V ONE CORP/ DE - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED: DECEMBER 31, 1998

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM ______________ TO ______________

COMMISSION FILE NUMBER 0-21511

V-ONE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 52-1953278
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

20250 CENTURY BLVD., SUITE 300, GERMANTOWN, MARYLAND 20874
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(301) 515-5200
(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, $0.001 PAR VALUE PER SHARE

(TITLE OF CLASS)
TRADED ON THE NASDAQ NATIONAL MARKET

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X ] No [ ] .

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of the voting and non-voting equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked price of such common equity, as of on March
1, 1999 was approximately $50,284,000. This calculation does not reflect a
determination that persons are affiliates for any other purposes.

Registrant had 16,761,299 shares of Common Stock outstanding as of March 1,
1999.

DOCUMENTS INCORPORATED BY REFERENCE

Part III -- Portions of the registrant's definitive proxy statement to be issued
in conjunction with registrant's 1999 annual stockholder's meeting to be held on
May 13, 1999.

Forward-Looking Statements

In addition to historical information, this Annual Report contains
forward-looking statements that involve risks and uncertainties. These
statements may differ in a material way from actual future events. For instance,
factors that could cause results to differ from future events include rapid
rates of technological change and intense competition, among others. Readers are
cautioned not to place undue reliance on these forward-looking statements. V-ONE
Corporation undertakes no obligation to publicly revise these forward-looking
statements or to reflect events or circumstances that arise after the date
hereof.

PART I

ITEM 1. BUSINESS

V-ONE Corporation ("V-ONE" or the "Company") develops markets and licenses a
comprehensive suite of network security products that enable organizations to
conduct secured electronic transactions and information exchange using public
switched networks, such as the Internet. The Company's suite of products address
network user authentication, perimeter security, access control and data
integrity through the use of smart cards, tokens, digital certificates,
firewalls and encryption technology. The Company's products interoperate
seamlessly and can be combined to form a complete, integrated network security
solution or can be used as independent components in customized security
solutions. The Company's products have been designed with an open and flexible
architecture to enhance application functionality and to support emerging
network security standards. In addition, the Company's products enable
organizations to deploy and scale their solutions from small single-site
networks to large multi-site environments, and can accommodate both wireline and
wireless media.

The Company was incorporated in Maryland in February 1993 and reincorporated in
Delaware in February 1996. Effective July 2, 1996, the Company changed its name
from "Virtual Open Network Environment Corporation" to "V-ONE Corporation." The
Company's principal executive offices are located at 20250 Century Boulevard,
Suite 300, and Germantown, Maryland 20874. The Company's telephone number is
(301) 515-5200.

FINANCING ACTIVITIES

The Company offered 3,000,000 shares of its Common Stock, par value $0.001
("Common Stock"), in an initial public offering (the "IPO") on October 24, 1996
at $5.00 per share. On November 22, 1996, the Company's underwriters exercised
their option to purchase an additional 200,000 shares of Common Stock from the
Company and certain shareholders for $5.00 per share.

On December 8, 1997, the Company, issued 4,000 shares of Series A Convertible
Preferred Stock ("Series A Stock") to Advantage Fund II Ltd. ("Advantage") for
$4 million in the aggregate. Each share of Series A Stock was convertible into
shares of Common Stock, $0.001 par value per share, of the Company ("Common
Stock") and warrants to purchase shares of Common Stock ("Series A Warrants").

Due to the Maximum Share Amount limitation found in Section 7(a)(1) of the
Certificate of Designations of the Series A Stock ("Certificate"), the Company
was obligated to convert shares of Series A Stock held by Advantage. On
September 21, 1998, the Company sent an inconvertibility notice to Advantage
pursuant to Section 7(a)(2) of the Certificate indicating that, as of September
11, 1998, Advantage had the right to have some of its shares of Series A Stock

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redeemed by the Company for the Share Limitation Redemption Price (which term is
defined in the Certificate).

On September 22, 1998, the Company and Advantage entered into a waiver agreement
("Waiver Agreement") and Amendment No. 1 ("Amendment No. 1") to the Registration
Rights Agreement dated as of December 3, 1997 by and between the Company and
Advantage (as amended, "Registration Rights Agreement"). Pursuant to the Waiver
Agreement, the Company redeemed 2,462 shares of Series A Stock for $3,200,000 in
the aggregate on November 20, 1998. Advantage waived all accrued dividends on
the Series A Stock. No shares of Series A Stock remain outstanding.

Simultaneously with the execution of the Waiver Agreement, the Company granted
to Advantage warrants to purchase 100,000 shares of the Company's Common Stock
at an exercise price of $2.125 per share and warrants to purchase 389,441 shares
of the Company's Common Stock at an exercise price of $4.77 per share, all of
which expire on September 21, 2003 (collectively "Additional Warrants").
Pursuant to the terms of Amendment No. 1, the Company has agreed to file a
registration statement with respect to the shares of Common Stock underlying the
Additional Warrants.

On November 20, 1998, the Company sold 1,860,000 shares of its Common Stock, at
$2.00 per share to a group of accredited investors pursuant to its Placement
Agent Agreement dated October 9, 1998, as amended, between the Company and
LaSalle St. Securities, Inc. ("LaSalle"). The shares of Common Stock were sold
pursuant to Rule 506 of Regulation D promulgated under the Securities Act of
1933, as amended ("Securities Act"). The Company received $3,366,600 in net sale
proceeds after payment of commissions of 8% of the gross sale proceeds and
non-accountable expense allowance of 1.5% of the gross sale proceeds to LaSalle.

LaSalle also received warrants in the aggregate to purchase 50,000 shares of
Common Stock at an exercise price of $2.125 per share. These warrants were
issued pursuant to Rule 506 of Regulation D promulgated under the Securities
Act.

Between December 4, 1998 and December 9, 1998, the Company, sold 675,000 shares
of its Common Stock at $2.00 per share to certain accredited investors pursuant
to Rule 506 of Regulation D promulgated under the Securities Act. The Company
received $1,308,000 in net sale proceeds after payment of commissions to LaSalle
and Coldwater Capital LLC.

On February 24, 1999, V-ONE obtained a $3,000,000 term loan from Transamerica
Business Credit Corporation. The term loan is due on August 31, 1999.
Thereafter, the term loan will convert into a revolving credit facility if V-ONE
is not in default under its credit agreement with Transamerica. The maximum
amount that can be borrowed by V-ONE under the revolving credit facility is the
lesser of $3,000,000 and 80% of eligible receivables. The revolving credit
facility expires on August 31, 2000.

In connection with this loan, V-ONE granted a security interest in all of its
assets, including its intellectual property, to Transamerica. If V-ONE is unable
to repay the loan or there is an event of default under the loan, Transamerica
could foreclose on its security interest.

Pursuant to the terms of the loan agreement relating to this term loan, receipt
by V-ONE of an opinion from its independent auditors which expresses doubt with
regard to the ability of V-ONE to continue as a going concern constitutes an
event of default under the loan agreement and allows Transamerica to foreclose
on its security interest. V-ONE has received such an opinion from its
independent auditors in connection with their review of V-ONE's financial
statements as of and for the year ended December 31, 1998. As of the date of
such opinion, there was an event of default under the loan agreement; however,
Transamerica has subsequently waived this event of default. In consideration for
such waiver, V-ONE has agreed to (a) grant an affiliate of Transamerica warrants
to purchase 100,000 shares of Common Stock at an exercise price of $3.25 per
share and (b) accept an additional financial covenant that V-ONE's net worth
will be $5,000,000 as of June 30, 1999 and September 30, 1999. There can be no
assurance that V-ONE will be able to comply with the loan covenants.

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BACKGROUND

OVERVIEW. Over the last decade, decentralized computing has emerged as a result
of the widespread adoption of personal computers, local area networks and wide
area networks. This emergence has enabled users to communicate with each other
and share data throughout an entire organization. With the recent popularization
of the Internet and increased performance capabilities offered by high-speed
modems, ISDN services and frame relay technology, the volume of data transferred
over networks has increased dramatically. Further fueling this expansion,
carriers and Internet service providers have dramatically reduced their tariffs
for their high speed aggregation services running over T-1 and T-3 transits,
which have data transfer rates that approximate local area network performance.

In addition, leading hardware and software vendors have adopted and support
TCP/IP, the Internet's non-proprietary communications protocol, for computer
communications and information exchange. This open platform, along with the
emergence of the Internet, allows increasing numbers of businesses and consumers
to engage in electronic commerce, such as home banking, credit verification,
securities trading and home shopping. The problem is that TCP/IP networks are
unsecure. Using the Company's technology, users can create "virtual" private
networks at a fraction of the cost of actual private wide area networks.

Organizations, recognizing the potential cost savings using public networks,
such as the Internet, as an extension of their enterprise networks, have begun
connecting branch offices and remote and mobile users to mission critical
applications and corporate resources such as groupware, customer databases and
inventory control systems. Also, the Internet can be used as a lower cost
alternative to value-added networks as a means to link companies with customers,
suppliers and trading partners. This instantiation is known in the industry as
extranet architecture. The need for internal security continues to grow as
businesses deploy extranets, intranets, internal networks using TCP/IP
protocols, and browser-based applications to facilitate geographically dispersed
communications and the transmission of information throughout an enterprise in a
cost-effective manner.

With the increased use of the Internet and intranets, many organizations are
discovering that network security is a key element in successfully implementing
distributed applications and services, including electronic mail, electronic
data interchange, electronic commerce and information exchange services.
Information becomes more vulnerable as organizations rely heavily on computer
networks for the electronic transmission of data. In the absence of
comprehensive network security, individuals and organizations are able to
exploit system weaknesses to gain unauthorized access to networks, network
transmissions and individual network computers. These individuals and
organizations use such access to alter or steal data or, in some cases, to
launch destructive attacks on data and computers within a network.

NETWORK SECURITY ELEMENTS. Each of the following elements is critical in
creating a complete network security solution to protect an organization's data,
network and computer systems:

- - - - Data Privacy through Encryption -- Preventing unauthorized users from
viewing private data through the process of "scrambling" data before it is
transmitted or placed into electronic storage.

- - - - User Identification and Authentication -- Verifying the user's identity to
prevent unauthorized access to computer and network resources.

- - - - Authorization -- Controlling which systems, data and applications a user can
access.

- - - - Data Integrity -- Ensuring that network data, whether in storage or
transmission, has not been changed or compromised by any unauthorized
manipulation.

- - - - Non-repudiation -- Verifying that data transmissions have been executed
between specific parties so that neither party may legitimately claim that the
transaction did not occur.

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NETWORK SECURITY PRODUCTS. Over the years, a number of network security products
have been developed, including passwords, token-based access devices, firewalls,
encryption products, biometric devices, smart cards and digital certificates.
Each of these products was designed with a specific function or objective;
however, few were designed to meet all of the needs of enterprise-wide network
security. Single function or "point" products that have been developed to
address one or a limited number of network security requirements include the
following:

Passwords and Tokens -- Until recently, passwords were the most common method of
authentication. Static (non-changing) passwords were developed as the first
attempt to address the need for authentication. Static passwords, however, are
inadequate as they are susceptible to "sniffing" (unauthorized viewing) and to
attacks using software designed to randomly generate and enter thousands of
passwords. As a result, dynamic passwords, including single-use passwords, were
created to provide a greater level of authentication. Dynamic password
implementations include the use of time-varying and challenge-response
passwords. Generally, dynamic passwords require the use of a hand-held,
electronic device called a hardware token.

Dynamic passwords were subsequently strengthened by incorporating two-factor
identification, which provides a higher level of authentication in that two
independent components are combined to identify a user (for example, a bank ATM
card and a PIN code). However, dynamic passwords and two-factor identification
provide only a limited level of security because the sessions they authenticate
are still vulnerable to interception.

Biometric Systems - Biometric systems are used to measure fingerprint images,
voice analysis, or facial/retinal characteristics. They provide strong user
authentication while eliminating the need for cards or passwords.

Firewalls -- Firewalls are network access control devices that regulate the
passage of information based on a set of user-defined rules. Generally,
firewalls are based upon one of two technical architectures: packet filters
(customarily used in routers) or proxy-based application-level gateways. Packet
filters screen network traffic and allow or prevent network access based upon
source and destination Internet protocol addresses. Proxy-based
application-level gateways provide access to applications on the network only
after the user has identified the desired application and submitted a valid
password.

Encryption -- Encryption products provide privacy for transmitted data.
Encryption algorithms scramble data so that only users with the appropriate
decoding key are able to view transmitted or stored data. Public-key encryption
has recently gained additional credibility for managing the keys (codes) used to
encrypt and subsequently decrypt user designated data.

Smart Cards -- Smart cards are similar in size to credit cards, but contain a
small, tamper-proof microprocessor chip and are capable of storing data and
processing complex encryption algorithms. Smart cards are advanced
authentication tokens that are also capable of storing information, such as
credit card or bank account numbers, medical records, photographic images or
digital certificates.

Digital Certificates -- A digital certificate serves as an individual's
electronic identification card. The certificates are digitally certified by a
third party, called a certificate authority, who vouches for the identity of the
certificate holder. Digital certificates are being standardized as a means of
authenticating on-line users and are perceived to be a key technology for the
expansion of secure transactions and electronic commerce.

As organizations increase their dependence on the Internet and deploy intranets,
the Company believes that there will be an increasing need for a comprehensive
enterprise-wide network security solution. Many network security vendors,

5

however, have focused on developing products that address only one or a limited
number of specific security requirements. In addition, products developed by
different vendors are often difficult to integrate with each other and pose
interoperability problems. Consequently, the Company believes that organizations
will increasingly demand comprehensive network security solutions that are easy
to implement and transparent to the user. These solutions must have the ability
to integrate with existing applications, networks and/or mainframe applications,
while being flexible and powerful enough to address the needs created by newly
developed technologies.

THE V-ONE SOLUTION

The Company offers a comprehensive suite of network security products that
address the need for identification and authentication, integrity,
non-repudiation, authorization and encryption. This combination of network
security products enables organizations to identify and authenticate network
users while controlling access to specific network services. The Company's
technology is designed to prevent unauthorized access to an organization's
mission critical applications and internal data without impeding permitted uses
of the organization's resources and information. The Company's products are
compatible with many leading hardware platforms and operating systems, as well
as many third-party security products. The Company's customers are able to
integrate V-ONE's security products into their networks with minimal impact on
existing systems and applications.

The Company's current suite of products can be combined and configured to
provide network perimeter security, secure remote access and
intra/inter-enterprise security to facilitate secured electronic commerce and
information exchange. The Company's principal products are SmartGate, a
client/server product that offers identification and authentication, integrity,
non-repudiation, authorization and encryption; and SmartWall, an
application-level firewall that incorporates SmartGate's functionality. The
Company provides customers with two-factor identification, mutual
authentication, fine-grained access control and encryption by combining smart
card emulation technology with the SmartGate server. In addition, SmartGate
users can access enterprise networks from remote locations using SmartCAT
technology incorporated in SmartGate.

The Company's technology provides customers with the ability to create network
security solutions designed to meet their specific network security
requirements. V-ONE's customers can securely deploy a broad range of services
and applications to engage in secured electronic transactions, information
exchange and remote access to mission critical applications and corporate
resources. The Company's technology is designed to be (i) modular, allowing
organizations to utilize the security product or products best suited to address
their immediate needs, with a seamless migration path to additional products as
required, (ii) scaleable, ranging from a single system supporting several users
to multiple systems potentially supporting hundreds of thousands of users, and
(iii) portable, securing access independent of any particular user's machine or
network entry point through the use of smart card technology.

STRATEGY

The Company's goal is to become the leading provider of comprehensive, open and
interoperable network security products that are easy to install, convenient to
use, and highly scalable. The Company's strategy to realize its goal contains
the following elements:

- - - - Provide an Interoperable, Scaleable and Open Solution. The Company intends
to continue to provide network security products that operate on leading
platforms and that are interoperable and compatible with other network security
products. The flexible and open architecture of the Company's products enable

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the Company to deliver component technologies for a seamless and interoperable
system. In addition, the Company's technology is scaleable,
application-independent and designed both to integrate with existing
technologies as well as to support emerging standards and applications.

- - - - Augment and Integrate with Existing Security Products. The Company intends
to continue to offer products that interoperate with a wide variety of
third-party security products, including multiple firewalls and tokens, allowing
a customer to augment existing network security systems. The Company believes
that its technology protects a customer's existing network security investments
because the Company's products are designed to integrate easily with point
products currently employed by its customers. The Company believes that this
strategy will enable it to gain access to potential customers who have
previously made network security investments but whose network security needs
are continuing to evolve.

- - - - Leverage Key Reference Accounts in Selected Vertical Markets. The Company
has identified strategic vertical markets that require sophisticated network
security solutions and has targeted its marketing and direct sales efforts on
key participants within these selected vertical markets. By successfully
installing its products at key accounts, the Company intends to leverage
positive references from its installed customer base to expand its market
penetration within those information critical industries. The Company intends to
increase its marketing and sales efforts to expand its customer base in
additional vertical markets.

- - - - Develop and Leverage Strategic Alliances. The Company has established
strategic alliances to increase the distribution and market acceptance of its
network security products including an alliance with GTE Internetworking, a unit
of GTE Corp. ("GTE"), and MCI Telecommunications Corporation ("MCI"). The
Company intends to continue to strengthen its existing strategic alliances while
forging new relationships with key industry participants. In addition, the
Company is exploring opportunities to develop new products and expand the
functionality of its existing products through alliances with key vendors of
complementary technologies.

PRODUCTS AND SERVICES

The Company's network security products are designed to protect an
organization's information and networks from unauthorized access while allowing
users of the network to conduct business securely over the Internet and
intranets. These products have been designed to interoperate seamlessly and
enhance application functionality. The Company designs its products so that they
can be combined in different configurations to provide customized solutions for
its customers. The following table lists the Company's current products:

- - ---------------------------------------------------------------------------------------------------------------
DATE OF
PRODUCT CATEGORY DESCRIPTION INTRODUCTION

SmartGate(REGISTERED) Client/server End-to-end, application level network data Q4 1995
security security system providing two-factor
identification, mutual authentication, encryption
and access control

Air SmartGate(TRADEMARK) Wireless Client/ A system that provides an end-to-end security Q4 1998
Server Security system for two-way pagers

SmartWall(REGISTERED) Network perimeter An application level, dual-homed firewall that Q4 1994
security protects internal networks while enabling remote
(firewall) access to internal resources

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

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

SmartCAT(REGISTERED) Smart card Smart card client software that is interoperable Q2 1994
technology with third-party smart cards and smart card
readers that incorporate SmartGate(REGISTERED)
technology

Online Registration Client/server A system that allows remote creation and Q2 1996
Service(TRADEMARK) token management of secure tokens and workstation
distribution configuration files incorporated in
SmartGate(REGISTERED) technology

Wallet Electronic Electronic technology that enables secure payment Q3 1995
Technology(TRADEMARK) commerce transactions containing credit card information
incorporated in SmartGate(REGISTERED) technology

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

SmartGate -- SmartGate is designed to interoperate easily with most TCP/IP-based
applications and to allow the end user to securely use existing and future
software applications over the Internet and intranets. SmartGate employs
two-factor identification (two independent components are combined to
authenticate a user) and mutual authentication (both the server and client,
SmartPass(TRADEMARK), determine that the other party to the transaction is
authorized to participate in the transaction) through the use of virtual or
physical smart cards or other authentication devices.

SmartGate establishes a secured, encrypted link over an unsecured network once
both parties to a communication over the unsecured network have been identified
and authenticated. The authorized user is then granted access to only those
services and data for which the user has been approved. SmartGate supports
secure remote administration, which can be accessed using a Web browser or
telnet. SmartGate also supports the data encryption standard ("DES") (which, in
most forms, cannot be exported from the United States without the approval of
the Department of Commerce) and the RC4 encryption algorithm of RSA Data
Security, Inc. ("RSA") (which is exportable).

SmartGate server software versions are available on a variety of leading
operating systems, including RedHat's Linux, Berkeley Software Development,
Inc.'s BSD/OS, Sun Microsystems, Inc.'s Solaris, and Trusted Solaris, and
Hewlett-Packard Company's HP-UX. SmartGate client supports Microsoft
Corporation's Windows versions 3X, Windows 95 and 98 and Windows NT. A turnkey
version of SmartGate server is available for BSD/OS on an Intel Pentium hardware
platform.

Air SmartGate - working in a manner similar to SmartGate allows for secure,
encrypted, authenticated communication between two-way pagers and e-mail through
a SmartGate server.

SmartWall -- SmartWall, the Company's firewall product, provides a high level of
protection against unauthorized access to a secured network from an unsecured
network. SmartWall also allows transparent access from the secured network to
services and applications on the unsecured network. SmartWall includes a secured
graphical user interface for firewall administration, strong mutual
authentication to identify users and complete transparency for authorized
traffic. In addition, SmartWall allows multiple sites to be administered from
any location using a Web browser or telnet. SmartWall supports multiple types of
existing encryption products, authentication tokens, proxy services and secure
transmission channels. SmartGate is bundled into every SmartWall.

SmartWall software-only versions are currently available on a variety of leading
operating systems, including Windows NT, BSD/OS, Solaris and HP-UX. A SmartWall
turnkey system is currently available for BSD/OS.

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SmartCAT -- The SmartCAT product, when used with the SmartGate server, provides
two-factor identification and mutual authentication using physical smart card
technology. There are three key parts to the SmartCAT product: (i) a standard
smart card (ISO/IEC 7816-3, T=0 compliant), (ii) a smart card reader designed by
the Company, and (iii) the Company's proprietary SmartPass client software.
Together these elements provide smart card-based encryption and authentication
services.

Online Registration Service -- A user must be registered to access an
authentication-based system. The Online Registration Service product is a system
for efficient on-line enrollment of large user communities. The Online
Registration Service completely automates the creation and exchange of the
user's keys and initializes the user's default access privileges. The Online
Registration Service either creates a virtual smart card or formats a physical
smart card that contains a shared secret key that is PIN code protected. Online
registration service is now incorporated in SmartGate server version 2.6 and
SmartPass client version 3.3.

Wallet Technology -- Wallet Technology enables secured electronic credit card
payment transactions over unsecured networks. Wallet Technology encrypts the
credit card information supplied by the purchaser and forwards that information
to the vendor. The vendor adds the purchase value to the encrypted credit card
information and sends all of this information to the credit card
issuer/processor. The issuer/processor decodes this information and either
authorizes or rejects the purchaser's request. The Company's design does not
allow the vendor to view the unencrypted credit card information supplied by the
purchaser. Elements of the Wallet Technology are incorporated in SmartGate.

Network Security Support -- The Company's support staff provides pre-and
post-sales support, vulnerability analysis, performance analysis, systems
integration and system security architecture support. The Company's support
staff also provides fee-based engineering services.

TECHNOLOGY

The cornerstone of the Company's network security solution is its patented
SmartGate client/server security technology. SmartGate enables two-factor
identification, mutual authentication and fine-grained access control for most
TCP/IP-based client/server applications. Using SmartGate technology,
organizations can employ two-factor identification and mutual authentication to
identify and authenticate a network user while fine-grained access control
restricts each user's access to only those services to which the user is
entitled.

Two-Factor Identification -- Two-factor identification employs two independent
components to identify a user using an identity token contained in a physical or
virtual smart card. The information in the physical or virtual smart card is
secured by a PIN code that is set by the user and is not known by anyone else.
SmartCAT provides the means for accessing and using smart cards via smart card
readers. SmartGate client provides the means for using virtual smart cards. Both
physical and virtual smart cards store information about the user including the
user's keys, which are used for authentication. The keys also contain
information that allows the SmartGate client to authenticate the SmartGate
server with which it communicates.

Mutual Authentication -- Mutual authentication employs a dual set of challenges
and encrypted responses that interact to enable both the client and the server
to determine that the other party to the transaction is authorized to
participate in the transaction. SmartGate's mutual authentication employs dual
challenges coupled with encrypted responses to ensure non-repudiation between
the two parties to an electronic transaction. When a client application attempts
to make a connection with an application service protected by a SmartGate
server, the SmartGate client performs a mutual authentication process with the
SmartGate server protecting the application service. During the authentication
process, the SmartGate server sends a challenge to the SmartGate client, and the
SmartGate client uses the secret keys on the physical or virtual smart card to
correctly respond to the challenge. In addition, the SmartGate client sends a

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challenge to the SmartGate server, and the SmartGate server must prove to the
SmartGate client that the server is the issuer of the client's secret key.

Fine-Grained Access Control -- Fine-grained access control employs access
control lists to compare an identified user's request for services against a
list of entitlements to determine whether to grant the user access to the
requested service. SmartGate employs an access control list to define the
specific Web content page, file or host application that identified users are
permitted to use. If SmartGate determines that the user is permitted to access
the requested service, the connection is passed through the SmartGate server to
the requested service; otherwise the connection is dropped.

In addition to providing identification, authentication and access control, the
SmartGate client and server independently compute a session key for encrypting
the current TCP/IP data stream. The encryption key is computed based on
information exchanged during the authentication process and is never transmitted
over the network.

SALES AND MARKETING

The Company markets its network security products through its "direct touch"
sales force through systems integrators, value-added resellers ("VARs") and
international distributors. The sales organization is equally incented to work
with resellers and channel partners. This agnostic approach anticipates the need
to grow sales via opening new channels. "Direct touch" gives V-ONE the option to
work directly in support of a sales opportunity without requiring the Company to
assume the burden of credit collection or high inventory levels but still ship
direct if required by the end customer.

Direct Marketing Effort -- The Company has developed its initial marketing and
direct touch sales efforts on key industry participants within certain industry
and market segments, including financial services, telecommunications and
information services companies and government agencies. The Company employs a
direct touch sales force to market its products to these key industry
participants. The Company's direct touch sales force solicits prospective
customers and provides technical advice and support with respect to the
Company's products. In 1996, the Company opened regional sales offices in New
York, New York and San Francisco, California. The Company added a Chicago,
Illinois regional sales office in 1997, and added regional offices in Boston,
Massachusetts, Columbus, Ohio, Northern Virginia, and Houston, Texas in 1998.

Indirect Marketing Effort -- An important component of the Company's sales
strategy is the development of indirect sales channels such as Internet Service
Providers ("ISPs"), systems integrators and value-added network service
providers. The Company utilizes indirect sales channels to leverage the efforts
of its direct sales force. The Company has initiated sales and marketing
programs to sign up integrators, value-added resellers ("VARs") and original
equipment manufacturers within the United States. The Company has established
relationships with international distributors in the United Kingdom, Sweden,
Germany, Belgium, Canada, China, Chile, Japan, Singapore, South Africa, South
Korea and Australia.

Strategic Alliance Development -- The Company plans to increase market
penetration by developing and capitalizing upon strategic alliances. These
alliances are intended to increase the distribution and market acceptance of
V-ONE's network security products in markets where direct sales and traditional
indirect sales efforts are not cost-effective. The Company intends to continue
efforts to strengthen its existing relationships while also forging new
relationships with key industry participants.

V-ONE has broadened its customer base and had no customers with 10% or more of
its 1998 sales. Approximately 12% of 1997 sales were to Government Technology
Services, Inc.

10

CUSTOMER SERVICE AND SUPPORT

The Company believes that customer support and product maintenance is critical
to retaining existing customers and attracting prospective customers. The
Company provides on-site installation support and basic administrator training
with each turnkey hardware product sale. Each turnkey product comes with 24
hours a day, seven days per week hardware and software support for 90 days. Upon
expiration of the 90-day period, customers may purchase an annual maintenance
plan. Purchasers of the Company's software products may also purchase annual
maintenance plans. The annual maintenance plan provides customers access to the
Company's customer service line, technical support personnel and software
upgrades.

The Company provides additional user or administrator training, on-site support,
vulnerability analysis, performance analysis, systems integration and system
security architecture support as an optional service through its support staff.
Additionally, the Company provides customer support services for those customers
who have entered into an evaluation agreement with the Company.

PRODUCT DEVELOPMENT

The market for the Company's products is dynamic and rapidly changing. The
Company believes that its future success will depend upon its ability to: (i)
enhance its existing products, (ii) identify new opportunities to leverage
existing technologies, and (iii) develop new technologies resulting in new
products, markets and services. Accordingly, the Company expects to continue to
make a significant investment in research and development, product market
analysis and systems integration. The Company believes that its customer-driven
development strategy will enable it to continue to broaden its product
offerings.

COMPETITION

The market for network security products and services is intensely competitive.
The Company expects competition to intensify in the future.

Currently, the Company competes in several different markets, including hardware
assisted encryption devices, token authentication, smart card-based security
applications and electronic commerce applications. The Company's competitors for
Internet and intranet perimeter security and access control include Ascend
Communications, Inc., AXENT Technologies, Inc., Northern Telecom Limited (Nortel
Networks), Check Point Software Technology Ltd., Cisco Systems, Inc.,
International Business Machines Corporation, Secure Computing Corporation, Sun
Microsystems, Inc. and Network Associates, Inc.

The Company competes to a lesser degree with token vendors because the Company's
SmartGate product supports many vendor tokens. Token vendors include, AXENT
Technologies, Inc., Leemah DataCom Security Corporation, National Semiconductor
Inc., Racal-Guardata, Inc. and Security Dynamics Technologies, Inc. ("Security
Dynamics").

For smart card-based security applications, the Company principally competes
with those token vendors listed above who offer smart card technology.

The Company's principal competitors in electronic commerce applications are
Netscape Communication's Secure Socket Layer, Open Market Inc.'s Secure HTTP and
Cylink Corporation's transaction software.

Because of the rapid expansion of the network security market, the Company will
face competition from existing and new entrants, possibly including the
Company's customers, suppliers and/or resellers. There can be no assurance that

11

the Company's competitors will not develop network security products that may be
more effective than the Company's current or future products or that the
Company's technologies and products would not be rendered obsolete by such
developments.

Many of the Company's current and potential competitors have longer operating
histories, greater name recognition, larger installed customer bases and
significantly greater financial, technical and marketing resources than the
Company. As a result, they may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the promotion and sale of their products, than the Company. There
can be no assurance that the Company's customers will not perceive the products
of such other companies as substitutes for the Company's products.

The Company believes that the principal competitive factors affecting the market
for network security products include effectiveness, scope of product offerings,
technical features, ease of use, reliability, customer service and support, name
recognition, distribution resources and price. Current and potential competitors
have established, or may establish in the future, strategic alliances to
increase their ability to compete for the Company's prospective customers.
Accordingly, it is possible that new competitors or alliances may emerge and
rapidly acquire significant market share. Increased competition may result in
price reductions, reduced gross margins and loss of market share, which would
materially adversely affect the Company's business, financial condition and
results of operations.

BACKLOG

The Company's customers order on an as-needed basis. The Company has typically
been able to ship products within 30 days after the customer submits a firm
purchase order. The Company does not generally maintain long-term contracts with
its customers that require customers to purchase its products. Accordingly, the
Company has not maintained and does not anticipate maintaining a backlog.

In 1998, no customer accounted for more than 10% of product revenues, while in
1997, Government Technology Services, Inc. ("GTSI") accounted for approximately
12% of total revenues. In 1996, product revenues from MCI and the National
Security Agency ("NSA") accounted for approximately 14% and 14%, respectively,
of total revenues.

SUPPLY SOURCES

Components used in the Company's network security products consist primarily of
computer diskettes and computer magnetic tapes purchased from commercial
vendors. Components used in the Company's turnkey SmartWall and SmartGate server
products consist primarily of off-the-shelf computers, memory, displays, power
supplies and third-party peripherals (such as hard drives and network interface
cards).

The Company has agreements with at least two vendors for each of its parts and
components. However, the Company orders most of each of its parts and components
from a single vendor to maintain quality control and enhance working
relationships. The Company uses smart card readers manufactured by two contract
manufacturers based on the Company's design specifications. The Company has
outsourced to hardware fulfillment companies its hardware and hardware
integration requirements.

While the Company believes that alternative sources of supply could be obtained,
the Company's inability to develop alternative sources if and as required in the
future could result in delays or reductions in product shipments that could have
a material adverse effect on the Company's business, financial condition and
results of operations.

12

REGULATION AND GOVERNMENT CONTRACTS

The Company's information security products are subject to the export
restrictions administered by the U.S. Department of Commerce, which permit the
export of encryption products only with the required level of export license or
through a license exception KMI (Key Management Infrastructure). U.S. export
laws prohibit the export of encryption products to a number of hostile
countries. Although to date the Company has been able to secure all required
U.S. Export licenses, including the license exception KMI, there can be no
assurance that the Company will continue to be able to secure such licenses in a
timely manner in the future, or at all.

In certain foreign countries, the Company's distributors are required to secure
licenses or formal permission before encryption products can be imported. To
date, except for certain limited cases, the Company's distributors have not been
denied permission to import the Company's products.

LICENSE AGREEMENTS

RSA Data Security, Inc. Agreement. The Company's SmartCAT and Wallet Technology
software incorporate data encryption and authentication technology owned by RSA.
The Company has a perpetual license agreement with RSA, which became effective
as of December 30, 1994. On May 23, 1996, RSA exercised an option granted under
the agreement to convert its right to receive future royalties into 2% of the
Company's outstanding voting securities, after giving effect to the issuance to
RSA, until the date of the Company's IPO. Pursuant to a separate agreement
between RSA and Massachusetts Institute of Technology ("MIT"), MIT is entitled
to receive a portion of any royalties that RSA receives. As a result, the
Company issued directly to MIT a portion of the shares of Common Stock to which
RSA was entitled under the RSA Agreement. The Company issued 188,705 shares of
Common Stock to RSA and MIT immediately prior to consummation of the IPO. RSA
was acquired by Security Dynamics in 1996.

There can be no assurance that the Company will be able to maintain its license
rights for the RSA data encryption and authentication technology, and the loss
of such rights could have a material adverse effect on the Company's business,
financial condition and results of operations. If either RSA terminates the
license agreement or takes any other action that results in the loss of, or
inability to maintain, such licensed technology, the Company may incur lost
sales, delays in delivery of the Company's current products and services or
delays in the introduction of new products and services, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.

PATENTS, PROPRIETARY TECHNOLOGY, TRADEMARKS AND LICENSES

The Company relies on trademark, copyright, patent and trade secret laws,
employee and third-party non-disclosure agreements and other methods to protect
its proprietary rights. The Company has received four patents, which expire in
2013, 2014, and 2015 and has pending four patent applications with the United
States Patent and Trademark Office that cover certain aspects of its technology.
Prosecution of these patent applications and any other patent applications that
the Company may subsequently determine to file may require the expenditure of
substantial resources. The issuance of a patent from a patent application may
require 24 months or longer. There can be no assurance that the Company's
technology will not become obsolete while the Company's applications for patents
are pending. There also can be no assurance that any pending or future patent
application will be granted, that any future patents will not be challenged,
invalidated or circumvented or that the rights granted thereunder will provide
competitive advantages to the Company. The Company has pursued patent protection
outside of the United States for the technology covered by the most recently
filed patent applications although there can be no assurance that any such
protection will be granted or, if granted, that it will adequately protect the
technology covered thereby.

The Company's success is also dependent in part upon its proprietary software
technology. There can be no assurance that the Company's trade secrets or
non-disclosure agreements will provide meaningful protection for its proprietary
technology and other proprietary information. In addition, the Company relies on

13

"shrink wrap" license agreements that are not signed by the end user to license
the Company's products and, therefore, may be unenforceable under the laws of
certain jurisdictions. Further, there can be no assurance that others will not
independently develop similar technologies or duplicate any technology developed
by the Company or that its technology will not infringe upon patents, copyrights
or other intellectual property rights owned by others.

Further, the Company may be subject to additional risk as it enters into
transactions in countries where intellectual property laws are not well
developed or are poorly enforced. Legal protections of the Company's rights may
be ineffective in foreign markets, and technology manufactured or sold abroad
may not be protectable in jurisdictions in circumstances where protection is
ordinarily available in the United States.

The Company believes that, due to the rapid pace of technological innovation for
network security products, the Company's ability to establish and, if
established, maintain a position of technology leadership in the industry is
dependent more upon the skills of its development personnel than upon legal
protections afforded its existing or future technology.

As the number of security products in the industry increases and the
functionality of these products further overlaps, software developers may become
subject to infringement claims. There can be no assurance that third parties
will not assert infringement claims against the Company in the future with
respect to current or future products. The Company also may desire or be
required to obtain licenses from others to effectively develop, produce and
market commercially viable products. Failure to obtain those licenses could have
a material adverse effect on the Company's ability to market its software
security products. There can be no assurance that such licenses will be
obtainable on commercially reasonable terms, if at all, that the patents
underlying such licenses will be valid and enforceable or that the proprietary
nature of the unpatented technology underlying such licenses will remain
proprietary.

There has been, and the Company believes that there may be in the future,
significant litigation in the industry regarding patent and other intellectual
property rights. Although the Company is not currently the subject of any
material intellectual property litigation, litigation involving other software
developers, including companies from which the Company licenses certain
technology, could have a material adverse affect on the Company's business,
financial condition and results of operations.

IMPACT OF THE YEAR 2000 ISSUE ON THE COMPANY

The Year 2000 issue concerns the potential exposures related to the automated
generation of business and financial misinformation resulting from the
application of computer programs that have been written using six digits (E.G.,
12/31/99), rather than eight (E.G., 12/31/1999), to define the applicable year
of business transactions.

V-ONE has completed the identification and assessment of most of its IT systems,
and those systems have been modified by the suppliers of those systems to V-ONE
to address Year 2000 problems. In addition to its internal systems, V-ONE has
assessed the level of Year 2000 problems associated with most of its suppliers
of software incorporated or bundled with its products, other suppliers,
customers and creditors. V-ONE has also identified and assessed most of its
non-IT systems, which include its telephone systems, heating and
air-conditioning, elevators, and other business equipment. Almost all of these
suppliers have indicated that their software and other products are Year 2000
compliant. In addition, most of V-ONE's non-IT systems appear to be Year 2000
compliant.

V-ONE's own software products are Year 2000 compliant.

14

V-ONE's costs to date for its Year 2000 compliance program, excluding the
salaries of its employees, has not been material. In fact, most of V-ONE's IT
systems have been modified by the suppliers of those systems and such
modifications were included as part of normal upgrades of those systems.
Although V-ONE has not completed its assessment, it does not currently believe
that the future costs associated with its remaining IT systems or its non-IT
systems will be material.

V-ONE cannot determine currently its most likely worst case Year 2000 scenario,
as it has not identified and assessed all of its systems, particularly its
non-IT systems. As V-ONE completes its identification and assessment of internal
and third party systems, it expects to develop contingency plans for various
worst-case scenarios. V-ONE expects to complete such contingency planning by
September 1999. A failure to address Year 2000 issues successfully could have a
material adverse effect on V-ONE's business, financial condition, results of
operations and cash flows.

EMPLOYEES

As of March 1, 1999, the Company had 67 full-time employees and 1 consultant. Of
these individuals, 30 were in sales and marketing, 25 were in development and 13
were in finance and administration. None of the Company's employees are
represented by a labor union or are subject to a collective bargaining
agreement. The Company has never experienced a work stoppage and believes that
its employee relations are good.

RISK FACTORS THAT MAY AFFECT FUTURE RESULTS AND MARKET PRICE OF COMMON STOCK

V-ONE operates in a rapidly changing environment that involves numerous risks,
some of which are beyond V-ONE's control. The following discussion highlights
some of the risks V-ONE faces. This Annual Report on Form 10-K contains
"forward-looking statements." Such statements involve known and unknown risks
and uncertainties that could cause V-ONE's actual performance or achievements to
differ from any future performance or achievements expressed or implied by such
statements. Readers should carefully consider the following risk factors before
purchasing common stock of V-ONE. Readers are also referred to other documents
to be filed by V-ONE with the SEC, which may identify important risk factors for
V-ONE.

V-ONE'S LIMITED OPERATING HISTORY, ACCUMULATED DEFICIT AND FINANCING ACTIVITIES.
As of December 31, 1998, V-ONE had an accumulated deficit of approximately
$29,692,000. V-ONE currently expects to incur additional net losses over the
next several quarters. V-ONE will need to raise additional capital through
various financing activities in the short term to finance its ongoing operations
and is presently exploring sources of such financing.

Because of V-ONE's limited operating history, V-ONE may not achieve or sustain
profitability or significant revenues. To address these risks, V-ONE must, among
other things, continue its emphasis on research and development, successfully
execute and implement its marketing strategy, respond to competitive
developments and seek to attract and retain talented personnel. V-ONE may be
unable successfully to address these risks and the failure to do so could have a
material adverse effect on V-ONE's business, financial condition, results of
operations and cash flows.

V-ONE was founded in February 1993 and introduced its first product in December
1994. Accordingly, V-ONE did not generate any significant revenues until 1995
when it commenced sales of its SmartWall firewall product and introduced its
SmartGate client/server system. Revenues for 1995, 1996, 1997 and 1998 were
approximately $1,104,000, $5,319,000, $5,973,000 and $6,260,000, respectively.

15

Losses attributable to holders of Common Stock for 1995, 1996, 1997 and 1998
were approximately $1,122,000, $7,813,000, $10,828,000 and $9,407,000,
respectively.

V-ONE's growth in recent periods may not be an accurate indication of future
results of operations in light of V-ONE's short operating history, the evolving
nature of the network security market and the uncertainty of the demand for
Internet and intranet products in general and V-ONE's products in particular.

RISKS RELATING TO AVAILABILITY OF CAPITAL. It is anticipated that V-ONE will
continue to expend significant amounts to fund its operations and research and
development. V-ONE's cash and cash equivalents may not be sufficient to meet its
requirements beyond August 31, 1999. In order to maintain V-ONE's operations and
research and development at present levels, V-ONE anticipates that it will need
to secure additional financing through the sale of equity securities by the
third quarter of 1999. If such additional financing is not available to V-ONE,
it will attempt to reduce its cash requirements through significant reductions
in operating levels. V-ONE may be unable to place equity securities on favorable
terms or in an amount required to meet its future cash requirements. In
addition, V-ONE may not be successful in reducing operating levels or, if
operating levels are reduced, V-ONE may not be able to maintain operations for
any extended period of time.

RISKS RELATING TO SECURED LOAN. On February 24, 1999, V-ONE obtained a
$3,000,000 term loan from Transamerica Business Credit Corporation
("Transamerica"). The term loan is due on August 31, 1999. Thereafter, the term
loan will convert into a revolving credit facility if V-ONE is not in default
under its credit agreement with Transamerica. The maximum amount that can be
borrowed by V-ONE under the revolving credit facility is the lesser of
$3,000,000 and 80% of eligible receivables. The revolving credit facility
expires on August 31, 2000.

In connection with this loan, V-ONE granted a security interest in all of its
assets, including its intellectual property, to Transamerica. If V-ONE is unable
to repay the loan or there is an event of default under the loan, Transamerica
could foreclose on its security interest.

Pursuant to the terms of the loan agreement relating to this term loan, receipt
by V-ONE of an opinion from its independent auditors which expresses doubt with
regard to the ability of V-ONE to continue as a going concern constitutes an
event of default under the loan agreement and allows Transamerica to foreclose
on its security interest. V-ONE has received such an opinion from its
independent auditors in connection with their review of V-ONE's financial
statements as of and for the year ended December 31, 1998. As of the date of
such opinion, there was an event of default under the loan agreement; however,
Transamerica has subsequently waived this event of default. In consideration for
such waiver, V-ONE has agreed (a) to grant an affiliate of Transamerica warrants
to purchase 100,000 shares of Common Stock at an exercise price of $3.25 per
share and (b) accept an additional financial covenent that V-ONE's net worth
will be $5,000,000 as of June 30, 1999 and September 30, 1999. There can be no
assurance that V-ONE will be able to comply with the loan covenants.

RISKS ASSOCIATED WITH THE EMERGING NETWORK SECURITY MARKET. The market for
V-ONE's products, particularly its client/server VPN or virtual private network
products, is in an early stage of development and the market's acceptance of
these products has been slower than expected. The rapid development of Internet
and intranet computing has increased the ability of users to access proprietary
information and resources and has recently increased demand for network security
products. Because the market for network security products is only beginning to
develop and potential customers are only beginning to realize the benefits of
VPN technology, it is difficult to assess the size of the market, the product
features desired by the market, the best price structure for V-ONE's products,
the best distribution strategy and the competitive environment that will develop
in this market.

The demand for V-ONE's products could decline as a result of competition,
technological change, the public's perception of the need for security products,
developments in the hardware and software environments in which these products
operate, general economic conditions or other factors beyond V-ONE's control.
Any such decline would adversely effect V-ONE.

16

ANTICIPATED FLUCTUATIONS IN QUARTERLY RESULTS. At V-ONE's board of directors
meeting on March 4, 1999, V-ONE revised its revenue recognition policy. V-ONE
had previously used a "sell-in" model with distributors, where revenue is
recognized when product is sold to the distributor. V-ONE is now using a
"sell-through" model, where revenue is recognized when the distributor has
delivered the licenses to end-user customers and the end-user customers have
registered the software with V-ONE. This revision in policy will cause revenue
to be recognized later in the distribution cycle and may make V-ONE's quarterly
financial results more variable. In addition, future revenues may be less
affected by V-ONE's direct sales efforts unless V-ONE directly assists resellers
in sales to end users.

V-ONE is applying the revised revenue recognition policy to its financial
statements for the year ended December 31, 1998. In addition, V-ONE has restated
its financial statements for the years ended December 31, 1997 and 1996 and for
the quarters ended September 30, 1998, 1997 and 1996, June 30, 1998 and 1997 and
March 31, 1998 and 1997 for consistency of presentation.

V-ONE'S DEPENDENCE ON KEY PERSONNEL. V-ONE's success depends, to a large extent,
upon the performance of its senior management and its technical, sales and
marketing personnel, many of whom have only recently joined V-ONE. There is
intense competition in the software security industry to hire and retain
qualified personnel. V-ONE is actively searching for additional qualified
personnel. V-ONE's success will depend upon its ability to retain and hire
additional key personnel. The loss of the services of key personnel or the
inability to attract additional qualified personnel could materially and
adversely effect V-ONE's results of operations and product development efforts.

V-ONE has entered into employment agreements with David D. Dawson, its Chairman
of the Board, President and Chief Executive Officer, Charles B. Griffis, its
Senior Vice President and Chief Financial Officer, and Robert F. Kelley, its
Vice President of Engineering, that provide for fixed terms of employment.
However, V-ONE has not historically provided such types of employment agreements
to its other employees. This may adversely impact V-ONE's ability to attract and
retain the necessary technical, management and other key personnel.

RISK OF V-ONE'S INABILITY TO MANAGE GROWTH. To manage growth effectively, V-ONE
needs to continue to improve its operational, financial and management
information systems and to hire, train, motivate and manage its employees.
Competition is intense for qualified technical, marketing and management
personnel. V-ONE may be unable to achieve or manage any future growth. Its
failure to do so could delay V-ONE's product development cycles and marketing
efforts.

V-ONE has experienced and may experience future growth in the number of its
employees and the scope of its operations, resulting in increased
responsibilities for management and added pressure on V-ONE's operating and
financial systems. As of January 1, 1999, V-ONE had 77 employees, as compared to
83, 77, and 34 employees on January 1, 1998, 1997, and 1996, respectively.

RISK OF V-ONE'S DEPENDENCE ON SMARTGATE AND SMARTWALL. V-ONE currently generates
most of its revenues from its SmartWall and SmartGate products. SmartWall and
SmartGate have met with a favorable degree of market acceptance since sales of
SmartWall commenced in the first quarter of 1995 and since SmartGate was
introduced in the fourth quarter of 1995. However, SmartWall or SmartGate may
not continue to be accepted in the future. In addition, any or all of V-ONE's
other current or future products could fail to win market acceptance.

V-ONE's success depends, in part, on V-ONE's ability to design, develop and
introduce new products, services and enhancements on a timely basis to meet
changing customer needs, technological developments and evolving industry
standards.

17

RISK OF INADEQUATE PROTECTION FOR V-ONE'S TECHNOLOGIES. V-ONE relies on
trademark, copyright, patent and trade secret laws, employee and third-party
non-disclosure agreements and other methods to protect the rights of V-ONE and
the companies from which V-ONE licenses technology. V-ONE currently holds
patents on its Wallet Technology, its SmartGate technology, its Smartcard
Technology, and its On-Line Registration technology. Others may independently
develop similar technologies or duplicate any technology developed by V-ONE.

Prosecution of patent applications and any other patent applications may require
the expenditure of substantial resources. For example, the issuance of a patent
may require 24 months or longer. During this period, V-ONE's technology may
become obsolete. Pending or future patent applications may not be granted,
future patents may be challenged, invalidated or circumvented and the rights
granted may not provide competitive advantages to V-ONE.

V-ONE currently intends to pursue patent protection outside of the United States
for the technology covered by the most recently filed patent applications. This
protection may not be granted. Even if it is granted, it may not adequately
protect the covered technology.

V-ONE's success also depends on its software technology and technology licensed
from others. V-ONE's trade secrets, license agreements and non-disclosure
agreements may not provide appropriate protection for V-ONE's technology or the
technology it licenses from others. Further, V-ONE relies on license agreements
that are not signed by the end user to license V-ONE's products. These license
agreements may be unenforceable under the laws of certain jurisdictions.

V-ONE may be subject to additional risk as V-ONE enters into transactions in
countries where intellectual property laws are not well developed or are poorly
enforced. Legal protections of V-ONE's rights may be ineffective in foreign
markets and technology developed by V-ONE may not be protectable in foreign
jurisdictions.

As the number of security products in the industry increases and the
functionality of these products overlap, software developers may become subject
to infringement claims. Third parties may in the future assert infringement
claims against V-ONE with respect to current or future products. V-ONE also may
desire or be required to obtain licenses from others. Failure to obtain those
licenses could adversely effect V-ONE's ability to market its software security
products. However, V-ONE may be unable to obtain these licenses on commercially
reasonable terms, if at all. In addition, the patents underlying such licenses
may not be valid or enforceable and the proprietary nature of the unpatented
technology underlying such licenses may not remain proprietary.

Any claims or litigation could be costly and could result in a diversion of
management's attention. Adverse determinations in such claims or litigation
could also adversely effect V-ONE.

RISK OF ERRORS OR FAILURES. The complex nature of V-ONE's software products can
make the detection of errors or failures difficult when products are introduced.
If errors or failures are subsequently discovered, this may result in delays and
lost revenues during the correction process. In addition, technology licensed by
V-ONE for use in its products may contain errors that adversely effect such
products. Despite testing by V-ONE and current and prospective customers, errors
may still be discovered in new products or releases after commencement of
commercial shipments. This might result in delay, adverse publicity, loss of
market acceptance and claims against V-ONE.

A malfunction or the inadequate design of V-ONE's products could result in tort
or warranty claims. V-ONE generally attempts to reduce the risk of such losses
to itself and to the companies from which V-ONE licenses technology through
warranty disclaimers and liability limitation clauses in its license agreements.
V-ONE may not have obtained adequate contractual protection in all instances or

18

where otherwise required under agreements V-ONE has entered into with others. In
addition, these measures may not be effective in limiting V-ONE's liability to
end users and to the companies from which V-ONE licenses technology.

V-ONE'S PRODUCT LIABILITY RISK. V-ONE currently has product liability insurance.
However, V-ONE's insurance coverage may not be adequate and any product
liability claim against V-ONE for damages resulting from security breaches could
be substantial. In addition, a well-publicized actual or perceived security
breach could adversely effect the market's perception of security products in
general or V-ONE's products in particular. This could result in a decline in
demand for V-ONE's products.

RISKS OF CHANGES IN TECHNOLOGY AND INDUSTRY STANDARDS AND NEW PRODUCT
INTRODUCTION. The network security industry is characterized by rapid changes,
including evolving industry standards, frequent new product introductions,
continuing advances in technology and changes in customer requirements and
preferences. Advances in techniques by individuals and entities seeking to gain
unauthorized access to networks could expose V-ONE's existing products to new
and unexpected attacks and require accelerated development of new products or
enhancements to existing products.

V-ONE may be unable to counter challenges to its current products. V-ONE's
future products may not keep pace with technological changes implemented by
competitors or persons seeking to breach network security. Its products may not
satisfy evolving consumer preferences and V-ONE may not be successful in
developing and marketing products for any future technology. Failure to develop
and introduce new products and improve current products in a timely fashion
could adversely effect V-ONE.

RISK OF DEFECTS AND DEVELOPMENT DELAYS. V-ONE may experience schedule overruns
in software development triggered by factors such as insufficient staffing or
the unavailability of development-related software, hardware or technologies.
Further, when developing new software products, V-ONE's development schedules
may be altered as a result of the discovery of software bugs, performance
problems or changes to the product specification in response to customer
requirements, market developments or V-ONE-initiated changes.

Changes in product specifications may delay completion of documentation,
packaging or testing. This may, in turn, affect the release schedule of the
product.

When developing complex software products, the technology market may shift
during the development cycle, requiring V-ONE either to enhance or change a
product's specifications to meet a customer's changing needs. All of these
factors may cause a product to enter the market behind schedule, which may
adversely effect market acceptance of the product or place it at a disadvantage
to a competitor's product that has already gained market share or market
acceptance during the delay.

RISKS RELATING TO EVOLVING DISTRIBUTION CHANNELS. V-ONE relies on its direct
sales force and its channel distribution strategy for the sale and marketing of
its products. V-ONE's sales and marketing organization may be unable to
successfully compete against the more extensive and well-funded sales and
marketing operations of certain of its current and future competitors.

V-ONE's distribution strategy involves the development of relationships with
resellers and international distributors to enable V-ONE to achieve broad market
penetration. However, V-ONE may be unable to continue to attract integrators and
resellers that will be able to market V-ONE's products effectively and that will
be qualified to provide timely and cost-effective customer support and service.

V-ONE ships products to distributors, integrators and resellers on receipt of a
purchase-order, and its distributors, integrators and resellers generally carry
competing product lines. Current distributors, integrators and resellers may not

19

continue to represent V-ONE's products. The inability to recruit, or the loss
of, important sales personnel, distributors, integrators or resellers could
adversely effect V-ONE.

RISKS RELATING TO COLLECTION OF RECEIVABLES. Due to certain worldwide economic
factors, V-ONE has from time to time experienced and may continue to experience
difficulty in collecting its receivables on a timely basis. V-ONE continues to
focus on the collection of its receivables on a timely basis. However, if V-ONE
is unable to collect its receivables on a timely basis, it could have an adverse
effect on V-ONE's financial condition, results of operations and cash flows.

RISKS ASSOCIATED WITH LONG SALES CYCLE AND SEASONALITY. Sales of V-ONE's
products generally involve a significant commitment of capital by its customers.
For sales by V-ONE's sales force directly to end users, V-ONE often permits
customers to evaluate products being considered for license, generally for a
period of up to 30 days. For these and other reasons, the sales cycle associated
with V-ONE's products is likely to be lengthy and subject to a number of
significant risks over which V-ONE has little or no control. As a result, V-ONE
believes that its quarterly results are likely to vary significantly.

V-ONE may be required to ship products shortly after it receives orders.
Consequently, order backlog, if any, at the beginning of any period may
represent only a small portion of that period's expected revenues. As a result,
product revenues in any period will be substantially dependent on orders booked
and registered in that period.

V-ONE plans its production and inventory levels based on internal forecasts of
customer demand, which is highly unpredictable and can fluctuate substantially.
If revenues fall significantly below anticipated levels, V-ONE's financial
condition, results of operations and cash flows could be adversely effected. In
addition, V-ONE may experience significant seasonality in its business, and
V-ONE's financial condition and results of operations may be effected by such
trends in the future. Such trends may include higher revenues in the third
quarter of the year. V-ONE believes that revenues may tend to be higher in the
third quarter due to the fiscal year end of the U.S. government.

RISK OF SALES TO GOVERNMENTS. No government agency or department has an
obligation to purchase products from V-ONE in the future. Accordingly, V-ONE
believes that future government contracts and orders for its network security
products will in part depend on the continued favorable reaction of government
agencies and departments to the development capabilities of V-ONE and the
reliability and perceived reliability of its products.

V-ONE may be unable to sell its products to government departments and agencies
and government contractors and such sales, if any, may not result in commercial
acceptance of V-ONE's products. In addition, reductions or delays in funds
available for projects V-ONE is performing or to purchase its products could
adversely impact V-ONE's government contracts business.

Contracts involving the U.S. government are also subject to the risks of
disallowance of costs upon audit, changes in government procurement policies,
the necessity to participate in competitive bidding and, with respect to
contracts involving prime contractors or government-designated subcontractors,
the inability of such parties to perform under their contracts. V-ONE is also
exposed to the risk of increased or unexpected costs, causing losses or reduced
profits, under government and certain third-party contracts. Any of the
foregoing events could adversely effect V-ONE.

In 1995, V-ONE derived a substantial portion of its revenue from the sale of
SmartWall to departments and agencies of the U.S. government and government
contractors. In 1996, V-ONE's revenues were attributable, in part, to a contract
with the National Security Agency. In 1997, approximately one-half of V-ONE's
total sales were attributable to contracts with various agencies and departments

20

of the United States government and of state and local governments. This
relationship increased to more than 60% through December 31, 1998.

RISK OF EFFECT OF GOVERNMENT REGULATION OF TECHNOLOGY EXPORTS. V-ONE currently
sells its products abroad and intends to continue to expand its relationships
with international distributors. V-ONE's international sales and operations
could be subject to risks such as the imposition of governmental controls,
export license requirements, restrictions on the export of critical technology,
trade restrictions and changes in tariffs. In particular, V-ONE's information
security products are subject to the export restrictions administered by the
U.S. Department of Commerce. These restrictions, in the case of some products,
permit the export of encryption products only with a specific export license.

These export laws also prohibit the export of encryption products to a number of
countries, individuals and entities and may restrict exports of some products to
a narrow range of end-users. In certain foreign countries, V-ONE's distributors
are required to secure licenses or formal permission before encryption products
can be imported.

V-ONE has obtained a license exception to export strong encryption from the U.S.
Department of Commerce on a worldwide basis (except to the seven terrorist
countries) as long as the end user agrees to use the KRAKit(TRADEMARK) session
key recreation capability. Foreign competitors that face less stringent controls
on their products may be able to compete more effectively than V-ONE in the
global network security market.

RISKS ASSOCIATED WITH YEAR 2000 ISSUE. The Year 2000 issue concerns the
potential exposures related to the automated generation of business and
financial misinformation resulting from the application of computer programs
that have been written using six digits (E.G., 12/31/99), rather than eight
(E.G., 12/31/1999), to define the applicable year of business transactions.

V-ONE has completed the identification and assessment of most of its IT systems,
and those systems have been modified by the suppliers of those systems to V-ONE
to address Year 2000 problems. In addition to its internal systems, V-ONE has
assessed the level of Year 2000 problems associated with most of its suppliers
of software incorporated or bundled with its products, other suppliers,
customers and creditors. V-ONE has also identified and assessed most of its
non-IT systems, which include its telephone systems, heating and
air-conditioning, elevators, and other business equipment. Almost all of these
suppliers have indicated that their software and other products are Year 2000
compliant. In addition, most of V-ONE's non-IT systems appear to be Year 2000
compliant.

V-ONE's own software products are Year 2000 compliant.

V-ONE's costs to date for its Year 2000 compliance program, excluding the
salaries of its employees, has not been material. In fact, most of V-ONE's IT
systems have been modified by the suppliers of those systems and such
modifications were included as part of normal upgrades of those systems.
Although V-ONE has not completed its assessment, it does not currently believe
that the future costs associated with its remaining IT systems or its non-IT
systems will be material.

V-ONE cannot determine currently its most likely worst case Year 2000 scenario,
as it has not identified and assessed all of its systems, particularly its
non-IT systems. As V-ONE completes its identification and assessment of internal
and third party systems, it expects to develop contingency plans for various
worst-case scenarios. V-ONE expects to complete such contingency planning by
September 1999. A failure to address Year 2000 issues successfully could have a
material adverse effect on V-ONE's business, financial condition, results of
operations and cash flows.

EFFECTS OF CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS AND
DELAWARE LAW. Certain provisions of V-ONE's Amended Certificate of Incorporation
and of Delaware law could delay or make difficult a merger, tender offer or

21

proxy contest involving V-ONE. Among other things, these provisions include a
classified board, prohibitions on removing directors except for cause, and other
requirements.

MARKET VOLATILITY. The market price of the Company's Common Stock could be
subject to significant fluctuations in response to variations in quarterly
operating results and other factors, such as announcements of new products by
the Company or its competitors and changes in financial estimates by securities
analysts or other events. Moreover, the stock market has experienced extreme
volatility that has particularly affected the market prices of equity securities
of many technology companies and that has often been unrelated and
disproportionate to the operating performance of such companies. Broad market
fluctuations as well as economic conditions generally and in the software
industry specifically, may adversely affect the market price of the Company's
Common Stock.

ITEM 2. PROPERTIES

The Company leases approximately 28,312 square feet of office space in
Germantown, Maryland under a lease agreement that will expire on July 1, 2003.
The Company expects that this space will be sufficient for its needs through
March 31, 2000. The Company also leases approximately 10,699 square feet, which
is sublet in Rockville, Maryland under leases that will expire on April 17,
2001.

The Company also leases office space in Fairfax, Virginia, Burlington,
Massachusetts, San Francisco, California, Columbus, Ohio, Rochelle Park, New
Jersey, Chicago, Illinois and Podium Block, Singapore under leases that can be
extended on a month to month basis.

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any material legal proceedings.

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

No matters were submitted to a vote of the Company's security holders during the
quarter ended December 31, 1998.

PART II

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

The Company's Common Stock has been traded in the Nasdaq National Market since
the Company's IPO on October 24, 1996. According to records of the Company's
transfer agent, the Company had approximately 124 record holders on March 24,
1999. Because brokers and other institutions hold many of such shares on behalf
of stockholders, the Company is unable to estimate the total number of
stockholders represented by these record holders. The following table sets forth
the low and high sale prices as of the close of market of the Company's Common
Stock for each quarter during the two year period ended December 31, 1998.

1997
----
High Sale Price Low Sale Price
--------------- --------------

First Quarter $9.250 $5.375
Second Quarter $6.375 $4.000
Third Quarter $6.250 $3.000
Fourth Quarter $5.063 $2.750

22

1998
----
High Sale Price Low Sale Price
--------------- --------------

First Quarter $4.125 $2.250
Second Quarter $4.000 $2.500
Third Quarter $4.125 $1.375
Fourth Quarter $3.625 $1.875

The Company has never declared or paid cash dividends on its Common Stock or
other securities. The Company anticipates that all of its net earnings, if any,
will be retained for use in its operations and does not anticipate paying cash
dividends on its Common Stock in the foreseeable future. Payments of future cash
dividends, if any, will be at the discretion of the Company's Board of Directors
after taking into account various factors, including the Company's financial
condition, operating results and current and anticipated cash needs. No
dividends, unless in the form of Common Stock, may be paid under the terms of
the Transamerica loan executed on February 24, 1999.

On November 20, 1998, the Company sold 1,860,000 shares of its Common Stock, at
$2.00 per share to a group of accredited investors pursuant to its Placement
Agent Agreement dated October 9, 1998, as amended, between the Company and
LaSalle St. Securities, Inc. ("LaSalle"). The shares of Common Stock were sold
pursuant to Rule 506 of Regulation D promulgated under the Securities Act. The
Company received $3,366,600 in net sale proceeds after payment of commissions of
8% of the gross sale proceeds and non-accountable expense allowance of 1.5% of
the gross sale proceeds to LaSalle.

LaSalle also received warrants in the aggregate to purchase 50,000 shares of
Common Stock at an exercise price of $2.125 per share. These warrants were
issued pursuant to Rule 506 of Regulation D promulgated under the Securities
Act.

On November 20, 1998, the Company also redeemed 2,462 shares of Series A Stock
held by Advantage for $1,300 per share or $3,200,600 in the aggregate pursuant
to the terms of the Waiver Agreement dated as of September 22, 1998 between the
Company and Advantage. Advantage waived all accrued dividends on the Series A
Stock. The redeemed shares of Series A Stock represented all of the shares of
Series A Stock that were outstanding on the date of redemption.

Between December 4, 1998 and December 9, 1998, the Company, sold 675,000 shares
of its Common Stock at $2.00 per share to certain accredited investors pursuant
to Rule 506 of Regulation D promulgated under the Securities Act. The Company
received $1,308,000 in net sale proceeds after payment of commissions to LaSalle
and Coldwater Capital LLC.

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data set forth below with respect to the
Company's Statements of Operations for the years ended December 31, 1996, 1997
and 1998 and balance sheets as of December 31, 1997 and 1998 are derived from
the audited financial statements of the Company included elsewhere in this
Annual Report. The following selected financial data as of December 31, 1994,
1995 and 1996 and for each of the years ended December 31, 1994 and 1995 are

23

derived from audited financial statements of the Company not included in this
Annual Report. The financial data set forth below should be read in conjunction
with the Company's financial statements and the notes thereto included elsewhere
in this Annual Report and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

Year ended December 31,
--------------- -----------------------------------------------------------------
Statement of Operations Data: 1994 1995 1996 (1) 1997 (1) 1998
---- ---- --------- --------- ----

Revenues:
Products $ -- $ 1,101,418 $ 5,008,523 $ 5,470,230 $ 5,798,542
Consulting and services 59,716 2,083 310,557 502,771 461,263
---------- ------------ ------------ ------------ ------------

Total revenues 59,716 1,103,501 5,319,080 5,973,001 6,259,805
---------- ------------ ------------ ------------ ------------

Cost of revenues:
Products -- 376,359 1,969,117 1,848,871 1,623,396
Consulting and services 35,114 800 56,502 96,949 68,060
---------- ------------ ------------ ------------ ------------
Total cost of revenues 35,114 377,159 2,025,619 1,945,820 1,691,456
---------- ------------ ------------ ------------ ------------
Gross profit 24,602 726,342 3,293,461 4,027,181 4,568,349
---------- ------------ ------------ ------------ ------------

Operating expenses:
Sales and marketing 36,212 130,917 3,914,630 7,717,640 6,071,919
General and administrative 315,192 1,350,361 4,879,940 3,699,278 3,896,210
Research and development 127,926 304,973 1,960,727 3,153,941 3,853,274
---------- ------------ ------------ ------------ -------------
Total operating expenses 479,330 1,786,251 10,755,297 14,570,859 13,821,403
---------- ------------ ------------ ------------ -------------
Operating loss (454,728) (1,059,909) (7,461,836) (10,543,678) (9,253,054)
---------- ------------ ------------ ------------ -------------

Other (expense) income:
Interest expense (2,360) (66,615) (518,965) (13,130) (65,372)
Interest income -- 4,513 168,176 341,469 125,030
--------- ----------- ------------ ------------ -------------
Total other expenses (2,360) (62,102) (350,789) 328,339 59,658
--------- ----------- ------------ ------------ -------------

Net loss (457,088) (1,122,011) (7,812,625) (10,215,339) (9,193,396)

Dividend on preferred stock -- -- -- 12,600 110,879
Deemed dividend on preferred stock -- -- -- 600,000 102,755
Loss attributable to holder of common --------- ----------- ------------ ------------ -------------
stock $(457,088) $(1,122,011) $ (7,812,625) $(10,827,939) $ (9,407,030)
========= =========== ============ ============ =============

Basic loss per share attributable to
holder of common stock $ (0.06) $ (0.14) $ (0.85) $ (0.84) $ (0.68)
========== =========== ============ ============ =============

Weighted average shares outstanding 8,046,766 8,099,223 9,245,305 12,858,859 13,898,450
========== =========== ============ ============ =============

24

December 31,
-------------------------------------------------------------------------------
1994 1995 1996 (1) 1997 (1) 1998
---- ----- --------- --------- ----

Balance Sheet Data:

Working capital (deficit) $245,598 $(168,311) $ 11,526,091 $ 5,912,046 $ (1,277,368)
Total assets 394,906 2,050,602 14,580,346 10,313,276 3,922,192
Long-term debt, less current portion -- 126,908 134,704 300,861 197,982
Series A Convertible Preferred Stock -- -- -- 3,766,297 --
Total shareholder's equity (deficit) 318,028 (139,938) 12,876,676 4,211,210 635,725
Cash dividends per common share -- -- -- -- --

(1) The Company's financial results for 1996 and 1997 have been restated. See
Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Note 12 to the Company's Financial Statements
included in Item 8.

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

OVERVIEW

The Company offered 3,000,000 shares of Common Stock, par value $0.001 ("Common
Stock"), in its initial public offering ("IPO") on October 24, 1996 at $5.00 per
share. On November 22, 1996, the Company's underwriters exercised their option
to purchase an additional 200,000 shares of Common Stock from the Company
(117,791 shares) and certain shareholders (82,209 shares) for $5.00 per share.
Net of the underwriting discount and related expenses, the Company raised
approximately $13,195,000 from the IPO and the underwriter's exercise of the
overallotment option.

On December 8, 1997, the Company issued 4,000 shares of Series A Stock to
Advantage for $4 million in the aggregate. Each share of Series A Stock was
convertible into shares of Common Stock and Series A Warrants to purchase Common
Stock. Net of fees and related expenses, the Company raised approximately
$3,766,000.

On November 20, 1998, the Company sold 1,860,000 shares of its Common Stock, at
$2.00 per share to a group of accredited investors pursuant to its Placement
Agent Agreement dated October 9, 1998, as amended, between the Company and
LaSalle St. Securities, Inc. ("LaSalle"). The Company received $3,366,600 in net
sale proceeds after payment of commissions of 8% of the gross sale proceeds and
non-accountable expense allowance of 1.5% of the gross sale proceeds to LaSalle.
LaSalle also received warrants in the aggregate to purchase 50,000 shares of
Common Stock at an exercise price of $2.125 per share.

On November 20, 1998, the Company also redeemed 2,462 shares of Series A Stock
held by Advantage for $1,300 per share or $3,200,600 in the aggregate pursuant
to the terms of the Waiver Agreement dated as of September 22, 1998 between the
Company and Advantage. Advantage waived all accrued dividends on the Series A
Stock. The redeemed Series A Stock represented all of the shares of Series A
Stock that were outstanding on the date of redemption.

Between December 4, 1998 and December 9, 1998, the Company, sold 675,000 shares
of its Common Stock at $2.00 per share to certain accredited investors. The
Company received $1,308,000 in net sale proceeds after payment of commissions to
LaSalle and Coldwater Capital LLC.

25

The Company generates revenues primarily from software licenses and sale of
hardware products and, to a lesser extent, consulting and related services. The
Company anticipates that revenues from products will continue to be the
principal source of the Company's total revenues.

The Company has revised its revenue recognition accounting from recognizing
revenue upon the initial shipment of software to the distributor to recognizing
the revenue when the software is deployed to an end-user. Accordingly, the
Company has restated its financial results for calendar year 1996 and 1997 as
well as the first three quarters of 1998. The Company often permits customers to
evaluate products being considered for purchase, generally for a period of up to
30 days, in which event the Company does not recognize revenues until the
customer has accepted the product. Accordingly, the Company's revenue
recognition policy does not necessarily correlate with the signing of a contract
or the shipment of a product.

As of December 31, 1998, the Company had an accumulated deficit of approximately
$29,692,000. The Company currently expects to incur net losses over the next
several quarters as a result of operating expenses and will therefore need to
raise additional capital through various financing activities to fund its
ongoing operations. V-ONE is presently exploring sources of such funding. To
date, the Company has expensed all software development costs as incurred in
compliance with Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to Be Sold, Leased or Otherwise Marketed."
The Company believes that, with its current development cycle, its future
software development costs are likely to be expensed as incurred.

In 1998, no customer accounted for 10% or more of total revenues. In 1997,
product revenues from Government Technology Services, Inc. ("GTSI") accounted
for approximately 12% of total revenues. In 1996, product revenues from MCI
Telecommunications Corporation ("MCI") and the National Security Agency ("NSA")
accounted for approximately 14% and 14%, respectively, of total revenues.

RESULTS OF OPERATIONS

The following table sets forth certain statement of operations data as a
percentage of revenues for the periods indicated:

Year ended December 31,
1996 1997 1998
---- ---- ----

Revenues:
Products 94.2 % 91.6 % 92.6 %
Consulting and services 5.8 8.4 7.4
------ ----- -----
Total revenues 100.0 100.0 100.0
------ ----- -----
Cost of revenues:
Products 37.0 31.0 25.9
Consulting and services 1.1 1.6 1.1
------ ------ -----
Total cost of revenues 38.1 32.6 27.0
------ ------ -----
Gross profit 61.9 67.4 73.0
------ ------ -----
Operating expenses:
Sales and marketing 73.6 129.2 97.0

26

General and administrative 91.7 61.9 62.2
Research and development 36.9 52.8 61.6
------ ------ -----

Total operating expenses 202.2 243.9 220.8
------ ------ -----
Operating loss (140.3) (176.5) (147.8)
------ ------ -----
Other (expense) income:
Interest expense (9.8) (0.2) (1.0)
Interest income 3.2 5.7 2.0
------ ------ -----
Total other expenses (6.6) 5.5 1.0
------ ------ -----
Net loss (146.9) (171.0) (146.9)
Dividend on preferred stock -- 0.2 1.5

Deemed dividend on preferred stock -- 10.0 1.9
------ ------ -----
Loss attributable to holder of common stock (146.9) % (181.3) % (150.3) %
====== ====== =====

COMPARISON OF YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

REVENUES

Total revenues increased from approximately $5,319,000 in 1996, to approximately
$5,973,000 in 1997 and to approximately $6,260,000 in 1998. Product revenues are
derived principally from software licenses and the sale of hardware products.
Product revenues increased from approximately $5,009,000 in 1996 to
approximately $5,470,000 in 1997 and to approximately $5,799,000 in 1998. The
increase from 1996 to 1997 was due principally to increased sales of the
Company's SmartWall and SmartGate products, which offset a small decline of
sales of the Company's SmartWall product. The increase from 1997 to 1998 was due
principally to increased sales of the Company's SmartGate product.

Consulting and services revenues are derived principally from fees for services
complementary to the Company's products, including consulting, maintenance and
training. Consulting and services revenues increased from approximately $311,000
in 1996, to approximately $503,000 in 1997 and declined to approximately
$461,000 in 1998. Consulting and services revenues increased from 1996 to 1997
as the Company increased staffing to support consulting and services and product
sale installations in 1997 but declined in 1998 as the Company's focus was more
on support.

COST OF REVENUES

Total cost of revenues as a percentage of total revenues were 38.1%, 32.6% and
27.0% in 1996, 1997 and 1998, respectively.

Cost of product revenues consists principally of the costs of computer hardware,
licensed technology, manuals and labor associated with the distribution and
support of the Company's products and shipping costs. Cost of product revenues
decreased from approximately $1,969,000 in 1996, to approximately $1,849,000 in
1997 and to approximately $1,623,000 in 1998. Cost of product revenues as a
percentage of product revenues was 39.3%, 33.8% and 28.0% for 1996, 1997 and
1998, respectively. The dollar and percentage decreases in 1997 and 1998 were
attributable to an increase in revenues combined with a higher mix of SmartGate
software licenses to SmartWall turnkey hardware sales.

Cost of consulting and services revenues consists principally of personnel and
related costs incurred in providing consulting, support and training services to
customers. Cost of consulting and services revenues increased from approximately
$57,000 in 1996, to approximately $97,000 in 1997 and decreased to $68,000 in
1998. Cost of consulting and services revenues as a percentage of consulting and
services revenues was 18.2%, 19.3%, and 14.8% for 1996, 1997 and 1998,
respectively. The dollar and percentage increases in 1997 over 1996 were
attributable to increased staffing to support consulting and services. The

27

dollar and percentage decrease from 1997 to 1998 was principally due to a
reduced emphasis on consulting and a greater concentration on training and
support.

OPERATING EXPENSES

Sales and Marketing -- Sales and marketing expenses consist principally of the
costs of sales and marketing personnel, advertising, promotions and trade shows.
Sales and marketing expenses increased from approximately $3,915,000 in 1996, to
approximately $7,718,000 in 1997 and decreased to approximately $6,072,000 in
1998. Sales and marketing expenses as a percentage of total revenues were 73.6%,
129.2% and 97.0% in 1996, 1997 and 1998, respectively. The dollar increase in
1997 over 1996 was principally due to increased personnel, higher levels of
sales and marketing efforts associated with the sales of SmartWall and
SmartGate. The large percentage increase was due to significantly higher
expenses incurred during 1997. The dollar decrease in 1998 was principally due
to reduced personnel and lower levels of advertising and promotion expenses. The
percentage decrease in 1998 was due to lower expenses as compared to 1997. Sales
and marketing expenses are expected to decrease both in the aggregate and as a
percentage of total revenues in the near term as a result of the Company's
efforts to reduce expense. This statement is based on current expectations. It
is forward-looking, and the actual results could differ materially. For
information about factors that could cause the actual results to differ
materially, please refer to Item 1. "Business - Risk Factors that May Affect
Future Results and Market Price of Common Stock" in this Form 10-K.

General and Administrative -- General and administrative expenses consist
principally of the costs of finance, management and administrative personnel and
facilities expenses. General and administrative expenses decreased substantially
from approximately $4,880,000 in 1996 to approximately $3,699,000 in 1997 and
increased slightly to approximately $3,896,000 in 1998. General and
administrative expenses as a percentage of total revenues were 91.7%, 61.9% and
62.2% in 1996, 1997 and 1998, respectively.

In 1996, the Company recorded non-cash compensation expense of approximately
$2,515,000 in conjunction with the grant of options to purchase 590,394 shares
of Common Stock at an exercise price of $3.75 per share and options to purchase
10,000 shares of Common Stock at an exercise price of $4.50 per share, each
granted pursuant to the Company's 1996 Incentive Stock Plan, and the grant of
options to purchase 383,965 shares of Common Stock at an exercise price of $0.75
per share pursuant to the Company's 1996 Non-Statutory Stock Option Plan, the
underlying shares of which were funded by a contribution of 383,965 shares of
Common Stock by James F. Chen, the Company's founder. The non-cash compensation
expense was recognized in the second quarter of 1996. In the fourth quarter of
1996, the Company recognized a non-cash compensation expense of approximately
$264,000 in conjunction with a contribution to the Company of 52,885 shares of
Common Stock by James F. Chen. The increase in 1997 was principally attributable
to these non-cash compensation charges partially offset by the additional hiring
of management and administrative personnel and professional and legal fees and a
$200,000 non-cash charge attributable to the resetting of the exercise price on
certain warrants in the fourth quarter of 1997 (see Note 4 in the Notes to
Financial Statements). The percentage decrease in 1997 was primarily due to the
reduced level of expenditure and the allocation over a larger revenue base.

28

The small dollar and percentage increases in 1998 were primarily attributable to
a total of $394,000 in non-cash charges stemming from the reset of the exercise
price on certain warrants as discussed above. The Company anticipates that
general and administrative expenses will decrease in future periods. This
statement is based on current expectations. It is forward-looking, and the
actual results could differ materially. For information about factors that could
cause the actual results to differ materially, please refer to Item 1. "Business
- - - Risk Factors that May Affect Future Results and Market Price of Common Stock"
in this Form 10-K.

Research and Development -- Research and development expenses consist
principally of the costs of research and development personnel and other
expenses associated with the development of new products and enhancement of
existing products. Research and development expenses increased from
approximately $1,961,000 in 1996, to approximately $3,154,000 in 1997 and to
approximately $3,853,000 in 1998. Research and development expenses as a
percentage of total revenues were 36.9%, 52.8% and 61.6% in 1996, 1997 and 1998,
respectively. The dollar and percentage increases in 1997 and 1998 were
primarily due to increases in the number of personnel associated with the
Company's product development efforts. The Company believes that a continuing
commitment to research and development is required to remain competitive.
Accordingly, the Company intends to continue to allocate substantial resources
to research and development, but research and development expenses may vary as a
percentage of total revenues. This statement is based on current expectations.
It is forward-looking, and the actual results could differ materially. For
information about factors that could cause the actual results to differ
materially, please refer to Item 1. "Business - Risk Factors that May Affect
Future Results and Market Price of Common Stock" in this Form 10-K.

Interest Income and Expense -- Interest income represents interest earned on
cash, cash equivalents and marketable securities. Interest income was
approximately $168,000 in 1997 from interest earned on the net proceeds from the
Company's IPO and private financings, approximately $341,000 in 1997 from
interest earned on the net proceeds from the Company's IPO and the private
placement and approximately $125,000 in 1998 from interest earned on the
proceeds of the Company's private placement. Interest expense represents
interest payable or accreted on promissory notes and capitalized lease
obligations. Interest expense was approximately $519,000 in 1996, primarily due
to the Company's issuance of $1,250,000 in promissory notes in 1995, the
issuance of approximately $1,250,000 promissory notes in 1996 and the issuance
of a promissory note in the amount of $1,500,000 in 1996. Interest expenses were
approximately $13,000 in 1997 and $65,000 in 1998 and were attributable to
interest accreted on promissory notes and capitalized lease obligations.

Income Taxes -- The Company did not incur income tax expenses in December 31,
1996, 1997 and 1998 as a result of the net loss incurred during these periods.
As of December 31, 1998, the Company had net operating loss carry forwards of
approximately $23,532,000 as a result of net losses incurred since inception.

Dividend on Series A Stock -- The Company provided approximately $13,000 for a
dividend on Series A Stock in 1997 and $111,000 in 1998.

Deemed Dividend on Series A Stock - In December 1997, the Company recorded a
deemed dividend on the Series A Stock of $600,000, or $150 per share of Series A
Stock, in accordance with the Securities and Exchange Commission's position on
accounting for preferred stock that is convertible at a discount to the market
price for common stock. A further $103,000 was recorded as a deemed dividend in
1998 as a result of the redemption of the Series A Stock.

29

LIQUIDITY AND CAPITAL RESOURCES

On October 24, 1996, the Company commenced an IPO of its Common Stock, which
ultimately provided the Company with net proceeds, inclusive of the
underwriter's exercise of the overallotment option, of approximately
$13,195,000. On December 8, 1997, the Company issued 4,000 shares of Series A
Stock to Advantage for $4 million in the aggregate. Each share of Series A Stock
was convertible into shares of Common Stock and Series A Warrants. Net of fees
and related expenses, the Company raised approximately $3,766,000. On November
20, 1998, the Company redeemed 2,462 shares of Series A Stock held by Advantage
for $3,200,600 in the aggregate. The redeemed shares of Series A Stock
represented all of the shares outstanding on the date of redemption. As of
December 31, 1998, the Company had nominal debt and had cash and cash
equivalents of approximately $636,000 and negative working capital of
approximately $1,277,000.

The Company's operating activities used cash of approximately $5,119,000,
$9,020,000 and $6,642,000 in 1996, 1997 and 1998, respectively. Cash used in
operating activities was principally a result of net losses and increases in
accounts receivable, prepaid expenses and inventory, which were partially offset
by increases in accounts payable, the establishment of allowances for
potentially uncollectible accounts receivable and non-saleable inventory,
non-cash expenses related to the issuance of certain stock options and non-cash
charges for preferred stock dividends.

Capital expenditures for property and equipment were approximately $562,000,
$353,000 and $322,000 in 1996, 1997 and 1998, respectively. These expenditures
have generally been for computer workstations and personal computers, office
furniture and equipment, and leasehold additions and improvements. The capital
expenditures were less in 1998 as the Company had completed its relocation to
Germantown, Maryland in the previous year. In 1997, the Company paid a security
deposit of $370,000 as part of the six year operating lease agreement for its
principal office in Germantown, Maryland and made an investment of $250,000 in
Network Flight Recorder, Inc. Network Flight Recorder, Inc. develops software to
provide network administrators with network audit capabilities and is headed by
Marcus J. Ranum, the Company's former Chief Scientist.

Prior to its IPO, the Company had financed its operations through the private
sale of equity securities, notes to shareholders and short-term borrowings. In
1995, the Company raised approximately $400,000 through the sale of Common
Stock. In addition, in December 1995 and January 1996, the Company raised
$2,500,000 from the sale of 7% unsecured promissory notes scheduled to mature on
June 30, 1996. In addition, in April 1996, the Company raised approximately
$1,000,000 by selling an additional 222,222 shares of its former Series A
Convertible Preferred Stock ("Old Series A Stock") at $4.50 per share. In April
and May of 1996, the Company exchanged all of the 7% unsecured promissory notes
for Old Series A Stock. Upon consummation of the IPO, each share of Old Series A
Stock automatically converted into 1.20 shares of Common Stock and the Old
Series A Stock was retired.

In June 1996, the Company raised an additional $1,500,000 by issuing to JMI
Equity Fund II, L.P. ("JMI") an 8% unsecured senior subordinated note with
detachable warrants to purchase 333,332 shares of Common Stock of which 266,666
were exercisable at $4.50 per share ("$4.50 Warrants") and 66,666 were
exercisable at $0.015 per share ("$0.015 Warrants"). The note was redeemed upon
consummation of the IPO and the $0.015 Warrants were exercised on June 28, 1996.
Pursuant to the terms of the $4.50 Warrants, upon consummation of the IPO at a
price per share of $5.00, the $4.50 Warrants were adjusted to entitle JMI to
purchase 319,999 shares of Common Stock at $3.75 per share. The $4.50 Warrants
were adjusted throughout 1997 and 1998 resulting in non-cash charges of $200,000
and $418,00, respectively, as a result of the issuance of warrants to David D.
Dawson in 1997, the conversion of Series A Stock and the issuance of shares in
the private placement in 1998. Ultimately, JMI became entitled to purchase
600,000 shares of Common Stock at an exercise price of $2.00 per share. On
January 14, 1999, JMI elected to do a cashless exercise of all of the warrants
and purchased 223,529 shares of Common Stock.

30

Financing activities include cash received of approximately $1,261,000 and
$273,000 from the exercise of stock options during 1997 and 1998, respectively.
The Company received 6,020 and 37,192 shares of Common Stock as payment for
stock options issued under the 1996 Non-Statutory Stock Option Plan during 1997
and 1998, respectively. The Company retired all of these shares of Common Stock.

On February 24, 1999, the Company entered into a Loan and Security Agreement
("Loan Agreement") with a lender. Under the terms of the Loan Agreement, the
Company received $3.0 million under a term loan and bears interest at 12.53% per
annum. The term loan matures on August 31, 1999. On the term loan maturity date,
the term loan converts into a revolving loan in an amount not to exceed the
lesser of $3.0 million or 80 per cent of the Company's eligible receivables. The
revolving loan will bear interest at a rate equal to the lender's borrowing base
plus 2.5% and matures August 31, 2000.

In connection with this loan, the Company granted a security interest in all of
its assets, including its intellectual property, to the lender. If the Company
is unable to repay the loan or there is an event of default under the loan, the
lender could foreclose on its security interest.

Pursuant to the terms of the loan agreement relating to this term loan, receipt
by the Company of an opinion from its independent auditors which expresses doubt
with regard to the ability of the Company to continue as a going concern
constitutes an event of default under the loan agreement and allows the lender
to foreclose on its security interest. The Company has received such an opinion
from its independent auditors in connection with their review of the Company's
financial statements as of and for the year ended December 31, 1998. As of the
date of such opinion, there was an event of default under the loan agreement;
however, the lender has subsequently waived this event of default. In
consideration for such waiver, the Company has agreed to (a) grant an affiliate
of the lender warrants to purchase 100,000 shares of Common Stock at an exercise
price of $3.25 per share and (b) accept an additional financial covenant that
the Company's net worth will be $5,000,000 as of June 30, 9999 and September 30,
1999. There can be no assurance that the Company will be able to comply with the
loan covenants.

As a result of the $3 million term loan, the Company believes that its current
cash and cash equivalents and funds that may be generated from on-going
operations will be sufficient to finance the Company's operations at least
through August 31, 1999. V-ONE is actively seeking additional capital through
other financing activities in the short term to finance its ongoing operations
and is presently exploring sources of such financing.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company is not exposed to a variety of market risks such as fluctuations in
currency exchange rates or interest rates. All of the Company's products are
invoiced in U.S. dollars. The Company does not hold any derivatives or
marketable securities

31

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

V-ONE CORPORATION

INDEX TO FINANCIAL STATEMENTS

--------

Report of Independent Accountants 33

Balance Sheets as of December 31, 1997 and 1998 34

Statements of Operations for the years ended December
31, 1996, 1997 and 1998 36

Statements of Shareholders' Equity for the years ended
December 31, 1996, 1997 and 1998 37

Statements of Cash Flows for the years ended December 31, 1996
1997 and 1998 39

Notes to Financial Statements 41

Schedule of Valuation and Qualifying Accounts for the years ended
December 31, 1996, 1997 and 1998 60

32

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors of V-ONE Corporation

In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of V-ONE Corporation (the Company) at December 31, 1997 and 1998,
and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally
accepted auditing standards, 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 audits provide a reasonable basis for the opinion expressed above.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 10 to the
financial statements, the Company is experiencing difficulty in generating
sufficient operating cash flow to meet its obligations and sustain its
operations, which raises substantial doubt about its ability to continue
as a going concern. Management's plans with regard to these matters are
also described in Note 10 to the financial statements. The financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.

As discussed in Note 12 to the financial statements, the Company has
restated the accompanying financial statements as of December 31, 1997 and
for the years ended December 31, 1996 and 1997 to reflect a revision of
certain revenue recognition policies.

/s/ PricewaterhouseCoopers LLP

McLean, VA
March 11, 1999,
except as to Note 14, which
is as of March 31, 1999

33

V-ONE CORPORATION
BALANCE SHEETS
--------
ASSETS
December 31
-----------

1997
(as adjusted,
NOTE 12) 1998
------------ ----

Current assets:
Cash and cash equivalents $ 6,203,525 $ 635,959
Accounts receivable, less allowances of $500,405 and
$524,638 as of December 31, 1997 and 1998, respectively 794,395 513,221
Finished goods inventory, less allowances of $212,700 and $313,356
as of December 31, 1997 and 1998, respectively 583,894 385,481
Prepaid expenses and other current assets 328,261 276,456
------------ -----------
Total current assets 7,910,075 1,811,117

Property and equipment, net 1,001,581 874,553
Licensing fee, net of accumulated amortization of $353,820 and $636,876
as ofDecember 31, 1997 and 1998, respectively 538,434 255,378
Other assets 863,186 981,144
------------ -----------
Total assets $ 10,313,276 $ 3,922,192
============ ===========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable and accrued expenses $ 1,151,589 $ 2,124,156
Deferred revenue 812,647 888,295
Notes payable - current 16,667 5,259
Capital lease obligations - current 17,126 70,775
------------ ------------
Total current liabilities 1,998,029 3,088,485

Notes payable - noncurrent 5,555 -
Deferred rent 36,879 -
Capital lease obligations - noncurrent 295,306 197,982
------------ ------------
Total liabilities 2,335,769 3,286,467

Commitments and contingencies
Mandatorily redeemable series A convertible preferred stock, $0.001 par value;
13,333,333 shares authorized; 4,000 and 0 shares issued and outstanding as
of December 31, 1997 and 1998, respectively 3,766,297 --

Shareholders' equity:

34

Common stock, $0.001 par value; 33,333,333 shares authorized; 13,070,235 and
16,478,046 shares issued and outstanding as of December 31, 1997 and 1998,
respectively; 1,476,000 and no shares reserved for conversion, as of
December 31, 1997 and
1998, respectively 13,070 16,478
Additional paid-in capital 24,649,538 30,361,685
Notes receivable from sales of common stock (166,011) (50,021)
Accumulated deficit (20,285,387) (29,692,417)
----------- -----------
Total shareholders' equity 4,211,210 635,725
----------- -----------
Total liabilities and shareholders' equity $10,313,276 $3,922,192
=========== ==========

The accompanying notes are an integral part of these financial statements.

35

V-ONE CORPORATION
STATEMENTS OF OPERATIONS
--------

Year Ended December 31,
---------------------------------------------
1996 1997
(as adjusted, (as adjusted,
Note 12) Note 12) 1998
----------- ------------ ----

Revenues:
Products $ 5,008,523 $ 5,470,230 $ 5,798,542
Consulting and services 310,557 502,771 461,263
----------- ------------ -------------

Total revenues 5,319,080 5,973,001 6,259,805
----------- ------------ -------------

Cost of revenues:
Products 1,969,117 1,848,871 1,623,396
Consulting and services 56,502 96,949 68,060
----------- ------------ -------------

Total cost of revenues 2,025,619 1,945,820 1,691,456
----------- ------------ -------------

Gross profit 3,293,461 4,027,181 4,568,349
----------- ------------ -------------

Operating expenses:
Sales and marketing 3,914,630 7,717,640 6,071,919
General and administrative 4,879,940 3,699,278 3,896,210
Research and development 1,960,727 3,153,941 3,853,274
----------- ------------ -------------
Total operating expenses 10,755,297 14,570,859 13,821,403

Operating loss (7,461,836) (10,543,678) (9,253,054)
----------- ------------ -------------
Other (expense) income:
Interest expense (518,965) (13,130) (65,372)
Interest income 168,176 341,469 125,030
----------- ------------ -------------
Total other (expense) income (350,789) 328,339 59,658
----------- ------------ -------------
Net loss (7,812,625) (10,215,339) (9,193,396)

Dividend on preferred stock -- 12,600 110,879
Deemed dividend on preferred stock -- 600,000 102,755
----------- ------------ -------------
Loss attributable to holders of
common stock $(7,812,625) $(10,827,939) $ (9,407,030)
=========== ============ =============

Basic and diluted loss per share
attributable to holders of
common stock $ (0.85) $ (0.84) $ (0.68)
=========== ============ =============

Weighted average number of
common shares outstanding 9,245,305 12,868,859 13,898,450
=========== ============ =============

The accompanying notes are an integral part of these financial statements.

36

V-ONE CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
----------
Notes
Additional Receivable
Common Stock Paid-in from Accumulated
Shares Amount Capital Stock Sales Deficit Total
------ ------ ------- ----------- ------- -----

Balance, December 31, 1995 8,304,426 $ 8,304 $1,496,541$ $ - $(1,644,783) $(139,938)
Contribution of common stock
from related party (383,965) (384) 288,360 - - 287,976
Issuance of common stock
related to 1996 Non-Statutory
Stock Option Plan 383,965 384 1,727,459 (287,400) - 1,440,443
Issuance of common stock
as payment for services 11,111 11 49,989 - - 50,000
Issuance of non-qualified stock
options below fair market value - - 487,796 - - 487,796
Issuance of warrants to purchase
common stock - - 299,000 - - 299,000
Exercise of warrants to purchase
common stock 66,666 67 933 - - 1,000
Issuance of common stock as
payment of a note 73,333 74 329,926 - - 330,000
Contribution of common stock
from related party (153,333) (153) 153 - - -
Issuance of common stock as
payment on accrued interest 153,333 153 64,937 - - 65,090
Repurchase of fractional shares
of common stock related to
the reverse stock split (9) - (41) - (40) (81)
Issuance of common stock as
payment of licensing fees 188,705 188 848,985 - - 849,173
Issuance of common stock,
net of issuance costs 3,117,791 3,118 13,191,692 - - 13,194,810
Contribution of common stock
from related party (52,885) (53) 264,531 - - 264,478
Conversion of preferred stock to
common stock at 1-to-1.2 ratio 949,209 949 3,558,605 - - 3,559,554
Net loss, as adjusted (Note 12) - - - - (7,812,625) (7,812,625)
---------- --------- ----------- --------- ----------- -----------

Balance, December 31, 1996
as adjusted (Note 12) 12,658,347 12,658 22,608,866 (287,400) (9,457,448) 12,876,676
Exercise of common stock options 417,908 418 1,260,975 - - 1,261,393
Payments received in connection
with notes receivable for stock - - - 88,480 - 88,480
Retirement of common stock (6,020) (6) (32,903) 32,909 - -
Issuance of common stock warrants - - 200,000 - - 200,000
Deemed dividend on preferred stock - - 600,000 - - 600,000
Dividend on preferred stock - - 12,600 - - 12,600
Net loss, as adjusted (Note 12) - - - - (10,827,939) (10,827,939)
---------- --------- ----------- --------- ----------- -----------

37

Balance, December 31, 1997,
as adjusted (Note 12) 13,070,235 13,070 24,649,538 (166,011) (20,285,387) 4,211,210
Net loss (9,193,396) (9,193,396)
Issuance of common stock, net
of issuance costs 2,535,000 2,535 4,532,554 - - 4,535,089
Exercise of common stock options 189,333 189 273,228 - - 273,417
Conversion of mandatorily
redeemable preferred stock
to common stock 720,670 721 1,537,279 - - 1,538,000
Redemption of mandatorily
redeemable preferred stock - - (1,011,716) - - (1,011,716)
Retirement of common stock (37,192) (37) (115,953) 115,990 - -
Deemed dividend on preferred
Stock - - 102,755 - (102,755) -
Dividend on preferred stock - - - - (110,879) (110,879)
Issuance of common stock
warrants - - 394,000 - - 394,000
---------- -------- ----------- --------- ------------ ----------
Balance, December 31, 1998 16,478,046 $ 16,478 $30,361,685 $ (50,021) $(29,692,417) $ 635,725
========== ======== =========== ========= ============ ==========

The accompanying notes are an integral part of these financial statements.

38

V-ONE CORPORATION
STATEMENTS OF CASH FLOWS
--------

Year ended
December 31,
--------------------------------------------
1996 1997
(as adjusted, (as adjusted,
Note 12) Note 12) 1998
--------- --------- -----

Cash flows from operating activities:
Net loss $(7,812,625) $(10,215,339) $(9,193,396)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 172,582 591,965 637,243
Loss on disposal of assets - 101,354 95,228
Interest expense on accretion of note payable 299,000 - -
Consulting expense satisfied by issuance of
common stock 45,833 - -
Compensation expense for issuance of
non-qualified stock options 487,796 - -
Compensation expense for common stock
contributed to stock option plan 287,976 - -
Compensation expense for issuance of common
stock related to 1996 non-statutory stock
option plan 1,440,443 - -
Compensation expense recognized for conversion
of preferred stock to common 264,425 - -
Noncash charge related to issuance of warrants
of preferred stock to common - 200,000 394,000
Accrued interest satisfied with common stock 65,090 - -
Accrued interest satisfied with preferred stock 59,554 - -
Changes in assets and liabilities:
Accounts receivable, net (1,287,734) 735,731 281,174
Inventory, net (161,240) (165,024) 198,413
Prepaid expenses and other assets (173,695) (782,549) (66,153)
Accounts payable and accrued expenses 1,083,499 (159,455) 972,567
Deferred revenue 85,248 714,899 75,648
Deferred rent 25,316 (41,396) (36,879)
----------- ------------ -----------
Net cash used in operating activities (5,118,532) (9,019,814) (6,642,155)
----------- ------------ -----------

Cash flows from investing activities:
Purchase of property and equipment (562,190) (353,110) (322,387)
Investment in affiliate - (250,000) -
Collection of note receivable - 88,480 -
Net cash used in investing activities (562,190) (514,630) (322,387)
------------- ----------- ------------

Cash flows from financing activities:
Issuance of common stock 15,550,055 - 5,070,000
Issuance of preferred stock 1,000,000 4,000,000 -

39

Payment of common stock issuance costs (2,355,245) - (534,911)
Payment of preferred stock dividends - - (110,879)
Payment of preferred stock issuance costs - (233,703) (39,413)
Redemption of preferred stock - - (3,200,600)
Issuance of debt with detachable warrants 1,500,000 - -
Exercise of stock options and warrants 1,000 1,261,393 273,417
Issuance of notes payable 1,250,000 - -
Principal payments on capitalized lease obligations (43,843) (167,429) (43,675)
Repayment of notes payable (11,111) (16,667) (16,963)
Repayment of notes payable to related parties (1,644,144) - -
----------- ------------ -----------
Net cash provided by financing activities 15,246,712 4,843,594 1,396,976
----------- ------------ -----------
Net increase (decrease) in cash and cash equivalents 9,565,990 (4,690,850) (5,567,566)
Cash and cash equivalents, beginning of year 1,328,385 10,894,375 6,203,525
----------- ------------ -----------
Cash and cash equivalents, end of year $10,894,375 $ 6,203,525 $ 635,959
=========== ============ ===========

The accompanying notes are an integral part of these financial statements.

40

V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------

1. NATURE OF BUSINESS

V-ONE Corporation ("V-ONE" or the "Company") develops, markets and
licenses a comprehensive suite of network security products that enable
organizations to conduct secured electronic transactions and
information exchange using private enterprise networks and public
networks, such as the Internet. The Company's principal market is the
United States, with headquarters in Maryland, and secondary markets
located in Europe and Asia.

The Company was originally incorporated in the State of Maryland on
February 16, 1993 with the authorization to issue 5,666,666 shares of
Common Stock. The Board of Directors authorized and the shareholders
approved a stock split of the Company's Common Stock as of November 11,
1995 increasing authorized Common Stock to 13,333,333 shares. Effective
February 7, 1996, the Company merged with a pre-existing corporation
formed in Delaware. The Delaware corporation became the surviving
corporation.

In connection with its reincorporation, the Company increased the
number of authorized shares of Common Stock from 13.3 million to 33.3
million and authorized 13.3 million shares of Preferred Stock. On June
12 and June 28, 1996, respectively, the Board of Directors authorized
and the shareholders approved a two-for-three reverse stock split of
the outstanding shares of the Company's Preferred and Common Stock,
which was effective July 2, 1996. All references to Common Stock,
Preferred Stock, options and per share data have been restated to give
effect to both stock splits.

2. SIGNIFICANT ACCOUNTING POLICIES

REVENUE RECOGNITION

The Company develops, markets, licenses and supports computer software
products and provides related services. The Company conveys the rights
to use the software products to customers under perpetual license
agreements, and conveys the rights to product support and enhancements
in annual maintenance agreements. The Company recognizes revenue upon
deployment of the software directly to an end-user or a value-added
reseller. (See Note 12.) The Company defers and recognizes maintenance
and support services revenue over the term of the contract period,
which is generally one year. The Company recognizes training and
consulting services revenue as the services are provided. The Company
generally expenses sales commissions as the related revenue is
recognized and pays sales commissions upon receipt of payment from the
customer.

In addition to the direct sales effort, the Company licenses its
products through a network of distributors. The Company generally does
not record revenue until the distributor has delivered the licenses to
end-user customers and the end-user customers have registered the
software with the Company. (See Note 12.) The Company also records
revenue when the software is deployed directly to the end-user customer
on behalf of the distributor.

In certain instances, as appropriate, the Company recognizes revenues
from the sale of systems using the percentage of completion method as
the work is performed, measured primarily by the ratio of labor hours
incurred to total estimated labor hours for each specific contract.

Continued
41

V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------

When the total estimated cost of a contract is expected to exceed the
contract price, the total estimated loss is charged to expense in the
period when the information becomes known.

The Company's revenue recognition policies for the years ended December
31, 1996 and 1997 are in conformity with the Statement of Position
91-1, "Software Revenue Recognition," promulgated by the American
Institute of Certified Public Accountants. The Company's revenue
recognition policies for the year ended December 31, 1998 are in
conformity with the Statement of Position 97-2, "Software Revenue
Recognition" (SOP 97-2), promulgated by the American Institute of
Certified Public Accountants. Management has assessed SOP 97-2 and
believes that its adoption on January 1, 1998 will not have an effect
on the Company's revenue recognition policy.

RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS

Software development costs are included in research and development and
are expensed as incurred. Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Cost of Computer Software to be
Sold, Leased or Otherwise Marketed" requires the capitalization of
certain software development costs once technological feasibility is
established, which the Company generally defines as completion of a
working model. Capitalization ceases when the products are available
for general release to customers, at which time amortization of the
capitalized costs begins on a straight-line basis over the estimated
product life, or on the ratio of current revenues to total projected
product revenues, whichever is greater. To date, the period between
achieving technological feasibility and the general availability of
such software has been short, and software development costs qualifying
for capitalization have been insignificant. Accordingly, the Company
has not capitalized any software development costs.

USE OF ESTIMATES

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

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. Cash and
cash equivalents include time deposits with commercial banks used for
temporary cash management purposes.

INVENTORIES

Inventories are valued at the lower of cost or market and consist
primarily of computer equipment for sale on orders received from
customers and other vendor's software licenses held for resale. Cost is
determined based on specific identification.

Continued
42

V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------

PROPERTY AND EQUIPMENT

Office and computer equipment and furniture and fixtures are recorded
at cost. Depreciation and amortization of property and equipment is
calculated using the straight-line method over a useful life of the
assets, generally three to seven years. Depreciation expense was
$101,818, $285,213 and $354,187 for the years ended December 31, 1996,
1997 and 1998, respectively.

Repairs and maintenance costs are charged to expense as incurred. Upon
sale or retirement of property and equipment, the costs and related
accumulated depreciation are eliminated from the accounts and any
resulting gain or loss on such disposition is included in the
determination of net income.

INCOME TAXES

Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
by applying presently enacted statutory tax rates, which are applicable
to the future years in which deferred tax assets or liabilities are
expected to be settled or realized, to the differences between the
financial statement carrying amounts and the tax bases of existing
assets and liabilities. The effect of a change in tax rates on deferred
tax assets and liabilities is recognized in net income in the period
that the tax rate is enacted.

The Company provides a valuation allowance against net deferred tax
assets if, based upon available evidence, it is more likely that some
or all of the deferred tax assets may not be realized.

COMPUTATION OF NET LOSS PER COMMON SHARE

Basic earnings (or loss) per share is computed by dividing net income
(or loss) by the weighted average number of shares of common stock
outstanding. Diluted earnings per share is computed by dividing net
income by the weighted average common and potentially dilutive common
equivalent shares outstanding. However, the computation of diluted loss
per share was antidilutive in each of the years presented; therefore,
basic and diluted loss per share are the same. The weighted average
number of shares used in the computations was 9,245,305 in 1996,
12,868,859 in 1997 and 13,898,450 in 1998.

RISKS, UNCERTAINTIES AND CONCENTRATIONS

Financial instruments that potentially subject the Company to
significant concentration of credit risk consist primarily of cash
equivalents and accounts receivable. The Company's cash balances exceed
federally insured amounts. The Company invests its cash primarily in
money market funds with an international commercial bank. The Company
sells its products to a wide variety of customers in a variety of
industries. The Company performs ongoing credit evaluations of its
customers but does not require collateral or other security to support
customer accounts receivable. In management's opinion, the Company has
provided sufficient provisions to prevent a significant impact of
credit losses to the financial statements.

Continued
43

V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------

In 1996, two customers accounted for approximately 28% of total
revenues. In 1997 one customer comprised 12% of total revenues. As of
December 31, 1998 and for the year then ended, no customer represented
more than 10% of total revenues and one customer represented 15% of
accounts receivable.

The Company had significant purchases of product from one major
supplier in the amount of approximately $307,000 during 1996 and
approximately $1,201,000 from the same supplier and another major
supplier during 1997, and approximately $524,000 from the same supplier
and a different major supplier during 1998, representing 16%, 65% and
32% of total product cost of revenues for those periods, respectively.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the
1998 presentation. These changes had no impact on previously reported
results of operations.

NEW ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 is effective
for fiscal years beginning after June 15, 1999 and cannot be applied
retroactively. SFAS 133 establishes accounting and reporting standards
requiring that every derivative instrument be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS
133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are
met. The Company currently plans to adopt SFAS 133 effective January 1,
2000, and will determine both the method and impact of adoption prior
to that date.

3. NOTES PAYABLE

In October 1995, the Company entered into a $50,000 loan agreement with an
international financial institution. The loan required monthly payments of
interest at a rate equal to the institution's prime lending rate for the
first twelve months or 8.25% as of December 31, 1996. In October 1996, the
interest rate increased to 1.5% over prime or 10% as of December 31, 1997
and 9.25% at December 31, 1998. The Company was required to repay the loan
through 36 monthly payments commencing May 1996. The loan is
collateralized by the assets of the Company. The balance outstanding at
December 31, 1998 of $5,259 matured in 1999 and was repaid in full in
February 1999.

In both December 1995 and January 1996, the Company issued $1,250,000 in
7% uncollateralized promissory notes to fourteen individual investors.
During April 1996, the principal and accrued interest of $59,554 was
converted into shares of the Company's former Series A Convertible
Preferred Stock ("Old Series A Stock"), which was, concurrent with the
Company's initial public offering ("IPO"), converted to Common Stock (see
Note 7).

4. RELATED PARTY TRANSACTIONS

On June 1, 1995, the Company borrowed $330,000 from Scientek Corporation
and issued a promissory note, bearing no interest, due June 1, 1996. The
note was assigned to Hai Hua Cheng (a former board member of the Company),
by Scientek Corporation. The terms of the note provided that, as further
consideration for the loan, the Company would issue 153,333 shares of

Continued
44

V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------

Common Stock to Mr. Cheng immediately after repayment of the loan. On June
12, 1996, in consideration for Mr. Cheng's agreement not to demand payment
of the note until May 31, 1997, the Board of Directors authorized the
Company to offer Mr. Cheng the option to receive Common Stock based on a
$4.50 per share conversion price in lieu of cash in payment of the note.
The Board reserved and authorized the issuance of 73,333 shares of Common
Stock for this purpose. On June 28, 1996, the Company repaid the loan by
issuing 226,666 shares of Common Stock to Mr. Cheng, inclusive of the
153,333 shares of Common Stock described above. In connection with this
loan, the Company recognized interest expense of $40,681 during the year
ended December 31, 1996.

The Company's founder and majority shareholder advanced the Company
operating funds under three separate promissory notes. The notes bore
interest at 8% and were due on demand. Following the consummation of the
IPO during 1996, the Company repaid the outstanding balance of the notes
and all accrued interest.

During June 1996, the Company borrowed $1,500,000 and issued an 8%
uncollateralized senior subordinated note due June 18, 2000, with 333,332
detachable warrants to purchase Common Stock. Of the original 333,332
detachable warrants, 266,666 were exercisable at $4.50 per share, and
66,666 were exercisable at $0.015 per share. Because the initial offering
price per share of Common Stock in the IPO was less than $7.00, each share
of Old Series A Stock was automatically converted into 1.20 shares of
Common Stock and the 266,666 warrants were converted into 319,999 warrants
exercisable at $3.75 per share. James F. Chen, the Company's founder,
contributed 13,333 shares of Common Stock due to the increase in the Old
Series A Stock's conversion ratio. The Company allocated $1,201,000 and
$299,000 to notes payable and additional paid-in capital, respectively,
based upon the pro-rata fair value of the instruments. As of December 31,
1996, the $299,000 allocated to additional paid-in capital was fully
amortized. Following the consummation of the IPO, the Company repaid the
outstanding balance of the note and all accrued interest. The 66,666
detachable warrants with an exercise price of $0.015 were exercised on
June 28, 1996. The remaining 319,999 detachable warrants with an exercise
price of $3.75 outstanding at December 31, 1996, increased to 383,999
exercisable at $3.125, as a result of the anti-dilution clause triggered
upon the issuance of 300,000 warrants with an exercise price of $3.125 to
David D. Dawson, President and Chief Executive Officer, on November 21,
1997. The Company recognized expense of $200,000 due to the increase and
decrease in the number of the detachable warrants and exercise price,
respectively. The remaining 383,999 detachable warrants with an exercise
price of $3.125 outstanding at December 31, 1997, increased to 600,000
exercisable at $2.00, as a result of the anti-dilution clause triggered
upon the issuance of Common Stock for $2.00 per share on November 20, 1998
and conversion ofshares of Series A Convertible Preferred Stock ("Series A
Stock") with shares of Common Stock and Warrants and purchase shares of
Common Stock ("Series A Warrants"). The Company recognized expense of
$394,000 due to the increase and decrease in the number of the detachable
warrants and exercise price, respectively. On January 14, 1999, these
warrants were exercised in full pursuant to their cashless exercise
provisions and the Company issued 223,529 shares of Common Stock to the
holder.

In January 1997, the Company made an investment of $250,000 in Network
Flight Recorder, Inc. ("NFR") in exchange for ten percent of NFR common
stock. NFR develops software to provide network administrators with
network audit capabilities. NFR is headed by the Company's former Chief
Scientist, who continues to work as a consultant for the Company.

5. SELECTED BALANCE SHEET INFORMATION

Property and equipment consisted of the following at December 31:

Continued
45

V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------

1997 1998
------------ ------------
Office and computer equipment $ 1,251,922 $ 1,256,626
Leasehold improvements 54,869 62,332
Furniture and fixtures 110,447 120,811
------------ ------------
1,417,238 1,439,769
Less: accumulated depreciation 415,657 565,216
------------ ------------
$ 1,001,581 $ 874,553
============ ============

Other assets consisted of the following at December 31:

1997 1998
------------- --------------
Deposits $ 613,186 $ 731,144
Investment in NFR 250,000 250,000
------------- --------------
$ 863,186 $ 981,144
============= ==============

Accounts payable and accrued expenses consisted of the following at
December 31:

1997 1998
------------ -------------
Accounts payable $ 601,046 $ 1,820,812
Accrued compensation 473,507 234,638
Accrued marketing costs 48,193 15,000
Sales tax payable 28,843 28,904
Other accrued expenses - 24,802
------------ -------------
$ 1,151,589 $ 2,124,156
============ =============

Continued
46

V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------

6. INCOME TAXES

The tax effect of temporary differences that give rise to significant
portions of the deferred income taxes are as follows at December 31:

1997 1998
--------------- ----------------
Deferred tax assets (liabilities):

Deferred revenue $ 313,844 $ 131,573
Inventory 82,145 121,018
Accounts receivable 193,256 202,615
Property and equipment - (78,178)
Deferred rent 14,243 -
Non-deductible accruals 59,071 65,739
Stock-based employee compensation 188,388 -
Licensing fee (191,305) (81,989)
Net operating loss carryforward 6,768,239 9,087,986
-------------- --------------

Total deferred tax asset 7,431,743 9,448,764
Valuation allowance (7,431,743) (9,448,764)
-------------- --------------
Net deferred tax asset $ - $ -
============== ==============

The net change in the valuation allowance from 1997 to 1998 is due
principally to the increase in net operating losses. Valuation allowances
have been recognized due to the uncertainty of realizing the benefit of
net operating loss carryforwards. At December 31, 1998, the Company had
net operating loss carryforwards of approximately $23,531,814 for Federal
and state income tax purposes available to offset future taxable income.
The net operating loss carryforwards begin to expire in 2008.

7. SHAREHOLDERS' EQUITY

OLD SERIES A STOCK

During April and May 1996, the Board of Directors authorized the
issuance of 791,011 shares of Old Series A Stock with a par value of
$0.001. On April 15, 1996, the Company repaid the full amount of the 7%
uncollateralized promissory notes outstanding, including accrued
interest, to seven of the investors who participated in the December
1995 and January 1996 note offering, by issuing shares of the Company's
Old Series A Stock, at a price of $4.50 per share. The Company paid
cash to each of these investors in an amount equal to the value of any
fractional shares of Old Series A Stock that would otherwise have been
transferred to such investors. In addition, the Company permitted the
seven investors to purchase an additional 222,222 shares of Old Series
A Stock at a price of $4.50 per share. Of the remaining seven
investors, two transferred their notes to one of the other remaining
investors. The remaining five investors exchanged their notes,
including the transferred notes, for shares of the Company's Old Series
A Stock on May 24, 1996, also at a price of $4.50 per share. A total of
791,011 shares of Old Series A Stock were issued on May 24, 1996.

In connection with the IPO, each share of Old Series A Stock
automatically converted into 1.20 shares of Common Stock. The 791,011
shares of Old Series A Stock were converted into 949,209 shares of
Common Stock. James F. Chen, the Company's founder, contributed 39,552
shares of Common Stock to the Company due to the increase in the Old
Series A Stock's conversion ratio, because the initial offering price
per share of Common Stock in the IPO was less that $7.00.

MANDATORILY REDEEMABLE PREFERRED STOCK

On December 8, 1997, the Company issued 4,000 shares of mandatorily
redeemable Series A Convertible Preferred Stock ("Series A Stock") to
Advantage Fund II Ltd. ("Advantage") for $4 million, less issuance
costs of approximately $273,000. Each share of Series A Stock was
convertible into shares of Common Stock and warrants to purchase shares
of Common Stock ("Series A Warrants").

Continued
47

V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------

The holders of Series A Stock were entitled to receive, at the
discretion of the Board of Directors, dividends at the rate of $50.00
per annum per share, which were fully cumulative, accrue without
interest from the date of original issuance and were payable quarterly
commencing March 1, 1998. During the years ended December 31, 1997 and
1998, the Company recorded dividends of $12,600 and $110,879. All
dividends were paid by the Company in 1998.

Due to the Maximum Share Amount limitation found in Section 7(a)(1) of
the Certificate of Designations of the Series A Stock ("Certificate"),
the Company was obligated to convert shares of Series A Stock held by
Advantage. On September 21, 1998, the Company sent an inconvertibility
notice to Advantage pursuant to Section 7(a)(2) of the Certificate
indicating that, as of September 11, 1998, Advantage had the right to
have some of its shares of Series A Stock redeemed by the Company for
the Share Limitation Redemption Price (which term is defined in the
Certificate).

On September 22, 1998, the Company and Advantage entered into a waiver
agreement ("Waiver Agreement") and Amendment No. 1 ("Amendment No. 1")
to the Registration Rights Agreement dated as of December 3, 1997 by
and between the Company and Advantage (as amended, "Registration Rights
Agreement"). Pursuant to the Waiver Agreement, the Company redeemed
2,462 shares of Series A Stock for $3,200,000 in the aggregate on
November 20, 1998. Advantage waived all accrued dividends on the Series
A Stock. No shares of Series A Stock remain outstanding.

Simultaneously with the execution of the Waiver Agreement, the Company
granted to Advantage warrants to purchase 100,000 shares of the
Company's Common Stock at an exercise price of $2.125 per share and
warrants to purchase 389,441 shares of the Company's Common Stock at an
exercise price of $4.77 per share, all of which expire on September 21,
2003 (collectively "Additional Warrants"). Pursuant to the terms of
Amendment No. 1, the Company has agreed to file a registration
statement with respect to the shares of Common Stock underlying the
Additional Warrants.

STOCK OFFERING

In October 1996, the Company completed an underwritten initial public
offering of 3,000,000 shares of its Common Stock, at a public offering
price of $5.00 per share (the "IPO"). The net proceeds from the IPO of
approximately $12,645,000 were used to repay indebtedness outstanding
under the Company's senior subordinated note and promissory notes due
to the Company's founder. (See Note 4.) On November 22, 1996, the
Company's underwriters exercised their option to purchase an additional
200,000 shares of Common Stock of which 117,791 shares were issued by
the Company at $5.00 per share.

In November and December 1998, the Company consummated a private
placement of 1,860,000 and 675,000 shares, respectively, of its Common
Stock at a price of $2.00 per share. The Company incurred issuance
costs of approximately $546,000 and on November 20, 1998, granted
50,000 warrants to purchase one share of common stock to the
underwriter of the private placement. The warrants have an exercise
price of $2.125 and expire five years from the date of grant.

WARRANTS

In addition to the warrants discussed above and in Note 4, the Company
has issued other warrants during the years ended December 31, 1997 and
1998.

Continued
48

V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------

On December 8, 1997, the Company issued warrants to purchase 60,000
shares of Common Stock at an exercise price of $4.725 to its
underwriter in consideration for services rendered in connection with
the private placement of its Series A Stock. Such warrants are due to
expire on December 8, 2002.

In connection with a marketing agreement, the Company issued to a
consultant warrants to purchase 25,000 shares of Common Stock at an
exercise price of $3.875 per share, exercisable as of November 4, 1997
and warrants to purchase 15,000 shares of Common Stock at an exercise
price of $3.188 per share, exercisable as of April 22, 1998.

On July 8, 1998, the Company granted warrants to purchase 10,000 shares
of Common Stock each to two directors of the Company. The warrants have
an exercise price of $2.688 and expire five years from the date of
grant.

Warrants to purchase shares of the Company's Common Stock outstanding
at December 31, 1997 and 1998 were as follows:

Warrants
Outstanding
AS OF DECEMBER 31,

1997 1998 EXERCISE PRICE
---- ---- --------------
- 600,000 $2.00
- 150,000 $2.13
- 20,000 $2.69
683,999 300,000 $3.13
- 15,000 $3.19
25,000 25,000 $3.88
60,000 60,000 $4.73
- 533,576 $4.77
------ ---------
768,999 1,703,576
======= =========

At December 31, 1998, all 1,703,576 warrants were exercisable at a
weighted-average exercise price of $3.22 per share of Common Stock

STOCK OPTIONS PLANS

The Company has the following four stock options plans: the 1995
Non-Statutory Stock Option Plan, the 1996 Non-Statutory Stock Option
Plan, the 1996 Incentive Stock Plan and the 1998 Incentive Stock Option
Plan ("Plans"). The Plans were adopted to attract and retain key
employees, directors, officers and consultants. The Plans are
administered by a committee appointed by the Board of Directors
("Compensation Committee").

Continued
49

V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------

1995 NON-STATUTORY STOCK OPTION PLAN

The Compensation Committee determines the number of options granted to
a key employee, the vesting period and the exercise price provided it
is not below market value on the date of the grant for the 1995
Non-Statutory Stock Option Plan ("1995 Plan"). In most cases, the
options vest over a two year period and terminate ten years from the
date of grant. The 1995 Plan will terminate during May 2005 unless
terminated earlier with the provisions of the 1995 Plan. On June 12,
1996, the Board of Directors determined that no further options would
be granted under the 1995 Plan.

Option activity under the 1995 Plan for the three years ended December
31, 1998 was as follows:

Shares Price
------ -----

Balance as of December 31, 1995 350,293 $0.425-$2.505
Granted 2,000 $4.50
Exercised - -
Cancelled (2,000) $4.50
--------

Balance as of December 31, 1996 350,293 $0.425-$2.505
Granted -
Exercised (119,070) $0.425-$2.505
Cancelled -
--------

Balance as of December 31, 1997 231,223 $0.425-$2.505
Granted - $0.425-$2.505
Exercised (158,333) $0.425
Cancelled (8,888) $0.425-$2.505
--------

Balance as of December 31, 1998 64,002 $0.425-$2.505
========

The Compensation Committee was authorized by the Board of Directors to
grant options for a total of 352,293 shares of Common Stock under the
1995 Plan. As of December 31, 1998, 64,002 options were granted and
outstanding, of which 20,000 are exercisable at $0.425 per share and
40,002 are exercisable at $2.505 per share. All of the outstanding
options are vested and exercisable at December 31, 1998.

1996 NON-STATUTORY STOCK OPTION PLAN

The Compensation Committee, which administers the 1996 Non-Statutory
Stock Option Plan ("Non-Statutory Plan"), established the option price
to be the fair market value of the stock on the date of grant. The
options were not transferable, were subject to various restrictions
outlined in the Non-Statutory Plan and must have been exercised by
December 31, 1996. During April 1996, the Company's founder contributed
383,965 shares of Common Stock to the Company and the Company issued
those shares to employees in connection with the exercise of stock
options granted under the Non-Statutory Plan. The Company recognized
compensation expense of $287,976 with a corresponding increase to
additional paid-in capital to record this transaction. All 383,965
options were granted with an exercise price of $0.75 and exercised
during 1996.

Continued
50

V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------

The options were exercised on April 22, 1996 at $0.75 per share in
exchange for notes receivable from shareholders. The Company recognized
$1,439,867 in compensation expense based upon the difference between
the fair market value of $4.50 at the date of grant and the exercise
price of $0.75 per share. The notes are full recourse promissory notes
bearing interest at 6% per annum and are collateralized by the
underlying Common Stock. Principal and interest are payable in
installments. Maturities range from April 1997 to April 2006. The
Company has accounted for these notes as a reduction to shareholders'
equity. During 1997 and 1998, the shareholders repaid a portion of the
notes receivable with cash and by returning shares of the Company's
Common Stock.

1996 INCENTIVE STOCK PLAN

During June 1996, the Company adopted the 1996 Incentive Stock Plan
("1996 Plan"), under which incentive stock options, non-qualified stock
options and restricted share awards may be made to the Company's key
employees, directors, officers and consultants. Both incentive stock
options and options that are not qualified under Section 422 of the
Internal Revenue Code of 1986, as amended ("non-qualified options"),
are available under the 1996 Plan. The options are not transferable and
are subject to various restrictions outlined in the 1996 Plan. The
Compensation Committee or the Board of Directors determines the number
of options granted to a key employee, officer or consultant, the
vesting period and the exercise price provided that it is not below
market value. The 1996 Plan will terminate during June 2006 unless
terminated earlier by the Board of Directors.

On February 17, 1998, the Company's Board of Directors authorized an
offer to reset the exercise price of all full-time employees' (other
than the President and any Vice President) incentive stock options and
non-qualified stock options granted under the 1996 Plan. If accepted by
the option holder, such options were replaced with non-qualified
options at the new exercise price of $2.625 per share. To have been
eligible for repricing, a participant must: 1) have been a full-time
employee on February 17, 1998; 2) have agreed to remain an employee of
the Company until August 17, 1998, and 3) have accepted the offer by
February 24, 1998.

On May 1, 1998, the Company's Board of Directors authorized an offer to
reset the exercise price of all options issued to the President and any
Vice Presidents granted under the 1996 Plan. If accepted by the option
holder, such options were replaced with non-qualified options at the
new exercise price of $2.875 per share. To have been eligible for
repricing, a participant must: 1) have been a full-time employee on May
1, 1998; 2) have agreed to remain an employee of the Company until
November 1, 1998, and 3) have accepted the offer by May 8, 1998.

Option activity under the 1996 Plan for the three years ended December
31, 1998 was as follows:

Shares Price
------ -----

Balance as of December 31, 1995 - -

Granted 1,224,213 $3.75-$9.00
Exercised

Continued
51

V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------

Cancelled (70,242) $3.75-$9.00
---------

Balance as of December 31, 1996 1,153,671 $3.75-$9.00

Granted 1,315,501 $3.75-$5.88
Exercised (298,838) $3.75-$5.00
Cancelled (198,299) $3.75-$9.00
---------
Balance as of December 31, 1997 1,972,035 $3.75-$9.00

Granted 558,667 $2.625-$2.875
Granted (Repriced) 961,359 $2.625-$2.875
Cancelled (Repriced) (961,359) $3.75-$9.00
Cancelled (613,326) $2.625-$9.00
Exercised (35,000) $2.625
---------

Balance as of December 31, 1998 1,882,376 $2.625-$9.00
=========

Awards may be granted under the 1996 Plan with respect to a total of
2,333,333 shares of Common Stock. As of December 31, 1998, 796,876
options are vested and exercisable. As of December 31, 1998, the
Company had 117,119 shares of Common Stock available for grant under
the 1996 Plan. The 1,882,376 options outstanding at December 31, 1998
are exercisable at the following prices:

OPTIONS OUTSTANDING EXERCISE PRICE

403,958 $2.625
550,000 $2.875
74,667 $3.031
500,000 $3.125
45,000 $3.250
87,048 $3.750
163,371 $4.500
20,000 $5.000
15,000 $5.500
10,000 $5.875
13,332 $9.000
-----------
1,882,376
===========

1998 INCENTIVE STOCK OPTION PLAN

On February 2, 1998, the Board of Directors authorized the adoption of
the 1998 Incentive Stock Option Plan (the "1998 Plan"). The purpose of
the 1998 Plan is to provide for the acquisition of an equity interest
in the Company by non-employee directors, officers, key employees and
consultants. The 1998 Plan will terminate February 2, 2008.

Incentive stock options may be granted to purchase shares of Common
Stock at a price not less than fair market value on the date of grant.
Only employees may receive incentive stock options; all other qualified
participants may receive non-qualified stock options with an exercise
price determined by a Committee or the Board. Options are generally

Continued
52

V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------

exercisable after one or more years and expire no later than ten years
from the date of grant. The 1998 Plan also provides for reload options
and restricted share awards to employee and consultant participants
subject to various terms.

Option activity under the 1998 Plan for the year ended December 31,
1998 was as follows:

SHARES PRICE
Balance as of December 31, 1997 - -
Granted 712,000 $2.625-$2.875
Exercised - -
Cancelled (101,000) $2.688
--------
Balance as of December 31, 1998 611,000 $2.625-$2.875
========

Awards may be granted under the 1998 Plan with respect to a total of
2,500,000 shares of Common Stock. As of December 31, 1998, no options
are vested and exercisable. As of December 31, 1998, the Company had
1,889,000 shares of stock available for grant under the 1998 Plan. As
of December 31, 1998, 611,000 options were granted and outstanding, of
which 236,500 have exercise prices of $2.625 per share, 322,500 have
exercise prices of $2.688 per share and 52,000 have exercise prices of
$2.875 per share.

The Company measures compensation expense for its employee stock-based
compensation using the intrinsic value method and provides pro forma
disclosures of net loss as if the fair value method had been applied in
measuring compensation expense. Under the intrinsic value method of
accounting for stock-based compensation, when the exercise price of
options granted to employees is less than the fair value of the
underlying stock on the date of grant, compensation expense is to be
recognized over the applicable vesting period.

1996 1997 1998
------------ -------------- -----------

Loss attributable to holders of common
stock:
As reported $7,812,625 $10,827,939 $9,407,030
Pro forma $10,626,435 $11,142,262 $10,464,134
Basic and diluted loss per share
attributable to holders of common
stock:
As reported $0.85 $0.84 $0.65
Pro forma $1.15 $0.87 $0.75

The fair value of each option is estimated on the date of grant using a
type of Black-Scholes option pricing model with the following
weighted-average assumptions used for grants during the years ended
December 31, 1996, 1997 and 1998, respectively: dividend yield of 0%
for all periods; expected volatility of 43%, 56%, and 68%; risk-free
interest rate of 6.5%, 6.0%, and 5.3%; and expected terms of 3.4, 4.0,
and 4.0 years, respectively.

Continued
53

V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------

The weighted-average fair value of the options granted during the years
ended December 31, 1996, 1997 and 1998 was $1.758, $2.039 and $1.10,
respectively. The weighted average exercise price of the options
outstanding at December 31, 1996, 1997 and 1998 was $2.433, $3.960 and
$3.06, respectively.

As of December 31, 1998, the weighted average remaining contractual
life of the options outstanding is 8.9 years.

As of December 31, 1996, 1997 and 1998, the pro forma tax effects under
SFAS 109 would include an increase to both the deferred tax asset and
the valuation allowance of approximately $1,087,000, $121,000 and
$423,000, respectively, and no impact to the statement of operations.

8. COMMITMENTS

LEASES

The Company is obligated under various operating and capital lease
agreements, primarily for office space and equipment through 2003. Future
minimum lease payments under these non-cancelable operating and capital
leases as of December 31, 1998 are as follows:

OPERATING CAPITAL

1999 $ 961,737 $ 102,959
2000 918,027 100,084
2001 621,357 83,498
2002 576,590 50,059
2003 341,199 -
----------- ----------

Total minimum payments $ 3,418,910 336,600
===========
Interest (67,843)
----------
Present value of capital lease
obligations 268,757
Less: current portion (70,775)
----------
Capital lease obligations non-current $ 197,982
==========

Rent expense was $258,607, $550,693 and $701,133, for the years ended
December 31, 1996, 1997 and 1998, respectively.

At December 31, 1998, the Company's future minimum sublease rental income
payments with respect to certain non-cancelable operating leases with
terms in excess of one year are as follows:

1999 $ 204,043
2000 214,489
2001 74,712
----------
Total minimum payments $ 493,244
==========

Continued
54

V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------

The cost and accumulated depreciation of assets under capital leases were
as follows as of December 31:

1997 1998
----------- ----------
Furniture $ 8,752 $ -
Computers and equipment 440,147 359,859
----------- ----------
448,899 359,859
Accumulated depreciation (86,428) (119,351)
$ 362,471 $ 240,508
=========== ==========

LICENSE AGREEMENTS

In 1994, the Company entered into two licensing agreements whereby the
Company obtained the right to modify and sell certain technology used
in its product line. One of the agreements requires the Company to pay
fees based on product and subscription sales for any product using the
licensed technology. The other agreement provides for payment of fees
based upon gross revenues of the Company. This latter agreement also
gives the other party ("Licensor") the right to forfeit future
licensing fees in exchange for 2% of the Company's outstanding voting
stock, after giving effect to the issuance. The Licensor elected to
receive voting stock in May 1996. In October 1996, the Company issued
188,705 shares of Common Stock to the Licensor and the Massachusetts
Institute of Technology. The fair market value of the stock issued,
approximately $944,000, is recorded as an asset by the Company and is
being amortized over the period of its estimated useful life, 3 years.
The Company incurred amortization expense of $135,779, $283,056 and
$283,056 relating to these agreements in 1996, 1997 and 1998,
respectively.

EMPLOYMENT AGREEMENTS

Effective November 21, 1997, the Company entered into a three year
employment agreement with David D. Dawson, the President and Chief
Executive Officer. This agreement provides for severance payments if
Mr. Dawson is terminated without cause during the term of the
agreement, and includes one year renewal options. The agreement also
provides a relocation cost allowance; and an incentive compensation
package based on performance criteria, for each year of the contract
term. The relocation cost allowance and certain incentive compensation
have been reflected in the financial statements.

During 1997 and 1998, the Company amended the standard employment
agreements of the Chairman of the Board of Directors and certain senior
executives of the Company. Such agreements provide for minimum salary
levels and incentive bonuses payable if specified management goals are
attained. In the event of termination due to a change in control of the
Company or employment location, the aggregate commitment under these
agreements should all four covered executives be terminated is
approximately $630,000 to be discounted at a rate of 1% above the
prevailing one-year Treasury Bill rate. Additionally, all outstanding
stock options become fully vested with no change in term, and current
year bonuses to the extent earned will be payable upon termination.

Continued
55

V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------

9. EMPLOYEE 401(K) DEFERRED COMPENSATION PLAN

Effective January 1, 1997, the Company adopted the V-ONE 401(k) Plan (the
"401(k) Plan"). The 401(k) Plan is a contributory profit sharing plan
covering all eligible employees of the Company. An employee is eligible to
participate in the 401(k) Plan upon completing three months of service and
upon reaching age 21. The 401(k) Plan is subject to the regulations issued
by the United States Treasury Department and Department of Labor under the
Employee Retirement Income Security Act of 1974.

Under the provisions of the 401(k) Plan, eligible participants can
contribute in pretax dollars an amount up to 15% of their annual
compensation, not to exceed the maximum legal deferral. Employer
contributions are discretionary and are determined by the management of
the Company. There were no employer contributions for the year ended
December 31, 1998.

Vesting for Company contributions and actual earnings thereon is based on
the participant's number of years of continuous service with the Company.
A participant is fully vested after six years of continuous service.
Regardless of years of service, a participant is fully vested upon the
occurrence of: (a) normal retirement age; (b) death; (c) termination of
the 401(k) Plan; or (d) retirement due to disability.

10. WORKING CAPITAL

The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in
the financial statements during the years ended December 31, 1996, 1997
and 1998, the Company incurred significant losses of $7,812,625,
$10,215,339 and $9,193,396, respectively, and had a net working capital
deficit position of $1,277,368 at December 31, 1998. These factors among
others may indicate that the Company may be unable to continue as a going
concern for a reasonable period of time.

The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. The Company
has reached agreement with a lender on a $3 million loan, structured as
senior secured debt, which converts to a receivables based facility on
August 31, 1999. See Note 14 for a discussion of an event of default under
this facility. The Company's continuation as a going concern is dependent
upon its ability to generate sufficient cash flow to meet its obligations
on a timely basis and to obtain additional financing or refinancing as may
be required, and ultimately to attain profitability. The Company is
currently reviewing proposals regarding other sources of additional equity
financing. The accompanying financial statements do not include any
adjustments that might result from the outcome of the uncertainties.

11. SUPPLEMENTAL CASH FLOW DISCLOSURE

Selected cash payments and noncash activities were as follows:

Year Ended December 31,
1996 1997 1998
---- ---- ----

Cash payments for interest $ 133,042 $ 13,130 $ -

Continued
56

V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------

Noncash investing and financing activities:
Capitalized lease obligations incurred 98,165 302,147 -
Retirement of fully depreciated property
and equipment 5,405 - -
Notes repaid from return and retirement
of common stock - 32,909 115,953
Deemed dividend on preferred stock - 600,000 102,755
Notes received from sales of common stock 287,400 - -
Consulting expense recognized by issuance
of common stock 50,000 - -
Notes payable plus accrued interest
satisfied with preferred stock 2,559,554 - -
Issuance of common stock to satisfy note
payable to related party 330,000 - -
Payment of licensing fee by issuance of
common stock 849,173 - -
Conversion of preferred stock to common
Stock 3,559,554 - 1,538,000
Repurchase of fractional shares of
common stock related to the reverse
stock split 81 - -

12. RESTATEMENT OF FINANCIAL STATEMENTS

The Company has revised its revenue recognition accounting from
recognizing revenue upon the initial shipment of software to the
distributor to recognizing revenue when the software is deployed to an
end-user customer. In addition, certain costs originally classified as
restructuring costs during the year ended December 31, 1997, have been
reclassified as sales and marketing, general and administrative and
research and development expenses in the period in which the costs were
incurred. The effect of the restatement as of December 31, 1997 and the
years ended December 31, 1996 and 1997 is:

Increase (Decrease)
Year Ended December 31,
-----------------------
1996 1997
---- ----
Effect on:
Revenue $(947,069) $(3,429,743)
Gross Profit (947,069) (3,213,969)
Operating Expenses 170,000 (2,384,228)
Loss attributable to holders of
common stock 1,117,069 829,741
Basic and diluted loss per share 0.12 0.06

Continued
57

V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------

Increase (Decrease)
December 31, 1997
----------------------------

Accounts receivable $(1,762,584)
Finished goods inventory 215,775
Deferred revenue 400,000
Accumulated deficit 1,946,810

13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

At the Company's board of directors meeting on March 4, 1999, the Company
revised its revenue recognition policy. The Company had previously used a
"sell-in" model with distributors, where revenue is recognized when
product is sold to the distributor. The Company is now using a
"sell-through" model, where revenue is recognized when the distributor has
delivered the licenses to end-user customers and the end-user customers
have registered the software with the Company. The Company is applying the
new revenue recognition policy to its financial statements for the year
ended December 31, 1998. In addition, the Company has restated its
financial statements for the years ended December 31, 1997 and 1996 and
for the quarters ended September 30, 1998, 1997 and 1996, June 30, 1998
and 1997 and March 31, 1998 and 1997 for consistency of presentation.

Quarterly financial information for 1996, 1997 and 1998 is as follows:

First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------

1996

Total revenues $ 1,021,811 $ 1,354,576 $ 1,693,961 $ 1,248,732
Gross profit 699,813 876,023 1,178,523 539,102
Net loss (994,660) (3,393,401) (1,004,099) (2,420,465)
Basic and diluted loss per share (0.12) (0.40) (0.12) (0.21)

1997

Total revenues $ 1,397,156 $ 1,167,031 $ 2,181,708 $ 1,227,106
Gross profit 835,852 848,189 1,487,732 855,408
Loss attributable to holders
of common stock (1,888,078) (3,254,445) (1,303,085) (4,382,331)
Basic and diluted loss per share (0.15) (0.25) (0.10) (0.34)

1998

Total revenues $ 1,295,710 $ 1,243,015 $ 1,999,470 $ 1,721,610
Gross profit 810,103 733,867 1,669,330 1,355,049
Loss attributable to holders
of common stock (2,803,927) (2,670,102) (1,560,577) (2,372,424)
Basic and diluted loss per share (0.21) (0.20) (0.11) (0.16)

The effect of the restatement (see Note 12) on the Company's previously
reported quarterly results of operations for the years ended December
31, 1996, 1997 and 1998 is as follows:

Continued
58

V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------

Increase (Decrease)
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------

Effect on:

1996

Total revenues $ - $ - $ (26,582) $ (920,487)
Gross profit - - (26,582) (920,487)
Net loss - - (26,582) 1,090,485
Basic and diluted loss per share - - - 0.09

1997

Total revenues $ (1,016,859) $ (967,550) $ (582,644) $ (862,690)
Gross profit (1,016,859) (967,550) (582,644) (862,690)
Loss attributable to holders
of common stock 1,016,859 104,953 869,442 (1,161,513)
Basic and diluted loss per share 0.08 0.01 0.07 (0.09)

1998

Total revenues $ (1,207,170) $ (2,161,382) $ (398,335)$ -
Gross profit (1,269,452) (2,314,874) (398,335) -
Loss attributable to holders
of common stock 1,269,452 2,338,003 102,204 -
Basic and diluted loss per share 0.10 0.17 0.01 -

14. SUBSEQUENT EVENTS

NOTE PAYABLE

On February 24, 1999, the Company entered into a Loan and Security
Agreement ("Loan Agreement") with a lender. Under the terms of the Loan
Agreement, the Company received $3.0 million under a term loan and bears
interest at 12.53% per annum. Interest is payable monthly in arrears. The
term loan matures on August 31, 1999. On the term loan maturity date, the
term loan converts into a revolving loan in an amount not to exceed the
lesser of $3.0 million or 80 per cent of the Company's Eligible
Receivables, as defined in the Loan Agreement. The revolving loan bears
interest at a rate equal to the lender's base rate plus 2.5% and matures
August 31, 2000. The Company incurred loan fees of $150,000 related to the
Loan Agreement and is required to pay an additional $360,000 fee if the
Company is acquired during the term of the term loan or the revolving
loan.

The Loan Agreement contains certain covenants that restrict the activities
of the Company including sales of assets, loans to other persons, liens,
dividends, stock redemption; investments in other persons, and creation of
partnerships, subsidiaries, joint ventures or management contracts.

Continued
59

V-ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS
------------------

In connection with this loan, the Company granted a security interest in
all of its assets, including its intellectual property, to the lender. If
the Company is unable to repay the loan or there is an event of default
under the loan, the lender could foreclose on its security interest.

Pursuant to the terms of the Loan Agreement, receipt by the Company of an
opinion from its independent auditors which expresses doubt with regard to
the ability of the Company to continue as a going concern constitutes an
event of default under the Loan Agreement and allows the lender to
foreclose on its security interest. The Company has received such an
opinion from its independent auditors in connection with their review of
the Company's financial statements as of and for the year ended December
31, 1998. As of the date of such opinion, there was an event of default
under the Loan Agreement; however, the lender has subsequently waived this
event of default. In consideration for such waiver, the Company has agreed
to (a) grant an affiliate of the lender warrants to purchase 100,000 shares
of Common Stock at an exercise price of $3.25 per share and (b) accept an
additional financial covenant that the Company's net worth will be
$5,000,000 as of June 30, 1999 and September 30, 1999. There can be no
assurance that the Company will be able to comply with the loan covenants.

Valuation and Qualifying Accounts and Reserves

V-ONE CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

For the years ended December 31, 1996, 1997 and 1998

Additions
Balance at Charged to Balance at
Beginning of Costs and End of Period
Description Period Expenses Deductions

ALLOWANCE FOR DOUBTFUL ACCOUNTS
December 31, 1996 $ 23,620 $ 228,775 $ --- $ 252,395
December 31, 1997 252,395 248,010 --- 500,405
December 31, 1998 500,405 24,233 --- 524,638

DEFERRED TAX ASSET VALUATION ALLOWANCE
December 31, 1996 506,293 2,986,491 --- 3,492,784
December 31, 1997 3,492,784 3,938,959 --- 7,431,743
December 31, 1998 7,431,743 2,431,359 --- 9,863,102

ALLOWANCE FOR NON-SALABLE INVENTORY
December 31, 1996 50,000 --- --- 50,000
December 31, 1997 50,000 162,700 --- 212,700
December 31, 1998 212,700 100,656 --- 313,356

Continued
60

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item concerning directors and executive
officers is incorporated herein by reference to the Company's definitive proxy
statement for its annual stockholders' meeting to be held on May 13, 1999.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item concerning executive compensation is
incorporated herein by reference to the Company's definitive proxy statement for
its annual stockholders' meeting to be held on May 13, 1999.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this Item concerning security ownership of certain
beneficial owners and management is incorporated herein by reference to the
Company's definitive proxy statement for its annual stockholders' meeting to be
held on May 13, 1999.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item concerning certain relationships and
related transactions is incorporated herein by reference to the Company's
definitive proxy statement for its annual stockholders' meeting to be held on
May 13, 1999.

PART IV

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

61

(a) Financial Statement Schedules.

See index to Financial Statement on page 32. All required financial statement
schedules of the Registrant are set forth under Item 8 of this Annual Report
on Form 10-K.

62

(b) Exhibits

Number Description
- - ------ -----------

3.1 Amended and Restated Certificate of Incorporation as of July 2,
1996 (1)
3.2 Amended and Restated Bylaws dated as of February 2, 1998 (4)
3.3 Certificate of Amendment to Certificate of Designation,
Preferences, and Rights of Series A Convertible Preferred Stock
dated September 9, 1996 (1)
3.4 Certificate of Elimination of Certificate of Designation,
Preferences and Rights of Series A Convertible Preferred Stock (2)
3.5 Certificate of Designations of Series A Convertible Preferred
Stock (2)
3.6 Certificate of Elimination of Certificate of Designation,
Preferences and Rights of Series A Convertible Preferred Stock,
dated March 4, 1999
9.1 Voting Trust Agreement between Hai Hua Cheng and James F. Chen,
Trustee (1)
9.2 Voting Trust Agreement between Robert Zupnik and James F. Chen,
Trustee (1)
9.3 Voting Trust Agreement between Dennis Winson and James F. Chen,
Trustee (1)
10.1 Employment Agreement between V-ONE Corporation ("V-ONE") and James
F. Chen dated as of June 12, 1996 (1)
10.2 V-ONE 1995 Non-Statutory Stock Option Plan (1)
10.3 V-ONE 1996 Non-Statutory Stock Option Plan (1)
10.4 V-ONE 1996 Incentive Stock Plan (1)
10.5 Software License Agreement between Trusted Information Systems,
Inc. ("TIS") and V-ONE executed October 6, 1994 (1)
10.6 First Amendment to the Software License Agreement between TIS and
V-ONE (1)
10.7 Second Amendment to the Software License Agreement between TIS and
V-ONE (1)
10.8 Third Amendment to the Software License Agreement between TIS and
V-ONE (1)
10.9 Fourth Amendment to the Software License Agreement between TIS and
V-ONE (1)
10.10 OEM Master License Agreement between RSA Data Security, Inc. ("RSA")
and V-ONE dated December 30, 1994 and Amendment Number One to the
OEM Master License Agreement between RSA and V-ONE (1)
10.11 Amendment Number Two to the OEM Master License Agreement between RSA
and V-ONE and Conversion Agreement dated May 23, 1996 (1)
10.12 Promissory Note for Hai Hua Cheng with Allonge and Amendment dated
June 12, 1996 (1)
10.13 Form of Exchange and Purchase Agreement dated April 1996 (1)
10.14 Registration Rights Agreement Between V-ONE and JMI Equity Fund
II, L.P. ("JMI") (1)
10.15 8% Senior Subordinated Note due June 18, 2000 Issued by V-ONE to
JMI (1)
10.16 Warrant to Purchase 100,000 shares of Common Stock Issued by V-ONE
to JMI (1)
10.17 Warrant to Purchase 400,000 shares of Common Stock Issued by V-ONE
to JMI (1)
10.18 Employment Agreement between V-ONE and Jieh-Shan Wang dated as of
July 8, 1996 (1)
10.19 Subscription Agreement dated as of December 3, 1997 between V-ONE
and Advantage Fund II Ltd. (2)
10.20 Registration Rights Agreement dated as of December 3, 1997 between
V-ONE and Advantage Fund II Ltd. (2)
10.21 Commitment Letter dated December 8, 1997 between V-ONE and
Advantage Fund II Ltd. (2)
10.22 Registration Rights Agreement dated as of December 8, 1997 between
V-ONE and Wharton Capital Partners, Ltd. (2)
10.23 Warrant to Purchase 60,000 shares of Common Stock Issued on
December 8, 1997 by V-ONE to Wharton Capital Partners, Ltd. (2)
10.24 Letter Agreement between V-ONE and Wharton Capital Partners, Ltd.
dated October 22, 1997 (2)

63

Number Description
- - ------ -----------

10.25 V-ONE 1998 Incentive Stock Plan (4)
10.26 Warrants dated November 21, 1997 to Purchase 300,000 shares of
Common Stock granted to David D. Dawson (4)
10.27 Employment Agreement dated November 21, 1997 between V-ONE and
David D. Dawson (4)
10.28 Amendment to Employment Agreement dated November 7, 1997 between
V-ONE and Charles B. Griffis (4)
10.29 Amendment to Section 2.08 of 1996 Incentive Stock Plan (4)
10.30 Lease Agreement dated March 24, 1997 between Bellemead Development
Corporation and V-ONE (3)
10.31 Inconvertibility Notice dated September 21, 1998 (5)
10.32 Waiver Agreement, dated as of September 22, 1998, between the
Company and Advantage Fund II Ltd. (5)
10.33 Amendment No. 1 dated as of September 22, 1998 to the Registration
Rights Agreement between the Company and Advantage Fund II Ltd. (5)
10.34 Warrant to purchase 100,000 shares of Common Stock issued on
September 22, 1998 by V-ONE to Advantage Fund II Ltd. (5)
10.35 Warrant to purchase 389,441 shares of Common Stock issued on
September 22, 1998 by V-ONE to Advantage Fund II Ltd. (5)
10.36 Waiver Letter, dated November 5, 1998 between the Company and
Advantage Fund II Ltd. (6)
10.37 Placement Agent Agreement, dated October 9, 1998, between the
Company and LaSalle St. Securities, Inc. (6)
10.38 Amendment No. 1 to Placement Agent Agreement, dated November 9,
1998, between the Company and LaSalle St. Securities, Inc. (6)
10.39 Escrow Agreement, dated October 9, 1998, among the Company,
LaSalle St. Securities, Inc. and LaSalle National Bank (6)
10.40 Amendment No. 1 to Escrow Agreement, dated November 9, 1998, among
the Company, LaSalle St. Securities, Inc. and LaSalle National
Bank (6)
10.41 Form of Subscription Documents (6)
10.42 Form of Addendum #1 to Subscription Documents (6)
10.43 Form of Addendum #2 to Subscription Documents (6)
10.44 Form of Warrant granted to A.L. Giannopoulos to purchase 10,000
shares of the Company's Common Stock (6)
10.45 Form of Warrant granted to William E. Odom to purchase 10,000
shares of the Company's Common Stock (6)
10.46 Amendment No. 1 to Placement Agent Agreement, dated November 16,
1998, between the Company and LaSalle St. Securities, Inc. (7)
10.47 Waiver Letter dated November 18, 1998 between the Company and
LaSalle St. Securities, Inc. (7)
10.48 Form of Second Version of Subscription Documents (7)
10.49 Form of Addendum #1 to Second Version of Subscription Documents (7)
10.50 Form of Addendum #2 to Second Version of Subscription Documents (7)
10.51 Warrant dated November 20, 1998 to purchase 50,000 shares of
Common Stock issued to LaSalle St. Securities, Inc. (7)
10.52 Employment Agreement dated November 6, 1998 between V-ONE and
Charles B. Griffis
10.53 Employment Agreement dated August 1, 1998 between V-ONE and Robert
F. Kelly
10.54 Loan and Security Agreement dated February 24, 1999 between V-ONE
and Transamerica Business Credit Corporation ("Transamerica") (8)
10.55 Patent and Trademark Security Agreement dated February 24, 1999
between V-ONE and Transamerica (8)

64

Number Description
- - ------ -----------

10.56 Security Agreement in Copyrighted Works dated as of February 24,
1999 between V-ONE and Transamerica (8)
10.57 Amendment to Employment Agreement dated as of August 1, 1998 by
and between the Company and Jieh-Shan Wang
10.58 Amendment to Employment Agreement dated as of January 1, 1999 by
and between the Company and James F. Chen
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Revised Financial Data Schedule for the Quarter Ended September
30, 1996
27.2 Revised Financial Data Schedule for the Quarter Ended March 31,
1997
27.3 Revised Financial Data Schedule for the Quarter Ended June 30, 1997
27.4 Revised Financial Data Schedule for the Quarter Ended September
30, 1997
27.5 Revised Financial Data Schedule for the Year Ended December 31,
1996
27.6 Revised Financial Data Schedule for the Year Ended December 31,
1997
27.7 Financial Data Schedule for the Year Ended December 31, 1998

- - ------------------------------
(1) The information required by this exhibit is incorporated herein by reference
to V-ONE's Registration Statement on Form S-1 (No. 333-06535).

(2) The information required by this exhibit is incorporated herein by reference
to V-ONE's Form 8-K dated December 8, 1997.

(3) The information required by this exhibit is incorporated herein by reference
to V-ONE's Form 10-Q for the three months ended June 30, 1997.

(4) The information required by this exhibit is incorporated herein by reference
to V-ONE's Form 10-K for the twelve months ended December 31, 1997.

(5) The information required by this exhibit is incorporated herein by reference
to V-ONE's Form 8-K dated September 22, 1998.

(6) The information required by this exhibit is incorporated herein by reference
to V-ONE's Form 10-Q for the nine months ended September 30, 1998.

(7) The information required by this exhibit is incorporated herein by reference
to V-ONE's Form 8-K dated November 20, 1998.

(8) The information required by this exhibit is incorporated herein by reference
to V-ONE's Form 8-K dated March 11, 1999.

(c) Reports on Form 8-K

(i) Form 8-K dated November 9, 1998 reporting, under Item 5, the
release of the Company's financial results for the third
quarter ended September 30, 1998. A press release containing
the financial results for the quarter was attached as an
exhibit.

65

(ii) Form 8-K dated November 24, 1998 reporting, under Item 5, the
sale by the Company of 1,860,000 shares of its Common Stock
pursuant to Regulation D promulgated under the Securities Act
and the issuance to LaSalle of warrants to purchase 50,000
shares of Common Stock.

(iii) Form 8-K dated December 8, 1997 reporting, under Item 5, the
sale by the Company of 675,000 shares of its Common Stock
pursuant to Regulation D promulgated under the Securities Act.

66

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 to be signed on its
behalf by the undersigned thereunto duly authorized.

V-ONE Corporation

Date: March 26, 1999 By: /s/ DAVID D. DAWSON
---------------------
David D. Dawson
President and Chief Executive Officer

Pursuant to the requirements of Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities indicated.

Signature Title Date

/s/ David D. Dawson President, Chief Executive March 26, 1999
- - ------------------------- Officer and Director
David D. Dawson

/s/ Charles B. Griffis Senior Vice President, Chief March 26, 1999
- - ------------------------ Financial Officer and Treasurer
Charles B. Griffis (Principal Financial Officer)

/s/ Mark R. Fields Controller (Principal March 26, 1999
- - ------------------------ Accounting Officer)
Mark R. Fields

/s/ James F. Chen Director March 26, 1999
- - -------------------------
James F. Chen

/s/ Charles C. Chen Director March 26, 1999
- - ------------------------
Charles C. Chen

/s/ A. L. Giannopoulos Director March 26, 1999
- - -------------------------
A. L. Giannopoulos

/s/ William E. Odom Director March 26, 1999
- - -------------------------
William E. Odom

67