that its products incorporate or are supported by the
broadest array of technologies and product features available as integrated
components of a comprehensive network security solution. Examples of key
technologies and product features underlying the Company's products include:
 
  . An intuitive GUI based upon the MOTIF industry standard, which allows
    network administrators to easily set security parameters, control access
    and configure the system.
 
  . Security for common IP applications including HTTP, Gopher, Telnet, FTP,
    NNTP, and SMTP.
 
  . Transparent access to external networks for HTTP, FTP and Telnet.
 
  . A suspicious activity monitor ("SAM"), which offers real-time monitoring
    and detection of network activity with multiple notification options,
    such as fax, pager, e-mail, audio alarm or SNMP alert.
 
  . Configuration of remote sites and monitoring of a global, multi-level
    security system from a single point of control.
 
  . Network address translation, which provides the ability to hide the
    addresses of network nodes.
 
  . Illegal address support, which facilitates unambiguous communication with
    legitimate network addresses.
 
  . Strong authentication and encryption from industry leading partners
    including Security Dynamics, Bellcore and RSA Data Security, Cryptocard
    and Assurenet Pathways/Axent.
 
PRODUCTS
 
  The following table sets forth information regarding Raptor's current
product offerings.
 
<TABLE>
<CAPTION>
                                                                                   DATE OF
    ENVIRONMENT      PRODUCT NAME                  DESCRIPTION                   INTRODUCTION
    -----------      ------------                  -----------                   ------------
<S>                  <C>          <C>                                            <C>
Internet             Eagle        Application-level firewall that protects         Q3 1992
                     Eagle NT     internal network from external intrusion and     Q1 1996
                                  serves as the foundation for the Company's
                                  other products
                     THE WALL     THE WALL is a domain 1 security solution. It     Q1 1997
                                  was designed to provide smaller organizations
                                  with the same level of protection from
                                  intrusion demanded by Fortune 500 companies,
                                  in a very simple and highly affordable
                                  configuration.
LANs and Intranets   EagleLAN     Distributed firewall technology that protects    Q3 1992
                                  departmental networks, including Intranets,
                                  from unauthorized access by internal users
                     EagleDesk    Provides secure communications directly to       Q3 1995
                                  and from networked PCs
Mobile PC Users      EagleMobile  Provides secure communications over the          Q3 1995
                                  Internet and other public networks to and
                                  from mobile PC users
Remote Sites         EagleRemote  Provides secure communications over the          Q1 1995
                                  Internet and WANs to and from remote networks
Enterprise Security  Hawk         Provides centralized configuration,              Q3 1995
 Management                       monitoring, administration and management
                                  capabilities in support of distributed
                                  security solutions
</TABLE>
 
 
                                       9
<PAGE>
 
<TABLE>
<CAPTION>
                                                                            DATE OF
ENVIRONMENT  PRODUCT NAME                   DESCRIPTION                   INTRODUCTION
-----------  ------------                   -----------                   ------------
<S>          <C>           <C>                                            <C>
             EagleConnect  Virtual private networking technology that       Q1 1995
                           provides encrypted, authenticated tunnels
                           over both the Internet and WANs; integrates
                           Raptor modules
             EagleNetwatch Provides data graphing and 2D/3D                 Q2 1996
                           visualization of network activity
             WebNot        URL Blocker filters access to objectionable      Q4 1996
                           web sites
</TABLE>
 
  Eagle(TM). The Eagle application-level firewall is the foundation for
Raptor's integrated, enterprise-wide network security solution. Only after the
Eagle firewall is in place can the Company's other products, such as EagleLAN,
EagleDesk, EagleRemote and EagleMobile, be added to address specific network
security needs. The Eagle firewall secures communications over the Internet or
other public networks and serves as a barrier between the Internet and the
enterprise network. The Eagle includes a powerful network security management
facility with an intuitive GUI, real-time suspicious activity monitoring (SAM)
and alert capabilities, multiple types of standard encryption and
authentication, proxy services, and EagleConnect virtual private networking.
The Eagle requires a dedicated workstation. Depending on configurations, the
Eagle firewall is generally priced to end-users at between $6,500 and $25,000.
 
  EagleLAN /EagleDesk(TM). EagleLAN and EagleDesk are designed for improving
the internal security of a LAN or an Intranet. They provide protection against
unauthorized access to network resources by internal users. EagleLAN provides
workgroup security while EagleDesk protects communications among individual
PCs within and across workgroups. EagleLAN supports Sun, Hewlett-Packard, IBM
and Data General operating systems. The EagleLAN product supporting Windows NT
became commercially available during the second quarter of 1996. EagleDesk
operates on PCs with Windows 95 or Windows for Workgroups and the Company
expects that its EagleDesk product for PCs with Windows NT will be
commercially available by the end of the second quarter of 1997. EagleLAN is
generally priced to end-users at $3,500 and EagleDesk is generally priced to
end-users at $99 per PC client.
 
  EagleMobile(TM). EagleMobile (formerly known as EagleNomad) provides
multiple levels of security for remote users utilizing a PC to connect to an
internal network or communicate within an Intranet. EagleMobile provides
password protection for the PC, user authentication to prevent unauthorized
access to internal network resources and data encryption to protect the
integrity of information transmitted over the Internet or other public or
private networks. EagleMobile supports PCs with Windows 95 or Windows for
Workgroups. EagleMobile is generally priced to end-users at $99 per PC client.
 
  EagleRemote(TM). Extending the capabilities of the Eagle firewall,
EagleRemote provides network administrators with the ability to secure
communications to and from remote networks. EagleRemote's target customers are
enterprises with multiple divisions and remote locations. EagleRemote works in
conjunction with an Eagle-protected server to provide remote site network
security and remote management and control from a centralized location.
EagleRemote currently supports Sun, Hewlett-Packard operating systems, as well
as the Windows NT operating system. Depending on configurations, EagleRemote
is generally priced to end-users between $5,500 and $22,000.
 
  Hawk(TM)/EagleConnect(TM)/EagleNetwatch(TM). Hawk provides centralized
configuration, monitoring, administration and management capabilities in
support of the Company's distributed security solution. EagleConnect is the
Company's virtual private networking technology, which creates encrypted,
authenticated "tunnels" of communication within an organization's network and
over a public network, such as the Internet. EagleConnect transparently
manages the connections between the network security points throughout the
entire enterprise. EagleConnect is utilized in all of the Company's products.
The EagleNetwatch product became commercially available during the second
quarter of 1996 . EagleNetwatch provides data graphing and 2D/3D visualization
of network activity, including protocol and application monitoring, and
reporting and trend analysis.
 
                                      10
<PAGE>
 
  THE WALL(TM). THE WALL is the first product of its kind to specifically and
exclusively address the needs of smaller companies, schools and municipalities
for safe, simple and affordable access to the World Wide Web. Based on
Raptor's award-winning Eagle technology, THE WALL is a Windows NT-based
preconfigured firewall for protecting an organization's file transfers,
electronic mail and World Wide Web access, including blocking objectionable
Web sites. THE WALL provides the industry's highest level of security against
outside attacks by denying all incoming access to an organization's network.
THE WALL serves as the foundation for a new, low-end product line and provides
a clean and simple upgrade path to the Eagle family. THE WALL is generally
priced to end-users between $995 and $1,500, depending upon configuration.
 
SALES AND MARKETING
 
  The Company's marketing strategy is to achieve broad market penetration by
employing multiple distribution channels, including direct sales, strategic
VARs, regional VARs and international VARs. The Company believes that this
distribution strategy will enable it to market its family of network security
solutions effectively to potential customers based upon their specific needs.
 
  Direct Sales. The Company employs a direct sales force to market its
products to large, information-driven enterprises, such as financial services,
telecommunications and high-technology companies, and other large
organizations. The Company currently employs 18 direct sales representatives
and maintains direct sales offices in Atlanta, Boston, Chicago, Dallas,
Florida, Los Angeles, New York, San Francisco, Washington, DC, Amsterdam,
Tokyo and London. The Company believes that it is gaining market share and
building brand awareness among the early adopters of network security software
products through its direct sales channel.
 
  Strategic VARs. The Company also markets directly to strategic VARs, such as
Bell Atlantic Network Integration Services, Compaq Computer Corporation
("Compaq"), Data General Corporation, Digex Express Group, Inc., Digital
Equipment Corporation, Hewlett-Packard Company, Intergraph Corporation,
PSINet, Inc., Shiva Corporation, Siemens Nixdorf Information Systems, Sprint
Corporation and UUNet Technologies, Inc. These strategic VARs market and sell
the Company's products under the Raptor brand name. The Company believes that
committing resources to this channel will continue to result in new market
opportunities. In addition, the Company entered into definitive technology,
marketing, distribution and funding agreements with Compaq relating to
Raptor's NT firewall products.
 
  Regional VARs. The Company has built an extensive value-added reseller
channel to market Raptor products to companies in a variety of industries,
such as manufacturers, airlines, retailers and insurance underwriters, as well
as small- and medium-sized enterprises. The Company believes that smaller
organizations or organizations that are not early adopters of new technologies
are better serviced by VARs who are in close proximity to the customer and can
provide the customer with the necessary level of support. The Company has
relationships with approximately 250 domestic VARs.
 
  International VARs. The Company has relationships with more than 50 VARs in
Europe, Asia, Australia and Latin America, such as Kanematsu Electronics,
Ltd., Marubeni Hytech Corporation, Matsushita Electric Works, Ltd. and Racal-
Airtech, Ltd.
 
  In support of its sales efforts, the Company conducts sales training
courses, comprehensive targeted marketing programs, including direct mail,
public relations, advertising, seminars, trade shows and telemarketing,
ongoing customer and third-party communications programs. The Company also
seeks to stimulate interest in computer and network security through its
public relations program, speaking engagements, white papers, technical notes
and other publications. The Company also has established a home page on the
Web, which includes an extensive library of articles concerning network
security issues and developments. The address for the Company's home page is
www.raptor.com.
 
                                      11
<PAGE>
 
CUSTOMER SERVICE AND SUPPORT
 
  The Company offers software support contracts to customers who have entered
into license agreements for the use of Raptor's software products. The Company
provides customer service and support through its internal technical support
organization. Support services include the maintenance of the Company's
software products in accordance with specifications contained in the user's
guide for such products, access to technical support personnel and the free
availability of product enhancements. The Company's VARs also provide
telephone and initial support to end-users of the Company's products.
 
  The Company also provides support services to potential customers and
resellers. Potential clients who have entered into an evaluation agreement
with the Company are given 30 days of support without charge during the
product evaluation. The Company provides resellers with sales training for
qualified sales personnel and technical training for qualified technical
personnel at no charge. The Company will also furnish technical assistance and
installation support to end-users of the Company's products if a reseller is
unable to do so but reserves the right to charge the reseller a fee for such
services.
 
PRODUCT DEVELOPMENT
 
  The Company believes that its future success will depend upon its ability to
enhance its existing products and develop and introduce new products which
keep pace with technological developments in the marketplace and address the
increasingly sophisticated needs of its customers. The Company works closely
with certain of its larger VARs who are on the leading edge of network
security needs through extended alpha programs. In addition, these customers
provide significant product feedback that is channeled into product
development and innovation. The Company intends to expand its existing product
offerings and to introduce new application products for the enterprise network
security market. The Company's new product development efforts are focused on
enhancements to Raptor's current suite of products and new network security
products, including products that support additional hardware platforms. While
the Company expects that certain of its new products will be developed
internally, the Company may, based on timing and cost considerations, expand
its product offerings through acquisitions. In addition, the Company has
relied and will continue to rely on external development resources for the
development of certain of its products and components thereof, such as its GUI
and network activity monitoring features.
 
  On December 3, 1996, the Company invested $4 million to acquire
approximately 15% of VPNet Technologies, Inc. ("VPNet") of San Jose, CA, a
privately held start-up company. VPNet has recently announced a series of next
generation products designed to make virtual private networks (VPNs) a viable,
secure and affordable alternative to dedicated private leased lines. Raptor
will assist VPNet with developing its sales and marketing channels. VPNet's
hardware-based VPN service units incorporate key technologies including key
management and accelerated data compression and encryption at an aggressive
new price point.
 
  As of February 21, 1997, the Company had 28 employees and 10 independent
contractors devoted to product development and expects to increase this number
over the next year. The Company is a member of the Internet Engineering Task
Force, the National Computer Security Association, Intelligent Input OutPut
System sponsored by Intel, the Automotive eXchange Network (AXN) consortium
sponsored by the Automotive Industry Action Group and the Secure Wide Area
Networking Task Force. These groups encourage the development of products that
conform to specified industry standards.
 
COMPETITION
 
  The market for network security products and services is new, intensely
competitive, rapidly evolving and subject to rapid technological change. The
Company expects competition to intensify in the future. The Company's
principal current competitors include America Online, Inc.'s Advanced Network
and Services subsidiary, Ascend Communications Corporation, Bay Networks,
CheckPoint Software Technology, Ltd., Cisco Systems, Inc., Cybergaurd, Digital
Equipment Corporation, International Business Machines Corporation, Milkyway
Networks Corporation, Network Systems Corporation, Secure Computing
Corporation, Sun
 
                                      12
<PAGE>
 
Microsystems, Inc., 3Com Corporation, Trusted Information Systems Inc. and V-
One, Inc. Due to the rapid expansion of the network security market, the
Company may face competition from new entrants in the network security
industry, possibly including the Company's resellers. In addition, a number of
network hardware manufacturers, such as Cisco Systems, are now offering
products with embedded firewalls, and Microsoft has announced new software
products with security features. There can be no assurance that current or
future network security products offered by the companies competitiors will be
more effective than the Company's current or future products or that the
Company's technologies and products would not be rendered obsolete by such
developments. Many of the Company's current and potential competitors have
longer operating histories, greater name recognition, larger installed
customer bases and significantly greater financial, technical and marketing
resources than the Company. As a result, they may be able to adapt more
quickly to new or emerging technologies and changes in customer requirements,
or to devote greater resources to the promotion and sale of their products
than the Company. While the Company believes that it does not compete against
manufacturers of other classes of security products (such as encryption and
authentication), there can be no assurance that the Company's customers will
not perceive the products of such other companies as substitutes for the
Company's products.
 
  The Company believes that the principal competitive factors affecting the
market for network security products include security effectiveness, scope of
product offerings, technical features, ease of use, reliability, customer
service and support, distribution channels and price. Although the Company
believes that its products currently compete favorably with respect to such
factors, particularly in the high-end of the network security market, there
can be no assurance that the Company can maintain its competitive position
against current and potential competitors, especially those with significantly
greater financial, marketing, service, support, technical and other
competitive resources.
 
  Current and potential competitors have established or may in the future
establish cooperative relationships among themselves or with third parties to
increase the ability of their products to address the security needs of the
Company's prospective customers. Accordingly, it is possible that new
competitors or alliances may emerge and rapidly acquire significant market
share. If this were to occur, the financial condition or results of operations
of the Company could be materially adversely affected.
 
PROPRIETARY TECHNOLOGY
 
  The Company relies on copyright and trade secret laws, employee and third-
party non-disclosure agreements and other methods to protect its proprietary
rights. The Company currently has four patent applications pending in the
United States relating to computer security software and hardware. While the
Company believes that the pending patent applications relate to patentable
devices or concepts, there can be no assurance that any pending or future
patent applications will be granted or that any future patent relied upon by
the Company will not be challenged, invalidated or circumvented or that the
rights granted thereunder or under licensing agreements will provide
competitive advantages to the Company. The Company believes that, due to the
rapid pace of technological innovation for network security products, the
Company's ability to establish and maintain a position of technology
leadership in the industry is dependent more upon the skills of its
development personnel than upon the legal protections afforded its existing
technology.
 
  The Company's success is dependent in part upon its proprietary software and
security technology. There can be no assurance that its agreements with
employees, consultants and others who participate in the development of its
software will not be breached, that the Company will have adequate remedies
for any breach, or that the Company's trade secrets will not otherwise become
known to or independently developed by competitors. Furthermore, there can be
no assurance that the Company's efforts to protect its rights through patent
and copyright laws will not fail to prevent the development and design by
others of products or technology similar to or competitive with those
developed by the Company. The Company is not aware of any patent infringement
charge or any violation of other proprietary rights claimed by any third party
relating to the Company or the Company's products.
 
  The Company relies on an outside licensor for encryption technology that is
incorporated into and is necessary for the operation of the Company's
products. The Company's success will depend in part on its
 
                                      13
<PAGE>
 
continued ability to obtain and use licensed technology that is important to
the functionality of its products. An inability to continue to procure or use
such technology would likely have an adverse effect on the Company's business,
financial condition and operating results.
 
EMPLOYEES
 
  As of February 21, 1997, the Company had 112 full-time employees consisting
of 59 in sales and marketing, 28 in development, 9 in customer support and 16
in administration and finance. None of the Company's employees are represented
by a labor union or are subject to a collective bargaining agreement. The
Company has never experienced a work stoppage and believes that its employee
relations are good.
 
ITEM 2. PROPERTIES:
 
FACILITIES
 
  The Company leases approximately 19,300 square feet of office space in
Waltham, Massachusetts as its corporate headquarters. The initial term of the
lease for the Company's current office space will expire on October 31, 1997.
The Company expects to relocate its headquarters to larger facilities in the
Boston area in 1997. The Company also leases office space for its sales
representatives in Atlanta, Austin, Chicago, Dallas, Florida, Los Angeles, New
York, San Francisco, Washington DC, Amsterdam, Tokyo and London. The Company
leases approximately 2,000 square feet of research and development space in
Nashua, New Hampshire.
 
ITEM 3. LEGAL PROCEEDINGS:
 
LITIGATION
 
  On February 27, 1995, Lightburn and Associates, Inc. ("LAI"), a former
reseller of Raptor products, commenced an action against Raptor in the United
States District Court for the District of Maryland. This action is based on
allegations that Raptor engaged in unfair competition, fraud, intentional
and/or negligent misrepresentation, tortious interference with business
relationships and breach of contract by entering into direct contractual
arrangements with two customers. On December 9, 1996, the Court granted
Raptor's motion for summary judgment on all claims that had been asserted
against Raptor. The Court similarly entered an order dismissing the
counterclaims made by Raptor. As set forth in the Court's order, the case is
now closed, subject to any appeal rights the parties may have. LAI has filed
an appeal of the Court's decision, the outcome of which is not known at this
time.
 
  On June 10, 1996, Raptor and one of its customers was sued by a former
employee (a sales representative of Raptor whose employment had been
previously terminated by Raptor) claiming that he is owed certain commissions
on sales of Raptor products to this customer. Raptor anticipates that it will
vigorously defend the claims asserted in this action. Discovery in this
litigation is ongoing and at this time Raptor is unable to determine the
ultimate outcome of the litigation. See Note J of Notes to Consolidated
Financial Statements.
 
  Litigation costs are included in general and administrative expenses. The
Company believes that the ultimate outcome of the above litigation will not
have a material adverse effect on its financial position.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
 
  No matters were submitted to a vote of the Company's security holders during
the fourth quarter of 1996.
 
                                      14
<PAGE>
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK MATTERS:
 
  The Company's common stock began trading publicly on the NASDAQ National
Market System effective February 6, 1996. The Company's common stock trades on
the Nasdaq National Market tier of The Nasdaq Stock Market under the symbol:
RAPT. The following table sets forth the high and low sales prices of the
Company's common stock for the indicated periods as reported by NASDAQ.
 
<TABLE>
<CAPTION>
   1996                                                             HIGH   LOW
   ----                                                            ------ ------
   <S>                                                             <C>    <C>
   First Quarter.................................................. 39 1/4 22 3/4
   Second Quarter................................................. 28 1/2 19 1/4
   Third Quarter.................................................. 27 1/2 12 3/4
   Fourth Quarter................................................. 25 3/4 16 3/4
</TABLE>
 
  On February 1, 1997 there were 232 holders of record of the Company's common
stock, excluding stockholders whose shares were held in nominee name. The
Company believes, based on information provided by its stock transfer agent,
that it has over 3,000 beneficial owners of its stock, most of whom own stock
in nominee name.
 
  The Company has never declared nor paid any cash dividends on its common
stock. The Company's policy is to retain and invest all earnings for use in
the Company's business and therefore does not anticipate paying any cash
dividends on its common stock in the foreseeable future.
 
                                      15
<PAGE>
 
ITEM 6. SELECTED FINANCIAL DATA:
 
                            SELECTED FINANCIAL DATA
 
  The selected financial data set forth below with respect to the Company's
statements of operations for the five years ended December 31, 1992, 1993,
1994, 1995 and 1996 and the balance sheets at December 31, 1992, 1993, 1994,
1995 and 1996 are derived from the financial statements of the Company
included elsewhere in this Form 10-K. The data set forth below should be read
in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and the
notes thereto included elsewhere in this Form 10-K.
 
<TABLE>
<CAPTION>
                                           YEAR ENDED DECEMBER 31,
                                    -----------------------------------------
                                     1992    1993    1994     1995     1996
                                    ------  ------  -------  -------  -------
                                    (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                 <C>     <C>     <C>      <C>      <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................ $  115  $  477  $   248  $ 3,902  $14,527
Cost of revenue....................     27      53       10      308      846
                                    ------  ------  -------  -------  -------
Gross margin.......................     88     424      238    3,594   13,681
Operating expenses:
  Selling and marketing............    178     225      326    3,836    8,996
  Research and development.........     61     246      708    1,367    3,077
  General and administrative.......     82     166    1,165    1,153    2,221
    Total operating expenses.......    321     637    2,199    6,356   14,294
                                    ------  ------  -------  -------  -------
Operating loss.....................   (233)   (213)  (1,961)  (2,762)    (613)
Interest income (expense), net.....     (4)     (3)      (2)      76    2,414
                                    ------  ------  -------  -------  -------
Net income (loss).................. $ (237) $ (216) $(1,963) $(2,686) $ 1,801
                                    ======  ======  =======  =======  =======
Net income (loss) per common and
 common equivalent share(1)........ $ (.04) $ (.04) $  (.31) $  (.38) $   .13
                                    ======  ======  =======  =======  =======
Weighted average number of common
 and common equivalent shares
 outstanding(1)....................  5,458   5,926    6,253    7,048   13,641
</TABLE>
 
<TABLE>
<CAPTION>
                                                   DECEMBER 31,
                                        ---------------------------------------
                                        1992   1993    1994     1995     1996
                                        -----  -----  -------  -------  -------
                                                  (IN THOUSANDS)
<S>                                     <C>    <C>    <C>      <C>      <C>
BALANCE SHEET DATA:
Working capital.......................  $(178) $(305) $  (159) $   921  $53,690
Total assets..........................     13    272    1,113    4,285   63,184
Total liabilities and redeemable
 stock................................    181    571    3,020    8,761    4,056
Total stockholders' equity (deficit)..   (168)  (299)  (1,907)  (4,476)  59,128
</TABLE>
--------
(1) See Note B of Notes to Consolidated Financial Statements for an
    explanation of the method used to determine the weighted average number of
    common and common equivalent shares used in the computation of net loss
    per share amounts.
 
                                      16
<PAGE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
 
OVERVIEW
 
  The Company was organized in December 1991 as a Delaware corporation. During
the period from December 1991 until its first round of venture financing in
October 1994, the Company's products were in various stages of development and
beta testing. There were minimal revenues during this period and the Company
had one full-time employee on October 28, 1994.
 
  On October 28, 1994, the Company received $1.85 million in venture
financing. The proceeds were used to repay Company indebtedness and for
general operating expenses, increased staffing and the purchase of computer
equipment. The Company had eight full-time employees and two independent
contractors on December 31, 1994. Revenues for 1994 totaled $248,000.
 
  A second round of venture financing in April 1995 raised an additional $4.0
million. The proceeds were used for general operating expenses, increased
staffing and the purchase of capital equipment. During the balance of 1995,
the Company expanded its presence by opening six additional sales offices
across the United States and by developing a significant network of resellers
both in the United States and abroad. In March 1995, the Company introduced
EagleRemote and EagleConnect and in July 1995 the Company introduced its
EagleDesk, EagleMobile and an updated version of the Eagle firewall. For the
year ended December 31, 1995, revenue totaled $3.9 million, and the Company
had 58 full-time employees and 9 independent contractors as of that date. In
January 1996, the Company received $5.0 million from Compaq in connection with
the issuance of shares of Series C Convertible Preferred Stock. The Company
raised another $45 million from the initial public offering of its Common
Stock on February 7, 1996. In April 1996, the Company received an additional
$1.0 million from Compaq as consideration for the purchase of warrants issued
to Compaq. Raptor received $4.0 million in October of 1996 when Compaq
exercised such warrants. Compaq's ownership percentage of common stock of the
Company after this transaction is approximately 6.6% and amounts to
approximately $10 million. For the year ended December 31, 1996, operating
revenue totaled $14.5 million, and the Company had 100 full-time employees and
11 independent contractors as of that date. See Note G of Notes to Financial
Statements.
 
  The Company has committed significant research and development resources to
its Eagle products. In 1997, the Company intends to continue to increase its
research and development expenses while also increasing the absolute dollars
it spends in sales and marketing. The Company's expected levels of research
and development are based on its plans for product enhancements and increased
new product development. Selling and marketing expenses are expected to
increase as a result of a continued expansion of distribution channels and
marketing programs. Increases in general and administrative expenses are
planned as the Company expands its finance and administrative staff and incurs
increased expenses for insurance and other general operating expenses. As a
consequence, operating results for a given period could be disproportionately
affected by any shortfall in expected revenue. In addition, fluctuations in
revenue from quarter to quarter will likely have an increasingly significant
impact on the Company's results of operations. In view of the Company's short
operating history, recent revenue growth and recent product introductions, the
Company believes that period-to-period comparisons of its financial results
are not necessarily meaningful and should not be relied upon as an indication
of future performance.
 
RESULTS OF OPERATIONS
 
 COMPARISON OF YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
 
  Revenue. The Company's revenue, which is comprised of sales of software
licenses and maintenance revenues, decreased from $477,000 in 1993 to $248,000
in 1994 as the Company transitioned to a new management team and revised its
sales strategy. In 1995, revenue increased to $3.9 million. This increase,
which resulted primarily from the Company's investment in its distribution
channels, is attributable to increased sales of its Eagle and EagleLAN
products and, to a lesser extent, the introductions of its EagleRemote product
in the first quarter of 1995 and its EagleMobile and EagleDesk products in the
third quarter of 1995. During 1995,
 
                                      17
<PAGE>
 
revenue attributable to the Eagle firewall and EagleLAN products was
approximately $3.3 million, revenue attributable to products introduced in
1995 was approximately $300,000, and revenue attributable to maintenance was
approximately $300,000. In 1996, revenues increased to $14.5 million. This
increase is attributable to the introduction of the Eagle NT firewall, along
with the continued expansion of the Company's distribution channels. The Eagle
NT product, introduced in the first quarter of 1996, accounted for
approximately $7.4 million of the $14.5 million in revenues for the year ended
December 31, 1996. Maintenance revenues increased by $678,000 over those in
1995 to $922,000. This increase is attributable to the increase in business
that the Company experienced during 1996.
 
  Cost of Revenue and Gross Margin. Cost of revenue is comprised of media,
product manuals and labor costs associated with the distribution and support
of the Company's products. Gross margin was $238,000 or 96% of revenue for
1994. Gross margin increased to $3.6 million or 92% for 1995 as a result of
increased sales volume. In 1996, the gross margin was $13.7 million or 94%.
Gross margins improved in 1996 due to increased revenues and efficiencies
achieved in the production and customer support departments.
 
  Selling and Marketing. Selling and marketing expenses, which include salary,
commission, advertising, travel and other selling-related expenses, increased
from $326,000 in 1994 to $3.8 million in 1995. This substantial increase in
spending resulted from the costs associated with the opening of eight sales
offices and the development of the Company's network of VARs. Selling and
marketing expenses as a percentage of sales were 98% for 1995. Selling and
marketing expenses increased from $3.8 million in 1995 to $9.0 million in
1996, or 62% of sales in 1996. The increase from 1995 to 1996 is related to
the continued investment being made in the Company's distribution channels,
the increase in costs directly associated with revenue and the expansion of
operations to include offices in London, England and Amsterdam, the
Netherlands.
 
  Research and Development. Research and development expenses, which include
salary, payments to independent contractors and other costs associated with
the development of new products and the enhancement of existing products,
increased from $708,000 in 1994 to $1.4 million in 1995 and $3.1 million in
1996. The increases resulted from the addition of development personnel and
contract developers. The Company anticipates that its expenditures in this
area will increase during 1997 as the Company increases the functionality of
products, makes its products available on additional platforms and develops
new products.
 
  General and Administrative. General and administrative expenses include
salary, rent, other expenses associated with the general management and
administration of the Company. General and administrative expenses increased
from $166,000 in 1993 to $1.2 million in 1994, primarily due to the accrual of
$850,000 in litigation expenses in 1994 for certain pending litigation and, to
a lesser extent, the relocation of the Company's headquarters to Waltham,
Massachusetts and increased staffing levels. See "Business--Litigation."
General and administrative expenses were $1.2 million in both 1994 and 1995.
However, in 1994 the largest cost was $850,000 of litigation expenses which
were offset in 1995 by the Company's investment in management and
administrative staff. General and administrative costs were $2.2 million in
1996, an increase of $1.0 million over those in 1995. The increase is due to
increased staffing levels and public company compliance costs. The Company
anticipates that general and administrative expenses will increase in absolute
dollars over the 1996 levels through 1997 as it increases its finance and
administrative staff and incurs additional general operating costs associated
with the Company's growth and its reporting obligations as a public company.
In November 1995, the Company recorded unearned compensation of $1.0 million
in conjunction with the grant of options to purchase 512,700 shares of Common
Stock at an exercise price of $.50 per share and $150,000 in conjunction with
the sale of 75,000 shares of restricted common stock at a price of $.50 per
share. The non-cash compensation expense for the options and the restricted
stock will be recognized over four years. See Notes H and K of Notes to
Consolidated Financial Statements.
 
  Interest Income and Expense. Interest income of $7,000 in 1994 increased to
$103,000 in 1995 due to interest earned on the net proceeds from the venture
financing. Interest income grew from $103,000 in 1995 to $2.4 million in 1996
due to interest earned on the net proceeds from the Company's initial public
offering.
 
                                      18
<PAGE>
 
  Provision for Income Taxes. The effective income tax rate for the years
ended December 31, 1996 and 1995 was 0 percent, due to operating losses
generated in 1995 and prior years, and the carryover of those losses into
1996. The tax rate in 1997 is expected to be 35%. This tax rate estimate is
based on current tax law and is subject to change.
 
 QUARTERLY COMPARISONS
 
  The following table presents selected financial information for the periods
indicated. This information has been derived from the Company's unaudited
financial statements which, in the opinion of management, reflect all
adjustments necessary to fairly present this information when read in
conjunction with the financial statements and notes thereto included elsewhere
in this Form 10-K. The results of operations for any quarter are not
necessarily indicative of the results to be expected for any future period.
 
<TABLE>
<CAPTION>
                                                THREE MONTHS ENDED
                         -----------------------------------------------------------------
                         MARCH 31, 1996 JUNE 30, 1996 SEPTEMBER 30, 1996 DECEMBER 31, 1996
                         -------------- ------------- ------------------ -----------------
                                                  (IN THOUSANDS)
<S>                      <C>            <C>           <C>                <C>
Revenue.................     $2,068        $2,907           $4,141            $5,412
Cost of revenue.........        152           209              223               262
                             ------        ------           ------            ------
Gross margin............      1,916         2,698            3,918             5,150
                             ------        ------           ------            ------
Operating expenses:
  Selling and
   marketing............      1,597         1,944            2,458             2,997
  Research and
   development..........        567           884              827               799
  General and
   administrative.......        550           421              584               667
                             ------        ------           ------            ------
    Total operating
     expenses...........      2,714         3,249            3,869             4,463
                             ------        ------           ------            ------
Operating income
 (loss).................       (798)         (551)              49               687
Interest income
 (expense), net.........        369           701              656               688
                             ------        ------           ------            ------
Net income (loss).......     $ (429)       $  150           $  705            $1,375
                             ======        ======           ======            ======
</TABLE>
 
LIQUIDITY AND CAPITAL RESOURCES
 
  Since its organization, the Company has financed its operations through the
issuance of equity securities and notes to shareholders and short-term
borrowings. In 1994, the Company raised $1.85 million from a first round of
venture funding. During 1995, the Company raised an additional $4 million from
a second round of venture funding. In January 1996, the Company raised an
additional $5 million through the issuance of shares of Series C Convertible
Preferred Stock to Compaq, which automatically converted one for one to Common
Stock upon the closing of the Company's initial public offering. The Company
received another $1 million from Compaq upon the closing of the initial public
offering as consideration for warrants issued to Compaq. The Compaq warrants
were exercisable for 363,636 shares of Common Stock at $11 per share and were
exercised in October 1996 by Compaq. The Company received $4 million from the
exercise of the Compaq warrants. The Company also raised $45 million from its
initial public offering in February 1996. See Note K of Notes to Consolidated
Financial Statements.
 
  Cash and cash equivalents were $949,000 at the end of 1994, $1.9 million at
the end of 1995, and $38 million at the end of 1996. Cash used in operating
activities increased substantially from $544,000 in 1994 to $3.2 million in
1995 as the Company's operating loss increased to $2.6 million and accounts
receivable increased by $1.6 million. These increases were partially offset by
increases in accrued liabilities and deferred revenue. In 1996, cash provided
by operations was $1.5 million. This increase was primarily due to the
Company's $1.8 million net income in 1996 along with an increase in deferred
revenues of $1 million. Cash used in investing activities increased from
$57,000 in 1994 to $706,000 in 1995 and to $21 million in 1996. The increase
in 1995 is primarily the result of the Company's acquisition of computer
equipment while the 1996 increase was due to
 
                                      19
<PAGE>
 
the Company's investments in marketable securities and a $4 million investment
in the common stock of VPNet. Cash provided by financing activities of $1.5
million in 1994 increased to $4.8 million in 1995, due primarily to the second
round of venture financing. In 1996, Cash provided by financing activities
increased to $55 million due primarily to the proceeds of $45 million from the
Company's initial public offering, $5 million from the sale of warrants and
Common Stock to Compaq and $5.8 million from the issuance of Preferred Stock
to Compaq.
 
  Capital expenditures for property and equipment were $57,000 in 1994,
$706,000 in 1995 and $1,212,000 in 1996. These expenditures have generally
been for computer workstations, personal computers, office furniture and
equipment as well as leasehold additions and improvements. The Company expects
to purchase additional computer equipment during 1997.
 
  The Company believes that cash generated from operations, together with
existing cash and cash equivalents, will be sufficient to finance the
Company's cash needs through at least the first quarter of 1998. The Company
continues to investigate the acquisition of key technology, complementary
product lines and other companies, all of which may be financed by a variety
of sources.
 
FACTORS THAT MAY AFFECT FUTURE RESULTS:
 
  This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially
from those set forth in the forward-looking statements. Factors that might
cause such a difference are set forth below. The words "believe," "expect,"
"anticipate," "intend," "estimate," and other expressions which are
predictions of or indicate future events and trends and which do not relate to
historical matters identify forward-looking statements. Reliance should not be
placed on forward-looking statements because they involve known and unknown
risks, uncertainties and other factors, which may cause the actual results,
performance or achievements of the Company to differ materially from
anticipated future results, performance or achievements expressed or implied
by such forward looking statements. The Company undertakes no obligation to
publicly update or revise any forward-looking statement, whether as a result
of new information, future events or otherwise.
 
  A number of uncertainties exist that could affect the Company's future
operating results, including, without limitation, changes in the market,
changes in technology, competition from larger, more established competitors,
general economic conditions, the Company's continued ability to develop and
introduce innovative products, new product announcements from other companies,
pricing practices of competitors, the Company's ability to control costs and
its ability to attract and retain key employees.
 
  Market prices for securities of software companies have generally been
volatile. In particular, the market price of the Company's common stock has
been and may continue to be subject to significant fluctuations. These
fluctuations may be due to factors specific to the Company or to factors
affecting the computer industry or securities markets in general.
 
  The Company derives substantially all of its revenue from its Eagle family
of network security products, all of which are dependent upon the Company's
Eagle application-level firewall. As a result, any factor adversely affecting
sales of this product could have a material adverse effect on the Company.
 
  The market for network security products and services is new, intensely
competitive, rapidly evolving and subject to rapid technological change. The
Company expects competition to intensify in the future. Due to the rapid
expansion of the network security market, the Company may face competition
from new entrants in the network security industry, possibly including the
Company's resellers. There can be no assurance that the Company's current and
potential competitors will not develop network security products that may be
more effective than the Company's current or future products or that the
Company's technologies and products would not be rendered obsolete by such
developments. An increase in competition could result in price reductions and
loss of market share. Such competition and any resulting reduction in gross
margins could have a material adverse effect on the Company's business,
financial condition and results of operations. While the Company believes that
it does not compete against manufacturers of other classes of security
products (such as encryption
 
                                      20
<PAGE>
 
and authentication), there can be no assurance that the Company's customers
will not perceive the products of such other companies as substitutes for the
Company's products.
 
  The Company recently has experienced significant growth in both revenue and
in employees. This growth has resulted in an increase in responsibilities
placed upon the Company's management and has placed added pressures on the
Company's operating and financial systems. In 1995, the Company hired 50 new
employees, including its Chief Executive Officer and other key members of
management, to help it manage this growth. In 1996, the Company hired 42
additional employees including its Chief Financial Officer. The Company's
ability to assimilate new personnel will be critical to the Company's
performance, and there can be no assurance that the management and systems
currently in place will be adequate if the Company continues to grow or that
the Company will be able to implement additional systems successfully and in a
timely manner as required.
 
  The Company's future success depends to a significant extent on its senior
management and other key employees, including key development personnel. The
Company has no employment agreements with any of its employees. The Company
also believes that its future success will depend in large part on its ability
to attract and retain additional key employees. Any inability on the part of
the Company to attract and retain additional key employees or the loss of one
or more of its current key employees could have a material adverse effect on
the Company's business, financial condition and results of operations.
 
  The Company distributes its products primarily through strategic VARs,
regional VARs and international VARs. The success of the Company is therefore
dependent in large part upon the performance of its resellers, and is
therefore outside the Company's control. The Company's relationships with most
of its resellers have been established within the last year, and the Company
is unable to predict with accuracy the extent to which its resellers will be
successful in marketing and selling the Company's products.
 
  In addition, as the network security industry continues to evolve, the
Company plans to develop and introduce new products to address the changing
needs of the evolving network security market. There can be no assurance that
the Company will be able to develop new products or that such products will
achieve market acceptance or, if market acceptance is achieved, that the
Company will be able to maintain such acceptance for a significant period of
time. Any inability of the Company to develop products on a timely basis that
address changing customer requirements may require the Company to
substantially increase development expenditures or may result in a loss of
market share to a competitor. Moreover, products as complex as those offered
by the Company may contain undetected errors when first introduced or when new
versions are released. The Company has in the past discovered software errors
in certain of its product offerings after their introduction and has
experienced delays and lost revenue during the period required to correct
these errors. In particular, the personal computer hardware environment is
characterized by a wide variety of non-standard configurations that make pre-
release testing for programming or compatibility errors very difficult and
time-consuming. There can be no assurance that, despite testing by the
Company, errors will not occur in new products or releases after commencement
of commercial shipments, resulting in adverse publicity, in loss of or delay
in market acceptance, or in claims by customers against the Company, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
 
  Prior to 1996, there was no public market for the Company's Common Stock. In
addition, in recent years the stock market in general, and the market for
shares of small capitalization companies in particular, have experienced
extreme price fluctuations, which have often been unrelated to the operating
performance of affected companies. There can be no assurance that the market
price of the Company's Common Stock will not experience significant
fluctuations in the future, including fluctuations that are unrelated to the
Company's performance. General market price declines or market volatility in
the future could have a material adverse effect on the market price of the
Common Stock.
 
                                      21
<PAGE>
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and
Stockholders of Raptor Systems, Inc.:
 
  We have audited the accompanying consolidated balance sheets of Raptor
Systems, Inc. and its wholly owned subsidiaries as of December 31, 1995 and
1996 and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Raptor Systems, Inc. and
its wholly owned subsidiaries as of December 31, 1996 and 1995 and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
 
                                          Coopers & Lybrand L.L.P.
 
Boston, Massachusetts
January 28, 1997
 
                                      22
<PAGE>
 
                              RAPTOR SYSTEMS, INC.
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                       ------------------------
                                                          1995         1996
                                                       -----------  -----------
                                     ASSETS
<S>                                                    <C>          <C>
Current assets:
  Cash and cash equivalents..........................  $ 1,889,584  $37,567,372
  Marketable securities..............................          --    15,396,866
  Accounts receivable, less allowances of $197,000
   and $431,000, at December 31, 1995 and 1996,
   respectively......................................    1,497,385    4,048,456
  Other current assets...............................      272,591      733,507
                                                       -----------  -----------
    Total current assets.............................    3,659,560   57,746,201
                                                       -----------  -----------
  Net property and equipment.........................      625,550    1,401,447
  Equity investments.................................          --     4,036,001
                                                       -----------  -----------
    Total assets.....................................  $ 4,285,110  $63,183,649
                                                       ===========  ===========
                 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  Accounts payable...................................  $   131,851  $   481,266
  Accrued liabilities................................      573,250    1,879,903
  Accrued litigation.................................      820,115      114,426
  Bank debt..........................................      681,972          --
  Deferred revenue...................................      530,928    1,580,289
                                                       -----------  -----------
    Total current liabilities........................    2,738,116    4,055,884
                                                       -----------  -----------
Long-term bank debt..................................      253,333          --
Mandatory redeemable convertible preferred stock $.01
 par value; 1,995,839 shares authorized; 1,995,839
 shares issued and outstanding at December 31, 1995
 and none at December 31, 1996. .....................    5,769,649          --
Stockholders' equity (deficit):
  Preferred stock, $.01 par value; 3,004,161 and
   5,000,000 shares authorized at December 31, 1995
   and 1996, respectively; none issued and
   outstanding.......................................          --           --
  Common stock, $.01 par value; 30,000,000 shares
   authorized; 2,449,770 and 13,102,528 shares issued
   and outstanding at December 31, 1995 and 1996,
   respectively......................................       24,498      131,025
Additional paid-in capital...........................     (408,549)  60,989,463
Accumulated deficit..................................   (2,978,580)  (1,177,620)
Cumulative translation adjustment....................          --        (1,746)
Unearned compensation................................   (1,113,357)    (813,357)
                                                       -----------  -----------
    Total stockholders' equity (deficit).............   (4,475,988)  59,127,765
                                                       -----------  -----------
    Total liabilities and stockholders' equity.......  $ 4,285,110  $63,183,649
                                                       ===========  ===========
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                       23
<PAGE>
 
                              RAPTOR SYSTEMS, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                              YEARS ENDED DECEMBER 31,
                                         -------------------------------------
                                            1994         1995         1996
                                         -----------  -----------  -----------
<S>                                      <C>          <C>          <C>
Revenue................................  $   247,548  $ 3,901,634  $14,527,059
Cost of revenue........................        9,594      307,424      845,900
                                         -----------  -----------  -----------
Gross margin...........................      237,954    3,594,210   13,681,159
Operating expenses:
  Selling and marketing................      326,386    3,836,097    8,995,697
  Research and development.............      707,847    1,367,370    3,077,096
  General and administrative...........    1,165,036    1,153,154    2,221,359
                                         -----------  -----------  -----------
    Total operating expenses...........    2,199,269    6,356,621   14,294,152
                                         -----------  -----------  -----------
Operating loss.........................   (1,961,315)  (2,762,411)    (612,993)
Interest income........................        6,900      102,774    2,413,953
Interest expense.......................       (8,801)     (26,766)         --
                                         -----------  -----------  -----------
Net income (loss)......................  $(1,963,216) $(2,686,403) $ 1,800,960
                                         ===========  ===========  ===========
Net income (loss) per common and common
 equivalent share......................  $      (.31) $      (.38) $       .13
Weighted average common and common
 equivalent shares outstanding.........    6,253,492    7,047,923   13,640,543
</TABLE>
 
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                       24
<PAGE>
 
                              RAPTOR SYSTEMS, INC.
 
           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
              FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
 
<TABLE>
<CAPTION>
                            COMMON        COMMON     ADDITIONAL                              CUMULATIVE
                            STOCK         STOCK       PAID-IN-    ACCUMULATED    UNEARNED    TRANSLATION
                           -SHARES-   $.01 PAR VALUE   CAPITAL      DEFICIT    COMPENSATION  ADJUSTMENT     TOTAL
                          ----------  -------------- -----------  -----------  ------------  ----------- -----------
<S>                       <C>         <C>            <C>          <C>          <C>           <C>         <C>
BALANCE AT DECEMBER 31,
 1993...................     975,000     $  9,750    $   145,250  $  (454,336)                 $   --    $  (299,336)
Net loss................                                           (1,963,216)                            (1,963,216)
Issuance of common
 stock..................   1,559,250       15,592        439,839                                             455,431
Shares repurchased and
 canceled...............    (468,750)      (4,687)       (95,307)                                            (99,994)
Accumulated deficit
 reclassified upon
 termination of
 subchapter S status....                              (2,125,375)   2,125,375                                    --
                          ----------     --------    -----------  -----------  -----------     -------   -----------
BALANCE AT DECEMBER 31,
 1994...................   2,065,500     $ 20,655    $(1,635,593) $  (292,177)                 $   --    $(1,907,115)
Net loss................                                           (2,686,403)                            (2,686,403)
Exercise of stock
 options................     309,270        3,093         14,894                                              17,987
Issuance of common
 stock..................      75,000          750         36,750                                              37,500
Issuance of stock
 options and restricted
 stock below fair market
 value..................                               1,175,400               $(1,175,400)                      --
Amortization of unearned
 compensation...........                                                            62,043                    62,043
                          ----------     --------    -----------  -----------  -----------     -------   -----------
BALANCE AT DECEMBER 31,
 1995...................   2,449,770     $ 24,498    $  (408,549) $(2,978,580) $(1,113,357)    $   --    $(4,475,988)
Net income..............                                            1,800,960                              1,800,960
Exercise of stock
 options................     441,105        4,411        175,275                                             179,686
Issuance of common
 stock..................   3,360,505       33,605     50,521,603                                          50,555,208
                          ----------     --------    -----------                                         -----------
Conversion of preferred
 stock..................   6,487,512       64,875      5,704,774                                           5,769,649
                          ----------     --------    -----------                                         -----------
Issuance/Exercise of
 stock warrants.........     363,636        3,636      4,996,360                                           4,999,996
Cumulative translation
 adjustment.............                                                                        (1,746)       (1,746)
Amortization of unearned
 compensation...........                                                           300,000                   300,000
                          ----------     --------    -----------  -----------  -----------     -------   -----------
BALANCE AT DECEMBER 31,
 1996...................  13,102,528     $131,025    $60,989,463  $(1,177,620) $  (813,357)    $(1,746)  $59,127,765
                          ==========     ========    ===========  ===========  ===========     =======   ===========
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                       25
<PAGE>
 
                              RAPTOR SYSTEMS, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                              YEARS ENDED DECEMBER 31,
                                        --------------------------------------
                                           1994         1995          1996
                                        -----------  -----------  ------------
<S>                                     <C>          <C>          <C>
Operating activities:
  Net income (loss).................... $(1,963,216) $(2,686,403) $  1,800,960
  Adjustments to reconcile net income
   (loss) to net cash provided by (used
   in) operating activities:
    Depreciation.......................       8,091      135,176       435,894
    Provision for receivable
     allowances........................         --       195,000       234,000
    Compensation expense on equity
     issuances.........................     355,437       62,043       300,000
    Changes in operating assets and
     liabilities:
      Accounts receivable..............     153,194   (1,632,605)   (2,785,071)
      Other assets.....................     (48,958)    (223,633)     (460,915)
      Accounts payable.................     (28,789)      56,368       355,517
      Accrued liabilities..............      45,630      481,791     1,298,804
      Accrued litigation...............     850,000      (29,885)     (705,689)
      Deferred revenue.................      84,376      446,552     1,049,361
                                        -----------  -----------  ------------
  Cash provided by (used in) operating
   activities..........................    (544,235)  (3,195,596)    1,522,861
Investing activities:
  Purchases of property and equipment..     (57,486)    (706,072)   (1,211,791)
  Purchases of marketable securities...         --           --    (15,396,866)
  Equity investment in common stock....         --           --     (4,036,001)
                                        -----------  -----------  ------------
    Cash used in investing activities..     (57,486)    (706,072)  (20,644,658)
                                        -----------  -----------  ------------
Financing activities:
  Amounts payable to related parties...    (305,433)    (115,500)          --
  Proceeds from issuance of common
   stock...............................         --        55,487    44,965,245
  Proceeds from exercise of stock
   warrants............................         --           --      3,999,996
  Proceeds from issuance of stock
   warrants............................         --           --      1,000,000
  Net proceeds from issuance of
   preferred stock.....................   1,802,958    3,966,691     5,769,649
  Proceeds from bank debt..............         --       935,305      (935,305)
                                        -----------  -----------  ------------
  Cash provided by financing
   activities..........................   1,497,525    4,841,983    54,799,585
                                        -----------  -----------  ------------
  Net increase in cash and cash
   equivalents.........................     895,804      940,315    35,677,788
Cash and cash equivalents at beginning
 of year...............................      53,465      949,269     1,889,584
                                        -----------  -----------  ------------
Cash and cash equivalents at end of
 year.................................. $   949,269  $ 1,889,584  $ 37,567,372
                                        ===========  ===========  ============
</TABLE>
 
   The accompanying notes are an integral part of the consolidated financial
                                  statements.
 
                                       26
<PAGE>
 
                             RAPTOR SYSTEMS, INC.
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
A. NATURE OF BUSINESS:
 
  The Company develops, markets, licenses and supports a family of integrated
network security software products that provide comprehensive, enterprise-wide
security for organizational networks, including networks that are connected to
the Internet and Intranets.
 
B. SIGNIFICANT ACCOUNTING POLICIES:
 
 Revenue Recognition
 
  The Company's revenue recognition policy is in conformance with the American
Institute of Certified Public Accountants' Statement of Position 91-1,
"Software Revenue Recognition." Revenue is generally recognized from the
license of software upon shipment, net of allowances, provided that no
significant vendor obligations remain. Allowances for estimated future
returns, credits, and doubtful accounts are netted against accounts
receivable. Support, service and training revenue is recognized as the
services are performed. Payments received in advance of revenue recognition
are included in deferred revenue.
 
 Research and Development and Software Development Costs
 
  Research and development expenditures are charged to operations as incurred.
Software development costs subsequent to the establishment of technological
feasibility are capitalized and amortized to cost of sales against the related
revenue. Based on the Company's product development process, technological
feasibility is established upon completion of a working model. Costs incurred
by the Company between completion of the working model and the point at which
the product is ready for general release have been insignificant.
 
 Cash Equivalents
 
  The Company considers all short-term investments, which consist of money
market accounts and Government securities with original maturities of less
than 90 days, to be cash equivalents. Securities held with maturities greater
than 90 days but less than a year are classified as marketable securities
available for sale.
 
 Income Taxes
 
  Prior to October 26, 1994, the Company was an S Corporation under the rules
of the Internal Revenue Code. Under this election, the company passes through
to its shareholders, as individual taxpayers, each item of income, loss,
deduction or credit. Accordingly, no federal income tax was recorded through
October 26, 1994. Effective October 26, 1994, the Company changed from an S
Corporation to a C Corporation, which requires that taxes on income be paid by
the Company. As a result of the termination of S Corporation status, the
Company has reclassified the cumulative deficit from accumulated deficit to
additional paid-in capital.
 
  The Company uses the liability method of accounting for income taxes. Under
this method, deferred tax liabilities and assets are determined based on the
differences between the tax and financial reporting basis of assets and
liabilities and are measured using the tax rates and laws that will be in
effect when the differences are expected to reverse. The Company provides a
valuation allowance against net deferred tax assets if, based upon the
available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized.
 
 Property and Equipment
 
  Property and equipment are stated at cost and are depreciated by use of the
straight-line method over the estimated useful lives of the related assets,
which range from three to five years. Upon sale or retirement, the asset cost
and related accumulated depreciation are removed from the respective accounts,
and any related gain or loss is reflected in operations. Repair and
maintenance costs are expensed as incurred.
 
                                      27
<PAGE>
 
                             RAPTOR SYSTEMS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Computation of Net Income per Common and Common Equivalent Share
 
  Net income per common share is computed based upon the weighted average
number of common shares and common equivalent shares outstanding. Common
equivalent shares are included in the per share calculations where the effect
of their inclusion would be dilutive. In accordance with the Securities and
Exchange Commission Staff Accounting Bulletin No. 83 ("SAB No. 83") all common
and common equivalent shares and other potentially dilutive instruments
(including stock options and the redeemable convertible preferred stock)
issued during the twelve month period prior to the initial filing date in
December 1995 of the Registration Statement for the Company's initial public
offering have been included in the calculation as if they were outstanding for
all periods presented. The common equivalent shares for stock options were
determined using the treasury stock method at an assumed initial public
offering price of $11.00 per share. The redeemable convertible preferred stock
was included on an as-if converted basis.
 
  Fully diluted net income per common share is the same as primary net income
per common share for all periods presented.
 
 Accounting Standards
 
  SFAS No. 128, "Earnings Per Share", must be adopted in 1997. The standard
requires the replacement of the current primary earnings per share
presentation with a basic earnings per share presentation. Basic earnings per
share includes no dilution and is computed by dividing income available for
common stock holders by the weighted-average number of common shares
outstanding for the period. Management has not made a determination of the
impact the adoption of SFAS No. 128 would have on the consolidated financial
statements.
 
 Risks and Uncertainties
 
  The Company invests its cash primarily in deposits and money market funds
with commercial banks and in government securities. The Company has not
experienced any losses to date on its invested cash.
 
  The Company sells its products to a wide variety of customers in a variety
of industries. The Company performs ongoing credit evaluations of its
customers but does not require collateral or other security to support
customer receivables. The Company maintains reserves for credit losses and
such losses have been within management's expectations.
 
  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets, liabilities and accrued litigation at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates and would impact future results of operations and cash flows.
 
C. PROPERTY AND EQUIPMENT:
 
  Property and equipment consists of the following:
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                          ---------------------
                                                            1995        1996
                                                          ---------  ----------
   <S>                                                    <C>        <C>
   Office and computer equipment......................... $ 677,460  $1,571,786
   Furniture and fixtures................................    68,585     204,959
   Leasehold improvements................................    30,663     211,754
                                                          ---------  ----------
                                                            776,708   1,988,499
   Less accumulated depreciation.........................  (151,158)   (587,052)
                                                          ---------  ----------
                                                          $ 625,550  $1,401,447
                                                          =========  ==========
</TABLE>
 
                                      28
<PAGE>
 
                             RAPTOR SYSTEMS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
D. INCOME TAXES:
 
  The effective tax rate varies from the amount computed using the statutory
federal income tax rate as follows:
 
<TABLE>
<CAPTION>
                                                                  1995    1996
                                                                 ------  ------
   <S>                                                           <C>     <C>
   Statutory rate...............................................  34.00%  34.00%
   Other........................................................    --     1.46
   Utilization of net operating losses.......................... (34.00) (35.46)
                                                                 ------  ------
   Net provision for income taxes...............................   0.00%   0.00%
                                                                 ======  ======
</TABLE>
 
 
  The components of the net deferred tax asset at December 31, 1995 and 1996,
were as follows:
 
<TABLE>
<CAPTION>
                                                         DECEMBER 31,
                                                    ------------------------
                                                       1995         1996
                                                    -----------  -----------
   <S>                                              <C>          <C>
   Federal and state net operating loss
    carryforwards.................................. $   912,000  $   500,000
   Stock options...................................         --     2,128,000
   Reserves and other..............................     388,000      409,000
                                                    -----------  -----------
   Deferred income tax assets......................   1,300,000    3,037,000
   Valuation allowance.............................  (1,300,000)  (3,037,000)
                                                    -----------  -----------
   Net deferred income tax assets.................. $       -0-  $       -0-
                                                    ===========  ===========
</TABLE>
 
  Deferred tax assets are recognized for the estimated future tax consequences
attributable to tax benefit carryforwards and to differences between the
financial statement amounts of assets and liabilities and their respective tax
basis. Deferred tax assets are measured using enacted tax rates.
 
  At December 31, 1996 the Company had federal tax net operating loss
carryforwards of approximately 6,900,000, of which $5,600,000 related to
disqualifying dispositions of qualified incentive stock options. The tax
benefit of $2,128,000 related to disqualifying dispositions of qualified
incentive stock options will be credited to equity when realized. The federal
net operating loss carryforwards expire beginning in 2009.
 
  As required by Financial Accounting Statement No. 109, management of the
Company has evaluated the positive and negative evidence of the realizability
of its deferred tax asset. Management has considered the Company's history of
losses and concluded, in accordance with the applicable accounting standards,
that it is more likely than not that the net deferred tax assets will not be
realized. Accordingly the Company has provided a full valuation allowance.
Management re-evaluates the positive and negative evidence on a quarterly
basis.
 
E. BANK DEBT:
 
  In September 1995, the Company obtained a working capital line of credit in
the amount of $600,000 from a bank at the bank's prime rate plus 1/2% with
final payment due in August 1996 and an equipment line of credit of $400,000
at the bank's prime rate plus 1%, which was available through December 31,
1995, with final payment due in June 1998. Amounts outstanding at December 31,
1995 totaled $535,305 and $400,000 under the working capital line and
equipment line, respectively. These lines of credit are secured by all of the
 
                                      29
<PAGE>
 
                             RAPTOR SYSTEMS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
Company's assets. In January 1996, these credit facilities were amended to
provide (i) a working capital line of $2.0 million which increased to $5.0
million after the closing of the Company's initial public offering, at the
bank's prime rate plus 1/2% with final payment due in January 1997; (ii) an
additional equipment line of credit in the amount of $500,000 which increased
to $1.0 million after the closing of the Company's initial public offering, at
the bank's prime rate plus 1%, which was available through September 1996; and
(iii) a stand-by line of credit of $1.0 million at the bank's prime rate plus
2%, which was due in July 1996. At December 31, 1995 and 1996 the bank's prime
rate was 8 1/2% and 8 1/4%, respectively. During 1996 all outstanding balances
under these lines were paid down. As of December 31, 1996 there were no
borrowings under these lines of credit.
 
F. COMMITMENTS:
 
 Lease Commitments
 
  In November 1994, the Company leased office facilities in Waltham,
Massachusetts for its corporate headquarters. The Company has entered into
other operating lease agreements for sales office facilities in New York,
Virginia, Florida, California, Texas, Amsterdam and London expiring at various
dates through the year 2001. The agreements generally require the payment of
utilities, real estate taxes, insurance and repairs. Total rent expense for
all operating leases was $7,695, $200,729 and $498,500 in 1994, 1995 and 1996,
respectively.
 
  Future minimum operating lease payments as of December 31, 1996 are
$487,440, $113,623, $115,151, $98,014 and $41,790 due in 1997, 1998, 1999,
2000, and 2001, respectively.
 
G. REDEEMABLE CONVERTIBLE PREFERRED STOCK:
 
  At the time of its initial public offering, the Company had authorized
1,995,839 shares of $.01 par value Redeemable Convertible Preferred Stock,
consisting of 1,181,500 authorized shares of Series A Redeemable Convertible
Preferred Stock ("Series A Redeemable Stock") and 814,339 shares of Series B
Redeemable Convertible Preferred Stock ("Series B Redeemable Stock"), none of
which was outstanding at December 31, 1996.
 
  On October 28, 1994, the Company sold 1,181,500 shares of Series A
Redeemable Stock in a private offering at a purchase price of $1.57 per share
and received net proceeds of $1,802,958. Each share of Series A Redeemable
Stock was converted into three shares of the Company's common stock upon the
Company's initial public offering. The Series A Redeemable Stock had no fixed
dividend requirement and had a liquidation preference of $1.57 per share.
 
  In April 1995, the Company sold 814,339 shares of Series B Redeemable Stock
at a price of $4.93 per share. The Series B Redeemable Stock has the same
terms as the Series A Redeemable Stock. Each share of Series B Redeemable
Stock was converted into three shares of the Company's common stock at the
Company's initial public offering.
 
  In January 1996, the Company agreed in principle to a Stock Purchase and
Warrant Agreement with Compaq Computer Corporation ("Compaq") for $5 million
in Series C Redeemable Convertible Preferred Stock and $1 million in warrants.
Each share of Series C Redeemable Convertible Stock was converted into one
share of the Company's common stock upon the Company's initial public
offering. On April 15, 1996, the Company and Compaq executed a definitive
Network Security Partnership Agreement. As a result of that agreement,
warrants to purchase 363,636 shares of the Company's common stock became
exercisable. On October 11, 1996 Compaq, through a wholly-owned subsidiary,
exercised its warrants to purchase 363,636 shares of the Company's Common
Stock at a price of $11.00 per share.
 
 
                                      30
<PAGE>
 
                             RAPTOR SYSTEMS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
H. STOCK COMPENSATION PLANS:
 
 STOCK OPTION PLAN:
 
  The 1995 Stock Option and Grant Plan (the "1995 Stock Option Plan") permits
the grant of (i) options to purchase shares of Common Stock intended to
qualify as incentive stock options under Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), (ii) options that do not so qualify and
(iii) shares of Common Stock. Each non-employee director initially elected to
the Board of Directors in the future will receive an automatic option grant to
purchase 5,000 shares of Common Stock when such director is first elected to
the Board of Directors, with 1,000 option shares vested at the time of grant
and the remainder vesting proportionately over four years. In addition, each
non-employee director will receive an automatic option grant to purchase 2,500
shares of Common Stock on each January 1st that such director is a member of
the Board of Directors, with 500 option shares vested at the time of grant and
the remainder vesting proportionately over four years. All option grants to
non-employee directors will be at a per share exercise price equal to the fair
market value of the Common Stock at the time of grant and have a ten year
life. The 1995 Stock Option Plan is designed and intended as a performance
incentive for officers, directors, employees, consultants and other key
persons performing services for the Company to encourage such persons to
acquire or increase a proprietary interest in the success of the Company. The
1995 Stock Option Plan is administered by the Compensation Committee as
appointed by the Board of Directors from time to time. The 1995 Stock Option
Plan was amended in 1996 to allow for the delegation by the Compensation
Committee of its authority to grant incentive stock options to non-executive
employees of the Company to the Company's Chief Executive Officer.
 
  Below is a summary of stock option activity under the Plans through December
31, 1996:
 
<TABLE>
<CAPTION>
                                                        OPTIONS OUTSTANDING
                                                     ---------------------------
                                                                    WEIGHTED
                                           SHARES               AVERAGE EXERCISE
                                         AVAILABLE    SHARES         PRICE
                                         ----------  ---------  ----------------
   <S>                                   <C>         <C>        <C>
   Balance at December 31, 1994.........  2,298,750        --           --
   Shares Authorized....................  1,250,000        --           --
   Options Granted...................... (2,730,144) 2,730,144       $ 0.17
   Options Exercised....................        --    (309,263)      $ 0.06
   Options Canceled.....................     83,065    (83,065)      $ 0.05
                                         ----------  ---------
   Balance at December 31, 1995.........    901,671  2,337,816       $ 0.18
                                         ----------  ---------
   Options Granted......................   (645,825)   645,825       $19.12
   Options Exercised....................        --    (441,105)      $ 0.41
   Options Canceled.....................    122,315   (122,315)      $10.11
                                         ----------  ---------
   Balance at December 31, 1996.........    378,161  2,420,221       $ 4.69
                                         ==========  =========
</TABLE>
 
                                      31
<PAGE>
 
                             RAPTOR SYSTEMS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The following table summarizes the status of the Company's stock options
outstanding and exercisable at December 31, 1996:
 
<TABLE>
<CAPTION>
                                           STOCK OPTIONS           STOCK OPTIONS
                                            OUTSTANDING             EXERCISABLE
                                   ------------------------------ ----------------
                                              WEIGHTED
                                               AVERAGE
                                              REMAINING  WEIGHTED         WEIGHTED
                                             CONTRACTUAL AVERAGE          AVERAGE
    RANGE OF                                    LIFE     EXERCISE         EXERCISE
 EXRCISE PRICESE                    SHARES   (IN YEARS)   PRICE   SHARES   PRICE
---------------                    --------- ----------- -------- ------- --------
   <S>                             <C>       <C>         <C>      <C>     <C>
   $0 to .05...................... 1,145,869    8.17      $  .05  148,066  $  .05
   $.06 to $.22...................   211,790    8.61      $  .20   21,254  $  .20
   $.23 to $1.00..................   492,505    8.96      $  .75   84,166  $  .75
   $1.01 to $15.24................   113,264    9.04      $ 8.80   13,802  $ 8.80
   $15.25 to $23.24...............   293,293    9.80      $19.39   15,022  $17.11
   $23.25 to 30.13................   163,500    9.55      $26.47   21,870  $29.57
                                   ---------                      -------
   Total.......................... 2,420,221                      304,180
                                   =========                      =======
</TABLE>
 
  For stock options granted below fair market value in November 1995 for
financial reporting purposes, the Company recorded unearned compensation of
$1,025,400 which is being amortized over the four-year vesting period of the
options. Of the outstanding options at December 31, 1995 and 1996, 28,287 and
304,180 were exercisable, respectively.
 
EMPLOYEE STOCK PURCHASE PLAN
 
  The Company's 1995 Employee Stock Purchase Plan (the "Employee Stock
Purchase Plan") was adopted by the Board of Directors in December 1995 and was
approved by the stockholders in January 1996. The Company has reserved a total
of 100,000 shares of Common Stock for issuance under the Employee Stock
Purchase Plan. The Employee Stock Purchase Plan, which is intended to qualify
under Section 423 of the Internal Revenue Code of 1986, as amended, permits
eligible employees of the Company to purchase Common Stock through payroll
deductions of up to ten percent of their compensation. The price of Common
Stock purchased under the Employee Stock Purchase Plan will be 85% of the
lower of the fair market value of the Common Stock on the first or last day of
each six month purchase period. The Employee Stock Purchase Plan will be
administered by the Compensation Committee of the Board of Directors.
Employees are eligible to participate if they are customarily employed by the
Company or any designated subsidiary for at least 20 hours per week and for
more than six months. Under the Plan, the Company sold 10,535 shares to
employees in 1996.
 
                                      32
<PAGE>
 
                             RAPTOR SYSTEMS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Under Financial Accounting Standards No. 123, compensation cost is
recognized for the fair value of the employee's options granted, which was
estimated using the Black-Scholes model with the following assumptions for
1995 and 1996: no dividends for all years; an expected life of 4.5 years;
expected volatility of 0 and .70 percent; and a risk-free interest rate of
6.125 percent. The weighted-average fair value of those stock options granted
in 1995 and 1996 was $27,000 and $931,000, respectively.
 
  Under Financial Accounting Standards No. 123, compensation cost is
recognized for the fair value of the employees' purchase rights, which was
estimated using the Black-Scholes model with the following assumptions for
1996: no dividends for all years; an expected life of .67 year; expected
volatility of .90 percent; and a risk-free interest rate of 5.375 percent. The
weighted-average fair value of those purchase rights granted in 1996 was
$94,000.
 
  The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" and related Interpretations in accounting for
the 1995 Stock Option and Employee Stock Purchase Plans (the "Plans").
Accordingly, no compensation costs have been recognized for the Plans. Had
compensation costs for the Plans been determined on the fair value at the
grant dates for awards under the Plans consistent with the methodology
prescribed under Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation," the Company's net income would have been adjusted to the
pro forma amounts indicated below:
 
<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                       ----------------------
                                                          1995        1996
                                                       ----------  ----------
                                                       (IN THOUSANDS, EXCEPT
                                                          PER SHARE DATA)
   <S>                                                 <C>         <C>
   Net income (loss)
     As reported...................................... $   (2,686) $    1,801
     Compensation expense for stock options and pur-
      chase plan......................................        (27)     (1,052)
                                                       ----------  ----------
     Pro forma net income (loss)......................     (2,713)        749
                                                       ==========  ==========
   Earnings (loss) per share:
     As reported...................................... $     (.38) $      .13
                                                       ==========  ==========
     Pro forma earnings (loss) per share.............. $     (.38) $      .05
                                                       ==========  ==========
</TABLE>
 
I. SAVINGS PLAN:
 
  The Company's Savings Plan (the "401(k) Plan") was adopted by the Company in
1994. All United States employees of the Company are eligible to participate
in the 401(k) Plan upon the completion of 90 days of service. Participants may
elect to defer receipt of compensation and have such deferred amounts
contributed to the 401(k) Plan to a maximum permitted under the Code. The
Company makes no contributions under the 401(k) Plan.
 
J. LITIGATION:
 
  On February 27, 1995, Lightburn and Associates, Inc. ("LAI"), a former
reseller of Raptor products, commenced an action against Raptor in the United
States District Court for the District of Maryland. This action is based on
allegations that Raptor engaged in unfair competition, fraud, intentional
and/or negligent misrepresentation, tortious interference with business
relationships and breach of contract by entering into direct contractual
arrangements with two customers. On December 9, 1996, the Court granted
Raptor's motion for summary judgment on all claims that had been asserted
against Raptor. The Court similarly entered an order dismissing the
counterclaims made by Raptor. As set forth in the Court's order, the case is
now closed, subject to any appeal rights the parties may have. LAI has filed
an appeal of the Court's decision, the outcome of which is not known at this
time.
 
                                      33
<PAGE>
 
                             RAPTOR SYSTEMS, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  On June 10, 1996, Raptor and one of its customers was sued by a former
employee (a sales representative of Raptor who had been previously terminated
by Raptor) claiming that he is owed certain commissions on sales of Raptor
products to this customer. Raptor anticipates that it will vigorously defend
the claims asserted in this action. Discovery in this litigation is ongoing
and at this time Raptor is unable to determine the ultimate outcome of the
litigation.
 
  Litigation costs are included in general and administrative expenses. The
Company believes that the ultimate outcome of the above litigation will not
have a material adverse effect on its financial position.
 
K. STOCKHOLDERS' EQUITY (DEFICIT):
 
  In February 1995, the Company's Board of Directors approved a two hundred
fifty-for-one stock split of the Company's common stock and redeemable
convertible preferred stock, effected as a stock dividend. In December 1995,
the Board of Directors approved a three-for-one split of the common stock
effected as a stock dividend. All share and per share data has been adjusted
to reflect these changes.
 
  In January 1996, the Company amended its Certificate of Incorporation
effecting an increase in the number of authorized common and preferred shares
to 30,000,000 and 5,000,000, respectively. The financial statements have been
adjusted to reflect this change.
 
  The Amended and Restated Certificate of Incorporation also provides that the
Board of Directors of the Company is authorized, without further action of the
stockholders of the Company, to issue up to 5,000,000 shares of Preferred
Stock in classes or series and to fix the designations, powers, preferences
and the relative, participating, optional or other special rights of the
shares of each series and any qualifications, limitations and restrictions
thereon as set forth in the Certificate. Any such Preferred Stock issued by
the Company may rank prior to the Common Stock as to dividend rights,
liquidation preference or both, may have full or limited voting rights and may
be convertible into shares of Common Stock.
 
  In November 1995, the Company sold 75,000 shares of restricted common stock
to its non-employee directors for a total of $37,500 and recorded unearned
compensation of $150,000 which is being amortized over the vesting period. The
shares are subject to restrictions on transfer. The Company has the right to
repurchase any unvested shares held by such directors in the event that they
cease to serve as directors other than as a result of their death or
disability or a sale of the Company. 15,000 shares vested at the time of
issuance and the remainder vests proportionately over four years.
 
  In February 1996, the Company offered 3,360,000 shares of its common stock
for sale to the public. See the Company's Form S-1 filed with the Securities
and Exchange Commission.
 
                                      34
<PAGE>
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
 
  None.
 
                                   PART III.
 
ITEMS 10-13.
 
  The information called for by Item 10 (Directors and Executive Officers of
the Registrant), Item 11 (Executive Compensation), Item 12 (Security Ownership
of Certain Beneficial Owners and Management) and Item 13 (Certain
Relationships and Related Transactions) is incorporated herein by reference to
the registrant's definitive proxy statement for its 1997 Annual Meeting of
Stockholders, which definitive proxy statement is expected to be filed with
the Commission not later than April 30, 1997.
 
  For purposes of calculating the aggregate market value of the voting stock
of the registrant held by nonaffiliates as shown on the cover page of this
report, it has been assumed that the directors and executive officers of the
registrant, as set forth in the Company's definitive proxy statement for its
1997 Annual Meeting of Stockholders, are the only affiliates of the
registrant. However, this should not be deemed to constitute an admission that
all of such persons are, in fact, affiliates or that there are not other
persons who may be deemed affiliates of the registrant.
 
                                   PART IV.
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
  (a) Documents Filed as Part of this Report:
 
    1. FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
                                                                         PAGE
                                                                         -----
       <S>                                                               <C>
       Report of Independent Accountants................................  22
       Consolidated Balance Sheets as of December 31, 1995 and 1996.....  23
       Consolidated Statements of Operations for the Three Years Ended
        December 31, 1996...............................................  24
       Consolidated Statement of Stockholders' Equity (Deficit) for the
        Three Years Ended December 31, 1996.............................  25
       Consolidated Statements of Cash Flows for the Three Years Ended
        December 31, 1996...............................................  26
       Notes to Consolidated Financial Statements....................... 27-34
</TABLE>
 
    2. FINANCIAL STATEMENT SCHEDULES:
 
      All schedules are omitted because they are not applicable, not
    required, or because the required information is included in the
    financial statements or notes thereto.
 
                                      35
<PAGE>
 
    3. EXHIBITS:
 
      Exhibits to the Form 10-K have been included only with the copies of
    the Form 10-K filed with the Commission. Upon request to the Company
    and payment of a reasonable fee, copies of the individual exhibits will
    be furnished.
 
<TABLE>
<CAPTION>
                                                                    LOCATION
     EXHIBIT NO.                  DESCRIPTION                      SEE NOTE:
     -----------                  -----------                    --------------
     <C>         <S>                                             <C>
         3.2     Form of Third Amended and Restated                    (1)
                 Certificate of Incorporation of the Company.
         3.3     Amended and Restated By-laws of the Company.          (1)
         4.3     Amended and Restated 1995 Raptor Systems,             (2)
                 Inc. Stock Option and Grant Plan.
         4.4     Raptor Systems, Inc., 1995 Stock Purchase             (2)
                 Plan.
        10.7     Employment Offer Letter dated January 26,             (1)
                 1995 between the Company and Robert A.
                 Steinkrauss.
        10.8     Stand-Alone Line of Credit Agreement dated            (1)
                 January 10, 1996 between the Company and
                 Silicon Valley East.
        10.9     Fixed Asset Line of Credit Agreement dated            (1)
                 January 10, 1996 between the Company and
                 Silicon Valley East.
        10.10    Working Capital Line of Credit Agreement              (1)
                 dated January 10, 1996 between the Company
                 and Silicon Valley East.
        10.11    Stock and Warrant Purchase Agreement dated            (1)
                 January 16, 1996 between the Company and
                 Compaq Computer Corporation.
        11       Statement regarding computation of earnings     Filed Herewith
                 per share.
        23       Consent of Coopers & Lybrand L.L.P.             Filed Herewith
        24       Power of Attorney for Shaun McConnon, William   Filed Herewith
                 S. Kaiser, Brian D. Owen, Ernest C. Parizeau,
                 David A. Pensak, and Robert Schechter
        27       Financial Data Schedule.                        Filed Herewith
</TABLE>
--------
(1) Incorporated by reference to the similarly numbered exhibit to the
    Company's Form S-1, filed February 6, 1996, Registration Statement (No.
    33-80691)
(2) Incorporated by reference to the similarly numbered exhibit to the
    Company's Form S-8, filed April 3, 1996, Registration Statement (No. 33-
    03146)
 
  (b) Reports on Form 8-K
 
    No reports on Form 8-K were filed during the fourth quarter of 1996
 
                                      36
<PAGE>
 
  PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON MARCH 24,
1997.
 
                                          Raptor Systems, Inc.
 
                                          By: _________________________________
                                                   ROBERT A. STEINKRAUSS
                                            CHAIRMAN OF THE BOARD OF DIRECTORS
                                                AND CHIEF EXECUTIVE OFFICER
 
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
 
              SIGNATURE                        Title                 DATE
 
 
 
      /s/ Robert A. Steinkrauss        Chairman, Chief          March 24, 1997
-------------------------------------   Executive Officer
        ROBERT A. STEINKRAUSS           and Director
                                        (Principal
                                        Executive Officer)
 
 
 
         /s/ Shaun McConnon            President, Chief         March 24, 1997
-------------------------------------   Operating Officer
           SHAUN MCCONNON               and Director
 
 
 
         /s/ John S. Ingalls           Vice President of        March 24, 1997
-------------------------------------   Finance and Chief
           JOHN S. INGALLS              Financial Officer
                                        (Principal
                                        Financial Officer)
 
 
 
        /s/ Robert H. Fincke           Vice President,          March 24, 1997
-------------------------------------   Treasurer and
          ROBERT H. FINCKE              Controller
                                        (Principal
                                        Accounting Officer)
 
 
 
                  *                    Director                 March 24, 1997
-------------------------------------
          WILLIAM S. KAISER
 
 
 
                  *                    Director                 March 24, 1997
-------------------------------------
             BRIAN OWEN
 
 
 
                  *
-------------------------------------  Director                 March 24, 1997
         ERNEST C. PARIZEAU
 
 
 
                  *                    Director                 March 24, 1997
-------------------------------------
           DAVID A. PENSAK
 
 
 
                  *                    Director                 March 24, 1997
-------------------------------------
          ROBERT SCHECHTER
 
      /s/ Robert A. Steinkrauss
*By: ________________________________
(ROBERT A. STEINKRAUSS, AS ATTORNEY-
 IN-FACT FOR THE PERSONS INDICATED)
 
 
                                      37
<PAGE>
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
  EXHIBIT
   NUMBER                           DESCRIPTION                          PAGE
  -------                           -----------                          ----
 <C>        <S>                                                          <C>
 Exhibit 11 --Computation of net income (loss) per share                  39
 Exhibit 23 --Consent of Independent Accountants                          40
 Exhibit 24 --Power of Attorney for William S. Kaiser, Brian D. Owen,
              Ernest C. Parizeau, David A. Pensak, and Robert Schechter   41
 Exhibit 27 --Financial Data Schedule                                     42
</TABLE>