<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, 1996

                                      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 X  No
                                             ---    ---


<PAGE>
 
        Documents incorporated by the reference:  Specified portions of the 
Definitive Proxy Statement to be filed with the Commission pursuant to 
Regulation 14A in connection with the 1997 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, 1996.

        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, 1997 was approximately $102,342,000.
                                                      

        The number of shares outstanding of the Registrant's Common Stock, as 
of March 25, 1997 was 10,153,014 Shares of Common Stock.
                    



<PAGE>
 
                           AXENT TECHNOLOGIES, INC.
                                   FORM 10-K

                               TABLE OF CONTENTS

                                    Part I
<TABLE> 

<S>         <C>                                                                                          <C> 
Item 1.     Business ....................................................................................  1

              Overview
              Industry Background
              The AXENT Technologies Solution
              Strategy
              Technology
              Products and Services
              Sales and Marketing
              Customers
              Product Development
              Competition
              Intellectual Property Rights
              AssureNet Acquisition
              Employees

Item 2.     Properties................................................................................... 12

Item 3.     Legal Proceedings............................................................................ 12

Item 4.     Submission of Matters to a Vote of Security Holders.......................................... 12

                                                   Part II
 
Item 5.     Market for the Company's Common Equity and Related Stockholder Matters....................... 13

Item 6.     Selected Consolidated Financial Data......................................................... 14

Item 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations........ 15

Item 8.     Financial Statements and Supplementary Data.................................................. 23

Item 9.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......... 23

                                                   Part III

Item 10.    Directors and Executive Officers of the Registrant........................................... 24

Item 11.    Executive Compensation....................................................................... 24

Item 12.    Security Ownership of Certain Beneficial Owners and Management............................... 24

Item 13.    Certain Relationships and Related Transactions............................................... 24
 
                                    Part IV

Item 14.     Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................ 25

Signatures............................................................................................... 49

Exhibit Index............................................................................................

</TABLE> 

<PAGE>
 

                                    PART I

ITEM 1.   BUSINESS. 
 
OVERVIEW

  AXENT Technologies, Inc. ("AXENT" or the "Company") develops, markets,
licenses and supports computer security solutions for enterprise computing
environments. AXENT's OmniGuard family is a suite of software products which
provides a comprehensive solution to a wide range of computer security
requirements across multiple computing platforms. OmniGuard products enable
organizations to centrally manage computer security functions. In addition,
OmniGuard products provide data confidentiality, access control, user
administration, monitoring, and intrusion detection across local area networks
("LANs"), the Internet and intranets and on personal computers, computers
running NT, UNIX, NetWare, and other midrange and mainframe operating systems.
AXENT addresses the growing requirement for comprehensive security solutions as
organizations migrate from centralized, proprietary computing platforms to
distributed, heterogeneous client/server environments accessible from both
internal networks and external networks, such as the Internet. AXENT believes
that enterprise security is best addressed primarily as a business problem
rather than a technological one and that its OmniGuard family of software
products and related consulting services enable organizations to select,
install, manage and maintain robust yet cost-effective security solutions
appropriate for their businesses.
 
  The increasing capabilities and declining cost of desktop computers and
workstations, coupled with improvements in network communications technology,
have motivated many organizations to transition from host-centric systems
dominated by mainframes or minicomputers to distributed, client/server
environments. As these environments become widespread, they have been
increasingly used for mission-critical applications. As a result, sensitive
corporate information has become distributed across client/server networks,
where the level of security readily attainable on host-centric systems is much
more difficult to achieve. Organizations have therefore developed a growing
need for comprehensive client/server oriented information security solutions.
 
  AXENT's OmniGuard family of software products consists of Enterprise
Security Manager (ESM), Intruder Alert (ITA), Enterprise Access Control (EAC),
UNIX Privilege Manager (UPM), and Enterprise Resource Manager (ERM--formerly
referred to as Enterprise SignOn or ESO), each of which is available across a
variety of common computing platforms. These products may be used in
combination to provide a comprehensive information security solution for the
enterprise or individually to fulfill a specific need. ESM, AXENT's flagship
product, provides a framework that enables business managers to centrally
define, manage and enforce security policies across a distributed,
heterogeneous computing environment and works with other OmniGuard and third-
party security products. OmniGuard can also be part of a broader systems
management strategy and can be used in conjunction with client/server
administration platforms such as AT&T's OneVision, MC/EMpower of MainControl,
Inc., Hewlett-Packard's OpenView and Tivoli's Tivoli Management Environment.
 
  AXENT owns a line of utility software products for the OpenVMS platform that
is now marketed by Raxco Software, Inc. ("Raxco"), pursuant to an Exclusive
Distributor License Agreement. Raxco was spun-off by AXENT as of December 31,
1995. AXENT also owns and markets several security products developed for
OpenVMS systems that are predecessors of the OmniGuard family of software
products.

  On March 25, 1997, AXENT completed the acquisition of AssureNet Pathways, Inc.
("AssureNet"). AssureNet provided a broad range of network security solutions 
that protect enterprise-wide networks from unauthorized entry, tampering and 
theft of information and services. See "--AssureNet Acquisition."

INDUSTRY BACKGROUND
 
  As organizations migrate from centralized, proprietary computing toward
distributed client/server environments, mission-critical applications for
payroll, financial reporting, order processing, billing, manufacturing design,
funds transfer and medical records are increasingly being deployed on networks
of personal computers, workstations and servers. Client/server environments,
however, present significant challenges in designing and implementing
information security functions which were not as difficult in the traditional
centralized environment. These challenges include the following:
 
<PAGE>
 
  . Physically dispersed storage of sensitive corporate information. In the
    centralized computing environment, sensitive corporate data was
    physically stored in one or a few controlled sites, allowing for strict
    access control. In a client/server environment, information may be
    scattered across thousands of file servers, desktop computers and
    laptops, providing multiple points of access. Thus, information can be
    easily removed on a floppy disk or portable hard drive or sent out of the
    protected environment over external networks.
 
  . Wide access to information. In contrast to the centralized computing
    environment where access to data was restricted to one or a few consoles
    or a number of dumb terminals linked through a controlled, proprietary
    internal network, the client/server environment frequently allows access
    to information from a number of locations either within the internal
    network or on external networks, such as the Internet. In addition, in
    the less secure client/server environment, the network traffic itself can
    be monitored by unauthorized parties.
 
  . Multiple platform computing environment. While the centralized computing
    environment can utilize a single technical architecture for security
    functions, the client/server environment forces organizations to
    implement security measures across a broad range of disparate computing
    hardware, operating systems and communications protocols. Different
    platforms included in a network are likely to provide inconsistent levels
    of security.
 
  The conflict between the benefit of easy access to information inherent in
the client/server computing environment and the need to protect and secure
corporate information requires a new generation of security software
solutions. These solutions must be specifically designed to function in large-
scale, multi-platform computing environments while providing the same level of
protection and security functionality expected of a centralized computing
environment. Security solutions must:
 
  . Manage security. Enable management to centrally define, manage, implement
    and enforce corporate security policies which are tailored to the
    specific needs of their business;
 
  . Control access. Control access to computing resources such as clients,
    servers or the network;
 
  . Identify and authenticate. Ensure the identity of users attempting to
    access computing resources;
 
  . Protect information. Preserve the confidentiality and integrity of
    information by ensuring that only those with proper authority may view,
    monitor, modify or delete information;
 
  . Administer users. Centrally administer the user's credentials and
    privileges; and
 
  . Audit. Monitor all systems to detect and prevent intrusions or
    unauthorized actions.
 
  The operating systems of most distributed computing platforms and most
third-party products generally address only some of these needs. In addition,
few vendors provide centralized security management for heterogeneous
environments. In an enterprise computing environment, all of these functions
must be available on all parts of a client/server network--client, internal
network, server and connections to external networks such as the Internet--to
provide robust security. Therefore, any comprehensive enterprise solution
needs to address these key functions across multiple client/server platforms
and communication protocols and be tied together by an enterprise security
framework.
 
THE AXENT TECHNOLOGIES SOLUTION
 
  AXENT's OmniGuard family of software products, together with its related
consulting services, provides a comprehensive security solution based on
AXENT's belief that corporate security policy, determined by the specific
needs of the business, must be the foundation for the development and
implementation of information security. ESM provides an enterprise security
framework that ties together security functions--whether such functions are
provided by AXENT's products, the operating system, the network or other
vendors' products--and enables the organization's management to relate those
functions to business goals and objectives. AXENT's products provide a
comprehensive security solution that can manage and enhance the security
capabilities already resident in a wide range of distributed computing
platforms.
 
<PAGE>
 
  OmniGuard's features enable organizations to establish appropriate security
policies based on business needs and risk analysis, including the need for
central control of the level of security on all platforms, status reporting
and enforcing corporate security policy. OmniGuard ensures that only
authorized users have access to computing resources such as clients and
servers or the network itself, and monitors all systems in order to detect and
prevent intrusions or unauthorized actions. OmniGuard authenticates users
logging into the network and preserves the confidentiality and integrity of
information by allowing only those who have proper authority to view, monitor,
modify or delete information. OmniGuard also enables the security
administrator to establish authorized users, create, modify and delete user
privileges, and manage the credentials of users.
 
  The OmniGuard solution incorporates the following key elements:
 
    Enables organizations to establish security policy to match business
  needs. As part of its security solution, AXENT provides services that
  enable an organization to determine an appropriate security policy to match
  its business requirements, to adopt a solution to fit those requirements
  and to incorporate those policies into the OmniGuard framework.
 
    Provides open security framework that manages AXENT or third-party
  security solutions. ESM enables business managers to centrally manage
  security across a distributed multi-platform client/server computing
  environment and works with other OmniGuard and third-party products. The
  OmniGuard family of software products can also be integrated into a broader
  systems management environment and can be used in conjunction with widely
  deployed client/server administration platforms. An important benefit of
  OmniGuard's framework-based, open-component approach is that an
  organization can use the most appropriate security technology to manage a
  particular security issue. OmniGuard is designed with an open architecture.
  It uses a published application program interface ("API") and has an
  optionally available software development kit which enables customer-
  developed applications or other third party products to be integrated into
  the OmniGuard security management framework.
 
    Provides security component solutions that can be used stand-alone or as
  part of AXENT's framework. AXENT currently offers Intruder Alert and
  Enterprise Access Control, individually or as part of its OmniGuard family of
  software products. AXENT recently developed OmniGuard/Enterprise Resource
  Manager (ERM), which is a family of products to administer users and other
  computing resources as well as provide one-time identification and
  authentication of network users. ERM was first available under the Company's
  early shipment program in December 1996. See "--Product Development."
  Customers can use existing and planned individual OmniGuard products to
  satisfy a specific security need or to address security issues on a specific
  platform. While each product can function independently of other OmniGuard
  components, OmniGuard products can also be combined to provide a more
  comprehensive security solution that supports environments ranging in size
  from a single desktop up to and including global, enterprise-wide
  environments.
 
    Enables easy management of security across heterogeneous computing
  environments. OmniGuard enables security administrators to manage security
  across multiple heterogeneous platforms from a central workstation. Each of
  OmniGuard's Windows- and UNIX Motif-based graphical user interfaces enables
  an administrator to centrally establish security policies, evaluate
  security status, monitor and prevent unauthorized actions, detect and
  prevent Internet intrusions administer users, and make changes to security
  settings for the systems being managed. Because OmniGuard displays security
  information in an easy to understand graphical format, security
  administrators can manage multiple types of systems without the necessity
  of knowing the specific capabilities or user interfaces of each of the
  operating systems in the administered environment.
 
    Leverages security capabilities of existing systems and provides
  mainframe-level security and functionality across various operating
  systems. Most client/server operating systems provide limited security
  functionality while some, such as common personal computer operating
  systems, provide none. AXENT's solution enhances the information security
  capabilities of host operating systems and network operating systems to
  provide mainframe-level security functionality on a wide variety of
  client/server computing platforms.
 
<PAGE>
 
    Supports multiple operating systems, network operating systems and
  network protocols. OmniGuard supports a range of popular operating systems
  including MS/DOS, Windows 3.x, Windows 95, Windows NT, UNIX, NetWare and
  OpenVMS, and interfaces with mainframe security products, such as
  IBM's RACF and Computer Associates' ACF 2. OmniGuard also works with most
  popular network protocols, including TCP/IP, NetWare IPX and DECNet. See
  "--Product Development."
 
STRATEGY
 
  AXENT's objective is to be the leading provider of information security
solutions for enterprise computing environments. Key elements of AXENT's
strategy to attain this objective are:
 
    Provide comprehensive business security solutions. AXENT seeks to provide
  a comprehensive family of products that addresses most, if not all, of an
  organization's enterprise security requirements. AXENT intends to add new
  products, enhance existing functions and increase the number of platforms
  supported by the OmniGuard family of products. AXENT believes that adding
  new products and functions to the OmniGuard family will allow AXENT to
  market new technology to current customers while it expands its customer
  base.
 
    AXENT recently developed OmniGuard/Enterprise Resource Manager
  (ERM), a product designed to provide central user administration, network-
  wide identification and authorization, and secure, one-time sign-on to an
  organization's network. Using ERM, administrators will be able to centrally
  create, modify and delete users and their security profiles across
  disparate platforms. ERM is also designed to provide network-wide
  identification and authentication to enable users to sign-on to the network
  once and gain secure access to heterogeneous application servers. AXENT
  intends to design future releases of ERM to support multiple authentication
  methods, including smart cards, tokens, DCE authentication services and
  Kerberos.
 
    Support multiple platforms. AXENT believes that OmniGuard's depth of
  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 OmniGuard and provide hard-to-duplicate product
  features. See "--Product Development."
 
    Provide consulting services to enhance product offerings. AXENT believes
  that there is a significant need for technical expertise in deploying
  client/server security solutions. AXENT has an experienced consulting
  services group that supplies services before, during and after an OmniGuard
  sale, in order to configure a security solution appropriate to an
  enterprise's needs. AXENT intends to expand its consulting services
  business to enable faster implementation and roll-out of AXENT's products.
 
    Increase market penetration with multiple channels. AXENT currently has a
  targeted distribution strategy aimed at large corporate customers using a
  mix of direct sales, original equipment manufacturers ("OEMs"), system
  integrators and distributors, both domestically and abroad. AXENT plans to
  increase market penetration by increasing the productivity of its direct
  sales channel and expanding its indirect distribution channels. AXENT has
  marketing relationships with several large computer and professional
  services companies. AXENT intends to solidify and expand the existing
  relationships and develop strategic partnerships in order to become the
  security standard for client/server computing environments inside major
  systems management frameworks.
 
TECHNOLOGY
 
  AXENT's OmniGuard family of software products is designed to allow
organizations to centrally manage information security in client/server
computing environments. OmniGuard products can be deployed on a stand-alone
basis as well as in client/server environments with thousands of machines. A
typical OmniGuard product deployment contains three main components: graphical
user interface, managers and agents. The graphical user interface can reside
on either a UNIX workstation running Motif or on a personal computer running
Microsoft Windows. The manager/agent architecture enables OmniGuard to scale
up to large client/server computing environments.
 
<PAGE>
 
  A manager typically resides on a server and connects to the graphical user
interface over the network. Functions common to all managed platforms are
implemented in the manager. Functions specific to a particular platform are
implemented in the agents. Agents contain most of the processor-intensive code
and report only summary information or alarms to a manager. A manager
aggregates information from the agents and presents it to the administrator
through the graphical user interface. Conversely, instructions given through
the graphical user interface to the manager can be implemented on multiple
agents. AXENT has designed trusted communications paths intended to prevent
the interception or unauthorized manipulation of the data traffic among the
managers, agents and graphical user interface.
 
  With the OmniGuard software products, the graphical user interface, manager
and agent software can all reside on different platforms. For example, the
graphical user interface can reside on a PC using Microsoft Windows, while the
manager runs on a Novell, Inc. ("Novell") NetWare server and the agents run on
a mix of PCs, UNIX servers, Novell servers and OpenVMS platforms. OmniGuard
managers communicate with agents over the native communications protocol for
each respective platform. In other words, NetWare managers communicate with
NetWare agents using IPX and with UNIX agents using TCP/IP.
 
PRODUCTS AND SERVICES
 
 OmniGuard Products
 
  AXENT's OmniGuard family of software products provides business managers
with a framework and the capability to centrally manage corporate information
security across client/server environments.
 
                              OMNIGUARD PRODUCTS
 
<TABLE>
<CAPTION>
                          SINGLE COPY      PLATFORMS       DATE OF COMMERCIAL
      PRODUCT NAME        LIST PRICE       SUPPORTED          INTRODUCTION        DESCRIPTION
      ------------        ----------- -------------------- ------------------ -------------------
<S>                       <C>         <C>                  <C>                <C>
Enterprise Security       
 Manager................  $ 395-3,995 NetWare 3.x + 4.x,     11/94            Centralized       
                                      Windows NT,                             security management
                                      UNIX, OpenVMS                           across distributed
                                      Windows                                 multi-platform    
                                                                              client/server     
                                                                              computing         
                                                                              environments       
Intruder Alert..........  $ 395-3,995 NetWare 3.x + 4.x,      4/95            Detection of and
                                      UNIX, OpenVMS,                          automated response
                                      Windows NT                              to unauthorized
                                      Windows                                 activity across
                                                                              multi-platform
                                                                              client/server
                                                                              computing
                                                                              environments
Enterprise Access         
 Control for UNIX.......  $ 393-3,995 UNIX                    4/95            Central          
                                                                              administration of
                                                                              users and secure 
                                                                              authentication   
                                                                              across           
                                                                              heterogeneous UNIX
                                                                              environments      
Enterprise Access         
 Control for PCs........  $139        MS/DOS + Windows 3.x    5/95            Central definition
                                                                              and control of user
                                                                              access to computing
                                                                              resources and     
                                                                              automatic file    
                                                                              encryption for    
                                                                              MS/DOS and Windows
                                                                              3.x PCs            
Enterprise Access         
 Control for Windows      
 95.....................  $139        Windows 95             10/96            Central definition
                                                                              and control of user
                                                                              access to computing
                                                                              resources and     
                                                                              automatic file    
                                                                              encryption for    
                                                                              Windows 95 PCs     
UNIX Privilege Manager..  $99-$1,995  UNIX                   10/96            Centralized control
                                                                              of UNIX root
                                                                              privilege
Enterprise Resource       
 Manager................  $95-$19,950 Netware 3.x + 4.x,     Early            Centralized       
                                      Banyan, UNIX,          shipment         administration of 
                                      Windows, Netscape      in 12/96         users and other   
                                                                              computing resources
                                                                              as well as one-time
                                                                              identification and
                                                                              authentication of 
                                                                              network users      
</TABLE>

<PAGE>
 
  . OmniGuard/Enterprise Security Manager. ESM, AXENT's flagship product,
    enables a security manager to centrally define, manage and enforce
    information security policies in enterprise computing environments and
    works with other OmniGuard and third-party security products. ESM is 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.
    ESM security policies can be applied to a single user or machine, a group
    of users or machines, or to an entire organization. ESM integrates
    security functionality from the operating system with the functionality
    provided by it and other OmniGuard products as well as third-party
    security products. With an easy-to-use graphical user interface, ESM
    permits information security administrators to quickly assess the overall
    status of corporate information security and analyze weak areas. ESM
    periodically monitors the entire network for viruses, worms, weak
    passwords, trap doors, modifications to key programs or files, users with
    unauthorized privileges, Internet vulnerabilities and other security
    threats.
 
  . OmniGuard/Intruder Alert. ITA permits information security administrators
    to monitor an organization's network for suspicious events in real time.
    Using a graphical user interface, a security manager can define rules and
    desired reactions to unauthorized events across heterogeneous UNIX,
    NetWare, Windows NT, and personal computer platforms on the
    organization's network. ITA uses knowledge-based technology to correlate
    multiple events across multiple machines to determine if a security
    violation has occurred. In addition to logging an event, ITA can alert
    the security administrator of significant security threats in real time
    via a message to the administrator's workstation, E-mail or pager. ITA
    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.
 
  . OmniGuard/Enterprise Access Control for UNIX. EAC/UNIX allows managers to
    centrally define and control access to information across a range of
    different UNIX platforms and supplements built-in native UNIX security
    features. Security administrators may assign users to groups and define
    password control features such as length, time-of-day access restrictions
    and requirements to periodically change passwords. Unattended
    workstations can also be locked based on selected criteria. In addition,
    EAC/UNIX provides an intuitive graphical user interface for adding,
    modifying and deleting users across heterogeneous UNIX platforms.
 
  . OmniGuard/Enterprise Access Control for PC's and Windows 95s. EAC allows
    managers to centrally control access to information stored on MS-DOS,
    Windows 3.x or Windows 95-based desktop computers through user
    identification and authentication functions, providing these systems with
    security functionality meeting U.S. Government "C2" functionality
    guidelines. EAC allows system administrators to define file-level
    discretionary access controls and automatically encrypts protected files.
    EAC transparently enforces those controls no matter where such files
    reside. If a file is protected by EAC, 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. EAC also offers
    features such as single sign-on to network servers and secure deletion of
    protected files.
 
  . OmniGuard/UNIX Privilege Manager. UPM enables users to execute programs
    or commands that ordinarily require UNIX root privileges without having
    to give the user access to the root account. In addition, UPM provides a
    full and indelible audit trail of all actions occurring in important
    accounts such as root.
 
  . OmniGuard/Enterprise Resource Manager (formerly called Enterprise
    SignOn). ERM is a family of products designed to administer users and
    other computing resources as well as identify and authenticate network
    users. ERM provides a single point of user administration and resource
    management for PCs, NT, UNIX, NetWare, Banyan, Internet, mainframes and
    other applications. In addition, ERM enables users to log-on once to an
    enterprise security server and gain secure access to all network
    resources they are authorized to run. ERM was available under the Company's 
    early shipment program in December 1996.
 
<PAGE>
 
 OpenVMS Security Products
 
  AXENT markets several security products which are predecessors to the
OmniGuard family of software products. AXENT developed these products for
OpenVMS systems. These products provide improved access control, full system
monitoring, automated reporting and analysis, and security auditing and
assessment.
 
 OpenVMS Utility Products
 
  As of December 31, 1995, AXENT transferred to Raxco the marketing,
distribution and maintenance rights to AXENT's OpenVMS utility software
products. The products marketed and distributed by Raxco include nine products
that provide system management and performance enhancement functions for the
OpenVMS system. All of these products run on Digital's VAX and Alpha
platforms. The products automate time and labor intensive tasks, such as
defragmentation and optimization of disk files, memory tuning, input and
output caching and user support functions. The benefits of the products
include simplified system management, faster response times, higher system
throughput and improved end-user productivity. The products are sold
separately and in technology-integrated packages that provide single-source
solutions to the OpenVMS customer base.
 
 Services
 
  In addition to its software products, AXENT provides fee-based, on-site
consulting and training services through a group of 27 information security
analysts. 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 shortcomings in their
computers or networks 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 the OmniGuard framework or develop customized
information security solutions. In addition, the analysts provide pre-sales
assistance for customers evaluating AXENT's software products.
 
  AXENT believes that a high level of continuing customer service and support
is required in order 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 AXENT's offices in Provo, Utah, 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.
 
SALES AND MARKETING
 
  AXENT markets its products and services through a 38 person direct sales
organization and through a mix of indirect channels including OEMs, systems
integrators and distributors, both domestically and abroad.
 
  Direct Sales. The direct sales organization is divided into four districts
in North America and one district in the United Kingdom. AXENT's sales
strategy emphasizes activity based selling using telemarketing to qualify
prospects and determine their information security requirements and strategic
solution selling once potential customers are identified. On-site meetings,
often conducted with one of AXENT's consultants, are used to demonstrate
information security solutions to finalize product and service transactions.
 
  AXENT's products are primarily sold to large, corporate customers that have
deployed or are beginning to deploy mission-critical applications into
client/server computing environments. A customer's decision to use
 
<PAGE>
 
AXENT's products may involve a substantial financial commitment, including the
license costs, consulting fees, maintenance fees, education and deployment
costs, as well as substantial involvement of the customer's personnel
resources. Accordingly, a decision to purchase AXENT's products often involves
the customer's senior management. As a result, the sales cycle for AXENT's
products historically has been relatively long, averaging nine to twelve
months.
 
  AXENT has designed a pilot program to assist customers in decision-making.
The pilot program, which is a coordinated effort between sales and marketing
and consulting services, involves a small-scale installation which requires a
financial and personnel commitment by the customer and which allows the
customer to fully understand OmniGuard's features and capabilities. The pilot
program is becoming more frequently deployed as customers consider large-scale
installations of OmniGuard products.
 
  Indirect Distribution Channels. An important facet of AXENT's sales strategy
is the development of indirect distribution channels, such as OEMs, systems
integrators for particular vertical markets and other software vendors whose
products fit well with those of AXENT. AXENT currently has several indirect
distribution relationships, including an OEM relationship with AT&T whereby
OmniGuard is bundled with NCR's OneVision systems management framework. AXENT
also receives referral business as part of Hewlett-Packard OpenView Solution
Partners program, Sun's Solstice program and Tivoli's Tivoli Plus program.
 
  International Distribution Channels. AXENT sells its products
internationally through a combination of direct sales and distributors. AXENT
maintains a direct presence in the United Kingdom, Belgium and the Netherlands
and has entered into non-exclusive marketing relationships with several
independent distributors in order to serve additional international markets in
which AXENT does not have a direct presence. These distributors are located in
France, Germany, Italy, Norway, Sweden, Finland, Australia, Asia and South
America. These distributors license AXENT's products at a discount for
relicensing to end user customers, and may provide training, support and
consulting services to such customers. For the fiscal years ended December 31,
1995 and 1996, international revenues accounted for approximately 27% and 24% of
AXENT's revenues, respectively. See Note 14 of Notes to the AXENT Consolidated
Financial Statements for financial information regarding AXENT's foreign
operations.
 
  Marketing. 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, Internet marketing, advertising,
seminars, public relations and trade shows as well as overseeing AXENT's
participation in industry programs and forums. Strategic marketing is
conducted through market analysis and interpretation by a customer advisory
council which meets for the purpose of validating AXENT product development
direction. AXENT's internal product steering committee establishes long- and
short-term strategic product goals. In addition, AXENT's marketing department
participates and assists in preparing and giving 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.
 
CUSTOMERS
 
  During 1996, AXENT had licensed various OmniGuard products to more than 300
customers world-wide. These customers, which include British Telecom plc,
Johnson & Johnson, LSI Logic and Wells Fargo Bank, are public and private
sector entities utilizing client/server computing environments with numerous
users and diverse operating system platforms. Wells Fargo Bank accounted for
more than 21% of AXENT's total revenues during 1996.
 
  AXENT's customers represent enterprises across a broad range of industries,
including financial services, technology, professional services, government,
consumer products and energy and utilities. These customers include ten of the
Business Week's 30 largest U.S. public companies and nine of Forbes' 30
largest U.S. private companies and five of the six largest public accounting
firms.
 
<PAGE>
 
  In order to protect its intellectual property, AXENT does not sell or
transfer title to its products to customers. Instead, AXENT provides software
products to customers under non-exclusive, non-transferable perpetual license
agreements.
 
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 products have been developed primarily by its internal
development staff, in some instances with the assistance of external
consultants. Through the acquisition of Datamedia in December 1994, AXENT
added to its product line a personal computer access control software product
and acquired certain in-process research and development projects related to
Enterprise Resource Manager. Certain other technologies have been acquired
through licensing arrangements and earlier acquisitions.
 
  AXENT has its principal software development centers in Nashua, New
Hampshire, and Provo, Utah. The software development efforts in Nashua are
focused on access control, user administration and resource management
products. The Provo center focuses on security management and intrusion
detection. The development centers operate with small project teams, state-of-
the-art software development tools, and industry standard languages and
compilers. AXENT employs a separate development team to port its products to
new operating systems or new releases of supported operating systems. AXENT
uses object-oriented development techniques to minimize the amount of code
changes required to support new platforms and enhancements to its family of
products. AXENT has a rigorous quality control process and source code is
tightly managed, backed-up regularly and escrowed in a secure, off-site
location.
 
  AXENT recently developed OmniGuard/Enterprise Resource Manager (ERM)
which was formerly known as Enterprise SignOn. ERM is a family of products,
designed to administer users and other computing resources as well as identify
and authenticate network users. Collectively, the ERM components provide a
single point of user administration and resource management for PCs, NT, UNIX,
NetWare, Banyan, Internet, and mainframes. When used for network
identification and authentication, ERM enables users to log-on once to an
enterprise security server and gain secure access to all network resources
they are authorized to run. ERM was first available under the Company's early 
shipment program in December 1996.
 
  AXENT is also developing versions of its OmniGuard family of software
products to work with applications such as Internet firewalls, Lotus Notes,
SAP/R3 and PeopleSoft, and relational databases such as Oracle, Informix, and
Sybase.
 
  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 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 AXENT can maintain or enhance its competitive position
against current and future competitors.
 
<PAGE>
 
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 publicly
available software.
 
  Large, multi-product vendors. AXENT's principal competitors include IBM,
Computer Associates, ICL, Digital and Groupe Bull. 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 Mergent International, Inc., Memco Software Ltd. (Memco's
products are also marketed by Platinum Technology, Inc. and the Tivoli
division of IBM), Dynasoft Software A.B. (marketed by its distributor,
Securix, in the U.S.), Fischer International Systems, Intrusion Detection,
Inc. and the LAN Support Group. 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 Digital,
Hewlett Packard, IBM, Sun, and Microsoft. 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 substantial portion of AXENT's current
business comes from customers licensing UNIX versions of its products. Certain
UNIX security products that compete with one or more aspects of AXENT's
products are available in the public domain for little or no cost or from open
systems standards such as the Open Group's Distributed Computing Environment
("DCE"). DCE can be licensed for a fee and have been incorporated into
operating systems and into third party security products. AXENT intends to
work with and support DCE as well as other standards that become widely
adopted by AXENT's customers.
 
  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 products comparable or superior to
those developed 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 no
patents or patents
 
<PAGE>
 
pending with respect to its security information products and has not to date
registered any of its copyrights. In addition, AXENT is currently seeking to
register certain of its trademarks in principal foreign jurisdictions. AXENT
uses a signed license agreement with many customers and a printed "shrink-
wrap" license for all other users of its products in order to protect its
copyrights and trade secrets. Since shrink-wrap licenses are not signed by the
licensee, 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.
 
  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.
 
  As of December 31, 1996, AXENT has received two patents and has filed two
patent applications on the products being marketed by Raxco. The status of
patents involves complex legal and factual questions and the breadth of claims
allowed is uncertain. Accordingly, there can be no assurance that patent
applications filed by AXENT will result in patents being issued or that its
patents, and any patents that may be issued to it in the future, will afford
protection against competitors with similar technology; nor can there be any
assurance that patents issued to AXENT will not be infringed upon or designed
around by others or that others will not obtain patents that AXENT would need
to license or design around. If existing or future patents containing broad
claims are upheld by the courts, the holders of such patents might be in a
position to require companies to obtain licenses. There can be no assurances
that licenses that might be required for AXENT's products would be available
on reasonable terms, if at all.

ASSURENET ACQUISITION

  On March 25, 1997, AXENT completed the acquisition of AssureNet Pathways, Inc.
("AssureNet"). In connection with the acquisition, AXENT will issue 1,550,000
shares of AXENT common stock in exchange for all of the outstanding shares of
AssureNet preferred and common stock and certain outstanding AssureNet stock
options and warrants. In addition, AXENT assumed all other AssureNet stock
options and warrants outstanding at the time of the merger. AXENT will account
for the acquisition under the purchase method of accounting. The purchase price,
approximately $32 million, includes the value of shares exchanged, net
liabilities assumed and direct costs associated with the transaction and is
allocated among AssureNet's assets based on fair market value. During the first
quarter of 1997, AXENT incurred a one-time charge to earnings of approximately
$28 million to reflect in-process research and development costs.


  Before the acquisition, AssureNet developed and marketed certain hardware and
software remote access authentication products (Defender(R) products) and had
certain other software products under development. AXENT intends to integrate
the existing Defender software technology with AXENT's OmniGuard family of
products where appropriate. With the exception of hardware tokens, AXENT intends
to cease actively marketing the majority of AssureNet hardware products and
focus its efforts on marketing the Defender software products. The acquisition
also is expected to permit AXENT to expand its indirect distribution
capabilities through the resellers that are distributing AssureNet's Defender
products.
 
EMPLOYEES
 
  As of January 2, 1997, AXENT had 157 full-time employees at its offices in
the U.S., including 56 in product development, 20 in customer support, 24 in
sales, seven in marketing, 22 in customer service and consulting, and 28 in
finance, executive, centralized services and administration. As of January 2,
1997, AXENT had 39 full-time employees located predominantly in the office of
its United Kingdom subsidiary, of which 14 were engaged in sales, eight in
support, three in marketing, five in customer service and consulting and nine
in finance and administration.
 
  AXENT's future success will depend in significant part on the continued
service of its key technical, sales and senior management personnel.
Competition for such personnel is intense and there can be no assurance that
AXENT can retain its key managerial, sales and technical employees, or that it
can attract, assimilate or retain other highly qualified technical, sales and
managerial personnel in the future. None of AXENT's employees is represented
by a labor union. AXENT has not experienced any work stoppages and considers
its relations with its employees to be good.
<PAGE>
 
Item 2. Properties.
 
  AXENT's principal administrative, sales and marketing facility is located in
approximately 17,000 square feet of office space in Rockville, Maryland which
it has leased through February 1999. AXENT's development laboratories are
located in Provo, Utah and Nashua, New Hampshire, where it has leased
approximately 20,000 and 10,000 square feet, respectively. AXENT's customer
service department is resident in the Provo facility. AXENT also leases
domestic sales offices in Lexington, Massachusetts, Kirkland, Washington, Los
Angeles, California, and Bridgewater, New Jersey, approximately 9,000 square
feet of office space in the United Kingdom and a small office in the
Netherlands. AXENT believes that its existing facilities are adequate for its
needs and that additional space will be available as needed.
 

Item 3. Legal Proceedings.
 
  In November 1995, Advanced Systems Concepts Inc. ("ASCI") filed a lawsuit in
the U.S. District Court for the District of New Jersey naming as defendants
AXENT, the manager of technical support for Raxco, an independent contractor
of Raxco, several of such contractor's officers and employees, a company
regarded by ASCI as a competitor, several of such company's officers and
employees and a former employee of ASCI. ASCI alleged that the defendants
participated in a conspiracy to misappropriate various proprietary rights of
ASCI and that the defendants engaged in racketeering, mail fraud, wire fraud,
unfair competition, breach of employment agreement, conversion, embezzlement
and tortious interference with contractual relationships. The allegations
against the defendants stem from communication among the various defendants,
including one communication by the Raxco employee to the former ASCI employee
at the request of the independent contractor. ASCI is seeking treble damages
under the federal racketeering laws, attorneys' fees and other damages and an
injunction against continuing use of technology that allegedly was acquired
unlawfully. AXENT has denied ASCI's substantive claims, has moved to dismiss
ASCI's claims alleging racketeering and violation of Federal statutes and
intends vigorously to defend the litigation. If ASCI's claims against AXENT
are not dismissed, the ASCI litigation could result in substantial expense to
AXENT and diversion of effort by certain of AXENT's management. If AXENT is
found to have conspired to misappropriate proprietary rights of ASCI, AXENT
could be liable for damages and an injunction could issue regarding certain of
AXENT's OpenVMS utility software products. None of ASCI's claims relate to any
of the OmniGuard products. AXENT believes the possibility of an unfavorable
outcome related to this litigation is remote.
 
  AXENT is not currently aware of any other pending or threatened litigation
that could have a material adverse effect on AXENT's financial condition or
results of operations.
 

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>
        Fiscal 1996
        Second Quarter (from April 24, 1996)...................... 24     13 1/2
        Third Quarter............................................. 23 1/2 9 3/8
        Fourth Quarter............................................ 23 3/4 12 5/8
</TABLE>
 
  On March 25, 1997 the last reported sale price of the Common Stock was $12.875
per share. As of March 25, 1997, the Company had approximately 140 stockholders
of record, and approximately 4,900 beneficial owners. AssureNet, which was
acquired on March 25, 1997, had approximately 200 stockholders of record. 

The Company has never paid or declared any cash dividends on its Common Stock.
The Company currently intends to retain any earnings for future growth and,
therefore, does not expect to pay cash dividends in the forseeable future.
<PAGE>

Item 6.  Selected Consolidated Financial Data.

        The following selected consolidated financial data should be read in 
conjunction with the Company's Consolidated Financial Statements and notes 
thereto and "Management's Discussion and Analysis of Financial Condition and 
Results of Operations" included elsewhere in this Form 10-K. The selected 
consolidated financial data as of December 31, 1995 and 1996, and for each of 
the three years in the period ended December 31, 1996, have been derived from 
the Company's consolidated financial statements included elsewhere in this Form 
10-K, which have been audited by Coopers & Lybrand L.L.P., independent 
accountants, whose report thereon is also included in this Form 10-K. The 
selected consolidated financial data as of December 31, 1992, 1993 and 1994 and 
for each of the years ended December 31, 1992 and 1993 have been derived from 
audited financial statements of the Company not included in this Form 10-K.
 
 
<TABLE>
<CAPTION>
                                             YEAR ENDED DECEMBER 31,
                                     -------------------------------------------
                                       1992     1993    1994     1995     1996
                                     -------------------------  -------  -------
                                         (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                  <C>       <C>     <C>      <C>      <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues:
 Product licenses..................  $  3,045  $4,316  $ 5,832  $10,117  $16,002
 Maintenance and support services..     1,113   1,759    2,242    3,174    3,885
 Consulting services...............       --      --       520    1,437    2,210
                                     --------  ------  -------  -------  -------
   Total net revenues..............     4,158   6,075    8,594   14,728   22,097
                                     --------  ------  -------  -------  -------
Cost of net revenues...............       702     939    1,238    1,747    1,912
                                     --------  ------  -------  -------  -------
 Gross profit......................     3,456   5,136    7,356   12,981   20,185
                                     --------  ------  -------  -------  -------
Operating expenses:
 Sales and marketing...............     2,272   3,751    5,697   11,324   12,610
 Research and development..........       690     860    1,644    3,976    5,034
 General and administrative........       853     862    1,048    2,393    2,483
 Write-off of purchased in-process
  research and development.........       --      --     4,280      --       --
                                     --------  ------  -------  -------  -------
   Total operating expenses........     3,815   5,473   12,669   17,693   20,127
                                     --------  ------  -------  -------  -------
Income (loss) from continuing
 operations before royalty,
 interest and taxes................      (359)   (337)  (5,313)  (4,712)      58
Royalty income.....................       --      --       --       --     3,321
Interest income (expense)..........       --      --       --      (129)   1,065
Income tax benefit (provision).....       --      906    2,040    2,146   (1,159)
                                     --------  ------  -------  -------  -------
Income (loss) from continuing
 operations........................      (359)    569   (3,273)  (2,695)   3,285
Income (loss) from discontinued
 operations, net of tax............    (1,685)  1,663    3,782    5,050    2,395
                                     --------  ------  -------  -------  -------
Net income (loss)..................  $ (2,044) $2,232  $   509  $ 2,355  $ 5,680
                                     ========  ======  =======  =======  =======
Net income (loss) per common share:
 Continuing operations.............  $  (0.04) $ 0.06  $ (0.36) $ (0.30) $  0.31
 Discontinued operations...........     (0.21)   0.19     0.42     0.56     0.23
                                     --------  ------  -------  -------  -------
Net income (loss) per common
 share.............................  $  (0.25) $ 0.25  $  0.06  $  0.26  $  0.54
                                     ========  ======  =======  =======  =======
Weighted average number of common
 shares outstanding................     8,332   9,021    9,065    9,118   10,662
                                     ========  ======  =======  =======  =======
CONSOLIDATED BALANCE SHEET DATA:
 Cash and cash equivalents.........  $  3,198  $4,577  $ 6,612  $ 6,083  $17,261
 Short-term investments............       --      --       --       --    18,629
 Net identifiable (assets)
  liabilities from discontinued
  operations.......................     4,739   3,685   (1,221)   1,319      163
 Working capital...................    (1,925)    691    2,366    1,948   31,731
 Total assets......................     5,534   7,141   10,009   12,646   44,001
 Total debt........................       --      --     2,817      900      --
 Stockholders' equity..............    (1,065)  1,358    1,944    2,976   34,448
</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 and other parts of this Annual Report contain forward-looking 
statements which involve risks and uncertainties. The Company's actual results 
may differ significantly from the results discussed in forward-looking 
statements.
 
OVERVIEW
 
  AXENT develops, markets, licenses and supports computer security solutions
for enterprise computing environments. Historically, AXENT offered an array of
system management software products and certain security products. In 1994,
AXENT 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. AXENT made the first sale of its OmniGuard/Enterprise
Security Manager product in November 1994.
 
  The businesses divested by AXENT were (i) the storage management products
business, which was sold in 1994 for cash, notes and the assumption of certain
liabilities, (ii) the Helpdesk products business, which was sold in February
1996, for cash, a note, royalties and the assumption of certain liabilities,
and (iii) the OpenVMS utility software products business, which was conveyed
to Raxco, effective as of December 31, 1995. AXENT has retained ownership of
the OpenVMS utility software products which will be distributed by Raxco
pursuant to 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. 
 
  Prior to the divestment of these businesses, AXENT utilized centralized
systems for cash management, payroll, purchasing, distribution, employee
benefit plans, insurance and administrative services. As a result,
substantially all of the cash receipts of AXENT, Raxco and the other
discontinued operations were commingled. Similarly, operating expenses,
capital expenditures and other cash outlays were centrally disbursed and
charged directly or allocated to Raxco and the other discontinued operations.
In the opinion of management, AXENT's methods for allocating costs among the
continued and discontinued operations are reasonable. However, the historical
results are not necessarily indicative of the costs that would have been
incurred by AXENT or its discontinued operations had the divestments occurred
at the beginning of 1994. AXENT believes that it is not practicable to
determine what those costs would have been on a stand-alone basis.
 
  AXENT's results of operations for 1994 reflect AXENT's acquisition of
Datamedia in December 1994 for up to $5.0 million in a transaction accounted
for using the purchase method. AXENT incurred a one-time charge of $4.3
million to write-off purchased in-process research and development costs
related to Datamedia products under development. See "AXENT Business--Product
Development." The remaining purchase price was allocated to existing net
assets and purchased software costs of $548,000 and $102,000, respectively.
Existing net assets included $639,000 of cash and cash equivalents. The
operating results of Datamedia have been included in AXENT's Consolidated
Statement of Operations since the date of acquisition.
 
  AXENT's revenues are derived principally from two sources: (i) product
license fees for the use of AXENT's software products and (ii) service fees
for maintenance, consulting services and training related to AXENT's software
products. AXENT generally ships its software on a trial basis and recognizes
revenue upon acceptance of the software by the customer, unless AXENT has
significant future obligations to the customer, in which case revenue is
recognized when such obligations are satisfied. 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.
 
<PAGE>
 
  AXENT markets its products primarily 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 8% of AXENT's net
revenues from its information security products for each of the years ended
December 31, 1994 and 1995, respectively, and 9% for the year ended December
31, 1996. AXENT generally records revenue from distributors at the net license
or service fee, after deducting the distributors' commissions, which range
from 40% to 75%.
 
 
 Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
 
  Net revenues. AXENT's net revenues from product licenses increased
approximately 58%, or $5.88 million, from $10.12 million in 1995, to $16.00
million in 1996, representing 69% and 72% of total net revenues for 1995 and
1996, respectively. The increase in product license revenue is primarily
attributable to the expansion of AXENT's product offerings, with the
introduction, general release and increased market acceptance of additional
products comprising the OmniGuard family of software products throughout 1995
and 1996, offset in
 
<PAGE>
 
part by a decrease in license revenues derived from AXENT's other (primarily
OpenVMS) computer security software products. Product license revenues
relating to the OmniGuard family of software products accounted for
approximately 97% of AXENT's net product license revenues in 1996 compared
with 85% in 1995. OmniGuard/Intruder Alert and OmniGuard/Enterprise Access
Control for both UNIX and PCs were released commercially during the second
quarter of 1995. Enterprise Access Control for Windows 95 and UNIX Privilege
Manager were released commercially in the fourth quarter of 1996.
 
  AXENT's net revenues from maintenance and support services increased
approximately 23%, or $720,000, from $3.17 million in 1995 to $3.89 million in
1996, representing 22% and 18% of total net revenues in 1995 and 1996,
respectively. The increase in net revenues from maintenance and support
services is attributable to a larger base of customers on maintenance
agreements resulting from the increased licensing of AXENT's OmniGuard
products, offset in part by a decrease in maintenance revenues derived from
AXENT's other (primarily OpenVMS) computer security software products. The
decrease in net revenues from maintenance and support services as a percentage
of total net revenues is attributable to the increase in total revenues,
particularly net revenues from product licenses.
 
  AXENT's net revenues from consulting services increased approximately 53%,
or $770,000, from $1.44 million in 1995 to $2.21 million in 1996, representing
10% of total net revenues for both 1995 and 1996. The increase in consulting
services revenues is attributable to an increase in the size and number of
engagements associated with licensing of AXENT's OmniGuard products.
 
  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 from international operations as a
percent of total net revenues were 76% and 24%, respectively, in 1996 as
compared to 73% and 27%, respectively, in 1995.
 
  Cost of net revenues. AXENT's cost of net revenues from product licenses
includes the cost of media, product packaging, documentation and other
production costs and amortization of purchased software costs and provisions
for bad debt. Cost of net revenues associated with product licenses decreased
approximately 36%, or $321,000, from $887,000 in 1995 to $566,000 in 1996,
representing 9% and 4% of net revenues from product licenses in 1995 and 1996,
respectively. The decrease in cost of net revenues associated with product
licenses is primarily attributable to an increase in production efficiency due
to the consolidation of worldwide production in the second half of 1995, a
change in product media from tape to CD-ROM resulting in a decrease in
production and shipping expense and an increase in the average size of the
transactions recorded in 1996. Cost of net revenues associated with product
licenses as a percentage of net revenues from product licenses may fluctuate
from year to year due to a change in product mix or a change in the number or
size of transactions recorded year over year.
 
  AXENT's cost of net revenues from maintenance and support services includes
direct and indirect costs of providing technical support to AXENT's customers.
Cost of net revenues associated with maintenance and support services
increased 35%, or $246,000, from $697,000 in 1995 to $943,000 in 1996,
representing 22% and 24% of net revenues from maintenance and support services
in 1995 and 1996, respectively. The increase in cost of net revenues from
maintenance and support services is primarily attributable to increased
staffing of AXENT's customer support operations necessary to support a larger
customer base and the additional products and platforms supported by AXENT.
 
  AXENT's cost of net revenues from consulting services includes direct and
indirect costs of providing training and consulting services to AXENT's
customers. Cost of net revenues associated with consulting services increased
147%, or $240,000, from $163,000 in 1995 to $403,000 in 1996, representing 11%
and 18% of net revenues from consulting services in 1995 and 1996,
respectively. The increase in cost of net revenues from consulting services is
primarily attributable to increased staffing of AXENT's training and
consulting professionals necessary to meet the customer demand for consulting
services offered by AXENT.
 
<PAGE>
 
  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 11%, or $1.29 million, from
$11.32 million in 1995 to $12.61 million in 1996, representing 77% and 57% of
total net revenue for 1995 and 1996, respectively. The increase in dollar
amount was due primarily to increased commissions associated with the
additional revenues, additional investment in AXENT's US and UK operations and
increased investment in indirect distribution, offset in part by the closing
of AXENT's German and Swiss direct offices during the fourth quarter of 1995.
The decrease in sales and marketing expenses as a percent of total net
revenues is attributable to the increase in total net revenues.
 
  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 generally are expensed as
incurred. Research and development expenses increased 26%, or $1.05 million,
from $3.98 million in 1995 to $5.03 million in 1996, representing 27% and 23%
of total net revenues for 1995 and 1996, respectively. The increase in dollar
amount resulted primarily from the addition of internal and third-party
contract developers needed to develop, maintain and enhance the OmniGuard
family of software products, including AXENT's Enterprise Resource Manager
product which was under development in 1996. The decrease in research and
development expenses as a percentage of total net revenues was due primarily to
the increase in total net revenues. AXENT currently anticipates that research
and development expenses may increase in absolute dollars as AXENT 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 and
related costs for management, finance and accounting, legal and other
professional services. General and administrative expenses increased 4%, or
$90,000 from $2.39 million in 1995 to $2.48 million in 1996, representing 16%
and 11% of total net revenue for 1995 and 1996, respectively. The decrease in
general and administrative expenses as a percentage of total net revenues was
due primarily to the increase in total net revenues.
 
  In 1996, certain general and administrative expenses are offset in part by
the Administrative Services Agreement between AXENT and Raxco. That agreement
provides for Raxco to pay AXENT on an annual basis, 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. In 1996, AXENT
received $750,000 from Raxco under the Administrative Services Agreement.
 
  Royalty income. In 1996, AXENT recorded royalty income of $3.32 million,
representing 15% of total net revenue pursuant to the Exclusive Distributor
License Agreement with Raxco. The Agreement provides for payment by Raxco to
AXENT the greater of (i) a 30% royalty on license and services fees related to
the OpenVMS utility software products owned by AXENT and marketed exclusively
by Raxco or (ii) $2.0 million for 1996, $1.5 million for 1997 and $1.0 million
for 1998, and a 30% royalty thereafter for two additional years.
 
  Interest (expense) income. Interest (expense) income increased $1.20
million, from an expense of $129,000 in 1995, to income of $1.07 million for
1996. The increase is primarily attributable to interest on the proceeds from
AXENT's initial public offering, as well as a decrease in the amortization of
discount on the note payable.
 
  Income taxes. AXENT 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, AXENT 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 1996, a portion of the valuation
allowance for the deferred tax asset was released, as a result of AXENT's
profitable operations, which established the recognition of a deferred tax
asset in the amount of $400,000 as of December 31, 1996. Management believes
that it is more likely than not that this tax asset will be realized.
<PAGE>
 
  AXENT recorded an income tax benefit in 1995 related to the loss from
continuing operations in 1995 and an income tax provision in 1996 related to
the income from continuing operations in 1996. The effective rate for 1996
differs from the federal statutory rate due to the utilization of prior years
net operating losses and the change in the valuation allowance for deferred
tax assets.
 
  Income (loss) from continuing operations before royalty, interest and
taxes. As a result of the above, AXENT recorded income from continuing
operations of $58,000 in 1996, compared with the loss of $4.71 million for
1995.
 
  Income from discontinued operations. Income from discontinued operations
consists of the net results of operations from the divested businesses of AXENT,
which for financial statement purposes have been accounted for in accordance
with APB 30 and classified as discontinued operations. See "AXENT Business," and
the Consolidated Financial Statements and Notes thereto included elsewhere in
this Form 10-K. AXENT's income from discontinued operations decreased 52%, or
$2.65 million, from $5.05 million in 1995 to $2.40 million in 1996, representing
34% and 11% of total net revenues for 1995 and 1996, respectively. AXENT
anticipates a continued decline in income from discontinued operations over the
next several quarters.
 
 Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
 
  Net revenues. AXENT's net revenues from product licenses increased
approximately 74%, or $4.29 million, from $5.83 million in 1994 to $10.12
million in 1995, representing 68% and 69% of total net revenues in 1994 and
1995, respectively. The increase in product license revenues is primarily
attributable to the expansion of AXENT's product offerings, with the
introduction and general release of the OmniGuard family of software products,
offset in part by a decrease in AXENT's other computer security products. One
OmniGuard product was available for sale by the end of 1994, and three
OmniGuard products were available for sale by the end of 1995. Product license
revenues relating to the OmniGuard family of software products accounted for
approximately 85% of AXENT's net product license revenues in 1995 compared
with only 12% in 1994.
 
  AXENT's net revenues from maintenance and support services increased
approximately 42%, or $930,000, from $2.24 million in 1994 to $3.17 million in
1995, representing 26% and 22% of total net revenue in 1994 and 1995,
respectively. The increase in net revenues from maintenance and support
services is attributable to a larger base of customers on maintenance
agreements as a result of increased product licenses. The decrease in net
revenues from maintenance and support services as a percentage of total net
revenues is attributable to the increase in the total net revenues,
particularly net revenues from product licenses.
 
  AXENT's net revenues from consulting services increased approximately 177%,
or $920,000, from $520,000 in 1994 to $1.44 million in 1995, representing 6%
and 10% of total net revenues in 1994 and 1995, respectively. The increase in
net revenues from consulting services is primarily attributable to an increase
in the size and number of engagement associated with licensing of the
Company's OmniGuard products.
 
  Cost of net revenues. Cost of net revenues associated with product licenses
decreased approximately 10%, or $102,000, from $989,000 in 1994 to $887,000 in
1995, representing 17% and 9% of net revenues from product licenses in 1994
and 1995, respectively. The decrease in the cost of net revenues associated
with product licenses is primarily attributable to an increase in production
efficiency due to the consolidation of worldwide production during the second
half of 1995, a reduction in the amortization expense related to a decrease in
capitalized software and an increase in the average size of the transactions
recorded in 1995. Costs of net revenues associated with product licenses as a
percentage of net revenues from product licenses may fluctuate from year to
year due to a change in product mix or a change in the number or size of
transactions recorded year over year.
 
  Costs of net revenues associated with maintenance and support services
increased 350%, or $542,000, from $155,000 in 1994 to $697,000 in 1995,
representing 7% and 22% of net revenues from maintenance and support services
in 1994 and 1995, respectively. The increase in cost of net revenues from
maintenance and support
<PAGE>
 
services is primarily attributable to increased staffing of the Company's
customer support operations necessary to support a larger customer base and
the additional products offered by the Company.
 
  Cost of net revenues associated with consulting services increased 73%, or
$69,000, from $94,000 in 1994 to $163,000 in 1995, representing 18% and 11% of
net revenues from consulting services in 1994 and 1995, respectively. The
increase in cost of net revenues from consulting services is primarily
attributable to increased staffing of the Company's training and consulting
professionals necessary to support a larger customer base and greater customer
demand for consulting services offered by the Company.
 
  Sales and marketing. Sales and marketing expenses consist primarily of
personnel costs, including commissions, salaries, benefits and bonuses,
travel, telephone and costs of advertising, public relations seminars and
trade shows. Sales and marketing expenses increased 99%, or $5.62 million,
from $5.70 million in 1994 to $11.32 million in 1995, representing 66% and 77%
of net revenues in 1994 and 1995, respectively. The increase as a percentage
of net revenues was principally due to costs associated with the transition
from primarily a telemarketing model to a more direct selling model including
the expansion of AXENT's direct sales organization, increased technical pre-
sales personnel, personnel increases in the marketing group and increased
costs associated with advertising and public relations. The dollar increase
was primarily due to the same factors, as well as higher sales commissions
associated with increased net revenues. Sales and marketing expenses for 1995
included approximately $957,000 of costs relating to AXENT's former German and
Swiss operations which were discontinued during 1995. Effective November 1995,
AXENT began marketing its products through independent distributors in Germany
and Switzerland.
 
  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.
Research and development expenses increased approximately 144%, or $2.36
million, from $1.64 million in 1994 to $4.0 million in 1995, representing 19%
and 27% of net revenues in 1994 and 1995, respectively. Such increase resulted
primarily from the addition of developers needed to develop, maintain and
enhance the OmniGuard family of software products, including AXENT's
Enterprise Resource Manager product currently under development. 
 
  AXENT believes that a significant level of investment for product research
and development is essential for it to achieve and maintain market leadership.
Accordingly, AXENT anticipates that it will continue to devote substantial
resources to product research and development for the foreseeable future. To
date, substantially all research and development costs have been expensed as
incurred.
 
  General and administrative. General and administrative expenses consist
primarily of personnel costs, including salaries, benefits and bonuses,
related costs for management, finance and accounting, legal and other
professional services, and depreciation of equipment and facilities. While
AXENT discontinued certain operations during 1995, the general and
administrative expenses related to AXENT's infrastructure did not change
materially, causing a greater proportion of total expenses to be borne by to
AXENT's continuing operations. General and administrative expenses increased
by approximately 128%, or $1.34 million, from $1.05 million in 1994 to $2.39
million in 1995, representing 12% and 16% of net revenues in 1994 and 1995,
respectively. The increase in 1995 is principally due to a decrease in the
amount of general and administrative expenses borne by AXENT's discontinued
operations.
 
  Income (loss) from continuing operations before interest and taxes. As a
result of the above, the loss from continuing operations before interest and
taxes decreased approximately 11%, or $600,000, from $5.31 million in 1994 to
$4.71 million in 1995.
 
  Income tax provision. AXENT accounts for income taxes under SFAS 109. SFAS
109 requires AXENT to record an asset with respect to the expected future
value of its net operating loss carryforwards. AXENT's history of operating
losses makes the realization of its net operating loss carryforwards
uncertain. Accordingly,
<PAGE>
 
AXENT has placed a valuation allowance against its deferred tax asset. AXENT
has recorded a provision for federal and state income taxes associated with
the discontinued operations which is substantially offset by an accrued tax
benefit related to the loss from continuing operations. Under the Tax Reform
Act of 1986, the amounts of and benefit from net operating losses that can be
carried forward may be impaired or limited in certain circumstances. At
December 31, 1995, AXENT had federal net operating loss carryforwards of
approximately $1.75 million, which may be utilized to reduce future taxable
income through the year 2007.
 
  Income from discontinued operations. AXENT's income from discontinued
operations increased approximately 33%, or $1.27 million, from $3.78 million
in 1994 to $5.05 million in 1995, representing 44% and 34% of net revenues in
1994 and 1995, respectively.

 
QUARTERLY RESULTS OF OPERATIONS
 
  The following tables set forth unaudited quarterly consolidated financial
data for 1995 and 1996. AXENT 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 OF AXENT
                                (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                        1995                                 1996
                          -----------------------------------  ----------------------------------
                          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.......  $ 1,680  $ 2,558  $ 1,547   $4,332   $2,674   $3,929    $3,124  $6,275
 Maintenance & support
  services..............      818      733      827      796    1,015      856       957   1,057
 Consulting services....      241      213      413      570      393      540       871     406
                          -------  -------  -------   ------   ------   ------    ------  ------
  Total net revenues....    2,739    3,504    2,787    5,698    4,082    5,325     4,952   7,738
Cost of net revenues....      435      442      421      449      382      481       456     593
                          -------  -------  -------   ------   ------   ------    ------  ------
Gross profit............    2,304    3,062    2,366    5,249    3,700    4,844     4,496   7,145
                          -------  -------  -------   ------   ------   ------    ------  ------
Operating expenses:
 Sales and marketing....    2,918    2,884    2,689    2,833    2,813    2,968     2,891   3,938
 Research and
  development...........      981      996      951    1,048    1,084    1,173     1,253   1,524
 General and
  administrative........      533      577      566      717      557      595       620     711
                          -------  -------  -------   ------   ------   ------    ------  ------
  Total operating
   expenses.............    4,432    4,457    4,206    4,598    4,454    4,736     4,764   6,173
Income (loss) from
 continuing operations
 before royalty,
 interest and taxes.....   (2,128)  (1,395)  (1,840)     651     (754)     108      (268)    972
                          -------  -------  -------   ------   ------   ------    ------  ------
Royalty income..........      --       --       --       --       800      804       794     923
Interest expense
 (income)...............      (34)     (35)     (34)     (26)      72      257       339     397
Income tax (provision)
 benefit................      958      634      830     (276)     (35)     (25)     (365)   (734)
                          -------  -------  -------   ------   ------   ------    ------  ------
Income (loss) from
 continuing operations..   (1,204)    (796)  (1,044)     349       83    1,144       500   1,558
Income from discontinued
 operations, net of
 tax....................    1,238    1,394    1,338    1,080    1,027      526       591     251
                          -------  -------  -------   ------   ------   ------    ------  ------
Net income..............  $    34  $   598  $   294   $1,429   $1,110   $1,670    $1,091  $1,809
                          =======  =======  =======   ======   ======   ======    ======  ======
</TABLE>

 
            UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS OF AXENT
                    (AS A PERCENTAGE OF TOTAL NET REVENUES)
 
<TABLE>
<CAPTION>
                                        1995                             1996
                          -------------------------------- --------------------------------
                          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.......    61.3%   73.0%   55.5%    76.0%   65.6%   73.8%   63.1%    81.1%
 Maintenance & support
  services..............    29.9    20.9    29.7     14.0    24.9    16.1    19.3     13.7
 Consulting services....     8.8     6.1    14.8     10.0     9.5    10.1    17.6      5.2
                           -----   -----   -----    -----   -----   -----   -----    -----
  Total net revenues....   100.0   100.0   100.0    100.0   100.0   100.0   100.0    100.0
Cost of net revenues....    15.9    12.6    15.1      7.9     9.3     9.0     9.2      7.7
                           -----   -----   -----    -----   -----   -----   -----    -----
Gross profit............    84.1    87.4    84.9     92.1    90.7    91.0    90.8     92.3
                           -----   -----   -----    -----   -----   -----   -----    -----
Operating expenses:
 Sales and marketing....   106.5    82.3    96.5     49.7    69.0    55.7    58.4     50.9
 Research and
  development...........    35.8    28.4    34.1     18.4    26.6    22.0    25.3     19.7
 General and
  administrative........    19.5    16.5    20.3     12.6    13.7    11.2    12.5      9.2
 Write off of purchased
  in-process research
  and development.......     --      --      --       --      --      --      --       --
                           -----   -----   -----    -----   -----   -----   -----    -----
  Total operating
   expenses.............   161.8   127.2   150.9     80.7   109.3    88.9    96.2     79.8
Income (loss) from
 continuing operations
 before royalty,
 interest and taxes.....   (77.7)  (39.8)  (66.0)    11.4   (18.6)    2.1    (5.4)    12.5
                           -----   -----   -----    -----   -----   -----   -----    -----
Royalty income..........     --      --      --       --     19.6    15.1    16.0     11.9
Interest (expense)
 income.................    (1.3)   (1.0)   (1.2)    (0.5)    1.8     4.8     6.8      5.1
Income tax (provision)
 benefit................    34.9    18.1    29.8     (4.8)   (0.9)   (0.5)   (7.4)    (9.5)
                           -----   -----   -----    -----   -----   -----   -----    -----
Income (loss) from
 continuing operations..   (44.1)  (22.7)  (37.4)     6.1     1.9    21.5    10.0     20.0
Income from discontinued
 operations, net of
 tax....................    45.2    39.8    48.0     19.0    25.2     9.9    11.9      3.2
                           -----   -----   -----    -----   -----   -----   -----    -----
Net income..............     1.1%   17.1%   10.6%    25.1%   27.1%   31.4%   21.9%    23.2%
                           =====   =====   =====    =====   =====   =====   =====    =====
</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>
                                       1995                             1996
                         -------------------------------- --------------------------------
                         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...............  14.7%    9.2%    12.1%    5.0%    4.2%    3.0%     3.7%    3.5%
Cost of maintenance and
 support services.......  18.6%   22.9%    22.9%   23.5%   19.2%   25.1%    24.7%   28.1%
Cost of consulting
 services...............  14.9%   18.5%    10.8%    7.7%   19.1%   27.8%    11.8%   18.5%
</TABLE>
 
  AXENT has experienced quarterly fluctuations in operating results and
anticipates that such fluctuations will continue. Quarterly revenues and
operating results depend on the volume and timing of orders received during
the quarter, which are sometimes difficult to forecast. Historically, AXENT
has often recognized a substantial portion of its product license revenues in
the last month of the quarter. Operating results may fluctuate due to a
variety of reasons, including the impact of a large order. For example, an
individual transaction accounted for 16% of the total net revenues in the
quarter ended September 30, 1994. In addition, revenues tend to be lower in
the summer months, particularly in Europe, where businesses often defer
purchase decisions. Because AXENT's staffing and other operating expenses are
based on anticipated revenue, a substantial portion of which is not typically
generated until the end of each quarter, delays in the receipt of orders can
cause significant variations in operating results from quarter to quarter.
 
  AXENT's revenues historically have been higher in the fourth quarter of each
fiscal year than in the first quarter of the following fiscal year. AXENT
believes that fourth calendar 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. AXENT expects that this
will continue for the foreseeable future and may intensify depending upon the
timing of new product introductions by AXENT.

<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES
 
  During 1994 and 1995 AXENT financed its operations primarily through cash
flows generated from discontinued operations and available working capital as
well as cash flows from continuing operations. During 1996 AXENT financed its
operations through cash flows from continuing operations. AXENT's continuing
operating activities used cash of $6.88 million and provided cash of $5.58
million in 1995 and 1996, respectively. Total cash provided from discontinued
operations was $7.71 million and $379,000 in 1995 and 1996, respectively.
During 1996, AXENT purchased $18.63 million in short-term investments. During
1995 and 1996, AXENT made payments of $1.83 million and $854,000,
respectively, to former stockholders of Datamedia Corporation as part of the
Datamedia acquisition in December 1994. During 1996, AXENT paid $900,000 to a
third party to acquire a non-exclusive source code license. AXENT will pay the
third party a royalty of up to $1.0 million over a three year period, of which
AXENT made a non-refundable prepayment of $400,000 in 1996. The royalty is
based on a percentage of the net revenues from the source code license. During
1996, AXENT received $300,000 associated with the sale of its Helpdesk
operations.
 
  AXENT made capital expenditures of approximately $867,000 and $955,000 in
1995 and 1996, respectively. These purchases have generally consisted of
computer workstations, networking equipment, office equipment, office
furniture and equipment and leasehold improvements. AXENT had no firm
commitments for capital expenditures at December 31, 1996.
 
  AXENT had a revolving credit facility commitment with a bank for up to $2.50
million which expired in May 1996. There were no amounts outstanding under
this revolving credit facility commitment at the time of expiration.
 
  As a result of AXENT's initial public offering in 1996, AXENT received
proceeds of approximately $25.08 million, net of approximately $1.96 million
in underwriting discounts and $960,000 in offering expenses.
 
  AXENT believes that the net proceeds from the initial public offering, cash
generated from operations, cash generated under the Administrative Services
Agreement and the Exclusive Distributor License Agreement with Raxco, together
with existing sources of liquidity, will be sufficient to meet its capital
expenditures, working capital and other cash requirements both for the next
twelve months and for the forseeable future. Depending on AXENT's future
growth and acquisitions, AXENT will consider from time to time various
financing alternatives and may seek to raise additional capital through equity
or debt financing or to enter into strategic arrangement. There can be no
assurance, however, that this funding will be available on terms acceptable to
AXENT, if at all.
 
CERTAIN FACTORS AFFECTING FUTURE PERFORMANCE
 
  Although AXENT has experienced significant growth in revenues from the
OmniGuard family of software products, AXENT does not believe prior growth
rates are indicative of future operating results. In addition, AXENT expects
increased competition and intends to invest significantly in its product
development. As a result, there can be no assurance that AXENT will remain
profitable on a quarterly or annual basis. Due to AXENT's limited operating
history with respect to the OmniGuard family of software products, predictions
as to future operating results are difficult. Future operating results may
fluctuate due to factors such as: demand for AXENT'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 AXENT 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; and competitive conditions in the industry; and changes
in technologies affecting computing, networking, communications, systems and
applications management and data security.
 
  The market for AXENT's software products is highly competitive, and AXENT
expects that it will face increasing price pressures from its current
competitors and new market entrants. Any material reduction in the
<PAGE>
 
price of AXENT's software products would negatively affect gross margins and
could materially adversely affect AXENT's financial condition and results of
operations. 
 
  The sales of AXENT's security 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 sales of AXENT's security products is typically long and subject to a
number of significant risks over which AXENT has little or no control and, as
a result, AXENT may expend significant resources pursuing potential sales that
will not be consummated.
 
  AXENT 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 AXENT's financial condition and results of operations.
Although AXENT'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.
 
  The management of AXENT entered into the Merger Agreement with AssureNet with
the expectation that the merger will result in beneficial synergies. However,
there can be no assurance that the combining of the two companies' businesses,
even if achieved in an efficient and effective manner, will result in increased
earnings per AXENT share or a financial condition superior to that which would
have been achieved by AXENT. AXENT expects to incur a one-time change of
approximately $28 million in the first quarter of 1997, the quarter in which the
merger was consummated, to reflect in-process research and development costs.
AXENT expects that risks inherent in AssureNet's business may also affect the
combined company.
 
Item 8.  Financial Statements and Supplementary Data.

       The information required by Item 8 of Part II is incorporated herein by 
reference to the Consolidated Financial Statements filed with this report, see 
Item 14 of Part IV.

         See quarterly financial information included in Item 7 above.

Item 9.  Changes in and Disagreements with Accountants on Accounting and 
         Financial Disclosure.

       None. 

<PAGE>
 
                                   PART III

Item 10.  Directors and Executive Officers of the Company.

          The information required by Item 10 is hereby incorporated by 
reference from the Definitive Proxy Statement of the Company in connection with
its 1997 Annual Meeting of Stockholders (the "Proxy Statement").

Item 11.  Executive Compensation.

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

Item 12.  Security Ownership of Certain Beneficial Owners and Management.

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

Item 13.  Certain Relationships and Related Transactions.

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

<PAGE>
 
                                    PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K.

<TABLE> 
<CAPTION> 
                                                                                        Page Number
                                                                                        -----------
<C>       <S>                                                                               <C> 
(a)       Documents filed as part of the report:

          (1)   Report of Independent Accountants                                            26
                Consolidated Balance Sheets at December 31, 1995 and 1996                    27
                Consolidated Statements of Operations for the years ended
                        December 31, 1994, 1995 and 1996                                     28
                Consolidated Statements of Stockholders' Equity for the 
                        years ended December 31, 1994, 1995 and 1996                         29
                Consolidated Statements of Cash Flows for the years ended
                        December 31, 1994, 1995 and 1996                                     30
                Notes to Consolidated Financial Statements                                   31

          (2)   Financial Statement Schedule                                                 51

          (3)   Exhibits
</TABLE> 

<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors of AXENT Technologies, Inc.:
 
  We have audited the consolidated balance sheets of AXENT Technologies, Inc.
and subsidiaries as of December 31, 1995 and 1996, and the related
consolidated statements of operations, changes in stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of AXENT
Technologies, Inc. and subsidiaries as of December 31, 1995 and 1996, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
 
                                          COOPERS & LYBRAND L.L.P.
 
Washington, D.C.
January 28, 1997
 

<PAGE>
 
                            AXENT TECHNOLOGIES, INC.
 
                          CONSOLIDATED BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                          DECEMBER 31,
                                                    --------------------------
                      ASSETS                            1995          1996
                      ------                        ------------  ------------
<S>                                                 <C>           <C>
Current assets:
  Cash and cash equivalents........................ $  6,083,000  $ 17,261,000
  Short-term investments...........................          --     18,629,000
  Accounts receivable, net of allowance for
   doubtful accounts of $297,000 and $318,000,
   respectively....................................    5,071,000     4,826,000
  Prepaid expenses and other current assets........      338,000       568,000
                                                    ------------  ------------
    Total current assets...........................   11,492,000    41,284,000
                                                    ------------  ------------
Property and equipment, net (note 4)...............    1,097,000     1,417,000
Other assets.......................................       57,000     1,300,000
                                                    ------------  ------------
  Total assets..................................... $ 12,646,000  $ 44,001,000
                                                    ============  ============
       LIABILITIES AND STOCKHOLDERS' EQUITY
       ------------------------------------
Current liabilities:
  Accrued liabilities and accounts payable (note
   7).............................................. $  5,035,000  $  6,361,000
  Current portion of long-term debt (notes 3 and
   5)..............................................      900,000           --
  Deferred revenue.................................    2,290,000     3,029,000
  Net identifiable liabilities from discontinued
   operations (note 2).............................    1,319,000       163,000
                                                    ------------  ------------
    Total current liabilities......................    9,544,000     9,553,000
Long-term deferred revenue, net of current
 portion...........................................      126,000           --
                                                    ------------  ------------
    Total liabilities..............................    9,670,000     9,553,000
                                                    ------------  ------------
Commitments and contingencies (note 8)
Stockholders' equity: (notes 2, 9, and 10)
  Common stock, par value $0.02: 7,953,464 and
   10,130,064 shares issued, respectively..........      159,000       203,000
  Additional paid-in capital.......................   22,133,000    47,909,000
  Accumulated deficit..............................  (19,277,000)  (13,597,000)
  Currency translation adjustments.................      (39,000)      (67,000)
                                                    ------------  ------------
    Total stockholders' equity.....................    2,976,000    34,448,000
                                                    ------------  ------------
  Total liabilities and stockholders' equity....... $ 12,646,000  $ 44,001,000
                                                    ============  ============
</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,
                                          -------------------------------------
                                             1994         1995         1996
                                          -----------  -----------  -----------
<S>                                       <C>          <C>          <C>
Net revenues:
  Product licenses......................  $ 5,832,000  $10,117,000  $16,002,000
  Maintenance and support services......    2,242,000    3,174,000    3,885,000
  Consulting services...................      520,000    1,437,000    2,210,000
                                          -----------  -----------  -----------
    Total net revenues..................    8,594,000   14,728,000   22,097,000
                                          -----------  -----------  -----------
Cost of net revenues:
  Product licenses......................      989,000      887,000      566,000
  Maintenance and support services......      155,000      697,000      943,000
  Consulting services...................       94,000      163,000      403,000
                                          -----------  -----------  -----------
    Total cost of net revenues..........    1,238,000    1,747,000    1,912,000
                                          -----------  -----------  -----------
Gross profit............................    7,356,000   12,981,000   20,185,000
                                          -----------  -----------  -----------
Operating expenses:
  Sales and marketing...................    5,697,000   11,324,000   12,610,000
  Research and development..............    1,644,000    3,976,000    5,034,000
  General and administrative............    1,048,000    2,393,000    2,483,000
  Write-off of purchased in-process
   research and development.............    4,280,000          --           --
                                          -----------  -----------  -----------
    Total operating expenses............   12,669,000   17,693,000   20,127,000
                                          -----------  -----------  -----------
Income (loss) from continuing operations
 before royalty interest and taxes......   (5,313,000)  (4,712,000)      58,000
Royalty income..........................          --           --     3,321,000
Interest (expense) income...............          --      (129,000)   1,065,000
Income tax benefit (provision) (note
 11)....................................    2,040,000    2,146,000   (1,159,000)
                                          -----------  -----------  -----------
Income (loss) from continuing
 operations.............................   (3,273,000)  (2,695,000)   3,285,000
Income from discontinued operations, net
 of tax (note 2)........................    3,782,000    5,050,000    2,395,000
                                          -----------  -----------  -----------
Net income..............................  $   509,000  $ 2,355,000  $ 5,680,000
                                          ===========  ===========  ===========
Net income (loss) per common share:
  Continuing operations.................  $     (0.36) $     (0.30) $      0.31
  Discontinued operations...............         0.42         0.56         0.23
                                          -----------  -----------  -----------
Net income per common share.............  $      0.06  $      0.26  $      0.54
                                          ===========  ===========  ===========
Weighted average number of common shares
 used in computing net income (loss) per
 common share outstanding...............    9,065,485    9,118,439   10,662,043
                                          ===========  ===========  ===========
</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, 1994, 1995 AND 1996
 
<TABLE>
<CAPTION>
                                              
                                              
                              COMMON STOCK      ADDITIONAL    CURRENCY
                          --------------------   PAID-IN     TRANSLATION   ACCUMULATED
                            SHARES    AMOUNT     CAPITAL     ADJUSTMENT      DEFICIT        TOTAL
                          ---------- --------- ------------  -----------  -------------  ------------
<S>                       <C>        <C>       <C>           <C>          <C>            <C>
BALANCE, DECEMBER 31,
 1993...................   7,943,439 $ 159,000 $ 28,436,000  $ (552,000)  $ (26,685,000) $  1,358,000
Net income..............         --        --           --          --          509,000       509,000
Stock options exer-
 cised..................         950       --         2,000         --              --          2,000
Foreign currency trans-
 lation gain............         --        --           --       75,000             --         75,000
                          ---------- --------- ------------  ----------   -------------  ------------
BALANCE, DECEMBER 31,
 1994...................   7,944,389   159,000   28,438,000    (477,000)    (26,176,000)    1,944,000
Net income..............         --        --           --          --        2,355,000     2,355,000
Stock options exer-
 cised..................       9,075       --        18,000         --              --         18,000
Foreign currency trans-
 lation gain............         --        --           --       46,000             --         46,000
Spin-off of discontinued
 operations.............         --        --    (6,323,000)    392,000       4,544,000    (1,387,000)
                          ---------- --------- ------------  ----------   -------------  ------------
BALANCE, DECEMBER 31,
 1995...................   7,953,464   159,000   22,133,000     (39,000)    (19,277,000)    2,976,000
Net income..............         --        --           --          --        5,680,000     5,680,000
Issuance of common stock
 (net of costs of
 $960,000)..............   2,000,000    40,000   25,040,000         --              --     25,080,000
Stock options exer-
 cised..................     176,600     4,000      339,000         --              --        343,000
Tax benefit related to
 employee stock op-
 tions..................         --        --       397,000         --              --        397,000
Foreign currency trans-
 lation loss............         --        --           --      (28,000)            --        (28,000)
                          ---------- --------- ------------  ----------   -------------  ------------
BALANCE, DECEMBER 31,
 1996...................  10,130,064 $ 203,000 $ 47,909,000  $  (67,000)  $ (13,597,000) $ 34,448,000
                          ========== ========= ============  ==========   =============  ============
</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,
                                        --------------------------------------
                                           1994         1995          1996
                                        -----------  -----------  ------------
<S>                                     <C>          <C>          <C>
Cash flows from operating activities:
 Income (loss) from continuing
  operations..........................  $(3,273,000) $(2,695,000) $  3,285,000
Adjustments to reconcile income (loss)
to net cash provided by operating
activities:
 Depreciation and amortization........      697,000      263,000       692,000
 Write-off of purchased in-process
  research and development............    4,280,000          --            --
 Change in deferred income taxes .....          --           --       (400,000)
 Provision for losses on accounts
  receivable..........................      296,000      (18,000)      233,000
 Benefit for income taxes.............   (2,040,000)  (2,146,000)          --
 Tax benefit of stock option
  exercises...........................          --           --       (397,000)
 Amortization of discount on long-term
  debt................................          --       129,000        51,000
 (Increase) decrease in accounts
  receivable..........................   (1,003,000)  (2,565,000)       12,000
 Increase in prepaid expenses and
  other assets........................     (101,000)    (121,000)     (230,000)
 Increase in accrued liabilities and
  accounts payable....................    2,215,000      885,000     1,723,000
 Increase (decrease) in deferred
  revenue.............................    2,156,000     (616,000)      613,000
                                        -----------  -----------  ------------
  Net cash provided by (used in)
  operating activities................    3,227,000   (6,884,000)    5,582,000
  Net cash provided by discontinued
  operating activities (note 2).......    3,386,000    7,707,000       379,000
                                        -----------  -----------  ------------
 Net cash provided by operating
  activities..........................    6,613,000      823,000     5,961,000
                                        -----------  -----------  ------------
Cash flows from investing activities:
 Capital expenditures.................     (361,000)    (867,000)     (955,000)
 Proceeds from sale of Helpdesk
  business............................          --           --        300,000
 Purchase of short-term investments...          --           --    (18,629,000)
 Purchase of software.................     (865,000)         --       (900,000)
 Payments for corporate acquisition
  (note 3)............................     (964,000)  (1,833,000)     (854,000)
                                        -----------  -----------  ------------
  Net cash used in investing
  activities..........................   (2,190,000)  (2,700,000)  (21,038,000)
  Net cash provided by (used in)
  discontinued investing activities
  (note 2)............................     (780,000)   1,284,000       860,000
                                        -----------  -----------  ------------
 Net cash used in investing
  activities..........................   (2,970,000)  (1,416,000)  (20,178,000)
                                        -----------  -----------  ------------
Cash flows from financing activities:
 Proceeds from initial public offering
  of common stock (net of costs of
  $960,000)...........................          --           --     25,080,000
 Proceeds from issuance of common
  stock...............................        2,000       18,000       343,000
                                        -----------  -----------  ------------
  Net cash provided by financing
  activities..........................        2,000       18,000    25,423,000
  Net cash used in discontinued
  financing activities (note 2).......   (1,685,000)         --            --
                                        -----------  -----------  ------------
 Net cash provided by (used in)
  financing activities................   (1,683,000)      18,000    25,423,000
                                        -----------  -----------  ------------
Effect of exchange rate changes on
 cash.................................       75,000       46,000       (28,000)
                                        -----------  -----------  ------------
Net increase (decrease) in cash and
 cash equivalents.....................    2,035,000     (529,000)   11,178,000
Cash and cash equivalents, beginning
 of period............................    4,577,000    6,612,000     6,083,000
                                        -----------  -----------  ------------
Cash and cash equivalents, end of
 period...............................  $ 6,612,000  $ 6,083,000  $ 17,261,000
                                        ===========  ===========  ============
</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. and its subsidiaries (the "Company" or "AXENT")
develop, market, license and support enterprise-wide information security
solutions for client/server computing environments and provide related
services. Effective December 31, 1995, the structure of AXENT was
substantially altered when AXENT authorized the distribution of the preferred
stock of a wholly-owned subsidiary, Raxco Software, Inc. ("Raxco") resulting
in the division of the Company's operations into two separate companies. See
note 2 for a discussion of the spin-off and future relationship and other
divestments.
 
  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 and Datamedia Corporation and its subsidiaries.
These entities are collectively referred to as the "Company." 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 upon acceptance of the software by the
customer unless the Company has significant future obligations to the
customer, in which case revenue is recognized when such obligations are
satisfied. Insignificant vendor obligations are accrued upon acceptance of the
product by the customer. 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 for all periods presented are in conformity with the Statement of
Position 91-1 "Software Revenue Recognition" promulgated by the American
Institute of Certified Public Accountants.
 
  Fees for software porting agreements are generally recognized as revenue
upon the completion of milestones specified in the agreements. Porting fees
are generally included in license fee revenue.
 
  In addition to the direct sales effort, the Company licenses its products
and provides support services to customers through a network of independent
distributors, primarily in foreign countries where it has no direct presence.
The Company generally records revenue from independent distributors at the net
license or service fee, after deducting the corresponding independent
distributor's commissions which range from 40%-75%. 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. Included in the financial
statements are net revenues from independent distributors of $651,000,
$1,211,000 and $1,930,000 in 1994, 1995 and 1996, respectively. On a gross
basis, prior to deducting commissions to independent distributors, revenues
from independent distributors were $1,412,000, $2,636,000 and $2,777,000 in
1994, 1995 and 1996, respectively.
 

<PAGE>
 
                           AXENT TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 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. Accordingly, the Company has not
capitalized any software development costs with respect to its continuing
operations.
 
 Net income per common share
 
  Net income per common share is computed on a primary and fully diluted basis
and classified according to continuing or discontinued operations, using the
weighted average number of shares of common stock, assuming conversion of
dilutive common stock equivalent shares from common stock options and
warrants. Primary and fully diluted net income per common share were
equivalent for all periods presented. Pursuant to the Securities and Exchange
Commission's Staff Accounting Bulletin No. 83, common stock and common stock
equivalent shares issued by the Company at prices below the public offering
price during the twelve month period prior to the offering date of April 24,
1996 (using the treasury stock method and the public offering price of $14.00
per share) have been included in the calculation of common and common
equivalent shares as if they were outstanding for all periods presented.
 
  Net income per common share subsequent to the Company's initial public
offering is calculated in accordance with Accounting Principles Board Opinion
No. 15 "Earnings per Share."
 
 Purchased Software
 
  Purchased software is recorded at the lower of cost or net realizable value.
Amortization is calculated on a straight-line basis over the estimated lives
of the software products, generally three years (see note 3). Amortization
expense for the years ended December 31, 1995 and 1996 was $45,000 and
$57,000, respectively.
 
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                            -------------------
                                                              1995      1996
                                                            --------  ---------
   <S>                                                      <C>       <C>
   Purchased software...................................... $102,000  $ 602,000
   Accumulated amortization................................  (45,000)  (102,000)
                                                            --------  ---------
   Purchased software, net................................. $ 57,000  $ 500,000
                                                            ========  =========
</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 $900,000 of which $500,000 was an acquisition fee upon acceptance
of the source code and $400,000 was a non-refundable royalty 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 net revenues
derived from the source code license over a three year period. The acquisition
fee and royalty prepayment are included in other assets.
 
 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.
 

<PAGE>
 
                           AXENT TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 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 December 31, 1995 and 1996. Revenue
and expense accounts of these operations are translated at average exchange
rates prevailing during the month the transactions occur. Translation gains
and losses are included as an adjustment to stockholders' equity. Net
transaction gains (losses) for the years ended December 31, 1994, 1995 and
1996 were ($4,000), $3,000, and ($22,839) 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 and short-term
repurchase agreements, which have original maturity dates of three months or
less. As of December 31, 1995 and 1996, the Company had experienced no losses
on these investments.
 
 Short-Term Investments
 
  Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Pursuant to SFAS No. 115,
the Company has classified its short-term securities investments as
"available-for-sale" and accordingly carries such securities at aggregate fair
value with unrealized gains and losses included as a component of
stockholders' equity, net of tax. The Company's available-for-sale short-term
investments consist primarily of certificates of deposit and government
securities, all with maturities less than one year. The Company held no short-
term investments at December 31, 1995. During 1996, the Company did not
realize significant gains or losses on short-term investments. The Company
determines the fair value of equity securities based on the market value
provided by brokers/dealers, and determines the cost based on specific
identification. The estimated fair value of each instrument approximates cost.
Therefore, there were no unrealized gains or losses as of December 31, 1996.
 
  Short-term investments as of December 31, 1996, consisted of the following:
 
<TABLE>
     <S>                                                            <C>
     Certificates of deposit....................................... $ 1,600,000
     Government securities.........................................  17,029,000
                                                                    -----------
                                                                    $18,629,000
                                                                    ===========
</TABLE>
 
 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.
 
  One customer accounted for 21% of revenue in 1996. Two customers accounted
for 31% of total accounts receivable at December 31, 1995.
 
 

<PAGE>
 
                           AXENT TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
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 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 will distribute the Company's OpenVMS utility
software products and pay the Company the greater of (i) a 30% royalty on the
gross license and services fees related to the licensed products or (ii) $2.0
million for 1996, $1.5 million for 1997 and $1.0 million for 1998, and a 30%
royalty thereafter for two additional years. The Company will account for
royalties in future periods as non-operating income from continuing
operations. Pursuant to the Administrative Services Agreement, 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
will provide a line of credit to Raxco of up to $750,000 for general working
capital needs for a period of 12 months. Advances under the Line of Credit
Loan Agreement will bear interest at prime plus 1% and be collateralized by
all of Raxco's assets.
 
  For the period ended December 31, 1996, the Company recorded royalty income
of $3.32 million under the Exclusive Distributor License Agreement and
recorded $750,000 as an offset to general and administrative expenses related
to the Administrative Services Agreement. As of December 31, 1996, there were
no amounts outstanding to the Company from Raxco under the Exclusive
Distributor License Agreement, Administrative Services Agreement or the Line
of Credit Loan Agreement.
 
  For the period ended 1996, Raxco reported to the Company gross revenues of
approximately $12.2 million (unaudited), which included approximately $11.1
million (unaudited) of revenues from licensing of the Company's OpenVMS
utility products and a net loss of $621,000 (unaudited) for the year ended
December 31, 1996.
 
  During 1996, one of the Company's foreign subsidiaries distributed the
Company's Open VMS utility software product 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
 

<PAGE>
 
                           AXENT TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
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.
 
  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 lease obligations of approximately
$887,000, and personnel obligations associated with approximately 28
employees. 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 is 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 approximate the potential exposure and time frame of certain contractual
indemnification provisions provided by the Company to the buyer for third
party claims related to product ownership and performance prior to the sale or
other related liabilities incurred by the Company prior to the sale. The
Company recognized $860,000 of the gain in both 1995 and 1996.
 
  During 1994 and 1995, the Company restructured, sold or put into liquidation
several wholly-owned subsidiaries and ceased direct operations in France,
Germany, Switzerland, Sweden and Norway. The Company subsequently entered into
distribution agreements with independent distributors to market the Company's
information security products in these countries.
 
  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.
 
 
 

<PAGE>
 
                           AXENT TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  The following table summarizes the results of Discontinued Operations for
the divested operations for the years ended December 31, 1994, 1995 and 1996.
 
<TABLE>
<CAPTION>
                                                  YEAR ENDED DECEMBER 31,
                                             ----------------------------------
                                                1994        1995        1996
                                             ----------- ----------- ----------
<S>                                          <C>         <C>         <C>
Net revenues:
  Open VMS utility.........................  $17,391,000 $14,313,000 $  932,000
  Storage management.......................    5,116,000      91,000        --
  Helpdesk.................................    1,723,000   2,359,000        --
                                             ----------- ----------- ----------
    Total net revenues.....................   24,230,000  16,763,000    932,000
                                             ----------- ----------- ----------
Cost of net revenues.......................    3,171,000   1,537,000     81,000
                                             ----------- ----------- ----------
Gross profit...............................   21,059,000  15,226,000    851,000
                                             ----------- ----------- ----------
Operating expenses:
  Sales and marketing......................   11,694,000   5,420,000    165,000
  Research and development.................    3,308,000   1,970,000        --
  General and administrative...............    2,514,000   1,850,000    103,000
                                             ----------- ----------- ----------
    Total operating expenses...............   17,516,000   9,240,000    268,000
                                             ----------- ----------- ----------
Income from operations.....................    3,543,000   5,986,000    583,000
Non-operating income.......................          --          --   1,756,000
Gain on sale of storage management
 products..................................    2,295,000     860,000    860,000
Interest income, net.......................       50,000     421,000        --
                                             ----------- ----------- ----------
Income before income taxes.................    5,888,000   7,267,000  3,199,000
Provision for income taxes.................    2,106,000   2,217,000    804,000
                                             ----------- ----------- ----------
Income from discontinued operations, net of
 tax.......................................  $ 3,782,000 $ 5,050,000 $2,395,000
                                             =========== =========== ==========
</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, 1995 and 1996. 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, 1995 and 1996, respectively.
 
<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                      ------------------------
                                                         1995         1996
                                                      -----------  -----------
<S>                                                   <C>          <C>
Accounts receivable.................................. $ 3,058,000  $   109,000
Notes receivable.....................................   1,108,000    1,009,000
Other current assets.................................     181,000       55,000
Long-term notes receivable...........................     780,000          --
                                                      -----------  -----------
  Total assets....................................... $ 5,127,000  $ 1,173,000
                                                      -----------  -----------
Accrued liabilities and accounts payable............. $(1,062,000) $  (356,000)
Deferred gain........................................    (860,000)    (780,000)
Deferred revenue.....................................  (3,744,000)    (200,000)
Long-term deferred gain..............................    (780,000)         --
                                                      -----------  -----------
  Total liabilities.................................. $(6,446,000) $(1,336,000)
                                                      -----------  -----------
Net identifiable liabilities......................... $(1,319,000) $  (163,000)
                                                      ===========  ===========
</TABLE>
 
  In connection with the Spin-off, the Company transferred to Raxco certain
identifiable assets and foreign operations and made certain accruals for
anticipated costs associated with the Spin-off. These transfers resulted in
contributions to Raxco of additional paid in capital, currency translation
adjustments and accumulated deficit of approximately $6.3 million, $392,000
and $4.5 million, respectively.
 
 

<PAGE>
 
                            AXENT TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  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, 1994, 1995 and 1996.
 
<TABLE>
<CAPTION>
                                               YEAR ENDED DECEMBER, 31
                                         -------------------------------------
                                            1994         1995         1996
                                         -----------  -----------  -----------
<S>                                      <C>          <C>          <C>
Cash flows from discontinued operating
 activities:
  Income from discontinued operations..  $ 3,782,000  $ 5,050,000  $ 2,395,000
Adjustments to reconcile income to net
 cash provided by operating activities:
  Depreciation and amortization........    1,017,000      900,000          --
  Gain on sale of storage management
   products............................   (2,295,000)    (860,000)    (860,000)
  Provision for losses on accounts
   receivable..........................      573,000          --           --
  Provision for income taxes...........    2,040,000    2,146,000          --
  (Increase) decrease in accounts
   receivable..........................     (649,000)   3,038,000    2,949,000
  (Increase) decrease in other assets..     (122,000)     338,000      126,000
  Decrease in accrued liabilities and
   accounts payable....................   (1,715,000)  (2,091,000)    (706,000)
  Increase (decrease) in deferred
   revenue.............................      755,000     (781,000)  (3,544,000)
  Interest accrued on note receivable..          --       (33,000)      19,000
                                         -----------  -----------  -----------
Net cash provided by operating
 activities............................  $ 3,386,000  $ 7,707,000  $   379,000
                                         ===========  ===========  ===========
Cash flows from discontinued operations
 investing activities:
  Capitalization of computer software
   development costs...................  $  (400,000)         --           --
  Proceeds from sale of assets.........      136,000          --           --
  Proceeds from sale of storage
   management products.................       75,000  $ 1,570,000  $   860,000
  Capital expenditures.................     (591,000)    (286,000)         --
                                         -----------  -----------  -----------
Net cash (used in) provided by
 investing activities..................  $  (780,000) $ 1,284,000  $   860,000
                                         ===========  ===========  ===========
Cash flows from discontinued operations
 financing activities:
  Principal payments on notes payable..  $(1,685,000)         --           --
                                         -----------  -----------  -----------
Net cash used in financing activities..  $(1,685,000) $       --   $       --
                                         ===========  ===========  ===========
</TABLE>
 
 

<PAGE>
 
                           AXENT TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 3. ACQUISITION OF DATAMEDIA CORPORATION
 
  On December 9, 1994, the Company acquired all of the outstanding shares of
Datamedia Corporation ("Datamedia") for up to $5.0 million in a transaction
accounted for using the purchase method. The acquisition provided for an
initial payment of $2.5 million less certain deductible costs, with two
additional $1.0 million payments due December 9, 1995 and December 9, 1996,
respectively (see note 5). The agreement also provided for up to $500,000 in
royalty payments at 10% of product license revenues through December 31, 1995,
payable on or before March 31, 1996. The Company evaluated the assets of
Datamedia and allocated and expensed as a one-time charge $4.3 million to
write-off purchased in-process research and development costs of a future
product based on the determination of the future product's net present value.
The Company used a discounted cash flow model to determine the valuation of
the product. At the time of the purchase, management determined that the
purchased in-process research and development had not reached technological
feasibility and there was no alternative future use for this technology.
Accordingly, this purchased in-process research and development was written
off as of December 31, 1994. The remaining purchase price was allocated to
existing net assets and purchased software costs of $548,000 and $102,000,
respectively. Existing net assets included $639,000 of cash and cash
equivalents. The operating results of Datamedia have been included in the
Consolidated Statement of Operations since the date of acquisition.
 
NOTE 4. PROPERTY AND EQUIPMENT
 
  Property and equipment consisted of the following:
 
<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                         ----------------------
                                                            1995        1996
                                                         ----------  ----------
<S>                                                      <C>         <C>
Leasehold improvements.................................. $  144,000  $  176,000
Computer equipment......................................  2,379,000   2,904,000
Furniture and fixtures..................................  1,055,000     630,000
                                                         ----------  ----------
                                                          3,578,000   3,710,000
Less accumulated depreciation and amortization.......... (2,481,000) (2,293,000)
                                                         ----------  ----------
Property and equipment, net............................. $1,097,000  $1,417,000
                                                         ==========  ==========
</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 $132,000, $212,000 and $635,000 for 1994, 1995 and 1996,
respectively. The principal estimated useful lives range from three to five
years for computer equipment and seven 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
 
  Long-term debt as of December 31, 1995 consisted of the following:
 
<TABLE>
<S>                                                                   <C>
Notes payable to former Datamedia stockholders....................... $ 900,000
Less current portion.................................................  (900,000)
                                                                      ---------
Long-term portion.................................................... $     --
                                                                      =========
</TABLE>
 

<PAGE>
 
                           AXENT TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  In connection with the Datamedia acquisition in 1994 (see note 3), the
Company recorded the two additional non-interest bearing $1.0 million notes
due to the former Datamedia stockholders on December 9, 1995 and December 9,
1996 at a discounted value. The discounted value reflected a 7.5% imputed
interest rate. The Datamedia notes were collateralized by substantially all of
the assets of the Company, subordinated to the interest of the Bank of Boston
(the "Bank").
 
  During 1995, the Company paid former Datamedia stockholders $1,833,000,
consisting of $672,000 relating to the initial payment of $2.5 million,
$932,000 relating to the $1.0 million installment due December 9, 1995,
accrued interest of $64,000 and $165,000 relating to the rights of certain
former Datamedia stockholders to receive their portion of the December 1996
$1.0 million payment and the March 1996 royalty-related payment. The
negotiated, discounted prepayment of 1996 amounts due resulted in a savings of
$52,000 to the Company. Included in the notes payable balance as of December
31, 1995 is $65,000 related to accrued interest. During 1996, the Company paid
$854,000 of the $900,000 note payable related to the Datamedia acquisition.
The $854,000 consisted of $137,000 relating to the royalty liability due March
31, 1996 and $717,000 relating to the final installment due December 9, 1996.
The remaining $46,000 related to accrued but unpaid transaction fees were
reclassified to accrued liabilities and accounts payable.
 
  The Company had a revolving credit facility commitment with the Bank for up
to $2.5 million, of which approximately $2.4 million was available as of
December 31, 1995. Any outstanding balance of the revolving credit facility
bears interest at the Bank's base rate plus 0.25%. In 1996, the revolving
credit facility commitment with the Bank expired. There were no amounts
outstanding under the revolving credit facility at the time of expiration.
 
  In 1995, the Company issued a letter of credit for 100,000 Deutschemarks,
approximately $70,000, related to undelivered service obligations for a
customer. Due to the liquidation of the Company's German subsidiary, such
letter of credit was redeemed by the customer in January 1996 and the Company
was relieved of its service obligation.
 
  Total interest expense was $51,000 in 1996, $129,000 in 1995 and zero in
1994. Interest expense in 1995 and 1996 relates solely to the imputed interest
on the notes payable to former Datamedia stockholders.
 
NOTE 6. DEVELOPER ROYALTIES
 
  The Company has royalty agreements with a developer for certain VMS utility
products. The revenues derived from such products accounted for approximately
55% of revenues from Discontinued Operations in 1995. These agreements provide
for royalty payments to the developer of a percentage of the net product
license fees (gross revenues excluding product support and enhancement fees
less appropriate deductions such as independent distributor commissions) upon
receipt of payment by the Company (see note 2). During 1994 and 1995 the
Company incurred royalties of $642,000 and $488,000, respectively which are
included in discontinued operations. Following the Spin-off, Raxco became the
exclusive distributor for these products and has assumed full responsibility
for the payment of royalties due the developer. Accordingly, no royalty
expense was incurred in 1996 by the Company.
 
 

<PAGE>
 
                           AXENT TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
NOTE 7. ACCRUED LIABILITIES AND ACCOUNTS PAYABLE
 
  Accrued liabilities and accounts payable consist of the following:
 
<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                           ---------------------
                                                              1995       1996
                                                           ---------- ----------
<S>                                                        <C>        <C>
Accounts payable, accrued expenses........................ $1,794,000 $3,217,000
Accrued payroll, bonus and vacation.......................  1,022,000  2,127,000
Accrued royalties and commissions.........................    617,000    863,000
Spin-off, merger and other................................    977,000        --
Subsidiary liquidation and restructuring..................    625,000    154,000
                                                           ---------- ----------
                                                           $5,035,000 $6,361,000
                                                           ========== ==========
</TABLE>
 
  Spin-off, merger, liquidation and restructuring costs are management's best
estimate of the accounting, legal, personnel and transaction costs to be
incurred by the Company related to these activities. The amounts the Company
will ultimately incur could differ from the amounts accrued in arriving at net
income.
 
NOTE 8. COMMITMENTS AND CONTINGENCIES
 
 Operating Leases
 
  The Company leases office space under operating leases expiring through
2015. 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 $722,000, $779,000 and $872,000 for 1994,
1995 and 1996, respectively.
 
  The future minimum payments under non-cancelable lease agreements as of
December 31, 1996, are as follows:
 
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S>                                                                   <C>
  1997............................................................... $1,115,000
  1998...............................................................  1,027,000
  1999...............................................................    746,000
  2000...............................................................    529,000
  2001...............................................................    327,000
  Thereafter.........................................................    902,000
                                                                      ----------
                                                                      $4,646,000
                                                                      ==========
</TABLE>
 
 Legal Proceedings
 
  The Company is subject to legal proceedings and claims which are 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.
 

<PAGE>
 
                           AXENT TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
NOTE 9. COMMON STOCK
 
  At December 31, 1995, the Company was authorized to issue 10,000,000 shares
of common stock, with a par value of $0.02 per share and had outstanding
warrants to purchase 30,000 common shares with an exercise price of $1.40. In
January 1996, the Board of Directors adopted an amended and restated
Certificate of Incorporation which increased the authorized capitalization of
the Company from 10,000,000 shares of common stock to 50,000,000 shares of
common stock and 5,000,000 shares of preferred stock. During 1996, the 30,000
warrants were exercised.
 
  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 that 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. After the registration
statement became effective, the initial public offering closed resulting in
proceeds to the Company 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 the initial public offering.
 
NOTE 10. STOCK OPTION PLANS
 
  The Company has adopted certain fixed stock option plans. The Employee Stock
Option Plan (the "Employee Plan") provides for 2,501,714 shares of common
stock to be issued. The Employee Plan provides for grants to employees,
consultants, directors and advisors. Of the authorized shares under the
Employee Plan, options for 1,555,900 shares are outstanding; 287,017 shares
have been issued; and 658,797 shares are 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. There have been no option issuances under the Director Plan in 1996.
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.
 
 

<PAGE>
 
                           AXENT TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  Option activity for 1994, 1995 and 1996 is summarized as follows:
 
<TABLE>
<CAPTION>
                                                                   WEIGHTED-
                                           NUMBER                   AVERAGE
                                         OF OPTIONS  PRICE RANGE EXERCISE PRICE
                                         ----------  ----------- --------------
     <S>                                 <C>         <C>         <C>
     Outstanding, December 31, 1993..... 1,183,263   $1.40- 3.00       --
       Granted..........................   195,800    3.00- 3.00       --
       Exercised........................      (950)   1.70- 2.50       --
       Canceled.........................  (104,080)   1.40- 3.00       --
                                         ---------   -----------     -----
     Outstanding, December 31, 1994..... 1,274,033    1.40- 3.00     $2.13
                                         ---------   -----------     -----
       Granted..........................   161,100    3.00- 4.00      3.63
       Exercised........................    (9,075)   1.40- 3.00      2.00
       Canceled.........................  (142,358)   1.40- 4.00      2.93
                                         ---------   -----------     -----
     Outstanding, December 31, 1995..... 1,283,700    1.40- 4.00     $2.23
                                         ---------   -----------     -----
       Granted..........................   463,500   10.00-15.00     11.82
       Exercised........................  (146,600)   1.40- 4.00      2.04
       Canceled.........................   (44,700)   1.70-12.00      6.87
                                         ---------   -----------     -----
     Outstanding, December 31, 1996 .... 1,555,900   $1.40-15.00     $4.97
                                         =========   ===========     =====
</TABLE>
 
  Stock options for 760,776, 909,713 and 973,450 shares were vested and
exercisable as of December 31, 1994, 1995 and 1996, respectively. The weighted
average fair value of options granted for 1995 and 1996 were $0.69 and $6.11,
respectively. The weighted average fair value of options vested and
exercisable as of December 31, 1995 and 1996 were $1.92 and $2.27,
respectively.
 
  The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
 
<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     12/31/96        LIFE       EXER. PRICE     12/31/96     EXER. PRICE
------------------------  -------------- ------------- ------------- -------------- -------------
<S>                       <C>            <C>           <C>           <C>            <C>
$ 1.40 to  1.70.........      481,725     1.99 years      $ 1.45        479,985        $ 1.45
$ 2.50 to  4.00.........      634,475     3.90              2.83        465,715          2.66
$10.00 to 15.00.........      439,700     6.45             11.92         27,750         10.00
                            ---------     ----------      ------        -------        ------
                            1,555,900     4.06 years      $ 4.97        973,450        $ 2.27
                            =========     ==========      ======        =======        ======
</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 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>
                                                              1995       1996
                                                           ---------- ----------
     <S>                                                   <C>        <C>
     Net income
       As reported........................................ $2,355,000 $5,680,000
       Pro forma.......................................... $2,342,000 $4,985,000
     Earnings per share
       As reported........................................ $     0.26 $     0.54
       Pro forma.......................................... $     0.26 $     0.47
</TABLE>
 

<PAGE>
 
                           AXENT TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  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 1995
and 1996 respectively: divided yield of 0% for all grants; expected volatility
of 0 and 65 percent; risk-free interest rates of 6.09 and 6.14 percent; and
expected lives of 3.5 years for each grant.
 
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
1996, a portion of the valuation allowance for the deferred tax assets was
released as a result of the Company's profitable operations, which established
a deferred tax asset in the amount of $400,000 as of December 31, 1996.
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,
                                          ------------------------------------
                                             1994         1995         1996
                                          -----------  -----------  ----------
<S>                                       <C>          <C>          <C>
Continuing Operations
 Current provision (benefit)
  Federal................................ $(1,900,000) $(1,999,000) $1,331,000
  State..................................    (140,000)    (147,000)    228,000
                                          -----------  -----------  ----------
Total current provision (benefit) from
 continuing operations................... $(2,040,000) $(2,146,000) $1,559,000
                                          ===========  ===========  ==========
</TABLE>
<TABLE>
<S>                                      <C>          <C>          <C>
 Deferred provision (benefit)
  Federal............................... $       --   $       --   $ (370,000)
  State.................................         --           --      (30,000)
                                         -----------  -----------  ----------
Total deferred benefit from continuing
 operations............................. $       --   $       --   $ (400,000)
                                         ===========  ===========  ==========
Total provision (benefit) from
 continuing operations.................. $(2,040,000) $(2,146,000) $1,159,000
                                         ===========  ===========  ==========
</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:
<TABLE>
<CAPTION>
                                                  YEAR ENDED DECEMBER 31,
                                                 -----------------------------
                                                   1994       1995      1996
                                                 --------   --------   -------
<S>                                              <C>        <C>        <C>
U.S. federal statutory rate.....................   (34.00)%   (34.00)%   34.00%
Increase (decrease) in rates resulting from
  State taxes...................................     (2.5)      (2.5)      4.4
  Permanent differences.........................      0.1        1.0      (0.6)
  Write-off of purchased in process R&D.........     22.9        --        --
  Foreign losses not benefited..................      --         --       16.0
  Foreign income not subject to tax.............     (0.3)      (5.0)      --
  Change in valuation allowance for deferred tax
   asset .......................................    (24.6)      (3.8)    (27.7)
                                                 --------   --------   -------
  Effective tax rate............................   (38.40)%   (44.30)%   26.10%
                                                 ========   ========   =======
</TABLE>
 

<PAGE>
 
                           AXENT TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Deferred tax assets (liabilities) are included in other assets and are
comprised of the following:
 
<TABLE>
<CAPTION>
                                      YEAR ENDED DECEMBER 31,
                         ------------------------------------------------------
                                 1995                        1996
                         ----------------------  ------------------------------
                           FEDERAL      STATE     FEDERAL    STATE     FOREIGN
                         -----------  ---------  ---------  --------  ---------
<S>                      <C>          <C>        <C>        <C>       <C>
Current deferred assets
  Accrued expenses...... $   269,000  $  32,000  $ 252,000  $ 31,000  $     --
  Deferred rent.........      27,000      3,000        --        --         --
  Deferred revenue......     471,000     54,000    157,000    20,000        --
  Reserves..............     364,000     46,000    242,000    30,000        --
                         -----------  ---------  ---------  --------  ---------
    Total current
     deferred assets....   1,131,000    135,000    651,000    81,000        --
                         -----------  ---------  ---------  --------  ---------
Non-current deferred
 assets
  Depreciation and
   amortization.........     207,000     32,000     53,000     7,000        --
  Net operating loss....     596,000        --         --        --     632,000
  State tax effect......     (57,000)       --     (30,000)      --         --
  Credits...............     569,000        --     471,000       --         --
                         -----------  ---------  ---------  --------  ---------
    Total non-current
     deferred assets....   1,315,000     32,000    494,000     7,000    632,000
                         -----------  ---------  ---------  --------  ---------
Gross deferred tax
 assets.................   2,446,000    167,000  1,145,000    88,000    632,000
Valuation allowance.....  (2,446,000)  (167,000)  (775,000)  (58,000)  (632,000)
                         -----------  ---------  ---------  --------  ---------
Net deferred tax
 assets................. $       --   $     --   $ 370,000  $ 30,000  $     --
                         ===========  =========  =========  ========  =========
</TABLE>
 
  As of December 31, 1996, the Company has an alternative minimum tax credit
in the amount of $200,000 and general business credits of approximately
$271,000, which expire between 1997 and 2006. The Company also has a foreign
loss carryover from continuing and discontinued operations in the amount of
$1,271,000, which does not expire.
 
NOTE 12. 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 full-time U.S.
employees, 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, 1994, 1995 and
1996, the Company did not contribute to the 401(k) Plan.
 
  The Company also sponsors a voluntary defined contribution retirement plan
(the "UK Plan") for certain employees in the United Kingdom. Employees may
elect to contribute a percentage of their annual gross compensation to the UK
Plan. Employer contributions to the UK Plan are required for all participating
employees at 3% of their base salary. Contributions to the plan were $25,000,
$4,500 and $1,500 for the years ended December 31, 1994, 1995 and 1996,
respectively,
 
  In conjuunction with the Datamedia acquisition (see note 3), the Company
acquired an additional 401(k) plan established for the benefit of the
Datamedia employees. All employee/employer contributions to such plan ceased
effective December 31, 1994. The Company is in the process of terminating this
plan.
 

<PAGE>
 
                           AXENT TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
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:
 
 1994
 
  The Company received $2.5 million in notes receivable as part of the sale of
its storage management products. In connection with the Datamedia acquisition,
the Company issued notes payable for $2,817,000 (see note 5).
 
  Cash paid for interest associated with discontinued operations was $100,000.
 
  Cash paid for income taxes associated with discontinued operations was
$66,000.
 
 1995
 
  In connection with the Spin-off of the OpenVMS utility software business,
the Company made certain accruals and transferred certain identifiable assets
and foreign operations to Raxco in the amount of $1,387,000 (see note 2).
 
  Cash paid for income taxes associated with discontinued operations was
$71,000.
 
 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 $114,000.
 
NOTE 14. FOREIGN OPERATIONS
 
  The Company operates primarily in the United States and Europe. Summary
information related to these operations is as follows:
 
<TABLE>
<CAPTION>
                                                        DECEMBER 31,
                                             -----------------------------------
                                                1994        1995        1996
                                             ----------- ----------- -----------
<S>                                          <C>         <C>         <C>
Net Revenues
  United States............................. $ 5,701,000 $10,687,000 $16,801,000
  International.............................   2,893,000   4,041,000   5,296,000
                                             ----------- ----------- -----------
                                             $ 8,594,000 $14,728,000 $22,097,000
                                             =========== =========== ===========
Total Assets
  United States............................. $ 8,408,000 $10,257,000 $42,820,000
  International.............................   1,601,000   2,389,000   1,181,000
                                             ----------- ----------- -----------
                                             $10,009,000 $12,646,000 $44,001,000
                                             =========== =========== ===========
</TABLE>
 

<PAGE>
 
                           AXENT TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
NOTE 15. SUBSEQUENT EVENT
 
  On January 6, 1997, the Company entered into an Agreement and Plan of Merger
("Merger Agreement") under which the Company will issue a maximum of 1,550,000
common shares in exchange for all outstanding preferred and common stock of
AssureNet Pathways, Inc. ("AssureNet"). In addition, the Company will assume
all of the AssureNet options and warrants outstanding at the consummation of
the merger. The Company also entered into a Management Agreement with
AssureNet under which the Company actively manages the day to day operations
from the effective date of the Merger Agreement. On January 23, 1997, the
Company filed a Form S-4 with the Securities and Exchange Commission to
register the shares to be issued under the Merger Agreement.
 
  AssureNet is a leading provider of network security products and services
that protect enterprise networks, including local area networks, wide area
networks and internal networks based on non-proprietary communications
protocols.
 
  The transaction will be accounted for under the purchase method. The
purchase price, approximately $32 million, will include the value of shares
exchanged, net liabilities assumed and other costs associated with the
transaction and will be allocated among AssureNet's assets based on fair
market value. A significant portion of the purchase price will be allocated to
in-process research and development costs which will result in a one-time
charge to earnings of the Company of approximately $28 million (unaudited).
The acquisition is expected to be completed in the first quarter of 1997.
 

<PAGE>
 
Exhibit Number         Description
--------------         -----------

    3.1*          Amended and Restated Certificate of Incorporation of the 
                  Company.
    3.2+          Amended and Restated Bylaws of the Company.
    4.1*          Specimen stock certificate for shares of Common Stock of the
                  Company.
   10.1*          The Company's 1991 Amended and Restated Stock Option Plan.
   10.2**         The Company's 1996 Amended and Restated Stock Option Plan.
   10.3**         The Company's 1996 Amended and Restated Directors' Stock 
                  Option Plan.
   10.7*          Registration Rights Agreement dated as of December 10, 1992,
                  by and among the Company and the parties thereto.
   10.7.1**       Amendment No. 1 to Registration Rights Agreement dated as of
                  February 26, 1997, by and among the Company and the parties 
                  thereto.
   10.8*          Settlement Agreement effective as of September 13, 1991, by 
                  and among the Company and the parties thereto.
   10.9*          Form of Indemnification Agreement between the Company and its
                  directors and executive officers.
   10.10*         Agreement of Merger dated as of November 17, 1994, among 
                  the Company, Datamedia Corporation and Raxco Acquisition
                  Corporation.
   10.11*         Lease Agreement dated as of September 6, 1995, by and between
                  Research Grove Associates and the Company.
   10.12*         Lease of Real Property dated as of March 7, 1995, by and 
                  between TNK Associates and the Company.
   10.13*         Deed of Lease dated as of March 14, 1995 by and between Bill
                  Harris Music, Inc. and the Company.
   10.14*         Agreement dated as of December 30, 1987, by and between the 
                  Company and William R. Davy.
 
<PAGE>
 
       10.15*    Agreement dated as of September 20, 1990, by and between the 
                 Company and William R. Davy.
       10.16*    Agreement dated as of November 7, 1991, by and between the 
                 Company and William R. Davy.
       10.17*    Severance Arrangement for Richard A. Lefebvre, dated 
                 October 16, 1992.
       10.18*    Severance Arrangement for John C. Becker, dated October 16, 
                 1992.
       10.19*    Severance Arrangement for Brett Jackson, dated October 16, 
                 1992.
       10.20*    The Company's Officer/Vice President Severance Policy.
       10.21*    Exclusive Distributor License Agreement, effective as of 
                 December 31, 1995, between the Company and Raxco Software, Inc.
       10.22*    Administrative Services Agreement, effective as of December 31,
                 1995, between the Company and Raxco Software, Inc.
       10.23*    Line of Credit Loan Agreement, effective as of December 31, 
                 1995, between the Company and Raxco Software, Inc.
       10.24*    Agreement and Plan of Separation, effective as of December 31, 
                 1995, between the Company and Raxco Software, Inc.
       10.28*    Purchase Agreement, date as of February 29, 1996, by and 
                 between the Company and Silvon Software, Inc.
       10.29**   Amended Agreement and Plan of Merger among the Company,
                 Axquisition, Inc., and AssureNet Pathways, Inc, dated as of
                 January 6, 1997 and amended February 26, 1997.
       11.1++    Statement of computation of loss per share.
       21.1*     Subsidiaries of the Registrant.
       23.1++    Consent of Coopers & Lybrand L.L.P. and opinion on certain
                 financial data schedules.
       24.1++    Power of Attorney (included in signature pages).

       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.

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

    *     Previously filed as an exhibit to the Company's Registration Statement
          on Form S-1 (File No. 333-01368) and incorporated herein by reference.
   **     Previously filed as an exhibit to the Company's Registration Statement
          on Form S-4 (File No. 333-20207) and incorporated herein by reference.
    +     Previously filed as an exhibit to the Company's Quarterly Report on 
          Form 10-Q for the Quarter Ended September 30, 1996.
   ++     Filed herewith.

(b)    Reports on Form 8-K

          None.

(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>
 
                                  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 27th day of March, 1997.

                                 AXENT TECHNOLOGIES, INC.



                                 By: /s/ John C. Becker
                                     -------------------------------------
                                     John C. Becker
                                     President, Chief Operating Officer
                                     and Director

     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 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.

          Signature                        Title                 Date
          ---------                        -----                 ----

/s/ Richard A. Lefebvre                 Chief Executive          March 27, 1997
----------------------------------      Officer, Chairman of
         Richard A. Lefebvre            the Board and Director
                                        (Principal Executive
                                        Officer)

/s/ John C. Becker                      President, Chief         March 27, 1997
----------------------------------      Operating Officer 
         John C. Becker                 and Director


/s/ Robert B. Edwards, Jr.              Vice President           March 27, 1997
----------------------------------      Chief Financial
         Robert B. Edwards, Jr.         Officer and 
                                        Treasurer (Principal
                                        Financial and 
                                        Accounting Officer)

/s/ Gabriel A. Battista                 Director                 March 24, 1997
----------------------------------     
         Gabriel A. Battista
<PAGE>
 
/s/ Richard A. Hosley II                  Director               March 27, 1997
----------------------------------
         Richard A. Hosley II

/s/ Jacqueline C. Morby                   Director               March 27, 1997
----------------------------------
         Jacqueline C. Morby

                                          Director               March __, 1997
----------------------------------
         Arthur C. Patterson

                                          Director               March __, 1997
----------------------------------
         Richard W. Smith

/s/ John F. Burton                        Director               March 27, 1997
----------------------------------
         John F. Burton
<PAGE>
 
                                  SCHEDULE II

                       VALUATION AND QUALIFYING ACCOUNTS

             For the Years Ended December 31, 1994, 1995 and 1996

<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, 1994..................................     138,000         296,000           $ (214,000)           220,000
December 31, 1995..................................     220,000         (18,000)              95,000            297,000
December 31, 1996..................................     297,000         233,000             (212,000)           318,000

DEFERRED TAX ASSET VALUATION ACCOUNT
December 31, 1994..................................   5,349,000             --            (2,823,000)         2,526,000
December 31, 1995..................................   2,526,000             --               (87,000)         2,613,000
December 31, 1996..................................   2,613,000             --            (1,148,000)         1,465,000

</TABLE>
<PAGE>
 
                           AXENT TECHNOLOGIES, INC.

                                   FORM 10-K

                                 EXHIBIT INDEX

<TABLE> 
<CAPTION> 

Exhibit   Description
-------   -----------
<S>       <C> 
  3.1*    Amended and Restated Certificate of Incorporation of the Company.
  3.2+    Amended and Restated Bylaws of the Company.
  4.1*    Specimen stock certificate for shares of Common Stock of the Company.
 10.1*    The Company's 1991 Amended and Restated Stock Option Plan.
 10.2**   The Company's 1996 Stock Option Plan.
 10.3**   The Company's 1996 Directors' Stock Option Plan.
 10.7*    Registration Rights Agreement dated as of December 10, 1992, by and 
          among the Company and the parties thereto.
 10.7.1** Amendment No. 1 to Registration Rights Agreement dated as of 
          February 26,1997, by and among the Company and the parties thereto.
 10.8*    Settlement Agreement effective as of September 13, 1991, by and among 
          the Company and the parties thereto.
 10.9*    Form of Indemnification Agreement between the Company and its 
          directors and executive officers.
 10.10*   Agreement of Merger dated as of November 17, 1994, among the Company, 
          Datamedia Corporation and Raxco Acquisition Corporation.
 10.11*   Lease Agreement dated as of September 6, 1995, by and between Research
          Grove Associates and the Company.
 10.12*   Lease of Real Property dated as of March 7, 1995, by and between TNK 
          Associates and the Company.
 10.13*   Deed of Lease dated as of March 14, 1995 by and between Bill Harris 
          Music, Inc. and the Company.
 10.14*   Agreement dated as of December 30, 1987, by and between the Company 
          and William R. Davy.
 10.15*   Agreement dated as of September 20, 1990, by and between the Company 
          and William R. Davy.
 10.16*   Agreement dated as of November 7, 1991, by and between the Company and
          William R. Davy.
 10.17*   Severance Arrangement for Richard A. Lefebvre, dated October 16, 1992.
 10.18*   Severance Arrangement for John C. Becker, date October 16, 1992.
 10.19*   Severance Arrangement for Brett Jackson, dated October 16, 1992.
 10.20*   The Company's Officer/Vice President Severance Policy.
 10.21*   Exclusive Distributor License Agreement, effective as of December 31, 
          1995, between the Company and Raxco Software, Inc.
 10.22*   Administrative Services Agreement, effective as of December 31, 1995, 
          between the Company and Raxco Software, Inc.
 10.23*   Line of Credit Loan Agreement, effective as of December 31, 1995, 
          between the Company and Raxco Software, Inc.
 10.24*   Agreement and Plan of Separation, effective as of December 31, 1995, 
          between the Company and Raxco Software, Inc.
 10.28*   Purchase Agreement, dated as of February 29, 1996, by and between the 
          Company and Silvon Software, Inc.


</TABLE> 
<PAGE>
 


    10.29**        Amended Agreement and Plan of Merger among the Company, 
                   Axquisition, Inc., and AssureNet Pathways, Inc., dated as of
                   January 6, 1997 and amended February 26, 1997.   
    11.1++         Statement of computation of loss per share.
    21.1*          Subsidiaries of the Registrant.
    23.1++         Consent of Coopers & Lybrand L.L.P. and opinion on certain 
                   financial data schedules.
    24.1++         Power of Attorney (included in signature pages).
   
    Schedule Description
    --------------------

    II. ++         Valuation and Qualifying Accounts.

--------------------------------------------------------------------------------
*           Previously filed as an exhibit to the Company's Registration 
            Statement on Form S-1 (File No. 333-01368) and incorporated herein
            by reference.
**          Previously filed as an exhibit to the Company's Registration 
            Statement on Form S-4 (File No. 333-20207) and incorporated herein
            by reference.
+           Previously filed as an exhibit to the Company's Quarterly Report on
            Form 10-Q for the Quarter Ended September 30, 1996.
++          Filed herewith.