NETEGRITY INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

FOR ANNUAL OR TRANSITION REPORTS PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

OR

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

COMMISSION FILE NUMBER 1-10139

NETEGRITY, INC.
(Exact name of Registrant as specified in its charter)

DELAWARE 04-2911320
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

52 SECOND AVENUE
WALTHAM, MASSACHUSETTS 02451
(Address of principal executive offices, including Zip Code)

(781) 890-1700
(Registrant's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)

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. [X] Yes No [ ]

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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). [X] Yes No [ ]

The aggregate market value of the voting Common Stock held by
non-affiliates of the registrant was $190,634,555 based on the closing price of
the registrant's Common Stock on June 30, 2002 as reported by the NASDAQ
National Market ($6.16 per share). As of February 10, 2003, there were
34,311,460 shares of Common Stock outstanding.

DOCUMENT INCORPORATED BY REFERENCE:

Portions of the registrant's definitive Proxy Statement for its Annual
Meeting of Stockholders for the year ended December 31, 2002, which will be
filed with Securities and Exchange Commission within 120 days after the end of
the registrant's fiscal year, are incorporated by reference into Part III
hereof.
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ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 2002

TABLE OF CONTENTS

PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 11
Executive Officers of Registrant...................................... 11

PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 13
Item 6. Selected Financial Data..................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 15
Item 7A. Quantitative and Qualitative Disclosure About Market Risk... 35
Item 8. Financial Statements and Supplementary Data................. 36
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 64

PART III
Item 10. Directors and Executive Officers of the Registrant.......... 64
Item 11. Executive Compensation...................................... 64
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 64
Item 13. Certain Relationships and Related Transactions.............. 64
Item 14. Controls and Procedures..................................... 64

PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 65

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report and the documents incorporated in it by reference contain
forward-looking statements about our plans, objectives, expectations and
intentions. You can identify these statements by words such as "expect,"
"anticipate," "intend," "plan," "believe," "seek," "estimate," "may," "will" and
"continue" or similar words. You should read statements that contain these words
carefully. They discuss our future expectations, contain projections of our
future results of operations or our financial condition or state other
forward-looking information, and may involve known and unknown risks over which
we have no control. You should not place undue reliance on forward-looking
statements. We cannot guarantee any future results, levels of activity,
performance or achievements. Moreover, we assume no obligation to update
forward-looking statements or update the reasons actual results could differ
materially from those anticipated in forward-looking statements, except as
required by law. The factors discussed in the sections captioned "Business,"
"Certain Factors that May Affect Future Results," and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in this report
and the documents incorporated in it by reference identify important factors
that may cause our actual results to differ materially from the expectations we
describe in our forward-looking statements.

PART I

ITEM 1. BUSINESS

Netegrity, Inc., a Delaware corporation, and its wholly-owned subsidiaries,
are referred to throughout this report as "Netegrity", "Company", "we", and "us"
or through similar expressions. For financial information about our business,
see our consolidated financial statements and the related notes thereto found in
Item 8 of this report. Netegrity(R), SiteMinder(R), IdentityMinder(TM) (formerly
Delegated Management Services ("DMS")), PortalMinder(TM) and Transaction
Minder(TM) are trademarks or registered trademarks of Netegrity, Inc. All other
brand or product names may be trademarks or registered trademarks of their
respective owners.

COMPANY OVERVIEW

We are a leading provider of security software solutions for securing
access to corporate assets and for managing and securing the identities of users
accessing those assets. Our flexible, standards-based solutions are designed to
enable companies to conduct business securely with customers, partners,
suppliers and employees across the Internet, intranets and extranets.

Our products help companies ensure that only the people or business
processes that are entitled to access corporate resources and applications
access them. Our products enable customers to manage the user population that
needs to access those resources and applications. In addition, our products
provide a more automated way to grant, modify or revoke account access to
applications and resources.

We are integrating our core products, SiteMinder, IdentityMinder, and
TransactionMinder, with our new provisioning technology into an identity and
access management solution to provide Web access control and management, user
administration, provisioning and de-provisioning of account access. Our solution
supports a broad range of technology environments, and aims to ensure that
companies optimize their existing information technology investments while
incorporating new technologies. We believe that through these solutions, we help
companies to address some of the most critical requirements for conducting
business securely.

We also offer various levels of consulting and support services that enable
our customers to successfully implement our products in their organizations.

We were formed as a Delaware corporation in 1986. Our Internet address is
www.netegrity.com. We make available free of charge through our Web site our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to these reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we
electronically file such materials with the Securities and Exchange Commission.

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INDUSTRY BACKGROUND

As more companies conduct business online, they are realizing that Internet
security is not only about keeping users out, but also about securely letting
users into their network environments and managing such users access to
appropriate business and information resources. Today, many companies accomplish
this task by managing user access within individual business applications. This
is known as a "silo approach".

While managing user access at the application level may create user level
security, the silo-style security approach is both repetitive and cumbersome to
manage. It is also challenging for the user, who is given an "identity" for each
application. A user is required to log in to a site multiple times and use
multiple user names and passwords for individual applications.

To reduce costs and compete more effectively, companies are increasing the
amount of business they conduct online. As a result, they service a growing
number of users. User populations are constantly evolving to accommodate
changing customers, partners, suppliers, employees and even automated Web
services.

This creates three management challenges for companies: 1) managing the
increasing number of users; 2) managing user entitlement to an increasing number
of applications and resources; and 3) managing frequently changing user
information. For example, employees may change assignment, requiring access to a
different set of enterprise resources. Business partners may change the terms of
their relationship with a company entitling them to different discounts or
product information. Customers may sign up for a premium support option
entitling them to higher priority status. All of these changes require updates
to users or resource access rights or entitlements, resulting in increased cost
and complexity to manage business online.

To deal with these challenges, companies require a centralized solution to
securely manage users, their identities and entitlements. They also need to
provide secure access to corporate applications and resources through the
validation of the user and his entitlements. Key requirements for this solution
include:

- Providing companies with a unified view of their relationships with all
constituents -- customers, partners, suppliers and employees -- across
enterprise applications, both internal and external

- Creating a single identity for each user to enable him to log-in only
once across multiple applications

- Creating a more streamlined way to manage large populations of users

- Creating a central place to identify users and verify their entitlements

- Providing a centralized, more automated way to grant, change or revoke
access to applications

- Providing a record of user entitlement and access history for reporting
purposes.

The security technologies needed to address these problems are access
control and management, user administration and provisioning.

THE NETEGRITY SOLUTION

Our flexible, standards-based solution is designed to enable companies to
conduct business securely with customers, partners, suppliers and employees
across the Internet, intranets and extranets.

By using our solutions, companies can ensure that only the people, devices
or applications that are entitled to access corporate resources and applications
can access them. Our solutions help companies manage the users who need access
to those resources and applications as well as the entitlements that are granted
to those users.

Our solutions are designed to address the following three critical needs of
conducting business online:

1. Web access control and management for users and Web services

2. User administration

3. Provisioning and de-provisioning of access to accounts and
resources

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Our individual product lines include SiteMinder, TransactionMinder and
IdentityMinder software, as well as provisioning software. We are integrating
these products to provide our identity and access management solution. The key
benefits that our software provides to companies include:

- Automating and simplifying management of users and their entitlements
across heterogeneous environments. Our solution reduces the number of
tasks required to create a new user, set up or provision a user account,
modify the user's rights and de-provision a user account if needed. Our
solution is designed to run on many of the major platforms used for
e-business, including multiple operating system versions, Web servers,
directories, application servers and databases.

- Centralized access and authentication management, reducing IT complexity
and cost of administration. Our solution allows administrators to
centrally determine the type of authentication required for different
applications depending upon the sensitivity of the application data. It
also provides for a centralized location for the management and reporting
of user access. This centralization simplifies the administrative
requirements and increases a company's ability to audit user access.

- Securing distributed administrative workload with delegated
administration. Our solution allows administrative responsibilities to
be delegated as needed while maintaining compliance with corporate
policies.

- Reducing help desk contacts by enabling self-service. Our solution
allows end users to register for applications and modify their account
details themselves, rather than initiating a help desk incident. This
reduces the number of help desk incidents resulting from forgotten
passwords or the need to update user information.

- Improving security procedures and auditability. Our solution enables
companies to use consistent security procedures across their environment.
In addition, by recording which users have access to applications and
resources, companies have the ability to audit identity-related security
events more easily.

- Simplifying development of additional applications. Our solution creates
a centralized set of access control and management services that can be
easily leveraged for additional internal and external applications.

THE NETEGRITY STRATEGY

Our objective is to strengthen our position as a leading provider of
security software solutions for managing and securing users, their identities
and access to corporate applications and resources. To achieve this objective we
are pursuing the following strategies:

- Expanding our product lines and offering an integrated identity and
access management solution. One of our competitive advantages is our
leading position in the Web access control and management market that we
achieved with our SiteMinder product. We believe that we can continue to
derive revenue from this market. Furthermore, we believe that our
expanded product lines, now including IdentityMinder software,
TransactionMinder software and our provisioning software, will enable us
to sell a broader set of related products to our installed base of
approximately 700 customers, as well as to new customers.

With TransactionMinder software, our new Web services security product, we
are one of the few companies to address the emerging need that companies
have to securely incorporate and manage Web services in their business
environments. We believe that this provides us with the opportunity to
sell to customers who are early adopters of Web services.

Finally, by integrating our product lines, we will be one of the few
vendors able to offer a complete identity and access management solution
that addresses the complex problem of centralized user access,
administration and account provisioning/de-provisioning. This gives us the
opportunity to sell the integrated solution or to sell an individual
product to address a customer's specific need at a point in time, and then
sell the other products in the solution in a follow-on sale.

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- Establishing leadership status for our identity and access management
solution and its components. We will work to establish a leadership
position for our integrated solution as well as for our individual
products. To do this we will continue to develop and expand our product
lines and to respond competitively to customer requirements. We will
continue to work with leading industry analysts to establish a leading
market position for our integrated identity and access management
solution as well as for its product components.

- Continuing to support and incorporate new technologies in key areas of
development. Our identity and access management solution, along with our
individual products, will continue to support key enterprise applications
and new resources that companies need to securely manage. Furthermore, we
will continue to support emerging and established technologies and
standards that are important to our customers including Web services,
Extensible Markup Language (XML) and XML-based standards such as Security
Assertion Markup Language (SAML).

- Leveraging and deepening existing strategic relationships. We have
established significant relationships with major global system
integrators, including PricewaterhouseCoopers, Deloitte & Touche, Ernst &
Young and Accenture. We are working closely with these firms to increase
market awareness, expand our distribution capabilities and expand
deployment and integration services for our products. We believe that
these relationships will enable us to increase penetration into our
markets and help to accelerate global customer deployments of our
solution.

- Increasing our penetration in focused geographies. In 2002, we
established several relationships to further extend our resale and
integration capabilities beyond North America, in order to better serve
customers in Europe and Asia. We will work to localize and translate our
products to enable further penetration into those markets.

- Improving customer service. We believe that a company's decision to
purchase our products is based, in part, on our ability to provide a high
level of customer service and implementation support. As the worldwide
demand for our products grows, we continue to invest in and enhance our
customer service capabilities. In addition, our relationships with
leading systems integration firms enable us to provide a wide range of
implementation services to help customers successfully deploy our
products.

- Continuing to evaluate strategic acquisitions. We will continue to
evaluate strategic opportunities and potential acquisitions where there
is a fit with our strategy. These opportunities may include companies or
technologies that broaden our market opportunity and enable us to expand
into adjacent areas, or that leverage our current solutions to extend our
position in our current markets.

THE NETEGRITY PRODUCTS

We offer a range of products that are designed to help companies to
securely conduct business by centrally managing the users with whom a company
does business as well as their accounts and access to company applications and
resources. We offer four product lines which include SiteMinder,
TransactionMinder, IdentityMinder and our provisioning software. These products
deliver access control and management, user administration and
provisioning/de-provisioning functionality. We are also integrating these
products to provide our identity and access management solution. We currently
derive most of our revenue from the SiteMinder product line.

SITEMINDER SOFTWARE

SiteMinder software enables companies to control user access to Web-based
business applications within the enterprise or across multiple partners.
SiteMinder software centrally manages user and entitlement information and
shares this information across all applications or resources being managed.
SiteMinder software includes a rules-based policy engine that enables
administrators to define policies that the SiteMinder software will use to
deliver shared services such as single sign-on, authentication management,
entitlement management, reporting and auditing.

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SiteMinder provides a broad range of benefits including:

- Centralized control. Centrally managing users and their entitlements
eliminates the need for managing redundant "silos" of application
security. This greatly reduces the complexity and cost of managing users.

- High-quality user experience. Single sign-on enables users to log on
once to a Web site and access multiple applications thereby increasing
customer satisfaction by eliminating the need for multiple log-ons.

- Personalization based on identity. SiteMinder software delivers
personalized identity information to Web applications enabling
presentation of user specific content.

- Enterprise scalability. SiteMinder software has been designed to manage
large number of users, applications and resources. Our customers have
deployed Web applications with millions of users secured by SiteMinder
software.

- Open platform. SiteMinder software is designed to run on many of the
major platforms used for transacting business, including multiple
versions of operating systems, Web servers, directories, application
servers and databases.

IDENTITYMINDER SOFTWARE

IdentityMinder software is complementary to our SiteMinder software. It
enables companies to manage the identities of large populations of distributed
users accessing Web applications protected by SiteMinder. Using IdentityMinder
software, companies can manage user profiles, create, modify and change user
accounts for access to Active Directory or other directory-based Web
applications. With IdentityMinder software companies can establish a delegated
and distributed hierarchy of managed organizations, roles, users and groups.
Using IdentityMinder's workflow capability, companies can also automate many of
their manual user administration tasks.

Key benefits of IdentityMinder software include:

- Enabling companies to securely manage users worldwide. IdentityMinder
software allows companies to delegate user management to logically and
physically distinct business partners while ensuring the security of the
supported business system.

- Reducing costs associated with managing large numbers of
users. IdentityMinder software leverages infrastructure using existing
directories where user information is stored. This eliminates the need to
create new directories. It also enables flexible delegation of user
administration thereby reducing information technology workload and
staffing requirements. Additionally, it enables users to self-service
their profile information or passwords.

- Enabling auditability. IdentityMinder software also collects and
preserves information regarding changes to user profiles. This
information is required in most security or privacy related audits.

TRANSACTIONMINDER SOFTWARE

TransactionMinder software is one of the first products to manage Web
services access to business applications and resources, either within the
enterprise or across multiple partners. TransactionMinder software is
complementary to SiteMinder software -- SiteMinder manages user access while
TransactionMinder software manages Web services access. TransactionMinder builds
upon our shared-services vision to provide a Web services security platform. It
offers centralized, policy based authentication and access management for Web
services.

Key benefits of TransactionMinder software include:

- Reducing information technology cost and complexity. TransactionMinder
software eliminates the need for application specific security for Web
services.

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- Enforcing security standards uniformly. TransactionMinder software also
enables companies to manage security policies consistently across all
application delivery methods -- of which Web services is one.

- Enabling auditability. TransactionMinder software assists corporate
compliance by enabling central auditing of security information related
to Web services transactions.

- Eliminating redundant data stores. TransactionMinder software supports
native directories for Web services.

- Maximizing security. TransactionMinder software uses session management
to increase Web services throughput for complex Web service interactions.

- Enabling a single Web services platform. TransactionMinder software
supports both intranet and extranet Web services solutions.

THE NETEGRITY PROVISIONING SOFTWARE

Our provisioning software allows companies to provide their employees,
business partners and customers with access to corporate applications and
resources when needed and remove that access when no longer required. By
integrating with the existing information technology infrastructure, the
provisioning software enables a company to create automated workflows that map
business processes to information technology activities using such company's
existing business rules and security policies. With this software, user accounts
can be automatically established, maintained or terminated in a consistent and
timely manner with proper authorizations, audit tracking, and escalation,
reducing or eliminating many of the previous error prone manual provisioning and
de-provisioning activities.

Key benefits of our provisioning software include:

- Enabling automated business changes. Our provisioning software automates
business changes (such as the hiring and termination of employees, or
changes to business alliances) by mapping those processes to information
technology specific activities, such as configuring access to shared
network or applications resources.

- Ensuring efficient implementation. Our provisioning software implements
business changes through dynamic workflows that automatically build and
initiate a set of manual tasks (such as installing hardware), automated
tasks (such as creating user accounts) and escalation procedures (for
approvals and task completion).

- Ensuring quick retrieval of information. Our provisioning software helps
ensure that all activities are tracked and recorded in audit logs that
can be quickly retrieved.

- Ensuring timely access to resources. Our provisioning software enables
employees and business partners to be more productive by enabling faster
access to resources.

- Ensuring deprovisioning. Our provisioning software helps ensure that
former employees and business partners are completely de-provisioned when
employment or business relationships end.

- Improving customer service. By enabling automated workflows and customer
self-service, our provisioning software helps to reduce the time required
to grant, modify or revoke access to applications and resources.

SERVICES AND SUPPORT

PROFESSIONAL SERVICES

Our professional services organization provides consulting and integration
services that aid our customers in implementing our products. Our professional
services offerings include Web infrastructure planning, application prototyping
and integration, custom development of application agents, user administration
utilities, and monitoring utilities. We also have relationships with global
systems integrators, such as PricewaterhouseCoopers, Deloitte &

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Touche, Ernst & Young, and Accenture, who play a major role in deploying our
products to customers. These partners also help promote our products.

TRAINING

Our worldwide training organization teaches SiteMinder, IdentityMinder,
TransactionMinder and provisioning skills to customers, partners, and employees.
We offer comprehensive training for our products, and bring our courses to
market in parallel with the general release of new products. Our courseware is
varied and modular, allowing us to customize a training program to meet the
instructional objectives and time constraints of our customers.

MAINTENANCE AND SUPPORT

Our technical support organization is headquartered in Waltham,
Massachusetts. To ensure the availability of customer service on a 24-hour per
day, seven-day per week basis, the Company also operates a technical support
center in Kuala Lumpur, Malaysia. We provide a range of services as well as
various levels of support for all customer environments. Our technical support
centers offer email, fax, Web-based, and telephone access options for our
customers. Our technical support organization also offers extended services such
as on-site training, installation, and customized service offerings.

ADDITIONAL PRODUCTS AND SERVICES

In addition to selling and marketing Netegrity's SiteMinder,
IdentityMinder, TransactionMinder and provisioning products, we also distribute,
on a non-exclusive basis, Check Point Software Technologies Ltd.'s FireWall-1
product. We sell this product directly to end users throughout the United States
through a small, dedicated sales organization.

SALES, MARKETING AND DISTRIBUTION

We directly market our SiteMinder, IdentityMinder, TransactionMinder and
provisioning software and services domestically through a field sales
organization supported by inside sales representatives. We also indirectly
market through strategic partnerships and other third-party relationships with
vendors of Internet-related systems and application software, as well as through
resellers and systems integrators. As of December 31, 2002, our sales, marketing
and customer support organizations consisted of 175 individuals.

Direct Sales Force. Our direct sales force consists of field sales
representatives covering three geographical regions. Our sales organization
identifies prospects that have identity and access management plans and
requirements. Upon prospect qualification they use a solution-selling approach.
Our inside sales representatives qualify, develop and pursue leads generated
through a variety of sources. Our field sales group conduct on-site meetings
with accounts that have substantial product and service requirements. We market
software and services to large, corporate customers in the major vertical
markets of the Global 1500 companies and smaller firms that need to protect
access to mission-critical information while providing the users of their
applications with a personalized, seamless experience. We generally sell to
Chief Information Officers, Vice Presidents/Directors of Information Technology
Operations, and other people responsible for analyzing and selecting identity
and access management solutions.

Indirect Distribution. One of our strategic initiatives has been to
further our relationships with systems integrators and technology partners to
increase the leverage of our partner channel. We classify our partners as
follows:

- Systems Integrators. We have established significant partnerships with
major global systems integrators who play a major role in deploying the
Company's products and who may also recommend our products to prospective
customers. We are investing in training our systems integration partners
to enhance their effectiveness in integrating and selling our products.
As of December 31, 2002, we had trained over 1,000 consultants at partner
companies.

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- Alliance Partners and Resellers. Alliance partners license our software
and bundle our products into their product offerings. Resellers sell
licenses to the Company's products and have played a significant role in
the expansion of our distribution network, particularly in Europe and
Asia.

- Technology Partners. Technology partners integrate their product
offerings to ensure that they interoperate with our software and bundle
our products into their product offerings. We work together with these
vendors to provide technical integration of our products. In many cases
we also work together on sales and marketing initiatives. There were over
200 members in the Netegrity Technology Partner Program as of December
31, 2002.

Product Marketing Programs. We engage in a broad range of product
marketing activities, including sponsoring seminars for prospective customers,
exhibiting at targeted conferences for the technology and investment
communities, as well as deploying paper and e-mail based awareness and lead
generation activities. We maintain an active public relations program through
which we issue press releases that highlight major customer additions, strategic
partnerships and new product releases. We develop relationships with industry
analysts, and promote coverage of the Company in the trade and business press.
We devote significant resources to our Web site to provide product and Company
information as well as customer profiles. We continue to enhance our Web site
with features, including online presentations and seminar content and customer
application success stories. Our product marketing programs are aimed at
informing customers of the capabilities and benefits of our solutions and
increasing the demand of such solutions across major industry segments. We plan
to continue to devote significant resources to marketing our products and brand.

CUSTOMERS

As of December 31, 2002, we licensed Netegrity software to approximately
700 customers. Our customer base spans multiple industry segments, including
financial services, government, manufacturing and telecommunications.

We operate in one business segment. Our total revenues from customers in
the years ended December 31, 2002, 2001 and 2000 were $69.3 million, $88.1
million and $55.2 million, respectively. No single customer, including direct
end users or resellers, accounted for more than 10% of our total revenues during
the years ended December 31, 2002, 2001 or 2000.

PURCHASING

The Company purchases the FireWall-1 product directly through Check Point
Software Technologies, Ltd. The Company also purchases firewall-related
accessory products from various third-party vendors. Additionally, the Company
licenses various third party software products to enhance, enable or provide
additional functionality to our products. The Company has not experienced any
material difficulties or delays in acquiring any of the products that it
distributes or licenses.

COMPETITION

The identity and access management market is new, rapidly evolving and
highly competitive. We expect competition to continue to increase both from
existing competitors and new market entrants. We believe that our ability to
compete depends on many factors both within and beyond our control, including:
the performance, reliability, features, price and ease of use of our products as
compared to those of our competitors; our ability to secure and maintain key
strategic relationships; our ability to expand both our domestic and
international sales operations; and the timing and market acceptance of new
products and enhancements to existing products developed by us and our
competitors.

Our primary competitor in the identity and access management market is the
Tivoli Division of IBM. We also compete against other security companies such as
Oblix, RSA, Waveset, Novell and Open Network Technology. In addition, a number
of other security and software companies have indicated that they plan to offer
products that may compete with our identity and access management solution in
the future. Competition may also develop as the market matures and other
companies begin to offer similar products, and as our

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product offerings expand to other segments of the marketplace. Current and
potential competitors have established, or may in the future establish,
cooperative selling relationships with third parties to increase the
distribution of their products to the marketplace. Accordingly, it is possible
that new competitors may emerge and acquire significant market share.

Today, some of our competitors have shorter operating histories, and fewer
financial and technical resources than we have. In addition, these smaller
competitors have smaller customer bases. Several of our competitors, however,
are larger companies who have significant financial resources, well-established
development and support teams, and large customer bases. These larger
competitors may initiate pricing policies that would make it more difficult for
us to maintain our competitive position.

As new participants enter the identity and access management market, we
will face increased competition. Potential competitors may bundle their products
in a manner that discourages users from purchasing our products. It is also
possible that current and potential competitors may be able to respond more
quickly to new or emerging technologies or customer requirements, resulting in
increased market share for these companies.

Our FireWall-1 reseller business competes with companies that offer
products competitive with Check Point Software Technologies' FireWall-1 product,
including Symantec Technologies, Cisco Systems and Trusted Information Systems.
We also compete with other resellers of the FireWall-1 product.

PRODUCT RESEARCH AND DEVELOPMENT

The market for identity and access management products is characterized by
rapid technological change, changes in customer requirements, new product
introductions and enhancements, and emerging industry standards. We devote
significant time and resources to analyzing and responding to changes in the
industry, such as changes in operating systems, application software, security
standards, networking software and evolving customer requirements.

Identity and access management solutions have significant requirements for
scalability, reliability, sophisticated security and ease of administration.
These demands drive the need for a centralized management model for
administrators, a single point of access for users and centralized means of
managing users, their access rights and identities. With the growing
implementation of standards-based user directories, such as LDAP, and the
proliferation of flexible and easy-to-use security products, businesses are able
to take advantage of best-of-breed solutions as they deploy business
applications across heterogeneous networks. We have made, and expect to continue
to make, a substantial investment in research and development. In the years
ended December 31, 2002, 2001 and 2000, we spent approximately $22.7 million,
$15.8 million, and $9.1 million, respectively (exclusive of approximately $3.0
million of non-recurring acquired in-process research and development in
connection with the acquisition of DataChannel in December 2001) or 33%, 18%,
and 16% of total revenues on research and development. We will continue our
product development efforts for our current products, as well as for next
generation products for new markets. As of December 31, 2002, we had 114
employees engaged in research and development activities.

We believe the future success of the Company depends largely on our ability
to enhance and broaden our existing product lines to meet the evolving needs of
the market. There can be no assurance that we will be able to respond
effectively to technological changes or new industry standards or developments.
Our operating results and business could be adversely affected if we were to
incur significant delays or be unsuccessful in developing new products or
enhancing our existing products, or if any such enhancements or new products do
not gain market acceptance. In addition, a number of factors may cause
variations in our future operating results including the timing of product
introductions and enhancements by us or our competitors, market acceptance of
new products, or the delay of customer orders in anticipation of new products.

PROPRIETARY RIGHTS

Our success and ability to compete are dependent to a significant degree on
our ability to develop and maintain the proprietary aspects of our technology
and operate without infringing on the proprietary rights of others. We rely on a
combination of patent, trademark, trade secret and copyright laws and licenses
and

9

contractual restrictions to protect the proprietary aspects of our technology.
These legal protections afford only limited protection for our technology. We
seek to protect our source code for our software, documentation and other
written materials under trade secret and copyright laws. We license our software
pursuant to license agreements, which impose restrictions on the licensee's
ability to utilize the software. Finally, we seek to limit disclosure of our
intellectual property by requiring employees, consultants and customers with
access to our proprietary information to execute confidentiality agreements with
us and by restricting access to our source code. Due to rapid technological
change, we believe that factors such as the technological and creative skills of
our personnel, new product developments and enhancements to existing products
are more important than the various legal protections of our technology to
establishing and maintaining a technology leadership position.

We have filed patent applications on three inventions embodied in the
software products that we have developed and that may be useful in the field of
identity and access management. There can be no assurance that any of these
applications will result in an issued patent.

Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary. Policing unauthorized use of our products is
difficult and, while we are unable to determine the extent to which piracy of
our software exists, it can be expected to be a persistent problem. In addition,
the laws of many countries do not protect our proprietary rights to as great an
extent as do the laws of the United States. Litigation may be necessary in the
future to enforce our intellectual property rights, to protect our trade
secrets, to determine the validity and scope of the proprietary rights of others
or to defend against claims of infringement or invalidity. Any such litigation
could result in substantial costs and diversion of resources and could have a
material adverse effect on our business, operating results and financial
condition. There can be no assurance that our means of protecting our
proprietary rights will be adequate or that our competitors will not
independently develop similar technology. Any failure by us to meaningfully
protect our property could have a material adverse effect on our business,
operating results and financial condition.

There can be no assurance that other parties will not claim infringement
with respect to our current or future products. We expect that developers of
Web-based application software products will increasingly be subject to
infringement claims as the number of products and competitors in our industry
segment grows and as the functionality of products in different segments of the
software industry increasingly overlaps. Any such claims, with or without merit,
could be time consuming to defend, result in costly litigation, divert
management's attention and resources, cause product shipment delays or require
us to enter into terms marginally acceptable to us. A successful infringement
claim against us and our failure or inability to license the infringed rights or
develop or license technology with comparable functionality could have a
material adverse effect on our business, financial condition and operating
results.

We integrate third-party software into our products. This third-party
software may not continue to be available on commercially reasonable terms. We
believe, however, there are alternative sources for such technology. If we are
unable to maintain licenses to the third-party software included in our
products, however, distribution of our products could be delayed until
equivalent software could be developed or licensed and integrated into our
products. This delay could materially adversely affect our business, operating
results and financial condition.

EMPLOYEES

As of December 31, 2002, we had a total of 363 full-time employees, of
which 114 were involved in research and development, 175 in sales, marketing and
customer support, 36 in consulting and training and 38 in administration and
finance. None of our employees are represented by a labor union. We have not
experienced any work stoppages and believe that our relationships with our
employees are good. Our future success will depend in part on our ability to
attract, retain and motivate highly qualified technical and management
personnel, for whom competition is intense.

10

ITEM 2. PROPERTIES

The Company's current headquarters consist of a leased office suite located
at 52 Second Avenue in Waltham, Massachusetts. We occupy 50,345 square feet of
space at that location under a lease expiring in March 2003. We also occupy
50,665 square feet of office space in Bellevue, Washington under three separate
leases expiring in April 2004. In addition, we lease 4,127 square feet of space
to house our technical service center in Kuala Lumpur, Malaysia, under a lease
expiring in June 2004. In August 2002, the Company entered into a five year
non-cancelable lease for office space for its new corporate headquarters. The
Company anticipates moving to the new facility in March 2003. In connection with
the lease agreement, the Company delivered an irrevocable, unconditional,
negotiable letter of credit in the amount of $760,000 as a security deposit. The
Company anticipates that it will spend approximately $1.0 million in leasehold
improvements to build out the new facility. As of December 31, 2002,
approximately $725,000 had been spent.

In order to support our field sales and consulting staff, we lease office
space domestically in Los Angeles and San Jose, California; Orlando, Florida;
Atlanta, Georgia; Chicago, Illinois; Methuen, Massachusetts; New York, New York;
Reston, Virginia; and Bellevue, Washington. Internationally, we lease office
space in Sydney and Melbourne, Australia; Toronto, Canada; Marlow, England;
Helsinki, Finland; Paris, France; Frankfurt and Munich, Germany; Hong Kong,
China; Milan, Italy; Tokyo, Japan; Seoul, Korea; Ngee Ann City, Singapore; and
Stockholm, Sweden.

ITEM 3. LEGAL PROCEEDINGS

From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. The Company is
not presently a party to any legal proceedings, the adverse outcome of which, in
management's opinion, would have a material adverse effect on the Company's
results of operations or financial position.

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

No matters were submitted to a vote of security holders, whether through
the solicitation of proxies or otherwise, during the quarter ended December 31,
2002.

EXECUTIVE OFFICERS OF THE REGISTRANT

Below are the name, age and principal occupations for at least the last
five years of our current executive officers. All such persons have been
appointed to serve until their successors are appointed or until their earlier
resignation or removal.

BARRY N. BYCOFF, 54 years old, was appointed President and Chief Executive
Officer and Director of the Company in April 1993. In November 1999, Mr. Bycoff
was also appointed Chairman of the Board.

REGINA O. SOMMER, 44 years old, joined the Company as Vice President, Chief
Financial Officer and Treasurer in December 2001. From 1999 to 2001, she was
Vice President and CFO for Revenio, Inc. a privately-held customer relationship
management software company. From 1995 to 1999, she served as Senior Vice
President and CFO for Open Market, Inc., an Internet infrastructure software
company.

WILLIAM C. BARTOW, 39 years old, joined the Company in October 1999 and
presently serves as Vice President of Engineering. From August 1998 to October
1999, he was Vice President of Marketing and Engineering at the internet
division of Powersoft Corporation, a subsidiary of Sybase, Inc. Mr. Bartow was
employed by Powersoft Corporation as Director of the Power Builder Product Line
from July 1996 to July 1998.

THOMAS THIMOT, 36 years old, joined the Company in September 2002 and
presently serves as Vice President Worldwide Sales and Services. From February
2001 to June 2002, he was President and Chief Operating Officer of Enigma, a
privately-held provider of support chain solutions. From November 1994 to
January 2001, he served in multiple sales and service leadership roles at Oracle
where he was most recently

11

area Vice President of Sales for the central U.S. Prior to his tenure at Oracle,
Mr. Thimot held management and consulting positions at Price Waterhouse and
Accenture.

STEPHANIE FERADAY, 43 years old, joined the Company in November 2002 and
presently serves as Vice President of Marketing. From October 2001 to November
2002, she ran her own strategy consulting firm for emerging technology
companies. From September 2000 to October 2001, she served as Executive Vice
President of Virtusa, Inc., a privately-held advanced technology services firm.
From July 1992 to 1997, she was general manager at Symantec, where she launched
their Networking Business Unit, which was acquired by Hewlett Packard in 1997.
At Hewlett Packard, she was responsible for developing HP OpenView's business
strategy until September 2000.

JAMES E. ROSEN, 49 years old, is the Company's Vice President of Corporate
and Business Development. Mr. Rosen joined the Company as Vice President
Marketing in April 1997. From 1995 to 1997, he was Director of Business
Alliances at BBN Planet Corporation, an internet services provider, now Genuity.

DEEPAK TANEJA, 42 years old, joined the Company in January 1998 and
presently serves as Chief Technology Officer. From January 1998 until November
2001, Mr. Taneja served the Company as Vice President Engineering and
Development. From 1996 to 1998, he was Director of Development for Switchboard,
Incorporated, an Internet directory services firm.

12

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is traded on the NASDAQ National Market under the symbol
"NETE." As of February 10, 2003, there were 190 holders of record of our common
stock, some of whom are holders in nominee name for the benefit of different
shareholders. The following table sets forth, for the periods indicated, the
range of high and low closing prices per share of our common stock, as reported
on the NASDAQ National Market during each of the quarters indicated.

13

ITEM 6. SELECTED FINANCIAL DATA

The selected financial data set forth below should be read in conjunction
with our consolidated financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
appearing elsewhere herein.

The following consolidated data includes the results of operations (from
the date of acquisition) of the Company's acquisition of DataChannel, Inc., on
December 14, 2001. See Note 3 to the Company's consolidated financial statements
for further information concerning this acquisition.

The Company has historically accounted for reimbursements received for
out-of-pocket expenses incurred as a reduction to the cost of service revenues
in the statement of operations to offset the costs incurred. The Company adopted
EITF 01-14 effective January 1, 2002 and reclassified approximately $1.6
million, $1.2 million and $200,000 into revenues from cost of revenues for the
years ended December 31, 2001, 2000 and 1999, respectively, to comply with this
guidance. There were no reimbursable out-of-pocket expenses in 1998.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION

The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with "Selected Financial
Data" appearing in Item 6 of this report and our consolidated financial
statements and related notes appearing under Item 8 of this report. This
discussion and analysis contains forward-looking statements that involve risks
and uncertainties. Our actual results may differ materially from those
anticipated in these forward-looking statements, as described under "Special
Note Regarding Forward-Looking Statements" above Item 1 of this report.

OVERVIEW

Netegrity is a leading provider of security software solutions for securing
access to corporate assets and for managing and securing the identities of users
accessing those assets. Netegrity's flexible, standards-based solutions are
designed to enable companies to conduct business securely with customers,
partners, suppliers and employees across the Internet, intranets and extranets.

Netegrity's products help companies ensure that only the people or business
processes that are entitled to access corporate resources and applications
access them. Netegrity's products enable customers to manage the user population
that needs to access those resources and applications. In addition, Netegrity's
products provide a more automated way to grant, modify or revoke account access
to applications and resources.

The Company is integrating its core products, SiteMinder, IdentityMinder,
and TransactionMinder, with its new provisioning technology into an identity and
access management solution to provide Web access control and management, user
administration, provisioning and de-provisioning of account access. Netegrity's
solution supports a broad range of technology environments, and aims to ensure
that companies optimize their existing information technology investments while
incorporating new technologies. The Company believes that through these
solutions, it helps companies to address some of the most critical requirements
for conducting business securely.

We also offer various levels of consulting and support services that enable
our customers to successfully implement our products in their organizations.

On December 14, 2001, the Company acquired all of the outstanding stock of
DataChannel, Inc., a Washington corporation and a provider of enterprise portal
solutions. As a result of the acquisition, DataChannel became a wholly-owned
subsidiary of the Company. The acquisition was accounted for using the purchase
method of accounting. Accordingly, the excess of the purchase price over the
fair value of the assumed tangible net liabilities of approximately $71.4
million was allocated to acquired technology, in-process research and
development, and goodwill in the amounts of approximately $11.0 million, $3.0
million and $57.4 million, respectively. Subsequently, during the quarter ended
September 30, 2002, the Company recorded a charge of $57.4 million classified as
an impairment charge in the accompanying consolidated statements of operations,
to write down the remaining goodwill to its implied fair value of zero.

15

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES

Netegrity's discussion and analysis of its financial condition and results
of operations are based on the Company's consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements as well as the
reported revenues and expenses during the reporting periods. On an ongoing
basis, management evaluates its estimates and judgments, including those related
to revenue recognition, accounts receivable reserves, marketable securities,
valuation of long-lived and intangible assets and goodwill, income taxes and
stock based compensation. Management bases its estimates on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying value of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions.

The significant accounting policies that management believes are most
critical to aid in fully understanding and evaluating our reported financial
results include the following:

REVENUE RECOGNITION

The Company's revenues have been primarily generated from the sale of
perpetual licenses for its proprietary SiteMinder and DMS (renamed
IdentityMinder in the fourth quarter of 2002) products and services. In the
future, the Company anticipates generating its revenue primarily from the sale
of perpetual licenses for SiteMinder, IdentityMinder, TransactionMinder and the
provisioning products and services, as well as from new product offerings. The
Company generates its services revenue from consulting and training services
performed for customers and from maintenance and support services. As described
below, significant management judgments and estimates must be made and used in
connection with the revenue recognized in any accounting period. Management
analyzes various factors, including a review of specific transactions,
historical experience, credit worthiness of customers and current market and
economic conditions. Changes in judgments based upon these factors could impact
the timing and amount of revenue and cost recognized.

We generally license our software products on a perpetual basis. We apply
the provisions of Statement of Position No. 97-2, "Software Revenue
Recognition," as amended by Statement of Position No. 98-9, "Software Revenue
Recognition, with Respect to Certain Transactions," to all transactions
involving the sale of software products. We recognize revenue from the sale of
software licenses when persuasive evidence of an arrangement exists, the product
has been delivered, the fees are fixed or determinable and collection of the
resulting receivable is reasonably assured. This policy is applicable to all
sales, including sales to resellers and end users. The Company does not offer a
right of return on its products.

For all sales, we use either a binding purchase order or signed license
agreement as evidence of an arrangement. For arrangements with multiple
obligations (for example, product, undelivered maintenance and support, and
training and consulting), we allocate revenue to each component of the
arrangement using the residual value method based on the fair value of the
undelivered elements. We defer revenue from the arrangement equivalent to the
fair value of the undelivered elements. Fair values for the ongoing maintenance
and support obligations are based upon separate sales of renewals of maintenance
contracts. Fair value of services, such as training or consulting, is based upon
separate sales of these services to other customers.

At the time of the transaction, we assess whether the fee associated with
the transaction is fixed or determinable based on the payment terms associated
with the transaction. If a significant portion of the fee is due after our
normal payment terms, which are generally 30 to 90 days from invoice date, we
account for the fee as not being fixed or determinable. In these cases, we
recognize revenue as the fees become due. In addition, we assess whether
collection is probable or not based on the credit worthiness of the customer.
Initial credit worthiness is assessed through Dun & Bradstreet or similar credit
rating agencies. Credit worthiness for follow-on transactions is assessed
through a review of the transaction history with the customer. We do not request
collateral from our customers. If we determine that collection of a fee is not
reasonably assured, we

16

defer the fee and recognize revenue at the time collection becomes reasonably
assured, which is generally upon receipt of cash.

Installation by Netegrity is not considered essential to the functionality
of our products as these services do not alter the product capabilities, do not
require specialized skills and may be performed by the customer or other
vendors. Revenues for maintenance and support are recognized ratably over the
term of the support period. Revenues from consulting and training services are
recognized as the services are performed.

ACCOUNTS RECEIVABLE RESERVES

Accounts receivable are reduced by an allowance for amounts that may become
uncollectible in the future. The estimated allowance for uncollectible amounts
is based primarily on a specific analysis of accounts in the receivable
portfolio and a general reserve based on the aging of receivables and historical
write-off experience. While management believes the allowance to be adequate, if
the financial condition of the Company's customers were to deteriorate,
resulting in impairment of their ability to make payments, additional allowances
may be required and could materially impact our financial position and results
of operations.

MARKETABLE SECURITIES

Investments, which primarily consist of debt securities, are accounted for
under Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" issued by the Financial
Accounting Standards Board (FASB). Pursuant to the provisions of SFAS No. 115,
the Company has classified its investment portfolio as "trading",
"available-for-sale" or "held to maturity". "Trading" securities are bought and
held principally for the purpose of selling them in the near term and are
recorded at fair value. Fair value is based upon quoted market prices.
Unrealized gains and losses on trading securities are included in the
determination of net earnings. "Available-for-sale" securities include debt
securities that are being held for an unspecified period of time and may be used
for liquidity or other corporate purposes and are recorded at fair value.
Unrealized gains and losses on available-for-sale securities are reported as a
separate component of comprehensive income (loss) in stockholders' equity. "Held
to maturity" securities are debt securities that the Company intends to hold to
maturity and are recorded at amortized cost. As of December 31, 2002, all of the
Company's investments have been classified as available-for-sale.

VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS AND GOODWILL

Effective January 1, 2002, the Company adopted the provisions of SFAS No.
142, "Goodwill and Other Intangible Assets". Under SFAS No. 142, goodwill is
required to be tested for impairment annually in lieu of being amortized.
Furthermore, goodwill is required to be tested for impairment on an interim
basis if an event or circumstance indicates that it is more likely than not that
an impairment loss has been incurred. An impairment loss shall be recognized to
the extent that the carrying amount of goodwill exceeds its implied fair value.
Impairment losses shall be recognized in operations.

The acquisition of DataChannel, Inc. on December 14, 2001 was accounted for
in accordance with the transition provisions of SFAS No. 141 and No. 142. The
Company adopted SFAS No. 142 during the first quarter of 2002 without a material
impact on its financial position or results of operations. Intangible assets
other than goodwill that are not deemed to have indefinite lives are amortized
over their useful lives. The Company chose to perform the annual impairment test
in the fourth quarter of each fiscal year. If the Company had accounted for
goodwill and other intangibles in accordance with SFAS 142 during the years
ended December 31, 2001 and 2000, the results of operations would not be
materially different from those previously reported.

During the third quarter of 2002, the Company determined that a significant
decline in our stock price as a result of underperformance relative to recent
and expected operating results and the overall adverse change in the business
climate had resulted in a triggering event that warranted an interim impairment
review in accordance with SFAS No. 142. As a result, the Company tested for
impairment based on a two-step approach. The first step was to test for
indicators of impairment of goodwill by comparing the fair value of the
17

Company with its carrying value. Since the Company operates as an
enterprise-wide reporting unit, it was determined that the market value of the
Company represented an approximation of its fair value as of September 30, 2002.
Furthermore, it was determined that the fair value of the Company as of
September 30, 2002 was less than its carrying value and therefore, an indication
of impairment existed. The second step was to measure the amount of the
impairment of goodwill. As a result of the second step, we determined that the
implied fair value of the goodwill determined using the market capitalization of
the Company on September 30, 2002 was lower than its carrying value and
therefore, goodwill had been impaired. The Company recorded a charge of $57.4
million in the third quarter of fiscal 2002, classified as impairment charge in
the accompanying consolidated statements of operations, to write down goodwill
to its implied fair value of zero.

The Company reviews the valuation of long-lived assets, including property
and equipment and capitalized software, under the provisions of SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" and SFAS No.
86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed". The Company is required to assess the recoverability of
long-lived assets and purchased software on an interim basis whenever events and
circumstances indicate that the carrying value may not be recoverable. Factors
we consider important that could trigger an interim impairment review include
the following:

- significant underperformance relative to expected historical or projected
future operating results;

- significant changes in the manner of our use of the acquired assets or
the strategy of our overall business;

- significant negative industry or economic trends;

- significant decline in our stock price for a sustained period; and

- our market capitalization relative to net book value.

In accordance with SFAS No. 144, when we determine that the carrying value
of applicable long-lived assets may not be recoverable based upon the existence
of one or more of the above indicators of impairment, we evaluate whether the
carrying amount of the asset exceeds the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of that asset. If such
a circumstance exists, we would measure an impairment loss to the extent the
carrying amount of the particular long-lived asset or group exceeds its fair
value. We would determine the fair value based on a projected discounted cash
flow method using a discount rate determined by our management to be
commensurate with the risk inherent in our current business model. In accordance
with SFAS No. 86, when we determine that the carrying value of certain other
types of long-lived assets may not be recoverable we evaluate whether the
unamortized cost exceeds the expected future net realizable value of the
products. If the unamortized costs exceed the expected future net realizable
value of the products, the excess amount is written off. Changes in judgments on
any of these factors could impact the value of the asset being evaluated.

The Company adopted SFAS No. 144 during the first quarter of fiscal year
2002 without a material impact on its financial position or results of
operations.

During the fourth quarter of 2002, the Company made the decision to remove
certain technology acquired in the DataChannel acquisition from its products. It
is expected that the first version of its products that do not include the
portal technology will be released in August 2003 and will be the only version
sold in the third quarter of 2003. As a result of this decision, the Company
determined that there has been a change in the estimated useful life of the
acquired technology and therefore it is now appropriate to be amortized over a
nine month period starting at the beginning of the fourth quarter (the period
during which the change in estimated life was identified). Prior to this change,
the acquired technology long-lived asset was being amortized on a straight line
basis over three years. Therefore, the quarterly amortization increased from
approximately $916,000 in each of the first three quarters of 2002 to
approximately $2.7 million in the fourth quarter of 2002. It is currently
expected that the acquired technology will be fully amortized at the end of the
second quarter of 2003.

18

ACCOUNTING FOR INCOME TAXES

The preparation of our consolidated financial statements require us to
estimate our income taxes in each of the jurisdictions in which we operate,
including those outside the United States which may be subject to certain risks
that ordinarily would not be expected in the United States. The income tax
accounting process involves our estimating our actual current exposure together
with assessing temporary differences resulting from differing treatment of
items, such as deferred revenue, for tax and accounting purposes. These
differences result in the recognition of deferred tax assets and liabilities.
The Company must then record a valuation allowance to reduce its deferred tax
assets to the amount that is more likely than not to be realized.

Significant management judgment is required in determining our provision
for income taxes, our deferred tax assets and liabilities and any valuation
allowance recorded against deferred tax assets. The Company has recorded a
valuation allowance of $75.9 million as of December 31, 2002, due to
uncertainties related to our ability to utilize some of our deferred tax assets,
primarily consisting of certain net operating losses carried forward before they
expire. The valuation allowance is based on our estimates of taxable income by
jurisdiction in which we operate and the period over which our deferred tax
assets will be recoverable. In the event that actual results differ from these
estimates or we adjust these estimates in future periods we may need to adjust
our valuation allowance, which could materially impact our financial position
and results of operations.

STOCK BASED COMPENSATION

Netegrity's stock option program is a broad-based, long-term retention
program that is intended to contribute to the success of the Company by
attracting, retaining and motivating talented employees and to align employee
interests with the interests of our existing stockholders. Stock options are
typically granted to employees when they first join the Company and typically on
an annual basis thereafter. Stock options are also granted when there is a
significant change in an employee's responsibilities and, occasionally, to
achieve equity within a peer group. The Compensation Committee of the Board of
Directors may, however, grant additional options to executive officers and key
employees for other reasons. Under the stock option plans, the participants may
be granted options to purchase shares of Netegrity stock and substantially all
of our employees and directors participate in at least one of our plans. Options
issued under these plans generally are granted at fair market value at the date
of grant, become exercisable at varying rates, generally over three or four
years and generally expire seven to ten years from the date of grant.

We recognize that stock options dilute existing shareholders and have
attempted to control the number of options granted while remaining competitive
with our compensation packages. At December 31, 2002, approximately 71% of our
stock options had exercise prices in excess of the closing market price on that
day.

All stock option grants are made after a review by, and with the approval
of, the Compensation Committee of the Board of Directors. All members of the
Compensation Committee are independent directors, as defined in the applicable
rules for issuers traded on The NASDAQ Stock Market. See the "Report of the
Compensation Committee" in our 2003 proxy statement for further information
regarding the policies and procedures of Netegrity and the Compensation
Committee regarding the grant of stock options.

The Company accounts for its stock option plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based compensation cost is
reflected in net income for these plans, as all options granted under these
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant. The following table illustrates the effect on net
income (loss) and earnings (loss) per share if the Company had applied the

19

fair value recognition provisions of FASB Statement No. 123, Accounting for
Stock Based Compensation, to stock based compensation.

20

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

Revenues. Total revenues decreased by $18.8 million or 21%, to $69.3
million in the year ended December 31, 2002, from $88.1 million in the year
ended December 31, 2001. The decrease was primarily due to decreases in software
license revenues for the SiteMinder product, partially offset by an increase in
service revenues and the impact of the acquisition of DataChannel in December
2001, which contributed approximately 6% of total revenues in 2002.
Additionally, revenues in both Europe and Asia have continued to decline
throughout 2002. Overall, we believe that revenue growth will be modest over the
next couple of quarters as constraints on technology spending continue. However,
we believe that the continued build-out of the leveraged model with our partners
and our focus on expanding our leadership position in the identity and access
management market with our new product offerings will help to drive new account
acquisition and increase deal size in the future.

Software license revenues decreased by $19.2 million or 35%, to $36.1
million in the year ended December 31, 2002, from $55.3 million in the year
ended December 31, 2001. The decrease is due to broad based economic weakness in
all geographic regions and reduced technology spending, which resulted in deals
being delayed or reduced in size. The number of new name deals decreased from
220 in 2001 to 163 in 2002 and the average size of new name deals decreased from
approximately $148,000 in 2001 to approximately $107,000 in 2002. The number of
follow-on deals also decreased from 204 in 2001 to 191 in 2002 and the average
size of follow-on deals decreased from approximately $204,000 in 2001 to
approximately $191,000 in 2002. The primary reason for the decrease in deal size
in 2002 was that customers bought licenses for a smaller number of users.

Services revenues increased by $1.0 million or 3%, to $30.2 million in the
year ended December 31, 2002, from $29.2 million in the year ended December 31,
2001. The increase is primarily attributable to an increase of $6.4 million in
2002 in maintenance and support revenue resulting from maintenance renewals by
our existing customer base and, to a lesser extent, the impact of the
acquisition of DataChannel in December 2001, which contributed approximately 9%
of services revenues in 2002. The increase was partially offset by a decrease of
$5.5 million in 2002 in consulting and training revenue as a result of (1) broad
based economic weakness and decreased technology spending that resulted in a
reduction in our customers' need for installation and integration services and
(2) the Company's decision to leverage its partners to provide integration
services directly to our customers. In connection with this leveraged model, the
cumulative number of third party consultants the Company had trained increased
from approximately 590 in 2001 to over 1,000 in 2002.

Other revenues decreased by $0.6 million or 17%, to $3.0 million in the
year ended December 31, 2002, from $3.6 million in the year ended December 31,
2001. Other revenues are derived from the Firewall legacy business. This
business has declined in 2002 and is not expected to have a significant impact
in future periods.

Cost of revenues. Total cost of revenues increased by $3.6 million or 19%,
to $23.0 million in the year ended December 31, 2002, from $19.4 million in the
year ended December 31, 2001. Our cost of revenues includes, among other things,
royalties due to third parties for technology included in our products,
amortization of acquired software, product fulfillment costs, salaries and
related expenses for our consulting, education and technical support services
organizations, and the associated cost of training facilities. Overall, we
believe that the cost of revenues, and particularly the cost of software
licenses, will increase over the short term primarily as a result of (1) the
cost of third party software products that enhance and enable additional
functionality in our products, (2) increased amortization of acquired technology
due to an acceleration of the amortization period of the capitalized software,
and (3) increased investment in our technical support organization.

Total cost of software license revenue, which includes non-cash cost of
software licenses, increased by $5.4 million or 257%, to $7.5 million in the
year ended December 31, 2002 from $2.1 million in the year ended December 31,
2001. This increase is primarily due to the amortization of purchased software
recorded in connection with the acquisition of DataChannel of approximately $5.4
million, partially offset by a decrease in cost of license software in 2002 that
is in relative proportion to the decrease in software license revenue. During
the fourth quarter of 2002, the Company accounted for a change in accounting
estimates to reflect a change in the useful economic life of certain technology
acquired in the DataChannel acquisition in December 2001. Prior to this change,
the acquired technology long-live asset was being amortized on a straight line
basis over three years. As a result of this change, beginning in the fourth
quarter of 2002, the acquired technology is

21

being amortized over its current estimated useful life of nine months starting
at the beginning of the quarter in which the change in estimated useful life was
identified. Therefore, the quarterly amortization increased from approximately
$916,000 in each of the first three quarters of 2002 to approximately $2.7
million in the fourth quarter of 2002. It is currently expected that the
acquired technology will be fully amortized by the end of the second quarter of
2003.

Cost of services decreased by $1.4 million or 9%, to $13.7 million in the
year ended December 31, 2002, from $15.1 million in the year ended December 31,
2001. The decrease is primarily due to the leveraging of our system integrator
partner relationships. The cumulative number of consultants we have trained at
our affiliated partners increased from approximately 590 in 2001 to over 1,000
in 2002. This leveraging allowed us to reduce the headcount in our professional
services organization by over 50% from December 31, 2001 to December 31, 2002.
This decrease was partially offset by increased investment in the technical
support organization during 2002 in order to enhance overall customer
satisfaction.

Cost of other revenues decreased by $0.4 million or 18%, to $1.8 million in
the year ended December 31, 2002 from $2.2 million in the year ended December
31, 2001. The decrease in cost of other revenues in 2002 is in relative
proportion to the decrease in revenue in 2002. Cost of other revenues is not
expected to have a significant impact in future periods.

Selling, general and administrative expenses. Selling, general and
administrative expenses increased by $0.8 million, or 1%, to $52.8 million in
the year ended December 31, 2002 from $52.0 million in the year ended December
31, 2001. Selling, general and administrative expenses consist primarily of
salaries and other related costs for selling, administrative and marketing
personnel, sales commissions, travel, legal and accounting services, public
relations, marketing materials, trade shows and certain facilities-related
expenses. The increase is primarily attributable to increased salaries and wages
associated with the DataChannel acquisition, increased legal expenses,
consulting and accounting fees, marketing program costs and insurance expenses
(primarily directors and officer's insurance premiums) and facility rent and
depreciation expense primarily related to office space and fixed assets acquired
from DataChannel. These increases were partially offset by reduced compensation
and bonus expenses and as a result of recording reduced bad debt expense in
2002. The reduction in bad debt expense was primarily due to improved credit
reviews, strong cash collections and fewer write-offs than anticipated. We will
continue to scrutinize all discretionary expenses and evaluate reductions in
non-strategic programs. In the immediate future, we anticipate selling, general
and administrative expenses will decrease slightly as we realize the economic
impact of the restructuring initiatives completed during 2002.

Research and development costs. Research and development costs increased
by $6.9 million or 44%, to $22.7 million in the year ended December 31, 2002,
from $15.8 million in the year ended December 31, 2001. Research and development
expenses consist primarily of personnel and outside contractor costs to support
product development. The increase was primarily due to the addition of
approximately 65 employees (including 40 from the acquisition of DataChannel in
the fourth quarter of 2001), the increased use of approximately 22 contractors
in India between 2001 and 2002 and other incremental expenses associated with
the research and development of our new product offerings which were released
for general availability during the fourth quarter of 2002. The increase was
partially offset by the reduction of approximately 35 employees during 2002,
primarily as a result of the Company's decision in the fourth quarter to stop
developing, marketing or selling its portal product. We believe that our
investment in research and development is required to remain competitive and
therefore, expect that research and development expenses may increase in future
periods due to the continued development of our products and services.

Impairment charges. Impairment charges recorded in the year ended December
31, 2002 were $57.4 million. There were no impairment charges recorded in the
year ended December 31, 2001. In the third quarter of 2002, management
determined that a significant decline in our stock price as a result of
underperformance relative to recent and expected operating results and the
overall adverse change in the business climate had resulted in a triggering
event that warranted an interim impairment review in accordance with SFAS No.
142. As a result, the Company tested for impairment based on a two-step
approach. The first step was to test for indicators of impairment of goodwill by
comparing the fair value of the Company with its

22

carrying value. Since the Company operates as an enterprise-wide reporting unit,
it was determined that the market value of the Company represents an
approximation of its fair value as of September 30, 2002. Furthermore, it was
determined that the fair value of the Company as of September 30, 2002 was less
than its carrying value and therefore, an indication of impairment existed. The
second step was to measure the amount of the impairment of goodwill. As a result
of the second step, we determined that the implied fair value of the goodwill
determined using the market capitalization of the Company on September 30, 2002
was lower than its carrying value and therefore, goodwill had been impaired. The
Company has recorded a charge of $57.4 million in the third quarter of fiscal
2002, classified as impairment charge in the consolidated statements of
operations, to write down goodwill to its implied fair value of zero.

Acquired in-process research and development. In the year ended December
31, 2001, we recorded non-recurring charges of $3.0 million or 3% of total
revenue for acquired in-process research and development resulting from the
acquisition of DataChannel. This amount was expensed on the date of acquisition
because the acquired technology had not yet reached technological feasibility
and had no future alternative uses. There can be no assurance that acquisitions
of businesses, products or technologies by us in the future will not result in
substantial charges for acquired in-process research and development. Such
charges may cause fluctuations in our quarterly and annual operating results.

Restructuring and other non-recurring expenses. In the year ended December
31, 2002, the Company, as a result of changing market dynamics and economic
factors, reduced its workforce through restructurings by approximately 138
positions, or 32%. The reductions in workforce were primarily in the development
group as well as in the sales and services departments, both domestically and
internationally. The majority of the reductions in the development group were
concurrent with the Company's decision to stop developing, marketing or selling
its portal product. As a result of the restructurings, the Company recorded
restructuring charges, which related primarily to severance payments and the
closing of several sales offices, of approximately $2.1 million during the year
ended December 31, 2002. Approximately $1.3 million was paid as of December 31,
2002. The remainder is expected to be paid prior to March 31, 2003.

During 2001, the Company reduced its workforce by approximately 8% in order
to reduce expenses and realign its cost structure. The reductions in workforce
were primarily in the sales, development and general and administrative groups.
The Company recorded a charge of $303,000 during the year ended December 31,
2001, for severance payments and the consolidation of excess facilities.
Additionally, the Company recorded non-recurring charges of $226,000 during the
year ended December 31, 2001 primarily attributable to a contribution to the
James Hayden Memorial Fund, established in the memory of the Company's former
Chief Financial Officer, and the acceleration of 15,300 of his options that
would have vested by December 31, 2001.

Other income. Other income decreased by approximately $2.4 million, or
50%, to $2.4 million in the year ended December 31, 2002, from $4.8 million in
the year ended December 31, 2001. This decrease was primarily attributable to
declines in the both the balances of and interest rates for cash and cash
equivalents and marketable securities.

Provision for income taxes. Provision for income taxes for the year ended
December 31, 2002 was approximately $70,000 compared with a provision of
approximately $607,000 for the year ended December 31, 2001. This decrease
relates to federal alternative minimum taxes, and larger state taxes and foreign
taxes in 2001. The provision for the year ended December 31, 2002 differs from
the expected tax rate due to nondeductible goodwill impairment and an increase
in the Company's valuation allowance. As of December 31, 2002, we had a deferred
tax asset related to net operating loss carryforwards of approximately $70.8
million, against which a full valuation allowance has been provided, available
for federal purposes to reduce future taxable income expiring on various dates
through 2022. Of the $177.0 million of net operating loss carryforwards, $98.2
million is attributable to tax deductions relating to stock options and $53.5
million is related to the acquisition of DataChannel. The benefit of the stock
option deductions included in the net operating loss carryforward will be
credited to additional paid-in capital when realized or recognized. The benefit
of the acquired net operating loss carryforward will first reduce non-current
intangible assets and the remaining will be recorded to reduce income tax
expense. The acquired loss carryforwards are subject to an annual limitation
under Internal Revenue Code Section 382 of approximately $3.1 million. Under the
Tax

23

Reform Act of 1986, the utilization of a corporation's net operating loss
carryforward is limited following a greater than 50% change in ownership over a
three-year period. As of December 31, 2002, no change in ownership has occurred,
although such a change can occur in a future period. If a change occurs, it
could substantially limit the utilization of the loss carryforwards of the
Company.

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

Revenues. Total revenues increased by $32.9 million, or 60%, to $88.1
million in the year ended December 31, 2001, from $55.2 million in the year
ended December 31, 2000.

Software license revenues increased by $17.6 million, or 47%, to $55.3
million in the year ended December 31, 2001, from $37.7 million in the year
ended December 31, 2000. This increase was due to the continued increase in
market awareness and the acceptance of the SiteMinder product, the expansion of
our sales organization and the leveraging of our strategic partner
relationships. For the year ended December 31, 2001, the Company added 220 new
SiteMinder software customers.

Service revenues increased by $15.3 million, or 110%, to $29.2 million in
the year ended December 31, 2001, from $13.9 million in the year ended December
31, 2000. This increase was attributable to maintenance and services
arrangements for a growing customer base coupled with increasing demand to
provide installation and integration services for our new customers.

Other revenues remained relatively unchanged at $3.7 million for the year
ended December 31, 2001 compared to the year ended December 31, 2000.

Cost of revenues. Total cost of revenues increased by $6.1 million or 46%,
to $19.4 million in the year ended December 31, 2001, from $13.3 million in the
year ended December 31, 2000.

Cost of software licenses decreased by $0.4 million, or 16%, to $2.1
million in the year ended December 31, 2001 from $2.5 million in the year ended
December 31, 2000. The decrease was primarily due to favorable revisions of
royalty contracts with third-party licensors slightly offset by increases in
amortization on acquired software.

Cost of services increased by $6.5 million or 76%, to $15.1 million in the
year ended December 31, 2001 from $8.6 million in the year ended December 31,
2000. The increase was primarily due to increases in payroll and related
personnel expenses for our consulting and training organizations as a result of
increased SiteMinder service revenues. During 2001, the Company opened a
technical service center in Kuala Lumpur, Malaysia.

Cost of other revenue remained relatively unchanged at $2.2 million in the
year ended December 31, 2001 compared to the year ended December 31, 2000.

Selling, general and administrative expenses. Selling, general and
administrative expenses increased by $15.9 million, or 44%, to $52.0 million in
the year ended December 31, 2001, from $36.1 million in the year ended December
31, 2000. This increase was attributable to several factors. Approximately $8.1
million (including $1.0 million related to the DataChannel acquisition), or 51%,
of this increase relates to increased payroll and related costs including the
addition of approximately 42 employees in the sales and marketing organization
of the Company during 2001 and the full-year effect of approximately 33
employees hired during the second half of fiscal year 2000 and $1.0 million, or
6%, in costs for additional administrative support personnel. Approximately $2.9
million, or 18%, of the increase relates to increased costs for promotional
initiatives including attendance at trade shows, advertising, public relations
and related printing and postage expenses. Approximately $2.0 million, or 13%,
of the increase relates to increases in rent, telephone and travel related
expenses primarily attributable to adding sales and marketing personnel and the
opening of additional sales offices in the Pacific Rim and Europe. Approximately
$1.5 million, or 9%, of the increase relates to increases in depreciation and
amortization connected with the Company's growth.

Research and development expenses. Research and development expenses
increased by $6.7 million, or 73%, to $15.8 million in the year ended December
31, 2001, from $9.1 million in the year ended December 31,

24

2000. Approximately $5.2 million, or 78%, of this increase was related to the
addition of approximately 70 employees (including 40 related to the DataChannel
acquisition) in the research and development organization during 2001 and the
full-year effect of approximately 19 employees hired during the second half of
fiscal year 2000 to support continued development of SiteMinder, DMS and other
related products. The remaining increase relates to increased general expenses
in support of the additional head count added to research and development for
the year ended December 31, 2001.

Acquired in-process research and development. In the year ended December
31, 2001, we recorded non-recurring charges of $3.0 million or 3% of total
revenue for acquired in-process research and development resulting from the
acquisition of DataChannel. This amount was expensed on the date of acquisition
because the acquired technology had not yet reached technological feasibility
and had no future alternative uses.

Restructuring and other non-recurring expenses. In the year ended December
31, 2001, we recorded other non-recurring charges of approximately $529,000 or
less than 1% of total revenue for expenses associated with the Company's
restructuring plan and other non-recurring expenses.

Other income. Other income decreased by approximately $1.3 million, or
21%, to $4.8 million in the year ended December 31, 2001, from $6.1 million in
the year ended December 31, 2000. This decrease was primarily attributable to
declines in interest rates for cash and cash equivalents and marketable
securities coupled with larger foreign currency translation losses during the
year ended December 31, 2001.

Provision for income taxes. Provision for income taxes for the year ended
December 31, 2001 was $607,000 compared with a provision of $75,000 for the year
ended December 31, 2000. This increase relates to federal alternative minimum
taxes, state taxes and foreign taxes. The provision for the year ended December
31, 2001 differs from the expected tax rates due to nondeductible acquired
in-process research and development expenses offset by a reduction in the
Company's valuation allowance. As of December 31, 2001, we had a net operating
loss carryforward of approximately $158.5 million, against which a full
valuation allowance has been provided, available for federal and state purposes
to reduce future taxable income expiring on various dates through 2020. Of the
$158.5 million of net operating loss carryforwards, $96.2 million is
attributable to tax deductions relating to stock options and $54.9 million is
related to the acquisition of DataChannel. The benefit of the stock option
deductions included in the net operating loss carryforward will be credited to
additional paid-in capital when realized. The benefit of the acquired net
operating loss carryforward will reduce goodwill when realized. Under the Tax
Reform Act of 1986, the utilization of a corporation's net operating loss
carryforward is limited following a greater than 50% change in ownership over a
three-year period. As a result of the DataChannel acquisition $54.9 million of
the net operating loss carryforwards are subject to an annual limitation of
approximately $3.1 million.

LIQUIDITY AND CAPITAL RESOURCES

Cash used in operating activities for the year ended December 31, 2002 was
$19.5 million, primarily due to a net loss of $86.3 million, a decrease in
accrued expenses (including approximately $1.9 million in payments made in
connection with the December 2001 acquisition of DataChannel), and a decrease in
accrued compensation and benefits, offset by non-cash charges for depreciation,
amortization and impairment of $67.5 million, a decrease in accounts receivable
and an increase in deferred revenue.

Cash provided by investing activities was $15.1 million for the year ended
December 31, 2002. Investing activities for the year consisted primarily of net
sales and maturities of marketable securities of approximately $181.5 million,
offset by the purchases of marketable securities of approximately $162.9
million, and the purchase of approximately $3.1 million of property and
equipment, primarily computer related, and leasehold improvements for the new
corporate headquarters.

Cash provided by financing activities in the year ended December 31, 2002
was approximately $776,000, primarily related to the exercise of stock options
and issuance of shares in connection with the employee stock purchase plan.

As of December 31, 2002, our primary financial commitments consisted of
obligations outstanding under operating leases as well as potential royalty
payments to certain system integrators.
25

The Company has commitments that expire at various times through 2010.
Operating leases shown below are primarily for facility costs for the Company's
corporate headquarters and world-wide sales offices. Other contractual
obligations primarily consist of minimum royalty fees payable by the Company in
connection with a software license and distribution agreement which the Company
entered into in January 2003.

Included in the operating lease commitments above is approximately $1.1
million related to excess facilities which have been accrued in purchase
accounting.

In April 2002, the Company entered into an agreement with a system
integrator to assist the Company in the development and launch of one of its
products. Under the terms of the agreement, for consideration of the system
integrator's time in assisting with the development of the product, the Company
agreed to promote the system integrator as an integrator of the developed
product. The Company's obligation under the agreement will be considered
satisfied once the system integrator receives consulting revenues totaling
approximately $3.9 million from the Company's customers, or by April 2004,
whichever occurs first. In the event that the Company recommends a competitor of
the system integrator to perform the integration work for a customer, the
Company could potentially owe a royalty to the system integrator based on the
net license fee. As of December 31, 2002 no royalties were due under this
agreement to the system integrator.

In August 2002, the Company entered into a five year non-cancelable
operating lease for an office building for its corporate headquarters. The
Company anticipates moving to the new facility in March 2003. In connection with
the lease agreement, the Company delivered an irrevocable, unconditional,
negotiable letter of credit in the amount of $760,000 as a security deposit. The
Company anticipates that it will spend approximately $1.0 million in leasehold
improvements to build out the new facility. As of December 31, 2002,
approximately $725,000 had been spent.

The Company has entered into indemnification agreements with the
non-employee members of its Board of Directors. Additionally, the Company has
entered into employment and executive retention agreements with certain
employees and executive officers which, among other things, include certain
severance and change of control provisions.

Under the terms of the Company's standard software license contracts, the
Company indemnifies its customers for the potential liability associated with
the infringement of other parties' technology based upon the Company's software
products. There is a possibility that the Company may be liable to its customers
in the event that there is infringement occurring. The Company is not aware of
any infringement related to the Company's technology, and therefore has not
accrued any amounts for the replacement or refund of any software products sold
through December 31, 2002.

In January 2003, the Company entered into a software license and
distribution agreement under which the Company was granted the right to
sublicense the use of a provisioning application software program. In addition,
the Company was granted certain rights to integrate or combine the software into
its existing products. In exchange for these rights, the Company has agreed to
pay a quarterly royalty fee based on a percentage of the net license fees
charged by Netegrity for the software. The minimum royalty fees due in the
first, second and third years of the agreement are approximately $1.0 million,
$1.4 million and $1.6 million. The initial term of this agreement is three
years.

26

As of December 31, 2002, we had cash and cash equivalents totaling $25.7
million, short-term marketable securities of approximately $48.4 million and
working capital of $64.7 million.

Any increase or decrease in our accounts receivable balance and accounts
receivable days outstanding (calculated as net accounts receivable divided by
revenue per day) will affect our cash flow from operations and liquidity. Our
accounts receivable and accounts receivable days outstanding may increase due to
changes in factors such as the timing of when sales are invoiced and length of
customer's payment cycle. We also record deferred maintenance billings as
accounts receivable, and the timing of these billings affects the accounts
receivable days outstanding. Historically, international and indirect customers
pay at a slower rate than domestic and direct customers. An increase in revenue
generated from international and indirect customers may increase our accounts
receivable days outstanding and accounts receivable balance. Due to the current
economic climate, we may observe an increase in the length of our customers'
payment cycle. To the extent that our accounts receivable balance increases, we
may incur increased bad debt expense and will be subject to greater general
credit risks.

In the past, we experienced a period of rapid growth which resulted in
significant increases in our operating expenses. More recently, due to economic
conditions beyond our control, we have made considerable efforts to reduce our
operating expenses through constrained spending and reductions in workforce. We
anticipate that we will realize a reduction in our operating expenses in the
immediate future as we experience the benefits of the reductions in force, the
changes in facilities and continued cost containment efforts. While we
anticipate that our operating expenses and capital expenditures will constitute
a material use of our cash resources, we may also utilize cash resources to fund
acquisitions or investments in businesses, technologies, products or services
that are complementary to our business. We believe that our existing cash and
cash equivalent balances together with our marketable securities will be
sufficient to meet our anticipated cash requirements for working capital and
capital expenditures for at least the next twelve months.

RELATED PARTY TRANSACTIONS

LOAN TO OFFICER

The consolidated balance sheets as of December 31, 2002 and 2001 include
$116,000 and $130,000, respectively, in loans to an officer of the Company
issued in connection with the exercise of stock options in 1996. The loan is
reflected as a reduction of stockholders' equity in the accompanying
consolidated balance sheets statements. The loan is payable upon demand and
bears interest at 7% per annum. The loan was originally represented by a secured
note however, in May 2002, the note was amended such that it became a full
recourse note. During the fourth quarter of 2002, the officer repaid
approximately $14,000 of the loan balance and repaid an advance made during 2002
of approximately $17,000.

MARKETING SERVICES

During the years ended December 31, 2002, 2001 and 2000, the Company paid
approximately $125,000, $68,000, and $15,000 respectively, to a company for
marketing services. The principal shareholder of such company, is the son-in-law
of one of the members of our Board of Directors. The Company has similar
arrangements with other marketing services firms and believes the arrangement
was entered into on substantially the same terms and conditions as its
arrangements with such other firms.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001, FASB issued SFAS No. 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that all
business combinations initiated after June 30, 2001, be accounted for using the
purchase method of accounting. SFAS No. 142 discusses how intangible assets that
are acquired should be accounted for in financial statements upon their
acquisition. In addition, under SFAS No. 142, goodwill and other indefinite
lived intangible assets are no longer amortized but are reviewed at least
annually for impairment (or more frequently if impairment indicators arise).
Separable intangible assets that are not deemed to have indefinite lives will
continue to be amortized over their useful lives.

27

The acquisition discussed in Note 2 to the consolidated financial
statements included in this report was accounted for in accordance with the
transition provisions of SFAS No. 141 and No. 142. In connection with the
adoption of SFAS No. 142, goodwill will be tested at least annually and on an
interim basis if an event or circumstance indicates that it is more likely than
not that an impairment loss has been incurred. We currently operate as a single
reporting unit and all of our goodwill is associated with the entire company. A
transitional impairment test was performed on January 1, 2002. See Note 2 to the
consolidated financial statements regarding the impairment of goodwill recorded
during the quarter ended September 30, 2002.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which is effective for the Company
on January 1, 2002. SFAS No. 144 addresses accounting and reporting of certain
long-lived assets, except goodwill, that are either held and used or disposed of
through sale or other means.

The Company adopted SFAS No's. 141, 142 and No. 144 during the first
quarter of 2002 without a material impact on its financial position or results
of operations. If the Company had accounted for goodwill and other intangibles
in accordance with SFAS 142 during the period ended September 30, 2001, the
results of operations would not be materially different from those previously
reported.

In November 2001, the Emerging Issues Task Force issued Topic No. D-103
(Topic D-103), subsequently recharacterized as EITF 01-14, relating to the
accounting for reimbursements received from customers for the Company's
out-of-pocket expenses for the delivery of services. In accordance with EITF
01-14, reimbursements received for out-of-pocket expenses incurred should be
characterized as revenue in the statement of operations. The Company has
historically accounted for reimbursements received for out-of-pocket expenses
incurred as a reduction to the cost of service revenues in the statement of
operations to offset the costs incurred. The Company adopted EITF 01-14
effective January 1, 2002 and reclassified approximately $1.6 million, $1.2
million and $200,000 into revenues from cost of revenues for the years ended
December 31, 2001, 2000 and 1999, respectively, to comply with this guidance.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit of Disposal Activities". SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
This statement is effective for restructuring activities commencing after
December 31, 2002. We do not believe that the impact of adopting SFAS No. 146
will have a material impact on the consolidated financial statements.

In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others", which clarifies disclosure and
recognition/measurement requirements related to certain guarantees. The
disclosure requirements are effective for financial statements issued after
December 15, 2002 and the recognition/measurement requirements are effective on
a prospective basis for guarantees issued or modified after December 31, 2002.
The application of the requirements of FIN 45 did not have a material impact on
the Company's financial position or results of operations.

In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation -- Transition and Disclosure". SFAS No. 148 amends SFAS No. 123, to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The transition guidance and
annual disclosure provisions of SFAS No. 148 are effective for fiscal years
ending after December 15, 2002. The interim disclosure provisions are effective
for financial reports containing financial statements for interim periods
beginning after December 15, 2002. As the Company did not make a voluntary
change to the fair value based method of accounting for stock-based employee
compensation in 2002, the adoption of SFAS No. 148 did not have a material
impact on the Company's financial position and results of operations.

28

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

The Private Securities Litigation Reform Act of 1995 contains certain safe
harbors regarding forward-looking statements. In that context, the discussion in
this item and other portions of this report contain forward-looking statements
that involve certain degrees of risk and uncertainty, including statements
relating to our business, liquidity and capital resources. Except for the
historical information contained herein, the matters discussed in this section
are such forward-looking statements that involve risks and uncertainties,
including:

WE HAVE INCURRED SUBSTANTIAL LOSSES AND MAY NOT BE PROFITABLE IN THE FUTURE.

In recent years, we have incurred substantial operating losses. We cannot
predict if we will achieve profitability for any substantial period of time. To
achieve and sustain operating profitability on a quarterly and annual basis, we
will need to increase our revenues significantly, particularly our license
revenues. Failure to maintain levels of profitability as expected by investors
may adversely affect the market price of our common stock. In the year ended
December 31, 2002, we had a net loss of $86.3 million and an accumulated deficit
of approximately $106.7 million as of December 31, 2002.

OUR QUARTERLY RESULTS MAY FLUCTUATE WIDELY.

Our quarterly revenues and operating results are difficult to predict and
may continue to fluctuate significantly from quarter to quarter for several
reasons, including, but not limited to, the following:

- customers choosing to delay their purchase commitments or purchase in
smaller than expected quantities due to a general slowdown in the economy
or in anticipation of the introduction of new products by us or our
competitors;

- market acceptance of our SiteMinder, IdentityMinder, TransactionMinder,
provisioning products and related products;

- our success in obtaining follow-on sales to existing customers;

- the long sales and deployment cycle of our products;

- our ability to hire and retain personnel, particularly in development,
services and sales and marketing;

- the loss of or changes in key management personnel;

- the timing of the release of new versions of SiteMinder, IdentityMinder,
TransactionMinder, provisioning products or other products;

- pricing pressures that result in increased discounts;

- the development of our direct and indirect sales channels; and

- integration issues with acquired technology.

In addition, because our revenues from services are largely correlated with
our software revenues, a decline in software revenues could also cause a decline
in our services revenues in the same quarter or in subsequent quarters. Other
factors, many of which are outside our control, could also cause variations in
our quarterly revenues and operating results.

Most of our expenses, such as employee compensation and rent, are
relatively fixed. Moreover, our expense levels are based, in part, on our
expectations regarding future revenue increases. As a result, any shortfall in
revenues in relation to our expectations could cause significant changes in our
operating results from quarter to quarter and could result in future losses.

29

OUR SUCCESS WILL DEPEND ON OUR ABILITY TO MARKET OUR PRODUCTS AND RELATED
SERVICES SUCCESSFULLY.

To date, we have derived the majority of our total revenues from the sale
of SiteMinder software licenses and related products and services. Commercial
deployments of SiteMinder products have grown to include not only large intranet
and multi-million user business-to-consumer deployments, but
business-to-business and e-business applications as well. Broad market
acceptance of our products will depend on the development of a market for
identity and access management, usage of our products for software
business-to-consumer, business-to-business and e-business applications and
customer demand for the specific functionality of our products. Market
acceptance for our products, and customer demand for the services they provide,
may not develop.

In addition, we have recently released several new product offerings. If we
fail to gain market acceptance for these products, it could have a material
adverse effect on our business, operating results and financial position.

Our ability to develop the market for our products depends in part on our
ability to provide support services on a 24 hour per day, seven-day per week
basis. Any damage or disruptions to our service centers, including the service
center in Malaysia, whether as a result of terrorism or some other cause, could
seriously impact our ability to provide the necessary service to our customers
and fulfill our service contracts.

OUR SUCCESS IS DEPENDENT ON OUR ABILITY TO ENHANCE OUR PRODUCT LINES AND DEVELOP
NEW PRODUCTS.

We believe our success is dependent, in large part, on our ability to
enhance and broaden our product lines to meet the evolving needs of both the
business-to-business and business-to-consumer markets. We may be unable to
respond effectively to technological changes or new industry standards or
developments. Although we recently released two new products on time, product
development cycles are unpredictable and in the past, we have delayed the
introduction of several new product versions due to delays in development of
these versions. In the future, we could be adversely affected and be at a
competitive disadvantage if we incur significant delays or are unsuccessful in
enhancing our product lines or developing new products, or if any of our
enhancements or new products do not gain market acceptance.

OUR PERFORMANCE DEPENDS ON OUR ABILITY TO WIN BUSINESS AND OBTAIN FOLLOW-ON
SALES IN PROFITABLE SEGMENTS.

Customers typically place small initial orders for a Netegrity product
installation to allow them to evaluate its performance. A key element of our
strategy is to pursue more significant follow-on sales after these initial
installations. Our financial performance depends on successful initial
deployments of our products that, in turn, lead to follow-on sales. If the
initial deployments of our products are not successful, we may be unable to
obtain follow-on sales. In addition, even if initial deployments are successful,
there can be no assurances that customers will choose to make follow-on
purchases, which could have a material adverse effect on our ability to generate
revenues.

WE FACE SIGNIFICANT COMPETITION FROM OTHER TECHNOLOGY COMPANIES AND WE MAY NOT
BE ABLE TO COMPETE EFFECTIVELY.

The market for identity and access management is highly competitive. We
expect the level of competition to increase as a result of the anticipated
growth of the identity and access management markets. Our primary competitor in
the identity and access management market is the Tivoli Division of IBM. We also
compete against traditional security companies such as Oblix, RSA, Novell,
Waveset and Open Network Technology. In addition, a number of other security and
software companies have indicated that they plan to offer products that may
compete with our identity and access management solution in the future.
Competition may also develop as the market matures and other companies begin to
offer similar products, and as our product offerings expand to other segments of
the marketplace. We also face competition from Web development professional
services organizations. We expect that additional competitors will emerge in the
future. Current

30

and potential competitors have established, or may in the future establish,
cooperative selling relationships with third parties to increase the
distribution of their products to the marketplace. Accordingly, it is possible
that new competitors may emerge and acquire significant market share. It is
possible that current and potential competitors may attempt to hire our
employees and although we have non-compete agreements in place with most of our
employees they may or may not be enforceable. It is possible that new
competitors or alliances may emerge and rapidly acquire significant market
share. Today, many of our competitors have shorter operating histories, and
fewer financial and technical resources than we have. In addition, these smaller
competitors have smaller customer bases. Some of our other competitors, however,
are larger companies who have large financial resources, well-established
development and support teams, and large customer bases. These larger
competitors may initiate pricing policies that would make it more difficult for
us to maintain our competitive position against these companies. It is also
possible that current and potential competitors may be able to respond more
quickly to new or emerging technologies or customer requirements, resulting in
increased market share. If, in the future, a competitor chooses to bundle a
competing point product with other applications within a suite, the demand for
our products might be substantially reduced. Because of these factors, many of
which are out of our control, we may be unable to maintain or enhance our
competitive position against current and future competitors.

REGULATIONS OR CONSUMER CONCERNS REGARDING THE USE OF "COOKIES" ON THE INTERNET
COULD REDUCE THE EFFECTIVENESS OF OUR SOFTWARE PRODUCTS.

Certain of our products use cookies to support their single sign-on
functionality. A cookie is information keyed to a specific user that is stored
on the hard drive of the user's computer, typically without the user's
knowledge. Cookies are generally removable by the user, and can be refused by
the user at the point at which the information would be stored on the user's
hard drive. A number of governmental bodies and commentators in the United
States and abroad have urged passage of laws limiting or abolishing the use of
cookies. The passage of laws limiting or abolishing the use of cookies, or the
widespread deletion or refusal of cookies by Web site users, could reduce or
eliminate the effectiveness of our single sign-on functionality and could reduce
market demand for our products.

WE MAY BE UNABLE TO HIRE AND RETAIN SKILLED PERSONNEL.

Qualified personnel are in great demand throughout the software industry.
Our success depends, in large part, upon our ability to attract, train, motivate
and retain highly skilled employees, particularly software engineers,
professional services personnel, sales and marketing personnel and other senior
personnel. Our failure to attract and retain the highly trained technical
personnel that are integral to our product development, professional services
and direct sales teams may limit the rate at which we can generate sales and
develop new products or product enhancements. A change in key management,
particularly in the sales and product development departments, such as the
recent appointment of Thomas Thimot, Vice President of Worldwide Sales and
Services, could result in transition and attrition in the affected department.
This could have a material adverse effect on our business, operating results and
financial condition.

OUR SUCCESS DEPENDS ON OUR ABILITY TO OPTIMIZE OUR DIRECT SALES AND INDIRECT
DISTRIBUTION CHANNELS.

To increase our revenues, we must optimize our direct sales force and
continue to enhance relationships with systems integrators and technology
partners to increase the leverage of our partner channel. There is intense
competition for sales personnel in our business, and we cannot be sure that we
will be successful in attracting, integrating, motivating and retaining sales
personnel. In addition, we must effectively leverage our relationships with our
strategic partners and other third-party system integrators, vendors of
Internet-related systems and application software and resellers. Our existing,
or future, channel partners may choose to devote greater resources to marketing
and supporting the products of other companies or conflicts may develop among
our sales force and channel partners. If we fail to develop these relationships
or these relationships do not result in successful partnerships, our revenue
could be adversely affected.

31

WE RELY ON THIRD PARTY TECHNOLOGY TO ENHANCE OUR PRODUCTS.

We incorporate into our products software licensed from third-party
software companies that enhances, enables or provides functionality for our
products. Third-party software may not continue to be available on commercially
reasonable terms or with acceptable levels of support or functionality, or at
all. Failure to maintain those license arrangements, failure of the third-party
vendors to provide updates, modifications or future versions of their software
or defects and errors in or infringement claims against those third-party
products could delay or impair our ability to develop and sell our products. In
addition, often these third party software companies require prepayment of
royalties on their products and in the past, we have had to write-off certain of
these prepayments when there has been an adverse change in forecasted sales
volume.

OUR FAILURE TO EXPAND OUR RELATIONSHIP WITH GLOBAL SYSTEMS INTEGRATORS COULD
LIMIT OUR ABILITY TO INCREASE OUR PRODUCT SALES.

Our professional services organization and our relationship with global
systems integrators provide critical support to our customers' installation and
deployment of our products. If we fail to adequately develop our relationship
with global systems integrators, our ability to increase products sales may be
limited. In addition, if we or our partners cannot adequately support product
installations, our customers may not be able to use our products which could
harm our reputation and hurt our business.

OUR LENGTHY SALES CYCLE MAKES IT DIFFICULT TO PREDICT OUR QUARTERLY OPERATING
RESULTS.

We have a long sales cycle because we generally need to educate potential
customers regarding the use and benefits of our products. The length of our
sales cycle varies depending on the size and type and complexity of the customer
contemplating a purchase, whether we have conducted business with a potential
customer in the past and the size of the deal. In addition, these potential
customers frequently need to obtain approvals from multiple decision makers
prior to making purchase decisions, a process that has been further lengthened
as a result of the current market conditions surrounding technology spending.
Our long sales cycle, which can range from several weeks to several months or
more, makes it difficult to predict the quarter in which sales will occur.
Delays in sales could cause significant variability in our revenues and
operating results for any particular quarterly period.

OUR FAILURE TO EFFECTIVELY MANAGE CHANGES IN THE BUSINESS ENVIRONMENT IN WHICH
WE OPERATE COULD HURT OUR BUSINESS.

Our failure to effectively manage changes in the business environment in
which we operate could have a material adverse effect on the quality of our
products, our ability to retain key personnel and our business, operating
results and financial condition. Historically, we experienced a period of rapid
growth that placed a significant strain on all of our resources. More recently,
based upon economic factors beyond our control, we implemented a reduction in
workforce of 48 positions during April 2002 and 90 positions during October
2002. We may experience similar changes in the future. To effectively manage
changes in the business environment in which we operate we must maintain and
enhance our financial and accounting systems and controls, maintain our ability
to retain key personnel, integrate new personnel and manage operations.

IF WE LOSE THE SERVICES OF BARRY BYCOFF OR ANY OTHER MEMBER OF OUR MANAGEMENT
TEAM, OUR BUSINESS COULD SUFFER.

Our future success depends, to a significant degree, on the skill,
experience and efforts of Barry Bycoff, our chief executive officer, and the
rest of our management team. A change in our management team or the inability of
our officers and key employees to work effectively as a team could have a
material adverse effect on our business, operating results and financial
condition.

32

AS WE CONTINUE TO OPERATE IN INTERNATIONAL MARKETS, WE WILL FACE CONTINUED RISKS
TO OUR SUCCESS.

At the current time, we have no plans to significantly expand beyond our
current international operations. However, if in the future we decide to expand
our international operations, the expansion will require additional resources
and management attention, and will subject us to increased regulatory, economic
and political risks. We have limited experience in international markets and we
cannot be sure that our continued expansion into global markets will be
successful. In addition, we will face increased risks in conducting business
internationally. These risks could reduce demand for our products and services,
increase the prices at which we can sell our products and services, or otherwise
have an adverse effect on our operating results. Among the risks we believe are
most likely to affect us are:

- longer decision making cycles;

- longer payment cycles and problems in collecting accounts receivable;

- adverse changes in trade and tax regulations, including restrictions on
the import and export of sensitive technologies, such as encryption
technologies, that we use or may wish to use in our software products;

- the absence or significant lack of legal protection for intellectual
property rights;

- selling under contracts governed by local law;

- difficulties in managing an organization spread over several countries,
including complications arising from cultural, language and time
differences that may lengthen sales and implementation cycles;

- currency risks, including fluctuations in exchange rates;

- political and economic instability;

- localization of technology;

- increased use of contractors on a global basis for both professional
services and development, that may result in increased cost of services
and/or less direct control; and

- disruption caused by terrorist activities in various regions around the
world.

OUR SUCCESS DEPENDS ON OUR ABILITY TO PROTECT OUR PROPRIETARY RIGHTS.

Our success depends to a significant degree upon the protection of our
software and other proprietary technology. The unauthorized reproduction or
other misappropriation of our proprietary technology could enable third parties
to benefit from our technology without paying us for it. This could have a
material adverse effect on our business, operating results and financial
condition. We depend upon a combination of patent, trademark, trade secret and
copyright laws, license agreements and non-disclosure and other contractual
provisions to protect proprietary and distribution rights in our products. In
addition, we attempt to protect our proprietary information and the proprietary
information of our vendors and partners through confidentiality and/or license
agreements with our employees and others. Although we have taken steps to
protect our proprietary technology, they may be inadequate and the unauthorized
use of our source code could have an adverse effect on our business. Existing
trade secret, copyright and trademark laws offer only limited protection.
Moreover, the laws of other countries in which we market our products may afford
little or no effective protection of our intellectual property. If we resort to
legal proceedings to enforce our intellectual property rights, the proceedings
could be burdensome and expensive, even if we were to prevail.

CLAIMS BY OTHER COMPANIES THAT WE INFRINGE THEIR PROPRIETARY TECHNOLOGY COULD
HURT OUR FINANCIAL CONDITION.

If we discover that any of our products or third party products embedded in
our products violates third-party proprietary rights, there can be no assurance
that we would be able to reengineer our product or to obtain a license on
commercially reasonable terms to continue offering the product without
substantial reengineering. We do not conduct comprehensive patent searches to
determine whether the technology used in our products

33

infringes patents held by third parties. In addition, product development is
inherently uncertain in a rapidly evolving technology environment in which there
may be numerous patent applications pending for similar technologies, many of
which are confidential when filed. Any claim of infringement, even if invalid,
could cause us to incur substantial costs defending against the claim and could
distract our management from our business. Furthermore, a party making such a
claim could secure a judgment that requires us to pay substantial damages. A
judgment could also include an injunction or other court order that could
prevent us from selling our products. Any of these events could have a material
adverse effect on our business, operating results and financial condition.

OUR BUSINESS COULD BE ADVERSELY AFFECTED IF OUR PRODUCTS CONTAIN ERRORS.

Software products as complex as ours may contain undetected errors or
"bugs" that result in product failures. The occurrence of errors could result in
loss of, or delay in, revenues, loss of market share, failure to achieve market
acceptance, diversion of development resources, injury to our reputation, or
damage to our efforts to build brand awareness, any of which could have a
material adverse effect on our business, operating results and financial
condition.

WE COULD INCUR SUBSTANTIAL COSTS RESULTING FROM PRODUCT LIABILITY CLAIMS
RELATING TO OUR CUSTOMERS' USE OF OUR PRODUCTS.

Many of the e-business applications supported by our products are critical
to the operations of our customers' businesses. Any failure in a customer's Web
site or application caused or allegedly caused by our products could result in a
claim for substantial damages against us, regardless of our responsibility for
the failure. Although we maintain general liability insurance, including
coverage for errors and omissions, and contractually attempt to limit liability,
we cannot be sure that our existing coverage will continue to be available on
reasonable terms or will be available in amounts sufficient to cover one or more
large claims, or that the insurer will not disclaim coverage as to any future
claim.

INCREASED UTILIZATION AND COSTS OF OUR TECHNICAL SUPPORT SERVICES MAY ADVERSELY
AFFECT OUR FINANCIAL RESULTS.

Our products involve very complex technology and the failure or inability
of our technical support staff to meet customer expectations in a timely manner
or customer dissatisfaction with our product functionality or performance could
result in loss of revenues, loss of market share, failure to achieve market
acceptance, injury to our reputation, liability for service or warranty costs
and claims and other increased costs. We may be unable to respond to
fluctuations in customer demand for support services as well as resolve customer
issues in a manner that is timely and satisfactory to them. We also may be
unable to modify the format of our support services to compete with changes in
support services provided by competitors.

OUR ACQUISITION OF OTHER COMPANIES MAY INCREASE THE RISKS WE FACE.

In the future, we may pursue acquisitions to obtain complementary products,
services and technologies. Any such acquisition may not produce the revenues,
earnings or business synergies that we anticipated, and an acquired product,
service or technology might not perform as we expected. In pursuing any
acquisition, our management could spend a significant amount of time and effort
in identifying and completing the acquisition. If we complete an acquisition, we
would probably have to devote a significant amount of management resources to
integrate the acquired business with our existing business. To pay for an
acquisition, we might use our stock or cash. Alternatively, we might borrow
money from a bank or other lender. If we use our stock, our stockholders would
experience dilution of their ownership interests. If we use cash or debt
financing, our financial liquidity will be reduced.

34

THE MARKET PRICE OF OUR COMMON STOCK HAS BEEN AND MAY CONTINUE TO BE VOLATILE.

Our stock price, like that of other technology companies, has been
extremely volatile. The announcement of new products, services, technological
innovations, customers or distribution partners by us or our competitors,
quarterly variations in our operating results, changes in revenues or earnings
estimates by securities analysts, speculation in the press or investment
community and overall economic conditions are among the factors affecting our
stock price.

In addition, the stock market in general and the market prices for
technology companies in particular, have experienced extreme volatility that
often has been unrelated to the operating performance of these companies. These
broad market and industry fluctuations may adversely affect the market price of
our common stock, regardless of our operating performance. Recently, when the
market price of a stock has been volatile, holders of that stock have often
instituted securities class action litigation against the company that issued
the stock. If any of our stockholders brought a lawsuit against us, we could
incur substantial costs defending the lawsuit. The lawsuit could also divert the
time and attention of our management.

The general economic uncertainties in the United States and abroad continue
to cause significant volatility in the stock markets. The continued threat of
terrorism in the United States and abroad, the ongoing military action and
heightened security measures undertaken in response to that threat can be
expected to cause continued volatility in securities markets. In addition,
foreign political unrest may continue to adversely affect the economy.

WE MAY LOSE MONEY ON FIXED-PRICE CONSULTING CONTRACTS.

In the future, an increased portion of our services revenues may be derived
from fixed-price contracts. We work with complex technologies in compressed time
frames and it can be difficult to judge the time and resources necessary to
complete a project. If we miscalculate the resources or time we need to complete
work under fixed-price contracts, our operating results could be materially
harmed. Currently, the Company does not have any outstanding fixed price
consulting contracts.

CERTAIN PROVISIONS OF OUR CHARTER AND OF DELAWARE LAW MAKE A TAKEOVER OF OUR
COMPANY MORE DIFFICULT.

Our corporate documents and Delaware law contain provisions that might
enable our management to resist a takeover of our company. These provisions
might discourage, delay or prevent a change in the control of Netegrity or a
change in our management. These provisions could also discourage proxy contests
and make it more difficult for you and other stockholders to elect directors and
take other corporate actions. The existence of these provisions could limit the
price that investors might be willing to pay in the future for shares of our
common stock. Additionally, the Company has entered into employment and
executive retention agreements with certain employees and executive officers
which, among other things, include certain severance and change of control
provisions.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

FOREIGN CURRENCY

In the year ended December 31, 2002, the Company generated approximately
19% of its revenues outside of North America. International sales are typically
denominated in U.S. dollars. Our foreign subsidiaries incur most of their
expenses in the local currency. Accordingly, all foreign subsidiaries use the
local currency as their functional currency. Translation gains and losses
(amounting to a loss of approximately $27,000 as of December 31, 2002) are
deferred and accumulated as a separate component of stockholders' equity
(accumulated other comprehensive income (loss)). Net gains and losses resulting
from foreign exchange transactions, amounting to a gain of approximately $16,000
for the year ended December 31, 2002, are included in other income, net in the
accompanying consolidated statements of operations. A 10% change in

35

the valuation of the functional currencies relative to the U.S. dollar as of
December 31, 2002 would not have a material impact on the Company's results of
operations for the year ended December 31, 2002.

INTEREST RATES

We invest our cash in a variety of financial instruments including floating
rate bonds, municipal bonds, asset-backed securities and money market
instruments in accordance with an investment policy approved by the Company's
Board of Directors. These investments are denominated in U.S. dollars. Cash
balances in foreign currencies overseas are operating balances and are only
invested in short-term deposits of the local operating bank.

Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. However, due to the
conservative nature of our investment portfolio, a sudden change in interest
rates would not have a material effect on the value of the portfolio. We
estimate that if the average yield of our investments had decreased by 100 basis
points, our interest income for the year ended December 31, 2002 would have
decreased by less than $1.0 million. This estimate assumes that the decrease
occurred on the first day of the year and reduced the yield of each investment
instrument by 100 basis points. The same 100 basis point change in interest
rates would not have a material impact on the fair value of the investment
portfolio. The impact on our future interest income and future changes in
investment yields will depend largely on the gross amount of our investment
portfolio.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Company's consolidated financial statements and the related auditors'
reports are presented in the following pages. The consolidated financial
statements filed in this Item 8 are as follows:

Reports of Independent Accountants

Consolidated Balance Sheets -- December 31, 2002 and 2001

Consolidated Statements of Operations for the years ended December 31,
2002, 2001 and 2000

Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2002, 2001 and 2000

Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000

Notes to Consolidated Financial Statements

36

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
and Stockholders of Netegrity, Inc.:

We have audited the accompanying consolidated balance sheet of Netegrity,
Inc. and subsidiaries as of December 31, 2002, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. The 2001 consolidated
financial statements were audited by other auditors who have ceased operations.
Those auditors expressed an unqualified opinion on those consolidated financial
statements, before the restatement described in Note 1 to the consolidated
financial statements, in their report dated January 30, 2002.

We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Netegrity, Inc. and
subsidiaries as of December 31, 2002, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.

As discussed above, the consolidated financial statements of Netegrity,
Inc. and subsidiaries as of December 31, 2001 and for the year then ended were
audited by other auditors who have ceased operations. As described in Note 1,
those financial statements have been restated. In our opinion, the adjustments
are appropriate and have been properly applied. However, we were not engaged to
audit, review, or apply any procedures to the 2001 consolidated financial
statements of Netegrity, Inc. and subsidiaries other than respect to such
adjustments and, accordingly, we do not express an opinion or any form of
assurance on the 2001 consolidated financial statements taken as a whole.

KPMG LLP

Boston, Massachusetts
January 29, 2003

37

THE FOLLOWING REPORT OF ARTHUR ANDERSEN LLP (ANDERSEN) IS A COPY OF THE REPORT
PREVIOUSLY ISSUED BY ANDERSEN ON JANUARY 30, 2002. THE REPORT OF ANDERSEN IS
INCLUDED IN THIS ANNUAL REPORT ON FORM 10-K PURSUANT TO RULE 2-02(E) OF
REGULATION S-X. AFTER REASONABLE EFFORTS THE COMPANY HAS NOT BEEN ABLE TO OBTAIN
A REISSUED REPORT FROM ANDERSEN. ANDERSEN HAS NOT CONSENTED TO THE INCLUSION OF
ITS REPORT IN THIS ANNUAL REPORT ON FORM 10-K. BECAUSE ANDERSEN HAS NOT
CONSENTED TO THE INCLUSION OF ITS REPORT IN THIS ANNUAL REPORT, IT MAY BE
DIFFICULT TO SEEK REMEDIES AGAINST ANDERSEN AND THE ABILITY TO SEEK RELIEF
AGAINST ANDERSEN MAY BE IMPAIRED.

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
and Stockholders of Netegrity, Inc.:

We have audited the accompanying consolidated balance sheet of Netegrity,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 2001, and the
related consolidated statement of operations, stockholders' equity and cash
flows for the year then ended. 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 audit.

We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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 audit provides a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Netegrity, Inc. and
subsidiaries as of December 31, 2001, and the results of their operations and
their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States.

ARTHUR ANDERSEN LLP

Boston, Massachusetts
January 30, 2002

38

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors
and Stockholders of Netegrity, Inc.:

In our opinion, the consolidated statements of operations, stockholders'
equity and cash flows for the year ended December 31, 2000 present fairly, in
all material respects, the results of operations and cash flows of Netegrity,
Inc. and its subsidiaries for the year ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States of America.
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 audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

PRICEWATERHOUSECOOPERS LLP

Boston, Massachusetts
January 25, 2001

39

NETEGRITY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of the consolidated financial
statements.

40

NETEGRITY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of the consolidated financial
statements.

41

NETEGRITY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

The accompanying notes are an integral part of the consolidated financial
statements.
42

NETEGRITY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of the consolidated financial
statements.
44

NETEGRITY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: NATURE OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

Netegrity, Inc. and its wholly-owned subsidiaries (Netegrity or the
Company) is a leading provider of security software solutions for securing
access to corporate assets and for managing and securing the identities of users
accessing those assets. Netegrity's flexible, standards-based solutions are
designed to enable companies to conduct business securely with customers,
partners, suppliers and employees across the Internet, intranets and extranets.

Netegrity's products help customers ensure that only the people or business
processes that are entitled to access corporate resources and applications
access them. Netegrity's products enable customers to manage the population that
needs to access those resources and applications. In addition, Netegrity's
products provide a more automated way to grant, modify or revoke account access
to applications and resources.

The Company is integrating its core products, SiteMinder, IdentityMinder,
and TransactionMinder, with its new provisioning technology into an identity and
access management solution to provide Web access control and management, user
administration, provisioning and de-provisioning of account access. Netegrity's
solution supports a broad range of technology environments, and aims to ensure
that companies optimize their existing information technology investments while
incorporating new technologies. The Company believes that through these
solutions it helps companies to address some of the most critical requirements
for conducting business securely.

We also offer various levels of consulting and support services that enable
our customers to successfully implement our products in their organizations.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements of the Company also include the
accounts and operations of its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.

REVENUE RECOGNITION

The Company's revenues have been primarily generated from the sale of
perpetual licenses for its proprietary SiteMinder and DMS (renamed
IdentityMinder in the fourth quarter of 2002) products and services. In the
future, the Company anticipates generating its revenue primarily from the sale
of perpetual licenses for SiteMinder, IdentityMinder, TransactionMinder and
provisioning products and services as well as from new product offerings. The
Company generates its services revenue from consulting and training services
performed for customers and from maintenance and support. As described below,
significant management judgments and estimates must be made and used in
connection with the revenue recognized in any accounting period. Management
analyzes various factors, including a review of specific transactions,
historical experience, credit worthiness of customers and current market and
economic conditions. Changes in judgments based upon these factors could impact
the timing and amount of revenue and cost recognized.

We generally license our software products on a perpetual basis. We apply
the provisions of Statement of Position No. 97-2, "Software Revenue
Recognition," as amended by Statement of Position No. 98-9, "Software Revenue
Recognition, with Respect to Certain Transactions," to all transactions
involving the sale of software products. We recognize revenue from the sale of
software licenses when persuasive evidence of an arrangement exists, the product
has been delivered, the fees are fixed or determinable and collection of the
resulting receivable is reasonably assured. This policy is applicable to all
sales, including sales to resellers and end users. The Company does not offer a
right of return on its products.

45

NETEGRITY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

For all sales, we use either a binding purchase order or signed license
agreement as evidence of an arrangement. For arrangements with multiple
obligations (for example, product, undelivered maintenance and support, and
training and consulting), we allocate revenue to each component of the
arrangement using the residual value method based on the fair value of the
undelivered elements. We defer revenue from the arrangement equivalent to the
fair value of the undelivered elements. Fair values for the ongoing maintenance
and support obligations are based upon separate sales of renewals of maintenance
contracts. Fair value of services, such as training or consulting, is based upon
separate sales of these services to other customers.

At the time of the transaction, we assess whether the fee associated with
the transaction is fixed or determinable based on the payment terms associated
with the transaction. If a significant portion of the fee is due after our
normal payment terms, which are generally 30 to 90 days from invoice date, we
account for the fee as not being fixed or determinable. In these cases, we
recognize revenue as the fees become due. In addition, we assess whether
collection is probable or not based on the credit worthiness of the customer.
Initial credit worthiness is assessed through Dun & Bradstreet or similar credit
rating agencies. Credit worthiness for follow-on transactions is assessed
through a review of the transaction history with the customer. We do not request
collateral from our customers. If we determine that collection of a fee is not
reasonably assured, we defer the fee and recognize revenue at the time
collection becomes reasonably assured, which is generally upon receipt of cash.

Installation by Netegrity is not considered essential to the functionality
of our products as these services do not alter the product capabilities, do not
require specialized skills and may be performed by the customer or other
vendors. Revenues for maintenance and support are recognized ratably over the
term of the support period. Revenues from consulting and training services are
recognized as the services are performed.

CASH AND CASH EQUIVALENTS AND STATEMENT OF CASH FLOWS SUPPLEMENTAL INFORMATION

Cash and cash equivalents include cash, money market investments and other
highly liquid investments with original maturities of three months or less at
the date of purchase.

Net cash used for operating activities reflect cash payments for income
taxes of approximately $57,000, $125,000 and $25,000 for the years ended
December 31, 2002, 2001 and 2000, respectively.

RESTRICTED CASH

Restricted cash represents time deposits held at financial institutions in
connection with the Company's lease of office space. As of December 31, 2002,
restricted cash is security for outstanding letters of credit expiring in
February 2003 and April 2003. The letter of credit expiring in April 2003 has an
automatic renewal clause.

MARKETABLE SECURITIES

Investments, which primarily consist of debt securities, are accounted for
under Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" issued by the Financial
Accounting Standards Board (FASB). Pursuant to the provisions of SFAS No. 115,
the Company has classified its investment portfolio as "trading",
"available-for-sale" or "held to maturity". "Trading" securities are bought and
held principally for the purpose of selling them in the near term and are
recorded at fair value. Fair value is based upon quoted market prices.
Unrealized gains and losses on trading securities are included in the
determination of net earnings. "Available-for-sale" securities include debt
securities that are being held for an unspecified period of time and may be used
for liquidity or other corporate purposes and are recorded at fair value.
Unrealized gains and losses on available-for-sale securities are reported as a
separate component of comprehensive income (loss) in stockholders' equity. "Held
to maturity"

46

NETEGRITY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

securities are debt securities that the Company intends to hold to maturity and
are recorded at amortized cost. See Note 4 for further information on the
Company's marketable securities.

OFF-BALANCE-SHEET AND CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents, marketable
securities and accounts receivable -- trade. The Company has no significant
off-balance-sheet risk such as foreign exchange contracts, option contracts or
other foreign hedging arrangements. Cash and cash equivalents are held with high
quality financial institutions. Marketable securities are primarily held in high
quality corporate debt instruments and government obligations. Concentration of
credit risk with respect to accounts receivable -- trade is limited due to a
large customer base. The Company periodically performs credit evaluations of its
customers and maintains reserves for potential losses. One customer accounted
for approximately 24% of accounts receivable as of December 31, 2002. No other
customer accounted for more than 10% of accounts receivable as of December 31,
2002 and no one customer accounted for more than 10% of accounts receivable as
of December 31, 2001. No one customer accounted for more than 10% of revenue for
each of the three years ended December 31, 2002.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Financial instruments consist principally of cash equivalents, restricted
cash, marketable securities, accounts receivable -- trade, accounts payable,
accrued expenses and letters of credit. The estimated fair value of these
financial instruments approximates their carrying value.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation and amortization is provided using the
straight-line method, based upon the following asset lives:

Computer equipment and purchased software.... 3-5 years
Furniture and office equipment............... 5-7 years
Leasehold improvements....................... Shorter of lease term or useful life of asset

Maintenance and repairs are charged to operations as incurred. Renewals and
betterments which materially extend the life of assets are capitalized and
depreciated. Upon disposal, the asset cost and related accumulated depreciation
are removed from their respective accounts and any resulting gain or loss is
reflected in earnings.

ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS

The Company uses the provisions of SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to undiscounted future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less cost to sell.

OTHER INTANGIBLE ASSETS, NET

The Company accounts for purchased technology and software development
costs in accordance with SFAS No. 86, "Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed".

47

NETEGRITY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Under SFAS No. 86, the Company is required to test for recoverability of its
capitalized software costs as of each balance sheet date or an interim period if
events and circumstances indicate that the carrying amount may not be
recoverable. Impairment is recorded as the excess of the unamortized cost over
the expected future net realizable value of the products.

Software development costs subsequent to the establishment of technological
feasibility are capitalized and amortized to non-cash cost of software. Based on
the Company's product development process, technological feasibility is
established upon completion of all planning, designing, coding and testing
activities. Such costs are amortized over the estimated life of the product.
During 2002, 2001 and 2000, costs incurred by the Company between completion of
all planning, designing, coding and testing activities and the point at which
the product is ready for general release were insignificant and therefore, no
such costs have been capitalized during this time period.

OTHER ACCRUED EXPENSES

Other accrued expenses consist of the following (in thousands):

COMPREHENSIVE INCOME

Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources, including foreign currency translation adjustments and
unrealized gains and losses on marketable securities held as
"available-for-sale". For the year ended December 31, 2002, the difference of
approximately $150,000 between the comprehensive loss of ($86.2) million and the
net loss is due to the effect of an unrealized gain on marketable securities of
approximately $177,000, partially offset by an unfavorable cumulative
translation adjustment of approximately ($27,000). For the year ended December
31, 2001, the difference of approximately $44,000 between the comprehensive
income of $1.6 million and net income is due to the effect of an unfavorable
cumulative translation adjustment. For the year ended December 31, 2000, there
was no difference between comprehensive income and net income.

RESEARCH AND DEVELOPMENT

Research and development expenditures are charged to operations as
incurred.

INCOME TAXES

The Company accounts for income taxes using the asset and liability method
in accordance with SFAS No. 109, "Accounting for Income Taxes", pursuant to
which deferred income taxes are recognized based on temporary differences
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the temporary differences are
expected to reverse. Valuation allowances are provided if based upon the weight
of available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized.
48

NETEGRITY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share (EPS) are calculated by dividing net income
(loss) by the weighted average number of shares outstanding during the period.
Diluted EPS is calculated by dividing net income by the weighted average number
of shares outstanding plus the dilutive effect, if any, of outstanding stock
options and warrants using the "treasury stock" method. During periods of net
loss, diluted net loss per share does not differ from basic net loss per share
since potential common shares from stock options and warrants are anti-dilutive
and therefore are excluded from the calculation. The following table presents
the calculation for both basic and diluted EPS (in thousands, except per share
data):

Options to purchase a total of 771,714, 1,347,000 and 285,000 shares for
the years ended December 31, 2002, 2001 and 2000, respectively, were excluded
from the computation of diluted EPS because the impact was anti-dilutive.

STOCK-BASED COMPENSATION

The Company accounts for its stock option plans under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based compensation cost is
reflected in net income for these plans, as all options granted under these
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant. The following table illustrates the effect on net
income (loss) and earnings (loss) per share if the Company had applied the fair
value recognition provisions of FASB Statement No. 123, Accounting for Stock
Based Compensation, to stock based compensation.

49

NETEGRITY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The fair value of each stock option is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions:

The pro-forma net loss for the years ended December 31, 2002 and 2001
includes the effects of options that were canceled by the Company in connection
with the tender offers described in Note 10 to the consolidated financial
statements. The remaining unamortized pro-forma compensation expense at the date
of cancellation for these options in the amount of approximately $51.9 million
and $63.0 million, respectively, is reflected as an expense in these pro-forma
amounts.

FOREIGN CURRENCY

The functional currencies of the Company's wholly-owned subsidiaries are
the local currencies. The financial statements of the subsidiaries are
translated to U.S. dollars using period-end exchange rates for assets and
liabilities and average exchange rates during the corresponding period for
revenues, cost of revenues and expenses. Translation gains and losses (amounting
to a loss of approximately $27,000 as of December 31, 2002) are deferred and
accumulated as a separate component of stockholders' equity (accumulated other
comprehensive income (loss)). Net gains and losses resulting from foreign
exchange transactions, amounting to a gain of approximately $16,000 and $325,000
for the years ended December 31, 2002 and 2001, are included in other income,
net in the accompanying consolidated statements of operations and was not
material for the year ended December 31, 2000.

EXPORT SALES

The Company generates revenues from international business. Export sales
amounted to approximately $13.1 million, or 19%, $16.1 million, or 18%, and
$10.0 million, or 18%, of total revenue for the years ended December 31, 2002,
2001 and 2000, respectively.

401(K) PLAN

The Company maintains a 401(k) Plan for its employees, which is intended to
be a retirement and tax deferred savings vehicle. The Company may make
discretionary contributions to the plan. The Company has made no contributions
to date.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

50

NETEGRITY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

RESTATEMENT ADJUSTMENTS

The Company has recorded certain restatement adjustments to its previously
issued 2001 and 2000 consolidated financial statements. The Company adopted EITF
01-14 effective January 1, 2002, and as a result, reclassified approximately
$1.6 million and $1.2 million into revenues from reduction of cost of revenues
for the years ended December 31, 2001 and 2000, respectively, to comply with
this guidance. Additionally, the Company has restated the previously reported
2001 and 2000 pro-forma impact of the fair value recognition provisions of SFAS
No. 123 to properly reflect pro-forma expense associated with its employee stock
purchase plans. The adjustment reflects additional pro-forma expense of
approximately $364,000 and $300,000 in 2001 and 2000, respectively, and results
in a pro-forma basic and diluted loss per share of ($3.03) and ($0.72) in 2001
and 2000, respectively. The Company has also reclassified $3.0 million from
short-term marketable securities to cash and cash equivalents at December 31,
2001.

NEW ACCOUNTING PRONOUNCEMENTS

In July 2001, FASB issued SFAS No. 141, "Business Combinations", and SFAS
No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that all
business combinations initiated after June 30, 2001, be accounted for using the
purchase method of accounting. SFAS No. 142 discusses how intangible assets that
are acquired should be accounted for in financial statements upon their
acquisition. In addition, under SFAS No. 142, goodwill and other indefinite
lived intangible assets are no longer amortized but are reviewed at least
annually for impairment (or more frequently if impairment indicators arise).
Separable intangible assets that are not deemed to have indefinite lives will
continue to be amortized over their useful lives.

The acquisition discussed in Note 3 was accounted for in accordance with
the transition provisions of SFAS No. 141 and No. 142. In connection with the
adoption of SFAS No. 142, goodwill is to be tested at least annually and on an
interim basis if an event or circumstance indicates that it is more likely than
not that an impairment loss has been incurred. We currently operate as a single
reporting unit and all of our goodwill was associated with the entire company. A
transitional impairment test was performed on January 1, 2002. See Note 3
regarding the impairment of goodwill recorded during the quarter ended September
30, 2002.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which is effective for the Company
on January 1, 2002. SFAS No. 144 addresses accounting and reporting of certain
long-lived assets, except goodwill, that are either held and used or disposed of
through sale or other means.

The Company adopted SFAS No's. 141, 142 and No. 144 during the first
quarter of 2002 without a material impact on its financial position or results
of operations. If the Company had accounted for goodwill and other intangibles
in accordance with SFAS 142 during the years ended December 31, 2001 and 2000,
the results of operations would not be materially different from those
previously reported.

In November 2001, the Emerging Issues Task Force issued Topic No. D-103
(Topic D-103), subsequently recharacterized as EITF 01-14, relating to the
accounting for reimbursements received from customers for the Company's
out-of-pocket expenses for the delivery of services. In accordance with EITF
01-14, reimbursements received for out-of-pocket expenses incurred should be
characterized as revenue in the statement of operations. The Company has
historically accounted for reimbursements received for out-of-pocket expenses
incurred as a reduction to the cost of service revenues in the statement of
operations to offset the costs incurred. The Company adopted EITF 01-14
effective January 1, 2002 and reclassified approximately $1.6 million and $1.2
million into revenues from cost of revenues for the years ended December 31,
2001 and 2000, respectively, to comply with this guidance.

In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit of Disposal Activities". SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities
51

NETEGRITY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

when they are incurred rather than at the date of a commitment to an exit or
disposal plan. This statement is effective for fiscal years beginning after
December 31, 2002. We do not believe that the impact of adopting SFAS No. 146
will have a material impact on the consolidated financial statements.

In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others", which clarifies disclosure and
recognition/measurement requirements related to certain guarantees. The
disclosure requirements are effective for financial statements issued after
December 15, 2002 and the recognition/measurement requirements are effective on
a prospective basis for guarantees issued or modified after December 31, 2002.
The application of the requirements of FIN 45 did not have a material impact on
the Company's financial position or results of operations.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure". SFAS No. 148 amends SFAS No. 123, to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The transition guidance and
annual disclosure provisions of SFAS No. 148 are effective for fiscal years
ending after December 15, 2002. The interim disclosure provisions are effective
for financial reports containing financial statements for interim periods
beginning after December 15, 2002. As the Company did not make a voluntary
change to the fair value based method of accounting for stock-based employee
compensation in 2002, the adoption of SFAS No. 148 did not have a material
impact on the Company's financial position and results of operations.

NOTE 2: RESTRUCTURING AND OTHER NON-RECURRING CHARGES

The Company recorded restructuring and other non-recurring expenses of $2.1
million and $529,000 for the years ended December 31, 2002 and 2001,
respectively. These expenses are associated with the Company's restructuring
plans and other non-recurring expenses.

During 2002, the Company, as a result of changing market dynamics and
economic factors, reduced its workforce through restructurings by approximately
32%. The reductions in workforce were primarily in the development group as well
as in the sales and services departments, both domestically and internationally.
The majority of the reductions in the development group were concurrent with the
Company's decision to stop developing, marketing or selling its portal product
on a stand-alone basis. As a result of the 2002 restructurings, the Company
recorded restructuring charges, which related primarily to severance payments
and the closing of several sales offices, of approximately $2.1 million during
the year ended December 31, 2002. Approximately $1.3 million was paid as of
December 31, 2002. The remainder is expected to be paid prior to March 31, 2003.

During 2001, the Company reduced its workforce by approximately 8% in order
to reduce expenses and realign its cost structure. The reduction in workforce
was primarily in the sales, development and general and administrative groups.
The Company recorded a charge of $303,000 during the year ended December 31,
2001, for severance payments ($278,000) and the consolidation of excess
facilities ($25,000). Approximately $275,000 was paid as of December 31, 2001
and the remainder was paid during 2002.

Additionally, the Company recorded non-recurring charges of $226,000 during
the year ended December 31, 2001 primarily attributable to a contribution to the
James Hayden Memorial Fund, established in the memory of the Company's former
Chief Financial Officer, and the acceleration of 15,300 of his options that
would have vested by December 31, 2001.

52

NETEGRITY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 3: ACQUISITION

On December 14, 2001, the Company acquired all of the outstanding stock of
DataChannel, Inc., a Washington corporation (DataChannel) and a provider of
enterprise portal solutions. DataChannel became a wholly-owned subsidiary of the
Company. The aggregate consideration included approximately $17.5 million in
cash (including assumed debt of approximately $1.4 million), $3.0 million in
acquisition costs and 2,499,968 shares of the Company's common stock valued at
approximately $49.7 million. The acquisition was accounted for using the
purchase method of accounting. Accordingly, the excess of the purchase price
over the fair value of the assumed tangible net liabilities of approximately
$71.4 million was allocated to acquired technology, in-process research and
development, and goodwill in the amounts of approximately $11.0 million, $3.0
million and $57.4 million, respectively. The results of operations of
DataChannel from the acquisition date are included in the Company's consolidated
results of operations.

In connection with the acquisition, the Company initiated an overall
integration plan that included the elimination of redundant headcount and
facilities. The Company accrued approximately $2.2 million of cost related to
the integration plan consisting of approximately $1.8 million of facilities
costs and $0.4 million for planned workforce reductions consisting primarily of
duplicative general and administrative functions. Approximately $1.2 million and
$0 of these costs were paid during the years ended December 31, 2002 and 2001,
respectively. The remainder is expected to be paid by June 2005.

The Company initially amortized the acquired existing technology of
approximately $11.0 million over an estimated remaining useful life of three
years. This technology was embedded in the initial version of one of our
products that was released in the fourth quarter of 2002. During the fourth
quarter of 2002, the Company made the decision to remove the acquired technology
from its products. It is expected that the first version of our products that do
not include the portal technology will be released in August 2003 and will be
the only version sold in the third quarter of 2003. As a result of this
decision, we determined that there has been a change in the estimated useful
life of the acquired technology and therefore it is appropriate to amortize the
associated expense over a nine month period starting at the beginning of the
fourth quarter of 2002 (the period during which the change in estimated life was
identified) through June 30, 2003. Amortization expense related to the purchased
technology was $5.4 million and $153,000 for the years ended December 31, 2002
and 2001, respectively, and has been classified as non-cash cost of software
licenses in the accompanying consolidated statements of operations. Amortization
expense for the purchased technology is estimated to be approximately $5.4
million for the year ended December 31, 2003

The total goodwill of approximately $57.4 million related to the
acquisition was not amortized in accordance with SFAS No. 142. In lieu of being
amortized, goodwill is required to be tested for impairment annually or on an
interim basis if an event or circumstance indicates that it is more likely than
not that an impairment loss has been incurred. During the first quarter of 2002,
the Company performed a transitional impairment test on goodwill and concluded
that there was no impairment as of January 1, 2002. During the third quarter of
2002, the Company determined that a significant decline in its stock price as a
result of underperformance relative to recent and expected operating results and
the overall adverse change in the business climate had resulted in a triggering
event that warranted an impairment review in accordance with SFAS No. 142. As a
result, the Company tested for impairment based on a two-step approach. The
first step was to test for indicators of impairment of goodwill by comparing the
fair value of the Company with its carrying value. Since the Company operates as
an enterprise-wide reporting unit, it was determined that the market value of
the Company represents an approximation of its fair value as of September 30,
2002. Furthermore, it was determined that the fair value of the Company as of
September 30, 2002 was less than its carrying value and therefore, an indication
of impairment existed. The second step was to measure the amount of the
impairment of goodwill. As a result of the second step, we determined that the
implied fair value of the goodwill determined using the market capitalization of
the Company on September 30, 2002 was lower than its carrying value and
therefore, goodwill had been impaired. The Company recorded a charge of $57.4
million

53

NETEGRITY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

in the third quarter of 2002, classified as impairment charge in the
accompanying consolidated statements of operations, to write down goodwill to
its implied fair value of zero.

The following unaudited pro-forma financial information presents the
combined results of operations of the Company and DataChannel as if the
acquisition of DataChannel occurred on January 1, 2000, after giving effect to
certain adjustments, including amortization expense. Due to the non-recurring
nature of the in-process research and development charge, the amount has not
been included in the unaudited pro-forma financial information. The unaudited
pro-forma financial information does not necessarily reflect the results of
operations that would have occurred had the acquisition been completed as of the
dates indicated or of the results that may be obtained in the future (in
thousands except per share data).

NOTE 4: MARKETABLE SECURITIES

As of December 31, 2002 and 2001, based on management's intentions, all
marketable securities have been classified as "available-for-sale" and consist
of the following (in thousands):

The total carrying value of all marketable securities as of December 31,
2002 and 2001 includes approximately $12.7 million and $6.1 million that mature
during 2004 and 2003, respectively, and are therefore classified as long-term.
Net gains (losses) from the sales and maturities of marketable securities
amounting to approximately ($3,000) and $291,000 are included in other income,
net in the consolidated statements of operations for the years ended December
31, 2002 and 2001. The net unrealized holding gain of approximately $177,000 and
$0 has been included in "Accumulated other comprehensive income (loss)" on the
consolidated financial statements at December 31, 2002 and 2001, respectively.

54

NETEGRITY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 5: PROPERTY AND EQUIPMENT

Property and equipment are stated at acquisition cost and consist of the
following (in thousands):

Depreciation expense for the years ended December 31, 2002, 2001 and 2000
was $4,708,000, $2,753,000 and $1,124,000, respectively.

NOTE 6: COMMITMENTS AND CONTINGENCIES

The Company has commitments that expire at various times through 2010.
Operating leases shown below are primarily for facility costs for the Company's
corporate headquarters and world-wide sales offices. Other contractual
obligations primarily consist of minimum royalty fees payable by the Company in
connection with a software license and distribution agreement which the Company
entered into in January 2003.

Included in the operating lease commitments above is approximately $1.1
million related to excess facilities which have been accrued in purchase
accounting.

The Company incurred total operating lease expense, primarily related to
certain facilities and equipment under non-cancelable operating leases, of
approximately $4.9 million, $3.7 million and $2.2 million for the years ended
December 31, 2002, 2001 and 2000, respectively.

In April 2002, the Company entered into an agreement with a system
integrator to assist the Company in the development and launch of one of its
products. Under the terms of the agreement, for consideration of the system
integrator's time in assisting with the development of the product, the Company
agreed to promote the system integrator as an integrator of the developed
product. The Company's obligation under the agreement will be considered
satisfied once the system integrator receives consulting revenues totaling
approximately $3.9 million from the Company's customers, or by April 2004,
whichever occurs first. In the event that the Company recommends a competitor of
the system integrator to do the integration work for a customer, the Company
could potentially owe a royalty to the system integrator based on the net
license fee. As of December 31, 2002, no royalties were due to the system
integrator.

55

NETEGRITY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In August 2002, the Company entered into a five year non-cancelable
operating lease for an office building for its Corporate headquarters. The
Company anticipates moving to the new facility in March 2003. In connection with
the lease agreement, the Company delivered an irrevocable, unconditional,
negotiable letter of credit in the amount of $760,000 as a security deposit. The
Company anticipates that it will spend approximately $1.0 million in leasehold
improvements to build out the new facility. As of December 31, 2002,
approximately $725,000 had been spent.

In January 2003, the Company entered into a software license and
distribution agreement under which Netegrity was granted the right to sublicense
the use of a provisioning application software program. In addition, Netegrity
was granted certain rights to integrate or combine the software into its
existing products. In exchange for these rights, Netegrity has agreed to pay a
quarterly royalty fee based on a percentage of the net license fees charged by
Netegrity for the software. The minimum royalty fees due in the first, second
and third years of the agreement are approximately $1.0 million, $1.4 million
and $1.6 million. The initial term of this agreement is three years.

The Company has entered into indemnification agreements with the
non-employee members of its Board of Directors. Additionally, the Company has
entered into employment and executive retention agreements with certain
employees and executive officers which, among other things, include certain
severance and change of control provisions.

Under the terms of the Company's standard software license contracts, the
Company indemnifies its customers for the potential liability associated with
the infringement of other parties' technology based upon the Company's software
product. There is a possibility that the Company may be liable to its customers
in the event that there is infringement occurring. The Company is not aware of
any infringement related to the Company's technology, and therefore has not
accrued any amounts for the replacement or refund of any software products sold
through December 31, 2002.

From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. The Company is
not presently a party to any legal proceedings, the adverse outcome of which, in
management's opinion, would have a material adverse effect on the Company's
results of operations or financial position.

NOTE 7: RELATED PARTY TRANSACTIONS

LOAN TO OFFICER

The consolidated balance sheets as of December 31, 2002 and 2001 include
$116,000 and $130,000, respectively, in loans to an officer of the Company
issued in connection with the exercise of stock options in 1996. The loan is
reflected as a reduction of stockholders' equity in the accompanying
consolidated balance sheets statements. The loan is payable upon demand and
bears interest at 7% per annum. The loan was originally represented by a secured
note however, in May 2002, the note was amended such that it became a full
recourse note. During the fourth quarter of 2002, the officer repaid
approximately $14,000 of the loan balance and repaid an advance made during 2002
of approximately $17,000.

MARKETING SERVICES

During the years ended December 31, 2002, 2001 and 2000, the Company paid
approximately $125,000, $68,000 and $15,000, respectively, to a company for
marketing services. The principal shareholder of such company, is the son-in-law
of one of the members of our Board of Directors. The Company has similar
arrangements with other marketing services firms and believes the arrangement
was entered into on substantially the same terms and conditions as its
arrangements with such other firms.

56

NETEGRITY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

ACQUISITION TRANSACTIONS

On August 2, 2001, the Company entered into an agreement with Broadview
International LLC ("Broadview"), which called for Broadview to assist the
Company in negotiating and structuring acquisitions of a defined set of
companies with portal service products. The Chairman and Chief Executive Officer
of Broadview is a member of the Company's Board of Directors. Under the
agreement, Broadview was entitled to a transaction fee equal to $750,000 in
connection with the Company's acquisition of DataChannel. The Company had a
substantially similar agreement with an investment bank that was not related to
the Company

56.1

NETEGRITY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

and thus believes the agreement with Broadview was entered into on the same
terms and conditions as would have been granted on an arm's-length basis.

The accompanying consolidated balance sheet as of December 31, 2001
includes $750,000 payable to Broadview in connection with the acquisition of
DataChannel discussed in Note 3. This amount was paid in 2002. The Company does
not expect to complete any additional acquisitions subject to this agreement.

NOTE 8: INCOME TAXES

The components of income tax expense are as follows (in thousands):

The provision for income taxes differs from the federal statutory rate of
34% as follows (in thousands):

57

NETEGRITY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Significant components of the deferred tax assets and liabilities are as
follows (in thousands):

In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
taxes assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which the net operating losses are allowed to be carried forward or
temporary differences become deductible. Due to the uncertainty of the Company's
ability to realize the benefit of the deferred tax assets, the deferred tax
assets are fully offset by a valuation allowance. The net change in the
valuation allowance during 2002 and 2001 was an increase of approximately $10.1
million and $29.3 million (primarily due to the DataChannel acquisition),
respectively. The Company re-evaluates the positive and negative evidence on a
quarterly basis.

At December 31, 2002, the Company has available for federal income tax
purposes net operating loss carryforwards of approximately $177.0 million
expiring at various dates through fiscal 2022. The net operating loss
carryforward includes approximately $98.2 million of tax deductions relating to
stock options that will be credited to additional paid-in capital when realized.
Additionally, approximately $53.5 million of the net operating loss carryforward
at December 31, 2002 is attributable to the DataChannel acquisition that when
realized, will first reduce any remaining non-current intangible assets and the
remaining will be recorded to reduce income tax expense. The acquired loss
carryforwards are subject to an annual limitation under Internal Revenue Code
Section 382 of approximately $3.1 million. Under the Tax Reform Act of 1986, the
utilization of a corporation's net operating loss carryforward is limited
following a greater than 50% change in ownership over a three-year period. As of
December 31, 2002, no change in ownership has occurred, although such a change
can occur in a future period. If a change occurs, it could substantially limit
the utilization of the loss carryforward of the Company in the future.

NOTE 9: CAPITAL STOCK AND CAPITAL STOCK WARRANTS

AUTHORIZED CAPITAL STOCK

As of December 31, 2002, the authorized capital stock of the Company was
composed of 55.0 million shares of common stock (approximately 34.3 million
shares issued), and 5.0 million shares of preferred stock, $0.01 par value (see
Preferred Stock Issuances, below).

PREFERRED STOCK ISSUANCES

The 5.0 million shares of preferred stock were designated as Series D.
Between January 6, 1998 and June 30, 1998, the Company sold 3.3 million shares
of Series D Preferred Stock to an institutional investor under a Preferred Stock
and Warrant Purchase Agreement, as amended. When issued, each share of Series D
Preferred Stock in 1998 was convertible into one share of common stock, which
represented a discount from the fair value of common stock on the date of
issuance. The value attributable to this conversion feature

58

NETEGRITY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

represented a beneficial conversion feature which was recognized as a return to
preferred stockholders. The Series D Preferred Stock converted one for one to
common stock in September 1999 and such shares cannot be reissued by the
Company. The remaining authorized shares of Series D Preferred Stock of
approximately 1.7 million shares have not been issued by the Company.

In conjunction with the agreement as described above, warrants to purchase
a total of 2,251,000 shares of common stock exercisable at $1.33 were issued to
an institutional investor expiring on January 7, 2003. As part of the Agreement
with the institutional investor described above, James McNiel joined the Board
of Directors of the Company, as designee of the Pequot Entities and the Company
granted Mr. McNiel a warrant for the purchase of 150,000 shares of common stock
exercisable at $1.00 expiring on January 7, 2003 for his services as a director.
Due to certain terms of the warrant, the warrant was accounted for as a variable
award. As a result, a non-cash compensation charge was recorded for the increase
in the fair market value of the Company's common stock compared to the exercise
price since the warrant was issued. The expense was recognized over the two year
vesting period of the warrant and through the date of exercise. During the year
ended December 31, 2000 compensation expense of $292,000 was recorded related to
this warrant. As of December 31, 2000, all of these warrants had been exercised.

WARRANTS

Outstanding warrants as of December 31, 2002 consisted of the following:

The outstanding warrants were granted to customers and accordingly revenue
was reduced on the grant date based on the value of the warrant using the
Black-Scholes option-pricing model.

NOTE 10: STOCK PLANS

STOCK OPTION PLANS

The Company has several stock option plans, as described hereunder, that
provide for the issuance of an aggregate of 12,647,000 shares of the Company's
common stock. All options issued under the plans are granted at fair market
value at the date of grant, become exercisable at varying rates, generally over
three or four years, as determined by the Board of Directors, and generally
expire seven to ten years from the date of grant.

Stock Option Plans for Outside Directors: The Company maintains stock
option plans intended only for members of the Company's Board of Directors who
are neither employees nor officers of the Company (the Directors' Plans). The
Directors' Plans provide for the grant of options to purchase up to 277,500
shares of Company common stock. The timing, amounts, recipients and other terms
of the option grants are determined by the provisions of or formulas in the
Directors' Plans. As of December 31, 2002, options for 71,562 shares were
available for future grant.

Stock Option Plans for Employees and Others: The Company maintains stock
option plans intended for employees, consultants and officers and, in the case
of one of the plans, directors, providing for the granting of options to
purchase up to 12,369,500 shares of Company common stock as an inducement to
obtain and retain the services of qualified persons. Incentive stock options may
be granted to officers and employees, and non-qualified stock options may be
granted to directors, officers, employees or consultants. As of December 31,

59

NETEGRITY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2002, aggregate options for 6,883,771 shares were available for future grant to
employees and officers of and consultants to the Company.

TENDER OFFERS

On August 9, 2001 and as subsequently amended, the Company filed a tender
offer statement with the Securities and Exchange Commission in connection with
certain stock options issued after December 1, 1999 (the Option Offer). Under
the Option Offer, the Company offered to exchange certain employee options to
purchase shares of the Company's common stock for new options to purchase shares
of its common stock. The Option Offer, which excluded executive officers,
directors and non-employees of the Company and which expired on September 7,
2001, provided for the grant of new options on March 11, 2002 to eligible
employees who were actively employed on the grant date. The number of shares
underlying the new options was equal to the number of shares underlying the
cancelled eligible options. The exercise price of the new options was equal to
the fair market value of one share of common stock on the date of grant of the
new options as determined in accordance with the applicable option plans. Each
new option will vest in accordance with a vesting schedule that is equivalent to
what would have been in place had the cancelled option remained in effect.

On March 11, 2002, the Company granted options to purchase an aggregate of
2,103,406 shares of its common stock at fair market value in connection with the
Option Offer. In accordance with FASB Interpretation No. 44, since the
replacement options were granted more than six months after cancellation of the
old options, the new options were considered a fixed award and therefore did not
result in any compensation expense.

On August 23, 2002 and as subsequently amended, the Company filed a tender
offer statement with the Securities and Exchange Commission in connection with
certain stock options outstanding under non-director stock plans (the Offer to
Exchange). Under the Offer to Exchange, the Company offered to exchange certain
employee options to purchase shares of the Company's common stock for new
options to purchase shares of its common stock. The Offer to Exchange, which
excluded directors and non-employees of the Company and which expired on
September 23, 2002, provided for the grant of new options on two different
dates. The Company expects to grant 50% of the new options on or about March 25,
2003 and the remaining 50% on or about April 25, 2003 to employees that are
continuously and actively employed from the date the employee tendered eligible
options for exchange to the date of the grant of the new options. The number of
shares underlying the new options will be equal to the number of shares
underlying the cancelled eligible options, except that certain options granted
to certain executive officers will be exchanged at a rate of one share
underlying a new option for each two shares underlying the tendered options. The
exercise price of the new options will be equal to the fair market value of one
share of common stock on the date of grant of the new options as determined in
accordance with the applicable option plans. Each new option will vest in
accordance with a schedule tied to the length of time of an individual's
employment with the Company.

60

NETEGRITY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

SUMMARY OF OPTION ACTIVITY

Stock option activity for the years ended December 31 is as follows (in
thousands, except average life and price data):

Stock options outstanding at December 31, 2002 are as follows (in
thousands, except price data):

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

(a) Average contractual life remaining in years.

EMPLOYEE STOCK PURCHASE PLAN

During May 2002, the Company established the 2002 Employee Stock Purchase
Plan ("2002 Stock Purchase Plan") under which eligible employees could purchase
shares of the Company's common stock, subject to certain limitations, at 85% of
the market value. Purchases were limited to 10% of an employee's eligible
compensation, up to a maximum of 1,000 shares per purchase period. The 2002
Stock Purchase Plan originally authorized the issuance of 700,000 shares of
common stock (subject to adjustment for capital changes) pursuant to the
exercise of nontransferable options granted to participating employees and the
maximum number of shares which are available in any single purchase period is
112,500. Prior to establishing the 2002 Stock Purchase Plan, the Company
maintained the 1990 Employee Stock Purchase Plan ("1990 Stock Purchase Plan")
under which eligible employees could purchase shares of the Company's common

61

NETEGRITY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

stock, subject to certain limitations, at 85% of the market value. Purchases
were limited to 10% of an employee's eligible compensation, up to a maximum of
500 shares per purchase period. The 1990 Stock Purchase Plan originally
authorized the issuance of 150,000 shares of common stock (subject to adjustment
for capital changes) pursuant to the exercise of nontransferable options granted
to participating employees. During the year ended December 31, 2002, 112,000
shares of the Company's common stock were issued under the 2002 Stock Purchase
Plan and during the years ended December 31, 2001 and 2000, 41,000 and 32,000
shares of the Company's common stock were issued under the 1990 Stock Purchase
Plan, respectively. As of October 1, 2001, all authorized shares had been issued
under the 1990 Stock Purchase Plan and the plan was terminated.

STOCK AWARD

During November 2001, the Company issued an aggregate of 5,291 shares of
common stock to certain employees as a stock award. This award resulted in
compensation expense of approximately $52,000 which is included in the
accompanying consolidated statement of operations for the year ended December
31, 2001.

NOTE 11: OPERATING SEGMENTS AND GEOGRAPHICAL INFORMATION

Based on the information provided to the Company's chief operating decision
maker for purposes of making decisions about allocating resources and assessing
performance, the Company's continuing operations have been classified into a
single segment. The Company operates primarily in three geographic regions:
North America, Europe and Asia Pacific. Revenues (based on the location of the
customer) and long-lived assets by geographic region are as follows (in
thousands):

62

NETEGRITY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 12: SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)

The following financial information reflects all normal recurring
adjustments that are, in the opinion of management, necessary for a fair
statement of the results of the interim periods. Summarized quarterly data for
fiscal 2002 and 2001 is as follows (in thousands, except per share data):

63

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

The Company changed its independent accountants in June 2002 as reported in
it Current Report on Form 8-K dated June 20, 2002.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item is incorporated by reference from the
Company's definitive proxy statement for its Annual Meeting of Stockholders to
be held in 2003 (the "2003 Proxy Statement"). The information regarding
executive officers of the Company is included in Part I of this Annual Report on
Form 10-K under the caption "Executive Officers of the Registrant."

ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is incorporated by reference from the
2003 Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is incorporated by reference from the
2003 Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is incorporated by reference from the
2003 Proxy Statement.

ITEM 14. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. Based on their
evaluation of the Company's disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934) as of a
date within 90 days of the filing date of this Annual Report on Form 10-K, the
Company's chief executive officer and chief financial officer have concluded
that the Company's disclosure controls and procedures are designed to ensure
that information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms and are
operating in an effective manner.

(b) Changes in internal controls. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls subsequent to the date of their most recent evaluation.

64

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

A. THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:

1. Financial Statements

The following financial statements are included in Item 8:

a. Reports of Independent Accountants

b. Consolidated Balance Sheets -- December 31, 2002 and 2001

c. Consolidated Statements of Operations for the years ended December
31, 2002, 2001 and 2000

d. Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2002, 2001 and 2000

e. Consolidated Statements of Cash Flows for the years ended December
31, 2002, 2001 and 2000

f. Notes to Consolidated Financial Statements

2. Financial Statement Schedules

Included at the end of this report are the following:

a. Reports of Independent Accountants

b. Schedule II: Valuation of Qualifying Accounts and Reserves

Schedules other than those listed above have been omitted since they are
either not required or the information is otherwise included.

3. List of Exhibits

The following exhibits, required by Item 601 of Regulation S-K, are filed
as part of this Annual Report on Form 10-K. Exhibit numbers, where applicable,
in the left column correspond to those of Item 601 of Regulation S-K.

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

+ Confidential treatment has been reported as to certain provisions, which
have been omitted and filed separately with the Commission.

(1) Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to Item 15(c) of Form 10-K.

B. REPORTS ON FORM 8-K

None.

C. EXHIBITS:

The Company hereby files as part of this Form 10-K the exhibits listed in
15(A)(3) above.

The consolidated financial statements for the year ended December 31, 2001,
included in this Form 10-K were audited by Netegrity's former independent
auditors, Arthur Andersen LLP ("Andersen"). Effective June 26, 2002, Netegrity's
Board of Directors engaged KPMG LLP as its independent auditors and dismissed
Andersen. Netegrity would ordinarily be required to obtain the consent of
Andersen to the inclusion into this Form 10-K of Andersen's report with respect
to its consolidated financial statements for the year ended December 31, 2001.
However, Andersen was indicted and found guilty of federal obstruction of
justice charges and is no longer able to provide such consent. Under these
circumstances, Rule 437a promulgated under the Securities Act of 1933, as
amended, permits Netegrity to file this Form 10-K without a written consent from
Andersen. The absence of Andersen's consent may limit a security holder's
recovery on certain claims. In particular, and without limitation, a person who
acquires shares of Netegrity will not be able to assert claims against Andersen
under Section 11 of the Securities Act of 1933 if this Form 10-K contains
financial statements audited by Andersen that include an untrue statement of
material fact or omit to state a material fact necessary to make other
disclosure in those financial statements not misleading. In addition, the
ability of

68

Andersen to satisfy any claims (including claims arising from Andersen's
provision of auditing and other services to Netegrity) may be limited as a
practical matter due to recent events regarding Andersen.

D. FINANCIAL STATEMENT SCHEDULES:

The Company hereby files as part of this Form 10-K the financial statement
schedule listed in Item 15(A)(2) above.

69

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.

NETEGRITY, INC.

By: /s/ BARRY N. BYCOFF
------------------------------------
Barry N. Bycoff
President and Chief Executive
Officer

February 13, 2003

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on Form 10-K has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.

70

CERTIFICATIONS

I, Barry N. Bycoff, President and Chief Executive Officer, certify that

1. I have reviewed this annual report on Form 10-K of Netegrity,
Inc.;

2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;

4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:

a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;

b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and

c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent functions):

a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

By: /s/ BARRY N. BYCOFF
------------------------------------
Barry N. Bycoff
President and Chief Executive
Officer
(Principal Executive Officer)

Date: February 13, 2003

71

CERTIFICATIONS

I, Regina O. Sommer, Chief Financial Officer and Treasurer, certify that:

1. I have reviewed this annual report on Form 10-K of Netegrity,
Inc.;

2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this annual report;

3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
annual report;

4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:

a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;

b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this annual report (the "Evaluation Date"); and

c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons performing
the equivalent functions):

a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

By: /s/ REGINA O. SOMMER
------------------------------------
Regina O. Sommer
Chief Financial Officer and
Treasurer
(Principal Financial Officer and
Principal Accounting Officer)

Date: February 13, 2003

72

NETEGRITY, INC.

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES/OXLEY ACT OF 2002

In connection with the Annual Report of Netegrity, Inc. (the "Company") on
Form 10-K for the year ended December 31, 2002 as filed with the Securities and
Exchange Commission (the "Report"), I, Barry N. Bycoff, President and Chief
Executive Officer of the Company, certify, pursuant to Section 1350 of Chapter
63 of Title 18, United States Code, that this Report fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
and that the information contained in this Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.

By: /s/ BARRY N. BYCOFF
------------------------------------
Barry N. Bycoff
President and Chief Executive
Officer
(Principal Executive Officer)

Date: February 13, 2003

73

NETEGRITY, INC.

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES/OXLEY ACT OF 2002

In connection with the Annual Report of Netegrity, Inc. (the "Company") on
Form 10-K for the year ended December 31, 2002 as filed with the Securities and
Exchange Commission (the "Report"), I, Regina O. Sommer, Chief Financial Officer
and Treasurer of the Company, certify, pursuant to Section 1350 of Chapter 63 of
Title 18, United States Code, that this Report fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
and that the information contained in this Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.

By: /s/ REGINA O. SOMMER
------------------------------------
Regina O. Sommer
Chief Financial Officer (Principal
Financial
Officer and Principal Accounting
Officer)

Date: February 13, 2003

74

REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Stockholders
of Netegrity, Inc.:

Under date of January 29, 2003, we reported on the consolidated balance
sheet of Netegrity, Inc. and subsidiaries as of December 31, 2002, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended, which are included in this Form 10-K. In
connection with our audit of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule for the year ended December 31, 2002 in this Form 10-K. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audit.

In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.

As discussed in our Report of Independent Accountants, the consolidated
financial statements of Netegrity, Inc. and subsidiaries as of December 31, 2001
and for the year then ended were audited by other auditors who have ceased
operations. As described in Note 1 to the consolidated financial statements,
those financial statements have been restated. In our opinion, the adjustments
are appropriate and have been properly applied. However, we were not engaged to
audit, review, or apply any procedures to the 2001 consolidated financial
statements of Netegrity, Inc. and subsidiaries other than respect to such
adjustments and, accordingly, we do not express an opinion or any form of
assurance on the 2001 consolidated financial statements taken as a whole.

KPMG LLP

Boston, Massachusetts
January 29, 2003

75

THE FOLLOWING REPORT OF ARTHUR ANDERSEN LLP (ANDERSEN) IS A COPY OF THE REPORT
PREVIOUSLY ISSUED BY ANDERSEN ON JANUARY 30, 2002. THE REPORT OF ANDERSEN IS
INCLUDED IN THIS ANNUAL REPORT ON FORM 10-K PURSUANT TO RULE 2-02(E) OF
REGULATION S-X. AFTER REASONABLE EFFORTS THE COMPANY HAS NOT BEEN ABLE TO OBTAIN
A REISSUED REPORT FROM ANDERSEN. ANDERSEN HAS NOT CONSENTED TO THE INCLUSION OF
ITS REPORT IN THIS ANNUAL REPORT ON FORM 10-K. BECAUSE ANDERSEN HAS NOT
CONSENTED TO THE INCLUSION OF ITS REPORT IN THIS ANNUAL REPORT, IT MAY BE
DIFFICULT TO SEEK REMEDIES AGAINST ANDERSEN AND THE ABILITY TO SEEK RELIEF
AGAINST ANDERSEN MAY BE IMPAIRED.

REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE

To the Board of Directors
of Netegrity, Inc.:

We have audited in accordance with auditing standards generally accepted in
the United States the consolidated financial statements of Netegrity, Inc. for
the year ended December 31, 2001 included in this Form 10-K, and have issued our
report thereon dated January 30, 2002. Our audit was made for the purpose of
forming an opinion on those statements taken as a whole. The schedule listed in
the index in item 14 is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule as of and for the year ended December 31, 2001 has been subjected to
the auditing procedures applied in the audit of the basic financial statements
and, in our opinion, fairly states, in all material respects, the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.

ARTHUR ANDERSEN LLP

Boston, Massachusetts
January 30, 2002

76

REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE

To the Board of Directors
of Netegrity, Inc.:

Our audit of the consolidated financial statements referred to in our
report dated January 25, 2001, appearing in this Annual Report on Form 10-K of
Netegrity, Inc. also included an audit of the financial statement schedule
listed in Item 15(A)(2) of this Form 10-K for the year ended December 31, 2000.
In our opinion, the financial statement schedule for the year ended December 31,
2000, presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.

PRICEWATERHOUSECOOPERS LLP

Boston, Massachusetts
January 25, 2001

77

NETEGRITY, INC.

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

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

(1) Primarily uncollectible accounts written off, net of recoveries.

78

EXHIBIT INDEX

EXHIBIT
ITEM NO. ITEM AND REFERENCE
- --------- ------------------

2.01 Agreement and Plan of Merger, dated as of October 24, 2001,
by and among Netegrity, Inc., LKN Acquisition Corp., and
DataChannel, Inc., as amended by the First Amendment to the
Agreement and Plan of Merger dated as of December 3, 2001
and by the Second Amendment to the Agreement and Plan of
Merger, dated as of December 7, 2001 (filed as Exhibit 2.1
to Current Report on Form 8-K dated December 24, 2001 and
incorporated by reference).
3.01 Restated Certificate of Incorporation, as amended, of the
Registrant (filed as Exhibit 3.1 to Registration Statement
on Form S-3 filed February 12, 2002 and incorporated by
reference).
3.02 Amended and Restated By-Laws of the Registrant (filed as
Exhibit 3.03 to the Registrant's annual report on Form 10-K
for the year ended December 31, 1998, and incorporated by
reference).
4.01 Specimen certificate for shares of Common Stock of the
Registrant (filed as Exhibit 4.01 to the Registrant's
Registration Statement on Form S-18, No. 33-24446-B, and
incorporated by reference).
10.01(1) 1991 Director Stock Plan (filed as Exhibit 10.10 to Annual
Report on Form 10-K for the fiscal year ended March 31,
1991, and incorporated by reference).
10.02 Form of Non-Qualified Stock Option Agreement for the
Registrant's 1993 Non-Employee Director Stock Option Plan
(filed as Exhibit 10.12 to Annual Report on Form 10-K for
the fiscal year ended March 31, 1993, and incorporated by
reference).
10.03(1) 1994 Stock Plan (filed as Exhibit 4 to Registration
Statement on Form S-8, filed on January 26, 1998, and
incorporated by reference).
10.04(1) 1997 Stock Option Plan (filed with the Definitive Proxy
Statement filed on March 19, 1999 and incorporated by
reference).
10.05(1) 1997 Non-Employee Director Stock Option Plan (filed as
Exhibit 10.16 to Annual Report on Form 10-K for the fiscal
year ended December 1977, and incorporated by reference).
10.06(1) 2001 Interim General Stock Incentive Plan (filed as Exhibit
4.1 on Form S-8, filed on October 31, 2002, and incorporated
by reference).
10.07(1) 2002 Employee Retention General Incentive Plan (filed as
Exhibit 4.1 on Form S-8, filed on October 31, 2002, and
incorporated by reference).
10.08(1) 2002 General Stock Incentive Plan (filed as Exhibit 4.1 on
Form S-8, filed on October 31, 2002, and incorporated by
reference).
10.09(1) 2002 Employee Stock Purchase Plan (filed as Exhibit 4.1 on
Form S-8, filed on October 31, 2002, and incorporated by
reference).
+10.10 Commercial Lease dated as of March 31, 2000 between the
Registrant and Renaissance Worldwide, Inc. (filed as Exhibit
10.09 on Form 10-K for the year ended December 31, 2001 and
incorporated by reference).
10.11 Preferred Stock and Warrant Purchase Agreement among the
Company, Pequot Private Equity Fund L.P. and Pequot Offshore
Private Equity Fund, Inc. (filed as Exhibit 4 to Report on
Form 8-K filed on January 15, 1998, and incorporated by
reference).
10.12(1) Employment Agreement between Netegrity, Inc. and Barry
Bycoff dated as of May 31, 1996 (filed as Exhibit 10.1 to
Annual Report on Form 10-K/A for the year ended December 31,

EXHIBIT INDEX

10.13(1) Netegrity Inc. 2000 Stock Incentive Plan as amended (filed
as Exhibit 10.12 to Annual Report on Form 10-K for the year
ended December 31, 2001, and incorporated by reference).
10.14 Lease Agreement by and between Netegrity, Inc., and
Stonybrook Associates, LLC dated August 2002 (filed as
Exhibit 10.1 to Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002, and incorporated by
reference).
10.15(1) Offer letter from Netegrity, Inc., to Thomas Thimot, dated
September 6, 2002 (filed as Exhibit 10.2 to Quarterly Report
on Form 10-Q for the quarter ended September 30, 2002, and
incorporated by reference).
10.16(1) Indemnification Agreement by and between Netegrity, Inc., a
Delaware corporation, and Eric Giler, a director of the
Corporation (filed as Exhibit 10.3 to Quarterly Report on
Form 10-Q for the quarter ended September 30, 2002, and
incorporated by reference).
10.17(1) Indemnification Agreement by and between Netegrity, Inc., a
Delaware corporation, and Lawrence D. Lenihan, Jr., a
director of the Corporation (filed as Exhibit 10.4 to
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002, and incorporated by reference).
10.18(1) Indemnification Agreement by and between Netegrity, Inc., a
Delaware corporation, and Michael L. Mark, a director of the
Corporation (filed as Exhibit 10.5 to Quarterly Report on
Form 10-Q for the quarter ended September 30, 2002, and
incorporated by reference).
10.19(1) Indemnification Agreement by and between Netegrity, Inc., a
Delaware corporation, and Ralph B. Wagner, a director of the
Corporation (filed as Exhibit 10.6 to Quarterly Report on
Form 10-Q for the quarter ended September 30, 2002, and
incorporated by reference).
10.20(1) Consulting Agreement by and between Netegrity, Inc. and
Thomas Palka (filed as Exhibit 10.7 to Quarterly Report on
Form 10-Q for the quarter ended September 30, 2002, and
incorporated by reference).
10.21(1) Transition Agreement by and between Netegrity, Inc. and
Thomas Palka (filed as Exhibit 10.8 to Quarterly Report on
Form 10-Q for the quarter ended September 30, 2002, and
incorporated by reference).
10.22(1) Executive Retention Agreement by and between Netegrity,
Inc., and Barry Bycoff (filed as Exhibit 10.9 to Quarterly
Report on Form 10-Q for the quarter ended September 30,
2002, and incorporated by reference).
10.23(1) Executive Retention Agreement by and between Netegrity,
Inc., and Regina O. Sommer (filed as Exhibit 10.10 to
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002, and incorporated by reference).
10.24(1) Executive Retention Agreement by and between Netegrity,
Inc., and Deepak Taneja (filed as Exhibit 10.11 to Quarterly
Report on Form 10-Q for the quarter ended September 30,
2002, and incorporated by reference).
10.25(1) Executive Retention Agreement by and between Netegrity,
Inc., and James Rosen (filed as Exhibit 10.12 to Quarterly
Report on Form 10-Q for the quarter ended September 30,
2002, and incorporated by reference).
10.26(1) Executive Retention Agreement by and between Netegrity,
Inc., and William Bartow (filed as Exhibit 10.13 to
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002, and incorporated by reference).

EXHIBIT INDEX

10.27(1) Executive Retention Agreement by and between Netegrity,
Inc., and Thomas Thimot (filed as Exhibit 10.14 to Quarterly
Report on Form 10-Q for the quarter ended September 30,
2002, and incorporated by reference).
10.28(1) Executive Retention Agreement by and between Netegrity,
Inc., and Scott Sullivan (filed as Exhibit 10.15 to
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002, and incorporated by reference).
10.29(1) Executive Retention Agreement by and between Netegrity,
Inc., and Carmen Parisi (filed as Exhibit 10.16 to Quarterly
Report on Form 10-Q for the quarter ended September 30,
2002, and incorporated by reference).
10.30(1) Executive Retention Agreement by and between Netegrity,
Inc., and Bradley Nelson (filed as Exhibit 10.17 to
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002, and incorporated by reference).
10.31(1) Executive Retention Agreement by and between Netegrity,
Inc., and Mary Jefts (filed as Exhibit 10.18 to Quarterly
Report on Form 10-Q for the quarter ended September 30,
2002, and incorporated by reference).
10.32(1) Executive Retention Agreement by and between Netegrity,
Inc., and Vadim Lander (filed as Exhibit 10.19 to Quarterly
Report on Form 10-Q for the quarter ended September 30,
2002, and incorporated by reference).
10.33(1) Executive Retention Agreement by and between Netegrity,
Inc., and Amit Jasuja (filed as Exhibit 10.20 to Quarterly
Report on Form 10-Q for the quarter ended September 30,
2002, and incorporated by reference).
10.34(1) Executive Retention Agreement by and between Netegrity,
Inc., and Thomas Locke (filed as Exhibit 10.21 to Quarterly
Report on Form 10-Q for the quarter ended September 30,
2002, and incorporated by reference).
10.35(1) Executive Retention Agreement by and between Netegrity,
Inc., and Mary Colette Cooke (filed as Exhibit 10.22 to
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002, and incorporated by reference).
10.36(1) Executive Retention Agreement by and between Netegrity,
Inc., and Geoffrey Charron (filed as Exhibit 10.23 to
Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002, and incorporated by reference).
10.37(1) Executive Retention Agreement by and between Netegrity,
Inc., and Michael Hyman (filed as Exhibit 10.24 to Quarterly
Report on Form 10-Q for the quarter ended September 30,
2002, and incorporated by reference).
10.38(1) Executive Retention Agreement by and between Netegrity,
Inc., and Jill Maunder (filed as Exhibit 10.25 to Quarterly
Report on Form 10-Q for the quarter ended September 30,
2002, and incorporated by reference).
10.39(1) Offer letter from Netegrity, Inc., to Stephanie Feraday,
dated October 30, 2002 (filed herewith).
10.40(1) Executive Retention Agreement by and between Netegrity,
Inc., and Stephanie Feraday (filed herewith).
16.01 Letter from PricewaterhouseCoopers LLP regarding the change
in accountant (filed as Exhibit 16.1 to Report on Form 8-K
dated March 18, 2001, and incorporated by reference).
21.01 Subsidiaries of the Registrant (filed herewith).
23.01 Consent of PricewaterhouseCoopers LLP (filed herewith).
23.03 Consent of KPMG LLP (filed herewith).