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, 1999

[ ]              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 SMALLCAP 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, 2000 was  approximately  $104,900,000.  This  calculation  does not reflect a
determination that persons are affiliates for any other purposes.

Registrant  had  18,243,530  shares of Common Stock  outstanding  as of March 1,
2000.



<PAGE>

                       DOCUMENTS INCORPORATED BY REFERENCE

Part III -- Portions of the registrant's definitive proxy statement to be issued
in conjunction with registrant's 2000 annual stockholder's meeting to be held on
May 11, 2000.

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.  The products are most  commonly used to establish
very secure Virtual Private Networks (VPNs). 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,  Germantown,  Maryland 20874. The Company's telephone number is (301)
515-5200.

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,  xDSL and Cable modems,  ISDN services and frame relay  technology,  the
volume of data  transferred  over networks has increased  dramatically.  Fueling
this  expansion   further,   carriers  and  Internet   service   providers  have
dramatically  reduced their tariffs for high-speed  aggregation services running
over T-1 and T-3 lines,  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  to engage in business to business  electronic  commerce,
such as supply chain  management,  customer  relationship  management  and other
extensions of corporate data resources to employees and business  partners.  The
problem  is  that  TCP/IP  networks  are  unsecured.   Utilizing  the  Company's
technology,  users can create  "virtual"  private  networks at a fraction of the
cost of actual private wide area networks. Organizations recognize the potential
cost savings when using public networks,  such as the Internet,  as an extension
of their existing enterprise networks.  These users have begun connecting branch
offices  and remote  and  mobile  users to  mission  critical  applications  and


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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.
Information  becomes more vulnerable as  organizations  rely heavily on computer
networks for the electronic  transmission of data. 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.  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.

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

o  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.

o  USER  IDENTIFICATION  AND  AUTHENTICATION.  Verifying the user's  identity to
   prevent unauthorized access to computer and network resources.

o  AUTHORIZATION.  Controlling  which systems,  data and applications a user can
   access.

o  DATA INTEGRITY.  Ensuring that data, whether in storage or transmission,  has
   not been changed or compromised by any unauthorized manipulation.

o  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.

Over the  years,  a number of network  security  products  have been  developed,
including passwords, token-based access devices, firewalls, encryption products,
biometrics devices, smart cards and digital certificates. Each of these products
was designed with a specific function or objective;  however, none 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:

o  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 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
   provided a higher level of authentication in that two independent  components
   were  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.

o  FIREWALLS.  Firewalls are network  access  control  devices that regulate the
   passage  of  information  based  on a  set  of  administrator-defined  rules.
   Generally,  firewalls  are  based  upon one of two  technical  architectures:


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   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.

o  ENCRYPTION.   Encryption  products  provide  privacy  for  transmitted  data.
   Encryption  algorithms scramble data so only those 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.

o  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.

o  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,
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 demand for computer network security is expected to grow  significantly as a
result of the increased use of the Internet and Intranets.  The total market for
Virtual  Private  Network  products  and services is projected to grow from $2.4
billion in 1999 to $32.2 billion by 2003.  The VPN market that V-ONE  addresses,
for products  alone,  is  anticipated  to grow from $303 million in 1999 to $2.3
billion by 2003 according to a report by Infonetics  Research,  Inc. released in
July 1999. This represents a compound annual growth rate of  approximately  100%
in the market for VPN products such as those offered by V-ONE.

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


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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  SmartPass
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 expandable.  The Company's strategy to realize its goal contains
the following elements:

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

o  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.

o  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  through the use of  value-added
   resellers  ("VAR's"),   original  equipment  manufacturers   ("OEM's"),   and
   Application  Service  Providers  ("ASP's")  to expand  its  customer  base in
   additional  vertical  markets.  Specific  vertical markets focused on include
   Banking and Finance, Healthcare, and Government.

o  DEVELOP AND LEVERAGE STRATEGIC  ALLIANCES AND PARTNERING  RELATIONSHIPS.  The
   Company has established  strategic  marketing and  distribution  alliances to
   increase  the  distribution  and market  acceptance  of its network  security
   products  including  alliances with a variety of major  companies among which
   are Motorola,  Sun  Microsystems and Microsoft and Sharp. The Company intends
   to continue to strengthen its existing strategic  alliances while forging new
   relationships with key industry participants.


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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

The  cornerstone  of the  Company's  network  security  solution is its patented
SmartGate  client/server  security  technology.   SmartGate  enables  two-factor
authentication,  mutual  authentication and fine-grained access control for most
TCP/IP-based   client/server    applications.    Using   SmartGate   technology,
organizations can employ two-factor  authentication 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.

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  products  including
products  scheduled  for release in the second half of 1999 and first quarter of
2000:



     PRODUCT          CATEGORY                 DESCRIPTION
  --------------- ------------------  -------------------------------

    SmartGate       Client/Server     End-to-end, application level network
                      Security        data security providing two-factor
                                      identification, mutual authentication,
                                      encryption and access control

    SmartWall          Network        An applicant level firewall that
                      Perimeter       protects internal networks while
                      Security        enabling remote access to internal
                                      resources

    SmartGate       Client/Server     Extends SmartGate registration process
    with IPSec        Security        to intranet environments

  SmartGate VPN     Client/Server     A VPN product designed for the Windows
  for Windows CE      Security        CE operating system

  Air SmartGate    Wireless Client/   A system that provides an end-to-end
                   Server Security    security system for 2-way pagers

     Instant        Client/Server     A secure, easily installed e-business
     Extranet         Security        gateway based on Linux operating system
   Server (IXS)


o  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   authentication  (two  independent  components  are  combined  to
   authenticate  a user) and mutual  authentication  (both the server and client
   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
   have been identified and  authenticated.  The authorized user is then granted
   access only to 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.

o  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


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   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.

o  SMARTGATE WITH IPSEC extends the client deployment and management  advantages
   of V-ONE's  patented online  registration  process to intranet  environments.
   This enables  V-ONE to compete for remote  access VPN business  (which offers
   secure  connectivity  for remote  employees  and  satellite  offices)  with a
   solution  that is  standards-based  yet  offers  unique  ease  of  deployment
   features.

o  SMARTGATE  VPN FOR  WINDOWS CE is the  industry's  only VPN that works on the
   Windows CE operating system from Microsoft. Already over 1 million Windows CE
   devices,  both  handheld  and  palm-sized,  have  been  deployed  to meet the
   exploding  demand for mobile PC companion  devices.  SmartGate VPN's security
   seamlessly  operates whether the Windows CE-based device is connected through
   wireline or wireless media,  transparently  protecting  sensitive data in any
   environment.

o  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. Air SmartGate delivers  communication  privacy to
   pager-to-pager,  email-to-pager and pager-to-email traffic and text messaging
   by   providing   two-factor   authentication   and  strong  data   encryption
   capabilities.   Air   SmartGate  is  a  `drop-in'   security   solution  that
   interoperates  seamlessly  with advanced  two-way  messaging  networks  using
   Motorola's ReFlex  communications  technology and is scheduled for deployment
   by a number of leading providers in early 2000.

o  INSTANT   EXTRANET  SERVER  (IXS)  offers  a  secure,   30-minutes-to-install
   e-business  gateway priced  competitively as an entry level product for small
   to mid sized  businesses.  Based on the Linux  operating  system,  IXS offers
   e-mail,  FTP and Web services  integrated with V-ONE security.  With IXS, the
   ability to securely communicate with partners and employees is no longer only
   for larger companies with significant technical and financial resources. As a
   low  cost,  intuitively  installed  VPN,  IXS  targets  small  and  mid-sized
   companies that are not currently  served by the available VPN solutions.  IXS
   provides VPN functionality to a large and rapidly growing market segment with
   a product that can readily be upgraded to V-ONE's full SmartGate product when
   the need arises.

MARKETING AND BUSINESS DEVELOPMENT

The Company  distributes its network  security  products  through a direct sales
force and  supplemental  channel  distribution  programs that employ value added
resellers  (VAR),  original  equipment  manufacturers  (OEM),  Internet  Service
Providers (ISP) and Application Service Providers (ASP),  designed to accelerate
the flow of V-ONE  products  to the end user  customers.  In addition to selling
product  directly to customers,  V-ONE delivers  product to the indirect channel
partners on receipt of a  purchase-order.  Although V-ONE's channel partners may
carry competing product lines, the Company is able to gain a preferred  position
with their sales force using the lead generation  program  described below. This
is successful  due, in part,  to the support  provided by the V-ONE direct sales
team and,  subsequently,  allows  the  Company  to  maintain  visibility  to its
customers.  The development of these  relationships  with resellers,  as well as
with  international   distributors,   enables  V-ONE  to  achieve  broad  market
penetration. An analysis of 1999 revenues shows that approximately 40% were from
direct sales  efforts and  approximately  60% were from indirect  (VAR,  OEM and
strategic partner) sales channels.

DIRECT MARKETING AND SALES EFFORT

V-ONE  initially  designed a direct sales  strategy to introduce  the  Company's
products to potential  customers in specific  market  segments known to be early
adopters of security  products for  electronic  data  transmission.  The Company
originally targeted financial services, telecommunications, information services
and  government  agencies  for this  reason.  During 1998 and 1999 the number of
users of electronic  data  transmission  started to grow  significantly  and the
awareness  of the need for  security,  and the  functionality  and  features  of


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<PAGE>

security  products,  increased.  V-ONE is now targeting  other  vertical  market
segments including healthcare and insurance.

V-ONE, through its direct sales force and its channel distribution  partners has
developed  its  approach to the market based on the  knowledge  derived from its
existing  installed  customer base and new requests  generated  through on-going
sales and marketing  programs.  The Company has selected those  vertical  market
segments  in  which  it has  successfully  established  itself  and in  which  a
significant increase in customer demand already is underway.

To  effectively  market its products to key industry  participants,  the Company
maintains a continuing relationship with its already established  customer-base.
The  Company's  direct  sales force calls on the  purchasing  agents  within the
organizations   of  its   existing   customers  to  generate  and  close  sales.
Additionally, the direct sales force is responsible for developing the Company's
channel  partners by providing  technical advice and support with respect to the
Company's  products  as  well as  generating  and  providing  the  channel  with
prospective customer leads.

INDIRECT MARKETING EFFORT

The Company expanded its visibility in the growing VPN industry by developing an
effective  channel strategy for the distribution of its products.  The Company's
business model increases market penetration by growing and developing the number
of  its  channel   partners.   Initially,   channel  partners  existed  only  in
international  markets.  Today,  however,  a domestic  channel strategy has been
developed  and  implemented.  Implementation  of  a  channel  strategy,  at  the
Company's  present stage of development  and awareness in the industry,  allowed
V-ONE to grow revenue without a directly  proportional increase in sales expense
by leveraging  the channel sales force when full  implementation  of the channel
strategy is complete  approximately  95% of the Company's sales will result from
VAR, OEM and strategic partner relationships.

An important  element of the Company's sales strategy is the support provided to
the indirect sales channels  through its internal lead generation  program.  The
Company  has  initiated  programs  to target and sign up channel  partners  both
domestically and  internationally.  Today,  V-ONE has established  relationships
with 58 channel partners  throughout the United States and with 21 international
distributors  serving the United  Kingdom,  Sweden,  Germany,  Belgium,  Canada,
China, Chile, Japan, Singapore, Ivory Coast, South Korea and Australia,  Norway,
Taiwan, Thailand, Turkey, Hong Kong, Malaysia and France.

V-ONE  expects to  significantly  expand it base of  targeted  channel  partners
throughout  2000.  These  channel  partners will be expected to have an existing
presence in V-ONE's  markets  and to have an  established  customer  base in the
vertical   market  segments  that  are  important  to  V-ONE  such  as  finance,
healthcare, sales force automation and government. When the Company's program is
fully  implemented,  specific  horizontal  resellers,  including  networking and
security  integrators,  internet service  providers,  web hosting  providers and
managed service providers, will become V-ONE channel partners.

The Company plans to further  increase  market  penetration  by  developing  and
capitalizing   on   strategic   alliances.   The  Company   develops   strategic
relationships  with partners that  incorporate  V-ONE  technology into their own
products.  These alliances are intended to increase the  distribution and market
acceptance  of V-ONE's  network  security  products in the  strategic  partner's
markets. In these instances, direct sales and traditional indirect sales efforts
are made  available  to  support  the  sales  and  distribution  efforts  of the
strategic  partner.  The Company  intends to continue  efforts to strengthen its
existing  relationships  while also forging new relationships  with key industry
participants.

CUSTOMER SERVICE AND SUPPORT

The Company provides one hour of installation and configuration support for each
VPN purchase.  The Company also offers, for a fee, on-site  installation support
and basic administrator training with each software product and bundled hardware
product sale. Customers are encouraged to purchase software  maintenance,  which
includes product  updates/upgrades  and telephone  support.  A one-year hardware
warranty comes with each bundled hardware purchase.


                                       8
<PAGE>

The Company offers additional user or administrator  training,  on-site support,
systems  integration  and system  security  architecture  support as an optional
service  through its Customer  Care staff.  Additionally,  the Company  provides
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

V-ONE competes in the market for network  security  products and services.  This
market is very  competitive and the Company expects  competition to intensify in
the future. Currently, V-ONE offers products that compete in several segments of
the network security market,  including  hardware assisted  encryption  devices,
token  authentication,  smart  card-based  security  applications and electronic
commerce  applications.  The  Company's  SmartGate  products  compete in the VPN
segment of the network security market, and also can be used in conjunction with
many other security solutions in the broader network security market,  including
intrusion  detection  products,  virus scanning products,  token  authentication
products,  biometric authentication  products,  digital certificate products and
firewalls.

The Company's  competitors for Internet and intranet security and access control
include Aventail  Corporation,  AXENT Technologies,  Inc., Lucent  Technologies,
Northern Telecom Limited (NortelNetworks), Check Point Software Technology Ltd.,
Cisco Systems, Inc.,  Intel/Shiva,  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 RSA  Security,  Inc.  For smart
card-based security  applications,  the Company principally  competes with those
token vendors listed above who offer smart card technology.

In the VPN market place, which is the Company's primary market,  there are three
classes of products:

      1.   Products that provide  secure  remote access to a company's  intranet
           and internal  LAN-based  information  by a company's  own  employees,
           telecommuters, or mobile workers. In this market, V-ONE competes with
           companies such as Check Point.

      2.   Products that provide secure  communication  among business  partners
           and customers that are not on the same intranet or LAN-based  system,
           commonly  referred to as extranet  products.  In the extranet market,
           V-ONE competes with companies such as Aventail and TimeStep.

      3.   Products that provide secure  communication for  office-to-office and
           LAN-to-LAN  applications.  These  are  referred  to  as  intranet  or
           site-to-site VPN products. In the site-to-site market, V-ONE competes
           with companies such as VP Net, TimeStep, and Radguard.

The Company faces intense  competition in all of its market  segments,  however,
only  V-ONE has a complete  product  offering  that  reaches  all three  product
classes and,  V-ONE is the only VPN  provider for wireless  pager and Windows CE
devices today.


                                       9
<PAGE>


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

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
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 with
the exception of long term service contracts.

In 1998 and 1999, 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  and  CD's  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.


                                       10
<PAGE>

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 Security,  Inc.  Agreement.  The Company's  SmartGate and Wallet  Technology
software incorporate data encryption and authentication  technology owned by RSA
Security,  Inc. ("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. On
July 14, 1999 Security Dynamics changed its name to RSA Security, Inc.

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 three 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


                                       11
<PAGE>

"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.

EMPLOYEES

As of January 1, 2000, the Company had 72 full-time employees and 2 consultants.
Of these individuals, 30 were in sales and marketing, 3 in business development,
25 were  in  research  and  product  development,  2 were  in  wireless  product
development  and 14 in  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.


                                       12
<PAGE>

V-ONE'S LIMITED OPERATING HISTORY, ACCUMULATED DEFICIT AND FINANCING ACTIVITIES.
As of December  31,  1999,  V-ONE had an  accumulated  deficit of  approximately
$39,645,000.  V-ONE  currently  expects to incur  additional net losses over the
next several quarters.  V-ONE raised  additional  capital of $2,375,000 in March
2000.

Because of V-ONE's limited operating  history,  V-ONE may not achieve or sustain
profitability or significant  revenues in the short run. 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, 1998 and 1999
were  approximately  $1,104,000,   $5,319,000,   $5,973,000,   $6,260,000,   and
$4,966,000, respectively.

Losses  attributable to holders of Common Stock for 1995,  1996,  1997, 1998 and
1999 were  approximately  $1,122,000,  $7,813,000,  $10,828,000,  $9,407,000 and
$9,952,000, respectively.

V-ONE's  results  of  operations  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  until it  reaches  profitability.  In order  to  maintain  V-ONE's
operations and research and development at necessary  levels,  V-ONE may need to
secure  additional  financing  through  the sale of equity  securities.  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  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.

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


                                       13
<PAGE>

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 and Margaret E. Grayson, its
Senior Vice President and Chief Financial Officer,  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, 2000, V-ONE had 72 employees, as compared to
77, 83, and 77 employees on January 1, 1999, 1998, and 1997, 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.

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 Smart Card
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


                                       14
<PAGE>

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
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.


                                       15
<PAGE>

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
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.


                                       16
<PAGE>

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 1997,  approximately  one-half of V-ONE's  total sales were  attributable  to
contracts with various agencies and departments of the United States  government
and of state and local governments. This relationship increased to more than 60%
through December 31, 1998 and decreased to approximately 35% for 1999`.

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(TM)  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.

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
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, 2001. The Company also leases  approximately  8,085 square feet, which
is sublet in  Rockville,  Maryland  under  leases  that will expire on April 17,
2001.


                                       17
<PAGE>

The Company also leases  office space in Podium  Block,  Singapore  under leases
that will expire on January 15 , 2001.

ITEM 3. LEGAL PROCEEDINGS

On January 27, 2000,  plaintiff  George McMeen filed a Class Action Complaint in
the  U.S.  District  Court  for the  District  of  Maryland,  Civil  Action  No.
MJG-CV-263,   against  David  D.  Dawson,   Steve  Mogul  and  Margaret  Grayson
(collectively,   "Individual   Defendants")   and  the  Company   (collectively,
"Defendants"),  alleging claims for violation of Section 10(b) of the Securities
Exchange  Act of 1934 (the  "Exchange  Act") and Rule  10b-5  thereunder  by the
Defendants, and violation of Section 20(a) of the Exchange Act by the Individual
Defendants.  On February 16, 20000, plaintiff Raj Patel filed a nearly identical
Class Action  Compliant  in the U.S.  District  Court for the District  Court of
Maryland, Civil Action No. PJM-CV-469. Neither complaint specifies the amount of
alleged damages.

On  February  18,  2000,  the  Court  entered  an Order  extending  the time for
Defendants  to file a  responsive  pleading in the McMeen  matter  until 45 days
after the later of appointment of Lead Plaintiff(s) and Lead Counsel pursuant to
15 U.S.C.  78u-4(a)(3) or the filing of a consolidated  amended compliant in the
matter.  The Court  entered an  identical  Order in the Patel matter on March 3,
2000.

Defendants deny all wrongdoing and intend to contest both cases vigorously. Both
cases remain pending.






                                       18
<PAGE>

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, 1999.

                                     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  through  September  3, 1999 when it was
transferred to the Nasdaq SmallCap market. According to records of the Company's
transfer agent,  the Company had  approximately  143 record holders on March 22,
2000.  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, 1999.




                                                      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


                                                      1999
                                                      ----
                                   High Sale Price             Low Sale Price
                                   ---------------             --------------
First Quarter                      $4.688                      $2.750
Second Quarter                     $3.313                      $1.688
Third Quarter                      $5.625                      $2.000
Fourth Quarter                     $15.500                     $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.






                                       19
<PAGE>

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, 1997,  1998
and 1999 and balance  sheets as of December  31, 1998 and 1999 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, 1995,
1996 and 1997 and for each of the years  ended  December  31,  1995 and 1996 are
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."

<TABLE>
<CAPTION>

                                                                Year ended December 31,
                                        --------------------------------------------------------------------------
Statement of Operations Data:                1995          1996          1997          1998              1999
                                             ----          ----          ----          ----              ----
<S>                                   <C>           <C>            <C>              <C>           <C>

Revenues:
 Products                               $1,101,418    $5,008,523      $5,470,230     $5,798,542     $3,427,422
 Consulting and services                     2,083       310,557         502,771        461,263      1,538,258
                                        ----------    ----------      ----------     ----------     ----------
      Total revenues                     1,103,501     5,319,080       5,973,001      6,259,805      4,965,680
                                        ----------    ----------      ----------     ----------     ----------
Cost of revenues:
 Products                                  376,359     1,969,117       1,848,871      1,623,396        973,866
 Consulting and services                       800        56,502          96,949         68,060        137,281
                                        ----------    ----------      ----------     ----------     ----------
      Total cost of revenues               377,159     2,025,619       1,945,820      1,691,456      1,111,147
                                        ----------    ----------      ----------     ----------     ----------
Gross profit                               726,342     3,293,461       4,027,181      4,568,349      3,854,533
                                        ----------    ----------      ----------     ----------     ----------

Operating expenses:
 Sales and marketing                       130,917     3,914,630       7,717,640      6,071,919      5,456,173
 General and administrative              1,350,361     4,879,940       3,699,278      3,896,210      3,380,227
 Research and development                  304,973     1,960,727       3,153,941      3,853,274      3,814,423
                                        ----------     ---------      ----------     ----------     ----------
      Total operating expenses           1,786,251    10,755,291       4,570,859     13,821,401      2,650,823
                                        ----------    ----------      ----------     ----------     ----------
Operating loss                         (1,059,909)   (7,461,836)    (10,543,678)    (9,253,054)    (8,796,290)
                                       -----------   -----------    ------------    -----------    -----------
Other (expense) income:
 Interest expense                         (66,615)     (518,965)        (13,130)       (65,372)      (676,443)
 Interest income                             4,513       168,176         341,469        125,030        164,841
                                       -----------   -----------    ------------    -----------    -----------
      Total other expenses                (62,102)     (350,789)         328,339         59,658      (511,602)
                                       -----------   -----------    ------------    -----------    -----------
Loss before extraordinary item         (1,122,011)   (7,812,625)    (10,215,339)    (9,193,396)    (9,307,892)
                                       -----------   -----------    ------------    -----------    -----------

Extraordinary item - early
 extinguishment of debt                          -             -               -              -      (372,052)
                                       -----------   -----------    ------------    -----------    -----------
Net loss                               (1,122,011)   (7,812,625)    (10,215,339)    (9,193,396)    (9,679,944)

Dividend on preferred stock                      -             -          12,600        110,879        272,245
Deemed dividend on preferred stock               -             -         600,000        102,755              -
                                       -----------   -----------    ------------    -----------    -----------

Loss attributable to holders of
 common stock                         $(1,122,011)  $(7,812,625)   $(10,827,9$9)    $(9,407,030)  $(9,952,189)

BASIC AND DILUTED LOSS PER SHARE
Loss before extraordinary item        $     (0.14)  $     (0.85)   $      (0.84)    $     (0.68)  $     (0.57)
                                      ============  ============   =============    ============   ===========
Net loss attributable                 $     (0.14)  $     (0.85)   $      (0.84)    $     (0.68)  $     (0.57)
     STOCK                            ============  ============   =============    ============   ===========

Weighted average number of common        8,099,223     9,245,305      12,868,859      13,898,450    16,938,205
shares outstanding                    ============  ============   =============    ============   ===========
</TABLE>




                                       20
<PAGE>


<TABLE>
<CAPTION>
                                                                           December 31,
                                               ---------------------------------------------------------------
                                                 1995         1996          1997          1998          1999
<S>                                            <C>          <C>           <C>            <C>           <C>
                                                 ----         ----          ----          ----          ----

Balance Sheet Data:

Working capital (deficit)                      $(168,311)   $11,526,091   $ 5,912,046    $(1,277,368)  $6,629,846
Total assets                                    2,050,602    14,580,346    10,313,276      3,922,192    9,775,436
Long-term debt, less current portion              126,908       134,704       300,861        197,982      119,746
Series A Convertible Preferred Stock                  ---           ---     3,766,297            ---          ---
Series B Convertible Preferred Stock                  ---           ---           ---            ---        1,288
Series C Redeemable Preferred Stock                   ---           ---           ---            ---          335
Total shareholder's equity (deficit)            (139,938)    12,876,676     4,211,210        635,725    7,841,603
Cash dividends per common share                       ---           ---           ---            ---          ---
</TABLE>


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

OVERVIEW

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 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.

In 1998 and 1999, 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.



                                       21
<PAGE>


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,
                                                --------------------------------
                                                     1997      1998       1999
                                                   -------   -------    -------
Revenues:

Products                                             91.6 %    92.6 %    69.0 %


Consulting and services                               8.4       7.4      31.0
                                                      ---       ---      ----

Total revenues                                      100.0     100.0     100.0
                                                    -----     -----     -----

Cost of revenues:

Products                                             31.0      25.9      19.6

Consulting and services                               1.6       1.1       2.8
                                                      ---       ---       ---

Total cost of revenues                               32.6      27.0      22.4
                                                     ----      ----      ----

Gross profit
                                                     67.4      73.0      77.6

Operating expenses:

Sales and marketing                                 129.2      97.0     109.9

General and administrative                           61.9      62.2      68.0

Research and development                             52.8      61.6      76.8
                                                     ----      ----      ----

Total operating expenses                            243.9     220.8     254.7
                                                    -----     -----     -----

Operating loss                                    (176.5)   (147.8)   (177.1)

Other (expense) income:

Interest expense                                    (0.2)     (1.1)    (13.6)

Interest income                                       5.7       2.0       3.3
                                                      ---       ---       ---

Total other expenses                                  5.5       0.9    (10.3)
                                                     ----       ---    ------

Loss before extraordinary item                    (171.0)   (146.9)   (187.4)

Extraordinary loss - early extinguishment of debt       -        -      (7.5)
                                                     ----     ----      -----

Net loss                                          (171.0)   (146.9)   (194.9)

Dividend on preferred stock                           0.2       1.8       5.5

Deemed dividend on preferred stock                   10.0       1.6         -
                                                     ----      ----      ----

Loss attributable to holder of common stock       (181.2) % (150.3) % (200.4) %
                                                  =======   =======   =======



COMPARISON OF YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999

REVENUES

Total revenues increased from approximately  $5,973,000 in 1997 to approximately
$6,260,000 in 1998 and decreased to  approximately  $4,966,000 in 1999.  Product
revenues are derived principally from software licenses and the sale of hardware
products.  Product revenues increased from  approximately  $5,470,000 in 1997 to
approximately  $5,799,000 in 1998, but declined to  approximately  $3,427,000 in
1999. The increase from 1997 to 1998 was due  principally to increased  sales of


                                       22
<PAGE>

the Company's SmartWall and SmartGate products,  which offset a decline of sales
of hardware turnkey systems.  The decrease from 1998 to 1999 was due principally
to lower sales of the Company's  SmartGate and Smartwall  product,  as well as a
decline in sales of hardware turnkey systems.

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 decreased slightly from approximately
$503,000  in  1997  to   approximately   $461,000  in  1998,  but  increased  to
approximately $1,538,000 in 1999. In 1999, the Company implemented a major drive
to focus on renewing  maintenance  contracts  to allow  customers  to upgrade to
current  versions of software.  This  resulted in  incremental  revenue from the
point of the lapse in service to the current period. In addition, resolution was
reached on an agreement with a partner which included recognition of maintenance
revenue of approximately $386,000 for services performed by the Company.

COST OF REVENUES

Total cost of revenues as a percentage of total  revenues were 32.6%,  27.0% and
22.4% in 1997, 1998 and 1999, 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  $1,849,000 in 1997 to approximately  $1,623,000 in
1998 and to  $974,000  in 1999.  Cost of product  revenues  as a  percentage  of
product  revenues  was  33.8%,   28.0%  and  28.4%  for  1997,  1998  and  1999,
respectively.  The  dollar  and  percentage  decreases  in 1998  and  1999  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 decreased from approximately
$97,000 in 1997 to $68,000 in 1998, and increased to  approximately  $137,000 in
1999. Cost of consulting and services revenues as a percentage of consulting and
services  revenues  was  19.3%,   14.8%  and  8.9%  for  1997,  1998  and  1999,
respectively.  The  dollar  and  percentage  decrease  from  1998  to  1999  was
principally due to a reduced emphasis on consulting and a greater  concentration
on training  and  support.  The  increase  from 1998 to 1999 relates to costs of
support for third party product maintenance.

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 decreased from approximately  $7,718,000 in 1997 to
approximately   $6,072,000  in  1998  and  decreased  further  to  approximately
$5,456,000  in 1999.  Sales and  marketing  expenses  as a  percentage  of total
revenues were 129.2%, 97.0% and 109.9% in 1997, 1998 and 1999, respectively. The
dollar decreases in 1998 and 1999 were principally due to personnel turnover and
lower levels of advertising and promotion  expenses.  The percentage decrease in
1998 was due to lower expenses as compared to 1997, and the percentage  increase
in 1999 is based on lower revenue.  Sales and marketing expenses are expected to
increase  in the near  term as a result of the  Company's  efforts  to  increase
awareness of new product  introductions and strategic alliances.  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 increased slightly from
approximately  $3,699,000  in 1997 to  approximately  $3,896,000  in  1998,  and
decreased  to  approximately  $3,380,000  in 1999.  General  and  administrative
expenses as a percentage of total revenues were 61.9%,  62.2% and 68.0% in 1997,
1998 and 1999, respectively.


                                       23
<PAGE>

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.  The  decrease  in expense in 1999 is due in part to
lower fees for recruiting  and relocation and the lack of non-cash  compensation
which occurred in 1998. The Company  anticipates that general and administrative
expenses,  as a percent  of  revenue,  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  $3,154,000  in  1997 to  approximately  $3,853,000  in  1998  and
decreased slightly to approximately $3,814,000 in 1999. Research and development
expenses as a percentage of total revenues were 52.8%,  61.6% and 76.8% in 1997,
1998 and 1999,  respectively.  The dollar and percentage  increases in 1998 were
primarily  due to  increases  in the  number of  personnel  associated  with the
Company's product development  efforts.  The percentage increase in 1999 was due
to the decrease in revenue. 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 $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 and
approximately  $165,000  in 1999 from  interest  earned on the  proceeds  of the
Company's  private  placements  and stock  option  exercises.  Interest  expense
represents  interest  payable or accreted on  promissory  notes and  capitalized
lease  obligations.  Interest  expense was  approximately  $13,000,  $65,000 and
$676,000 in 1997,  1998 and 1999,  respectively.  The large increase of interest
and related  financing costs was attributable to the Company's secured loan (see
Note 3 to the Financial  Statements) to Transamerica Business Credit Corporation
(TBCC).  These  interest  costs were being  amortized over the life of the loan,
which was expected to be paid at the February 29, 2000 maturity  date,  and were
in  addition to the  interest  expense on the loan.  The total  costs  including
interest  on the loan  proceeds,  transactions  costs  and the cost of  warrants
issued in  conjunction  with the  Transamerica  note  amounted to  approximately
$1,000,000 in 1999.

Income  Taxes -- The Company did not incur  income tax  expenses in December 31,
1997,  1998 and 1999 as a result of the net loss incurred  during these periods.
As of December 31, 1999,  the Company had net operating  loss carry  forwards of
approximately $38,000,000 as a result of net losses incurred since inception.

Dividend on Series C Stock -- The Company provided  approximately $272,000 for a
dividend on the Series C Stock during 1999, which compares to the  approximately
$111,000  provided  for last year for the  Series A Stock.  All of the  Series A
Stock was retired in November 1998. The Series B Stock bears no dividend.

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.

                                       24
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

Equity Transactions:
-------------------
The Company  offered  3,000,000  shares of Common  Stock   in an 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 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 and warrants to purchase  shares of Common Stock ("Series
A Warrants").

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 Common Stock at an exercise
price of $2.125 per share and  warrants  to  purchase  389,441  shares of 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 filed a registration statement on November 20, 1998
with respect to the shares of Common Stock underlying the Additional Warrants.

On September 8, 1999 and December 6, 1999,  Advantage  exercised its warrants to
purchase 100,000 and 533,576 shares, respectively, of Common Stock.

On November 20, 1998,  the Company sold  1,860,000  shares of Common  Stock,  at
$2.00 per share to a group of accredited investors pursuant to a 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. LaSalle exercised its warrants to purchase 50,000 shares of Common Stock on
December 9, 1999.  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 June 11, 1999, the Company issued  1,287,554  shares of Series B Stock in the
aggregate to two investors, in equal amounts, for $2.33 per share, or $3 million
in the aggregate.  Each share of Series B Stock is convertible into one share of
Common  Stock,  $.001 par value per  share,  of the  Company.  For the terms and
conditions of the Series B Stock refer to the  Company's  Form 8-K filed on June
23, 1999.

On September 9, 1999,  the Company  issued  335,000 shares of Series C Stock and
3,350,000  non-detachable Warrants to purchase shares of Common Stock to certain
accredited  investors listed in the Purchase  Agreement.  Each share of Series C
Stock was issued with ten Warrants for a price of $26.25 per Unit.  The Warrants
are  immediately  exercisable  at a price of $2.625  per  share and will  remain
outstanding  until 90 days after all of the Series C Stock has been redeemed and
the shares of the Common Stock  underlying the Warrants have been registered for
resale. The Series C Stock bears cumulative  compounding  dividends at an annual
rate of 10% for the first  five  years,  12.5% for the sixth year and 15% in and
after the seventh year. For the terms and conditions of the Series C Stock refer
to the Company's Form 8-K filed on September 15, 1999.

                                       25
<PAGE>

Pursuant to the Purchase Agreement,  the Company has granted registration rights
to each of the purchasers of the Series B and Series C Stock whereby the Company
is  obligated,  in certain  instances,  to register  the resale of the shares of
common stock issuable upon exercise of the Warrants.

At December 31, 1998,  the Company was in receipt of a "going  concern"  opinion
from its  independent  auditors  and the Company did not meet the $4 million net
tangible  assets  and other  requirements  for  continued  listing on the Nasdaq
National  Market.  The Company has completed three equity private  placements in
addition to exercise of options and warrants and has raised  approximately $18.6
million after commission and costs of placements,  in additional  equity capital
which the Company  believes is  sufficient  to sustain  operations.  In a letter
dated August 31, 1999,  the Company was advised  that a  determination  had been
made by the Nasdaq Listing  Qualifications  Panel to transfer the listing of the
Company's securities to the Nasdaq SmallCap Market effective with the opening of
business on  September  3, 1999.  Additionally,  the  Company  was advised  that
continued  listing on the Nasdaq  SmallCap  Market was contingent  upon making a
public filing,  on or before September 15, 1999 with the Securities and Exchange
Commission  (the "SEC") and Nasdaq  evidencing  a minimum of  $6,350,000  in net
tangible  assets.  The filing was to contain a July 31,  1999 pro forma  balance
sheet giving effect to  completion  of the financing for the Series C Stock.  On
September  15, 1999,  the Company  filed a Form 8-K  evidencing  compliance.  On
September 22, 1999, the Company received a letter from the Nasdaq Qualifications
Panel  stating  that the Company had complied  with the terms of its  exception,
that the Company would continue to be listed on The Nasdaq  SmallCap  Market and
that the hearing file would be closed.

During  1999,  three  warrants to  purchase a total of 683,576  shares of common
stock were exercised at various prices.  Proceeds from these  exercises  totaled
$2,863,908.

Additionally  during  1999,  various  employees  exercised  848,629  options  to
purchase common stock. The Company received net proceeds from these exercises of
$2,670,730.

On March 24,  2000 the  Company  completed a private  placement  with  Cranshire
Capital, L.P. for 500,000 shares at a purchase price of $4.75 per share pursuant
to Rule 506 of Regulation D  promulgated  under the  Securities  Act of 1933, to
augment  existing  resources.  The Company  received net proceeds of  $2,232,500
after  commission to LaSalle and believes it now has sufficient  working capital
to sustain operations.

Debt  Transactions
------------------

On February 24,  1999,  the Company  entered into a Loan and Security  Agreement
("Loan Agreement") with Transamerica. Under the terms of the Loan Agreement, the
Company received $3.0 million under a term loan that bore interest at 12.53% per
annum.  On March 31, 1999, the Company and  Transamerica  entered into the First
Amendment.  Under the  terms of the First  Amendment,  Transamerica  waived  the
default  created when the Company  received a  "going-concern"  opinion from its
independent auditors.  The Company agreed to (i) grant to TBCC Funding Trust II,
an  affiliate of  Transamerica,  warrants to purchase  100,000  shares of Common
Stock at an  exercise  price of $3.25 and (ii) accept the  additional  financial
covenant  that the  Company's net worth would be $5 million at June 30, 1999 and
September  30, 1999.  The  original  warrants  were valued at $224,000  using an
option-pricing  model  and the  following  assumptions:  dividend  yield  of 0%;
expected  volatility of 68%;  risk-free interest rate of 5.35% and expected term
of seven years. On June 30, 1999, the Company and Transamerica  entered into the
Second Amendment. Under the terms of the Second Amendment,  Transamerica has (i)
waived the  requirement  that the  Company's net worth be $5 million on June 30,
1999,  (ii) amended the promissory note issued by the Company in connection with
the Loan  Agreement to extend the maturity date of the term note to February 28,
2000 and removed the requirement  that  Transamerica  convert the term loan to a
revolving loan on February 28, 2000, and (iii) deleted the $360,000  acquisition
fee. In consideration for the Second Amendment,  the Company agreed to (i) grant
additional seven-year warrants to purchase 50,000 shares of the Company's common
stock at an  exercise  price of $3.75  per  share,  (ii) pay a  $150,000  fee to
Transamerica on February 28, 2000,  (iii) use 30% of any future equity raised by
the Company after completion of the current round (approximately $10-12 million)
of financing to prepay the term loan, (iv) repay $100,000 per month in principal
of the term loan  beginning on September 1, 1999, and (v) pay the balance of the
principal  and accrued and unpaid  interest due on the term loan on February 28,
2000. The additional 50,000 warrants granted in the Second Amendment were valued


                                       26
<PAGE>

at $86,000 using a dividend yield of 0%; expected  volatility of 68%;  risk-free
interest  rate of 5.35% and  expected  term of seven years.  The Loan  Agreement
contains  certain  covenants  that  restrict  certain  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.  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. The Transamerica term loan was repaid on September 30,
1999 and all indebtedness and obligations owed by the Company were terminated.

As a result of an  anti-dilution  clause triggered upon the issuance of Series B
Convertible  Preferred  Stock, the warrants to purchase 100,000 shares of Common
Stock  with an  exercise  price of $3.25 per share and  50,000  shares of Common
Stock  with an  exercise  price of $3.75  per share  increased  to  warrants  to
purchase 139,485 shares and 80,472 shares,  respectively,  each with an exercise
price of $2.33 per share. The Transamerica term loan was repaid on September 30,
1999 and all indebtedness and obligations owed by the Company were terminated.

On September 30, 1999, the Company  entered into a Revolving  Credit  Promissory
Note (the "Note") with Citibank.  Under the terms of the Note, the Company could
be  advanced  funds up to an  amount  of $3.0  million  under a  revolving  loan
agreement  with a maturity date of October 1, 2000 with the ability to renew for
additional  terms.  The Note  bore  interest  at a rate  equal to the sum of the
interest  rate  paid on the  automatically  renewable  one-year  certificate  of
deposit plus a margin of two percentage points.  Interest was payable monthly in
arrears.  The initial rate of interest was 6.78%.  Advances of  $2,900,000  were
made at September 30, 1999 which were used to pay off the remaining principal on
the  Transamerica  note payable.  On December 14, 1999, the Note was repaid with
the certificate of deposit, which had been the collateral for the Note.

As of December  31,  1999,  the  Company had nominal  debt and had cash and cash
equivalents  of  approximately   $7,137,000  and  positive  working  capital  of
approximately $6,630,000.

The  Company's  operating  activities  used  cash of  approximately  $9,020,000,
$6,642,000 and  $9,263,000 in 1997,  1998 and 1999,  respectively.  Cash used in
operating  activities  was  principally  a result of net losses  and  changes in
assets  and   liabilities,   non-cash   expenses  related  to  depreciation  and
amortization,  deferred  financing  costs  and the  issuance  of  certain  stock
options. The decrease in net cash used in operating activities from 1997 to 1998
was due in part to large increases in accounts payable and decreases in accounts
receivable  and  inventory.  The  large  increase  in 1999  was due in part to a
significant drop in accounts payable and deferred income.

Capital  expenditures  for property and equipment were  approximately  $353,000,
$322,000 and $176,000 in 1997, 1998 and 1999,  respectively.  These expenditures
have generally been for computer  workstations  and personal  computers,  office
furniture and equipment,  and leasehold additions and improvements.  The capital
expenditures decreased in 1998 and again in 1999 as the Company was conservative
in the use of cash for capital  equipment.  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.

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

ITEM 7B. IMPACT OF YEAR 2000 UPDATE

In prior years,  the Company  discussed  the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company  completed its remediation and
testing of systems.  As a result of those planning and  implementation  efforts,


                                       27
<PAGE>

the  Company   experienced  no  significant   disruptions  in  mission  critical
information technology and non-information technology systems and believes those
systems  successfully  responded  to the Year  2000  date  change.  The  Company
expensed  approximately  $25,000 during 1999 in connection with  remediating its
systems.  The Company is not aware of any material problems  resulting from Year
2000 issues, either with our products, our internal systems, or the products and
services  of third  parties.  The Company  will  continue to monitor its mission
critical computer applications and those of its suppliers and vendors throughout
the year 2000 to ensure  that any latent  Year 2000  matters  that may arise are
addressed promptly.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                                       28
<PAGE>




                                V-ONE CORPORATION
                          INDEX TO FINANCIAL STATEMENTS
                                    --------



Report of Ernst & Young LLP, Independent Auditors                     30

Report of PricewaterhouseCoopers LLP, Independent Auditors            31

Balance Sheets                                                        32

Statements of Operations                                              33

Statements of Stockholders' Equity                                    34

Statements of Cash Flows                                              35

Notes to Financial Statements                                         36

Schedule of Valuation and Qualifying Accounts for the years ended
     December 31, 1997, 1998 and 1999                                 53



                                       29
<PAGE>


                         Report of Independent Auditors


Board of Directors and Stockholders
V-One Corporation

We have  audited  the  accompanying  balance  sheet of V-One  Corporation  as of
December 31,  1999,  and the related  statements  of  operations,  stockholders'
equity,  and cash flows for the year then  ended.  Our audit also  included  the
financial  statement schedule for the year ended December 31, 1999 listed in the
Index  at  Item  14(a).   These  financial   statements  and  schedule  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements and schedule based on our audit.

We conducted our audit in accordance with auditing standards  generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audit  provides a  reasonable  basis for our
opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material  respects,  the financial position of V-One Corporation at December
31, 1999, and the results of its operations and its cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States.  Also, in our opinion,  the related financial statement schedule for the
year ended December 31, 1999, when considered in relation to the basic financial
statements  taken as a whole,  presents  fairly  in all  material  respects  the
information set forth therein.

                                    /s/ Ernst & Young LLP


McLean, Virginia
February 18, 2000, except Note 11,
as to which the date is March 24, 2000


                                       30
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS


      To the Board of Directors of V-ONE Corporation

      In our opinion,  the accompanying balance sheet and the related statements
      of operations,  shareholder's  equity and cash flows present fairly in all
      material  respects,  the  financial  position  of V-ONE  Corporation  (the
      Company) at December  31, 1998 and the results of its  operations  and its
      cash flows for each of the two years in the period  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. We
      have not audited the financials  statements of V-ONE  Corporation  for any
      period subsequent to December 31, 1998.

      The financial statements referred to above have been prepared assuming the
      Company  will  continue as a going  concern.  As shown in these  financial
      statements during 1997 and 1998 the Company incurred significant losses of
      $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 facts raise
      substantial  doubt  about the  Company's  ability to  continue  as a going
      concern. The financial statements do not include any adjustment that might
      result from the outcome of this uncertainty.



                                                 /s/ PricewaterhouseCoopers LLP
      McLean, VA
      March 11, 1999

           except as to the third and fourth
           sentences of the first paragraph of
           Note 3 to which the date is March 31, 1999







                                       31
<PAGE>


                                V-ONE CORPORATION
                                 BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                             December 31,
                                                                        ----------------------
                  ASSETS                                                   1998       1999
                                                                           ----       ----
<S>                                                                   <C>          <C>
Current assets:
     Cash and cash equivalents                                            $635,959   $7,136,943
     Accounts receivable, less allowances of $525,000 and $134,000,
     respectively.                                                         513,221      854,853
     Inventory, less allowances of $313,000 and $88,000, respectively      385,481       46,087
     Prepaid expenses and other current assets                             276,456      249,339
      Total current assets                                              ----------  -----------
                                                                         1,811,117    8,287,222

Property and equipment, net                                                874,553      585,708
Licensing fee, net of accumulated  amortization of $636,876 and
     $892,254, respectively                                                255,378            -
Other assets                                                               981,144      902,506
                                                                        ----------  -----------
      Total assets                                                      $3,922,192   $9,775,436
                                                                        ==========  ===========

           LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
     Accounts payable and accrued expenses                              $2,124,156   $1,157,660
     Deferred revenue                                                      888,295      420,922
     Notes payable - current                                                 5,259            -
     Capital lease obligations - current                                    70,775       78,794
                                                                        ----------  -----------
           Total current liabilities                                     3,088,485    1,657,376
Deferred rent                                                                    -      156,711
Capital lease obligations - noncurrent                                     197,982      119,746
                                                                        ----------  -----------
           Total liabilities                                             3,286,467    1,933,833

Commitments and contingencies

Stockholders' equity:
  Preferred stock, $0.001 par value;13,333,333 shares authorized
    Series B convertible preferred stock, 1,287,554 designated; zero
      and 1,287,554 shares issued and outstanding, respectively
      (liquidation preference of $3,000,000)                                     -        1,288
    Series C redeemable preferred stock, 500,000 designated,
      zero and 335,000 shares issued and outstanding,
      respectively (liquidation preference of $8,793,750).                       -          335
  Common stock, $0.001 par value; 33,333,333 shares authorized;
      16,478,046 and 18,233,780 shares issued and outstanding,
       respectively                                                         16,478       18,233
  Accrued dividends payable                                                      -      272,245
     Additional paid-in capital                                         30,361,685   47,197,893
     Subscriptions receivable                                             (50,021)      (3,785)
     Accumulated deficit                                              (29,692,417) (39,644,606)
                                                                      ------------ ------------
Total stockholders' equity                                                 635,725    7,841,603
                                                                      ------------ ------------
                                                                        $3,922,192   $9,775,436
                                                                      ============ ============
</TABLE>
   The accompanying notes are an integral part of these financial statements.




                                       32
<PAGE>




<TABLE>
<CAPTION>
                                          V-ONE CORPORATION
                                      STATEMENTS OF OPERATIONS


                                                            Year ended December 31,
                                       ---------------------------------------------------------------

                                              1997                  1998                  1999
                                              ----                  ----                  ----
<S>                                           <C>                   <C>                   <C>
Revenues:
     Products                                 $ 5,470,230           $ 5,798,542           $ 3,427,422
     Consulting and services                      502,771               461,263             1,538,258
                                       ---------------------------------------------------------------
         Total revenues                         5,973,001             6,259,805             4,965,680

Cost of revenues:
     Products                                   1,848,871             1,623,396               973,866
     Consulting and services                       96,949                68,060               137,281
                                       ---------------------------------------------------------------
         Total cost of revenues                 1,945,820             1,691,456             1,111,147
                                       ---------------------------------------------------------------

Gross profit                                    4,027,181             4,568,349             3,854,533

Operating expenses:
     Sales and marketing                        7,717,640             6,071,919             5,456,173
     General and administrative                 3,699,278             3,896,210             3,380,227
     Research and development                   3,153,941             3,853,274             3,814,423
                                       ---------------------------------------------------------------
         Total operating expenses              14,570,859            13,821,403            12,650,823
                                       ---------------------------------------------------------------

Operating loss                               (10,543,678)           (9,253,054)           (8,796,290)

Interest (expense) income:
     Interest expense                           (13,130)              (65,372)              (676,443)

     Interest income                             341,469               125,030               164,841
                                       ---------------------------------------------------------------
         Total interest (expense)                328,339                59,658             (511,602)
                                       ---------------------------------------------------------------

Loss before extraordinary item               (10,215,339)           (9,193,396)           (9,307,892)

Extraordinary item - early
     extinguishment of debt                             -                     -             (372,052)
                                       ---------------------------------------------------------------

Net loss                                     (10,215,339)           (9,193,396)           (9,679,944)

Dividend on preferred stock
                                                   12,600               110,879               272,245
Deemed dividend on preferred stock
                                                  600,000               102,755                     -
                                       ---------------------------------------------------------------

Net loss attributable to holders of
     common stock                           $(10,827,939)          $(9,407,030)          $(9,952,189)
                                       ===============================================================

Basic and diluted loss per share
     Loss before extraordinary item            $   (0.84)            $   (0.68)            $   (0.57)
                                       ===============================================================
     Net loss attributable to holders of
        common stock                           $   (0.84)            $   (0.68)            $   (0.59)
                                       ===============================================================
Weighted average number of
     common shares outstanding                 12,868,859            13,898,450            16,938,205
                                       ===============================================================

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

</TABLE>


                                                 33
<PAGE>

<TABLE>
<CAPTION>

                                         V-ONE CORPORATION
                                 STATEMENTS OF STOCKHOLDERS' EQUITY

                                                           Series B & C   Accrued  Additional
                                        Common Stock     Preferred Stock  Dividend   Paid-in  Subscriptions Accumulated
                                      Shares    Amount    Shares   Amount Payable   Capital     Receivable  Deficit      Total
                                      ------    ------    ------   --------------   -------     ----------  -------      -----
<S>                                  <C>        <C>      <C>       <C>    <C>       <C>         <C>         <C>          <C>
Balance, December  31, 1996          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                                    -         -                                     -            -  (10,827,939) 10,827,939)
                                  -------------------------------------------------------------------------------------------------
Balance, December 31, 1997           13,070,235  13,070                              24,649,538  (166,011)  (20,285,387)   4,211,210
Issuance of common stock, net         2,535,000   2,535                               4,532,554          -            -    4,535,089
of issuance costs
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
Net loss                                                                                                     (9,193,396) (9,193,396)
                                  --------------------------------------------------------------------------------------------------
Balance, December 31, 1998          16,478,046    16,478                             30,361,685    (50,021)  (29,692,417)    635,725
Exercise of common stock options,
   net of issuance costs               848,629       848                              2,669,882                            2,670,730
Exercise of warrants                   907,105       907                              2,863,001                            2,863,908
Issuance of Series B preferred
   stock, net issuance costs                             1,287,554 $1,288             2,981,212                            2,982,500
Issuance of Series C preferred
    stock, net of issuance costs                           335,000    335             7,918,349                            7,918,684
Collection and forgiveness of
   subscriptions receivable                                                                          46,236                   46,236
Issuance of common stock
   warrants                                                                             310,000                              310,000
Dividend on preferred stock                                               $272,245                             (272,245)           -
Issuance of common stock
   options to consultants                                                                93,764                               93,764
Net loss                                                                                                      9,679,944) (9,679,944)

------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999           18,233,780 $18,233  1,622,554 $1,623 $272,245  $47,197,893 $(3,785)    $(39,644,606)$7,841,603


====================================================================================================================================


             The accompanying notes are an integral part of these financial statements.
</TABLE>



                                                 34
<PAGE>

<TABLE>
<CAPTION>
                                          V-ONE CORPORATION
                                       STATEMENT OF CASH FLOWS


                                                                      Year ended December 31,
                                                         ---------------------------------------------------
                                                              1997            1998              1999
                                                              ----            ----              ----
<S>                                                        <C>             <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                $(10,215,339)   $ (9,193,396)     $(9,679,944)
   Adjustments to reconcile net loss to net cash
     used in operating activities:
     Depreciation                                                285,213         354,187          464,879
     Amortization                                                306,752         283,056          255,378
     Loss on disposal of assets                                  101,354          95,228                -
     Amortization of deferred financing costs
                                                                       -               -          730,000
     Forgiven subscription receivable                                  -               -           46,114

     Noncash charge related to issuance of warrants
         and options                                             200,000         394,000           93,764
     Changes in operating assets and liabilities:
       Accounts receivable, net                                  735,731         281,174        (341,632)
       Inventory, net                                          (165,024)         198,413          339,394

       Prepaid expenses and other assets                       (782,549)        (66,153)          105,755


       Accounts payable and accrued expenses                   (159,455)         972,567         (966,496)
       Deferred revenue                                         714,899           75,648         (467,373)
       Deferred rent                                            (41,396)        (36,879)           156,711
                                                         ---------------------------------------------------
         Net cash used in operating activities               (9,019,814)     (6,642,155)       (9,263,450)

CASH FLOWS FROM INVESTING ACTIVITIES:
   Net purchases of property and equipment                     (353,110)       (322,387)          (176,033)

   Investment in affiliate                                     (250,000)             -                   -

   Collection of note receivable                                  88,480             -                  122
                                                         ---------------------------------------------------
         Net cash used in investing activities                 (514,630)       (322,387)          (175,911)

CASH FLOWS FROM FINANCING ACTIVITIES:
   Issuance of common stock                                            -       5,070,000                 -
   Issuance of preferred stock, net of subscriptions
        receivable                                             4,000,000              -         11,793,750
   Payment of debt financing costs
                                                                       -              -           (420,000)
   Payment of preferred stock dividends                                -       (110,879)
   Payment of stock issuance costs                                             (574,324)
                                                               (233,703)                          (941,875)
   Redemption of preferred stock
                                                                       -     (3,200,600)                 -
   Exercise of stock options and warrants
                                                               1,261,393         273,417          5,583,946
 Principal payments on capital lease obligations               (167,429)        (43,675)           (70,217)

   Repayment of notes payable                                   (16,667)        (16,963)            (5,259)
                                                         --------------------------------------------------
         Net cash provided by financing activities             4,843,594       1,396,976         15,940,345
                                                         --------------------------------------------------
Net (decrease) increase in cash and cash equivalents         (4,690,850)     (5,567,566)          6,500,984

Cash and cash equivalents, beginning of year                  10,894,375       6,203,525            635,959
                                                         --------------------------------------------------
Cash and cash equivalents, end of year                        $6,203,525        $635,959         $7,136,943
                                                         ==================================================

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

</TABLE>


                                                 35
<PAGE>

                                V-ONE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                                DECEMBER 31, 1999

 1.     NATURE OF BUSINESS

        V-ONE Corporation  ("V-ONE" or the "Company"),  a Delaware  corporation,
        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,  with
        secondary markets located in Europe and Asia.

 2.     SIGNIFICANT ACCOUNTING POLICIES

        REVENUE RECOGNITION

        The Company develops,  markets,  licenses and supports computer software
        products and provides related services. The Company conveys the right 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.  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 its direct  sales  effort,  the  Company  licenses  its
        products through a network of distributors.  The Company 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.  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. 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 year ended December
        31,  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 years ended  December 31, 1998 and 1999 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.


                                       36
<PAGE>

                                V-ONE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

        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
        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 amounts reported in the financial  statement
        and  accompanying   notes.   Actual  results  could  differ  from  those
        estimates.

        CASH AND CASH EQUIVALENTS

        The Company  considers  all highly liquid  investments  with an original
        maturity of three months or less when purchased 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.

        PROPERTY AND EQUIPMENT

        Property and equipment are stated at historical cost and are depreciated
        using the  straight-line  method the  shorter of the  assets'  estimated
        useful  life or the  lease  term,  ranging  from  three to seven  years.
        Capital  leases are recorded at their net present value on the inception
        of the lease.  Depreciation expense was $285,213,  $354,187 and $464,879
        for the years ended December 31, 1997, 1998 and 1999, respectively.

        ADVERTISING COSTS

        The Company  expenses all  advertising  costs as  incurred.  The Company
        incurred  $731,000,  $196,000,  and $98,400 in advertising costs for the
        years ended December 31, 1997, 1998 and 1999, respectively.



                                       36
<PAGE>
                                V-ONE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


        STOCK-BASED COMPENSATION

        Statement of Financial  Accounting  Standards No. 123,  "Accounting  for
        Stock-Based  Compensation"  ("SFAS"),  allows  companies  to account for
        stock-based  compensation either under the new provisions of SFAS 123 or
        under  the  provisions  of  Accounting   Principles   Bulletin  No.  25,
        "Accounting for Stock Issued to Employees"  ("APB25"),  but requires pro
        forma disclosure in the footnotes to the financial  statements as if the
        measurement  provisions  of SFAS 123 had been  adopted.  The Company has
        elected to account for its  stock-based  compensation in accordance with
        the provisions of APB25 (see Note 6).

        EXTRAORDINARY ITEM

        On September 30, 1999,  the Company paid in full the  Transamerica  term
        loan prior to its maturity (see Note 3). In connection with the payment,
        the  Company   recognized   a  $372,052   loss   related  to  the  early
        extinguishment of debt.

        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.

        NET LOSS PER COMMON SHARE

        The Company follows Financial  Accounting  Standards Board Statement No.
        128, "Earnings Per Share," ("SFAS 128") for computing and presenting net
        income per share information. Basic net loss per share was determined by
        dividing  net loss by the  weighted  average  number  of  common  shares
        outstanding during each year. Diluted net loss per share excludes common
        equivalent  shares,  unexercised  stock  options  and  warrants  as  the
        computation  would be  anti-dilutive.  A reconciliation  of the net loss
        available  for  common  stockholders  and the  number of shares  used in
        computing basic and diluted net loss per share is in Note 10.

        BUSINESS SEGMENTS

        In 1998, the Company adopted FASB Statement No. 131,  "Disclosure  About
        Segments of an Enterprise and Related  Information,"  which  establishes
        standards  for  disclosures   about  products,   geographics  and  major
        customers.  The Company's  implementation of this standard does not have
        any effect on its financial statements.



                                       37
<PAGE>


                                V-ONE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


        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
        sufficiently provided for estimated credit losses.

        In 1997 one  customer  comprised  12% of total  revenues.  For the years
        ended December 31, 1998 and 1999, no customer  represented more than 10%
        of total revenues.

        The  Company  had  significant  purchases  of  product  from  two  major
        suppliers  of  approximately   $1,201,000   during  1997.   During  1998
        approximately   $524,000  was  purchased   from  two  major   suppliers,
        representing  32% of total 1998 product  cost of revenues.  No suppliers
        exceeded 10% of purchases in 1999.

        RECLASSIFICATIONS

        Certain prior year amounts have been reclassified to conform to the 1999
        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,  2000 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, 2001.

  3.    NOTES PAYABLE

        On February  24,  1999,  the Company  entered  into a Loan and  Security
        Agreement   ("Loan   Agreement")  with   Transamerica   Business  Credit
        Corporation ("Transamerica"). Under the terms of the Loan Agreement, the
        Company  received a $3.0 million term loan that bears interest at 12.53%
        per annum.  Interest is payable  monthly in arrears.  On March 31, 1999,
        the  Company  and  Transamerica  amended  the  Loan  Agreement,  whereby
        Transamerica  waived  the  event of  default  created  when the  Company
        received a "going-concern"  opinion from its independent  auditors.  The
        Company  agreed to (i) grant  TBCC  Funding  Trust II, an  affiliate  of
        Transamerica, a warrant to purchase 100,000 shares of Common Stock at an
        exercise  price of  $3.25  per  share  and (ii)  accept  the  additional


                                       38
<PAGE>

                                V-ONE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


        financial covenant that the Company's net worth would be $5.0 million at
        June 30, 1999 and September 30, 1999. The warrant was valued at $224,000
        using  the   Black-Scholes   option-pricing   model  and  the  following
        assumptions: dividend yield of 0%; expected volatility of 68%; risk-free
        interest rate of 5.35% and expected term of seven years.

        On June 30,  1999,  the Company and  Transamerica  entered into a second
        amendment,  whereby  Transamerica  (i) waived the  requirement  that the
        Company's net worth be $5.0 million on June 30, 1999,  (ii) extended the
        maturity  date of the $3.0  million  term note to February  28, 2000 and
        removed the  requirement  that  Transamerica  convert the term loan to a
        revolving  loan on February  28,  2000,  and (iii)  deleted the $360,000
        acquisition fee. In consideration for the second amendment,  the Company
        (i)  issued a  seven-year  warrant  to  purchase  50,000  shares  of the
        Company's  Common  Stock at an exercise  price of $3.75 per share,  (ii)
        paid a  $150,000  fee to  Transamerica,  (iii)  agreed to use 30% of any
        future  equity  raised by the Company  after  completion  of its current
        round of financing to prepay the term loan,  (iv) agreed to pay $100,000
        per month in principal on the term loan  beginning on September 1, 1999,
        and (v)  agreed to pay the  balance of the  principal  and  accrued  and
        unpaid  interest due on the term loan on February 28, 2000.  The warrant
        to purchase 50,000 shares was valued at $86,000 using the  Black-Scholes
        option-pricing  model and the following  assumptions:  dividend yield of
        0%;  expected  volatility of 68%;  risk-free  interest rate of 5.35% and
        expected term of seven years.

        As a result of an  anti-dilution  clause  triggered upon the issuance of
        Series B Convertible  Preferred  Stock, the warrants to purchase 100,000
        shares of Common  Stock  with an  exercise  price of $3.25 per share and
        50,000 shares of Common Stock with an exercise  price of $3.75 per share
        increased  to  warrants to purchase  139,485  shares and 80,472  shares,
        respectively,  each  with an  exercise  price of $2.33  per  share.  The
        Transamerica  term  loan  was  repaid  on  September  30,  1999  and all
        indebtedness and obligations owed by the Company were terminated.

        On September  30,  1999,  the Company  entered  into a Revolving  Credit
        Promissory Note (the "Note") with Citibank, F.S.B., ("Citibank").  Under
        the terms of the Note,  the Company  may be advanced up to $3.0  million
        under a revolving loan agreement with a maturity date of October 1, 2000
        with the ability to renew for additional  terms. The Note bears interest
        at  a  rate  equal  to  the  sum  of  the  interest  rate  paid  on  the
        automatically renewable one-year certificate of deposit plus a margin of
        two  percentage  points.  Interest is payable  monthly in  arrears.  The
        initial rate of interest is 6.78%.  Advances of $2,900,000  were made at
        September 30, 1999 which were used to pay off the remaining principal on
        the Transamerica note payable. On December 14, 1999, the Note was repaid
        with the  proceeds  from a  certificate  of deposit,  which had been the
        collateral for the Note.

 4.     SELECTED BALANCE SHEET INFORMATION

        Property and equipment consisted of the following at December 31:

                                                   1998         1999
                                                 ---------   ----------
        Office and computer equipment          $  896,767   $  988,041
        Office and computer equipment             359,859      359,859
          under capital leases



                                       39
<PAGE>

                                V-ONE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS



        Leasehold improvements                      62,332        62,332
        Furniture and fixtures                     120,811       120,811
                                                   -------       -------
                                                 1,439,769     1,531,043
        Less:  accumulated depreciation          (565,216)     (945,335)
                                               $   874,553   $   585,708
                                                ==========    ==========


        The Company had two licensing  agreements  whereby the Company  obtained
        the right to modify  and sell  certain  technology  used in its  product
        line.  All amounts are fully  amortized  as of December  31,  1999.  The
        Company incurred  amortization expense of $283,056 $283,056 and $255,378
        relating to these agreements in 1997, 1998 and 1999, respectively.

        Other assets consisted of the following at December 31:


                                                      1998        1999
                                                     -------     -------
        Deposits                                   $ 731,144   $ 652,506
        Investment in Network Flight Recorder        250,000     250,000
                                                     -------     -------
                                                   $ 981,144   $ 902,506
                                                     =======     =======

        In January  1997,  the Company made an investment of $250,000 in Network
        Flight  Recorder,  Inc.  ("NFR") in  exchange  for ten  percent of NFR's
        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.
        The Company's  investment in these equity securities was recorded at the
        fair market value on the date of the  transaction  and is accounted  for
        using the cost method.

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


                                            1998           1999
                                          --------       --------
        Accounts payable               $  1,820,812    $   847,267
        Accrued compensation                234,638        270,072
        Accrued marketing costs              15,000              -
        Sales tax payable                    28,904          1,936
        Other accrued expenses               24,802         38,385
                                       ------------    -----------
                                       $  2,124,156    $61,157,660
                                       ============    ===========

5.      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:
        (liabilities):


                                                1998           1999
        Deferred tax assets                    ------         ------
          Deferred revenue                   $ 131,573      $      -
          Inventory                            121,018         33,867
          Accounts receivable                  202,615         51,845
          Property and equipment              (78,178)       (60,343)
          Deferred rent                              -         60,522

                                       40
<PAGE>

                                V-ONE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


          Non-deductible accruals               65,739         61,320
          Options and warrants                       -        155,991
          Licensing fee                       (81,989)              -
          Net operating loss carry forward   9,087,986     14,556,026
                                           -----------     ----------

        Total deferred tax asset             9,448,764     14,859,228
        Valuation allowance                (9,448,764)   (14,859,228)
                                              --------     ----------
                                            $        -    $         -
        Net deferred tax asset              ==========     ==========


        The net  change  in the  valuation  allowance  from  1998 to 1999 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 and
        1999, the Company had net operating loss  carryforwards of approximately
        $23,756,029  and  $37,690,384  for Federal and state income tax purposes
        available  to offset  future  taxable  income.  The net  operating  loss
        carryforwards begin to expire in 2008.  Approximately  $4,279,000 of the
        net operating loss  carryforwards  is  attributable  to exercised  stock
        options,  the benefit of which,  when realized,  will directly  increase
        additional paid-in capital.


        A  reconciliation  between  income taxes  computed  using the  statutory
        federal  income  tax rate and the  effective  rate for the  years  ended
        December 31, 1999 and 1998 is as follows:


                                                      1998        1999
                                                    ---------   ---------
        Federal income tax
        (benefit) at statutory                       (34.0%)     (34.0%)
          Rate
        State income taxes, net                       (4.6%)      (6.6%)
        Permanent items                                 0.1%     (14.6%)
        Net change in valuation allowance              38.5%       55.2%

        Provision for Income Taxes                  ---------   ---------
                                                          0%          0%
                                                    =========   =========


 6.     SHAREHOLDERS' EQUITY

        SERIES A PREFERRED STOCK

        On December 8, 1997,  the Company  issued  4,000  shares of  mandatorily
        redeemable  Series A Convertible  Preferred Stock ("the Series A Stock")
        to Advantage Fund II Ltd.  ("Advantage") for $4.0 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").

        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,  accrued  without
        interest from the date of original  issuance and were payable  quarterly
        commencing  March 1, 1998.  During the years ended December 31, 1997 and


                                       41
<PAGE>
                                V-ONE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


        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  ("the
        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  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 and an amendment to their original 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  warrants  to  Advantage  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.  Pursuant  to the  terms  of the
        amendments the Company has agreed to file a registration  statement with
        respect to the shares of Common Stock underlying the warrants. Advantage
        exercised  all of these  warrants  in 1999 in  addition  to  warrants to
        purchase  144,123  shares  of  Common  Stock at $4.77  per  share  which
        Advantage  had  received in prior  private  placements.  The warrants to
        purchase a total of 633,576  shares of Common Stock were  exercised  for
        $2,757,881.

        SERIES B PREFERRED STOCK

        On June 11, 1999, the Company issued 1,287,554 shares at $2.33 per share
        of Series B  Convertible  Preferred  Stock (the "Series B Stock") to two
        investors for $1.0 million in cash and a subscription agreement for $2.0
        million.  Net proceeds to the Company  after  issuance  costs of $17,500
        were  $2,982,500.   The  subscription   receivable  was  repaid  in  two
        installments  of $1.0 million  plus accrued  interest in July and August
        1999.  The  Series  B Stock  ranks  senior  to the  Common  Stock  as to
        distributions of assets upon  liquidation,  dissolution or winding up of
        the  Company.  The  Series  B Stock  is not  redeemable,  does  not bear
        dividends  and generally  has no voting  rights.  Each share of Series B
        Stock is  convertible  at the  option of the holder at any time into one
        share of Common  Stock based upon an initial  conversion  price of $2.33
        per share.  The  conversion  price is subject to adjustment in the event
        the Company pays dividends or makes  distributions on, splits or reverse
        splits its Common Stock.  The holders of the Series B Stock are entitled
        to a liquidation preference of $2.33 per share.

        SERIES C PREFERRED STOCK

        On  September 9, 1999,  the Company  issued  335,000  shares of Series C
        Preferred  Stock (the  "Series C Stock")  and  3,350,000  non-detachable
        warrants  to  purchase  shares  of  the  Company's   Common  Stock  (the
        "Warrants")  to  certain  accredited  investors.  Each share of Series C
        Stock was issued with ten Warrants  (collectively  a "Unit") for a price
        of $26.25 per Unit. The Company  received  $7,918,684 in proceeds net of


                                       42
<PAGE>
                                V-ONE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS



        issuance costs of approximately  $875,000.  The Warrants are immediately
        exercisable  at a price of $2.625 per share and will remain  exercisable
        until 90 days after all of the Series C Stock has been  redeemed and the
        shares of the Common Stock  underlying the Warrants have been registered
        for resale.

        The Series C Stock bears cumulative  compounding  dividends at an annual
        rate of 10% for the first five  years,  12.5% for the sixth year and 15%
        in and after the seventh year.  The dividends may be paid in cash, or at
        the option of the Company,  in shares of registered  common  stock.  The
        Series C Stock is not  convertible  and ranks senior to the Common Stock
        and to the Series B Stock as to payment of  dividends,  and ranks senior
        to the  Common  Stock  and in  parity  with  the  Series  B Stock  as to
        distributions of assets upon  liquidation,  dissolution or winding up of
        the Company. Holders of the Series C Stock are entitled to a liquidation
        preference of $26.25 per share.

        At least  51% of the  outstanding  shares  of  Series C Stock  must vote
        affirmatively  as a separate  class for (i) the  voluntary  liquidation,
        dissolution  or  winding up of the  Company,  (ii) the  issuance  of any
        securities  senior to the  Series C Stock and (iii) the  declaration  or
        payment of a cash dividend on all junior  stocks and certain  amendments
        to the Company's certificate of incorporation.  Prior to the exercise of
        the Warrants, the holders shall also be entitled to ten common votes for
        each share of Series C Stock on all matters on which common stockholders
        are  entitled to vote,  except in  connection  with the  election of the
        Board of  Directors.  As long as at least  51% of the  Series C Stock is
        outstanding,  the holders  shall have the right to elect one director to
        the Company's Board of Directors.

        The Company has the right to redeem the  outstanding  shares of Series C
        Stock in whole  (i) at any  time  after  the  third  anniversary  of the
        issuance date, (ii) upon the closing of an underwritten  public offering
        in excess of $20  million and at a price in excess of $6.50 per share or
        (iii) prior to the third anniversary of the issuance date if the average
        closing bid price of the Common Stock for any 20 trading days during any
        30 trading days ending within 5 trading days prior to the date of notice
        of redemption is at least $3.9375 per share.  The redemption price would
        be paid in cash in full and would be equal to the  greater of the $26.25
        per share purchase price or the fair market value of each Series C share
        plus all unpaid dividends.

        At any time after all of the Warrants  have been  exercised by a holder,
        that holder shall have the right to require the Company to redeem all of
        its then  outstanding  share of Series C Stock. The redemption price for
        each  share of Series C Stock  shall be the  $26.25  per share  purchase
        price  plus all  unpaid  dividends  and is  payable at the option of the
        Company in either cash or shares of common stock.

        The Company has granted registration rights to the investors whereby the
        Company is obligated,  in certain  instances,  to register the shares of
        Common Stock issuable upon conversion of the Series B Stock and exercise
        of the Warrants attached to the Series C Stock.

        COMMON STOCK

        In fourth quarter of 1998, the Company  completed a private placement of
        2,535,00  shares of its Common Stock at a price of $2.00 per share.  The
        Company  incurred  issuance  costs  of  approximately  $546,000  and  on


                                       43
<PAGE>
                                V-ONE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS



        November 20, 1998, granted a warrant to purchase 50,000 shares of Common
        Stock to the  underwriter of the private  placement.  The warrant has an
        exercise price of $2.125 and expires five years from the date of grant.

        On January  14,  1999,  a warrant to purchase  600,000  shares of Common
        Stock was exercised in full pursuant to its cashless exercise  provision
        and the Company issued 223,529 shares of its common stock to the holder.
        In addition to the  exercise  of warrants  for 633,576  shares of Common
        Stock by  Advantage  for  $2,757,658,  a warrant to  purchase a total of
        50,000  shares  of Common  Stock was  exercised  at  $2.125  per  share.
        Proceeds from this exercise totaled $106,250.  Additionally during 1999,
        various  employees  exercised  848,629 options to purchase common stock.
        The Company received net proceeds from these exercises of $2,670,730.

        WARRANTS

        In addition to the warrants issued in connection  with the  Transamerica
        debt for  219,957  shares  of  Common  Stock at $2.33  per share and the
        warrants  attached to the Series C Stock for 3,350,000  shares of Common
        Stock at $2.625  per share  discussed  above,  the  Company  issued  the
        following  warrants  to  purchase  Common  Stock  during  the year ended
        December 31, 1997, 1998, and 1999:

        On November 21, 1997, the Company  issued a warrant to purchase  300,000
        shares of Common Stock with an exercise price of $3.125 to the President
        and  Chief  Executive  Officer.  The  warrant  vests  evenly on the four
        anniversaries following the date of grant.
        This warrant expires on November 21, 2007.

        In connection  with a marketing  agreement in 1997, the Company issued a
        warrant to a consultant to purchase  25,000 shares of Common Stock at an
        exercise price of $3.875 per share,  exercisable as of November 4, 1997.
        This warrant expires on November 4, 2002.

        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 a private
        placement. Such warrants expire on December 8, 2002.

        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, 1998 and 1999 were as follows:

               1998           1999       Exercise Price
               ----           ----       --------------
             600,000              -           $2.00
             150,000              -           $2.13
                  -         219,957           $2.33
                  -       3,350,000           $2.63
              20,000         20,000           $2.69
             300,000        300,000           $3.13
              25,000         25,000           $3.88
              60,000         60,000           $4.73




                                        44
<PAGE>

                                 V-ONE CORPORATION
                           NOTES TO FINANCIAL STATEMENTS

             533,576             -            $4.77
           ----------     ---------
           1,688,576       3,974,957

        At December 31, 1999,  warrants to purchase  3,824,957  shares of common
        stock were  exercisable.  The weighted  average grant date fair value of
        the  warrants  issued  during 1999 was  estimated  at $2.24 for warrants
        granted at fair market value and $1.72 for warrants  granted  below fair
        market  value.  The fair value was  determined  using the  Black-Scholes
        option-pricing model with the following assumptions:  dividend yield 0%,
        volatility of 67%,  risk-free  interest rate of 5.35% and expected lives
        of 7 years.

        STOCK OPTIONS PLANS

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

        1995 NON-STATUTORY STOCK OPTION PLAN

        The Compensation  Committee  determined the number of options granted to
        key  employees,  the vesting period and the exercise price provided they
        were  not  below  market  value on the  date of the  grant  for the 1995
        Non-Statutory  Stock Option Plan ("the 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  within 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, 1999 was as follows:
<TABLE>
<CAPTION>

                                                                     Weighted Average
                                                       Shares         Exercise Price
                                                       ------         --------------
        <S>                                           <C>              <C>
        Balance as of December 31, 1996                 350,293           $1.238
           Exercised                                  (119,070)           $1.001
           Cancelled                                          -           $0.425
                                                     ----------
         Balance as of December 31, 1997                231,223           $1.398
           Exercised                                  (158,333)           $1.213
           Cancelled                                    (8,888)           $0.425
                                                     ----------
        Balance as of December 31, 1998                  64,002           $1.855
           Exercised                                   (53,400)           $1.726
        Balance as of December 31, 1999                  10,602           $2.505
                                                     ==========
</TABLE>

        1996 INCENTIVE STOCK PLAN

        During June 1996,  the Company  adopted  the 1996  Incentive  Stock Plan
        ("the 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

                                       45
<PAGE>

                                V-ONE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


        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 key  employees,  officers  or  consultants,  the
        vesting  period and the exercise  price provided that they are not below
        fair 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 presidents)  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.


                                       46
<PAGE>

                                V-ONE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS



        Option  activity  under the 1996 Plan for the three years ended December
        31, 1999 was as follows:
                                                             Weighted Average
                                               Shares         Exercise Price
                                               ------         --------------

        Balance as of December 31, 1996       1,153,671            $4.312

             Granted                          1,315,501            $4.272
             Exercised                        (298,838)            $3.818
             Cancelled                        (198,299)            $5.106
                                             ----------
        Balance as of December 31, 1997       1,972,035            $4.243

             Granted                            558,667            $2.78
             Exercised                         (35,000)            $2.625
             Cancelled                        (613,326)            $4.28
                                             ----------
        Balance as of December 31, 1998       1,882,376            $3.221



             Granted                                  -
             Exercised                        (677,479)           $3.438
             Cancelled                        (290,666)           $2.787
             Expired                           (99,250)           $2.785
                                             ----------
        Balance as of December 31, 1999         814,981           $3.268
                                             ==========

        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
        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 two years ended December 31,
        1999 was as follows:
                                                              Weighted Average
                                                  Shares       Exercise Price
                                                  ------       --------------
            Balance as of December 31, 1997            -           -
            Granted                              712,000          $2.694
            Exercised                                  -           -
            Cancelled                           (101,000)         $2.688
                                                ---------

            Balance as of December 31, 1998      611,000          $2.695
            Granted                            1,641,500          $2.328


                                       47
<PAGE>



                                V-ONE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


            Exercised                           (117,750)         $2.53
            Cancelled                           (437,000)         $2.507
            Expired                               (7,500)         $2.688
                                               ----------
            Balance as of December 31, 1999    1,690,250          $2.40
                                               =========

        Awards  may be  granted  under the 1998 Plan with  respect to a total of
        2,500,000 shares of Common Stock.

        For all of its plans, 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.  The effect of
        applying  SFAS 123's  fair value  method to the  Company's  stock  based
        awards is not necessarily  representative of the effects on reported net
        income for future years, due to, among other things,  the vesting period
        of the stock options and the fair value of  additional  stock options in
        future years.
<TABLE>
<CAPTION>

                                                                   Year ended December 31,
                                                                   -----------------------
                                                           1997              1998             1999
                                                          -----             -----            -----
        <S>                                         <C>               <C>              <C>
        Loss attributable to holders of common
            stock:
              As reported                           $10,827,939        $9,407,030       $9,952,189
              Pro forma                             $11,142,262       $10,464,134      $10,895,072
        Basic and diluted loss per share
            attributable to holders of common stock:
              As reported                                 $0.84             $0.68            $0.59
              Pro forma                                   $0.87             $0.75            $0.64
</TABLE>


        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, 1997, 1998 and 1999, respectively: dividend yield of 0% for
        all periods; expected volatility of 56%, 68% and 92%; risk-free interest
        rate of 6.0%,  5.3%,  and 5.5%;  and expected  term of 4.0 years for all
        periods.  The  weighted-average  fair value of the options granted under
        all of the  Company's  plans  during the years ended  December 31, 1997,
        1998 and 1999 was $2.039,  $1.10 and $1.60,  respectively.  The weighted
        average  exercise  price of the  options  outstanding  under  all of the
        Company's plans at December 31, 1997, 1998 and 1999 was $3.96, $3.06 and
        $2.68,  respectively.  As of December  31, 1999,  the  weighted  average
        remaining  contractual life of the options  outstanding under all of the
        Company's  plans is 8.9 years and the number of options  exercisable  is
        403,457.


                                       48
<PAGE>


                                V-ONE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS



 7.     COMMITMENTS AND CONTINGENCIES

        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, 1999 are as follows:


                                                     Operating    Capital
             2000
             2001                                     $881,668     $100,739
             2002                                      612,385       83,499
             2003                                      576,590       50,059
             2004                                      341,199            -
                                                             -            -
                                                      --------     --------
             Total minimum payments
                                                     $2,411,842    $234,297
                                                     ==========    ========

             Interest                                              (35,757)
                                                                   --------

             Present value of capital lease obligations             198,540
             Less:  current portion                                (78,794)

             Capital lease obligations non-current               $  119,746
                                                                 ==========

        Rent  expense was  $550,693,  $701,133  and $919,550 for the years ended
        December 31, 1997, 1998 and 1999, respectively.

        At December 31, 1999,  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:

             2000                       $  206,081
             2001                           61,573
                                        ----------
             Total minimum payments     $  267,654
                                        ==========


        CONTINGENCIES

        On January 27, 2000, a class action lawsuit  alleging  violations of the
        federal securities laws was filed in the U.S. District Court of Maryland
        on behalf of purchasers  of the  Company's  common stock on November 30,
        1999.  The  lawsuit  seeks  unspecified  monetary  damages.  The Company
        believes the lawsuit is without  merit and intends to defend  against it
        vigorously.

        In the fourth quarter of 1999,  the Company  agreed to settlement  terms
        with Network Associates,  Inc. relating to disputed amounts owed between
        the two  parties.  The  Company  accrued  the net  settlement  costs  of
        $515,000 as of December 31, 1999 and recorded  revenues of approximately
        $386,000 in the fourth quarter.



                                       49
<PAGE>
                                V-ONE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


8.      EMPLOYEE 401(K) DEFERRED COMPENSATION PLAN

        The Company has a 401(K) plan (the  "Plan") for all  employees  over the
        age of 21.  Contributions  are made through  voluntary  employee  salary
        reductions,  up to 15% of their annual  compensation,  and discretionary
        matching  by the  Company.  Employer  contributions  vest  based  on the
        participant's  number of years of continuos  service.  A participant  is
        fully  vested  after  six years of  continuous  service.  There  were no
        employer contributions for the years ended December 31, 1998 or 1999.

9.      SUPPLEMENTAL CASH FLOW DISCLOSURE

        Selected cash payments and noncash activities were as follows:
<TABLE>
<CAPTION>

                                                                       Year  ended  December 31,
                                                                       -------------------------
                                                                1997            1998             1999
                                                                ----            ------          ------
      <S>                                                   <C>               <C>              <C>
      Cash paid for interest                                $  13,130         $      -         $728,221
      Noncash investing and financing activities:
           Capital lease obligations incurred                 302,147                -                -
           Notes repaid from return and retirement of
                  common stock                                 32,909          115,953                -
           Deemed dividend on preferred stock                 600,000          102,755                -
           Issuance of stock options to consultants                 -                -           93,764
           Collection and forgiveness of subscriptions
                  receivable                                        -                -           46,236
            Conversion of  Preferred Stock to
                  Common Stock                                      -        1,538,000
</TABLE>




                                       50
<PAGE>

                                V-ONE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


10.    NET LOSS PER SHARE

      The following  table sets forth the  computation  of basic and diluted net
loss per share:

<TABLE>
<CAPTION>

                                                                       YEAR ENDED DECEMBER 31,
                                                  -----------------------------------------------------------
                                                     1997                      1998                  1999
                                                  -----------              ------------           ------------
<S>                                               <C>                       <C>                  <C>
Numerator:
    Loss before extraordinary item                $(10,215,339)             $(9,193,396)         $(9,307,892)
    Less: Dividend on preferred stock                  (12,600)                (110,879)            (272,245)
          Deemed dividend on preferred
            stock                                     (600,000)                (102,755)                  -
                                                  -------------             ------------         --------------
    Net loss before extraordinary item             (10,827,939)              (9,407,030)          (9,580,137)
          Extraordinary item - early
            extinguishment of debt                          -                        -             (372,052)
                                                  -------------             ------------         --------------
     Net loss attributable to holders of
         common stock                             $(10,827,939)             $(9,407,030)         $(9,952,189)
                                                  =============             ============         ==============

Denominator:
   Denominator for basic net loss per share
   - weighted average shares                         12,868,859               13,898,450           16,938,205

  Effect of dilutive securities:
         Preferred stock                                    -                        -                    -
         Stock options                                      -                        -                    -
         Warrants                                           -                        -                    -
                                                  -------------             ------------         --------------
  Dilutive potential common shares                          -                        -                    -
Denominator for diluted net loss per
         share - adjusted weighted average
         shares                                      12,868,859              13,898,450              16,938,205
                                                  =============             ============         ==============
BASIC AND DILUTED LOSS PER SHARE
  Loss before extraordinary item                  $      (0.84)             $    (0.68)          $       (0.57)

  Extraordinary item - early                                 -                       -                   (0.02)
         extinguishment of debt                   -------------             ------------         --------------
  Net loss attributable to holders of
         common stock                             $      (0.84)             $    (0.68)          $       (0.59)
                                                  =============             ============         ==============

</TABLE>

                                       51
<PAGE>


                                V-ONE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS


The following  equity  instruments were not included in the diluted net loss per
share calculation because their effect would be anti-dilutive:


                               YEAR ENDED DECEMBER 31,
                        ---------------------------------------
                           1997          1998            1999
                         --------      --------       ---------

Preferred stock:
   Series A                4,000               -              -
   Series B                    -               -      1,287,554
   Series C                    -               -        335,000
Stock options          2,203,258       2,557,378      2,515,833
Warrants                 768,999       1,688,576      3,974,957


11.   SUBSEQUENT EVENTS

      In March 2000,  the Company  issued  500,000  shares of Common  Stock at a
      purchase  price  of  $4.75  per  share  to an  investor  in  exchange  for
      $2,375,000.




                                       52
<PAGE>





                                V-ONE CORPORATION
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

              For the years ended December 31, 1997, 1998 and 1999

<TABLE>
<CAPTION>
                                                         Additions
                                    Balance at           Charge to                                 Balance at
                                   Beginning of           Cost and                                    End of
     Description                      Period              Expenses             Deductions             Period
<S>                                 <C>                  <C>                    <C>                <C>
ALLOWANCE FOR DOUBTFUL
ACCOUNTS
   December 31, 1997                  $252,395             248,010                  ---               $500,405
   December 31, 1998                   500,405              24,233                  ---                524,638
   December 31, 1999                  $524,638           (220,912)              169,482               $134,244

DEFERRED TAX ASSET  VALUATION
ALLOWANCE
   December 31, 1997                $3,492,784           3,938,959                  ---            $ 7,431,743
   December 31, 1998                 7,431,743           2,017,021                  ---              9,448,764
   December 31, 1999                $9,448,764           5,410,464                  ---            $14,859,228

ALLOWANCE FOR NON-SALABLE
INVENTORY
   December 31, 1997                   $50,000             162,700                  ---               $212,700
   December 31, 1998                   212,700             100,656                  ---                313,356
   December 31, 1999                  $313,356                 ---              225,662                $87,694

</TABLE>


                                       53
<PAGE>





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


On October 7, 1999, V-ONE Corporation filed a Form 8-K, "Changes in Registrant's
Certifying  Public  Accountant" in which it noted that the Company dismissed the
accounting  firm  of  PricewaterhouseCoopers   LLP  ("PWC")  and  appointed  the
accounting  firm of Ernst & Young LLP to succeed  PWC as its  certifying  public
accountant  and to act as its  auditors  for the fiscal year ended  December 31,
1999. The  description of the change in auditors is qualified in its entirety by
reference to the Company's Form 8-K dated October 7, 1999 and the exhibits filed
therewith.



                                    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 11, 2000.

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 11, 2000.

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 11, 2000.

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 11, 2000.



                                     PART IV

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



                                       54
<PAGE>



(a)   Financial Statement Schedule.

See index to Financial  Statements on page 29. All required financial  statement
schedules  of the Company  are set forth  under Item 8 of this Annual  Report on
Form 10-K.


                                       55
<PAGE>




(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)
3.7        Certificate  of  Designations  of  Series  B  Convertible
           Preferred Stock, dated June 11, 1999 (10)
3.8        Certificate of Designations of Series C Preferred  Stock,
           dated September 9, 1999 (11)
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)


                                       56
<PAGE>


Number     Description
------     -----------
10.24      Letter  Agreement   between  V-ONE  and  Wharton  Capital
           Partners, Ltd. dated October 22, 1997 (2)
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 (9)
10.53      Employment  Agreement  dated August 1, 1998 between V-ONE
           and Robert F. Kelly (9)
10.54      Loan and  Security  Agreement  dated  February  24,  1999
           between   V-ONE   and   Transamerica    Business   Credit
           Corporation ("Transamerica") (8)


                                       57
<PAGE>


Number     Description
------     -----------
10.55      Patent and Trademark  Security  Agreement  dated February
           24, 1999 between V-ONE and Transamerica (8)
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 (9)
10.58      Amendment to Employment  Agreement dated as of January 1,
           1999 by and between the Company and James F. Chen (9)
10.59      Subscription   Agreement   for   Series   B   Convertible
           Preferred Stock, dated June 11, 1999 (10)
10.60      Registration Rights Agreement, dated June 11, 1999 (10)
10.61      Non-Negotiable Promissory Note, dated June 11, 1999 (10)
10.62      Form of Series C Preferred Stock Purchase Agreement (11)
10.63      Employment  Agreement  dated July 1, 1999 by and  between
           the Company and Margaret E. Grayson (12)
10.64      Employment  Agreement  dated July 1, 1999 by and  between
           the Company and David D. Dawson
23.1       Consent of Ernst & Young LLP, independent auditors
23.2       Consent of PricewaterhouseCoopers LLP
27         Financial  Data Schedule for the Year Ended  December 31,
           1999

------------------------------
(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.

(9) 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, 1998.

(10)  The  information  required  by this  exhibit  is  incorporated  herein  by
reference to V-ONE's Form 8-K dated June 23, 1999.

                                       58
<PAGE>


(11)  The  information  required  by this  exhibit  is  incorporated  herein  by
reference to V-ONE's Form 8-K dated September 15, 1999.

(12)  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, 1999.


(c)   Reports on Form 8-K

           (i)  Form 8-K dated  October  7, 1999  reporting,  under  Item 4, the
                change in the Company's Certifying Accountant.



                                       59
<PAGE>

                                   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 29, 2000            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 29, 2000
-------------------------      Officer and Director
David D. Dawson


/s/ Margaret E. Grayson        Senior Vice President, Chief       March 29, 2000
------------------------       Financial Officer and Treasurer
Margaret E. Grayson            (Principal Financial Officer)



/s/ John F. Nesline            Controller (Principal              March 29, 2000
------------------------       Accounting Officer)
John F. Nesline


/s/ James F. Chen              Director                           March 29, 2000
-------------------------
James F. Chen


/s/ A. L. Giannopoulos         Director                           March 29, 2000
-------------------------
A. L. Giannopoulos


/s/ William E. Odom            Director                           March 29, 2000
-------------------------
William E. Odom


                                       60