<PAGE>
 
                    U.S. SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549
                                        
                                   Form 10-K
                                        
(Mark One)
    X                Annual Report Pursuant to Section 13 or 15(d) of the
   ---               Securities Exchange Act of 1934
                     For the Fiscal Year Ended December 31, 1998
                                          or
   ---               Transition Report Pursuant to Section 13 or 15(d)   
                     of the Securities Exchange Act of 1934
                     For the transition period from _____ to _____

                        Commission File Number: 0-28100

                            AXENT TECHNOLOGIES, INC.
             (Exact Name of Registrant as specified in its charter)
                                        
       Delaware                                           87-0393420
(State or other jurisdiction of                         (IRS employer
incorporation or organization)                       identification No.)

                  2400 Research Boulevard, Suite 200    20850
                      Rockville, Maryland             (Zip Code)
                    (Address of principal executive office)

     Registrant's telephone number, including area code: (301) 258-5043

          Securities Registered Pursuant to Section 12(b) of the Act:  None

          Securities Registered Pursuant to Section 12(g) of the Act:

                                          Name of Each Exchange
               Title of Each Class:        On which Registered:
               --------------------       ----------------------
               Common Stock, par value    Nasdaq National Market
               $0.02 per share

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 XX   No 
                                       ---     ---

Documents incorporated by reference:  Specified portions of the Definitive
Proxy Statement to be filed with the Commission pursuant to Regulation 14A in
connection with the 1999 Annual Meeting are incorporated herein by reference
into Part III of this Report. Such proxy statement will be filed with the
Securities and Exchange Commission not later than 120 days after the
Registrant's fiscal year ended December 31, 1998.

Indicate by 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 Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K [X].

The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of March 25, 1999 was approximately $801,607,000.

The number of shares of the Registrant's Common Stock outstanding as of March
25, 1999 was 26,391,640.
<PAGE>
 
                            AXENT TECHNOLOGIES, INC.

                                   FORM 10-K

                               TABLE OF CONTENTS

<TABLE>  
<S>           <C>                                                                                   <C> 
Part I
 
Item 1.       Business.............................................................................   1
              Overview
              Industry Background
              AXENT's Information Security Solution
              Sales and Marketing
              Customers
              Product Development
              Competition
              Intellectual Property Rights
              Employees
Item 2.       Properties...........................................................................   8
Item 3.       Legal Proceedings....................................................................   8
Item 4.       Submission of Matters to a Vote of Security Holders..................................   8

Part II
 
Item 5.       Market for the Company's Common Equity and Related Stockholder Matters...............   9
Item 6.       Selected Consolidated Financial Data.................................................  10
Item 7.       Management's Discussion and Analysis of Financial Condition and Results of Operations  11
Item 7A.      Quantitative and Qualitative Disclosures about Market Risk...........................  11
Item 8.       Financial Statements and Supplementary Data..........................................  22
Item 9.       Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.  22

Part III
 
Item 10.      Directors and Executive Officers of the Registrant...................................  22
Item 11.      Executive Compensation...............................................................  22
Item 12.      Security Ownership of Certain Beneficial Owners and Management.......................  22
Item 13.      Certain Relationships and Related Transactions.......................................  22

Part IV
 
Item 14.      Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....................  22
 
Signatures.........................................................................................  46
</TABLE>
<PAGE>
 
                                     PART I

FORWARD-LOOKING STATEMENTS

THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY.
FACTORS THAT MIGHT CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT
LIMITED TO THOSE DISCUSSED IN THE SECTION OF AXENT'S PROSPECTUS/JOINT PROXY
STATEMENT DATED JANUARY 2, 1998 ENTITLED "RISK FACTORS" AND THE SECTION OF THIS
FORM 10-K ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--FACTORS THAT MAY AFFECT FUTURE PERFORMANCE."  READERS
SHOULD CAREFULLY REVIEW THE RISKS DESCRIBED IN OTHER DOCUMENTS AXENT FILED FROM
TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE
QUARTERLY REPORTS ON FORM 10-Q FILED BY AXENT IN 1998 AND TO BE FILED IN 1999.
READERS ARE CAUTIONED NOT TO RELY ON FORWARD-LOOKING STATEMENTS.  AXENT HAS NO
OBLIGATION TO PUBLICLY RELEASE ANY REVISIONS TO FORWARD-LOOKING STATEMENTS OR
REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE OF FILING OF THIS FORM 10-K.

ITEM 1.  BUSINESS.

Overview

     AXENT Technologies, Inc. ("AXENT") is a leading developer and provider
of information security solutions designed to address many of the information
security issues facing organizations using enterprise computer networks,
including systems utilizing the Internet, internal networks, and individual
servers, workstations and desktop and laptop computers. AXENT emphasizes the
breadth of its solutions as well as the functional robustness and multiple
platform coverage of its products and the increasing integration of its
products.  AXENT's products assist organizations in reducing the risks
associated with the inherent vulnerabilities of today's computing environments
where computer hackers, users of Web-based commerce sites, curious or
disgruntled employees, contractors and competitors can potentially gain access
to, modify or destroy sensitive information available on the company's computer
systems or disrupt the normal operation of the systems.

     AXENT's products provide security assessment and policy management, host
and network based intrusion detection, systems and network access control, data
confidentiality, user administration, activity monitoring, secure authentication
solutions for remote network access and virtual private networking capabilities
for remote users and remote sites. These products allow customers to create
trusted systems and networks that are protected from access, theft and damage by
unauthorized users from untrusted systems or networks, such as the Internet, and
also enable the creation of virtual private networks ("VPNs") through the
encrypted transmission of information across untrusted networks.

     AXENT also offers "Lifecycle Security Services" designed to help
organizations develop a framework and roadmap for assessing potential
vulnerabilities; developing security policies, guidelines, practices and
metrics; selecting and implementing solutions; conducting training; and ensuring
appropriate monitoring and compliance. AXENT also offers training and
certification courses for persons interested in the installation and use of
AXENT products or augmenting their basic security knowledge.

     AXENT expects to continue expanding its product and services offerings
through acquisition, internal development and marketing arrangements to maintain
its leadership in the field of information security solutions for enterprise
computing environments. While many of its security products and services have
been internally developed, AXENT has used, and anticipates using, acquisitions
to expand its offerings. Since 1997, AXENT has acquired secure authentication
solutions for remote network access, virtual private networking solutions,
firewalls, network-based intrusion detection and other internet related security
solutions through its acquisitions of AssureNet Pathways, Inc. ("AssureNet") in
March 1997, Raptor Systems, Inc. ("Raptor") in February 1998 and Internet Tools,
Inc. in January of 1999. In addition to the product-related acquisitions, AXENT
added extensive consulting service capabilities and methodologies by acquiring
Secure Network Consulting, Inc. in July 1998.

Industry Background

          As organizations continue to implement and expand distributed
enterprise information systems and attempt to exploit electronic commerce or
business opportunities, mission-critical applications and sensitive data are
deployed on networks of personal computers, workstations and servers, including
public networks such as the Internet.  The 
<PAGE>
 
accessibility and relative anonymity of users on these systems make the
enterprise information systems and the integrity of the information that is
stored on these systems inherently vulnerable to compromise or destruction. In
addition, enterprise information systems are complex and involve a variety of
hardware, operating systems, networking protocols, and applications supplied by
a multitude of vendors, making these systems difficult to manage, monitor and
protect. Further, each application, operating system and device connected to an
enterprise system has its own limited method of addressing security, creating
inconsistencies throughout the system and adding different types of
vulnerabilities that can be exploited by an unauthorized user.

     AXENT believes the demand for information security will continue to
increase as access to internal business information and mission critical
applications expands across geographically dispersed facilities and networks
where critical information may be scattered across thousands of file servers and
personal computers. When customers, remote employees, suppliers, distributors
and other business partners link inexpensively into enterprise information
systems through electronic business or commerce applications, the number of
points of access to critical information, and therefore the number of points of
potential vulnerability, increase exponentially.  In addition, when
organizations use the Internet or other insecure networks as a means of
communication, the data is vulnerable to interception and increased
accessibility by hackers.

     The increased number of users sharing computing resources and communicating
over LANs, WANs and public networks such as the Internet poses significant
access and security issues.  Those issues are difficult to address due to
breadth and ease of access, the use of disparate computing hardware, operating
systems and communications protocols and insecure communications across the
Internet, intranets, extranets and many internal networks.  In addition, an
enterprise security solution must provide a central point of control so that a
security administrator for the enterprise can configure, monitor and manage all
security issues throughout the enterprise uniformly and efficiently.

     Although enterprise information systems have many business advantages, the
conflict between the benefit of easy access to information and the need to
protect and secure sensitive information requires information security solutions
specifically designed to function in large-scale, multi-platform computing
environments.  AXENT believes that those solutions must perform the following
functions:

  -  Security management. Enable centralized definition, management,
     implementation and enforcement of security policies that are tailored to
     the specific needs and requirements of the business.

  -  Access Control. Control access to computing resources such as clients,
     servers, networks, intranets or specific Web-application data for intranets
     and extranets.

  -  Authentication and authorization. Ensure the identity of users attempting
     to access computing resources and assign and enforce the authority of users
     to access, copy, monitor, modify or delete information.

  -  Intrusion Detection. Monitor systems and networks to detect and prevent
     intrusions or unauthorized actions.

  -  User Administration. Centrally administer user's credentials and privileges
     individually and by other criteria, such as function, division or location.

     AXENT believes that many organizations will seek a comprehensive set of
security products that can accommodate a large number of users and integrate
heterogeneous computing resources into a centrally manageable, reliable and
secure computing environment. The operating systems of most distributed
computing platforms and most third-party products generally address only some of
these needs, and few vendors provide centralized security management or user
administration for heterogeneous environments. In an enterprise information
environment, all of these functions must be available on all parts of an
enterprise system--personal computer or workstation, internal network, server
and connections to external networks such as the Internet--to provide robust
security.

Axent's Information  Security Solution

     AXENT's approach to information security is to develop, market and support
security software products that perform a broad range of security functions and
to provide consulting services to address customers' security needs.  AXENT's
products perform a multitude of functions to manage the risk of vulnerabilities
and protect computer networks, including global Internet-based systems, internal
networks and individual servers, workstations and desktop and laptop computers.
AXENT believes that its integrated approach of providing broad security
functionality through its software 
<PAGE>
 
products, combined with its full range of consulting services, provides a more
comprehensive information security solution than the product offerings marketed
by many of its competitors.

     AXENT's products focus on the areas of security policy management,
vulnerability assessment, host and networked-based intrusion detection,
firewalls, strong authentication and authorization as well as single sign-on and
user administration that primarily perform security management functions.  These
products enable organizations to establish appropriate security policies,
including the need for centralized management of the level of security on all
platforms, status reporting and actions to be taken to enforce security
policies.  These products ensure that only authorized users have access to
computing resources such as clients and servers or the network itself, and
monitor all systems to detect and prevent intrusions or unauthorized actions.
These products can also authenticate users logging onto the network and preserve
the confidentiality and integrity of information by allowing only those who have
proper authority to access, copy, monitor, modify or delete information.  In
addition, these products can enable the security administrator to establish
authorized users, create, modify and delete user privileges and manage the
credentials of users.

     AXENT's products that primarily perform network security functions also
are one of AXENT's core strengths.  These products provide comprehensive,
enterprise-wide security for organizational networks, including networks that
are connected to the Internet.  These products include an application-level
firewall, access control products for workgroups and LANs, virtual private
network technology that enables an enterprise to communicate securely over the
Internet and internal networks (including intranets) and products that secure
mobile computer users and remote sites.  These products also include a Web
access product that provides blocking of undesirable sites and a product that
provides centralized management, authentication and authorization of users of
Web applications, such as applications supporting electronic commerce.

     AXENT's product family also includes products that provide user
authentication and encrypted communications over the Internet and public carrier
facilities primarily for the remote access market.  These products include
software tokens that utilize one-time dynamic password challenge/response
identification and authentication methodology that is not susceptible to
"sniffing" programs that detect static challenges or responses or attacks that
randomly generate thousands of short passwords.  These software tokens also are
incorporated into a product that provides virtual private networking using an
encrypted "tunnel" to communicate securely over the Internet, intranets or
public carrier facilities and another bundled product that provides full
authentication, virtual private networking, automatic encryption and decryption
of all files to which the user has access on the user's hard drive or network
drives and user administration functions.

     AXENT's principal information security products offered at December 31,
1998 are as follows:

-  Enterprise Security Manager(TM):   Enables a security administrator to
   centrally define, manage and enforce information security policies in
   enterprise computing environments, and works with other AXENT security
   management products and third-party security products, as well as other
   applications and database security.  It provides a security management
   framework that enables the establishment of security policies based on
   business risk analysis, central control of the level of security on all
   platforms, determination of the status of information security in the
   enterprise and enforcement of corporate security policy.  Enterprise Security
   Manager security policies can be applied to a single user or machine, a group
   of users or machines or to an entire organization.

-  Intruder Alert(TM):  Permits information security administrators to
   monitor an organization's network for suspicious events, unauthorized
   activity and abuse of the network in real time.  It combines packet
   monitoring, audit trail management and real-time activity monitoring, and
   uses knowledge-based technology to correlate multiple events across multiple
   machines to determine if a security violation has occurred. It can alert the
   security administrator of significant security threats in real time and can
   also take active measures to control security, such as disconnecting a
   session, shutting down an application, blocking an external Internet address
   or alerting an Internet firewall to block a particular type of access.

-  Raptor(R) Firewall: Secures communications over the Internet or other public
   networks and serves as a barrier between the Internet and the enterprise
   network by offering the proven security of application-level proxies combined
   with the flexibility and extensibility of packet filtering. Raptor Firewall
   NT incorporates a broad range of security features, including secure
   tunneling with secure standard protocols, spoof checking, a wide selection of
   strong authentication alternatives, a powerful and flexible management
   interface and the industry's only firewall-integrated content blockers. It
   includes a powerful network security management facility, real-time
   suspicious activity monitoring and alert capabilities and virtual private
   networking.
<PAGE>
 
-  NetRecon(TM): An intelligent network probe that scans enterprise networks to
   determine security vulnerabilities, including interrelated threats, and
   enable the security administrator to prioritize activities to plug security
   holes. Its third-generation technology executes multiple scans
   simultaneously, checking for common vulnerabilities in multiple systems,
   firewalls, routers, gateways, Webservers and other devices. NetRecon uses all
   leading network protocols to cover all network devices across a variety of
   operating systems and communications protocols.

-  Defender(TM) Software Token and Defender Security Server(TM): Provides two-
   factor identification and authentication to verify that users are who they
   say they are, in order to prevent unauthorized access to internal network
   resources. The Defender Security Server issues random challenges to users,
   calculates expected responses from the user's unique tokens and authenticates
   the users for network access if the responses match. When installed on a
   laptop or desktop computer, the Defender software token automatically
   computes a response to the challenge generated by the Defender Security
   Server and transmits the response to authenticate the user. A Defender
   hardware token is available for users of different or multiple computers.

-  Enterprise Resource Manager(TM): A family of products designed to administer
   users and other computing resources as well as identify and authenticate
   network users. It provides enterprise-wide user account administration across
   heterogeneous computing platforms, including IBM MVS, UNIX, NetWare, Windows
   NT, Windows 95, Netscape, and others. For end users, Enterprise Resource
   Manager provides one-time authentication, which allows access to a wide range
   of computing platforms and applications without the need to re-authenticate,
   remember remote access procedures or multiple passwords. Enterprise Resource
   Manager includes a series of management modules that enable user account
   administration and authentication for individual platforms. Each shares a
   common architecture, yet provides platform specific components that can be
   purchased and deployed according to the needs of the enterprise.

-  PowerVPN(TM): It provides integrated two-factor user identification,
   authorization and session encryption that creates an encrypted "tunnel" for
   secure communications over the Internet or other public carrier facilities.
   PowerVPN assures that the LAN is secure as it verifies that remote users are
   who they say they are, and it encrypts data transmission from the user's
   personal computer to the corporate LAN.

-  RaptorMobile(TM): It provides multiple levels of security for remote users
   utilizing a PC to connect to an internal network or communicate within an
   Intranet. RaptorMobile provides password protection for the PC, user
   authentication to prevent unauthorized access to internal network resources
   and encrypted "tunneling" of communications to protect the integrity of
   information transmitted over the Internet or other public carrier facilities.

-  Web Defender(TM): It supports a company's growing number of Web applications
   by providing central management to authenticate and authorize end users and
   establish their rights to data available on the Web site and connected
   applications. The result is simple, single sign-on access to proprietary
   corporate data distributed across the Web. With scaleable architecture
   supporting multi-vendor servers, Web Defender is designed to grow as quickly
   as the customer's corporate Web-site.

-  PCShield(TM): It allows managers to centrally define and control access to
   information on computers running Windows 95 or Windows NT through user
   identification and authentication functions. PCShield allows system
   administrators to define file-level access control and automatically encrypts
   and decrypts protected files so that only authorized users can access that
   file on the local hard drive, on a network server or as it is transferred
   over either internal or external networks.

-  Security Briefcase(TM): A three-pronged security solution: two-factor strong
   user authentication, personal VPN and policy-based automated local file
   encryption. Security Briefcase addresses all the remote access security needs
   of the corporate road warrior with cost effective virtual private network
   connectivity, two-factor user authentication, boot protection, and automated
   file encryption.


     AXENT's strategy is to provide a comprehensive family of products that
address many security requirements of an enterprise. AXENT intends to add new
products and enhance its existing products.  AXENT believes that adding new
products and functions to its existing product families and product lines will
allow it to market new technology to current 
<PAGE>
 
customers while it expands its customer base. AXENT also intends to integrate
many of the functions of its products to provide seamless sharing of
functionality and management capability.

     AXENT believes that the depth of its product functionality and breadth of
platform support give it an advantage over its competitors.  Because of the
difficulty in developing software products that function across multiple,
disparate platforms, AXENT believes that its technology leadership creates a
significant barrier to entry for single platform vendors that attempt to support
multiple platforms.  AXENT has invested heavily in developing several cross-
platform technologies, which serve as the core of its product families and
provide hard-to-duplicate product features.

     In addition to its software products, AXENT, through its subsidiary, Secure
Network Consulting, Inc., provides a full range of security consulting services
from security vulnerability assessment to selection and implementation of
solutions.  AXENT's information security analysts deliver standardized fixed-
price consulting packages that can provide customers with an objective
assessment of their existing security systems, identify security vulnerabilities
and suggest corrective actions. The analysts, on a fee basis, assist with
information risk analysis, develop security policy, implement AXENT's products
and help organizations securely connect to the Internet. The analysts also
design customized consulting packages to help customers analyze their
information security requirements, integrate in-house security products into
AXENT's product framework or develop customized information security solutions.

     AXENT believes that a high level of continuing customer service and support
is required to be successful in the enterprise information security market. All
customers who enter into maintenance agreements with AXENT are provided normal
business hours telephone support staffed by experienced information security
professionals. For an additional charge, customers can receive telephone support
twenty-four hours a day, seven days a week. All customers who enter into
maintenance agreements with AXENT receive free upgrades and enhancements to the
current products that are made generally available and access to technical
support personnel for answers to product-related questions.

     AXENT offers a comprehensive, standardized education and training program
to end-users of its products. Training classes are offered through in-house
facilities at various AXENT offices, as well as at customer locations. AXENT
also provides on-site training services upon request by customers. Fees for
educational and training services are charged separately from AXENT's software
products.  In addition, Secure Network Consulting, Inc. has announced a program
to train and certify personnel in the information technology industry who
satisfactorily complete a training course on AXENT products.

Sales and Marketing

     AXENT markets its products and services through a direct selling
organization and through a mix of indirect channels, including two-tiered
distribution, original equipment manufacturers ("OEMs"), distributors, resellers
and systems integrators, both domestically and abroad. The sales organization is
divided regionally among the Americas and international operations, which is
divided into Europe and the Asia/Pacific regions. AXENT has a number of domestic
sales offices and has international sales offices in England, several other
countries in Europe, Australia and Japan.  During 1998, approximately 56% of
AXENT total revenues were through the direct selling organization and
approximately 44% of total revenues came through AXENT's indirect channels,
compared with approximately 49% of AXENT total revenues through the direct sales
organization and approximately 51% of total revenues through AXENT's indirect
channels during 1997.

     International revenues accounted for approximately 27% of AXENT's revenues
in 1998 and approximately 22% of AXENT's revenues in 1997.  See Note 14 of Notes
to the AXENT Consolidated Financial Statements for financial information
regarding AXENT's foreign operations.

     A customer's decision to use AXENT's products may involve a substantial
financial commitment, which may require a substantial evaluation period and
approval of the customer's senior management.  A customer's decision to license
certain AXENT products may also involve significant user education and
deployment costs, as well as substantial involvement of the customer's personnel
resources, which may result in a long or unpredictable sales cycle. AXENT has no
significant inventory and little or no backlog.
 
     AXENT expects to continue relationships with Compaq Computer Corporation,
BMC Software, Inc., Hewlett-Packard Company and IBM's Tivoli business unit.
AXENT expects that it will continue its attempts to expand those indirect
distribution relationships in the future and provide more channel-ready products
to resell through those distributors and resellers, where appropriate.
<PAGE>
 
     In support of direct and indirect operations, AXENT conducts marketing
programs intended to position and promote its products and services.  Marketing
personnel engage in a wide variety of activities in support of all distribution
channels, including direct mail, telemarketing, Internet marketing, advertising,
seminars, public relations and trade shows as well as overseeing AXENT's
participation in industry programs and forums.  AXENT's product development
personnel provide sales and product training seminars for both AXENT's internal
sales force and the sales forces of its channel partners. The marketing
department also has a leading role in product marketing activities, including
product management, cooperative positioning and long-term product direction.

     AXENT has experienced significant quarterly fluctuations in its operating
results and anticipates such fluctuations in the future.  Revenues, operating
income and net income have been significantly higher in the fourth quarter of
each year than in the first quarter of the following year with the exception of
1997, when the accounting treatment of the AssureNet acquisition mitigated that
historic trend.  AXENT believes that fourth quarter revenues are positively
impacted by the end of year budgeting cycles of some large corporate customers,
as well as the annual nature of AXENT's sales compensation plans.  Revenues also
tend to be lower in the summer months, particularly in Europe, when businesses
often defer purchase decisions.   Quarterly revenues and operating results
depend on the volume and timing of orders received, which may be affected by
large individual transactions and which sometimes are difficult to predict,
especially with regard to orders received through indirect distribution
channels.  AXENT historically has recognized a substantial portion of its
license revenues in the last month of each quarter, and often in the last week
of each quarter, which makes it very difficult to gauge the level of license
revenues that will be recognized during a quarter until after its conclusion.
AXENT expects that this will continue for the foreseeable future.

Customers

     AXENT's customers represent enterprises across a broad range of industries,
including financial services, technology, professional services, government,
consumer products and energy and utilities.

Product Development

     AXENT believes that a technically competent, quality oriented and highly
productive software development organization is the key to AXENT's continued
successful product introduction. The software development staff is also
responsible for enhancing AXENT's existing products and expanding its product
line. AXENT's security management products have been developed primarily by its
internal development staff. Through the acquisition of AssureNet in 1997, AXENT
added to its product line the Defender software tokens, Defender Security Server
and certain related in-process research and development projects, as well as the
development staff responsible for those products.  Through the acquisition of
Raptor in 1998, AXENT added to its product line the Raptor Firewall,
RaptorMobile, WebDefender, THE WALL, certain related in-process research and
development projects and the development staff responsible for those products
and projects. As in the past, AXENT anticipates future acquisitions of products
and attempts to retain the development organizations associated with those
products. There can be no assurance that AXENT will be able to continue to
retain such employees.

     During 1998, AXENT maintained four principal software development centers
in Utah, New Hampshire, California and Massachusetts. Each development center is
responsible for certain products and related technologies and operates with
small project teams, support personnel, state-of-the-art software development
tools, and industry standard languages and compilers.

     AXENT has from time to time experienced delays in introducing new products
and product enhancements and there can be no assurance that AXENT will not
experience difficulties that could delay or prevent the successful development,
introduction and marketing of new products or product enhancements. In addition,
there can be no assurance that such new products or product enhancements will
meet the requirements of the marketplace and achieve market acceptance. Any such
failure could have a material adverse effect on AXENT's financial condition and
results of operations.

Competition

     Competition in the information security market is intense and constantly
evolving, and AXENT expects such competition to increase in the future. AXENT
believes that significant competitive factors affecting this market are breadth
of product, depth of product functionality, breadth of platform support, product
quality and performance, conformance to industry standards, product price and
customer support. In addition, AXENT believes that the ability to rapidly
develop and implement new products and features for the market is critical.
There can be no assurance that 
<PAGE>
 
AXENT can maintain or enhance its competitive position against current and
future competitors. Significant factors such as the emergence of new products,
fundamental changes in computing technology and aggressive pricing and marketing
strategies may also affect AXENT's competitive position. Many of these factors
are out of AXENT's control.

     AXENT's competitors fall into four main categories: large, multi-product
vendors, single purpose product providers, platform vendors and internally
developed or publicly available software.

     Large, multi-product vendors. AXENT's principal competitors include IBM
Corporation, Network Associates, Inc., Computer Associates International, Inc.,
Security Dynamics Technologies, Inc., Secure Computing Corporation, PLATINUM
Technology, Inc., the Digital Equipment operations of Compaq Computer
Corporation and Compagnie des Machines Bull SA.  Each of these organizations has
strategic software products that cover various aspects of information security
and compete directly with one or more components of AXENT's product line.

     Single purpose product providers. AXENT's principal single purpose product
competitors include, but are not limited to, Uti Maco GmbH, Internet Security
Systems, Inc., CyberGuard and CheckPoint Software Technology, Ltd. These vendors
each sell products that offer particular information security functions for
specific computing platforms. These products compete with one or more of AXENT's
products in specific functional areas or on specific platforms. While AXENT
believes that these competitors do not provide the depth of function and breadth
of platform support provided by AXENT's products, there can be no assurance that
these competitors will not expand their product offerings to other functional
areas or platforms and compete with more of AXENT's products.

     Platform vendors. AXENT competes with platform vendors such as Cisco
Systems, Inc., Microsoft Corporation, IBM, Hewlett-Packard Corporation and Sun
Microsystems, Inc.  Each of these vendors offers operating system software that
often includes native security functionality. To the extent that the security
features which become incorporated in operating systems overlap all or a portion
of the functionality offered by AXENT's products, AXENT's products may no longer
be required by customers to meet their information security requirements. All of
these vendors have indicated plans to expand the information security within
their operating systems.

     Publicly available software. A portion of AXENT's enterprise security
solution occasionally competes with products that are internally developed by
potential customers or available as "freeware" or "shareware" in the public
domain for little or no cost.

     Many of AXENT's current and potential competitors have longer operating
histories, significantly greater financial, technical and marketing resources,
greater name recognition and a larger installed customer base than AXENT. In
addition, one or more of these competitors may be able to respond more quickly
to new or emerging technologies and changes in customer requirements, and to
devote greater resources to the development, promotion and sale of their
products than AXENT. There can be no assurance that AXENT's current or potential
competitors will not develop or acquire products comparable or superior to those
developed or acquired by AXENT or adapt more quickly than AXENT to new
technologies, evolving industry trends or changing customer requirements.
Increased competition could result in price reductions, reduced margins or loss
of market share, any of which could materially adversely affect AXENT's
financial condition or results of operations. There can be no assurance that
AXENT will be able to compete successfully against current and future
competitors or that competitive pressures faced by AXENT will not have a
material adverse effect on its financial condition and results of operations. If
AXENT is unable to compete successfully against current and future competitors,
AXENT's financial condition and results of operations will be materially
adversely affected.

Intellectual Property Rights

     AXENT's success is heavily dependent on its proprietary technology. AXENT
views its software as proprietary and relies on a combination of trade secret,
copyright and trademark laws, non-disclosure agreements and contractual
provisions to establish and protect its proprietary rights. AXENT has several
patents or patents pending with respect to its security information products,
and has registered a number of its copyrights in the United States. AXENT has
registered certain of its trademarks in principal foreign countries and
currently is seeking to register other trademarks in those countries and in
other foreign jurisdictions. AXENT uses a signed license agreement with many
customers and a printed "shrink-wrap" or electronic "click-wrap" license for all
other users of its products in order to protect its copyrights and trade
secrets. Since the licensee does not sign shrink-wrap licenses, many authorities
believe that they may not be enforceable under many state's laws and the laws of
many foreign jurisdictions. The laws of Maryland, which the printed shrink-wrap
licenses purport to make the governing law, are unclear on this subject.
<PAGE>
 
     AXENT also relies on trade secrets to protect its proprietary rights in its
software. AXENT attempts to protect its trade secrets and other proprietary
information through agreements with customers and suppliers, non-disclosure and
non-competition agreements with employees and consultants and other security
measures. Although AXENT intends to protect its rights vigorously, there can be
no assurance that these measures will be successful.

     Despite AXENT's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of AXENT's products or to obtain and use
information that AXENT regards as proprietary. Policing unauthorized use of
AXENT's products is difficult, and, while AXENT is unable to determine the
extent to which piracy of its software products exists, such piracy can be
expected to be a persistent problem, particularly in international markets and
as a result of the growing use of the Internet. In addition, the laws of some
foreign countries either do not protect AXENT's proprietary rights or offer only
limited protection for those rights. There can be no assurance that the steps
taken by AXENT to protect its proprietary rights will be adequate or that
AXENT's competitors will not independently develop technologies that are
substantially equivalent or superior to AXENT's technologies or products.

     There has been substantial litigation in the software industry involving
intellectual property rights. Although AXENT does not believe that it is
infringing the intellectual property rights of others, there can be no assurance
that such claims, if asserted, would not have a material adverse effect on
AXENT's financial condition and results of operations. In addition, as AXENT may
acquire or license a portion of the software included in its products from third
parties, its exposure to infringement actions may increase because AXENT must
rely upon such third parties for information as to the origin and ownership of
such acquired or licensed software. Although AXENT would intend to obtain
representations as to the origins and ownership of such acquired or licensed
software and obtain indemnification to cover any breach of any such
representations, there can be no assurance that such representations will be
accurate or that such indemnification will provide adequate compensation for any
breach of such representations. In the future, litigation may be necessary to
enforce and protect trade secrets, copyrights and other intellectual property
rights of AXENT. AXENT may also be subject to litigation to defend against
claimed infringement of the rights of others or to determine the scope and
validity of the intellectual property rights of others. Any such litigation
could be costly and divert management's attention, either of which could have a
material adverse effect on AXENT's financial condition and results of
operations. Adverse determinations in such litigation could result in the loss
of AXENT's proprietary rights, subject AXENT to significant liabilities, require
AXENT to seek licenses from third parties and prevent AXENT from selling its
products, any one of which could have a material adverse effect on AXENT's
financial condition and results of operations.

Employees

     As of March 21, 1999, AXENT and its subsidiaries had over 527 active
employees worldwide, of which approximately 467 were employed in offices in the
U.S. and approximately 60 were employed at international offices. None of the
employees of AXENT or its subsidiaries is represented by a labor union. AXENT
has not experienced any work stoppages and considers its relations with its
employees to be good.

     AXENT's future success will depend in significant part on its ability to
attract and retain qualified personnel. Competition for such qualified
technical, management, consulting and sales personnel is intense in the software
industry, and there can be no assurance that AXENT can attract and retain
necessary qualified personnel in the future.

ITEM 2. PROPERTIES.

     AXENT's headquarters is located in approximately 26,000 square feet of
office space in Rockville, Maryland, which it has leased through February 2004.
AXENT has leased office space for its development laboratories in Utah,
Massachusetts, New Hampshire and California of approximately 20,000, 41,000,
16,000, and 15,000 square feet, respectively.  AXENT also leases domestic sales
offices in a number of locations, and approximately 9,000 square feet of office
space in the United Kingdom and several other small foreign sales offices.
AXENT believes that its existing facilities are adequate for its needs or that
additional space will be available as needed.

ITEM 3. LEGAL PROCEEDINGS.

     At December 31, 1998, there were no material legal proceedings pending
against AXENT.

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

None.
<PAGE>
 
ITEM 5.  MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

     AXENT Common Stock is traded on The Nasdaq National Market under the symbol
"AXNT."

     AXENT Common Stock began trading on The Nasdaq National Market on April 24,
1996. The following table sets forth for the periods indicated the high and low
sale prices per share of AXENT Common Stock on The Nasdaq National Market:
<TABLE>
<CAPTION>
 
                        High      Low
                       -------  -------
<S>                    <C>      <C>
     1997
     First Quarter...   17 3/4   11
     Second Quarter..   17 3/8   10 7/8
     Third Quarter...   22       14 3/8
     Fourth Quarter..   25 1/2   15 1/8

     1998
     First Quarter...   30 1/2  14 7/16
     Second Quarter..   32      22 3/4
     Third Quarter...   32 1/16 14 7/8
     Fourth Quarter..   31 1/8  13 1/2
</TABLE>

     On March 23, 1999 the last reported sale price of AXENT's Common Stock was
$30.44 per share. As of March 23, 1999, AXENT had approximately 310 stockholders
of record, and approximately 19,000 beneficial owners.

     AXENT has never paid or declared any cash dividends on its Common
Stock. AXENT currently intends to retain any earnings for future growth and,
therefore, does not expect to pay cash dividends in the foreseeable future.

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA.

     The selected consolidated financial data as of December 31, 1997 and 1998,
and for each of the three years in the period ended December 31, 1998, are
unaudited but have been derived from AXENT's consolidated financial statements
included elsewhere in this Form 10-K, which have been audited by
PricewaterhouseCoopers LLP, independent accountants, whose report thereon is
also included in this Form 10-K. The selected consolidated financial data as of
December 31, 1994, 1995 and 1996 and for each of the years ended December 31,
1994 and 1995 are unaudited but have been derived from audited financial
statements of AXENT not included in this Form 10-K.
<PAGE>
 
<TABLE>
<CAPTION>
          SELECTED CONSOLIDATED FINANCIAL DATA.
                                                                 Year Ended December 31,
                                                    -----------------------------------------------------
                                                      1994      1995       1996        1997       1998
                                                    --------  ---------  ---------  ----------  ---------
                                                          (In thousands, except per share data)
<S>                                                 <C>       <C>        <C>        <C>         <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues:
 Product licenses..............................     $ 6,080    $13,592   $ 29,425    $ 56,114   $ 80,901
 Services......................................       2,762      5,038      7,199      13,707     20,118
                                                    -------    -------   --------    --------   --------
    Total net revenues.........................       8,842     18,630     36,624      69,821    101,019
 
Cost of net revenues...........................       1,248      2,055      2,758       6,556      9,804
                                                    -------    -------   --------    --------   --------
 Gross profit..................................       7,594     16,575     33,866      63,265     91,215
                                                    -------    -------   --------    --------   --------
Operating expenses:
 Sales and marketing...........................       6,023     15,160     21,606      31,856     41,209
 Research and development......................       2,352      5,343      8,111      12,677     17,710
 General and administrative....................       2,213      3,546      4,704       7,030      6,445
 Non-recurring charges.........................       4,280         --         --      34,154     17,422
                                                    -------    -------   --------    --------   --------
  Total operating expenses.....................      14,868     24,049     34,421      85,717     82,786
                                                    -------    -------   --------    --------   --------
Income (loss) from continuing
 operations before royalty,
 interest and taxes............................      (7,274)    (7,474)      (555)    (22,452)     8,429
Royalty income.................................          --         --      3,321       2,977      1,862
Interest income (expense)......................          (2)       (53)     3,479       4,611      4,506
Gain on sale of marketable securities..........          --         --         --       1,738        389
Income tax benefit (provision).................       2,040      2,146     (1,159)     (5,744)    (7,507)
                                                    -------    -------   --------    --------   --------
Income (loss) from continuing
 operations....................................      (5,236)    (5,381)     5,086     (18,870)     7,679
Income from discontinued
 operations, net of tax........................       3,782      5,050      2,395         255         --
                                                    -------    -------   --------    --------   --------
Net income (loss)..............................     $(1,454)   $  (331)  $  7,481    $(18,615)     7,679
                                                    =======    =======   ========    ========   ========
Net income (loss) per common share (basic):
 Continuing operations.........................     $ (0.58)   $ (0.56)  $   0.27      $(0.83)     $0.31
 Discontinued operations.......................        0.42       0.52       0.13        0.01         --
                                                    -------    -------   --------    --------   --------
Net income (loss) per common
 share (basic).................................     $ (0.16)   $ (0.04)  $   0.40      $(0.82)     $0.31
                                                    =======    =======   ========    ========   ========
Number of shares used to compute basic
 earnings per common share.....................       8,946      9,635     18,551      22,638     24,501
                                                    =======    =======   ========    ========   ========
Net income (loss) per common share (diluted):
 Continuing operations.........................     $ (0.58)   $ (0.56)  $   0.24      $(0.83)     $0.30
 Discontinued operations.......................        0.42       0.52       0.11        0.01         --
                                                    -------    -------   --------    --------   --------
Net income (loss) per common
 share (diluted)...............................     $ (0.16)   $ (0.04)  $   0.35      $(0.82)     $0.30
                                                    =======    =======   ========    ========   ========
Number of shares used to compute diluted
 earnings per common share.....................       8,946      9,635     21,575      22,638     25,990
                                                    =======    =======   ========    ========   ========
 
CONSOLIDATED BALANCE SHEET DATA:
 Cash and cash equivalents.....................     $ 7,561    $ 7,973   $ 54,828    $ 51,618   $ 79,968
 Marketable securities.........................          --         --     34,026      40,882     31,774
 Net identifiable (assets) liabilities
  from discontinued operations.................      (1,221)     1,319        163          --         --
 Working capital...............................       2,207      2,869     85,421      94,544    117,436
 Total assets..................................      11,122     12,646    107,185     124,781    161,263
 Total debt....................................       2,817      1,835         --          --         --
 Stockholders' equity (deficit)................          37     (1,500)    93,576     104,265    134,437
 Cash dividends per share......................          --         --         --          --         --
</TABLE>
<PAGE>
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

     Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of
1933, which involve risk and uncertainties.  These forward-looking statements
are identified by the use of the words "believes", "expects", "anticipates",
"will", "would" or similar expressions that contemplate future events.  The
Company's actual results may differ significantly from the results discussed in
the forward-looking statements.  Factors that might cause such a difference
include, but are not limited to, those identified in "Certain Factors Affecting
Future Performance" (see below) and those discussed in the "Risk Factors" set
forth in the Company's Prospectus/Joint Proxy Statement dated January 2, 1998,
as filed with the SEC on January 4, 1998.  The Company assumes no obligation to
update or correct forward-looking statements due to events or changes after the
date of this report.

Overview

     The financial statements of AXENT Technologies, Inc. and its wholly owned
subsidiaries (collectively, the "Company"), selected financial data and other
financial data included herein have been restated to reflect consummation on
February 5, 1998, of the acquisition of Raptor Systems, Inc. ("Raptor"), which
was accounted for as a pooling-of-interests in accordance with APB No. 16.
Accordingly, all prior period consolidated financial statements presented have
been restated to include the combined results of operations, financial position,
and cash flows of Raptor as though it had always been part of the Company.  In
connection with that transaction, the Company incurred a one-time charge of
approximately $17.4 million.

     The financial statements and results of operations of the Company include 
the operations of AssureNet Pathways, Inc. ("AssureNet") from January 7, 1997.
AssureNet was acquired by AXENT in a transaction accounted for as a purchase.
In connection with that transaction, the Company incurred a one-time charge of
approximately $27.63 million for the write-off of purchased in-process research
and development costs in the first quarter of 1997.

     On May 9, 1997, Raptor acquired a perpetual license of technology,
including the underlying products, from Open Market, Inc.  The technology is
used in certain current product offerings and will be used in future product
offerings.  In connection with that transaction, the Company incurred a one-time
charge of approximately $6.52 million ($4.24 million, net of taxes) for the
write-off of purchased in-process research and development costs during the
second quarter of 1997.

     The financial statements and results of operations of the Company include
the operations of Secure Network Consulting, Inc. ("SNCI") from July 21, 1998.
SNCI was acquired by AXENT in a transaction accounted for as a purchase.

     Since January 1, 1995, AXENT has divested (i) its Helpdesk products
business, which was sold in February 1996, for cash, a note, royalties and the
assumption of certain liabilities, (ii) its OpenVMS utility software products
business, which was conveyed to Raxco Software, Inc. ("Raxco") in a spin-off,
effective as of December 31, 1995 and (iii) certain OpenVMS utility software
products, which were distributed by Raxco under an Exclusive Distributor License
Agreement.  The historical results of operations for these divested operations
have been accounted for as discontinued operations in accordance with APB No.
30.

     The Company's revenues are derived principally from two sources: (i)
product license fees for the use of its software products and (ii) service fees
for maintenance, consulting services and training related to the Company's
software products. The Company generally ships its software on a trial basis and
recognizes revenue when the customer becomes contractually obligated to pay for
the product. Service revenues from consulting and training are recognized as
services are performed, and maintenance revenues are deferred and recognized
ratably over the maintenance period, typically one year.

     The Company markets its products through a direct sales organization,
distributors and other marketing relationships. Sales made through distributors
typically have a lower gross margin than direct sales. Revenues from independent
distributors accounted for approximately 37%, 51% and 44% of the Company's net
revenues from its information security products for each of the years ended
December 31, 1996, 1997 and 1998, respectively.  The Company expects the
percentage of its net revenues derived from independent distributors to
fluctuate from period to 
<PAGE>
 
period. The Company generally records revenue from distributors at the net
license or service fee, after deducting the distributors' commissions.
 

Certain Risks and Uncertainties
-------------------------------

Year 2000
 
     The Company is assessing the impact of Year 2000 compliance on the current
and prior versions of its products, internal information systems, other internal
computer systems and equipment containing embedded systems, and is implementing
corrective actions, which are complete or substantially complete in many
instances.  The Company is using an approach to Year 2000 compliance that
involves preparing an inventory of all business disruption problems that the
Company regards as reasonably possible, prioritizing those possible problems to
allocate appropriate resources to the most critical areas, remediating or
replacing systems and equipment to solve or mitigate Year 2000 problems and, if
necessary, developing contingency plans if the Company or its key distributors,
resellers and suppliers will not be Year 2000 compliant and such noncompliance
is expected to have a material adverse effect on the Company's operations.

     The Company is substantially complete in its process of assessing Year 2000
compliance of its software products.  The Company believes that the current
version of each of its products has been designed and tested to process Year
2000 date data without interruption or error, and that the current version of
each of its product offerings is Year 2000 compliant assuming no error after
1999 in the operating system or other management software products operating on
the same computer system as the Company's product.  Information on the Year 2000
compliance of its products is available on the Company's Web site
(www.axent.com/y2k.htm).  The Company expects to continue Year 2000 testing of
the current and new versions of its products and of any products it acquires or
distributes.

     The Company believes it has identified its equipment and systems that are
critical to its operations, such as communications and networking equipment,
related software and certain hardware and software systems, and has completed
its assessment of the Year 2000 compliance of substantially all of such
equipment and systems, although it is continuing to assess and test.  The
Company also is continuing to assess and test the Year 2000 compliance of
various items of equipment, computer systems, applications software, and
equipment containing embedded systems that the Company does not consider
critical to its operations.  The Company has replaced or is replacing several
internal information systems critical to its operations as part of its normal
development and expansion or salesforce automation, accounting and customer
service-related information systems.  The Company has received product
warranties that those systems are Year 2000 compliant, and expects that
installation and Year 2000 testing will be completed by June 1999.

     The Company is continuing to assess the Year 2000 compliance of systems
used by distributors, resellers and suppliers, who the Company expects may be
material to its business after 1999.  This assessment process generally consists
of obtaining completed questionnaires or written assurances regarding
anticipated Year 2000 compliance.  The Company expects that this process will
continue through 1999.

     The Company anticipates that costs to be incurred in Year 2000 testing and
remediation or replacement of noncompliant systems will not be material to its
financial condition or results of operations.  The cost of continued testing of
the Company's products will be included in the Company's research and
development expenses, and testing of internal equipment, hardware and software
systems generally will be included in general and administrative expense.

     Even with those efforts, there can be no assurance that undetected errors
or defects may not cause Year 2000 problems in the Company's products. The
Company provides limited warranties as to Year 2000 compliance on current
versions of its products, but the Company does not believe that it is legally
responsible otherwise for costs incurred by its customers in achieving Year 2000
compliance. Year 2000 problems in or affecting the Company's products probably
would result in litigation and contractual claims by customers and increased
expenses negatively affecting the Company's future operating results. In the
worst case, litigation, claims and increased expenses could have a material
adverse effect on the Company's business, results of operations and financial
condition, although the Company currently believes such a result to be unlikely.
In addition, Year 2000 problems in older versions of the Company's products may
result in increased expense levels for the Company and defocus in development of
new products and enhancement of existing products. The Company expects that Year
2000 issues may alter the purchasing patterns of some of its customers or
prospective customers, which could have a material adverse effect on the
Company's business and results of operations.
<PAGE>
 
     There also can be no assurance that equipment, hardware and software
systems used internally in the Company's business will be free of Year 2000
problems.  Failure of internal information systems, equipment or other vendors'
software to operate properly after 1999 could disrupt or interfere with the
Company's business and result in unanticipated expense, which could adversely
affect the Company's business, operating results and financial condition.  Year
2000 problems experienced by distributors, resellers and suppliers of the
Company may result in disruption of the Company's business and may require the
Company to obtain alternative sources of distribution and supply, if possible.

     The Company is developing certain contingency plans in the event of Year
2000 problems in its products, critical equipment, hardware and software systems
and equipment with embedded systems, or in the event that key distributors or
resellers or critical suppliers experience Year 2000 problems.  The Company
expects to continue development and focus of those contingency plans throughout
1999.

     The foregoing statements are based upon management's best estimates at the
present time, which were derived utilizing numerous assumptions of future events
and conditions.  There can be no assurance that these assumptions will be
accurate and that estimates will be achieved.  The Company's evaluation and
assessment is ongoing and it expects that new or different information may
become available as its assessment and evaluation continue.

Euro Currency

     The European Union's adoption of the Euro currency raises a variety of
issues associated with the Company's European operations.  Although the
transition from national currencies to the Euro will be phased in over several
years, the Euro became the single currency for most European countries on
January 1, 1999.  The Company is assessing Euro issues related to its treasury
operations, product pricing, contracts and accounting systems.  Although the
evaluation of these issues is still in process, management currently believes
that the Company's existing or planned hardware and software systems will
accommodate the transition to the Euro and any required operating changes will
not have a material effect on future results of operations or financial
condition.


Year Ended December 31, 1998 Compared to Year Ended December 31, 1997


     Net Revenues.  The Company's net revenues from product licenses increased
approximately 44%, or $24.79 million, from $56.11 million in 1997 to $80.90
million in 1998, representing 80% of total net revenues for both 1997 and 1998,
respectively.  The increase in product license revenue is primarily attributable
to continued broader acceptance of the Company's products, continued expansion
into overseas markets, the introduction and general release of new products or
revisions and the expansion of available products running on new or additional
platforms.

     The Company's net revenues from services increased approximately 47%, or
$6.41 million, from $13.71 million in 1997 to $20.12 million in 1998,
representing 20% of total net revenues for both 1997 and 1998, respectively. The
increase in services revenues is primarily attributable to growth in the
customer base purchasing maintenance and to the increase in 1998 of revenues
related to consulting, training and the SNCI acquisition.

     AXENT currently believes that year-to-year comparisons of net revenues from
the licensing of different software products and the provision of related
services are not necessarily meaningful as an indication of future performance.

     Revenues derived from North American and international operations as a
percent of total revenues were 78% and 22%, respectively in 1997 as compared to
73% and 27%, respectively in 1998.  The increase in the international revenues
as a percentage of total revenues from 1997 to 1998 is attributable to continued
acceptance of the Company's products in international markets, particularly in
the United Kingdom, Europe and Asia.

     Cost of Net Revenues.  The Company's cost of net revenues includes the cost
of media, product packaging, documentation and other production costs,
amortization of purchased software costs, product royalties, and the direct and
indirect costs of providing technical support, training, and consulting services
to the Company's customers.  Cost of net revenues increased approximately 50%,
or $3.24 million, from $6.56 million in 1997 to $9.80 million in 1998,
representing 9% and 10% of net revenues in 1997 and 1998, respectively.  The
increase in the cost of net revenues is primarily attributable to the increase
in staff of the Company's customer support and consulting services operations
necessary to support a larger installed customer base as well as additional
products offered by the Company.  Cost of net revenues, as a percentage of
revenues, may fluctuate from period to period due to a change in product mix, a
change in 
<PAGE>
 
the number or size of transactions recorded in a quarter, integration
of acquired operations or products, or an increase or decrease in licenses of
royalty-bearing products.

     Sales and Marketing.  Sales and marketing expenses consist primarily of
personnel costs, including commissions, salaries, benefits and bonuses, travel,
telephone, costs of advertising, public relations seminars and trade shows.
Sales and marketing expenses increased 29%, or $9.35 million, from $31.86
million in 1997 to $41.21 million in 1998, representing 46% and 41% of total net
revenues for 1997 and 1998, respectively.  The increase in dollar amount was due
to the increase in sales staff to support the Company's growth.  The decrease in
sales and marketing expenses as a percentage of total net revenues was due
primarily to the greater increase in total net revenues. The Company currently
anticipates that the dollar amount of sales and marketing expenses will increase
as the Company continues to hire additional staff to support the Company's
growth in future periods.

     Research and Development.  Research and development expenses consist
primarily of personnel costs, including salaries, benefits and bonuses, travel
and other personnel-related expenses of the employees engaged in ongoing
research and development projects and third party development contracts.  Costs
related to research and development of products are expensed as incurred.
Research and development expenses increased 40%, or $5.03 million, from $12.68
million in 1997 to $17.71 million in 1998, representing 18% of total net
revenues for both 1997 and 1998, respectively.  The increase in dollar amount
resulted from the addition of staff needed to develop, maintain and enhance the
Company's software products in an effort to keep pace in a dynamic market where
security needs and demands are constantly changing. The Company currently
anticipates that the dollar amount of research and development expenses will
increase as the Company continues to commit substantial resources to research
and development in future periods.

     General and Administrative.  General and administrative expenses consist
primarily of personnel costs, including salaries, benefits and bonuses, travel
and related costs for management, finance and accounting, legal and other
professional services.  General and administrative expenses decreased 8%, or
$585,000, from $7.03 million in 1997 to $6.45 million in 1998, representing 10%
and 6% of total net revenues for 1997 and 1998, respectively.  The decrease is
primarily a result of the synergies gained from the elimination of overlapping
administrative functions associated with the Raptor acquisition. The Company
currently anticipates that the dollar amount of general and administrative
expenses will increase as the Company continues to hire additional staff to
support the Company's growth in future periods.

     In 1997, certain general and administrative expenses were offset in part by
fees billed by the Company under the Administrative Services Agreement between
the Company and Raxco, which terminated in 1998. That agreement provides for
Raxco to pay the Company for the cost of providing certain operational and
system support services including bookkeeping, personnel processing,
administrative support, facilities management and product packaging and mailing.
In 1997, the Company charged Raxco $570,000 under the Administrative Services
Agreement

     Non-Recurring Charges.  During 1997, the Company incurred a one-time charge
associated with the acquisition of AssureNet of approximately $27.63 million to
expense the purchased in-process research and development that had not reached
technological feasibility and had no probable future use, as well as a one-time
charge of $6.52 million, $4.24 million net of taxes, for the write-off of
purchased in-process technology associated with the acquisition of a perpetual
license of certain products from Open Market, Inc.  In 1998, the Company
incurred a one-time charge of $17.42 million, $13.3 million net of taxes, for
severance, investment banking, legal and accounting fees, and other costs
related to the merger with Raptor.

     Income (Loss) from Continuing Operations before Royalties, Interest and
Taxes.  Income from continuing operations before royalties, interest and taxes
increased $30.88 million to a profit of $8.43 million in 1998 from a loss of
$22.45 million in 1997.  The increase is primarily attributable to the decrease
in non-recurring charges as well as the overall increase in world-wide revenues
offset in part by the investments required to generate such revenues.  The
results of income from continuing operations before royalties, interest and
taxes excluding non-recurring items were $11.7 million and $25.9 million for
1997 and 1998, respectively.

     Royalty Income.  Royalty income consists of amounts payable to the Company
pursuant to the Exclusive Distributor License Agreement with Raxco related to
the OpenVMS utility software products owned by AXENT.  Royalty income declined
38%, or $1.12 million, from $2.98 million in 1997 to $1.86 million in 1998.  The
decline is primarily attributable to declining revenues recognized by Raxco as a
result of erosion of market share that the OpenVMS platform experienced.  During
1998, Raxco reported to AXENT approximately $6.2 million of OpenVMS utility
revenues.
<PAGE>
 
     Interest Income.  Interest income decreased 2%, or  $105,000, from $4.61
million in 1997 to $4.51 million in 1998. Interest income may fluctuate from
period to period due to changes in investment mix, varying cash balances, and
fluctuations in interest rates.

     Gain on Marketable Securities. As part of the consideration for the sale of
its storage management products in 1994, the Company received a warrant to
purchase 250,000 shares of common stock of MTI Technology Corporation ("MTI").
On October 15, 1997, the Company exchanged the warrant for 161,830 shares of MTI
common stock.  During 1997, the Company received proceeds of $1.74 million
($1.04 million, net of taxes) from the sale of 131,380 shares of MTI common
stock.  During January 1998, the remaining 30,000 shares of MTI common stock
were sold and the Company received proceeds of $389,000 ($238,000, net of
taxes).

     Income Taxes.   The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). In accordance with SFAS No. 109, the Company previously determined that
unrecognized tax benefits did not satisfy the recognition criteria set forth in
the standard. Accordingly, a valuation allowance was recorded against the
applicable deferred tax asset.  During 1998 and 1997, a portion of that
valuation allowance was released.  Management believes that it is more likely
than not that this tax asset will be realized.

     Income (Loss) from Continuing Operations. As a result of the above, the
Company recorded a profit from continuing operations of $7.68 million in 1998
compared to a loss of $18.87 million in 1997.  This increase is primarily
attributable to the decrease in non-recurring charges as well as the increase in
world-wide revenues offset in part by the investments required to generate such
revenues.

     Income from Discontinued Operations.  Income from discontinued operations
consists of the net results of operations from the divested businesses of the
Company, which for financial statement purposes have been accounted for in
accordance with APB No. 30 and classified as discontinued operations. AXENT's
income from discontinued operations decreased 100%, from $255,000 in 1997 to $0
in 1998.  The Company currently anticipates no further income from discontinued
operations.


Year Ended December 31, 1997 Compared to Year Ended December 31, 1996


     Net Revenues.  The Company's net revenues from product licenses increased
approximately 91%, or $26.68 million, from $29.43 million in 1996 to $56.11
million in 1997, representing 80% of total net revenues for both 1996 and 1997,
respectively.  The increase in product license revenue is primarily attributable
to the continued broader acceptance of the Company's products, the continued
expansion into overseas markets, the continued expansion of the Company's
distribution channels, the introduction and general release of new products or
revisions and the expansion of available products running on new or additional
platforms.  The Company also benefited from January 7, 1997 forward from the
licensing of the products acquired through the acquisition of AssureNet.

     The Company's net revenues from services increased approximately 90%, or
$6.51 million, from $7.20 million in 1996 to $13.71 million in 1997,
representing 20% of total net revenues for both 1996 and 1997, respectively. The
increase in services revenues is primarily attributable to growth in the
customer base purchasing maintenance, as well as the addition of the customers
on maintenance acquired through the AssureNet transaction.

     Revenues derived from North American and international operations as a
percent of total revenues were 79% and 21%, respectively, in 1996 as compared to
78% and 22%, respectively in 1997.  The increase in the international revenues
as a percentage of total revenue from 1996 to 1997 is attributable to continued
acceptance of the Company's products in international markets, particularly in
the United Kingdom and Europe.

     Cost of Net Revenues. Cost of net revenues increased approximately 138%, or
$3.80 million, from $2.76 million in 1996 to $6.56 million in 1997, representing
8% and 9% of net revenues in 1996 and 1997, respectively.  The increase in the
cost of net revenues is primarily attributable to the increase in staff of the
Company's customer support and consulting services operations necessary to
support a larger installed customer base as well as additional products offered
by the Company.

     Sales and Marketing. Sales and marketing expenses increased 47%, or $10.25
million, from $21.61 million in 1996 to $31.86 million in 1997, representing 59%
and 46% of total net revenues for 1996 and 1997, respectively.  The increase in
dollar amount was due to the increase in sales staff to support the Company's
growth.  The decrease in sales 
<PAGE>
 
and marketing expenses as a percentage of total net revenues was due primarily
to the greater increase in total net revenues. The Company currently anticipates
that the dollar amount of sales and marketing expenses will increase as the
Company continues to hire additional staff to support the Company's growth in
future periods.

     Research and Development. Research and development expenses increased 56%,
or $4.57 million, from $8.11 million in 1996 to $12.68 million in 1997,
representing 22% and 18% of total net revenues for 1996 and 1997, respectively.
The increase in dollar amount resulted from the addition of staff needed to
develop, maintain and enhance the Company's software products in an effort to
keep pace in a dynamic market where security needs and demands are constantly
changing.   The decrease in research and development expenses as a percentage of
total net revenues was due primarily to the greater increase in total net
revenues.

     General and Administrative. General and administrative expenses increased
50%, or $2.33 million, from $4.70 million in 1996 to $7.03 million in 1997,
representing 13% and 10% of total net revenues for 1996 and 1997, respectively.
The increase in dollar amount is primarily a result of increased staffing to
support organizational growth and the integration of AssureNet, public company
compliance costs, settlement of certain litigation regarding Raptor, and
recording of costs associated with the issuance by Raptor of stock options below
fair market value to certain key employees.  The decrease in general and
administrative expenses as a percentage of total net revenues was due primarily
to the greater increase in total net revenues.

     In 1996 and 1997, certain general and administrative expenses were offset
in part by fees billed by the Company under the Administrative Services
Agreement between the Company and Raxco. That agreement provides for Raxco to
pay AXENT for the cost of providing certain operational and system support
services including bookkeeping, personnel processing, administrative support,
facilities management and product packaging and mailing. In 1997, the Company
charged Raxco $570,000 under the Administrative Services Agreement, a decline of
$180,000 from $750,000 in 1996.

     Non-Recurring Charges.  During 1997, the Company incurred a one-time charge
associated with the acquisition of AssureNet of approximately $27.63 million for
the write-off of purchased in-process research and development that had not
reached technological feasibility and had no probable future use.  Also, during
1997, AXENT incurred nonrecurring charges of $6.52 million ($4.24 million net of
taxes) associated with the acquisition of a perpetual license of certain
products from Open Market, Inc.

     Income (Loss) from Continuing Operations before Royalties, Interest and
Taxes.  As a result of the approximately $34.15 million of non-recurring
charges, the Company recorded a loss from continuing operations before
royalties, interest and taxes of  $22.45 million in 1997 compared to a loss of
$555,000 in 1996.  Excluding non-recurring items, income from continuing
operations before royalties, interest and taxes increased $12.30 million from a
loss of $555,000 to income of $11.70 million, for 1996 and 1997, respectively.
The increase is primarily attributable to the overall increase in world-wide
revenues offset in part by the investments required to generate such revenues.

     Royalty Income.  Royalty income declined 10%, or $344,000, from $3.32
million in 1996 to $2.98 million in 1997.  The decline is primarily attributable
to declining revenues recognized by Raxco for these periods as a result of
erosion of market share that the OpenVMS platform experienced.

     Interest Income.  Interest income increased 32%, or  $1.13 million, from
$3.48 million in 1996 to $4.61 million in 1997.  The increase is attributable
primarily to having the proceeds from AXENT's April 1996 initial public offering
and Raptor's February 1996 initial public offering fully invested during all of
1997 and cash generated from operations during 1997.

     Gain on Marketable Securities. As part of the consideration for the sale of
its storage management products in 1994, the Company received a warrant to
purchase 250,000 shares of common stock of MTI Technology Corporation ("MTI").
On October 15, 1997, the Company exchanged the warrant for 161,830 shares of MTI
common stock.  During 1997, the Company received proceeds of $1.74 million
($1.04 million, net of taxes) from the sale of 131,380 shares of MTI common
stock.

     Income Taxes.   The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). In accordance with SFAS No. 109, the Company previously determined that
unrecognized tax benefits did not satisfy the recognition criteria set forth in
the standard. Accordingly, a valuation allowance was recorded against the
applicable deferred tax asset.  During 1997, a portion of that valuation
allowance was released.
<PAGE>
 
     Income (Loss) from Continuing Operations. The Company had a gain of $5.09
million from continuing operations in 1996 compared to a loss of $18.87 million
in 1997.  The loss from continuing operations in 1997 was primarily as a result
of approximately $34.15 million ($31.87 million net of taxes) of non-recurring
charges recorded in 1997, offset in part by the gain in 1997 of proceeds of
$1.74 million ($1.04 million net of taxes) from the sale of MTI common stock.
Excluding the one-time charges, income from continuing operations increased
135%, or $6.87 million, from income of $5.09 million to income of $11.96
million, for 1996 and 1997, respectively. The increase is primarily attributable
to the overall increase in world-wide revenues offset in part by the investments
required to generate such revenues.

     Income from Discontinued Operations.  Income from discontinued operations
consists of the net results of operations from the divested businesses of the
Company, which for financial statement purposes have been accounted for in
accordance with APB No. 30 and classified as discontinued operations. AXENT's
income from discontinued operations decreased 89%, or $2.14 million, from $2.40
million in 1996 to $255,000 in 1997.
<PAGE>
 
Quarterly Results of Operations

     The following tables set forth unaudited quarterly consolidated financial
data for 1997 and 1998. The Company believes that all necessary adjustments,
consisting only of normal recurring adjustments, have been included in the
amounts stated below to present fairly the selected quarterly information when
read in conjunction with the Consolidated Financial Statements and Notes thereto
included elsewhere herein. The results of operations for any quarter are not
necessarily indicative of results that may be expected for any subsequent
periods.

                 UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
                                 (In thousands)
<TABLE>
<CAPTION>
 
                                                    1997                                     1998
                                  ----------------------------------------  ----------------------------------------
                                   Mar. 31   June 30   Sept. 30   Dec. 31    Mar. 31   June 30   Sept. 30   Dec. 31
                                  ---------  --------  ---------  --------  ---------  --------  ---------  --------
<S>                               <C>        <C>       <C>        <C>       <C>        <C>       <C>        <C>
CONSOLIDATED STATEMENT
 OF OPERATIONS DATA:
Net revenues:
 Product licenses...............  $ 10,878   $12,635    $13,491   $19,110   $ 16,283   $17,392    $18,957   $28,269
 Services.......................     2,917     3,275      3,580     3,935      4,048     5,148      5,047     5,875
                                  --------   -------    -------   -------   --------   -------    -------   -------
  Total net revenues............    13,795    15,910     17,071    23,045     20,331    22,540     24,004    34,144
Cost of net revenues............     1,290     1,533      1,676     2,057      2,118     2,292      2,472     2,922
                                  --------   -------    -------   -------   --------   -------    -------   -------
Gross profit....................    12,505    14,377     15,395    20,988     18,213    20,248     21,532    31,222
                                  --------   -------    -------   -------   --------   -------    -------   -------
Operating expenses:
 Sales and marketing............     7,132     7,563      7,785     9,376      9,141     9,597      9,881    12,590
 Research and
  development...................     2,836     2,924      3,119     3,798      3,967     4,360      4,353     5,030
 General and
  administrative................     1,681     1,834      1,692     1,823      1,482     1,430      1,578     1,955
    Non-recurring charges.......    27,632     6,522         --        --     17,422        --         --        --
                                  --------   -------    -------   -------   --------   -------    -------   -------
   Total operating
     expenses...................    39,281    18,843     12,596    14,997     32,012    15,387     15,812    19,575
                                  --------   -------    -------   -------   --------   -------    -------   -------
Income (loss) from
 continuing operations
 before royalty,
 interest and taxes.............   (26,776)   (4,466)     2,799     5,991    (13,799)    4,861      5,720    11,647
                                  --------   -------    -------   -------    -------   -------    -------   -------
Royalty income..................       658       868        741       710        569       558        383       352
Interest income.................     1,079     1,165      1,154     1,213      1,063     1,022      1,228     1,193
Gain on the sale of
 marketable securities..........        --        --         --     1,738        389        --        --         --
Income tax benefit (provision)..      (962)      728     (1,773)   (3,737)     2,105    (2,283)    (2,571)   (4,758)
                                  --------   -------    -------   -------   --------   -------    -------   -------
Income (loss) from
 continuing operations..........   (26,001)   (1,705)     2,921     5,915     (9,673)    4,158      4,760     8,434
Income from discontinued
 operations, net of tax.........       173        82         --        --         --        --         --        --
                                  --------   -------    -------   -------   -------   -------     -------   -------
Net income (loss)...............  $(25,828)  $(1,623)   $ 2,921   $ 5,915   $ (9,673)  $ 4,158    $ 4,760   $ 8,434
                                  ========   =======    =======   =======   ========   =======    =======   =======

Net income (loss) per
 common share (basic):
  Continuing operations.........  $  (1.17)  $ (0.08)   $  0.13   $  0.26   $  (0.41)  $  0.17   $   0.19   $   0.34 
  Discontinued operations......       0.01      0.01         --        --         --        --         --         --
                                  --------   -------    -------   -------   --------   -------   --------   -------- 
Net income (loss) per
 common share (basic):..........  $  (1.16)  $ (0.07)   $  0.13   $  0.26   $  (0.41)  $  0.17   $   0.19   $   0.34
Number of shares used in
 computing net income (loss)
 per common share outstanding
 (000's)(basic)................     22,136    22,360     22,793    23,128     23,654    24,492     24,807     25,019
Net income (loss) per
 common share (diluted):
  Continuing operations........   $  (1.17)  $ (0.08)   $  0.11   $  0.23   $  (0.41)  $  0.16   $   0.18   $   0.32
  Discontinued operations......       0.01      0.01         --        --         --        --         --         --
                                  --------   -------    -------   -------   --------   -------   --------  ---------
Net income (loss) per
 common share (diluted)........   $  (1.16)  $ (0.07)   $  0.11   $  0.23   $  (0.41)  $  0.16   $   0.18   $   0.32
Number of shares used in
 computing net income
 (loss) per common
 share outstanding
 (000's)(diluted)..............     22,136    22,360     25,491    25,514     23,654    26,484     26,026     26,223
</TABLE>
<PAGE>
 
                 UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
                    (As a percentage of total net revenues)
<TABLE>
<CAPTION>
 
                                                      1997                                  1998
                                  ---------------------------------------  ---------------------------------------
                                   Mar. 31   June 30   Sept. 30   Dec. 31   Mar. 31   June 30   Sept. 30   Dec. 31
                                  --------  --------  ---------  --------  --------  --------  ---------  --------
<S>                               <C>       <C>       <C>        <C>       <C>       <C>       <C>        <C>
CONSOLIDATED STATEMENT
 OF OPERATIONS DATA:
Net revenues:
 Product licenses...............     78.9%     79.4%      79.0%     82.9%     80.1%     77.2%      79.0%     82.8%
 Services.......................     21.1      20.6       21.0      17.1      19.9      22.8       21.0      17.2
                                  -------    ------      -----     -----    ------     -----      -----     -----
   Total net revenues...........    100.0     100.0      100.0     100.0     100.0     100.0      100.0     100.0
 
Cost of net revenues............      9.4       9.6        9.8       8.9      10.4      10.2       10.3       8.6
                                  -------    ------      -----     -----    ------     -----      -----     -----
Gross profit....................     90.6      90.4       90.2      91.1      89.6      89.8       89.7      91.4
                                  -------    ------      -----     -----    ------     -----      -----     -----
Operating expenses:
 Sales and marketing............     51.7      47.5       45.6      40.7      45.0      42.6       41.2      36.9
 Research and
   development..................     20.6      18.4       18.3      16.5      19.5      19.3       18.1      14.7
 General and
   administrative...............     12.2      11.5        9.9       7.9       7.3       6.4        6.6       5.7
 Non-recurring charges..........    200.2      41.0         --        --      85.7        --         --        --
                                  -------    ------      -----     -----    ------     -----      -----     -----
   Total operating
     expenses...................    284.7     118.4       73.8      65.1     157.5      68.3       65.9      57.3
                                  -------    ------      -----     -----    ------     -----      -----     -----
Income (loss) from
 continuing operations
   before royalty,
     interest and taxes.........   (194.1)    (28.0)      16.4      26.0     (67.9)     21.5       23.8      34.1
                                  -------    ------      -----     -----    ------     -----      -----     -----
Royalty income..................      4.8       5.5        4.3       3.1       2.8       2.5        1.6       1.0
Interest income.................      7.8       7.3        6.8       5.3       5.2       4.5        5.1       3.5
Gain on sale of marketable
   securities...................       --        --         --       7.5       1.9        --         --        --
Income tax benefit (provision)..     (7.0)      4.5      (10.4)    (16.2)     10.4     (10.1)     (10.7)    (13.9)
                                  -------    ------      -----     -----    ------     -----      -----     -----
Income (loss) from
   continuing operations........   (188.5)    (10.7)      17.1      25.7     (47.6)     18.4       19.8      24.7
Income from discontinued
   operations, net of tax.......      1.3       0.5         --        --        --        --         --        --
                                  -------    ------      -----     -----    ------     -----      -----     -----
Net income (loss)...............  (187.2)%   (10.2)%      17.1%     25.7%   (47.6)%     18.4%      19.8%     24.7%
                                  =======    ======      =====     =====    ======     =====      =====     =====
 
</TABLE>
  The following table sets forth the cost of net revenues as a percentage of the
related net revenues for the periods indicated.
<TABLE>
<CAPTION>
                                            1997                                  1998
                           ---------------------------------------  --------------------------------------
                           Mar. 31   June 30   Sept. 30   Dec. 31   Mar. 31   June 30   Sept. 30   Dec. 31
                           --------  --------  ---------  --------  --------  --------  ---------  -------
<S>                        <C>       <C>       <C>        <C>       <C>       <C>       <C>        <C>
Cost of product
 licenses.........             6.5%      6.1%      6.9%       5.7%      4.5%      6.0%      6.1%       4.9%
Cost of services..            20.1%     23.2%     20.7%      24.8%     34.1%     24.2%     26.2%      25.9%
 
</TABLE>

     The Company has experienced significant quarterly fluctuations in its
operating results and anticipates such fluctuations in the future. Revenues,
operating income and net income have been significantly higher in the fourth
quarter of each year than in the first quarter of the following year with the
exception of 1997, when the accounting treatment of the AssureNet acquisition
mitigated that historic trend. The Company believes that fourth quarter revenues
are positively impacted by the end of year budgeting cycles of some large
corporate customers, as well as the annual nature of the Company's sales
compensation plans. Revenues also tend to be lower in the summer months,
particularly in Europe, when businesses often defer purchase decisions.
Quarterly revenues and operating results depend on the volume and timing of
orders received, which may be affected by large individual transactions and
which sometimes are difficult to predict, especially with regard to orders
received through indirect distribution channels. The Company historically has
recognized a substantial portion of its license revenues in the last month of
each quarter, and often in the last week of each quarter, which makes it very
difficult to gauge the level of license revenues that will be recognized during
a quarter until after its conclusion. The company expects that this will
continue for the foreseeable future.


<PAGE>
 
Liquidity and Capital Resources

     At December 31, 1997 and 1998, the Company had $51.62 million and $79.97
million, respectively, in cash and cash equivalents.  The Company had $40.88
million and $31.77 million in marketable securities at December 31, 1997 and
1998, respectively.  The combined total of cash and cash equivalents and
marketable securities at December 31, 1997 and 1998 were $92.50 million and
$111.74 million, respectively.

     The Company financed its operations during 1997 and 1998 through cash flows
from continuing operations.  The Company's continuing operating activities
provided net cash of  $6.21 million, $12.52 million and $12.04 million in 1996,
1997 and 1998, respectively.  Total cash provided by discontinued operations was
$379,000 in 1996 and total cash used in discontinued operations was $412,000 and
$141,000 in 1997 and 1998, respectively. Net cash provided by operating
activities in 1998 consisted primarily of net income, increases in deferred
revenue and income taxes payable and an offset by the growth in accounts
receivable and other assets. In 1997, net cash provided by operating activities
consisted primarily of net income before acquisition costs, which were offset by
growth in accounts receivables and other assets and increases in income taxes
payable and deferred revenue. As a result of AXENT's and Raptor's initial public
offerings in 1996, the Company received proceeds of approximately $65.63
million, net of approximately $5.11 million in underwriting discounts and $1.56
million in offering expenses. During 1996 the Company financed its operations
through cash flows from continuing operations as well as $5.77 million through
the issuance, by Raptor, of shares of Series C Convertible Preferred Stock,
which automatically converted into another $1.00 million upon the closing of
Raptor's initial public offering as consideration for warrants issued to Compaq
Computer Corporation. The Company received $4.00 million from the exercise of
the Compaq warrants in October 1996. Net cash provided by operating activities
in 1996 consisted primarily of net income, increases in accounts payable and
deferred revenue offset primarily by increases in accounts receivable and other
assets.

     During 1997 and 1998, the Company had gains from the sale of MTI Technology
Corporation ("MTI") shares of common stock.  This stock was received from the
exercise of stock warrants granted by MTI in connection with MTI's purchase of
the Company's storage management business in 1994.  The Company received
proceeds of $1.74 million ($1.04 million, net of taxes) and $389,000 ($238,000,
net of taxes) from the exercise of the MTI warrants in 1997 and 1998,
respectively.

     The Company made capital expenditures of approximately $2.71 million and
$5.86 million in 1997 and 1998, respectively. These purchases have generally
consisted of computer workstations, networking equipment, office equipment,
office furniture and equipment and leasehold improvements. The Company had no
material firm commitments for capital expenditures at December 31, 1998.

     During 1998, the Company's financial position was also affected by the
following: 1) the Company had cash outlays of approximately $10.48 million for
transaction costs associated with the acquisition of Raptor; 2) the Company
received proceeds of $13.32 million from the issuance of common stock for stock
option exercises and employee stock purchase plan; 3) the Company purchased
$64.13 million of marketable securities; 4) the Company received $73.24 million
from the maturity of short-term investments; and 5) the Company paid $124,000
for transaction expenses related to the SNCI business acquisition.

     The Company believes that its working capital at December 31, 1998 and cash
generated from operations will be sufficient to meet its capital expenditures,
working capital and other cash requirements both for the next twelve months and
for the foreseeable future.

RECENT ACCOUNTING PRONOUNCEMENTS

     In December 1998, the Accounting Standards Executive Committee of the 
American Institute of Certified Public Accountants (the "AICPA") issued 
Statement of Position (SOP) 98-9, "Modification of SOP 97-2, Software Revenue 
Recognition, With Respect to Certain Transactions."  SOP 98-9 modifies SOP 97-2 
by requiring revenue to be recognized using the "residual method" if certain 
conditions are met.  SOP 98-9 will be effective for the Company's 2000 financial
statements.  Management does not believe that SOP 98-9 will have a material 
impact on the Company's results of operations or financial condition.

     In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of 
Computer Software Developed or Obtained for Internal Use."  SOP 98-1 became 
effective January 1, 1999.  Management does not believe that SOP 98-1 will have 
a material impact on the Company's results of operations or financial condition.

<PAGE>
 
Certain Factors That May Affect Future Performance

Factors Affecting the Company's Business and Prospects

     Although the Company has experienced significant growth in revenues from
its software products, the Company does not believe prior growth rates are
necessarily indicative of future operating results. In addition, the Company
expects increased competition and intends to invest significantly in its product
development. As a result, there can be no assurance that the Company will remain
profitable on a quarterly or annual basis.  Due to the Company's relatively
limited operating history with respect to many of its software products,
predictions as to future operating results are difficult. Future operating
results may fluctuate due to factors such as: demand for the Company's products;
the size and timing of customer orders; the number of competitors and the
breadth and functionality of their product offerings; the introduction of new
products and product enhancements by the Company or its competitors; the
budgeting cycle of customers; changes in the proportion of revenues attributable
to license fees and consulting services; the availability of services personnel
to demonstrate, install, configure and implement products; changes in the level
of operating expenses; competitive conditions in the industry; and changes in
technologies affecting computing, networking, communications, systems and
applications management and data security.  The Company's future operating
results also may be affected if it fails to recognize the anticipated benefits
of its acquisitions on the timetable projected by the Company; those benefits
include, among others, integration of product offerings and coordination of
their sales, marketing and research and development teams without disruption or
unanticipated expense.  The Company's future results of operations may also be
adversely affected if the anticipated integration of operations of acquired
companies produces unexpected expenses, delays, inefficiencies, loss of key
personnel, loss of resellers or distributors or loss of consultants or if it
leads to adverse effects on customer purchasing decisions.

     The market for the Company's software products is highly competitive, and
the Company expects that it will face increasing pricing pressures from its
current competitors and new market entrants. As a result of increasing
consolidation in the information security industry, the Company expects that it
will become subject to increased competition, which may negatively impact
existing collaborative, marketing, reselling, distribution or marketing
agreements or relationships and thereby materially adversely affect the
Company's financial condition and results of operations. Any material reduction
in the price of the Company's software products would negatively affect gross
margins and could materially adversely affect the Company's financial condition
and results of operations.

     The licensing of many of the Company's software products generally involve
significant testing by and education of prospective customers as well as a
commitment of resources by both parties. For these and other reasons, the sales
cycle associated with the enterprise-wide licensing of the Company's security
software products is typically long and subject to a number of significant risks
over which the Company has little or no control and, as a result, may expend
significant resources pursuing potential sales that will not be consummated.

Factors Affecting International Operations

     The Company anticipates that international sales will continue to represent
a significant percentage of revenue in the foreseeable future. International
sales are subject to a number of risks, including unexpected changes in
regulatory requirements, export limitations on encryption technologies, tariffs
and other trade barriers, political and economic instability in foreign markets,
difficulty in the staffing, management and integration of foreign operations,
longer payment cycles, greater difficulty in accounts receivable collection,
currency fluctuations and potentially adverse tax consequences. The uncertainty
of the monetary exchange values has caused, and may in the future cause, some
foreign customers to delay new orders or delay payment for existing orders.
These factors may, in the future, contribute to fluctuations in the Company's
financial condition and results of operations. Although the Company's results of
operations have not been materially adversely affected to date as a result of
currency fluctuations, the long-term impact of currency fluctuations, including
any possible effect on the business outlook in other developing countries,
cannot be predicted.

Factors Affecting Marketable Securities

     The fair value of the Company's investments in marketable securities at
December 31, 1998 was $31.8 million.  The Company's investment policy is to
manage its marketable securities portfolio to preserve principal and liquidity
while maximizing the return on the investment portfolio through the full
investment of available funds.  The Company diversifies the marketable
securities portfolio by investing in multiple types of investment-grade
securities.  The Company's marketable securities portfolio is primarily invested
in short-term securities with at least an investment grade rating to minimize
interest rate and credit risk as well as to provide for an immediate source of
funds.  Although changes 
<PAGE>
 
in interest rates may affect the fair value of the marketable securities
portfolio and cause unrealized gains or losses, such gains or losses would not
be realized unless the investments are sold.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     Response to this item is included in "Item 7  Management's Discussion and
Analysis of Financial Condition and Results of Operations  -- Certain Factors
that May Affect Future Performance" above.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     Consolidated financial statements and schedules required by Item 8 are
incorporated herein by reference to the AXENT Consolidated Financial Statements
and financial statement schedules filed with this Form 10-K, under Item 14 of
Part IV.  Quarterly financial information required by Item 8 are included in
Item 7, above.

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE.

     None.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.

  The information required by Item 10 is hereby incorporated by  reference to
the Definitive Proxy Statement of the Company to be filed in connection with its
1999 Annual Meeting of Stockholders (the "Proxy Statement").

ITEM 11.  EXECUTIVE COMPENSATION.

  The information required by Item 11 is hereby incorporated by reference to the
Proxy Statement.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

  The information required by Item 12 is hereby incorporated by reference to the
Proxy Statement.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

  The information required by Item 13 is hereby incorporated by reference to the
Proxy Statement.

                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

                 Page Number
                 -----------

(a)  Documents filed as part of the report:
     (1) Report of Independent Accountants.............................   25
         Consolidated Balance Sheets at December 31, 1997 and 1998.....   26
         Consolidated Statements of Operations for the years ended
          December 31, 1996, 1997 and 1998.............................   27
         Consolidated Statements of Stockholders' Equity for the years 
          ended December 31, 1996, 1997 and 1998.......................   28
         Consolidated Statements of Cash Flows for the years ended
          December 31, 1996, 1997 and 1998.............................   29
         Consolidated Statements of Comprehensive Income for the years
          ended December 31, 1996, 1997 and 1998.......................   30
         Notes to Consolidated Financial Statements....................   31
     (2)  Financial Statement Schedule.................................   49
     (3)  Exhibits
<PAGE>
 
<TABLE>
<CAPTION>
Exhibit Number                                                 Description
-----------------                                              -----------
<S>                <C>    
  3.1    (1)        Amended and Restated Certificate of Incorporation of AXENT.
  3.2    (2)        Amended and Restated Bylaws of AXENT.
  4.1    (1)        Specimen stock certificate for shares of Common Stock of AXENT.
  10.1   (1)        AXENT's 1991 Amended and Restated Stock Option Plan.
  10.2   (3)        AXENT's 1996 Amended and Restated Stock Option Plan.
  10.3   (3)        AXENT's 1996 Amended and Restated Directors' Stock  Option Plan.
  10.8   (1)        Settlement Agreement effective as of September 13, 1991, by and among AXENT and the parties thereto.
  10.9   (1)        Form of Indemnification Agreement between AXENT and its directors and executive officers.
  10.11  (1)        Lease Agreement dated as of September 6, 1995, by and between
                    Research Grove Associates and AXENT.
  10.11A (7)        Second Amendment dated September 18, 1998 to Lease Agreement by and
                    between Research Grove Associates and AXENT.
  10.12  (1)        Lease of Real Property dated as of March 7, 1995, by and between
                    TNK Associates and AXENT.
  10.17  (4)        Memorandum of Understanding regarding certain compensation and
                    severance matters relating to Richard A. Lefebvre, dated July 22,
                    1997.
  10.24  (1)        Agreement and Plan of Separation, effective as of December 31,
                    1995, between AXENT and Raxco Software, Inc.
  10.29  (3)        Amended Agreement and Plan of Merger among AXENT, Axquisition,
                    Inc., and AssureNet Pathways, Inc, dated as of January 6, 1997 and
                    amended February 26, 1997.
  10.30  (5)        AXENT's 1998 Employee Stock Purchase Plan.
  10.31  (5)        AXENT's 1998 Incentive Stock Plan.
  10.32  (5)        AXENT's Exchange Option Plan for Optionees of Raptor Systems, Inc.
  10.33  (5)        Agreement and Plan of Merger among AXENT, Axquisition Two, Inc. and
                    Raptor Systems, Inc. dated as of December 1, 1997.
  10.34  (7)        AXENT's Executive Severance General Guidelines.
  10.35  (7)        Lease Agreement dated as of April 23, 1998 by and between Pracvest
                    and AXENT.
  10.36  (7)        Lease Agreement dated as of May 6, 1997 by and between CC&F Second
                    Avenue Trust and Raptor Systems, Inc.
  10.36A (7)        First Amendment to Lease dated as of December 15, 1997 by and
                    between CC&F Second Avenue Trust and Raptor Systems, Inc.
  11.1              Computation of Earnings (loss) per common share
  21.1*             Subsidiaries of the Registrant.
  23.1 *            Consent of PricewaterhouseCoopers LLP
  23.1A *           Consent of PricewaterhouseCoopers LLP on certain financial data
                    schedules.
  24.1 *            Power of Attorney (included in signature pages)
  27.1              Financial Data Schedule
  27.2              Financial Data Schedule (1997 Restated)
</TABLE> 
 
<PAGE>
 
  Schedule                 Description
  --------                 -----------

  II.   *    Valuation and Qualifying Accounts All other schedules for which
             provision is made in the applicable accounting regulation of the
             Securities and Exchange Commission are not required under the
             related instructions or are applicable, and therefore have been
             omitted.


     (1)  Previously filed as an exhibit to AXENT's Registration Statement on
          Form S-1 (File No. 333-01368) and incorporated herein by reference.
     (2)  Previously filed as an exhibit to AXENT's Quarterly Report on 
          Form 10-Q for the Quarter ended September 30, 1996.
     (3)  Previously filed as an exhibit to AXENT's Registration Statement on
          Form S-4 (File No. 333-20207) and incorporated herein by reference.
     (4)  Previously filed as an exhibit to AXENT's Quarterly Report on 
          Form 10-Q for the Quarter ended September 30, 1997.
     (5)  Previously filed as an exhibit to AXENT's Registration Statement on
          Form S-4 (File No. 444-43265) and incorporated herein by reference.
     (6)  Previously filed as an exhibit to AXENT's Annual Report on Form 10-K
          for the year ended December 31, 1997 (File No. 0-28100) and
          incorporated herein by reference.
     (7)  Previously filed as an exhibit to AXENT's Quarterly Report on 
          Form 10-Q for the Quarter ended September 30, 1998.
      *   Filed herewith.

 
(b)  Reports on Form 8-K.   AXENT filed a report on Form 8-K dated February 5,
     1998 that reported information under items 2, 5 and 7 (which incorporated
     financial statements of Raptor and pro forma information by reference to
     the Prospectus/Joint Proxy Statement of AXENT dated January 2, 1998) with
     respect to the closing of the merger with Raptor Systems, Inc., certain
     related matters and the action taken by AXENT's stockholders at the special
     meeting on February 5, 1998.

(c)  Exhibits.    The exhibits required by this Item are listed under Item
     14(a)(3).

(d) Financial Statement Schedule.  The consolidated financial statement schedule
    required by this Item are listed under Item 14(a)(2).
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
                                        
To the Board of Directors of AXENT Technologies, Inc.:

     In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity, cash flows
and comprehensive income  present fairly, in all material respects, the
financial position of  Axent Technologies, Inc. and its subsidiaries (the
Company) as of December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards that 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.




                                       PRICEWATERHOUSECOOPERS LLP

Washington, D.C.
January 26, 1999

<PAGE>
 
                            AXENT TECHNOLOGIES, INC.
                                        
                          CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
 
                                                                                        DECEMBER 31,
                                                                               ------------------------------
                                   ASSETS                                           1997            1998
                                   ------                                      --------------  --------------
<S>                                                                            <C>             <C>
Current assets:
  Cash and cash equivalents..................................................   $ 51,618,000    $ 79,968,000
  Marketable securities......................................................     40,882,000      31,774,000
  Accounts receivable, net of allowance for doubtful accounts of $1,339,000
   and $1,586,000, respectively..............................................     18,223,000      28,300,000
  Other current assets.......................................................      4,337,000       4,220,000
                                                                                ------------    ------------
     Total current assets....................................................    115,060,000     144,262,000
                                                                                ------------    ------------
Property and equipment, net (note 4).........................................      4,263,000       7,446,000
Other assets.................................................................      5,458,000       9,555,000
                                                                                ------------    ------------
  Total assets...............................................................   $124,781,000    $161,263,000
                                                                                ============    ============
 
                 LIABILITIES AND STOCKHOLDERS' EQUITY
                 ------------------------------------                                 
Current liabilities:
  Accrued liabilities and accounts payable (notes 2 and 7)...................   $ 13,120,000    $ 15,642,000
  Deferred revenue...........................................................      7,396,000      11,184,000
                                                                                ------------    ------------
     Total current liabilities...............................................     20,516,000      26,826,000
                                                                                ------------    ------------
Commitments and contingencies (note 8)
Stockholders' equity: (notes 2, 9, and 10)
  Common stock, par value $0.02: 23,268,657 and 25,460,090 shares issued
   and outstanding, respectively.............................................        466,000         509,000
  Additional paid-in capital.................................................    137,636,000     160,008,000
  Accumulated deficit........................................................    (33,389,000)    (25,710,000)
  Unearned compensation......................................................       (363,000)             --
  Currency translation adjustments and other.................................        (85,000)       (370,000)
                                                                                ------------    ------------
     Total stockholders' equity..............................................    104,265,000     134,437,000
                                                                                ------------    ------------
  Total liabilities and stockholders' equity.................................   $124,781,000    $161,263,000
                                                                                ============    ============
</TABLE>
     The accompanying notes are an integral part of these Consolidated Financial
Statements.
<PAGE>
 
                            AXENT TECHNOLOGIES, INC.
                                        
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                        
<TABLE>
<CAPTION>
 
 
                                                                      YEAR ENDED DECEMBER 31,
                                                             ------------------------------------------
                                                                 1996          1997           1998
                                                             ------------  -------------  -------------
<S>                                                          <C>           <C>            <C>
Net revenues:
  Product licenses.........................................  $29,425,000   $ 56,114,000   $ 80,901,000
  Services.................................................    7,199,000     13,707,000     20,118,000
                                                             -----------   ------------   ------------
      Total net revenues...................................   36,624,000     69,821,000    101,019,000
Cost of net revenues.......................................    2,758,000      6,556,000      9,804,000
                                                             -----------   ------------   ------------
Gross profit...............................................   33,866,000     63,265,000     91,215,000
                                                             -----------   ------------   ------------
Operating expenses:
  Sales and marketing......................................   21,606,000     31,856,000     41,209,000
  Research and development.................................    8,111,000     12,677,000     17,710,000
  General and administrative...............................    4,704,000      7,030,000      6,445,000
  Non-recurring charges....................................           --     34,154,000     17,422,000
                                                             -----------   ------------   ------------
      Total operating expenses.............................   34,421,000     85,717,000     82,786,000
                                                             -----------   ------------   ------------
Income (loss) from continuing operations
 before royalty, interest and taxes........................     (555,000)   (22,452,000)     8,429,000
Royalty income.............................................    3,321,000      2,977,000      1,862,000
Interest income............................................    3,479,000      4,611,000      4,506,000
Gain on sale of marketable securities......................           --      1,738,000        389,000
Income tax (provision) (Note 11)...........................   (1,159,000)    (5,744,000)    (7,507,000)
                                                             -----------   ------------   ------------
Income (loss) from continuing
 operations................................................    5,086,000    (18,870,000)     7,679,000
Income from discontinued operations, net
 of  tax (Note 2)..........................................    2,395,000        255,000             --
                                                             -----------   ------------   ------------
Net income (loss)..........................................  $ 7,481,000   $(18,615,000)  $  7,679,000
                                                             ===========   ============   ============
 
Net income (loss) per common share (basic):
  Continuing operations....................................  $      0.27   $      (0.83)  $       0.31
  Discontinued operations..................................         0.13           0.01             --
                                                             -----------   ------------   ------------
Net income (loss)  per common share (basic)................  $      0.40   $      (0.82)  $       0.31
                                                             ===========   ============   ============
Number of  shares used in computing net income (loss) per
 common share outstanding (basic)..........................   18,551,000     22,638,000     24,501,000
                                                             ===========   ============   ============
Net income (loss) per common share (diluted):
  Continuing operations....................................  $      0.24   $      (0.83)  $       0.30
  Discontinued operations..................................         0.11           0.01             --
                                                             -----------   ------------   ------------
Net income (loss)  per common share (diluted)..............  $      0.35   $      (0.82)  $       0.30
                                                             ===========   ============   ============
Number of  shares used in computing net income (loss) per
 common share outstanding (diluted)........................   21,575,000     22,638,000     25,990,000
                                                             ===========   ============   ============
 
</TABLE>
  The accompanying notes are an integral part of these Consolidated Financial
  Statements.
<PAGE>
 
                            AXENT TECHNOLOGIES, INC.
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
 
                                                                                     
                                                             Additional               
                                          Common Stock         Paid-In    Comprehensive    Unearned      Accumulated
                                      --------------------                    Income
                                        Shares     Amount      Capital       & Other     Compensation      Deficit         Total
                                      ----------  --------  -------------  ------------  -------------  -------------  ------------
<S>                                   <C>         <C>       <C>            <C>           <C>            <C>            <C>
BALANCE, DECEMBER 31,                 
 1995................................  9,913,280  $198,000  $ 21,710,000   $   (39,000)  $ (1,113,000)  $(22,255,000)  $ (1,499,000)
Net income...........................         --        --            --            --             --      7,481,000      7,481,000
Issuance/exercise of stock warrants..    290,909     6,000     4,994,000            --             --             --      5,000,000
Issuance of common stock,             
 net of costs of $1,560,000..........  4,688,404    94,000    75,541,000            --             --             --     75,635,000
Stock options exercised..............    529,484    11,000       512,000            --             --             --        523,000
Conversion of preferred stock........  5,190,010   103,000     5,666,000            --             --             --      5,769,000
Tax benefit related to                
 employee stock options..............         --        --       397,000            --             --             --        397,000
Amortization of unearned              
 compensation........................         --        --            --            --        300,000             --        300,000
Foreign currency translation loss....         --        --            --       (30,000)            --             --        (30,000)
                                      ----------  --------  ------------   -----------   ------------   ------------   ------------
BALANCE, DECEMBER 31,                 
 1996................................ 20,612,087   412,000   108,820,000       (69,000)      (813,000)   (14,774,000)    93,576,000
Net loss.............................         --        --            --            --             --    (18,615,000)   (18,615,000)
AssureNet acquisition................  1,550,000    31,000    23,046,000            --             --             --     23,077,000
Issuance of common stock.............     30,350     1,000       432,000            --             --             --        433,000
Stock options exercised..............  1,076,220    22,000     2,285,000            --             --             --      2,307,000
Tax benefit related to                
 employee stock options..............         --        --     3,053,000            --             --             --      3,053,000
Unrealized gain on marketable         
 securities, net of tax provision     
 of $159,000.........................         --        --            --       238,000             --             --        238,000
Amortization of unearned              
 compensation........................         --        --            --            --        450,000             --        450,000
Foreign currency translation loss....         --        --            --      (254,000)            --             --       (254,000)
                                      ----------  --------  ------------   -----------   ------------   ------------   ------------
BALANCE, DECEMBER 31,                 
    1997............................. 23,268,657   466,000   137,636,000       (85,000)      (363,000)   (33,389,000)   104,265,000
Net income...........................         --        --            --            --             --      7,679,000      7,679,000
Secure Network Consulting, Inc.       
 acquisition.........................     85,000     2,000     1,548,000            --             --             --      1,550,000
Issuance of stock under stock         
 option and employee stock            
 purchase plans......................  2,106,433    41,000    13,277,000            --             --             --     13,318,000
Tax benefit related to                
 employee stock options..............         --        --     7,547,000            --             --             --      7,547,000
Gain on the sale of marketable        
 securities, net of tax provision....         --        --            --      (238,000)            --             --       (238,000)
Amortization of unearned              
 compensation........................         --        --            --            --        363,000             --        363,000
Foreign currency translation          
 loss and other......................         --        --            --       (47,000)            --             --        (47,000)
                                      ----------  --------  ------------   -----------   ------------   ------------   ------------
BALANCE, DECEMBER 31,                 
    1998............................. 25,460,090  $509,000  $160,008,000     $(370,000)   $        --   $(25,710,000)  $134,437,000
                                      ==========  ========  ============   ===========   ============   ============   ============
</TABLE>
          The accompanying notes are an integral part of these Consolidated
     Financial Statements.
<PAGE>
 
                            AXENT TECHNOLOGIES, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                                  YEAR ENDED DECEMBER 31,
                                                                                        --------------------------------------------
                                                                                            1996            1997           1998
                                                                                        -------------  --------------  -------------
<S>                                                                                     <C>            <C>             <C>
Cash flows from operating activities:
 Income (loss) from continuing operations.............................................  $  5,086,000   $ (18,870,000)  $  7,679,000
Adjustments to reconcile income (loss) to net cash provided by operating activities:
 Depreciation and amortization........................................................     1,179,000       2,463,000      2,920,000
 Write-off of in process research and development.....................................            --      34,154,000             --
 Provision for losses on accounts receivable..........................................       467,000         794,000      1,121,000
 Compensation expense on equity issuances.............................................       300,000         449,000        363,000
 Deferred income taxes................................................................      (400,000)      1,219,000       (680,000)
 Accretion of discount on marketable securities.......................................            --        (347,000)      (241,000)
 Gain on sale of marketable securities................................................            --      (1,738,000)      (389,000)
Change in assets and liabilities
 (Increase) in accounts receivable....................................................    (2,773,000)     (8,722,000)   (11,112,000)
 (Increase) in other assets...........................................................    (1,591,000)     (2,361,000)    (1,199,000)
 Increase (decrease) in accrued liabilities and accounts payable......................     2,674,000        (267,000)     2,643,000 
 Increase (decrease) in income taxes payable..........................................      (397,000)      3,791,000      7,149,000
 Increase in deferred revenue.........................................................     1,662,000       1,952,000      3,788,000
                                                                                        ------------   -------------   ------------
    Net cash provided by operating activities.........................................     6,207,000      12,517,000     12,042,000
    Net cash provided by (used in) discontinued operating activities (note 2).........       379,000        (412,000)      (141,000)
                                                                                        ------------   -------------   ------------
 Net cash provided by operating activities............................................     6,586,000      12,105,000     11,901,000
                                                                                        ------------   -------------   ------------
Cash flows from investing activities:
 Capital expenditures.................................................................    (2,168,000)     (2,712,000)    (5,863,000)
 Sale of property, plant, and equipment...............................................            --          41,000             --
 Proceeds from sale of Helpdesk business..............................................       300,000              --             --
 Maturity of marketable securities (note 13)..........................................            --      18,629,000     73,242,000
 Purchases of marketable securities (note 13).........................................   (34,026,000)    (24,742,000)   (64,131,000)
 Proceeds from sale of marketable securities (note 13)................................            --       1,738,000        389,000
 Equity investment in common stock....................................................    (4,036,000)        (54,000)      (150,000)
 Payments for corporate acquisition (note 3)..........................................      (854,000)    (10,434,000)      (124,000)
                                                                                        ------------   -------------   ------------
    Net cash provided by (used in) investing activities...............................   (40,784,000)    (17,534,000)     3,363,000
    Net cash provided by discontinued investing activities (note 2)...................       860,000         645,000             --
                                                                                        ------------   -------------   ------------
  Net cash provided by (used in) investing activities.................................   (39,924,000)    (16,889,000)     3,363,000
                                                                                        ------------   -------------   ------------
Cash flows from financing activities:
 Proceeds from initial public offering of common
  stock (net of costs of $1,560,000)..................................................    65,633,000              --             --
 Proceeds from line of credit draws...................................................            --         490,000             --
 Principal payments on line of credit.................................................            --      (1,402,000)            --
 Proceeds from exercise of stock warrants.............................................     4,000,000              --             --
 Proceeds from the issuance of stock warrants.........................................     1,000,000              --             -- 
 Net proceeds from issuance of preferred stock........................................     5,770,000              --             --
 Proceeds from bank debt..............................................................      (935,000)             --             --
 Proceeds from issuance of common stock...............................................     4,755,000       2,740,000     13,318,000
                                                                                        ------------   -------------   ------------
     Net cash provided by financing activities........................................    80,223,000       1,828,000     13,318,000
                                                                                        ------------   -------------   ------------
Effect of exchange rate changes on cash...............................................       (30,000)       (254,000)      (232,000)
                                                                                        ------------   -------------   ------------
Net increase (decrease) in cash and cash equivalents..................................    46,855,000      (3,210,000)    28,350,000
Cash and cash equivalents, beginning of period........................................     7,973,000      54,828,000     51,618,000
                                                                                        ------------   -------------   ------------
Cash and cash equivalents, end of period..............................................  $ 54,828,000   $  51,618,000   $ 79,968,000
                                                                                        ============   =============   ============
 
</TABLE>
  The accompanying notes are an integral part of these Consolidated Financial
  Statements.
<PAGE>
 
                            AXENT TECHNOLOGIES, INC.

                CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



<TABLE>
<CAPTION>
                                                                                 Year ended December 31,
                                                              -------------------------------------------------------------
                                                                    1996                  1997                   1998
                                                              ----------------      -----------------      ----------------
<S>                                                           <C>                   <C>                    <C>
   Net income (loss)                                              $7,481,000            $(18,615,000)          $7,679,000
   Other comprehensive income (loss)                                                                          
       Recognition of unrealized gain on marketable                                                           
           securities                                                     --                 238,000                   --
       Realization of gain on marketable securities                       --                      --             (238,000)
      Currency translation effects                                   (30,000)               (254,000)            (232,000)
                                                                 -----------            ------------           ----------
   Comprehensive income (loss)                                    $7,451,000            $(18,631,000)          $7,209,000
                                                                 ===========            =============          ==========
</TABLE>

  The accompanying notes are an integral part of these Consolidated Financial
  Statements.
<PAGE>
 
                            AXENT TECHNOLOGIES, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                        

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

     AXENT Technologies, Inc. ("AXENT") and its subsidiaries (collectively, the
"Company") develop, market, license and support enterprise-wide information
security solutions for client/server computing environments and provide related
services.

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions, which could differ from actual results. These estimates and
assumptions affect the reported amounts of assets and liabilities and the
reported amounts of revenues and expenses for these financial statements.

Consolidation

     The accompanying consolidated financial statements include the accounts of
AXENT Technologies, Inc. and its wholly-owned subsidiaries, including AXENT
Technologies Limited, AXENT BV, Raptor Systems, Inc. ("Raptor") and its 
subsidiaries, AssureNet Pathways, Inc. ("AssureNet") and its subsidiary, 
Secure Network Consulting, Inc. ("SNCI") and Datamedia Corporation. All
significant intercompany transactions have been eliminated.

Revenue Recognition

     The Company develops, markets, licenses and supports computer software
products and provides related services. The Company conveys the rights to use
the software products to customers under perpetual license agreements, and
conveys the rights to product support and enhancements in annual maintenance
agreements or understandings. The Company generally ships its software on a
trial basis and recognizes revenue when the customer becomes contractually
obligated to pay for the product.  The Company defers and recognizes maintenance
and support services revenue over the term of the contract period, which is
generally one year. The Company recognizes training and consulting services
revenue as the services are provided. The Company generally expenses sales
commissions as the related revenue is recognized and pays sales commissions upon
receipt of payment from the customer. The Company's revenue recognition policies
are in conformity with the Statement of Position 97-2, "Software Revenue
Recognition," promulgated by the American Institute of Certified Public
Accountants.

     In addition to the direct sales effort, the Company licenses its products
and provides support services to customers through a network of independent
distributors. The Company generally records revenue from independent
distributors at the net license or service fee, after deducting the
corresponding independent distributor's commissions. Product support and
enhancement fees from independent distributors, net of independent distributor
commissions, are recorded as deferred revenue when received and recognized
ratably over the applicable contract period.

Software Development Costs

     Software development costs are included in research and development and are
expensed as incurred. Statement of Financial Accounting Standards ("SFAS") 
No. 86, "Accounting for the Cost of Computer Software to be Sold, Leased or
Otherwise Marketed" requires the capitalization of certain software development
costs once technological feasibility is established, which the Company generally
defines as completion of a working model. Capitalization ceases when the
products are available for general release to customers, at which time
amortization of the capitalized costs begins on a straight-line basis over the
estimated product life, or on the ratio of current revenues to total projected
product revenues, whichever is greater. To date, the period between achieving
technological feasibility and the general availability of such software has been
short, and software development costs qualifying for capitalization have been
insignificant.

<PAGE>
 
Net income per common share

      During 1997, the Company adopted Financial Accounting Standards Board
Statement No. 128 ("SFAS No. 128"), "Earnings per Share," to calculate net
income per share.  Basic earnings per common share have been computed by
dividing net income by the weighted average number of common shares outstanding
during the period.  Diluted earnings per share have been computed by dividing
net income by the weighted average number of common shares outstanding plus an
assumed increase in common shares outstanding for dilutive securities.  Net
income as reported is available to common stockholders and is not adjusted for
basic or diluted earnings per share.  Dilutive securities consist entirely of
options to acquire common stock for a specified price and their dilutive effect
is measured using the treasury method.  Earnings per share for all other periods
presented have been restated to conform to SFAS No. 128.

     The following table reconciles the weighted average number of common shares
during each period for basic earnings per share with the comparable amount for
diluted earnings per share.

<TABLE>
<CAPTION>
(amounts in thousands)                           1996    1997     1998
--------------------------------------------    ------  ------  -------
<S>                                             <C>     <C>     <C>         
Weighted average shares outstanding--(basic)    18,551  22,638   24,501
Stock options                                    3,024      --    1,489  
                                                ------  ------   ------
Weighted average shares outstanding--(diluted)  21,575  22,638   25,990
                                                ======  ======   ======
</TABLE>
Purchased Software

      Purchased software is recorded at the lower of cost or net realizable
value and is included in other assets. Amortization is calculated on a straight-
line basis over the estimated lives of the software products, generally three
years. Amortization expense for the years ended December 31, 1996, 1997 and 1998
was $57,000, $432,000 and $337,000, respectively. Purchased software, included
in other assets, is as follows:

<TABLE>
<CAPTION>
 
                                       December 31,
                                 ------------------------
                                    1997         1998
                                 -----------  -----------
<S>                              <C>          <C>
     Purchased software........  $1,192,000   $1,223,000
     Accumulated amortization..    (534,000)    (871,000)
                                 ----------   ----------
     Purchased software, net...  $  658,000   $  352,000
                                 ==========   ==========
</TABLE>

      In 1996, the Company entered into an agreement with an unrelated third
party to pay up to $1,500,000 for a nonexclusive license to the source code of
certain security technology. Pursuant to this agreement, the Company paid the
third party a $500,000 acquisition fee upon acceptance of the source code, plus
a non-refundable royalty prepayment of $400,000. Amortization expense was zero,
$167,000 and $167,000 for 1996, 1997 and 1998, respectively, and is included in
the schedule above.

     As a result of the AssureNet purchase in 1997, the Company acquired
$1,455,000 of purchased software.  Due to AssureNet's history of net operating
losses, a full valuation allowance was recorded against AssureNet's deferred tax
assets.  A tax benefit in the amount of $890,000 and $0 was recognized in 1997
and 1998, respectively, due to the utilization of AssureNet's deferred tax
assets and the reduction of the related valuation allowance.  In accordance with
SFAS No. 109, the benefit was recorded as a reduction in the book value of the
intangible assets.  Accordingly, the basis of the purchased software was reduced
by $890,000 during 1997.  Amortization expense for the year ended December 31,
1997 and 1998 related to this software was $265,000 and $150,000, respectively
and is included in the schedule above.
<PAGE>
 
Income Taxes

     Under SFAS No. 109, "Accounting for Income Taxes," deferred tax assets or 
liabilities are recorded to reflect the tax consequences on future years of the 
differences between the financial statement and income tax bases of assets and 
liabilities, using presently enacted tax rates.  Deferred income tax expenses or
credits are based on the changes in the asset or liability from period to 
period.

Foreign Currency Translation

      The assets and liabilities of non-U.S. operations are translated into U.S.
dollars at exchange rates in effect as of the balance sheet date. Revenue and
expense accounts of these operations are translated at average exchange rates
prevailing during the month the transactions occur. Transaction gains and losses
are included as an adjustment to stockholders' equity. Net transaction gains
(losses) for the years ended December 31, 1996, 1997 and 1998 were ($22,839),
$6,588 and ($9,665) respectively, and are included in the income (loss) from
continuing operations.

Cash and Cash Equivalents

      Cash and cash equivalents consist of time and demand deposits, money
market accounts, and government securities and short-term repurchase agreements,
which have original maturity dates of three months or less. As of December 31,
1997 and 1998, the Company had experienced no losses on these investments.

Marketable Securities

     The Company accounts for its marketable securities under the Financial
Accounting Standards Board Statement No. 115 ("SFAS No. 115"), "Accounting for
Certain Investments in Debt and Equity Securities".  Securities purchased in
1997 and 1998 were classified as either "available-for-sale" or "held-to-
maturity". All "available-for-sale" and "held to maturity" securities are 
carried at aggregate fair value and amortized cost, respectively. As of
December 31, 1997 and 1998, the Company's "held-to-maturity" securities were
valued at $15.10 and $31.80 million, respectively, and its "available-for-sale"
securities were valued at $25.80 million and $800,000, respectively.  The 
Company's marketable securities consist primarily of certificates of deposit and
government securities, all with maturities of one year or less.  Gains and
losses are determined based on the specific identification method.  During 1997
and 1998, the Company did not realize significant gains or losses on marketable
securities.

     As part of the consideration for the sale of its storage management
products effective as of December 31, 1994, the Company received a warrant to
purchase 250,000 shares of common stock of MTI Technology Corporation ("MTI").
On October 15, 1997, the Company exchanged its warrant for 161,830 shares of MTI
common stock.  These shares were considered to be available-for-sale as of the
exchange of the warrant.  During 1997, the Company received proceeds of $1.74
million ($1.04 million, net of taxes) from the sale of 131,380 shares of MTI
common stock.  Based upon the closing price of $13.25 on December 31, 1997, the
market value of the remaining 30,000 unsold shares of MTI common stock was
$398,000.  During 1998, AXENT sold the remaining 30,000 shares of MTI common
stock and received proceeds of $389,000 ($238,000, net of taxes) on the sale.


Concentration of Credit Risk

      Financial instruments that potentially subject the Company to significant
concentration of credit risk consist primarily of cash and cash equivalents,
short-term investments, accounts receivable, and to a lesser extent, currencies
denominated in other than U.S. dollars. The Company limits the amount of
investment exposure to any one financial instrument. The Company performs on-
going credit evaluations and maintains reserves for potential credit losses;
historically such losses have been immaterial. The Company minimizes the amount
of cash it maintains in local currencies by maintaining excess cash in U.S.
dollars.

     There were no customers that accounted for more than 10% of revenue in 1997
and 1998. One customer accounted for 13% of revenue in 1996.

Recent Accounting Pronouncements

     In December 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants (the "AICPA") issued
Statement of Position (SOP) 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions."  SOP 98-9 modifies SOP 97-2
by requiring revenue to be recognized using the "residual method" if certain
conditions are met.  SOP 98-9 will be effective for the Company's 2000 financial
statements.  Management does not believe that SOP 98-9 will have a material 
impact on the Company's results of operations or financial condition.


<PAGE>
 
     In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use."  SOP 98-1 became
effective January 1, 1999.  Management does not believe that SOP 98-1 will have
a material impact on the Company's results of operations or financial condition.

NOTE 2. RESTRUCTURING, DISPOSITIONS AND LIQUIDATIONS

     In mid-1994, the Company made a strategic decision to focus its business on
the information security market and to divest itself of products and services
unrelated to such core business.

      Effective December 31, 1995, in a transaction intended to qualify as a
tax-free reorganization, the Company transferred certain operations, assets,
liabilities and foreign subsidiaries to Raxco Software Inc. ("Raxco") and
approved the distribution of the preferred stock of such subsidiary to the
Company's stockholders resulting in the division of the Company's operations
into two separate companies (the "Spin-off"). The distributed operations
included the sales, marketing and support operations related to the OpenVMS
utility software business, leaving the Company with the sales, marketing,
development and support operations associated with the information security
business and ownership of the OpenVMS utility software products. The Company
elected to spin-off the distributed operations because of (i) the Company's
strategic focus on information security, (ii) the fundamental differences
between the information security business and the OpenVMS utility software
business and (iii) the capital requirements of multiple lines of businesses.

      In connection with the Spin-off, the Company and Raxco entered into an
Exclusive Distributor License Agreement, an Administrative Services Agreement
and a Line of Credit Loan Agreement. Pursuant to the Exclusive Distributor
License Agreement, Raxco distributed the Company's OpenVMS utility software
products and paid the Company a royalty.  The Company accounted for royalties as
non-operating income from continuing operations. Pursuant to the Administrative
Services Agreement, which was terminated in 1998, Raxco will pay the Company the
greater of $750,000 or the actual cost of providing certain operational and
system support services including bookkeeping, personnel processing,
administrative support, facilities management and product packaging and mailing.
Pursuant to the Line of Credit Agreement, the Company provided a line of credit
to Raxco of up to $750,000 for general working capital needs for a period of 12
months.  The Line of Credit Loan Agreement expired at December 31, 1996.

      For the periods ended December 31, 1997 and 1998, the Company recorded
royalty income of $2.98 million and $1.86 million, respectively, under the
Exclusive Distributor License Agreement and recorded $570,000 and $0,
respectively, as an offset to general and administrative expenses related to the
Administrative Services Agreement.

      For the periods ended 1997 and 1998, Raxco reported to the Company gross
revenues of approximately $11.7 million (unaudited) and $7.5 million
(unaudited), respectively, which included approximately $9.9 million (unaudited)
and $6.2 million (unaudited) of revenues from licensing of the Company's OpenVMS
utility products and a net loss of $618,000 (unaudited) and $642,000 (unaudited)
for the years ended December 31, 1997 and 1998, respectively.  As of December
31, 1997 and 1998, Raxco owed the Company $726,000 and $1.92 million,
respectively, which is included in other assets related to royalties under the
Exclusive Distributor License Agreement.

      During 1996, one of the Company's foreign subsidiaries distributed the
Company's OpenVMS utility software products licensed to Raxco pursuant to the
Exclusive Distributor License Agreement, in order to ensure a smooth transition
of the operations and customer base to Raxco. Included in the Company's results
from discontinued operations are revenues of $932,000 and expenses of $349,000
related to this understanding. This arrangement was terminated in December 1996.

     In February 1996, the Company disposed of its Helpdesk operations for
approximately $2.0 million, consisting of an initial cash payment of $150,000, a
non-interest bearing note of $150,000, assumption of approximately $400,000 in
obligations and liabilities, and the payment of a royalty up to a maximum of
$1.3 million on future gross revenues from all Helpdesk product license and
maintenance fees. The Company  transferred to the buyer the Helpdesk products
and the related fixed assets and customer base. The buyer assumed all of the
Company's obligations related to the Helpdesk products including obligations
related to sales, marketing, support and development employees, telephone
support obligations for the existing customers and the facility lease
obligations. The Company recognized a $10,000 gain associated with the
transaction. During 1996, the Company received $150,000 in full payment of the
non-interest bearing note associated with the sale of the Helpdesk operations
and recorded royalties of $48,000.  During 1997, the Company recorded royalties
of $60,537.  In 1997, the Company and the buyer agreed to amend the purchase
agreement by terminating the relationship for $150,000 in final consideration.

      On December 31, 1994, the Company sold its storage management products for
approximately $1.0 million in cash, $2.5 million in notes receivable and the
assumption of $1.5 million in certain liabilities, primarily related to customer
support obligations for the storage management products. In addition, the
purchaser assumed ongoing facility 
<PAGE>
 
lease obligations of approximately $887,000, and personnel obligations
associated with approximately 28 employees. The Company also received a warrant
to purchase 250,000 shares of the purchaser's common stock. The notes receivable
have a stated interest rate of 8.5% and are due quarterly over a two and one-
half year period. Of the notes receivable, $350,000 was contingent on the
purchasers' successful completion of future software deliverables to a specific
customer. This transaction resulted in a pre-tax gain of approximately $4.8
million ($4.3 million after tax), net of costs incurred in connection with the
sale. The Company recognized $2.3 million of the gain in 1994 and deferred $2.5
million. The deferred gain was recognized as the payments on the notes were
received, which approximated the potential exposure and time frame of certain
contractual indemnification provisions provided by the Company to the purchaser
for third party claims related to product ownership and performance prior to the
sale or other related liabilities incurred by the Company. The Company
recognized $860,000 and $430,000 of the gain in 1996 and 1997, respectively.

     For financial statement purposes, the foregoing discontinued operations
(the "Discontinued Operations") have been accounted for in accordance with APB
No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," and classified as discontinued operations in
the Consolidated Statement of Operations. Prior to the Spin-off, the Company and
Raxco shared certain administrative functions including cash management,
payroll, purchasing, distribution, employee benefit plans, insurance and
administrative services. As a result, substantially all of the cash receipts of
the Company and Raxco were co-mingled. Similarly, operating expenses, capital
expenditures and other cash outlays were centrally disbursed and charged
directly or allocated, based on relative revenue or headcount percentages, to
Raxco. In the opinion of management, the Company's methods for allocating costs
are reasonable. However, such allocated costs are not necessarily indicative of
the costs that would have been incurred by the Company or Raxco if the
Discontinued Operations had been discontinued as of the beginning of 1994. It is
not practicable to determine what those costs would have been on a stand-alone
basis.

The following table summarizes the results of Discontinued Operations for the
divested operations for the years ended December 31, 1996, 1997 and 1998.

<TABLE>
<CAPTION>
                                                            Year Ended December 31,
                                                   -----------------------------------------
                                                    1996            1997            1998
                                                   -----------   -----------   -------------  
<S>                                                <C>           <C>           <C>
Net revenues:
 Open VMS utility................................   $  932,000    $ 103,000     $        --
 Storage management..............................           --           --              --
 Helpdesk........................................           --           --              --
                                                   -----------   -----------   -------------  
  Total net revenues.............................      932,000      103,000              --
Cost of net revenues.............................       81,000           --              --
                                                   -----------   -----------   -------------
Gross profit.....................................      851,000      103,000              --
                                                   -----------   -----------   -------------
Operating expenses:
  Sales and marketing............................      165,000       97,000              --
  Research and development.......................           --           --              --
  General and administrative.....................      103,000           --              -- 
                                                   -----------   -----------   -------------
    Total operating expenses.....................      268,000       97,000              --
                                                   -----------   -----------   -------------
Income from operations...........................      583,000        6,000              --
Non-operating income.............................    1,737,000        9,000              --
Gain on sale of storage management products......      860,000      430,000              -- 
Interest income, net.............................       19,000       14,000              --
                                                   -----------   ----------    ------------- 
Income before income taxes.......................    3,199,000     459,000               --
Provision for income taxes.......................     (804,000)   (204,000)              --
                                                   -----------   ----------    ------------- 
Income from discontinued operations, net of tax..   $2,395,000   $ 255,000    $          --
                                                   ===========   ==========   ==============
</TABLE>

     The following table summarizes the identifiable net assets and liabilities
related to the Discontinued Operations included in the accompanying Consolidated
Balance Sheets as of December 31, 1997 and 1998. Pursuant to the terms of the
Spin-off, the Company retained and has remaining the following identifiable
assets and liabilities of the Discontinued Operations at December 31, 1997 and
1998, respectively.  The net identifiable liabilities have been included in
accrued liabilities and accounts payable as of December 31, 1997 and 1998.

 
<PAGE>
 
<TABLE>
<CAPTION>
                                                December 31,
                                             ------------------
                                                1997      1998
                                             -----------  --------
<S>                                          <C>          <C>
Accounts receivable........................   $       -   $     -
Notes receivable...........................           -         -
Other current assets.......................           -         -
                                             ----------   ------- 
    Total assets...........................   $       -   $     -
                                             ----------   ------- 
Accrued liabilities and accounts payable...   $(141,000)  $     -
Deferred gain..............................           -         -
Deferred revenue...........................           -         -
                                              ---------   ------- 
    Total liabilities......................   $(141,000)  $     -
                                              ---------   ------- 
Net identifiable liabilities...............   $(141,000)  $     -
                                              =========   ======= 
</TABLE>
  The following table summarizes the Statement of Cash Flows related to the
Discontinued Operations included in the accompanying Consolidated Statement of
Cash Flows for the years ended December 31, 1996, 1997 and 1998.
<TABLE>
<CAPTION>
 
 
                                                                     1996         1997        1998
                                                                 ------------  ----------  ----------
<S>                                                              <C>           <C>         <C>
Cash flows from discontinued operating activities:
    Income from discontinued operations........................  $ 2,395,000   $ 255,000   $      --
Adjustments to reconcile income to net cash provided by
 operating activities:
  Depreciation and amortization................................           --          --          --
  Gain on sale of storage management products..................     (860,000)   (430,000)         --
  Provision for income taxes...................................           --          --          --
  Decrease in accounts receivable..............................    2,949,000     109,000          --
  Decrease in decrease in other assets.........................      126,000      55,000          --
  Decrease in accrued liabilities and accounts payable.........     (706,000)   (215,000)   (141,000)
  (Decrease) in deferred revenue...............................   (3,544,000)   (200,000)         --
  (Increase) decrease in interest accrued on note receivable...       19,000      14,000          --
                                                                 -----------   ---------   ---------
Net cash provided by operating activities......................  $   379,000   $(412,000)  $(141,000)
                                                                 ===========   =========   =========
Cash flows from discontinued operations investing activities:
  Proceeds from sale of storage management products............  $   860,000   $ 645,000   $      --
  Capital expenditures.........................................           --          --          --
                                                                 -----------   ---------   ---------
Net cash provided by investing activities                        $   860,000   $ 645,000   $      --
                                                                 ===========   =========   =========
 
</TABLE>

NOTE 3. ACQUISITIONS

     On July 21, 1998, the Company completed the acquisition of Secure
Network Consulting, Inc. ("SNCI") a privately held information security
consulting firm.  In conjunction with the acquisition, the Company issued 85,000
shares of common stock to SNCI's stockholders.  The transaction was accounted
for using the purchase method of accounting.  The purchase price, including
transactions costs, was $2.3 million.  This amount exceeded the fair value of
assets acquired by approximately $2.1 million, which is being treated as
goodwill and amortized, on a straight-line basis, over seven years and is
included in other assets. The operating results of SNCI have been included in
the Consolidated Statement of Operations since July 21, 1998. The effect of this
acquisition does not have a material impact upon the financial results of the
Company.

     On February 5, 1998, the Company completed the acquisition of Raptor under
a definitive merger agreement dated December 1, 1997. Under terms of the merger
agreement, the Company offered 0.80 shares of its common stock for each
outstanding share of Raptor's common stock and agreed to exchange stock options
for all Raptor Stock options outstanding immediately prior to consummation of
the merger. Based upon 13,690,521 shares of Raptor common stock, and stock
options covering a total of 2,158,127 shares of Raptor common stock, that were
outstanding immediately before the effective time of the merger, the Company
issued approximately 10,952,380 shares of its common stock and exchanged stock
options covering a total of 1,725,988 shares of the Company's common stock as a
result of the merger. In connection with the merger, during 1998 the Company 
recorded a non-recurring charge of $17.42 million associated with investment
banking, legal and accounting fees, severance and costs associated with
eliminating duplicative operations. The remaining merger accrual as of December
31, 1998 of approximately $350,000 was fully utilized during March 1999. The
merger between the Company and Raptor has been accounted for as a "pooling-of-
interests", and accordingly, historical financial data has been restated to
include Raptor. The following data summarizes the results of operations of the
Company and Raptor on a stand-alone basis for the years ended December 31, 1996
and 1997:

<PAGE>
 
<TABLE>
<CAPTION>
                                                         AXENT
                                                ---------------------------
                                                   1996          1997
                                                -----------  -------------
<S>                                             <C>          <C>
Net revenues..................................  $22,097,000  $ 41,661,000
Net income (loss) from continuing operations..    3,285,000   (19,696,000)
Net income from discontinued operations.......    2,395,000       255,000

</TABLE> 


<TABLE> 
<CAPTION> 
 
                                                          Raptor
                                                -------------------------
                                                    1996         1997
                                                -----------  ------------
<S>                                             <C>          <C>  
Net revenues..................................  $14,527,000  $ 28,160,000
Net income (loss) from continuing operations..    1,801,000       826,000
Net income from discontinued operations.......           --            --
</TABLE>

     Before the combination, there were no intercompany transactions between the
Company and Raptor.  In addition, no adjustments were required to adopt
consistent accounting practices.  Certain reclassifications were recorded to the
Raptor financial statements to conform to the Company's presentation.

     On March 25, 1997, the Company exchanged 1,550,000 shares of its common
stock for all the outstanding stock and options of  AssureNet Pathways, Inc.
("AssureNet") in a transaction valued at $32.0 million, which was accounted for
using the purchase method of accounting.  A portion of the purchase price was
allocated to the net assets acquired, based on their fair market value.  The
fair market value of the tangible assets acquired was approximately $2.9
million, and purchased software was valued at approximately $1.5 million.  The
remaining $27.6 million of the purchase price was allocated to in-process
research and development based on the determination of the products' net present
value using a discounted cash flow model.  These products had not reached
technological feasibility and had no probable future uses, and therefore were
expensed at the date of the acquisition. The operating results of AssureNet have
been included in the Consolidated Statement of Operations since January 7, 1997.

     The following unaudited pro forma consolidated results of operations have
been prepared as if the acquisition of AssureNet had occurred at the beginning
of 1996 and assuming the hardware resale business had been discontinued as of
the beginning of 1996.  The pro forma information is presented for information
purposes only and is not indicative of what would have occurred if the
acquisition had actually been made as of the beginning of 1996.  In addition,
the pro forma information is not intended to be a projection of future results
and does not reflect synergies expected to result from the integration of
AssureNet and the Company.

<TABLE>
<CAPTION>
 
Pro Forma Information (Unaudited):                         Year Ended
                                                        December 31, 1996
                                                        -----------------
<S>                                                     <C>
Net revenues.........................................      $40,417,000
Net income from continuing                                 
     operations......................................      $ 3,610,000
Net income per common share                                
     from continuing operations (basic)..............      $      0.39
Net income per common share                                
     from continuing operations (diluted)............      $      0.34
</TABLE>

     On May 9, 1997, Raptor acquired a perpetual license, concerning
certain products, from Open Market, Inc., of Cambridge, Massachusetts.  In
association with this transaction, the Company incurred a one-time charge for
the write-off of purchased in-process technology of $6.52 million ($4.24
million, net of tax).
<PAGE>
 
NOTE 4. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

<TABLE>
<CAPTION>
                                                         December 31,
                                                  --------------------------
                                                      1997          1998
                                                  ------------  ------------
<S>                                               <C>           <C>
Leasehold improvements..........................  $   557,000   $ 1,371,000
Computer equipment..............................    7,055,000     8,534,000
Furniture and fixtures..........................    1,054,000     3,545,000
                                                  -----------   -----------
                                                    8,666,000    13,450,000
Less accumulated depreciation and amortization..   (4,403,000)   (6,004,000)
                                                  -----------   -----------
Property and equipment, net.....................  $ 4,263,000   $ 7,446,000
                                                  ===========   ===========
</TABLE>

     Property and equipment are stated at cost. Depreciation and amortization
are calculated using either straight-line or accelerated methods over the
estimated useful lives of the assets. Depreciation expense amounted to
approximately $1,071,000, $2,032,000 and $2,463,000 for 1996, 1997 and 1998,
respectively. The principal estimated useful lives range from three to five
years for computer equipment and seven to ten years for furniture and fixtures.
Leasehold improvements are amortized over the shorter of their economic useful
life or the terms of the respective lease.

NOTE 5. LONG-TERM DEBT

     In January 1997, AssureNet entered into an agreement with a bank for a
$2,500,000 revolving line of credit facility ("Line of Credit") and a $750,000
non-revolving equipment line ("Equipment Line").  In 1997, the Company paid all
amounts outstanding under the Line of Credit and the Equipment Line.

     Total interest expense for 1996 was $51,000 and zero for both 1997 and
1998. Interest expense in 1996 related solely to the imputed interest on the
notes payable to former Datamedia stockholders.

NOTE 6.  DEVELOPER ROYALTIES

     In 1996, the Company entered into an agreement with an unrelated third
party to purchase a nonexclusive license to the source code of a certain
technology.  The Company paid a $400,000 non-refundable pre-payment against
future royalties.  The Company may be required to pay up to an additional
$600,000 in royalties based on a percentage of the revenues derived from the
source code license over a three-year period. The Company incurred royalties of
zero, $91,000 and $100,000 in 1996, 1997 and 1998, respectively.


NOTE 7.  ACCRUED LIABILITIES AND ACCOUNTS PAYABLE

      Accrued liabilities and accounts payable consist of the following:

<TABLE>
<CAPTION>
                                             December 31,
                                        ------------------------
                                           1997          1998
                                        -----------  -----------
<S>                                     <C>          <C>
Accounts payable, accrued expenses....  $ 8,672,000  $ 7,860,000
Accrued payroll, bonus and vacation...    2,695,000    5,285,000
Accrued royalties and commissions.....    1,753,000    2,497,000
                                        -----------  -----------
                                        $13,120,000  $15,642,000
                                        ===========  ===========
</TABLE>
NOTE 8. COMMITMENTS AND CONTINGENCIES

Operating Leases

     The Company leases office space under operating leases expiring through
2007. A majority of the leases contain escalation clauses tied to Consumer Price
Index changes, which provide for increases in base rental to recover increases
in future operating costs. The future minimum rental payments shown below
include base rentals, exclusive of any future escalation. Rent expense is
recognized ratably over the period of occupancy for these leases. Rent expense
amounted to approximately $1,371,000, $2,045,000 and $2,695,000 for 1996, 1997
and 1998, respectively.
<PAGE>
 
     The future minimum payments under non-cancelable lease agreements as of
December 31, 1998 are as follows:

<TABLE>
<S>                        <C>
Year Ending December 31,
 1999..................... $ 3,685,000
 2000.....................   3,691,000
 2001.....................   3,434,000
 2002.....................   3,406,000
 2003.....................   3,291,000
 Thereafter...............   3,496,000
                           -----------
                           $21,003,000
                           ===========
</TABLE>

     The Company currently subleases two office spaces. Future income expected
to be recognized is approximately $143,000, $123,000, $42,000, $35,000, 
$35,000 and $132,000 for 1999, 2000, 2001, 2002, 2003 and years thereafter,
respectively. Total sublease rental income was approximately $246,000 in 1998.

Legal Proceedings

      The Company is subject to legal proceedings and claims that arise in the 
ordinary course of its business. In the opinion of management, the amount of 
ultimate liability with respect to these actions will not materially effect the 
financial position or results of operations of the Company.

NOTE 9.  COMMON STOCK

     All share and per share data has been adjusted to reflect the following
actions by Raptor: 1) a two hundred fifty-for-one stock split of Raptor's common
stock and redeemable convertible preferred stock approved in February 1995 and
effected as a stock dividend; 2) a three-for-one split of Raptor's common stock
approved in December 1995 and effected as a stock dividend; and 3) the
combination with the Company consummated in February 1998.

     In November 1995, Raptor 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 was amortized over the four-year vesting period.
All restrictions on transfer and rights of the Company to repurchase unvested
shares lapsed upon consummation of the combination of the Company and Raptor.

     In January 1996, the Company's Board of Directors adopted an amended and
restated Certificate of Incorporation which increased the authorized
capitalization of the Company to 50,000,000 shares of common stock and 5,000,000
shares of preferred stock.  The par value of each class of stock remained at
$0.02 per share.  During 1996, warrants to purchase 30,000 shares were
exercised.

     In February 1996, Raptor filed a registration statement with the Securities
and Exchange Commission and sold 3,000,000 shares of its common stock to the
public.  Raptor received proceeds from the offering of approximately $40.55
million, net of approximately $3.15 million and $600,000 in underwriting fees
and offering expenses, respectively.

     In April 1996, the Company filed a registration statement with the
Securities and Exchange Commission and sold 2,000,000 shares of its common stock
to the public. Under the registration statement, certain non-officer
stockholders of the Company also sold 990,000 shares to the public, which
included 390,000 shares to cover over-allotments. AXENT received proceeds from
its initial public offering of approximately $25.08 million, net of
approximately $1.96 million and $960,000 in underwriting fees and offering
expenses, respectively. The Company received no proceeds from the sale of shares
by selling stockholders in its initial public offering.

     In March 1997, the Company completed the acquisition of AssureNet.  The
Company issued 1,550,000 shares of its common stock to AssureNet securityholders
and assumed stock options and warrants to acquire up to 54,977 shares of the
Company's common stock.

     In February 1998, the Company completed the acquisition of Raptor.  The
Company issued approximately 10,952,380 shares of its common stock to Raptor
securityholders and exchanged stock options covering a total of 1,725,988 shares
of the Company's common stock as a result of the merger.

     In July 1998, the Company completed the acquisition of SNCI.  The Company
issued approximately 85,000 shares of its common stock to SNCI's stockholders.

<PAGE>
 
NOTE 10.   STOCK OPTION PLANS

     The Company has adopted certain fixed stock option plans. In connection
with the combination of the Company and Raptor, the Company adopted the Exchange
Option Plan for Optionees of Raptor.  Based upon the number of stock options
outstanding under Raptor's 1995 Stock Option and Grant Plan immediately before
the effective time of the merger the Company exchanged stock options covering a
total of 1,725,988 shares of its common stock for stock options covering a total
of 2,158,127 shares of Raptor common stock as a result of the merger.

     At the Company's Special Stockholders Meeting on February 5, 1998,
stockholders approved the 1998 Incentive Stock Plan (the "Employee Plan"). The
Employee Plan, together with other stock option plans, provides for a total of
7,166,297 shares of common stock to be issued. The Employee Plan and other plans
provide for grants to employees, consultants, directors and advisors. Of the
authorized shares under the Employee Plan and other plans, at December 31, 1998,
options for 2,802,984 shares were outstanding; 2,898,045 shares had been issued;
and 1,465,268 shares were available for future grants. The 1996 Directors' Stock
Option Plan (the "Director Plan") allows for the granting of up to 200,000
options to directors of the Company who are not employees of the Company. Of the
authorized shares under the Director Plan, at December 31, 1998, options for
59,000 shares were outstanding, 12,000 shares had been issued, and 129,000
shares were available for future grants. The exercise price of each option
equals the market price of the Company's stock as determined on the date of
grant and the option's maximum term ranges from seven to ten years. Options are
granted throughout the year and vest over a period of four to five years, except
the options granted under the Director Plan which vest over a period of one to
three years.  During 1997, the Company exchanged 264,400 options with exercise
prices between $14.00 and $15.00 per share, for options with an exercise price
of $11.125 per share, which was the fair market value of the Company's common
stock on the date of the exchange.

Stock option activity for 1996, 1997 and 1998 is summarized as follows:

<TABLE>
<CAPTION>
                                          Number                  Weighted Average
                                       Of Options   Price Range    Exercise Price
                                       -----------  ------------  ----------------
<S>                                    <C>          <C>           <C>
     Outstanding, December 31, 1995..   3,153,953   $ 0.07- 4.00       $ 1.04
     Granted.........................     980,160    1.25- 37.66        18.19
     Exercised.......................    (499,484)   0.07- 22.19         0.96
     Canceled........................    (142,552)   0.07- 37.66        10.83
                                       ----------   ------------       ------
     Outstanding, December 31, 1996..   3,492,077    0.07- 37.66       $ 5.46
                                       ----------   ------------       ------
     Granted.........................   2,441,476    11.13-25.16        14.12
     Exercised.......................  (1,076,220)    0.07-17.19         2.15
     Canceled........................  (1,066,887)    0.07-37.66        17.52
                                       ----------   ------------       ------
     Outstanding, December 31, 1997..   3,790,446     0.07-25.16       $ 8.76
                                       ----------   ------------       ------
     Granted.........................   1,629,500    14.38-25.50        18.37
     Exercised.......................  (2,093,225)    0.07-23.50         6.33
     Canceled........................    (464,737)    0.07-25.47        15.05
                                       ----------   ------------       ------
     Outstanding, December 31, 1998..   2,861,984   $ 0.07-25.50       $15.13
                                       ==========   ============       ======
</TABLE>

     Stock options for 1,216,794, 813,474 and 795,036 shares were vested and
exercisable as of December 31, 1996, 1997 and 1998, respectively. The weighted 
average fair value of options granted during 1996, 1997 and 1998 were $5.56, 
$8.39 and $12.57, respectively. The weighted average fair value of options
vested and exercisable as of December 31, 1996, 1997 and 1998, were $2.72, $6.75
and $13.01, respectively.

      The following table summarizes information about fixed stock options
outstanding at December 31, 1998:

<TABLE>
<CAPTION>
                                            Options Outstanding                 Options Exercisable
                                            -------------------                 -------------------
                                               Weighted-Avg.
                            Number Shares        Remaining                         Number Shares
                            Outstanding At      Contractual      Weighted-Avg.    Exercisable At     Weighted-Avg.
Range Of Exercise Prices      12/31/98             Life           Exer. Price        12/31/98         Exer. Price
------------------------    --------------  -------------------  -------------  -----------------    -------------
<S>                         <C>             <C>                  <C>            <C>                  <C>
$ 0.07 to  4.00                    127,371           5.75 years         $ 0.97               91,504         $ 0.65
$10.00 to 14.63                  1,181,691                 5.53          11.94              378,592          11.53
$15.38 to 19.25                  1,229,921                 8.18          17.71              272,338          17.49
$20.00 to 25.50                    323,001                 8.09          22.56               52,602          22.01
                                 ---------                 ----         ------             --------         ------
                                 2,861,984           6.97 years         $15.13              795,036         $13.01
                                 =========                 ====         ======             ========         ======
</TABLE>

     During 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." The Company has elected the disclosure-only alternative for
stock-based employee compensation which requires the disclosure of pro forma net
income or loss and per share amounts using the fair-value based method. The
Company
<PAGE>
 
applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations in accounting for its
plans. Accordingly, no compensation cost has been recognized for its fixed stock
option plans. Had compensation cost for the Company's plans been determined
based on the fair value at the grant dates for awards under those plans
consistent with the method of SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:

<TABLE>
<CAPTION>
                                             1996         1997           1998
                                          ----------  -------------  -------------
<S>                                       <C>         <C>            <C>
     Net income (loss)
       As reported                        $7,481,000  $(18,615,000)  $  7,679,000
       Pro forma                          $3,231,000  $(27,713,000)  $ (3,428,000)
     Basic earnings (loss) per share
       As reported                             $0.40        $(0.82)         $0.31
       Pro forma                               $0.17        $(1.22)        ($0.14)
     Diluted earnings (loss) per share
       As reported                             $0.35        $(0.82)         $0.30
       Pro forma                               $0.15        $(1.22)        ($0.14)
</TABLE>

      For the purpose of SFAS No. 123, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes multiple option-pricing
model with the following weighted-average assumptions used for grants in 1996,
1997 and 1998, respectively: dividend yield of 0% for all grants;  risk-free
interest rates of 6.14, 6.20 and 6.20 percent; expected lives of 3.5, 4.3 and
3.1 years for each grant; and expected volatility of  65 percent for 1996 and
1997 and 74 percent for 1998.

NOTE 11.   INCOME TAXES

      The Company has adopted the asset and liability method of accounting for
income taxes as required by SFAS No. 109. In accordance with SFAS No. 109, the
Company previously determined that unrecognized tax benefits did not satisfy the
recognition criteria set forth in the standard. Accordingly, a valuation
allowance was recorded against the applicable deferred tax assets. During 1998,
a portion of that valuation allowance, which was recorded against the foreign
deferred tax assets, was released.  Management believes that it is more likely
than not that this deferred tax asset will be realized.

      The Company files a consolidated tax return in the United States with its
U.S. subsidiaries. Deferred income taxes have been established by each entity
based upon the temporary differences, the reversal of which will result in
taxable or deductible amounts in future years when the related asset or
liability is recovered or settled.

          The components of the provision (benefit) for income taxes included in
the Consolidated Statements of Operations are as follows:

<TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                                                 ------------------------------------
                                                                    1996         1997        1998
                                                                 -----------  ----------  -----------
<S>                                                              <C>          <C>         <C>        
Continuing Operations
     Current provision (benefit)
          Federal..............................................  $1,331,000   $3,583,000  $6,789,000
          State................................................     228,000      752,000   1,320,000 
          Foreign..............................................          --       33,000     380,000
                                                                 ----------   ---------   ----------
Total current provision from continuing operations.............  $1,559,000   $4,368,000  $8,489,000
                                                                 ==========   ==========  ==========
     Deferred provision (benefit)
          Federal..............................................  $ (370,000)  $1,167,000  $ (899,000)
          State................................................     (30,000)     209,000    (175,000)
          Foreign..............................................          --           --      92,000
                                                                 ----------   ----------  ----------
Total deferred provision (benefit) from continuing operations..  $ (400,000)  $1,376,000  $ (982,000)
                                                                 ==========   ==========  ==========
Total provision from continuing operations.....................  $1,159,000   $5,744,000  $7,507,000
                                                                 ==========   ==========  ==========
</TABLE>
The Company's effective tax rate on pre-tax income (loss) from continuing
operations differs from the U.S. federal statutory tax rate as follows:
<PAGE>
 
<TABLE>
<CAPTION>
 
                                                                Year Ended December 31,
                                                         ----------------------------------
                                                             1996        1997         1998
                                                         ---------     -------      -------
<S>                                                      <C>           <C>           <C>   
U.S. federal statutory rate............................     34.0%       (34.0)%       34.0%
Increase (decrease) in rates resulting from                                         
 State taxes...........................................      3.2         (4.4)         4.9
 Permanent differences.................................     (0.4)          --          1.2
 Write-off of purchased in process R&D.................       --         80.7         13.4
 Effect of foreign income taxes........................     11.4          5.5         (4.1)
 Change in valuation allowance for deferred tax asset .    (29.6)        (6.4)          -- 
 Other.................................................       --          2.4           --
                                                           -----         ----         ---- 
 Effective tax rate....................................     18.6%        43.8%        49.4%
                                                           =====         ====         ==== 

</TABLE> 
 
     Deferred tax assets (liabilities) are included in other assets and are
comprised of the following:

<TABLE> 
<CAPTION> 
                                                                             Year Ended December 31,
                                                 ------------------------------------------------------------------------------
                                                           1997                                      1998
                                                ---------------------------------------   -------------------------------------
                                                  Federal        State        Foreign       Federal        State       Foreign
                                                -----------   -----------   -----------   -----------   -----------   --------
<S>                                             <C>           <C>           <C>           <C>           <C>           <C> 
Current deferred assets                        
  Accrued expenses............................. $   286,000   $    53,000   $        --   $ 1,319,000   $   247,000         --
  Deferred revenue.............................          --            --            --        40,000         8,000         --
  Reserves.....................................   1,073,000       201,000            --       818,000       154,000         --
                                                -----------   -----------   -----------   -----------   -----------   --------
   Total current deferred assets...............   1,359,000       254,000            --     2,177,000       409,000         --
                                                -----------   -----------   -----------   -----------   -----------   --------
Non-current deferred assets                    
  Depreciation and amortization................     166,000        31,000            --       187,000        35,000         --
  Net operating loss...........................   4,520,000       849,000     1,171,000     4,585,000       860,000         --
  Credits......................................   1,132,000            --            --     1,132,000            --         --
                                                -----------   -----------   -----------   -----------   -----------   --------
     Total non-current deferred assets.........   5,818,000       880,000     1,171,000     5,904,000       895,000         --
                                                -----------   -----------   -----------   -----------   -----------   --------
Non-current deferred liability                 
  Depreciation and amortization................         --             --            --            --            --     92,000
                                                -----------   -----------   -----------   -----------   -----------   --------
Gross deferred tax assets......................   7,177,000     1,134,000     1,171,000     8,081,000     1,304,000    (92,000)
Valuation allowance............................  (6,876,000)   (1,077,000)   (1,171,000)   (6,876,000)   (1,077,000)        --
                                                -----------   -----------   -----------   -----------   -----------   --------
Net deferred tax assets........................ $   301,000   $    57,000   $        --   $ 1,205,000   $   227,000   $(92,000)
                                                ===========   ===========   ===========   ===========   ===========   ========
 
</TABLE>

          As of December 31, 1998, the Company's subsidiaries AssureNet and
     Raptor, have net operating losses and credits that expire at various dates
     through 2011.  As of December 31, 1998, those net operating losses were
     approximately $7.1 million for Assurenet and $7.2 million for Raptor.  The
     general business credit carryforward was approximately $369,000 for
     Assurenet and $759,000 for Raptor.  AssureNet also has alternative minimum
     tax credit of approximately $3,000 that does not expire.  Due to a greater
     than 50% change in the ownership of Assurenet and Raptor, the annual
     utilization of the net operating loss carryforward and credit carryforward
     is limited to the lesser of the future taxable income of each company or
     approximately $1,375,000 for Assurenet and $8,600,000 for Raptor.  
     Approximately $6,700,000 of Raptor's losses relate to stock option
     exercises. The tax benefit associated with the stock option exercises will
     be credited to equity when realized.


NOTE 12.  EMPLOYEE BENEFIT PLANS

401(K) Retirement Plans

      The Company sponsors a 401(k) Retirement Plan (the "401(k) Plan") which is
qualified under section 401(k) of the Internal Revenue Code. Pursuant to the
401(k) Plan, eligible participants, which include all permanent U.S. employees
who work at least 20 hours per week and have served for a requisite period, may
elect to contribute a percentage of their annual gross compensation to the
401(k) Plan. Contributions to the 401(k) Plan by the Company are discretionary.
For the years ended December 31, 1996 and 1997, the Company did not contribute
to the 401(k) Plan. The
<PAGE>
 
Company amended its 401(k) Plan effective January 1, 1998, to provide for a
discretionary matching contribution by the Company of 25% of the first 4% of
qualified employee contributions. The Company contributed $222,000 to the 401(k)
Plan for the year ended December 31, 1998.

     In conjunction with the Raptor acquisition (see Note 3), the Company
acquired a 401(k) Plan established for the benefit of the Raptor employees.
Under the Plan, the Company makes no contributions.  All employee contributions
to this plan ceased effective on April 30, 1998.  This plan was terminated on
December 31, 1998 and was merged into the Company's 401(k) Plan in January 1999.

     In conjunction with the AssureNet acquisition (see Note 3), the Company
acquired a Savings and Retirement plan established for the benefit of the
AssureNet employees.  Employer matching contributions are discretionary.
Employer matching contributions are equal to 25% of the employee's contributions
to the Plan, up to 4% of their compensation.  For the year ended December 31,
1997 the Company made contributions of $46,000.  All employee/employer
contributions to this plan ceased effective on December 31, 1997.  This plan was
terminated and merged into the Company's 401(k) Plan on December 31, 1997.

Employee Stock Purchase Plan:

     The Company's 1998 Employee Stock Purchase Plan (the "Employee Stock
Purchase Plan") was adopted by the Board of Directors in December 1997 and was
approved by the stockholders in February 1998. The Company has reserved a total
of 500,000 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 is 85% of the lower of the fair market
value of the common stock on the first or last day of each three month purchase
period. The Employee Stock Purchase Plan is administered by the Compensation
Committee of the Board of Directors. Employees are eligible to participate if
they are employed by the Company or any designated subsidiary for at least 20
hours per week and for more than 90 days. Under the ESP Plan, the Company sold
25,642 shares to employees in 1998.


NOTE 13.  SUPPLEMENTAL CASH FLOW INFORMATION

      Supplemental disclosures of certain tax and interest information as well
as non-cash investing and financing activities include the following:

      1996

      Cash paid for income taxes associated with continuing and discontinued
operations was $784,000 and $30,000, respectively. Cash paid for interest
associated with continuing operations was $148,000.  During 1996, the Company's
current tax payable was reduced by approximately $5,393,000 due to tax benefits
associated with the exercise of employee stock options.

     1997

     Cash paid for income taxes associated with continuing and discontinued
operations was $342,000 and $289,000, respectively.  During 1997, the Company's
current tax payable was reduced by approximately $5,029,000 due to tax benefits
associated with the exercise of employee stock options.

     As part of the consideration for the sale of its storage management
products effective as of December 31, 1994, the Company received a warrant to
purchase 250,000 shares of common stock of MTI.  On October 15, 1997, the
Company exchanged the warrant for 161,830 shares of MTI common stock.  During
1997, AXENT received proceeds of $1.74 million ($1.04 million, net of taxes)
from the sale of 131,830 shares of MTI common stock.

     1998

     Cash paid for income taxes associated with continuing operations was
$892,000.  During 1998, the Company's current tax payable was reduced by
approximately $7,547,000 due to tax benefits associated with the exercise of
<PAGE>
 
employee stock options.  AXENT received proceeds during 1998 from the sale of
the remaining 30,000 shares of MTI common stock of $389,000 ($238,000, net of
taxes).


NOTE 14.  INFORMATION CONCERNING BUSINESS SEGMENTS

     In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information" established standards for reporting information about 
operating segments in annual financial statements and requires selected 
information about operating segments in interim financial reports issued to 
stockholders.  Operating segments are defined as components of an enterprise 
about which separate financial information is available that is evaluated 
regularly by the chief operating decision maker, or decision making group, in 
deciding how to allocate resources and in assessing performance.

     The Company's approach to information security is to develop, market and
support security software products that perform a broad range of security
functions and to provide consulting services to address customers' security
needs.  As such, the Company has two reportable segments: a software product
segment and a consulting services segment.  The software product segment
includes products which provide security assessment and policy management, host
and network based intrusion detection, systems and network access control, data
confidentiality, user administration, activity monitoring, secure authentication
solutions for remote network access and virtual private networking capabilities
for remote users and remote sites.  The consulting services segment includes
training and "Lifecycle Security Services" designed to help organizations
develop a framework and roadmap for assessing potential vulnerabilities;
developing security policies, guidelines, practices and metrics; selecting and
implementing solutions; conducting training; and ensuring appropriate monitoring
and compliance.

      The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies.  The Company
evaluates the performance of its operating segments based on income from
continuing operations before royalty, interest, taxes, non-recurring charges and
gains on the sale of marketable securities.  Intersegment sales and transfers
are not significant.

      Summarized financial information concerning the Company's reportable
segments is shown in the following table.  The "Other" column includes the
consulting services segment as it is below the quantitative thresholds,
corporate related items and, as it relates to segment profit(loss), income and
expense not allocated to reportable segments. There were no customers that
accounted for more than 10% of total revenues in 1997 and 1998. One customer
accounted for 13% of total revenues in 1996 with revenue from that customer
included in both reportable segments.

<TABLE>
<CAPTION>
                                      Software
                                      Products              Other             Total
                                   -------------        ------------     --------------
<S>                                <C>                  <C>               <C>
1998                                                                     
----                            
Net Revenues                       $96,568,000         $   4,451,000      $ 101,019,000
Segment operating profit (loss)     30,159,000           (21,730,000)         8,429,000
Total assets                        46,187,000           115,076,000        161,263,000
                                
1997                            
----                                                                        
Net Revenues                       $67,013,000         $  2,808,000       $  69,821,000
Segment operating profit (loss)     16,970,000          (39,422,000)        (22,452,000)
Total assets                        30,709,000           94,072,000         124,781,000
                                
1996                            
----                                                                        
Net Revenues                       $34,414,000         $  2,210,000       $  36,624,000
Segment operating profit (loss)      2,453,000           (3,008,000)           (555,000)
Total assets                        17,341,000           89,844,000         107,185,000
</TABLE>
<PAGE>
 
     The Company's area of operations are principally in the United States.
Operations outside of the United States are worldwide but primarily in the
United Kingdom, Europe and Asia.  No single foreign country is significant to
the consolidated operations.  Foreign operations' revenue, profit and
identifiable assets are shown in the following table.


<TABLE>
<CAPTION>
                          U.S.           International           Total
                    --------------     ----------------     ---------------
<S>                 <C>                <C>                  <C>
1998                
Revenues             $ 74,095,000         $26,924,000         $101,019,000
Profit                  3,808,000           3,871,000            7,679,000
Total assets          156,355,000           4,908,000          161,263,000
                                                              
1997                                                          
Revenues             $ 54,662,000         $15,159,000         $ 69,821,000
Profit (loss)         (16,904,000)         (1,966,000)         (18,870,000)
Total assets          120,605,000           4,176,000          124,781,000
                                                              
1996                                                          
Revenues             $ 28,688,000         $ 7,936,000         $ 36,624,000
Profit (loss)           5,307,000            (221,000)           5,086,000
Total assets          105,965,000           1,220,000          107,185,000
</TABLE>

NOTE 15. SUBSEQUENT EVENTS

  On January 12, 1999, the Company completed the acquisition of Internet Tools,
Inc ("ITI").  Under the terms of the merger agreement, the Company issued
750,000 shares of common stock to ITI stockholders and option holders.  The
merger between the Company and ITI will be accounted for as a "pooling-of-
interests," and accordingly historical financial results in future reports will 
be restated to include ITI. The acquisition did not meet the criteria for a 
significant business combination and as such pro forma disclosures are not 
included herein.
<PAGE>
 
 
                                   SIGNATURES
                                        
  Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Rockville,
Maryland, on the 28th day of March 1999.

                                                AXENT TECHNOLOGIES, INC.
        
                                                By:  /S/ JOHN C. BECKER
                                                     ------------------
                                                     John C. Becker
                                                     Chairman of the Board and
                                                     Chief Executive Officer
                                                
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
this Report has been signed below by the following persons on behalf of the
Company in the capacities and on the date indicated.

  Each person whose signature appears below in so signing also makes,
constitutes and appoints John C. Becker, Gary M. Ford and Edwin M. Martin, Jr.,
and each of them acting alone, his true and lawful attorney-in-fact, with full
power of substitution, for him in any and all capacities, to execute and cause
to be filed with the Securities and Exchange Commission any and all amendments
and post-effective amendments to this Report, with exhibits thereto and other
documents in connection therewith, and hereby ratifies and confirms all that
said attorney-in-fact or his substitute or substitutes may do or cause to be
done by virtue hereof.

A MAJORITY OF THE BOARD OF DIRECTORS:

<TABLE>
<CAPTION>
 
        Signature                         Title                        Date
        ---------                         -----                        ----
<S>                           <C>                               <C>
 
/S/ JOHN C. BECKER            Chairman of the Board,               March 28, 1999
----------------------------                                      
John C. Becker                Chief Executive Officer             
                              And Director (Principal             
                              Executive Officer                   
                                                                  
/S/ ROBERT B. EDWARDS, JR.    Vice President, Chief Financial      March 28, 1999
----------------------------                                      
Robert B. Edwards, Jr.        Officer and Treasurer (Principal    
                              Financial and Accounting Officer)   
                                                                  
/S/ GABRIEL A. BATTISTA       Director                             March 28, 1999
----------------------------                                      
Gabriel A. Battista                                               
                                                                  
/S/ JOHN F. BURTON            Director                             March 28, 1999
----------------------------                                      
John F. Burton                                                    
                                                                  
 /S/ TIMOTHY A. DAVENPORT     Director                             March 28, 1999
----------------------------                                      
Timothy A. Davenport                                              
                                                                  
/S/ RICHARD A. LEFEBVRE       Director                             March 28, 1999
----------------------------                                      
Richard A. Lefebvre                                               
                                                                  
/S/ KEVIN A. MCNERNEY         Director                             March 28, 1999
----------------------------
Kevin A. McNerney
</TABLE>
<PAGE>
 

EXHIBIT INDEX
-------------

<TABLE>         
<CAPTION>       
                 
Exhibit Number     Description
--------------     ------------
<S>                <C> 
  3.1   (1)        Amended and Restated Certificate of Incorporation of AXENT.
  3.2   (2)        Amended and Restated Bylaws of AXENT.
  4.1   (1)        Specimen stock certificate for shares of Common Stock of AXENT.
  10.1  (1)        AXENT's 1991 Amended and Restated Stock Option Plan.
  10.2  (3)        AXENT's 1996 Amended and Restated Stock Option Plan.
  10.3  (3)        AXENT's 1996 Amended and Restated Directors' Stock  Option Plan.
  10.8  (1)        Settlement Agreement effective as of September 13, 1991, by and among AXENT and the parties thereto.
  10.9  (1)        Form of Indemnification Agreement between AXENT and its directors and executive officers.
  10.11 (1)        Lease Agreement dated as of September 6, 1995, by and between
                   Research Grove Associates and AXENT.
  10.11A (7)       Second Amendment dated September 18, 1998 to Lease Agreement by and
                   between Research Grove Associates and AXENT.
  10.12  (1)       Lease of Real Property dated as of March 7, 1995, by and between
                   TNK Associates and AXENT.
  10.17  (4)       Memorandum of Understanding regarding certain compensation and
                   severance matters relating to Richard A. Lefebvre, dated July 22,
                   1997.
  10.24  (1)       Agreement and Plan of Separation, effective as of December 31,
                   1995, between AXENT and Raxco Software, Inc.
  10.29  (3)       Amended Agreement and Plan of Merger among AXENT, Axquisition,
                   Inc., and AssureNet Pathways, Inc, dated as of January 6, 1997 and
                   amended February 26, 1997.
  10.30  (5)       AXENT's 1998 Employee Stock Purchase Plan.
  10.31  (5)       AXENT's 1998 Incentive Stock Plan.
  10.32  (5)       AXENT's Exchange Option Plan for Optionees of Raptor Systems, Inc.
  10.33  (5)       Agreement and Plan of Merger among AXENT, Axquisition Two, Inc. and
                   Raptor Systems, Inc. dated as of December 1, 1997.
  10.34  (7)       AXENT's Executive Severance General Guidelines.
  10.35  (7)       Lease Agreement dated as of April 23, 1998 by and between Pracvest
                   and AXENT.
  10.36  (7)       Lease Agreement dated as of May 6, 1997 by and between CC&F Second
                   Avenue Trust and Raptor Systems, Inc.
  10.36A (7)       First Amendment to Lease dated as of December 15, 1997 by and
                   between CC&F Second Avenue Trust and Raptor Systems, Inc.
  11.1*            Computation of Earnings (loss) per common share
  21.1*            Subsidiaries of the Registrant.
  23.1 *           Consent of PricewaterhouseCoopers LLP
  23.1A *          Consent of PricewaterhouseCoopers LLP on certain financial data
                   schedules.
  24.1 *           Power of Attorney (included in signature pages)
  27.1 *           Financial Data Schedule
  27.2 *           Financial Data Schedule (1997 Restated)
</TABLE> 
 
<PAGE>
 
<TABLE> 
<CAPTION> 

  Schedule                 Description
  --------                 -----------
  <S>        <C> 
  II.   *    Valuation and Qualifying Accounts All other schedules for which
             provision is made in the applicable accounting regulation of the
             Securities and Exchange Commission are not required under the
             related instructions or are applicable, and therefore have been
             omitted.
</TABLE> 
-----------------------

     (1)  Previously filed as an exhibit to AXENT's Registration Statement on
          Form S-1 (File No. 333-01368) and incorporated herein by reference.
     (2)  Previously filed as an exhibit to AXENT's Quarterly Report on Form 10-
          Q for the Quarter ended September 30, 1996.
     (3)  Previously filed as an exhibit to AXENT's Registration Statement on
          Form S-4 (File No. 333-20207) and incorporated herein by reference.
     (4)  Previously filed as an exhibit to AXENT's Quarterly Report on Form 10-
          Q for the Quarter ended September 30, 1997.
     (5)  Previously filed as an exhibit to AXENT's Registration Statement on
          Form S-4 (File No. 444-43265) and incorporated herein by reference.
     (6)  Previously filed as an exhibit to AXENT's Annual Report on Form 10-K
          for the year ended December 31, 1997 (File No. 0-28100) and
          incorporated herein by reference.
     (7)  Previously filed as an exhibit to AXENT's Quarterly Report on Form 10-
          Q for the Quarter ended September 30, 1998.
       *  Filed herewith.
<PAGE>
 
                                  SCHEDULE II

                       VALUATION AND QUALIFYING ACCOUNTS

              For the Years Ended December 31, 1996, 1997 and 1998

<TABLE>
<CAPTION>
                                         Balance at   Additions                Balance at
                                        Beginning of  Charged to                 End of
             Description                   Period      Expenses   Deductions     Period
            ------------                ------------  ----------  -----------  ----------
<S>                                     <C>           <C>         <C>          <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
December 31, 1996.....................       492,000     467,000    (210,000)     749,000
December 31, 1997.....................       749,000     794,000    (204,000)   1,339,000
December 31, 1998.....................     1,339,000   1,121,000    (874,000)   1,586,000
 
DEFERRED TAX ASSET VALUATION ACCOUNT
 
December 31, 1996.....................     3,913,000   1,737,000  (1,148,000)   4,502,000
December 31, 1997.....................     4,502,000   5,548,000    (926,000)   9,124,000
December 31, 1998.....................     9,124,000              (1,171,000)   7,953,000
</TABLE>

Note:  Beginning balance at 12/31/96 and additions and deductions were adjusted
to include Raptor.  Additions for 1997 include the beginning valuation allowance
associated with AssureNet.