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, 2003

                                       OR

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

                         COMMISSION FILE NUMBER 0-21511

                                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.)

           20300 CENTURY BLVD., SUITE 200, 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)

                   NAME OF EXCHANGE ON WHICH REGISTERED: NONE


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

<PAGE>

incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

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

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 June 30,
2003,  was  approximately  $3,767,334.  This  calculation  does  not  reflect  a
determination that persons are affiliates for any other purposes.

Registrant had 30,220,293  shares of Common Stock outstanding as of February 27,
2004.

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<PAGE>

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive  proxy statement to be issued in conjunction with the
registrant's  annual  stockholder's  meeting,  to be held on May 13,  2004,  are
incorporated  by reference into Part III, Items 10, 11, 12 and 13 of this Annual
Report on Form 10-K.

                           FORWARD-LOOKING STATEMENTS

In addition to historical information,  this Annual Report on Form 10-K contains
forward-looking  statements  that  involve  risks  and  uncertainties  that  are
generally noted by terms such as "believe,"  "expectations," "foresee," "goals,"
"potential" and "prospects."  These statements may differ in a material way from
actual future events and involve known and unknown risks and uncertainties  that
could cause V-ONE  Corporation's  actual  performance or  achievements to differ
from any  future  performance  or  achievements  expressed  or  implied  by such
statements.  Readers are also referred to the risk factors  discussed on page 12
of this Annual  Report on Form 10-K.  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 at a later date.

                                     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 enables  organizations to
conduct secured  electronic  transactions and information  exchange using public
switched  networks,  such as the  Internet.  The  Company's  suite  of  products
addresses 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 20300 Century  Boulevard,
Suite 200,  Germantown,  Maryland 20874. The Company's telephone number is (301)
515-5200.

BACKGROUND

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  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

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support TCP/IP,  the Internet's  non-proprietary  communications  protocol,  for
computer communications and information exchange.

Organizations  are  increasing  their  dependence  on the  Internet  and private
enterprise  networks using Internet protocols  ("intranets") as a cost-effective
means to expand enterprise networks,  engage in electronic commerce and increase
information  exchange.  This  pervasive  use  of  the  Internet,  intranets  and
extranets (architecture linking companies with specific customers, suppliers and
trading  partners)  has increased  the need for  solutions  that provide  secure
communications because TCP/IP networks are not secure.

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 pervasive use of the
Internet and intranets, many organizations are discovering that network security
is a necessary 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  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.  Through the adoption of VPN  technology  products,  users can
create a so-called Virtual Private Network, which enables users to capitalize on
the  inherently low cost of public  networks in a highly secure manner,  without
risk or compromise to their information assets.

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,

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<PAGE>

   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:
   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.  A  third  party  digitally  certifies  the
   certificates,  called a certificate authority, which 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 current  demand for VPN  products is being  driven by the desire to transact
sensitive  communications  across  an  inherently  unsecure  Internet  to  solve
everyday  business and individual  communication  needs; i.e. (i) the increasing
need for employees to remotely  access data,  (ii) corporate  intranets  linking
multiple  geographic  locations,  (iii) corporate  extranets linking a company's
partners, suppliers and customers and (iv) the increasing demand for security in
electronic  commerce.  The increasing  reliance on the Internet by corporate and
individual  users and the  increasing  awareness to the potential  risk to their
private  information is causing such users to focus on security  concerns.  High
percentage  increases  in adoptions of VPNs are expected to continue as Internet
technologies,  such as electronic  commerce,  information sharing and electronic
collaboration  become  more  accepted.  In  addition,  the costs of  operating a
network utilizing the public lines or Internet are substantially less than T1/T3

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interchanges and continue to decline. With the advent of VPNs, corporations have
a practical, low-cost solution to their networking needs.

The events of September 11, 2001 accelerated the rate at which the Department of
Defense,  civilian  agencies,  and federal,  state and local law enforcement are
adopting security solutions.  As a result of the terrorist attacks,  many of the
U.S. law enforcement and intelligence  agencies are collaborating to investigate
and prosecute terrorist activities and conspiracies.  This joint effort requires
sharing information on an unprecedented  scale using, among other services,  the
Department of Justice's  Regional  Information  Sharing Systems ("RISS") Program
and the FBI LEO (Law Enforcement  Online) Program,  both of which are secured by
V-ONE's  technology.  The RISS Secure  Intranet is a nationwide law  enforcement
network that allows secure  communications among more than 6,600 federal,  state
and local law enforcement  agencies.  The FBI LEO program,  sponsored by the FBI
Criminal Justice  Information  Services Division and in operation since 1996, is
an online service  provided to over 50,000 law enforcement and criminal  justice
officials.  Sharing  information among law enforcement  agencies using RISS, LEO
and other  networks is a security  challenge  that requires  strongly  encrypted
communications  and powerful access controls.  Securing these expanding networks
creates additional opportunities for VPN providers.

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   VPN   software   product   that   offers    identification   and
authentication, data integrity,  non-repudiation,  authorization and encryption,
and SmartGuard I and SmartGuard II appliances. V-ONE's SmartGuard VPN appliances
are built on high-speed  Intel  processors.  SmartGuard  incorporates  SmartGate
security  technology into a "drop-in" suite of devices that are easy to install,
deploy and manage. The SmartGuard appliances use V-ONE's award-winning SmartGate
VPN software solution with a powerful user authentication system, access control
database  and strong  encryption  capabilities.  A  self-protecting  firewall is
included  with the  SmartGuard I and a robust  stateful  inspection  firewall is
integrated  with  all  SmartGuard  II  appliances.   SmartGuard's  advanced  VPN
capabilities  include IPSec tunneling and application layer security that allows
firewall  traversal  without  requiring end users to make network  configuration
changes. 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

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(iii) portable,  securing access independent of any particular user's machine or
network entry point through the use of smart card technology.

STRATEGY

V-ONE's objective is to capitalize on its application level technology to become
the  security  solution of choice for large  enterprises,  including  government
agencies  and  public  sector  organizations,  financial  institutions,  service
providers,  and commercial enterprises  worldwide.  V-ONE's products now include
both application  level technology and IPSec,  enabling  organizations to employ
the most  cost-effective  and efficient  security solution without  compromising
data integrity and ensuring that communications  will be completed  successfully
and securely.

Key elements of V-ONE's strategy are:

INCREASING  MARKET  SHARE  IN  THE  GOVERNMENT  SECTOR.  V-ONE  will  serve  its
established  base of  government  customers  through  existing  and new  channel
partners.  V-ONE  has  successfully  secured  confidential  information  for the
government since shipping its first products in 1995. V-ONE technologies use all
approved government encryption methods,  including the government's "triple DES"
Data  Encryption  Standard,  and meet the standards of the U.S.  government  for
broad scale  deployments.  The triple DES standard is the  strongest  encryption
method  employed  by the U.S.  government,  and is  applied to verify the user's
identity and to protect the flow of data itself. In addition,  in December 2001,
the  National  Institute  of  Standards  and  Technology  approved  the Advanced
Encryption  Standard  ("AES").  V-ONE  added AES to its  library  of  encryption
methods and incorporated this algorithm as an approved encryption method.  V-ONE
first  incorporated  AES as the  default  encryption  method in  SmartGate  4.4,
released in April 2003. Government clients currently using V-ONE's technology to
secure information include the U.S.  Department of the Treasury,  the Department
of  Defense  and the  Department  of  Justice.  The  programs  sponsored  by the
Department  of  Justice  link  more  than  6,600  federal,  state  and local law
enforcement  agencies  and over  50,000 law  enforcement  and  criminal  justice
officials who share data through the RISS and LEO programs, two out of the three
National Drug Intelligence  Centers, more than 30 regional Drug Traffic Centers,
12 state  governments  and  several  other  regional  and local law  enforcement
initiatives.  V-ONE's product  capabilities are well suited for the government's
secure information sharing demands.

ENHANCING PRODUCT TECHNOLOGY TO ADDRESS CUSTOMER NEEDS. V-ONE intends to enhance
its   technology   through   continued   internal   development   and  strategic
partnerships. V-ONE believes its current technology, consisting of the SmartGate
client/server VPN software featuring its patented On-Line  Registration  ("OLR")
capability, the SmartGuard family of VPN appliances featuring the Command Center
management  system,  and an IPSec  client  released  in January  2002,  delivers
superior  security,  performance  and cost  savings  when  compared to any other
security  products  available  in the market.  V-ONE will focus its  development
efforts on customer driven  requirements for its government and commercial users
to deliver specific functionality including a wider and more feature-rich set of
management tools,  additional high availability  performance  capabilities,  and
enhancements  for  the  emerging  mobile  enterprise  wireless/satellite  access
segments.

CAPITALIZING ON CHANNEL  PARTNERS'  MARKET PRESENCE TO INCREASE MARKET AWARENESS
OF V-ONE.  V-ONE intends to use its OEM, Service Provider and Systems Integrator
partners'  strong  brand  recognition  and  marketing  resources to increase the
market's awareness of V-ONE's security products.  This approach will allow V-ONE
to effectively  maintain lower sales and marketing costs,  preserving  resources
for continuing product development.  Although the Company has reduced its direct
marketing  efforts,  V-ONE  will  continue  in its role as an active  government
advisor.

SATELLITE MARKET. To address a critical enterprise need for secure VPN satellite
communication,  V-ONE  recently  introduced  SmartSAT,  a program  for users and
resellers of satellite IP data communications  services.  SmartSAT is built upon

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SmartGate  application  layer  security  technology  that can overcome  standing
performance problems associated with satellite circuit propagation delays.

PRODUCTS

V-ONE's  hardware  and  software  security  products  deliver  to users  all the
essential features of a secure network:  authentication,  integrity, privacy and
non-repudiation.  V-ONE's  technology  has met the tough  standards  of the U.S.
government  for  broad  scale  deployments  and  is  FIPS  (Federal  Information
Processing  Standards)  validated,  making it viable for the most  demanding  of
government or commercial  environments.  The Company's  product portfolio offers
solutions for remote access, site-to-site, and extranet applications.

The  cornerstone of V-ONE's  network and  application  security  solution is its
patented SmartGate client/server technology.

Smartgate Enterprise Solution
-----------------------------

V-ONE's powerful  SmartGate  server software,  available on Windows NT, Solaris,
BSD,  and Red Hat  Linux,  allows a company  to  rapidly  deploy a VPN  solution
scalable to hundreds of thousands of concurrent  users. It enables secure access
to TCP/IP  based  applications  and other  resources  through  the  Internet  by
providing a framework for mutual authentication,  strong data encryption, access
control, audit logging and on-line registration.  SmartGate works with all major
firewalls  and  supports  a wide  range of  third-party  authentication  systems
including  x.509  (PKI),  LDAP,  RSA  SecurID,   RADIUS,  Entrust,  and  digital
certificates  from  multiple   providers.   Since  SmartGate   operates  at  the
application  layer,  it can be deployed into complex  environments  and overcome
Network Address  Translation issues and other obstacles commonly  encountered in
VPN implementations.

A  patented  OLR  system  enables  VPN  deployment  to end  users in a matter of
minutes.  User  IDs  can  be  automatically   generated  without  administrative
interaction.

SmartPass
---------

V-ONE's  SmartPass  client  product runs as a  non-intrusive  application on the
desktop  or mobile  device,  or as a Java  applet on a browser,  to provide  VPN
connection services to the SmartGate server. The client is extremely well suited
for user devices with minimal consumption of system resources such as memory and
storage space.  Installation is fast, simple and designed to take the complexity
of VPN implementation out of the hands of end users. To securely connect, an end
user  simply  enters  an  access  code  that  verifies  ownership  of his or her
authentication token that can reside on a hard drive, floppy disk or smart card.
Advanced security related functions are performed  automatically and hidden from
the end  user.  SmartPass  is  available  on a very  broad  range  of  computing
platforms including Windows  98/NT/2000/XP/CE/Pocket PC, Solaris, Red Hat Linux,
and Mac.

SmartAdmin
----------

Management  of a V-ONE  VPN is  handled  by means  of  SmartAdmin,  a  powerful,
flexible tool that enables  administration  of one or more SmartGate servers and
allows full control of user access to specific resources.  The controls are both
easy to implement and precise. Access permissions can be as broad or as granular
as required,  ranging from company-wide visibility down to an individual who can
access  only  a  single  file,  application,  service  or  URL.  Access  control
permissions  can  be  created  for  groups  and  support  a  powerful  hierarchy
capability   (nested   group)   where   groups   inherit   access   permissions.
Administration  can be  centralized  or  distributed,  and performed  locally or
through a secure remote connection.

Smartguard Appliances
---------------------

V-ONE's  SmartGuard VPN appliances are built on high-speed  Intel processors and
provide cost-effective solutions for information sharing.

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SmartGuards  are  offered  in two lines to meet the  needs of small  businesses,
medium sized enterprises and large global organizations.  SmartGuard Series I is
comprised  of  the  1500,  4500,  and  5500  models,  all  of  which  include  a
self-protecting  firewall.  SmartGuard  Series II models  6000 and 9000 are both
enterprise  class devices that integrate  SmartGate  application  layer software
with certified stateful inspection firewall and IPSec functionality.

SmartGuard's  advanced VPN capabilities  include application layer security that
allows  firewall   traversal   without  requiring  end  users  to  make  network
configuration changes and optional IPSec tunneling.  This innovative combination
of application level and network security allows site-to-site protection as well
as the ability to extend  security to mobile  users and  business  partners  who
require extranet access.  SmartGuard  solutions are manageable from a single PC,
directly or via remote access.

The optional web accessible  SmartGuard  Command Center allows remote management
of a fully  meshed  network  for large scale  enterprise  class  solutions.  The
ability to easily  monitor,  manage and control  thousands of tunnels in a large
VPN network from a simple graphical interface is targeted for complex enterprise
and service provider implementations.

CUSTOMER SERVICE AND SUPPORT

V-ONE provides Tier 1 customer  support  service to direct  customers and Tier 2
support service to its channel  partners.  V-ONE's  Customer Care group provides
standard   response   services   and  optional   enhanced   services  for  large
implementations, including Extended Support and Rapid Response Support. Standard
service  provides live telephone and on-line  support between 8:30 A.M. and 5:00
P.M.  Eastern  Standard Time during V-ONE's  normal  business days. In addition,
V-ONE provides a toll-free callback system for customers who need service during
non-standard  hours.  On-call support engineers provide telephone support during
non-standard  hours.  Extended  Support  provides  24x7  coverage  with standard
response times. Rapid Response is 24x7 with shorter response windows.

V-ONE's expert sales  engineering  group also provides critical customer support
throughout  the  pre-sales  and  implementation  process,  and is available  for
assistance in support situations and enhancement engagements.

PRODUCT DEVELOPMENT

V-ONE  has  assembled  a team of  engineers  with  experience  in the  fields of
software  development,  network systems  design,  security  standards,  Internet
protocols and network management software.  In addition to having the ability to
build complex software,  V-ONE's  engineering team has the skills and experience
to deliver turnkey appliance solutions.

V-ONE believes that strong product development capabilities are essential to its
strategy  of  enhancing  its  core  technology,   developing  and  incorporating
additional   functions  and  maintaining  the  competitiveness  of  its  product
offerings.  V-ONE's research and development process is driven by market demand,
availability of new technology, evolution of Internet and security standards and
customer feedback. V-ONE's technology is its primary strength and it is critical
that V-ONE's products continue to evolve to meet the needs of the market.  V-ONE
continues  to  develop  new  releases  of  SmartGate,   its   enterprise   class
client/server software, and the SmartGuard appliance product line, including the
Command Center management tool.

                                       8
<PAGE>

V-ONE also provides  secure  wireless  communication  solutions with its current
technology.  The Company  intends to continue to develop this capability to meet
the   anticipated   demand  for  wireless   LAN  security  and  the   increasing
implementation of mobile devices in the enterprise and government sectors.

MARKETING AND BUSINESS DEVELOPMENT

The Company believes that the future success of the V-ONE product offerings will
depend on the Company's ability to execute a sharply focused sales and marketing
strategy.  To date,  the Company has had  success in the  government  sector and
plans to expand  its  marketing  efforts  in the  government  sector  and to the
commercial sector.

Similar to many other  companies  in the  security  sector,  recent  softness in
commercial IT spending and delays in government spending have adversely affected
V-ONE's  growth  performance.  However,  the Company has gained  market share in
federal,  state and local law  enforcement  and vertical  market  segments  that
require  advanced  security  technology  products  to meet the needs of  complex
distributed  network  environments  that must share  information among disparate
information assets.

V-ONE has a growing  installed  customer  base in  federal,  state and local law
enforcement.  Successful law enforcement installations include the Department of
Justice's RISS program,  the FBI's LEO and InfraGard  programs,  the Gateway ISI
Joint Terrorist Task Force program, the Congressionally  funded first responders
DMI-Services  program,  as well as installations with the Department of Defense.
Through its channel  partners,  the  Company is gaining  access to new  customer
accounts in both government and commercial enterprises.


Government Markets
------------------

V-ONE's strongest  component of revenue growth is in the law enforcement  sector
based in part upon homeland security requirements.  V-ONE security products have
become the "de facto  standard"  for the  Department  of Justice "as is" network
architecture for the FBI LEO, RISS and DMI-Services programs.  V-ONE secures the
backbone of the newly combined  LEO/RISS  information  sharing networks that are
critical to meeting strategic  homeland security needs.  DMI-Services,  a Marine
Corp/FEMA  initiative,  was added to this  growing  network  during  2002,  with
expansion  in 2003 under the  Department  of  Homeland  Security.  This  network
provides secure access to proprietary databases across federal,  state and local
government on a controlled  "need to know" basis.  In addition,  order flow from
the U.S.  Department  of Defense and other U.S.  civil  agencies has  increased,
including  maintenance  orders and new product licenses for the General Services
Administration,  U.S. Agency for  International  Development  (USAID),  National
Security Agency (NSA),  Military  Traffic  Management  Command  (MTMC),  Defense
Security Service (DSS), Office of Inspector General,  U.S. Navy Undersea Warfare
Laboratory, Defense Threat Reduction Agency (DTRA), and others.

Commercial Markets
------------------

V-ONE has identified financial services, healthcare and transportation as target
vertical  markets,  and is also  pursuing the wireless  and  satellite  segments
within  these   markets.   V-ONE  is  working   through  a  targeted   group  of
technologically  sophisticated channel partners. V-ONE's products are generating
revenue through the Company's channel programs in North America and Europe.  The
expansion of the  functionality of the SmartGuard  appliance  portfolio plays an
important role in building  V-ONE's  channel  program,  allowing V-ONE to better
address the  enterprise  market  with "drop in"  solutions  for remote  offices,
corporate campuses, WLAN gateways, and high-availability requirements.

Satellite Market
----------------

To address a critical  enterprise  need for secure VPN satellite  communication,
V-ONE  introduced  SmartSAT,  a program for users and  resellers of satellite IP
data communications services. SmartSAT is built upon SmartGate application layer

                                       9
<PAGE>

security  technology  that  can  overcome  long-standing   performance  problems
associated with satellite circuit propagation delays.  Satellite  communications
are a significant potential opportunity for VPN application;  however, realizing
acceptable  performance from a VPN over satellite is a long-standing problem for
IPSec VPN implementations. V-ONE application layer security technology overcomes
performance  problems  experienced  by IPSec  implementations.  In 2003,  Hughes
Network Systems certified V-ONE VPN solutions as the first VPN solution approved
for secure communications over its satellite networks.

COMPETITION

The  market for  network  security  products  is highly  competitive,  and V-ONE
expects  competition to intensify in the future.  V-ONE competes  principally on
the basis of  product  security,  breadth  of remote  client  support,  speed of
implementation, scalability and cost-effectiveness. The Company believes that it
competes favorably on the basis of these factors.

V-ONE   participates  in  the  VPN  appliance  and  software  market   segments.
Competitors in these markets include:

o  site-to-site  IPSec security appliance and network security systems suppliers
   such as SonicWall,  Inc., WatchGuard  Technologies Inc. and Juniper Networks,
   Inc. (formerly NetScreen Technologies, Inc.);

o  firewall and VPN software  vendors such as Check Point Software  Technologies
   Ltd.;

o  network  equipment   manufacturers   such  as  Cisco  Systems,   Inc.,  Nokia
   Corporation and Nortel Networks Corporation;

o  remote client vendors such as SafeNet, Inc. and Certicom Corporation;

o  suppliers that provide secure extranet solutions such as Aventail Corporation
   and Symantec Corporation; and

o  VPN management vendors such as SmartPipes, Inc.

The Company  believes it maintains a distinct  competitive  advantage over other
providers  by  securing  networks at the  application  level with  powerful  yet
precise user access  controls.  This  functionality  enables  V-ONE to serve the
complex  requirements of the large  enterprise  market where secure  information
sharing across organizational boundaries and partner extranet communications are
required.

BACKLOG AND CUSTOMERS

The Company's  customers order on an as-needed  basis. The Company has typically
been  able to ship  products  within  30 days  after a  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.

SUPPLY SOURCES

Components used in the Company's  network security products consist primarily of
computer diskettes and CD's purchased from commercial  vendors.  Components used
in the Company's  SmartGuard  Appliance  products and turnkey SmartWall 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 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

                                       10
<PAGE>

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 ability to meet delivery schedules.

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.
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,  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.

PATENTS, PROPRIETARY TECHNOLOGY, TRADEMARKS AND LICENSES

The Company's  success and ability to compete are  substantially  dependent upon
internally developed technology and expertise.  V-ONE has received eight patents
that expire over a period  between  2014 and 2017.  The patents  cover  critical
aspects of V-ONE  technology,  including ease of use advantages  gained by quick
client deployment, expandability and management features. The Company's stylized
"V-ONE,"  the  phrase  "Security  for a  Connected  World,"  and  the  Company's
"SmartGate" and "SmartGuard" products and certain other products are the subject
of U.S. and foreign tradename and trademark filings. 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 take 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. There
can be no  assurance  that any such  protection  will be granted or, if granted,
that it will adequately protect the covered technology.

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
"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.

                                       11
<PAGE>

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  ability to
develop new  technologies  and deliver  products in its current suite of network
security products.

EMPLOYEES

As of February 27, 2004,  the Company had 24  full-time  employees,  1 part-time
employee and 1 consultant. Of these individuals, 11 were in sales and marketing,
8 were in research and product development,  and 7 were in administration.  None
of the Company's  employees is  represented  by a labor union or is 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  addresses
risks V-ONE  believes to be material to its  business  and  operations.  Readers
should carefully  consider the following risk factors before  purchasing  Common
Stock of V-ONE. Readers are also referred to other documents filed by V-ONE with
the Securities and Exchange  Commission  ("SEC"),  which may identify  important
risk factors for V-ONE.

V-ONE'S LOSSES AND  ACCUMULATED  DEFICIT COULD AFFECT  PROFITABILITY  AND MARKET
ACCEPTANCE  OF  V-ONE'S  PRODUCTS.  As  of  December  31,  2003,  V-ONE  had  an
accumulated  deficit  of  approximately  $66,514,000.  V-ONE is  implementing  a
turnaround business plan, which management believes will enable V-ONE to achieve
profitable operating results in the future.  V-ONE may not, however,  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 affect  V-ONE's  ability to fully  implement  its  marketing  strategy and
achieve  profitability  and may have a  material  adverse  effect on the  market
acceptance  of  V-ONE's  products.  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
firewall product and introduced its SmartGate client/server system. Revenues for
the  years  1999,  2000,  2001,  2002 and 2003  were  approximately  $4,966,000,
$4,554,000,   $4,990,000,   $3,553,000  and  $4,003,000,   respectively.  Losses
attributable to holders of Common Stock for the years 1999, 2000, 2001, 2002 and

                                       12
<PAGE>

2003 were  approximately  $9,952,000,  $9,232,000,  $9,911,000,  $6,335,000  and
$1,392,000,  respectively.  V-ONE's  results of operations in recent periods may
not be an accurate  indication  of future  results of operations in light of 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.

OPERATING  LEVELS  WILL BE  AFFECTED  BY V-ONE'S  NEED FOR  ADDITIONAL  CAPITAL.
V-ONE's cash used in operating  activities was  approximately  $29,000 in fiscal
2003, an average "burn rate" of  approximately  $2,400 a month.  Notwithstanding
acceptance of V-ONE's  security  concepts and critical acclaim for its products,
there can be no assurance that the  consummation of sales of V-ONE's products to
existing customers or proposed agreements with potential customers will generate
timely or sufficient  revenue for V-ONE to cover its cost of operations and meet
its cash flow requirements.  Accordingly, V-ONE may not have the funds needed to
sustain  operations  during  2004,  and its  audited  financial  statements  are
presented subject to a "going concern" opinion. The Company is seeking to expand
its current  banking  relationships  to explore  alternatives  to  preserve  its
operations  and  maximize  stockholder  value,   including  potential  strategic
partnering  relationships,  a business  combination with a strategically  placed
partner, or a sale of the Company.

The Company's  annual report on Form 10-K for the fiscal year ended December 31,
2002 was initially filed with unaudited financial  statements in lieu of audited
financial  statements and without a Report of Independent  Auditors  because the
audit was not completed in time to include  audited  financial  statements and a
Report of Independent Auditors. In addition,  the Company's quarterly reports on
Form  10-Q for the  first  three  quarters  of 2003 were  initially  filed  with
financial statements that had not been reviewed by the Company's auditors.  This
action caused the Company's stock to be transferred  from the OTCBB to the "Pink
Sheets" as reported by the National  Quotation  Bureau,  Inc. as of May 29, 2003
with no  change  in its  ticker  symbol.  In  January  2004,  Aronson  & Company
completed  the 2002 audit and its review of the Company's  financial  statements
for the first  three  quarters  of 2003.  The  Company  promptly  filed with the
Securities  and Exchange  Commission  an amended  annual report on Form 10-K for
2002 containing  audited  financial  statements and amended quarterly reports on
Form 10-Q for the first three  quarters of 2003  containing  reviewed  financial
statements.

In July 2002,  the  Company  took steps to reduce  expenses  by  implementing  a
reduced  work week  designed to ensure  that  customers'  requirements  were met
without  jeopardizing the Company's  workforce.  The Company effected additional
staff  reductions in January 2003 and implemented a four day work week,  further
reducing expenses.  The Company returned its staff to a full work week effective
February  1,  2004  to  meet  engineering  enhancements  required  for  existing
customers  and to introduce  its products to a broader  customer  base.  For the
immediate  future,  V-ONE will focus on existing and potential  customers in the
government  sector,  targeted  marketing  operations to commercial  accounts and
continued minimization of general and administrative expenditures. V-ONE may not
be successful in further  reducing  operating  levels without  jeopardizing  the
ability to serve existing customers or grow its business base. In February 2004,
V-ONE completed a private  placement of 7% Subordinated  Convertible  Notes with
detachable  warrants  for an  aggregate  of  $1,200,000,  which  resulted in net
proceeds to V-ONE of $1,065,690.  V-ONE believes that to maintain operations for
any  extended  period of time it must  generate  revenue  from  existing and new
customers,   raise  additional  capital  or  undergo  a  significant   strategic
transformative  event. The Company's ability to reach and sustain  profitability
is  dependent  on its  ability  to  generate  sufficient  cash  flow to meet its
obligations and needs on a timely basis or to obtain additional funding.

SALES TO  GOVERNMENT  AGENCIES  CONSTITUTE A  SIGNIFICANT  PERCENTAGE OF V-ONE'S
REVENUE AND ARE SUBJECT TO VARIOUS  POLICIES  AND LENGTHY  TESTING  PERIODS THAT
EXPOSE V-ONE TO FINANCIAL  RISKS.  No  government  agency or  department  has an
obligation to purchase  products from V-ONE in the future and the government may
terminate its contracts  without  cause.  Moreover,  sales to and contracts with
government  agencies are subject to  reductions  or delays in funding,  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,

                                       13
<PAGE>

the  inability of such parties to perform  under their  contracts.  In addition,
product implementation in government sales may be subject to extended periods of
rigorous  validation  testing  and a  lengthy  approval  process  by  government
agencies  and bureaus  within an agency.  Such  testing and  approval  may delay
contract awards and payments to V-ONE under such contracts. V-ONE estimates that
for the fiscal  year  ended  December  31,  2003,  sales to the U.S.  government
constituted  approximately  67%  of its  revenue.  V-ONE  expects  to  derive  a
significant amount of its revenue in 2004 from sales to government agencies.

CONTINUED  MARKET  ACCEPTANCE  OF  SMARTGATE,  SMARTGUARD  AND  SMARTWALL IS NOT
GUARANTEED.  V-ONE  currently  generates  most of its product  revenues from its
software,   SmartGate,  and  hardware,   SmartGuard  and  SmartWall,   products.
SmartGate,  SmartGuard and SmartWall have met with a favorable  degree of market
acceptance.   The  percentage  of  total  revenue  for  software  and  hardware,
respectively,  was 50.0% to 23.6% for 2001,  47.4% to 9.9% for 2002 and 59.6% to
2.0% for 2003. However,  SmartGate,  SmartGuard or SmartWall 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.

RISKS OF  COMPETITION  COULD AFFECT  V-ONE'S  MARKET SHARE.  V-ONE faces intense
competition  in all of its market  segments.  The market  for  network  security
products is very  competitive and V-ONE expects  competition to intensify in the
future.  There  can  be no  assurance  that  V-ONE's  products  will  command  a
significant  share of the network security market.  Many of V-ONE's  competitors
have significantly  greater resources,  generate higher revenue and have greater
name recognition than V-ONE. There can be no assurance that V-ONE's  competitors
will not develop products that are superior to those developed by V-ONE or adapt
more  quickly  than  V-ONE to new  technologies  or  evolving  industry  trends.
Increased  competition may result in price reductions,  reduced gross margins or
loss of market  share,  any of which  could  have a material  adverse  effect on
V-ONE's revenue stream. There is no assurance that V-ONE will be able to compete
effectively against current or future competitors.

RISK OF ERRORS, FAILURES AND PRODUCT LIABILITY COULD AFFECT MARKET ACCEPTANCE OF
V-ONE'S  PRODUCTS.  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, lost
revenues,  lost  customers  during  the  correction  process,  damage to V-ONE's
reputation  and claims  against it. 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  it  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 it 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  currently has 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  affect the market's  perception of
security products in general or V-ONE's products in particular.

RISKS OF CHANGES IN  TECHNOLOGY  AND INDUSTRY  COULD  AFFECT  DEMAND FOR V-ONE'S
PRODUCTS.  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  competitors may develop  superior  products and
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

                                       14
<PAGE>

and  introduce  new products and improve  current  products in a timely  fashion
could  result in a decrease  in the demand for V-ONE's  products  and of V-ONE's
market share.

RISK OF  DEVELOPMENT  DELAYS  COULD  AFFECT  V-ONE'S  ABILITY  TO MEET  DELIVERY
SCHEDULES.  V-ONE may  experience  delays 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  schedules may be altered as a result of changes to
the  product  specifications  in  response  to  customer  requirements,   market
developments,  performance problems or V-ONE-initiated  changes. 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.  All of these  factors  may cause a product  to enter the market
behind schedule,  which may adversely affect 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 ASSOCIATED WITH LONG SALES CYCLE MAKE IT DIFFICULT TO PREDICT RESULTS. The
sales cycle  associated  with V-ONE's  products is likely to be lengthy due to a
number of  significant  risks over which  V-ONE has little or no  control.  As a
result, V-ONE finds it difficult to predict quarterly results and order backlog,
if any, at the  beginning of any period.  As a result,  product  revenues in any
period will be  substantially  dependent on orders booked and registered in that
period.

ADVERSE ECONOMIC IMPACT OF A SLOW GLOBAL ECONOMY COULD IMPAIR V-ONE'S  REVENUES.
A slow global  economy,  as hampered by the events of September  11,  2001,  has
created an uncertain  international economic environment,  and management cannot
predict the impact of any future  terrorist acts or any related  military action
on V-ONE's  customers or their  businesses.  In particular,  V-ONE's  commercial
customers could be negatively  affected by the sluggish  international  economy.
Although management believes that spending on security products will increase as
a result of these events, if businesses curtail or eliminate capital spending on
information  technology,  or if  downturns in the  Internet  infrastructure  and
related  markets  continue,  businesses  may delay or cancel orders for security
products which could result in reduced or cancelled orders for V-ONE's products.
In addition,  these  uncertain  economic  times could cause longer sales cycles,
payment  delays and price  pressure,  and  consequently,  V-ONE may not meet its
financial forecast..

MARKET  VOLATILITY COULD AFFECT V-ONE'S STOCK PRICE. The market price of V-ONE'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  V-ONE 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 V-ONE's Common Stock.

V-ONE  DEPENDS ON KEY  PERSONNEL  WHO WOULD BE  DIFFICULT  TO  REPLACE.  V-ONE's
success  depends,  to a  large  extent,  upon  the  performance  of  its  senior
management and its  technical,  sales and marketing  personnel.  The loss of key
personnel  or the  inability to attract  additional  qualified  personnel  could
materially  and  adversely  affect  V-ONE's  results of  operations  and product
development  efforts.  V-ONE  has  entered  into an  employment  agreement  with
Margaret E. Grayson,  its President and Chief Executive  Officer,  that provides
for fixed terms of employment. However, V-ONE has not historically provided such
types of  employment  agreements  to its  other  employees.  This  practice  may
adversely affect V-ONE's ability to attract and retain the necessary  technical,
management and other key personnel.

ITEM 2.  PROPERTIES

                                       15
<PAGE>

In 2002, the Company leased  approximately 28,312 square feet of office space at
20250 Century Boulevard,  Suite 300,  Germantown,  Maryland.  The termination of
this  lease in  February  2003  included  a full  release  of  future  occupancy
obligations  of the  Company  for  these  premises  from the  date of the  lease
termination.  Beginning March 1, 2003, the Company began paying $325,000 due for
unpaid rents during the term of occupancy,  recorded as deferred  rent, in equal
monthly  installments  over two  years.  The  Company  entered  into a new lease
agreement effective March 1, 2003 for 9,635 square feet of office space at 20300
Century Boulevard, Suite 200, Germantown,  Maryland under a lease agreement that
terminates  on February  28, 2008.  The Company  expects that this space will be
sufficient for its needs through expiration of the lease.

ITEM 3.  LEGAL PROCEEDINGS

On March 20, 2003, BSA Sales,  Inc. d/b/a BSA ("BSA") filed a complaint  against
the  Company  in the Court of Common  Pleas in the County of  Greenville,  South
Carolina,  alleging  breach of  contract  for failure to pay  disputed  fees and
seeking  damages  of a  maximum  of  $75,000.  The  fees  relate  to  the  early
termination  of a contract by the Company  for BSA's  non-performance  under the
contract. The parties proceeded to arbitration as required by the state of North
Carolina,  but were  unsuccessful  in settling  the matter.  Discovery is in the
early stages and the likelihood of an  unfavorable  outcome or the likely amount
associated  therewith  cannot be  estimated.  The Company  intends to vigorously
defend its position in this matter.

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, 2003.

                                     PART II

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

The  Company's  Common Stock was traded in the Nasdaq  National  Market from the
Company's  IPO on  October  24,  1996  through  September  3,  1999  when it was
transferred to the Nasdaq SmallCap  Market.  The Company was not able to satisfy
the minimum listing  requirements  for continued  listing on the Nasdaq SmallCap
Market and on October 18, 2002,  its stock was removed from the Nasdaq  SmallCap
Market and began  trading on the OTCBB.  The  transfer to the OTCBB was effected
without interruption in the trading market for the Company's securities.

On May 29, 2003, the Company's stock was transferred from the OTCBB to the "Pink
Sheets" as reported by the National Quotation Bureau,  Inc. due to the Company's
inability to include audited financial statements with its annual report on Form
10-K for 2002 and reviewed  financial  statements with its quarterly  reports on
Form 10-Q for 2003. This transfer  resulted in no change to the Company's ticker
symbol,  which remains VONE.  In January 2004,  Aronson & Company  completed the
2002 audit and its review of the Company's  financial  statements  for the first
three  quarters of 2003.  The Company  promptly  filed with the  Securities  and
Exchange  Commission an amended  annual report on Form 10-K for 2002  containing
audited financial  statements and amended quarterly reports on Form 10-Q for the
first three quarters of 2003 containing reviewed financial statements.

The following  table sets forth the high and low prices of the Company's  Common
Stock for each  quarter  during the  two-year  period  ended  December 31, 2003.
Prices  reflect  inter-dealer  prices,  without  retail  mark-up,  mark-down  or
commission and may not necessarily represent actual transactions.

                                       16
<PAGE>

                                            2003
                                            ----
                               HIGH                        LOW
                               ----                        ---
       First Quarter          $ 0.23                     $ 0.08
       Second Quarter         $ 0.20                     $ 0.11
       Third Quarter          $ 0.21                     $ 0.10
       Fourth Quarter         $ 0.42                     $ 0.15

                                            2002
                                            ----
                               HIGH                        LOW
                               ----                        ---
       First Quarter          $ 1.47                     $ 0.78
       Second Quarter         $ 0.93                     $ 0.50
       Third Quarter          $ 0.33                     $ 0.20
       Fourth Quarter         $ 0.40                     $ 0.13

According  to  records  of  the  Company's   transfer  agent,  the  Company  had
approximately 214 record holders on February 27, 2004. 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 Company has never declared or paid cash  dividends on its Common Stock.  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,  current and anticipated  cash needs and restrictions on the
payment  of  dividends  as  required  by the terms of the  Company's  8% Secured
Convertible  Notes, 7% Subordinated  Convertible Notes and Series C and Series D
Preferred Stock, as discussed in Note 6 to the financial statements beginning on
page 30 of this Annual Report on Form 10-K.

The  information  regarding  securities  authorized  for  issuance  under equity
compensation  plans is incorporated  by reference from the "Equity  Compensation
Plans"  section  of the proxy  statement  for the  Company's  annual  meeting of
stockholders to be held on May 13, 2004.

ITEM 6.  SELECTED FINANCIAL DATA

The  selected  financial  data set forth  below with  respect  to the  Company's
Statements of Operations  for the years ended  December 31, 2001,  2002 and 2003
and balance sheets as of December 31, 2002 and 2003 are derived from the audited
financial  statements of the Company included elsewhere in this Annual Report on
Form 10-K. The following financial data as of December 31, 1999 and 2000 and for
each of the years ended  December  31, 1999 and 2000 are  derived  from  audited
financial  statements  of the Company not included in this Annual Report on Form
10-K. 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."

                                       17

<PAGE>

<TABLE>
<CAPTION>
                                                              Year Ended December 31,
                                     -----------------------------------------------------------------------------------------------
<S>                                       <C>                <C>                <C>                <C>                  <C>
Statement of Operations Data:               1999               2000               2001               2002                 2003
Revenues:
      Products                            $ 3,427,422        $ 3,356,086        $ 3,669,817        $ 2,033,413          $ 2,466,178
      Consulting and services               1,538,258          1,197,544          1,320,345          1,519,613            1,536,748
                                     -----------------  -----------------  -----------------  ----------------- --------------------
                Total revenues              4,965,680          4,553,630          4,990,162          3,553,026            4,002,926
                                     -----------------  -----------------  -----------------  ----------------- --------------------
Cost of revenues:
      Products                                973,866            441,752            824,305            190,262              170,463
      Consulting and services                 328,333            278,327            509,570            293,363               94,545
                                     -----------------  -----------------  -----------------  ----------------- --------------------
Total cost of revenues                      1,302,199            720,079          1,333,875            483,625              265,008
                                     -----------------  -----------------  -----------------  ----------------- --------------------

Gross profit                                3,663,481          3,833,551          3,656,287          3,069,401            3,737,918

Operating expenses:
      Research and development              2,848,955          3,440,397          4,009,889          2,720,321            1,065,020
      Sales and marketing                   6,491,987          6,041,926          4,891,170          3,028,590            1,407,160
      General and administrative            3,118,829          3,517,068          2,537,103          2,220,138            1,493,822
                                     -----------------  -----------------  -----------------  ----------------- --------------------
Total operating expenses                   12,459,771         12,999,391         11,438,162          7,969,049            3,966,002
                                     -----------------  -----------------  -----------------  ----------------- --------------------

Operating loss                             (8,796,290)        (9,165,840)        (7,781,875)        (4,899,648)            (228,084)

Other (expense) income:
      Interest expense                       (676,443)           (25,945)           (11,560)          (744,818)            (217,669)
      Interest income                         164,841            329,770            249,575             16,833                5,256
Other (expense) income                              -                  -          1,306,582             (7,558)              (9,153)
                                     -----------------  -----------------  -----------------  ----------------- --------------------
                Total interest               (511,602)           303,825          1,544,597           (735,543)            (221,566)
                (expense) income     -----------------  -----------------  -----------------  ----------------- --------------------

Net loss before extraordinary item         (9,307,892)        (8,862,015)        (6,237,278)        (5,635,191)            (449,650)

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

Net loss                                   (9,679,944)        (8,862,015)        (6,237,278)        (5,635,191)            (449,650)

Dividend on preferred stock                   272,245            369,979            741,245            699,901              942,056
Deemed dividend on preferred stock                  -                  -          2,932,023                  -                    -
                                     -----------------  -----------------  -----------------  ----------------- --------------------

Loss attributable to holders
      of common stock                    $ (9,952,189)      $ (9,231,994)      $ (9,910,546)      $ (6,335,092)        $ (1,391,706)
                                     =================  =================  =================  ================= ====================

Basic and diluted loss per share
      Loss before extraordinary item          $ (0.57)           $ (0.44)           $ (0.44)           $ (0.25)             $ (0.05)
                                     =================  =================  =================  ================= ====================
      Net loss attributable to
         holders of common stock              $ (0.59)           $ (0.44)           $ (0.44)           $ (0.25)             $ (0.05)
                                     =================  =================  =================  ================= ====================
Weighted average number of
      common shares outstanding            16,938,205         20,871,076         22,576,188         25,230,360           27,142,148
                                     =================  =================  =================  ================= ====================

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

<TABLE>
<CAPTION>
                                     -----------------------------------------------------------------------------------------------
                                         1999                  2000              2001               2002                 2003
<S>                                      <C>                   <C>               <C>               <C>                  <C>
Balance Sheet Data:

Working capital (deficit)                $6,629,846            $1,591,967        $2,164,448        ($2,068,409)         ($1,931,331)
Total assets                              9,775,436             5,450,618         4,732,324            972,082              885,471
Long-term debt, less current
  portion                                   119,746                47,803                 -             32,831               85,822
Series B Convertible Preferred
  Stock                                       1,288                 1,288                 -                  -                    -
Series C Redeemable Preferred
  Stock                                         335                    55                43                 43                   43
Series D Convertible Preferred
  Stock                                           -                     -             3,675              3,021                3,021
Total shareholder's equity                7,841,603             2,721,581         2,882,367        ($1,691,750)         ($1,857,874)
</TABLE>

                                                                18
<PAGE>

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

FORWARD-LOOKING INFORMATION

All forward-looking  information  contained in this Management's  Discussion and
Analysis  of  Financial   Condition  and  Results  of  Operations  is  based  on
management's current knowledge of factors affecting the Company's business.  The
Company's  actual  results  may differ  materially  if these  assumptions  prove
invalid. Significant factors, while not all inclusive, are:

o  The possibility of increasing competition in the Company's market place.
o  The potential for changes in technology and industry.
o  The  risks  associated  with long  sales  cycles  and  inability  to  predict
   quarterly results.

See pages 12 through 15 for a more  detailed  discussion of the factors that may
affect the Company's business.

OVERVIEW

The Company generates  revenues primarily from software licenses and the sale of
hardware products and, to a lesser extent,  consulting and related services. The
Company  anticipates  that  revenues  from  software and hardware  products will
continue to be the principal source of the Company's total revenues. The Company
does not have any off balance sheet  arrangements  or  significant  transactions
with related parties.

CRITICAL ACCOUNTING POLICIES

V-ONE considers  certain  accounting  policies  related to revenue  recognition,
capitalized  software  development costs and valuation of accounts receivable to
be critical policies due to the estimation processes involved in each.

Revenue Recognition
-------------------

V-ONE's  revenue  recognition  policy  is  critical  because  revenue  is a  key
component  of the  Company's  results of  operations.  The Company  follows very
specific  and  detailed  guidelines  in  measuring  revenue;   however,  certain
judgments  affect the  application  of the  Company's  revenue  policy.  Revenue
results are  difficult  to  predict,  and any  shortfall  in revenue or delay in
recognizing  revenue could cause operating  results to vary  significantly  from
quarter to quarter and could result in future operating losses.

Capitalized Software Development Costs
--------------------------------------

V-ONE's  policy on  capitalized  software  costs  determines  the  timing of the
Company's  recognition of certain  development  costs. In addition,  this policy
determines  whether the cost is  classified  as  development  expense or cost of
license fees. Management is required to use professional judgment in determining
whether   development   costs  meet  the  criteria  for  immediate   expense  or
capitalization.

Valuation of Accounts Receivable
--------------------------------

V-ONE maintains  allowances for doubtful accounts for estimated losses resulting
from the inability of its customers to make required payments.  If the financial
condition of V-ONE's  customers were to deteriorate,  resulting in an impairment
of their ability to make payments, additional allowances may be required.

                                       19

<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,
                                         ---------------------------------------
                                            2001           2002          2003
                                         ------------   -----------  -----------
Revenues:
Products                                     73.5%           57.2%       61.6 %
Consulting and services                      26.5            42.8        38.4
                                         ------------   -----------  -----------
Total revenues                               100.0          100.0       100.0
                                         ------------   -----------  -----------
Cost of revenues:
Products                                      16.5            5.4         4.2
Consulting and services                       10.2            8.3         2.4
                                         ------------   -----------  -----------
Total cost of revenues                        26.7           13.6         6.6
                                         ------------   -----------  -----------
Gross profit                                  73.3           86.4        93.4

Operating expenses:
Research and development                      80.4           76.6        26.6
Sales and marketing                           98.1           85.2        35.2
General and administrative                    50.8           62.5        37.3
                                         ------------   -----------  -----------
Total operating expenses                     229.3          224.3        99.1
                                         ------------   -----------  -----------
Operating loss                              (156.0)        (137.9)       (5.7)

Other income (expense):
Interest expense                              (0.2)         (17.9)       (5.4)
Interest income                                5.0            0.5         0.1
Other income                                  26.2           (0.2)       (0.2)
                                         ------------   -----------  -----------
Total other income (expense)                  31.0          (17.7)       (5.5)
                                         ------------   -----------  -----------
Net loss                                    (125.0)        (155.6)      (11.2)
Dividends on preferred stock                  14.9           19.7        23.5
Deemed dividends on preferred stock           58.7              -           -
                                         ------------   -----------  -----------
Loss attributable to holders of
  Common Stock                              (198.6)%       (175.3)%     (34.8)%
                                         ============   ===========  ===========

                                       20

<PAGE>

COMPARISON OF FISCAL 2003 AND 2002

Revenues
--------

Total revenues increased to approximately  $4,003,000 in 2003 from approximately
$3,553,000  in 2002.  Product  revenues are derived  principally  from  software
licenses  and the sale of  hardware  products.  Product  revenues  increased  to
approximately  $2,466,000 in 2003 from  approximately  $2,033,000  in 2002.  The
increase  in  product  revenues  from  2002 to 2003  was due  principally  to an
increase in the number of licenses sold of the Company's SmartGate product.

Consulting and services revenues are derived  principally from fees for services
complementary to the Company's products,  including consulting,  maintenance and
training. Consulting and services revenues increased to approximately $1,537,000
in 2003 from approximately $1,520,000 in 2002.

Costs of Revenues
-----------------

Total costs of revenues as a percentage of total revenues were 6.6% and 13.6% in
2003 and 2002,  respectively.  The  percentage  decrease of 7.0% is comprised of
lower costs of product  revenue,  which  decreased  to 4.3% in 2003 from 5.4% in
2002 and lower costs of consulting and services revenue, which decreased to 2.4%
of total revenues in 2003 from 8.2% of total revenues in 2002.

Costs of product revenue consist  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.  Costs of product revenue
decreased to approximately $170,000 in 2003 from approximately $190,000 in 2002,
a decrease  of  $20,000.  Costs of product  revenue as a  percentage  of product
revenues  were 6.9% and 9.4% for 2003 and 2002,  respectively.  The  dollar  and
percentage  decreases in 2003 over 2002 were attributable  primarily to a higher
mix of  SmartGate  software  licenses  (increased  $668,000  or  11.2%  of total
revenues),  which have lower costs of revenues  when  compared to Smartwall  and
turnkey hardware systems..

Costs of consulting and services  revenue  consist  principally of personnel and
related costs incurred in providing consulting, support and training services to
customers.  Costs of consulting  and services  revenue  decreased by $198,000 to
approximately  $95,000 in 2003 from  $293,000 in 2002,  due primarily to product
enhancements enabling a reduction in staff hours needed to provide help desk and
onsite  customer  support  and  a  lower  proportion  of  support  required  for
third-party  firewall  maintenance  contracts.  Costs of consulting and services
revenue as a percentage of consulting and services  revenues were 6.1% and 19.3%
for 2003 and 2002, respectively.

Operating Expenses
------------------

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 decreased to approximately
$1,065,000  in  2003  from  approximately   $2,720,000  in  2002.  Research  and
development  expenses as a percentage of total  revenues were 26.6% and 76.6% in
2003 and 2002,  respectively.  The dollar and percentage  decreases in 2003 over
2002 of approximately $1,655,000 and 60.8%, respectively,  were primarily due to
decreases in the costs of personnel of approximately $1,340,000 resulting from a
reduced work week and reduction in staff of 6 employees,  in consulting services
of approximately  $136,000, in lower rent expense of $79,000 and in depreciation
expense of $124,000,  partially  offset by an decrease in  allocation to cost of
sales of $79,000. The Company believes that a continuing  commitment to research
and  development  is  required  to  remain  competitive.  Accordingly,  if  cash
resources  allow,  the Company  intends to  allocate  substantial  resources  to
research and  development,  but research and development  expenses may vary as a
percentage of total revenues.

                                       21
<PAGE>

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 to approximately  $1,407,000 in 2003 from
approximately  $3,029,000 in 2002. Sales and marketing  expenses as a percentage
of total  revenues  were  35.2% and 85.2% in 2003 and  2002,  respectively.  The
dollar decrease of $1,622,000 and percentage decrease of 53.5% in 2003 from 2002
were principally due to lower costs of personnel (decreased $889,000 or 22.2% of
total revenues),  lower levels of advertising and promotion expenses  (decreased
$141,000 or 3.5% of total revenues), lower costs of travel (decreased $85,000 or
2.1% of total revenues),  lower costs of consulting (decreased $189,000 or 40.7%
of total revenues),  lower  depreciation  expense  (decreased $84,000 or 2.1% of
total  revenues),  lower  rent  expense  (decreased  $60,000  or 1.5%  of  total
revenues) and lower bad debt expense  (decreased  $105,000 or 2.6%) in 2003 over
2002.

General  and  Administrative  -- General  and  administrative  expenses  consist
principally of the costs of finance, management and administrative personnel and
facilities   expenses.   General  and   administrative   expenses  decreased  to
approximately  $1,494,000 in 2003 from approximately $2,220,000 in 2002. General
and  administrative  expenses as a percentage  of total  revenues were 37.3% and
62.5% in 2003 and 2002,  respectively.  The decrease in expense in 2003 resulted
from lower costs of personnel  (decreased  $427,000 or 10.7% of total revenues),
lower costs of directors and officers insurance  (decreased  $155,000 or 3.9% of
total  revenues),  lower bad debt  expense  (decreased  $50,000 or 1.2% of total
revenues) and lower rent expense  (decreased $47,000 or 1.0% of total revenues),
partially  offset by higher costs of  consulting  (increased  $42,000 or 1.0% of
total revenues) in 2003 compared with 2002.

Other Income (Expense) -- Other income (expense)  represents interest income and
expense and other income.  Interest income  represents  interest earned on cash,
cash equivalents and marketable  securities.  Interest income was  approximately
$5,000  in 2003  compared  to  $17,000  in 2002.  Interest  income  was  derived
primarily  from  interest  earned on the  proceeds  from the  Company's  private
placements  of  securities.  Interest  expense  represents  interest  payable or
accreted on promissory notes and capitalized lease obligations. Interest expense
decreased  to $218,000  in 2003 from  approximately  $745,000 in 2002,  of which
approximately  $36,000 was for recognition of a beneficial conversion feature on
the Company's 8% Secured Convertible Notes, discussed below, $62,000 for accrued
interest  on the 8% Secured  Convertible  Notes,  $69,000  for  amortization  of
deferred  financing costs and $51,000 for  amortization of the fair market value
of warrants associated with the 8% Secured Convertible Notes.

Income Taxes -- The Company did not recognize income tax benefit in fiscal years
ending  December  31,  2003 and 2002  from the net loss  incurred  during  those
periods as the  realization  of such  benefit is not likely.  As of December 31,
2003,  the  Company  had net  operating  loss carry  forwards  of  approximately
$59,100,000 as a result of net losses incurred since inception. These net losses
result in a future tax benefit of  $22,951,000  (which is not  reflected  in the
financial statements), which can be used to offset any future taxable income.

Dividends on Series C and D Preferred Stock -- The Company accrued approximately
$942,000 for dividends on the Series C and Series D Preferred  Stock during 2003
and approximately  $700,000 for dividends on the Series C and Series D Preferred
Stock during 2002.

Recorded Debt Discount Relating to 8% Secured Convertible Notes -- In 2002, upon
the issuance of 8% Secured Convertible Notes ("8% Notes"),  the Company recorded
a debt  discount of  approximately  $185,000 in accordance  with the  accounting
requirements  for a beneficial  conversion  feature on the 8% Notes. The Company
will record interest  expense upon conversion of the 8% Notes as a result of the
embedded  conversion  feature.  The additional  interest expense is not recorded
until conversion because the 8% Notes contain a contingency that does not permit
the number of shares to be  received  upon  conversion  to be  calculated  until
conversion  occurs.  During 2003, holders converted $110,000 in principal of the
8% Notes into shares of Common Stock. As of December 31, 2003, $695,000,  or 59%

                                       22

<PAGE>

of the  principal  of the 8% Notes,  had been  converted  into  shares of Common
Stock. Upon such conversion, the Company recorded $161,000 in interest expense.

COMPARISON OF FISCAL 2002 AND 2001

Revenues
--------

Total revenues decreased to approximately  $3,553,000 in 2002 from approximately
$4,990,000  in 2001.  Product  revenues are derived  principally  from  software
licenses  and the sale of  hardware  products.  Product  revenues  decreased  to
approximately  $2,033,000 in 2002 from  approximately  $3,670,000  in 2001.  The
decrease  in  product  revenues  from  2001  to  2002  was  due  principally  to
recognition of revenue in 2001 of  approximately  $1,236,000 under the Company's
Licensing and  Distribution  Agreement with Citrix  Systems,  Inc.,  recorded as
sales of the Company's SmartGate product.

Consulting and services revenues are derived  principally from fees for services
complementary to the Company's products,  including consulting,  maintenance and
training. Consulting and services revenues increased to approximately $1,520,000
in 2002 from approximately $1,320,000 in 2001.

Costs of Revenues
-----------------

Total costs of revenues as a percentage  of total  revenues were 13.6% and 26.7%
in 2002 and 2001, respectively. The percentage decrease of 13.1% is comprised of
lower costs of product  revenue,  which  decreased to 5.4% in 2002 from 16.5% in
2001 and lower costs of consulting and services revenue, which decreased to 8.2%
of total revenues in 2002 from 10.2% in 2001.

Costs of product revenue consist  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.  Costs of product revenue
decreased to approximately $190,000 in 2002 from approximately $824,000 in 2001,
a decrease of  $634,000.  Costs of product  revenue as a  percentage  of product
revenues  were 9.4% and 22.5% for 2002 and 2001,  respectively.  The  dollar and
percentage  decreases in 2002 over 2001 were attributable  primarily to a higher
mix of SmartGate software licenses and a lower proportion of turnkey systems and
third-party  firewall  sales  (decreased  $498,000 or 14.0% of total  revenues),
which  have  higher  costs of  revenues  when  compared  to  SmartGate  software
licenses.

Costs of consulting and services  revenue  consist  principally of personnel and
related costs incurred in providing consulting, support and training services to
customers.  Costs of consulting  and services  revenue  decreased by $217,000 to
approximately $293,000 in 2002 from $510,000 in 2001, due primarily to a smaller
portion of  third-party  products  with  proportionately  higher  support  costs
(decreased  $171,000  or 4.8% of total  revenues)  and lower  costs of  training
(decreased $53,000 or 1.5% of total revenues).  Costs of consulting and services
revenue as a percentage of consulting and services revenues were 19.3% and 38.6%
for 2002 and 2001, respectively.

Operating Expenses
------------------

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 decreased to approximately
$2,720,000  in  2002  from  approximately   $4,010,000  in  2001.  Research  and
development  expenses as a percentage of total  revenues were 76.6% and 80.4% in
2002 and 2001,  respectively.  The dollar and percentage  decreases in 2002 over
2001 of approximately $1,290,000 and 32.2%, respectively,  were primarily due to
decreases in the costs of personnel of approximately  $484,000 and in consulting
services of approximately $465,000.

                                       23

<PAGE>

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 to approximately  $3,029,000 in 2002 from
approximately  $4,891,000 in 2001. Sales and marketing  expenses as a percentage
of total  revenues  were  85.2% and 98.1% in 2002 and  2001,  respectively.  The
dollar decrease of $1,862,000 and percentage decrease of 38.1% in 2002 from 2001
were principally due to lower costs of personnel (decreased $417,000 or 11.7% of
total revenues),  lower levels of advertising and promotion expenses  (decreased
$348,000 or 9.8% of total revenues),  lower costs of travel (decreased  $160,000
or 4.5% of total revenues), and lower costs of consulting (decreased $380,000 or
10.7% of total revenues) in 2002 over 2001.

General  and  Administrative  -- General  and  administrative  expenses  consist
principally of the costs of finance, management and administrative personnel and
facilities   expenses.   General  and   administrative   expenses  decreased  to
approximately  $2,220,000 in 2002 from approximately $2,537,000 in 2001. General
and  administrative  expenses as a percentage  of total  revenues were 62.5% and
50.8% in 2002 and 2001,  respectively.  The decrease in expense in 2002 resulted
from lower costs of personnel  (decreased  $253,000 or 7.1% of total  revenues),
lower  costs of  consulting  (decreased  $120,000  or 3.4% of  total  revenues),
partially  offset by higher  legal  costs  (increased  $69,000  or 1.9% of total
revenues)  and higher  costs of  directors  and  officers  insurance  (increased
$142,000 or 4.0% of total  revenues) in 2002 compared with 2001. The increase in
percentage  of revenues of 11.7%  consists of lower  expenses of 12.5% and lower
revenues of 28.8% for 2002.

Other Income (Expense) -- Other income (expense)  represents interest income and
expense and other income.  Interest income  represents  interest earned on cash,
cash equivalents and marketable  securities.  Interest income was  approximately
$17,000 in 2002  compared  to  $250,000  in 2001.  Interest  income was  derived
primarily  from  interest  earned on the  proceeds  from the  Company's  private
placements  of  securities.  Interest  expense  represents  interest  payable or
accreted on promissory notes and capitalized lease obligations. Interest expense
increased from approximately $12,000 in 2001 to approximately  $745,000 in 2002,
of which approximately  $102,000 was for recognition of a beneficial  conversion
feature on the Company's 8% Secured Convertible Notes, discussed below, $354,000
for  amortization of deferred  financing costs and $261,000 for  amortization of
the fair market  value of warrants  associated  with the 8% Secured  Convertible
Notes. Other income in 2001 of approximately  $1,307,000  represents the gain on
the sale of the  Company's  6.8%  holding  in the  stock of NFR  Security,  Inc.
(formerly Network Flight Recorder).

Income  Taxes -- The Company  did not  recognize  income tax  benefits in fiscal
years ending  December 31, 2002 and 2001 from the net loss incurred during those
periods as the  realization  of such  benefit is not likely.  As of December 31,
2002,  the  Company  had net  operating  loss carry  forwards  of  approximately
$58,600,000 as a result of net losses incurred since inception. These net losses
result in a future tax benefit of  $22,913,000  (which is not  reflected  in the
financial statements), which can be used to offset any future taxable income.

Dividends on Series C and D Preferred Stock -- The Company accrued approximately
$741,000 for dividends on the Series C and Series D Preferred Stock during 2001,
and approximately  $700,000 for dividends on the Series C and Series D Preferred
Stock during 2002.

Deemed  Dividends on Series D Preferred  Stock -- In 2001, the Company  recorded
deemed  dividends of $2,932,000 on the Series D Preferred  Stock,  in accordance
with the accounting treatment for convertible  preferred stock with a beneficial
conversion  feature.  The  proceeds  received  in  the  transaction  were  first
allocated between the convertible instrument and the Series D detachable warrant
on a relative fair value basis. The difference  between the fair market value of
the Common Stock on the commitment date and the effective  conversion  price was
recorded as a deemed dividend.

                                       24

<PAGE>

Recorded Debt Discount Relating to 8% Secured Convertible Notes -- In 2002, upon
the issuance of 8% Notes,  the Company recorded a debt discount of approximately
$185,000  in  accordance  with  the  accounting  requirements  for a  beneficial
conversion  feature  on  the  8%  Notes.  During  2002,  the  Company  amortized
approximately  $173,000 of the discount to interest expense.  Additionally,  the
Company will record interest expense upon conversion of the 8% Notes as a result
of the embedded  conversion  feature.  The  additional  interest  expense is not
recorded until  conversion  because the 8% Notes contain a contingency that does
not permit the number of shares to be received upon  conversion to be calculated
until  conversion  occurs.  As of  December  31,  2002,  holders  had  converted
$585,000,  or 49% of the principal of the 8% Notes, into shares of Common Stock.
Upon such conversion, the Company recorded $102,000 in interest expense.

LIQUIDITY AND SOURCES OF CAPITAL

The  Company's  operating   activities  used  cash  of  approximately   $29,000,
$3,167,000 and $7,771,000 in 2003,  2002 and 2001,  respectively.  In 2003, cash
used in  operating  activities  was  principally  a result  of net  losses.  The
decrease in cash used in  operating  activities  in 2003  includes a decrease of
$1,655,000 in engineering  expenses, a reduction of approximately  $2,347,000 in
sales,  marketing  and  general  and  administrative  expenses,  an  increase in
accounts  receivable of $583,000,  a decrease in deferred revenue of $91,000 and
an increase in accounts  payable of  $85,000.  In 2002,  cash used in  operating
activities was principally a result of net losses.  The decrease in cash used in
operating  activities in 2002  includes a decrease of $1,290,000 in  engineering
expenses,  a reduction  of  approximately  $2,180,000  in sales,  marketing  and
general  and  administrative  expenses,  a decrease in  accounts  receivable  of
$622,000, a decrease in deferred revenue of $168,000 and an increase in accounts
payable of $243,000.

Net capital expenditures for property and equipment were approximately ($3,000),
$69,000 and $370,000 in 2003,  2002 and 2001  respectively.  These  expenditures
have generally been for computer  workstations  and personal  computers,  office
furniture and equipment,  and leasehold additions and improvements.  The capital
expenditures  decreases of approximately  $76,000 and $301,000 in 2003 and 2002,
respectively,  were due primarily to conservation of funds.  The Company made no
capital expenditures in 2003. The Company's largest capital expenditures in 2002
were a telephone system at a cost of approximately  $52,000 and replacement of a
capital lease having an estimated annual cost of $77,000.

As of December  31,  2003,  the  Company's  principal  commitments  consisted of
obligations  outstanding under two operating leases for copier equipment and the
facility lease for its office space.  In February  2003, the Company  terminated
its lease for office space at 20250 Century  Boulevard,  Suite 300,  Germantown,
Maryland.  The termination included a full release of all occupancy  obligations
of the  Company  for  these  premises  from the date of the  lease  termination.
Beginning  March 1, 2003, the Company began paying $325,000 due for unpaid rents
during the term of  occupancy,  recorded  as  deferred  rent,  in equal  monthly
installments  over two years.  The Company  entered  into a new lease  agreement
effective  March 1, 2003 for 9,635 square feet of office space at 20300  Century
Boulevard,  Suite  200,  Germantown,  Maryland  under  a  lease  agreement  that
terminates  on  February  28,  2008.   V-ONE's  current  aggregate  annual  rent
obligation is approximately  $231,000 for 2004,  $235,000 for 2005, $230,000 for
2006, $237,000 for 2007 and $40,000 for 2008.

In  closings  on July 23 and 26 and  August 2,  2002,  V-ONE  issued 8%  Secured
Convertible Notes with detachable  warrants for an aggregate principal amount of
$1,188,000.  The 8% Notes  matured 180 days after  issuance  with an  additional
180-day  extension  available at the option of the Company or the  holders.  The
rate of interest payable during such extension of the 8% Notes is 10% per annum.
The  holders may convert  their 8% Notes at any time into the  Company's  Common
Stock at a  conversion  price  equal to the greater of $0.25 per share or 60% of
the average  closing sales price of Common Stock for the five trading day period
immediately  preceding the  Company's  receipt of the holders'  notification  of
conversion.  Detachable five year warrants,  exercisable at $0.50 per share, are
included  to provide  one  warrant  share for every  dollar  invested as warrant
coverage to the 8% Note holders. In January 2003, in connection with its efforts

                                       25
<PAGE>

to raise capital, V-ONE agreed to adjust the exercise price of the warrants from
$0.50 per share to $0.15 per share and to extend the 8% Notes for an  additional
180 days. The Company paid the interest accrued under the initial term of the 8%
Notes.  In July 2003, the Company  requested and received an extension of the 8%
Notes for an additional  180 days and agreed to an increase in the interest rate
from 10% to 12% during the extension period.

All of the proceeds  received  from the 8% Note offering were used during fiscal
2002 for general working capital  purposes,  including funding of operations and
cash flow requirements.  Notwithstanding acceptance of V-ONE's security concepts
and  critical  acclaim  for its  products,  there can be no  assurance  that the
consummation  of sales of V-ONE's  products  to existing  customers  or proposed
agreements with potential  customers will generate timely or sufficient  revenue
for  V-ONE to cover  future  costs of  operations  and  meet  future  cash  flow
requirements.  Accordingly,  V-ONE  may not have the  funds  needed  to  sustain
operations  during 2004,  and its audited  financial  statements  are  presented
subject to a "going  concern"  opinion.  V-ONE is seeking to expand its  current
banking  relationships to explore other  alternatives to preserve its operations
and  maximize  stockholder  value,   including  potential  strategic  partnering
relationships,  a business combination with a strategically placed partner, or a
sale of V-ONE.

In July 2002,  the  Company  took steps to reduce  expenses  by  implementing  a
reduced  work week  designed  to ensure  that  customers'  requirements  are met
without  jeopardizing the Company's  workforce.  The Company effected additional
staff  reductions  in January 2003 and  implemented a four day work week further
reducing expenses.  The Company returned its staff to a full work week effective
February  1,  2004  to  meet  engineering  enhancements  required  for  existing
customers  and to introduce  its products to a broader  customer  base.  For the
immediate  future,  V-ONE will focus on existing and potential  customers in the
government  sector,  targeted  marketing  operations to commercial  accounts and
continued minimization of general and administrative expenditures. V-ONE may not
be successful in further  reducing  operating  levels without  jeopardizing  the
ability to serve existing customers or grow its business base.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

The Company had no off-balance sheet arrangements during 2003.

The  following  table  discloses  aggregate   information  about  the  Company's
contractual  obligations  as of  December  31,  2003  and the  periods  in which
payments are due:

<TABLE>
<CAPTION>
                                                      Payments Due By Period
                                 ------------------------------------------------------------------
                                     2004           2005        2007       Thereafter      Total
                                                  and 2006    and 2008
                                 ------------------------------------------------------------------
<S>                                 <C>            <C>               <C>           <C>    <C>
Long-term debt obligations          $151,248       $45,287           0             0      $196,535
Convertible Debt                     493,000             0           0             0       493,000
                                 ------------  ------------  ----------   -----------   -----------
Operating leases                     231,072       465,069     296,275             0       992,416
                                 ------------  ------------  ----------   -----------   -----------
                                    $875,320      $510,356    $296,275             0    $1,681,951
                                 ============  ============  ==========   ===========   ===========
</TABLE>

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.

                                       26

<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                                V-ONE CORPORATION
                          INDEX TO FINANCIAL STATEMENTS

                                    --------


   Report of Aronson & Company, Independent Registered Public
     Accounting Firm                                                     28

   Report of Ernst & Young, LLP, Independent Auditors                    29

   Balance Sheets                                                        30

   Statements of Operations                                              31

   Statements of Stockholders' Equity (Deficiency)                       32

   Statements of Cash Flows                                              33

   Notes to Financial Statements                                         34

   Schedule of Valuation and Qualifying Accounts for the years ended     55
     December 31, 2003, 2002, and 2001

                                       27

<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Board of Directors
V-ONE Corporation
Germantown, Maryland

We have  audited the  accompanying  Balance  Sheets of V-ONE  Corporation  as of
December  31,  2003  and  2002  and  the  related   Statements  of   Operations,
Stockholders'  Deficiency  and Cash Flows for the years then  ended.  Our audits
also included the Schedule II - Valuation and Qualifying  Accounts for the years
ended December 31, 2003 and 2002.  These financial  statements and schedules are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedules based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements  and schedule are free of material  misstatement.  An audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial  statements  and schedule.  An audit also includes  assessing the
accounting principles used and significant estimates made by management, as well
as evaluating  the overall  financial  statement and schedule  presentation.  We
believe that our audits provide 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  as of
December 31, 2003 and 2002, and the results of its operations and its cash flows
for the years then ended in  conformity  with  accounting  principles  generally
accepted in the United  States of America.  Also,  in our  opinion,  the related
financial  statement  schedules for the years ended  December 31, 2003 and 2002,
when considered in relation to the basic financial  statements taken as a whole,
presents fairly in all material respects the information set forth therein.

The  accompanying  financial  statements have been prepared  assuming that V-ONE
CORPORATION will continue as a going concern. As more fully described in Note 2,
the Company has incurred  significant  operating  losses since  inception.  This
condition raises  substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to this matter are also described in
Note 2. The financial  statements do not include any  adjustments to reflect the
possible future effects on the  recoverability  and  classification of assets or
the amounts and  classification  of liabilities that may result from the outcome
of this uncertainty.

                                            /s/ Aronson & Company


Rockville, Maryland

February 20, 2004, except for Notes 2 and 13,
As to which the date is March 19, 2004

                                       28

<PAGE>

Report of Independent Auditors


Board of Directors and Stockholders
V-ONE Corporation

We have audited the accompanying statements of operations,  stockholders' equity
(deficiency),  and cash flows for the year ended  December 31,  2001.  Our audit
also included the financial  statement  schedule for the year ended December 31,
2001 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 results of the operations of V-ONE  Corporation and
its cash  flows  for the year  ended  December  31,  2001,  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, 2001 when considered in relation to the basic financial  statements taken as
a whole,  presents  fairly in all material  respects the  information  set forth
therein.

The  accompanying  financial  statements have been prepared  assuming that V-ONE
Corporation will continue as a going concern. As more fully described in Note 2,
the Company has incurred  significant  operating  losses since  inception.  This
condition raises  substantial doubt about the Company's ability to continue as a
going concern. Management's plans in regard to this matter are also described in
Note 2. The financial  statements do no include any  adjustments  to reflect the
possible future effects on the  recoverability  and  classification of assets or
the amounts and  classification  of liabilities that may result from the outcome
of this uncertainty.

                                                /s/ Ernst & Young LLP



McLean, Virginia
January 29, 2002

                                       29

<PAGE>

                             V-ONE CORPORATION
                               BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                            December 31,
                                                                ----------------------------------
                                   ASSETS                             2003               2002
<S>                                                                <C>                <C>
Current assets:
  Cash and cash equivalents                                         $ 27,755           $ 93,985
   Certificate of deposit - restricted                                26,500             35,000
  Accounts receivable, less allowances of
    $15,500 and $97,135 respectively                                 606,426            237,695
  Inventory, less allowances of $8,901 and
    $44,738 respectively                                               3,636              5,478
  Deferred financing costs, net                                            -             68,974
  Prepaid expenses and other assets                                   61,875            121,460
                                                              ---------------    ---------------
    Total current assets                                             726,192            562,592

Property and equipment, net                                           64,138            319,294
Deposits                                                              95,141             90,196
                                                              ---------------    ---------------
    Total assets                                                   $ 885,471          $ 972,082
                                                              ===============    ===============

                LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
  Accounts payable and accrued expenses                          $ 1,320,361        $ 1,235,574
  Deferred revenue                                                   692,914            784,185
  Convertible notes payable, net                                     493,000            591,242
  Notes payable,other                                                151,248             20,000
                                                              ---------------    ---------------
    Total current liabilities                                      2,657,523          2,631,001
    Notes payable, other - noncurrent                                 45,287                  -
Deferred rent                                                         40,535             32,831
                                                              ---------------    ---------------
    Total liabilities                                              2,743,345          2,663,832

Commitments and contingencies

Stockholders' deficiency:
Preferred stock, $.001 par value,13,333,333 shares
   authorized
  Series C redeemable preferred stock, 500,000
   designated, 42,904 shares issued and
   outstanding (liquidation preference of $1,126,000)                     43                 43
  Series D redeemable preferred stock, 3,675,000
   designated, 3,021,000  shares issued and outstanding,
   (liquidation preference of $5,770,110)                              3,021              3,021
Common stock, $0.001 par value, 75,000,000 and 50,000,000
   shares authorized, respectively;
  27,900,568 and 26,649,301 shares issued and outstanding,
   respectively                                                       27,901             26,649
Accrued dividends payable                                          2,517,765          1,575,709
Additional paid-in capital                                        62,107,340         61,825,066
Accumulated deficit                                              (66,513,944)       (65,122,238)
                                                               ---------------    ---------------
    Total stockholders' deficiency                                (1,857,874)        (1,691,750)
                                                               ---------------    ---------------
    Total liabilities and stockholders' deficiency                 $ 885,471          $ 972,082
                                                               ===============    ===============

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

                                    30
<PAGE>

                                V-ONE CORPORATION
                            STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                        Year ended December 31,
                                       -----------------------------------------------------------
                                                  2003                2002               2001
                                                  ----                ----               ----
<S>                                            <C>                 <C>                <C>
Revenues:
      Products                                 $ 2,466,178         $ 2,033,413        $ 3,669,817
      Consulting and services                    1,536,748           1,519,613          1,320,345
                                       -----------------------------------------------------------
               Total revenues                    4,002,926           3,553,026          4,990,162
                                       -----------------------------------------------------------

Cost of revenues:
      Products                                     170,463             190,262            824,305
      Consulting and services                       94,545             293,363            509,570
                                       -----------------------------------------------------------
Total cost of revenues                             265,008             483,625          1,333,875
                                       -----------------------------------------------------------

Gross profit                                     3,737,918           3,069,401          3,656,287

Operating expenses:
      Research and development                   1,065,020           2,720,321          4,009,889
      Sales and marketing                        1,407,160           3,028,590          4,891,170
      General and administrative                 1,493,822           2,220,138          2,537,103
                                       -----------------------------------------------------------
Total operating expenses                         3,966,002           7,969,049         11,438,162
                                       -----------------------------------------------------------

Operating loss                                    (228,084)         (4,899,648)        (7,781,875)

Other (expense) income:
Interest expense                                  (217,669)           (744,818)           (11,560)
Interest income                                      5,256              16,833            249,575
Other (expense) income                              (9,153)             (7,558)         1,306,582
                                       -----------------------------------------------------------
               Total                              (221,566)           (735,543)         1,544,597
                                       -----------------------------------------------------------

Net loss                                          (449,650)         (5,635,191)        (6,237,278)

Dividends on preferred stock                       942,056             699,901            741,245
Deemed dividend on preferred stock                       -                   -          2,932,023
                                       -----------------------------------------------------------

Loss attributable to holders
      of common stock                         $ (1,391,706)       $ (6,335,092)      $ (9,910,546)
                                       ===========================================================

Basic and diluted loss per share
      Net loss attributable to holders
      of common stock                              $ (0.05)            $ (0.25)           $ (0.44)
                                       ===========================================================
Weighted average number of
      common shares outstanding                 27,142,148          25,230,360         22,576,188
                                       ===========================================================

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

                                       31
<PAGE>

<TABLE>
<CAPTION>
                                                      V-ONE CORPORATION
                                        STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)

                                                                        Series B, C & D              Accrued     Additional
                                         Common Stock                   Preferred Stock              Dividend      Paid-in
                                           Shares          Amount       Shares       Amount          Payable       Capital

                                        -------------------------------------------------------------------------------------
<S>                                         <C>           <C>         <C>            <C>          <C>          <C>
Balance, December 31, 2000                  22,109,185    $ 22,109     1,342,268     $ 1,343      $ 180,911    $ 51,393,818
Employee stock purchase plan
  net of issuance costs                         29,399          29             -           -              -          11,980
Exercise of common stock options,
  net of issuance costs                         31,230          31             -           -              -          50,774
Conversion of Series B preferred
  stock to common stock                      1,287,554       1,288    (1,287,554)     (1,288)             -               -
Conversion of Series C preferred
  stock to common stock                        137,536         138       (11,810)        (12)       (46,348)        (38,482)
Issuance of Series D preferred stock,
  net of issuance costs                              -           -     3,675,000       3,675              -       6,266,047
Deemed Dividend on Series D                          -           -             -           -              -       2,932,023
Dividend on preferred stock                          -           -             -           -        741,245               -
Issuance of common stock options
  to consultants                                     -           -             -           -              -         150,232
Net loss                                             -           -             -           -              -               -
                                        -------------------------------------------------------------------------------------
Balance, December 31, 2001                  23,594,904    $ 23,595     3,717,904     $ 3,718      $ 875,808    $ 60,766,392
                                        -------------------------------------------------------------------------------------
Employee stock purchase plan
  net of issuance costs                         60,397          60             -           -              -          19,089
Conversion of Note payable
  to common stock                            2,340,000       2,340             -           -              -         582,660
Conversion of Series D preferred
  stock to common stock                        654,000         654      (654,000)       (654)             -               -
Dividend on preferred stock                          -           -             -           -        699,901               -
Issuance of common stock options
  to consultants                                     -           -             -           -              -          82,545
Beneficial Conversion Note payable                   -           -             -           -              -         101,600
Issuance of Warrants                                 -           -             -           -              -         272,780
Net loss                                             -           -             -           -              -               -
                                        -------------------------------------------------------------------------------------
Balance, December 31, 2002                  26,649,301    $ 26,649     3,063,904     $ 3,064    $ 1,575,709    $ 61,825,066
                                        -------------------------------------------------------------------------------------
Employee stock purchase plan
  net of issuance costs                         54,522          55             -           -              -           6,472
Exercise of warrants                           299,506         300             -           -              -          28,950
Conversion of Note payable
  into common stock                            440,000         440             -           -              -         109,560
Conversion of accrued interest on
  Note payable into common stock                 3,525           4             -           -              -           1,353
Dividend on preferred stock                          -           -             -           -        942,056               -
Issuance of common stock options
  to consultants                                     -           -             -           -              -           4,902
Issuance of common stock
  to consultants                               453,714         453             -           -              -          79,547
Beneficial Conversion Note payable                   -           -             -           -              -          27,600
Repricing of Warrants                                -           -             -           -              -          23,890
Net loss                                             -           -             -           -              -               -
                                        -------------------------------------------------------------------------------------
Balance, December 31, 2003                  27,900,568    $ 27,901     3,063,904     $ 3,064    $ 2,517,765    $ 62,107,340
                                        -------------------------------------------------------------------------------------

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

<PAGE>

                                             V-ONE CORPORATION
                               STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)

                                             Accumulated
                                                Deficit          Total

                                        ---------------------------------
Balance, December 31, 2000                 $ (48,876,600)      2,721,581
Employee stock purchase plan
  net of issuance costs                                -          12,009
Exercise of common stock options,
  net of issuance costs                                -          50,805
Conversion of Series B preferred
  stock to common stock                                -               -
Conversion of Series C preferred
  stock to common stock                                -         (84,704)
Issuance of Series D preferred stock,
  net of issuance costs                                -       6,269,722
Deemed Dividend on Series D                   (2,932,023)              -
Dividend on preferred stock                     (741,245)              -
Issuance of common stock options
  to consultants                                       -         150,232
Net loss                                      (6,237,278)     (6,237,278)
                                        ---------------------------------
Balance, December 31, 2001                 $ (58,787,146)    $ 2,882,367
                                        ---------------------------------
Employee stock purchase plan
  net of issuance costs                                -          19,149
Conversion of Note payable
  to common stock                                      -         585,000
Conversion of Series D preferred
  stock to common stock                                -               -
Dividend on preferred stock                     (699,901)              -
Issuance of common stock options
  to consultants                                       -          82,545
Beneficial Conversion Note payable                     -         101,600
Issuance of Warrants                                   -         272,780
Net loss                                      (5,635,191)     (5,635,191)
                                        ---------------------------------
Balance, December 31, 2002                 $ (65,122,238)   $ (1,691,750)
                                        ---------------------------------
Employee stock purchase plan
  net of issuance costs                                -           6,527
Exercise of warrants                                   -          29,250
Conversion of Note payable
  into common stock                                    -         110,000
Conversion of accrued interest on
  Note payable into common stock                       -           1,357
Dividend on preferred stock                     (942,056)              -
Issuance of common stock options
  to consultants                                       -           4,902
Issuance of common stock
  to consultants                                       -          80,000
Beneficial Conversion Note payable                     -          27,600
Repricing of Warrants                                  -          23,890
Net loss                                        (449,650)       (449,650)
                                        ---------------------------------
Balance, December 31, 2003                 $ (66,513,944)   $ (1,857,874)
                                        ---------------------------------

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

                                       32
<PAGE>

                                        V-ONE CORPORATION
                                    STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                                          Year ended December 31,
                                                       ----------------------------------------------------
                                                              2003              2002             2001
                                                              ----              ----             ----
<S>                                                        <C>             <C>              <C>
Cash flows from operating activities:
Net loss                                                   $ (449,650)     $ (5,635,191)    $ (6,237,278)
Adjustments to reconcile net loss to net cash
  used in operating activities:
  Depreciation                                                204,846           431,225          514,354
  Amortization                                                 43,725            66,566           36,811
  Loss on disposal of property and equipment                    9,908                 -                -
  Gain on sale of investment                                        -                 -       (1,375,000)
  Amortization of debt discount                                11,758           173,222                -
  Interest expense - beneficial conversion feature             27,600           101,600                -
  Interest expense on repricing of warrants                    23,890                 -                -
  Amortization of deferred financing costs                     68,974           334,015                -
  Note payable related to financing costs                          -            20,000                -
  Noncash charge related to issuance of warrants,
      options and stock as compensation                        84,902           170,345          150,232
  Conversion of accrued interest on notes payable               1,357                 -                -
Changes in operating assets and liabilities:
  Accounts receivable, net                                   (368,731)          621,963          (82,813)
  Inventory, net                                                1,842            51,876          114,823
  Prepaid expenses, deposits and other assets                  54,640           246,453          (85,309)
  Accounts payable and accrued expenses                       335,270           242,826         (606,620)
  Accrued interest on note payable related to
      financing costs                                           4,068                 -                -
  Deferred revenue                                            (91,271)         (167,859)        (161,158)
  Deferred rent                                                 7,704           (47,959)         (39,360)
                                                     ----------------------------------------------------
    Net cash used in operating activities                     (29,168)       (3,390,918)      (7,771,318)

Cash flows from investing activities:
  Net purchase of property and equipment                       (3,323)          (68,572)        (370,280)
  Purchase of cerfiticate of deposit                            8,500           (35,000)               -
  Collection of note receivable                                     -                 -                -
  Proceeds from sale of investment                                  -                 -        1,625,000
                                                     ----------------------------------------------------
    Net cash provided (used) in investing activities            5,177          (103,572)       1,254,720

Cash flows from financing activities:
  Issuance of common stock under employee stock plans           6,527            19,149           23,949
  Issuance of preferred stock, net of
    subscriptions receivable                                        -                 -        7,019,250
  Proceeds of notes payable                                         -         1,188,000                -
  Payment of preferred stock dividends                              -                 -             (259)
  Payment of notes payable and stock issuance costs                 -          (179,560)        (761,468)
  Redemption of preferred stock                                     -                 -          (84,445)
  Exercise of stock options and warrants                       29,250                 -           50,805
  Principal payments on notes payable-other                   (78,016)                -                -
  Principal payments on capital lease obligations                   -           (47,804)         (71,942)
                                                     ----------------------------------------------------
    Net cash (used) provided by financing activities          (42,239)          979,785        6,175,890
                                                     ----------------------------------------------------

  Net decrease in cash and cash equivalents                   (66,230)       (2,514,705)        (340,708)

  Cash and cash equivalents, beginning of year                 93,985         2,608,690        2,949,398
                                                     ----------------------------------------------------

  Cash and cash equivalents, end of year                     $ 27,755          $ 93,985      $ 2,608,690
                                                     ====================================================

             The accompanying notes are an integral part of these financial statements.
</TABLE>
                                             33
<PAGE>


1.    NATURE OF BUSINESS

      V-ONE  Corporation  ("V-ONE" or the "Company") was incorporated  under the
      laws of the state of Delaware on October 24, 1994.  The Company  develops,
      markets and licenses a comprehensive  suite of network  security  products
      that enables 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.    MANAGEMENT'S PLANS

      The  accompanying  financial  statements  have been prepared  assuming the
      Company will continue as a going concern.  The Company reported a net loss
      of $449,650,  $5,635,191  and  $6,237,278 for the years ended December 31,
      2003,  2002 and 2001,  respectively.  As of December 31, 2003, the Company
      has a deficiency in stockholders' equity of approximately $1,858,000 and a
      working capital deficiency of approximately $1,931,000.

      The Company's cash used in operating activities was approximately  $29,000
      in fiscal 2003,  an average "burn rate" of  approximately  $2,400 a month.
      Notwithstanding  acceptance  of V-ONE's  security  concepts  and  critical
      acclaim for its products,  there can be no assurance that the consummation
      of sales of V-ONE's products to existing customers or proposed  agreements
      with potential  customers will generate  timely or sufficient  revenue for
      V-ONE to cover its cost of operations and meet its cash flow requirements.

      In July 2002, the Company took steps to reduce  expenses by implementing a
      reduced workweek  designed to ensure that customers'  requirements are met
      without  jeopardizing  the  Company's  workforce.   The  Company  effected
      additional  staff  reductions  in January 2003 and  implemented a four-day
      work week further reducing  expenses.  The Company returned its staff to a
      full work week effective February 1, 2004 to meet engineering enhancements
      required for existing customers and to introduce its products to a broader
      customer base. For the immediate future,  V-ONE will focus on existing and
      potential   customers  in  the  government   sector,   targeted  marketing
      operations to commercial  accounts and continued  minimization  of general
      and  administrative  expenditures.  V-ONE may not be successful in further
      reducing  operating  levels  without  jeopardizing  the  ability  to serve
      existing  customers  or grow its  business  base.  In February  2004,  the
      Company completed a private placement of 7% Subordinated Convertible Notes
      with detachable warrants for an aggregate of $1,200,000, which resulted in
      net proceeds to the Company of  $1,065,690.  The Company  believes that to
      maintain  operations  for any  extended  period  of time it must  generate
      revenue  from  existing and new  customers,  raise  additional  capital or
      undergo  a  significant  strategic  transformative  event.  The  Company's
      ability to reach sustainable  profitability is dependent on its ability to
      generate  sufficient  cash  flow to meet its  obligations  and  needs on a
      timely basis or to obtain additional funding.

3.    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

                                       34

<PAGE>

      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.

      In addition to its direct sales efforts, 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 delivered  directly to
      the end-user customer on behalf of the distributor.

      In 2000,  the Company  entered  into a contract  that  contained  multiple
      elements,  including  specified  upgrades.  Because  the  Company  had not
      established vendor specific objective evidence for the specified upgrades,
      all revenues  under the contract  were  deferred  until the upgrades  were
      delivered.  At December  31,  2000,  the Company had  $500,000 in deferred
      revenue  related  to this  contract.  On October  26,  2001,  the  Company
      executed  a new  agreement  that  removed  the  specified  upgrades.  This
      completed the Company's  obligations for delivery of all specific  product
      requirements  under the  initial  contract  and  allowed  the  Company  to
      recognize  approximately  $1.2 million of revenue in the fourth quarter of
      2001.  During  2002,  the  Company  recognized  revenue  of  approximately
      $136,000  related to this agreement.  During 2003, the Company  recognized
      additional revenue of approximately $49,000 related to this agreement.

      The Company's  revenue  recognition  policies for the years ended December
      31, 2003,  2002 and 2001 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.

      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.
      All other research and development costs have been expensed as incurred.

      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  statements
      and accompanying notes. Actual results could differ from those estimates.

                                       35

<PAGE>

      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  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 over the shorter of the assets' estimated
      useful  life or the  lease  term,  ranging  from  three  to  seven  years.
      Depreciation  and  amortization  expense related to property and equipment
      was $248,571, $497,791 and $551,165 for the years ended December 31, 2003,
      2002 and 2001, respectively.

      Advertising Costs
      -----------------

      The  Company  expenses  all  advertising  costs as  incurred.  The Company
      incurred approximately $4,000,  $30,000, and $149,000 in advertising costs
      for the years ended December 31, 2003, 2002 and 2001, respectively.

      Stock-Based Compensation
      ------------------------

      Statement  of  Financial  Accounting  Standards  No. 123,  Accounting  for
      Stock-Based  Compensation  ("SFAS 123"),  allows  companies to account for
      stock-based  compensation either under the provisions of SFAS 123 or under
      the provisions of Accounting  Principles  Bulletin No. 25,  Accounting for
      Stock Issued to Employees  ("APB 25"),  as amended by FASB  Interpretation
      No. 44, Accounting for Certain  Transactions  Involving Stock Compensation
      (an  Interpretation  of APB  Opinion  No.  25),  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 APB 25 (see Note 6). The  following  table  illustrates  the
      effect on net  income  (loss) and  earning  per share if the  Company  had
      applied the fair value recognition provisions of SFAS 123:

<TABLE>
                                                       Year ended December 31,
                                               2003           2002            2001
<S>                                        <C>            <C>             <C>
      Loss attributable to holders of
      Common Stock:
              As reported                  ($1,391,706)   ($6,335,092)    ($9,910,546)

      Stock-based employee compensation
      net of related tax effects
      included in the determination of      $        0     $        0      $        0
      net income as reported:
       Stock-based employee compensation
      net of related tax effects that
      would have been included in the
      determination of net income if the
      fair value method had been applied
      to all awards:                        $  245,405     $  177,121      $1,901,457
                                           -------------  -------------   --------------
</TABLE>

                                       36
<PAGE>

<TABLE>
      Loss attributable to holders of
      Common Stock:
<S>                                        <C>            <C>             <C>
              Pro forma                    ($1,637,111)   ($6,512,213)    ($11,812,003)
      Basic and diluted loss per share
      attributable to holders of Common
      Stock:
             As reported                        ($0.05)        ($0.25)          ($0.44)
             Pro forma                          ($0.06)        ($0.26)          ($0.52)
</TABLE>

      This  disclosure is in accordance  with Statement of Financial  Accounting
      Standards No. 148,  Accounting for  Stock-Based  Compensation - Transition
      and   Disclosure,   that  the  Company  has  adopted  in  these  financial
      statements.

      Stock options and warrants granted to  non-employees  are accounted for in
      accordance  with SFAS 123 and the Emerging Issues Task Force Consensus No.
      96-18,  "Accounting for Equity  Instruments  That Are Issued to Other Than
      Employees  for  Acquiring,  or  in  Conjunction  with  Selling,  Goods  or
      Services,"  which  requires  the value of the  options to be  periodically
      re-measured as they vest over a performance  period. The fair value of the
      options and warrants is determined using the Black-Scholes model.

      Income Taxes
      ------------

      Deferred  tax assets and  liabilities  are  recognized  for the future tax
      consequences  attributable to differences  between the financial statement
      carrying amounts of 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 operations 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 than not 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 11.

      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.  In addition,  at times 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

                                       37

<PAGE>

      customer accounts  receivable.  In management's  opinion,  the Company has
      sufficiently provided for estimated credit losses.

      In 2003, two suppliers  exceeded 10% of purchases.  The Company  purchased
      SUN equipment  worth  approximately  $49,000 from  Electronics  Systems of
      Richmond and computer hardware for the Company's  SmartGuard product worth
      approximately  $52,000,  representing  29%  and  30%  of  total  purchases
      respectively.  In 2002,  two  suppliers  exceeded  10% of  purchases.  The
      Company purchased SUN equipment from Arrow MOCA, Incorporated and computer
      hardware for the Company's SmartGuard product worth approximately  $75,000
      and $17,000,  or 66% and 15% of total  purchases,  respectively.  In 2001,
      three  suppliers  exceeded 10% of  purchases.  The Company  purchased  SUN
      equipment worth approximately $162,000 from Ingram Micro and approximately
      $180,000 from Arrow MOCA, Incorporated. The two resellers of SUN equipment
      represented  33% and 37% of total  purchases.  In  addition,  the  Company
      purchased  approximately  $88,000 of  computer  hardware  from  SteelCloud
      Corporation  for  the  Company's  SmartGuard  product,  which  constituted
      approximately 18% of total purchases.

      During the years ended December 31, 2003,  2002,  and 2001,  approximately
      $637,000, $542,000, and $550,000, of sales, respectively, related to sales
      to international customers. During the years ended December 31, 2003, 2002
      and  2001,  sales  related  to  government   agencies  were  approximately
      $2,670,000, $2,136,000, and $2,142,000, respectively.

      Fair Value of Financial Instruments
      -----------------------------------

      At December  31, 2003 and 2002,  the carrying  value of current  financial
      instruments  such  as  cash,  accounts  receivable,   inventory,  accounts
      payable,  convertible notes payable and accrued  liabilities  approximated
      their  market  values,  based  on  the  short-term   maturities  of  these
      instruments.  Fair  value is  determined  based on  expected  cash  flows,
      discounted at market rates, and other appropriate valuation methodologies.

4.    SELECTED BALANCE SHEET INFORMATION

      Property and equipment consisted of the following at December 31:

                                              2003            2002
                                           ------------    ------------
      Office and computer equipment      $   1,040,641   $   1,329,617
      Capitalized software                     139,076         139,076
      Leasehold improvements                         -         186,467
      Furniture and fixtures                   177,715         308,008
                                           ------------    ------------
                                             1,357,432       1,963,168
      Less:  accumulated depreciation       (1,293,294)     (1,643,874)
                                           ------------    ------------
                                         $      64,138   $     319,294
                                           ============    ============

      Deferred financing costs consisted of the following at December 31:

                                               2003            2002
                                            -----------     -----------
      Deferred financing costs           $   1,113,044   $   1,113,044
      Accumulated amortization              (1,113,044)     (1,044,070)
                                            -----------     -----------
                                         $           -   $      68,974
                                            ===========     ===========

                                       38

<PAGE>

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

                                                2003            2002
                                             ------------    ------------
        Accounts payable                   $     945,933   $   1,025,810
        Accrued compensation                     245,655         140,941
        Other accrued expenses                   128,773          68,823
                                             ------------    ------------
                                           $   1,320,361   $   1,235,574
                                             ============    ============

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:

<TABLE>
                                            2003             2002           2001
                                       ---------------   -------------  -------------
<S>                                        <C>              <C>            <C>
      Inventory                            $     3,438      $   11,429     $   11,574
      Accounts receivable                        5,986          37,514         28,173
      Property and equipment                    82,769         106,440        (25,910)
      Financing costs                                -          41,632              -
      Deferred rent                             15,655          31,201         31,598
      Non-deductible accruals                   30,227          69,159         83,235
      Net operating loss carry forward      22,813,052      22,615,715     19,019,278
                                       ---------------   -------------  -------------
      Total deferred tax asset              22,951,127      22,913,090     19,147,948
      Valuation allowance                  (22,951,127)    (22,913,090)   (19,147,948)
                                       ---------------   -------------  -------------
      Net deferred tax asset                $        -        $      -       $      -
                                       ===============   =============  =============
</TABLE>

      The net changes in the valuation allowance from 2002 to 2003 and from 2001
      to 2002 are due  principally  to the  increases 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,
      2003, 2002 and 2001, the Company had net operating loss  carryforwards  of
      approximately $59,100,000, $58,600,000 and $48,600,000,  respectively, for
      federal and state income tax purposes  available to offset future  taxable
      income. If not previously  utilized,  the net operating loss carryforwards
      will expire on various dates starting in 2013 through 2023.

      A reconciliation between income taxes computed using the statutory federal
      income tax rate and the  effective  rate for the years ended  December 31,
      2003, 2002 and 2001 is as follows:

                                            2003         2002          2001
                                          ---------    ----------   ------------

      Federal income tax (benefit) at
      statutory rate                        (34.0%)       (34.0%)       (34.0%)
      State income taxes, net                (4.6%)        (4.6%)        (4.6%)
      Equity valuation difference            23.6%           -             -
      Other permanent items                   6.5%         (0.1%)        (0.2%)
      Net change in valuation allowance       8.5%         38.5%         38.4%
                                          ---------    ----------   ------------
      Provision for Income Taxes              0.0%          0.0%          0.0%
                                          =========    ==========   ============

                                       39

<PAGE>

6.    COMPANY DEBT AND SHAREHOLDERS' EQUITY

      8% Secured Convertible Notes
      ----------------------------

      In closings on July 23 and 26 and August 2, 2002,  V-ONE issued 8% Secured
      Convertible  Notes with  detachable  warrants for an  aggregate  principal
      amount of $1,188,000. The 8% Notes matured 180 days after issuance with an
      additional 180-day extension available at the option of the Company or the
      holders.  The rate of interest  payable  during such  extension  of the 8%
      Notes was 10% per annum.

      The  holders  could  convert the  principal  amount of their 8% Notes plus
      accrued  interest at any time prior to maturity into (i) Common Stock at a
      conversion  price  equal to the  greater  of $0.25 per share or 60% of the
      average  closing  sales price of the Common Stock for the five trading day
      period  immediately  preceding  the  Company's  receipt  of  the  holders'
      notification  of  conversion  or (ii) new V-ONE  securities  issued in any
      round  of  financing,  the  gross  proceeds  of  which  are  greater  than
      $3,000,000  at a  conversion  price  based upon the price at which the new
      securities are convertible into Common Stock.

      Notwithstanding  the previous  paragraph,  if,  prior to  maturity,  V-ONE
      received  gross  proceeds  of  $3,000,000  or more  from  the  sale of new
      securities, then the holders were required to convert the principal amount
      of their 8% Notes plus accrued interest into (i) shares of Common Stock at
      the Common Stock  conversion price or (ii) shares of new securities at the
      new  securities  conversion  price.  The holders,  however,  would have no
      mandatory  conversion  obligation  if V-ONE  received  gross  proceeds  of
      $6,000,000 or more from the sale of new securities.

      An event of default  would occur if V-ONE  defaulted in the payment of the
      8% Notes and the default  continued for five days, or upon the  occurrence
      of other  typical  default  events,  including,  but not  limited  to,  an
      assignment for the benefit of creditors, an adjudication of bankruptcy, an
      application   for  the  appointment  of  a  trustee  or  receiver  or  the
      dissolution of V-ONE. If an event of default occurred,  the 8% Notes would
      bear  interest  at the  fixed  rate of 15% from  the date of  acceleration
      resulting  from the  default.  The 8% Notes are  secured by all of V-ONE's
      assets,  except for  proprietary  technology,  intellectual  property  and
      source code information.

      For so long as any of the 8% Notes  remain  outstanding,  V-ONE shall not,
      without the consent of the placement  agent for the 8% Note offering or of
      a majority of the principal amount of the 8% Notes outstanding, declare or
      pay any cash dividend or purchase,  retire or otherwise  acquire for value
      any of its capital stock.

      In connection with the 8% Notes offering, V-ONE issued detachable warrants
      to purchase  1,188,000  shares of Common Stock.  The exercise price of the
      warrants  is  $0.50  per  share  and  they  are  exercisable  for a period
      beginning six months after issuance and ending five years after  issuance.
      In January 2003, in connection  with its efforts to raise  capital,  V-ONE
      agreed to adjust the exercise  price of the warrants  from $0.50 per share
      to $0.15 per share.  During  the year ended  December  31,  2003,  8% Note
      holders exercised  warrants to purchase 170,000 shares of Common Stock. In
      connection  with repricing of the warrants  during the year ended December
      31, 2003, the Company recorded interest expense of $23,890.

      The exercise  price and number of shares of Common Stock to be issued upon
      exercise of the warrants are subject to equitable  adjustment in the event
      of stock  dividends,  stock splits and similar events affecting the Common
      Stock.  In  addition,  if V-ONE  issues  any  shares  of  Common  Stock or
      equivalents at a purchase price less than the then current market price of
      the Common Stock or the warrant exercise price, the exercise price will be
      equitably reduced,  and number of shares of Common Stock to be issued upon

                                       40

<PAGE>

      exercise of the warrants adjusted  accordingly.  V-ONE will have the right
      to require  the  exercise of the  warrants  if the closing  sales price of
      Common  Stock  is  equal  to or  greater  than  $3.00  per  share  for any
      consecutive 20 trading days and the shares of Common Stock  underlying the
      warrants  have  been  registered  under  the  Securities  Act of 1933,  as
      amended.

      In  connection  with the 8% Notes  offering,  the Company  recorded a debt
      discount  of  $184,980  and  recognized  additional  interest  expense  in
      accordance with the accounting  requirements  for a beneficial  conversion
      feature on the  convertible  instruments.  The proceeds  received from the
      convertible 8% Notes offering were first allocated between the convertible
      instrument and the detachable warrants issued on the fair value basis. The
      Company used the  Black-Scholes  model to determine  the fair value of the
      warrants  that  was  recorded  as a  debt  discount  using  the  following
      assumptions:  volatility  of 100%,  risk  free  interest  rate of 4.7% and
      expected  term  of  5  years.  The  debt  discount   resulting  from  this
      transaction   is  amortized  over  the  initial  term  of  the  underlying
      convertible  instruments or through the date of the conversion,  whichever
      occurs  sooner.  During the year ended  December  31,  2002,  the  Company
      recorded amortization expense of the debt discount of $173,222. During the
      year ended December 31, 2003, the Company recorded additional amortization
      expense of the debt discount of $11,758.

      A calculation  was then performed to determine the difference  between the
      effective  conversion  price and the fair value of the Common Stock at the
      commitment  date. The Company will record interest expense upon conversion
      of the 8%  Notes as a  result  of the  embedded  conversion  feature.  The
      additional  interest expense is not recorded until conversion  because the
      8% Notes contain a  contingency  that does not permit the number of shares
      to be received upon conversion to be calculated until  conversion  occurs.
      Upon  conversion of $585,000 of 8% Notes into  2,340,000  shares of Common
      Stock  during the year ended  December  31,  2002,  the  Company  recorded
      $101,600 of interest  expense.  During the year ended  December  31, 2003,
      $110,000 of 8% Notes were  converted  into 440,000  shares of Common Stock
      and the Company recorded $27,600 of interest expense.

      In  January  2003,  the  Company  elected  to  extend  the 8% Notes for an
      additional  180 days and paid the interest  accrued under the initial term
      of the 8% Notes.  In July 2003,  the  Company  requested  and  received an
      extension  of the 8% Notes  for an  additional  180 days and  agreed to an
      increase in the interest rate from 10% to 12% during the extension period.
      In connection with a restructuring  of the 8% Notes, the Company agreed in
      January  2004  to  adjust  the  conversion   price  of  certain  8%  Notes
      constituting  $150,000 in  principal  to $.18 per share in exchange for an
      extension  of the term of such 8% Notes  to July 15,  2004 at an  interest
      rate of 10%. Also in connection with the January 2004  restructuring,  the
      Company   adjusted  the  conversion   price  of  the  remaining  8%  Notes
      outstanding,  which constituted  $343,000 in principal,  to $.15 per share
      and the holders of such 8% Notes  converted them into 2,286,667  shares of
      Common Stock.

      Series B Preferred Stock
      ------------------------

      On June  11,  1999,  the  Company  issued  1,287,554  shares  of  Series B
      Convertible  Preferred  Stock (the "Series B Stock") at $2.33 per share 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  received  in  two
      installments  of $1.0  million  plus  accrued  interest in July and August
      1999.  The  holders of the Series B Stock are  entitled  to a  liquidation
      preference  of $2.33 per share.  During  2001,  all shares of the Series B
      Stock were converted into Common Stock.

                                       41

<PAGE>
      Series C Preferred Stock
      ------------------------

      On  September  9, 1999,  the  Company  issued  335,000  shares of Series C
      Preferred Stock ("Series C Stock") and non-detachable warrants to purchase
      3,350,000  shares of the Company's  Common Stock  ("Series C Warrants") to
      certain accredited  investors.  The Series C Stock was sold in units, with
      each unit consisting of one share of Series C Stock and a Series C Warrant
      to  purchase  ten  shares of Common  for a price of $26.25  per unit.  The
      Company  received   $7,918,684  in  proceeds  net  of  issuance  costs  of
      approximately  $875,000. The Series C 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 Series C 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 as to
      payment  of  dividends  and  priority  on   distribution  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.  There are no sinking fund  provisions  applicable  to the Series C
      Shares.

      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
      Series C 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 at the  Company's  option in cash or in  shares  of Common  Stock 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 Series C Warrants  have been  exercised  by a
      holder,  that holder shall have the right to require the Company to redeem
      all of its then outstanding shares 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.

      Throughout  2000,  certain holders of the Series C Stock chose to exercise
      their  warrants  through  a  cashless  exercise  provision.  The  cashless
      exercise  provision  allowed  the  holders to remit each share of Series C
      Stock in exchange for 10 shares of Common Stock. A total of 280,286 shares
      of Series C Stock were remitted for 2,802,860  shares of Common Stock.  An
      additional  97,449  shares  of  Common  Stock  were  issued as a result of
      dividends  earned on the Series C Stock.  For the year ended  December 31,
      2001, a total of 11,810 shares of Series C Stock were remitted for 118,100

                                       42
<PAGE>

      shares of Common Stock,  and an  additional  19,436 shares of Common Stock
      were  issued as a result of  dividends  earned on the  Series C Stock.  At
      December  31,  2003 and 2002,  42,904  shares  of Series C Stock  remained
      outstanding. The dividend payable on these shares at December 31, 2003 and
      2002  was  $574,155  and  $373,044,  respectively,   payable  in  cash  or
      equivalent  shares of Common Stock at fair market value at the  conversion
      date.

      Series D Convertible Preferred Stock
      ------------------------------------

      On February 14,  2001,  V-ONE  issued  3,675,000  shares of Series D stock
      ("Series D Stock")  with  warrants  to purchase  735,000  shares of Common
      Stock  ("Series D Warrants").  The Series D Stock was sold in units,  with
      each  unit  consisting  of five  shares  of  Series D Stock and a Series D
      Warrant to purchase one share of Common Stock.  The Series D Warrants were
      exercisable at a price of $2.29 per share through February 14, 2004.

      The Series D Stock bears  cumulative  compounding  dividends  at an annual
      rate of 10.0% for the first five years, 12.5% for the sixth year and 15.0%
      in and after the seventh  year.  The  dividends may be paid in cash, or at
      the option of V-ONE,  in shares of registered  Common Stock.  The Series D
      Stock is  convertible  at any time  into  shares  of  Common  Stock at the
      initial  conversion price of $1.91 and the initial conversion ratio of one
      share of Series D Stock for one share of Common Stock. Both the conversion
      price and conversion  ratio are subject to equitable  adjustment for stock
      spits, stock dividends, combinations, and similar transactions, and in the
      event V-ONE issues  shares of Common  Stock at a purchase  price less than
      the  then  current   conversion   price.   The  Series  D  Stock  will  be
      automatically   converted  into  Common  Stock  upon  the  closing  of  an
      underwritten  public offering in excess of $20.0 million and at a price in
      excess of $3.00 per share.

      The  Series D Stock  ranks  senior to the  Common  Stock and junior to the
      Series C Stock as to payment of dividends and priority on  distribution of
      assets upon liquidation,  dissolution,  or winding up of V-ONE. Holders of
      the Series D Stock are entitled to a liquidation  preference  equal to the
      greater of (i) $1.91 plus any unpaid accrued preferred dividends, and (ii)
      the  dollar  value per share for the  Series D Stock that a holder of such
      shares would have been entitled to receive had such shares been  converted
      into Common Stock  immediately  prior to the  liquidation,  dissolution or
      winding up of V-ONE.  There are no sinking fund  provisions  applicable to
      the Series D Stock.

      Except as to matters  addressed in the next  sentence,  the holders of the
      Series D Stock have the right to vote that  number of shares  equal to the
      number of shares of Common Stock  issuable  upon the  conversion  of their
      Series D Stock and vote  together  with the  holders of Common  Stock as a
      single  class.  For so long as at least  51.0% of the  number of shares of
      Series D Stock outstanding on February 14, 2001 remains  outstanding,  the
      affirmative  vote or consent of the  holders of at least 51.0% of the then
      outstanding  number of shares of Series D Stock,  voting  separately  as a
      class,  is required  for (i) the  voluntary  liquidation,  dissolution  or
      winding up of V-ONE,  (ii) the issuance of any securities  senior to or on
      parity with the Series D Stock, (iii) the declaration or payment of a cash
      dividend on all junior  stocks,  and (iv)  certain  amendments  to V-ONE's
      certificate of incorporation and bylaws.

      V-ONE has the right to redeem the  outstanding  Series D Stock in whole at
      any time after  February 14, 2004.  The  redemption  price will be paid in
      cash in full and be the  greater  of $1.91  per  share or the fair  market
      value of each share of Series D Stock plus all unpaid dividends.

      Beginning  on  February  14,  2007,  and for each of the next three  years
      thereafter,  the holders of Series D Stock will have the cumulative  right
      to require V-ONE to redeem annually up to one-fourth of the Series D Stock
      issued by V-ONE to each such holder.  The redemption  right can be settled

                                       43
<PAGE>

      through  the  issuance  of Common  Stock,  at the  option  of  V-ONE.  The
      redemption  price for each share of Series D Stock is $1.91 per share plus
      all unpaid dividends.

      In  2001,  the  Company   recorded  a  deemed  dividend  of  approximately
      $2,932,000 in accordance with the accounting requirements for a beneficial
      conversion  feature on the Series D Stock.  The  proceeds  received in the
      Series D offering were first allocated between the convertible  instrument
      and the Series D Warrant on a relative fair value basis. A calculation was
      then  performed  to  determine  the   difference   between  the  effective
      conversion  price and the fair  market  value of the  Common  Stock at the
      commitment date.

      In 2002, a holder of Series D Stock chose to convert its Series D Stock to
      Common  Stock at the  conversion  ratio of one share of Series D Stock for
      one share of Common  Stock.  A total of  654,000  shares of Series D Stock
      were remitted for 654,000 shares of Common Stock. At December 31, 2003 and
      2002,  3,021,000  shares  of  Series  D Stock  remained  outstanding.  The
      dividend  payable on these  shares at December  31, 2003 and 2002  equaled
      $1,943,610  and  $1,202,665,  respectively,  payable in cash or equivalent
      shares of Common Stock at fair market value at the conversion date.

      V-ONE has granted  registration  rights to the  purchasers of the Series C
      and Series D Stock and the 7% and 8% Notes whereby V-ONE is obligated,  in
      certain  instances,  to register the shares of Common Stock  issuable upon
      conversion  of the Series D Stock and 7% and 8% Notes and  exercise of the
      warrants attached to the Series C and Series D Stock and 7% and 8% Notes.

      Common Stock
      ------------

      In June 2003, the stockholders voted to amend the Company's certificate of
      incorporation,  as  amended  and  restated,  to  increase  the  number  of
      authorized  shares of  Common  Stock of the  Company  from  50,000,000  to
      75,000,000 shares.

      During the year ended December 31, 2003, the Company issued 453,714 shares
      of Common Stock in exchange for governmental consulting services valued at
      $80,000.

      Warrants
      --------

      In addition to the warrants attached to the 7% and 8% Notes and the Series
      C and Series D Stock  discussed  above,  the Company  issued the following
      warrants to purchase  Common  Stock  during the years ended  December  31,
      2001, 2002, and 2003:

      On January 9, 2001, the Company  granted fully vested warrants to purchase
      an additional  30,000 shares of Common Stock to MindSquared,  LLC, as part
      of the consulting agreement. The warrants have an exercise price of $0.625
      per share and expire five years from the date of grant. The Company valued
      these   warrants  using  the   Black-Scholes   model  with  the  following
      assumptions:  volatility  of  123%,  risk  free  interest  rate  of 6% and
      expected  term  of 5  years.  The  value  of the  warrants,  $15,307,  was
      recognized ratably over the four-month term of the consulting agreement.

      During the year ended  December 31, 2001,  warrants to purchase  shares of
      Common Stock that were  attached to the Series C Stock were  exercised for
      an equal number of shares of Common Stock. Of the original warrants issued
      in the Series C offering,  429,040 remain outstanding at December 31, 2003
      at an exercise price of $1.91 per share.

                                       44

<PAGE>

      During 2001, in  connection  with the issuance of the Series D Convertible
      Preferred  Stock,  the Company  granted fully vested  warrants to purchase
      735,000 shares of Common Stock.  The Series D Warrants are  exercisable at
      $2.29 per share and expired  unexercised at February 14, 2004. Pursuant to
      the terms of the warrants issued in connection with a debt  transaction in
      1999,  a price  adjustment  was  created by the  issuance  of the Series D
      Stock.  The  warrants  to  purchase  210,914  shares of Common  Stock were
      reduced in price to $1.91,  and  additional  warrants to  purchase  57,411
      shares of Common  Stock were issued to increase the number of warrants for
      Transamerica  Business Credit  Corporation to 268,325 at February 14, 2001
      pursuant to the Loan and Security Agreement dated February 24, 1999.

      In 2002,  V-ONE granted  warrants to purchase a total of 336,750 shares of
      Common Stock to Joseph Gunnar & Co., LLC and LaSalle St. Securities,  LLC,
      placement agent and subagent, respectively, for the 8% Notes offering. The
      terms of the  placement  agent  warrants  mirror  those of the  detachable
      warrants  granted in connection  with the 8% Notes  offering.  The Company
      used the Black-Scholes model to determine the fair value of these warrants
      with the following  assumptions:  volatility  of 100%,  risk free interest
      rate of 4.7% and  expected  term of 5 years.  The value of the warrants of
      $87,800 was recognized during the year ended December 31, 2002. In January
      2003, in  connection  with its efforts to raise  capital,  V-ONE agreed to
      adjust the exercise  price of the  warrants  from $0.50 per share to $0.15
      per share.  During the year ended December 31, 2003,  Joseph Gunnar & Co.,
      LLC exercised warrants to purchase 139,146 shares of Common Stock.

      Warrants to purchase shares of the Company's  Common Stock  outstanding at
      December 31, 2003 and 2002 were as follows:

              2003            2002       Exercise Price
              ----            ----       --------------
               1,155,954              -      $0.15
                       -      1,524,750      $0.50
                  30,000         30,000      $0.63
                 100,000        100,000      $1.19
                 639,954        697,365      $1.91
                 735,000        735,000      $2.29
                       -         10,000      $2.69
                 150,000        150,000      $3.13
                       -         54,000      $4.73
             ------------------------------
               2,810,908      3,301,115
             ==============================

      At December  31,  2003,  warrants to purchase  2,810,908  shares of Common
      Stock were exercisable.

      Employee Stock Purchase Plan
      ----------------------------

      The Company's Board of Directors  adopted the 2001 Employee Stock Purchase
      Plan ("Purchase Plan") on February 26, 2001 and the Company's stockholders
      approved of the Purchase Plan at the Annual Meeting of Stockholders on May
      10, 2001.  The Purchase Plan became  effective upon adoption by the Board,
      however,  the first  offering  period under the Purchase Plan began on the
      first trading day on or after July 1, 2001. Pursuant to the Purchase Plan,
      2,500,000  shares of Common Stock were reserved for future issuance by the
      Company to employees through the grant of stock options to purchase Common
      Stock.  Shares  acquired  under the Purchase  Plan may be  authorized  and
      unissued shares or treasury shares.

      The purpose of the  Purchase  Plan is to provide  employees of the Company
      with an opportunity to purchase Common Stock through  payroll  deductions.
      Under the Purchase Plan, a participating  employee is granted an option to

                                       45

<PAGE>

      purchase Common Stock that is exercised  automatically at a specified date
      set forth in the Purchase  Plan.  The purchase  price for shares of Common
      Stock  received upon exercise of the option is paid through the employee's
      payroll  deductions  and may not be less than 85% of fair market  value at
      the date of the grant. It is the Company's  intention to have the Purchase
      Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the
      Internal  Revenue Code of 1986,  as amended  ("Code").  The Purchase  Plan
      shall be  construed  so as to extend and limit  participation  in a manner
      consistent  with Section 423 of the Code. The Purchase Plan is NOT subject
      to the provisions of the Employee  Retirement  Income Security Act of 1974
      or Section 401(a) of the Code.

      During  the years  ended  December  31,  2003 and 2002,  54,522 and 60,397
      shares,  respectively,  were  purchased by employees at various  prices in
      accordance  with the  provisions of the Purchase Plan. For the years ended
      December 31, 2003 and December 31, 2002,  the  weighted-average  prices of
      the shares purchased were $0.12 and $0.32, respectively.

      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 Plan.  These plans 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  and the  vesting  period  and  exercise  price  of the  options
      provided  it was not below  market  value on the date of the grant for the
      1995  Non-Statutory  Stock Option Plan ("1995 Plan").  In most cases,  the
      options  vested over a two-year  period and will  terminate ten years from
      the date of  grant.  The  1995  Plan  will  terminate  in 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.

      At  December  31,  2003,  2002 and 2001 there were  10,602  stock  options
      outstanding  under the 1995 Plan with a weighted average exercise price of
      $2.50.  There was no  activity  under the 1995 Plan  during the three year
      period ended December 31, 2003.

      1996 INCENTIVE STOCK PLAN

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

      Awards  may be  granted  under the 1996 Plan  with  respect  to a total of
      2,333,333 shares of Common Stock. As of December 31, 2003, 838,465 options
      are  outstanding  of which  392,848  are  vested,  and a total of  470,634
      options are available for grant under the 1996 Plan.

                                       46

<PAGE>

      Option activity under the 1996 Plan for the three years ended December 31,
      2003 was as follows:

                                                          Weighted Average
                                                Shares     Exercise Price
                                             ----------   -----------------
        Balance as of December 31, 2000        226,555         $3.833

        Granted                                455,400         $1.389
        Exercised                               (1,750)        $2.625
        Cancelled                              (47,300)        $1.383
        Expired                                (99,740)        $4.479
                                             ----------   -----------------
        Balance as of December 31, 2001        533,165         $1.845

        Granted                                678,500         $0.284
        Cancelled                             (208,625)        $0.881
        Expired                                (14,625)        $2.451
                                             ----------   -----------------
        Balance as of December 31, 2002        988,415         $0.980

        Cancelled                             (127,700)        $0.539
        Expired                                (22,250)        $0.884
                                             ----------   -----------------
        Balance as of December 31, 2003        838,465         $1.050
                                             ==========   =================

      1998 INCENTIVE STOCK PLAN

      On February 2, 1998, the Board of Directors authorized the adoption of the
      1998 Incentive  Stock Plan ("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 the Board of Directors or a committee of the Board of
      Directors.  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.

      Awards  may be  granted  under the 1998 Plan  with  respect  to a total of
      5,000,000  shares of Common  Stock.  As of December  31,  2003,  4,051,465
      options are  outstanding,  of which  2,608,799 are vested,  and a total of
      610,490 options are available for grant under the 1998 Plan.

      Option activity under the 1998 Plan for the three years ended December 31,
      2003 was as follows:

                                                             Weighted
                                                             Average
                                              Shares      Exercise Price
                                             ----------   ---------------
         Balance as of December 31, 2000      2,614,055       $2.178

         Granted                              1,287,000       $0.917
         Exercised                              (29,480)      $1.568
         Cancelled                             (313,685)      $2.131

                                       47

<PAGE>

         Expired                               (247,200)      $2.377
                                             ----------   ---------------
         Balance as of December 31, 2001      3,310,690       $1.683

         Granted                              1,027,000       $0.658
         Cancelled                             (596,663)      $1.518
         Expired                               (213,187)      $1.592
                                             ----------   ---------------
         Balance as of December 31, 2002      3,527,840       $1.418

         Granted                                909,500       $0.081
         Cancelled                             (211,875)      $1.135
         Expired                               (174,000)      $1.120
                                             ----------   ---------------
         Balance as of December 31, 2003      4,051,465       $1.143
                                             ==========   ===============

      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.

      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,
      2003,  2002 and  2001,  respectively:  dividend  yield of 0% and  expected
      volatility of 100% for all periods;  risk-free  interest rate of 4.7%; 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, 2003,  2002 and 2001 was $0.06,  $.32 and $.74,
      respectively.   The  weighted   average  exercise  price  of  the  options
      outstanding  under all of the Company's  plans at December 31, 2003,  2002
      and 2001 was $1.13,  $1.33 and $1.70,  respectively.  As of  December  31,
      2003,  the  weighted  average  remaining  contractual  life of the options
      outstanding  under all of the Company's  plans is 6.7 years and the number
      of options exercisable is 3,012,249.

      During the year ended  December 31, 2002,  the Company  issued  options to
      purchase  200,000  shares  of  common  stock to  various  consultants  for
      financial  advisory,   lobbying,   investigative  and  marketing  services
      provided.  The Company used the Black-Scholes  model to determine the fair
      value of these options with the following assumptions: volatility of 100%,
      risk  free   interest  rate  of  5.0%  and  expected  term  of  10  years.
      Compensation  expense of $82,545  related to the  options  was  recognized
      during the year ended December 31, 2002.

      Reserve for Issuance
      --------------------

      At December 31, 2003, the Company has  authorized the following  shares of
      Common Stock for issuance upon  conversion  of the 8% Secured  Convertible
      Notes,  Series C  Preferred  Stock,  Series D  Preferred  Stock,  and upon
      exercise of options and warrants (in thousands):

         Series D Preferred Stock                                       3,021
         Common Stock options outstanding                               4,900

                                       48
<PAGE>

         Common Stock options available for grant                       1,081
         Common Stock reserved for Employee Stock                       2,500
          Purchase Plan
         Common Stock underlying 8% Convertible Notes                   1,972
         Common Stock warrants                                          2,811
                                                                  -------------
        Total shares of authorized Common Stock reserved               16,285
                                                                  =============
7.    NOTES PAYABLE - OTHER

      At December  31, 2003 and 2002,  notes  payable - other  consisted  of the
      following:

                                                               2003       2002
                                                               ----       ----
     Note   payable  to  Joseph   Gunnar  &  Co.,   LLC,
     unsecured,   due  August  2003.  Beginning  at  the
     maturity   date,   the  note  became  payable  with
     interest  at 15% per  annum  from  the  date of the
     note.  Note balance at December  31, 2003  includes    $ 24,068   $ 20,000
     accrued interest of $4,068.

     Note  payable  to  landlord,   unsecured,   bearing
     interest  at 10%  per  annum,  payable  in  monthly
     installments  of $11,559  including  principal  and     172,467          -
     interest.  Note matures in April 2005.              -----------  ----------


     Total                                                   196,535     20,000

     Less: current portion of notes payable - other         (151,248)   (20,000)
                                                         -----------  ----------

     Notes payable - other, net of current portion         $ 45,287     $     -
                                                         ===========  ==========

      Future minimum payments under the notes payable - other are as follows:

         Year Ending
         December 31,               Amount
         ------------               ------

             2004                   $ 151,248
             2005                      45,287
                               -----------------

            Total                   $ 196,535
                               =================

8.    COMMITMENTS AND CONTINGENCIES

      OPERATING LEASES

      The  Company  is  obligated  under  various  operating  lease  agreements,
      primarily  for office space and equipment  through 2008.  The office lease
      provides for monthly  payments of  approximately  $17,600 subject to fixed
      rent escalations which under the generally accepted accounting  principles
      are  expensed  on a pro  rata  basis  over  the  term  of the  lease.  The
      difference  between expense  recognized and the required lease payments at
      the balance  sheet date is recorded as deferred  rent in the  accompanying
      Balance Sheets.

                                       49

<PAGE>

      Future minimum lease payments under these non-cancelable  operating leases
      as of December 31, 2003 are as follows:

           Year Ending
           December 31,                                        Operating
           ------------                                        ---------

              2004                                            $  231,072
              2005                                               235,177
              2006                                               229,892
              2007                                               236,789
              2008                                                59,486
              ----                                                ------
           Total minimum payments                             $  992,416
                                                              ==========

      Rent  expense was  $241,786,  $428,801  and  $464,483  for the years ended
      December 31, 2003, 2002 and 2001, respectively.

      LETTER OF CREDIT

      A bank  issued  an  irrevocable  standby  letter  of credit in 2002 on the
      Company's behalf for a maximum amount of $35,000,  originally  expiring on
      April 23, 2003. The letter of credit was extended until April 23, 2004. At
      December  31,  2002,  a $35,000  certificate  of  deposit  was  pledged as
      collateral  for the  letter  of  credit.  As of  December  31,  2003,  the
      certificate of deposit was reduced to $26,500.

9.    EMPLOYEE 401(K) DEFERRED COMPENSATION PLAN

      The  Company  has a  401(k)  plan  for all  employees  over the age of 21.
      Contributions are made through voluntary employee salary reductions, up to
      20% of  their  annual  compensation,  and  discretionary  matching  by the
      Company.  Employer contributions vest based on the participant's number of
      years of continuous service. A participant is fully vested after six years
      of continuous service.  There were no employer contributions for the years
      ended December 31, 2003, 2002, or 2001.

10.   SUPPLEMENTAL CASH FLOW DISCLOSURE

      Selected cash payments and noncash activities were as follows:

<TABLE>
<CAPTION>
                                                              Year ended December 31,
                                                      -----------------------------------------
                                                         2003            2002          2001
                                                      -----------     -----------   -----------
<S>                                                     <C>            <C>           <C>
      Cash paid for interest                            $ 71,813       $   6,647    $   11,560
      Cash paid for dividends                                  -               -    $      259
      Noncash investing and financing activities:
      Dividends paid with stock                                -               -    $   46,348
      Deemed dividend on preferred stock                       -               -    $2,932,023
      Notes converted to common stock                   $110,000       $ 585,000             -
      Debt discount on 8% Convertible Notes                    -       $ 184,980             -
      Issuance of stock options to consultants          $  4,902       $  82,545    $   98,232
      Issuance of restricted stock                             -               -    $   52,000
      Accounts payable converted to note
      payable-other                                     $250,483               -             -
</TABLE>

                                               50
<PAGE>

<TABLE>
<S>                                                     <C>                    <C>           <C>
      Accrued interest on 8% Convertible Notes
      converted to Common Stock                         $  1,357               -             -
      Common Stock issued to consultants                $ 80,000               -             -
</TABLE>

11.   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,
                                                      ----------------------------------------
                                                        2003            2002          2001
                                                      ----------------------------------------
<S>                                                 <C>             <C>           <C>
        Numerator:
        Net loss                                    $  (449,650)     (5,635,191)  $ (6,237,278)
        Less:  Dividend on preferred stock             (942,056)       (699,901)      (741,245)
        Deemed dividend on preferred stock                    -               -     (2,932,023)
                                                      ----------     -----------    ----------
        Net loss attributable to holders of
        Common Stock                                $ (1,391,706)    (6,335,092)  $ (9,910,546)
                                                      ==========     ===========    ==========
        Denominator:
        Denominator for basic net loss per
          share-weighted average shares               27,142,148     25,230,360     22,576,188

        Effect of dilutive securities:
          Preferred Stock                                     -               -             -
          Stock Options                                       -               -             -
          Warrants                                            -               -             -
                                                      ----------     -----------    ----------
        Dilutive potential common shares                      -               -             -
                                                      ----------     -----------    ----------
        Denominator for diluted net loss per
          share-adjusted weighted average shares      27,142,148     25,230,360     22,576,188
                                                      ==========     ===========    ==========

        Basic and diluted loss per share              ----------     -----------    ----------
          attributable to holders of Common Stock    $     (0.05)   $      (0.25)  $     (0.44)
                                                      ==========     ===========    ==========
</TABLE>

      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,
                               -----------------------------------------
                                  2003          2002           2001
                               ------------  ------------  -------------

Preferred stock:
       Series  D                3,021,000     3,021,000     3,675,000
Stock options                   4,900,532     4,526,857     3,854,457
Warrants                        2,810,908     2,586,204     1,776,365

                                       51

<PAGE>

12.   SELECTED QUARTERLY FINANCIAL DATA - UNAUDITED

      The following table presents the quarterly  results for V-ONE  Corporation
      for the years ended December 31, 2003 and 2002:
<TABLE>
<CAPTION>

                                  1st             2nd             3rd             4th
                                Quarter         Quarter         Quarter         Quarter
                                -------         -------         -------         -------
<S>                        <C>             <C>              <C>              <C>
       2003
       Revenue              $  1,005,270    $   1,155,220    $    878,766    $   963,670
       Gross profit              964,090        1,012,874         842,039        918,915
       Net income (loss)   ($    352,598)  ($      26,235)  ($     80,113)   $     9,296


       Net loss per
       share, basic and     $      (0.02)  $        (0.01)   $      (0.01)   $         -
       diluted

       2002                                                    (restated)
       Revenue              $    852,219    $     886,999    $  1,151,943    $   661,865
       Gross profit              686,486          760,053       1,014,259        608,603
       Net  loss           ($  2,013,619)  ($   1,430,459)  ($  1,186,638)  ($ 1,004,475)

       Net loss per
       share, basic and
       diluted              $      (0.09)           (0.07)          (0.05)         (0.04)
</TABLE>

      The Company  restated the results of the third  quarter of 2002 to account
      for the  allocation of the fair value of a warrant and a note payable that
      were  issued in  connection  with the 8% Secured  Convertible  Notes.  The
      result of the restatement  was to record  additional  interest  expense of
      $107,800.

13.   SUBSEQUENT EVENTS

      In connection with a restructuring  of the 8% Notes, the Company agreed in
      January  2004  to  adjust  the  conversion   price  of  certain  8%  Notes
      constituting  $150,000 in  principal  to $.18 per share in exchange for an
      extension  of the term of such 8% Notes  to July 15,  2004 at an  interest
      rate of 10%. Also in connection with the January 2004  restructuring,  the
      Company   adjusted  the  conversion   price  of  the  remaining  8%  Notes
      outstanding,  which constituted  $343,000 in principal,  to $.15 per share
      and the holders of such 8% Notes  converted them into 2,286,667  shares of
      Common  Stock and granted a warrant to purchase a total of 250,000  shares
      of Common Stock at an exercise price of $0.18 per share to Joseph Gunnar &
      Co., LLC,  placement  agent for the 8% Notes  offering.  In February 2004,
      Joseph Gunnar & Co., LLC  exercised the warrant to purchase  61,191 shares
      of Common Stock.

      7% Subordinated Convertible Notes
      ---------------------------------

      In  a  closing  on  February  27,  2004,   V-ONE  issued  7%  Subordinated
      Convertible  Notes ("7% Notes") with  warrants for an aggregate  principal
      amount of  $1,200,000,  resulting in net proceeds to V-ONE of  $1,065,690.
      The 7% Notes mature on February  27, 2009.  Interest at the rate of 7% per
      annum is payable semi-annually at the option of V-ONE in cash or in shares
      of Common  Stock.  The 7% Notes rank senior to the Common Stock and junior
      to the Series C Shares and Series D Shares as to the payment of  dividends
      and as to distribution of assets upon liquidation,  dissolution or winding
      up of V-ONE.  So long as at least $500,000 of the principal  amount of the

                                       52

<PAGE>

      7% Notes is outstanding,  the affirmative  vote of the holders of at least
      75% of the  principal  amount of the 7% Notes  outstanding  is required to
      issue any securities that rank senior to or on parity with the 7% Notes.

      The holders may convert the principal  amount of their 7% Notes,  in whole
      or in part, at any time into shares of Common Stock at a conversion  price
      of $.20 per share.  In addition,  subject to certain terms,  the principal
      amount  of the 7%  Notes  plus  all  accrued  and  unpaid  interest  shall
      automatically  convert  into  shares of Common  Stock at the then  current
      conversion  price on the  earlier of (i)  February  27,  2009 and (ii) the
      first date which is at least 180 days  following the effective date of the
      Registration  Statement  providing  for the resale of the shares of Common
      Stock issuable upon  conversion of the 7% Notes that the closing bid price
      of V-ONE Common Stock exceeds $1.00 for a period of 20 consecutive trading
      days.

      An event of  default  will  occur  if  V-ONE  fails to make any  principal
      payment under the 7% Notes, V-ONE fails to make any interest payment for a
      period of five days after such payment is due,  V-ONE fails to timely file
      the  Registration  Statement  providing  for the  resale of the  shares of
      Common Stock issuable upon conversion of the 7% Notes or the  Registration
      Statement is not declared effective by the SEC within 180 days of February
      27, 2004, the  effectiveness  of the  Registration  Statement lapses for a
      period of 20  consecutive  trading days,  or upon the  occurrence of other
      default  events,  including,  but not  limited to, an  assignment  for the
      benefit of creditors,  an application  for the appointment of a trustee or
      receiver or the  commencement of a bankruptcy  proceeding.  If an event of
      default occurs,  the Notes will bear interest at the lesser of 12% and the
      maximum  applicable  legal  rate per  annum  from the date of the event of
      default until such default is cured.

      Upon the  occurrence  of certain  events of default  and other  triggering
      events,  a 7% Note holder shall have the right to require  V-ONE to prepay
      in cash all or a portion of the holder's 7% Note at 120% of the  aggregate
      principal  amount of the 7% Note,  plus all accrued  and unpaid  interest.
      Similar  provisions  apply if V-ONE  cannot  fully  convert a 7% Note into
      shares of registered  Common Stock upon the receipt of a proper conversion
      notice from the holder.  In  addition,  in the event of a major  corporate
      transaction   such  as  the   consolidation,   merger  or  other  business
      combination  of V-ONE into  another  entity or a sale or  transfer of more
      than 50% of V-ONE's  assets,  the 7% Note  holder  shall have the right to
      require  V-ONE to prepay in cash all or a portion of the  holder's 7% Note
      at 100% of the aggregate principal amount of the 7% Note, plus all accrued
      and unpaid  interest.  If the major  corporate  transaction is consummated
      within  six months of the  issuance  of the 7% Note,  then the  prepayment
      shall be at 110% of the aggregate  principal  amount of the 7% Note,  plus
      all  accrued  and  unpaid  interest.  Also,  beginning  one year after the
      issuance  of the 7% Notes,  V-ONE may  prepay  any  portion  or all of the
      outstanding  principal  balance of the 7% Notes  together with all accrued
      and unpaid  interest at 110% of the aggregate  principal  amount of the 7%
      Notes plus any accrued and unpaid interest.

      For twelve  months after the  issuance of the 7% Notes,  each holder shall
      have a right of first  refusal to purchase  its pro rata  portion of V-ONE
      Common Stock (or any securities  convertible,  exercisable or exchangeable
      into Common Stock)  offered to a third party in a private  transaction  on
      the same terms as those offered to the third party,  other than in certain
      permitted  financings.  If a holder  elects not to  exercise  its right of
      first refusal,  the other holders may  participate on a pro rata basis. If
      the holders do not  participate,  V-ONE may proceed  with the  transaction
      with the third party.

      In connection with the 7% Notes offering, V-ONE issued detachable warrants
      to  purchase  6,000,000  shares of Common  Stock to the  holders of the 7%
      Notes.  The  warrants are  exercisable  beginning on August 27, 2004 at an

                                       53

<PAGE>

      exercise price of $0.25 per share and expire on August 27, 2008. Beginning
      180 days after the effective  date of a Registration  Statement  providing
      for the resale of the shares of Common Stock  issuable upon  conversion of
      the 7% Notes and  exercise of the  warrants,  V-ONE may call up to 100% of
      the  warrants if the per share  market  value of its Common Stock has been
      greater than $.75 for a period of 20 consecutive trading days by issuing a
      call notice to the warrant holders. The rights and privileges granted to a
      warrant holder with respect to the shares subject to the call notice shall
      expire on the twentieth  day after the holder  receives the call notice if
      the holder does not exercise the warrant.  If the holder does not exercise
      the  warrant,  V-ONE shall remit to the warrant  holder (i) $.01 per share
      subject to the call notice and (ii) a new warrant  representing the number
      of shares of Common  Stock,  if any,  which  were not  subject to the call
      notice.

      The exercise  price and number of shares of Common Stock to be issued upon
      conversion  of the 7% Notes and  exercise of the  warrants  are subject to
      equitable  adjustment  in the event of stock  dividends,  stock splits and
      similar events  affecting the Common Stock.  In addition,  if V-ONE issues
      any shares of Common Stock or  equivalents  at a purchase  price less than
      the then  current  conversion  price for the 7% Notes or warrant  exercise
      price,  the conversion  price and warrant exercise price will be equitably
      reduced, and number of shares of Common Stock to be issued upon conversion
      of  the 7%  Notes  and  exercise  of the  warrants  adjusted  accordingly.
      However,  in no event shall the conversion price, or exercise price in the
      event of the issuance of V-ONE securities at less than the current warrant
      exercise price, be less than $.15 per share.

      In  connection  with the 7% Notes  offering,  V-ONE  granted a warrant  to
      purchase  up to a total  of  1,260,000  shares  of  Common  Stock  to H.C.
      Wainwright & Co., Inc.,  placement  agent for the 7% Notes  offering.  The
      terms of the placement agent warrant mirror those of the warrants  granted
      in connection with the 7% Notes offering.

                                       54

<PAGE>

                                V-ONE CORPORATION
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

              For the years ended December 31, 2003, 2002 and 2001

<TABLE>
<CAPTION>
                                                  Additions
                                  Balance at      Charged                          Balance at
                                  Beginning       to Costs                        End of Period
         Description              of Period       and             Deductions
                                                  Expenses

 ALLOWANCE FOR DOUBTFUL
 ACCOUNTS
<S>                              <C>            <C>                  <C>           <C>
    December 31, 2001            $    105,664             ---         33,629       $    72,035
    December 31, 2002            $     72,035         155,000        129,900       $    97,135
    December 31, 2003            $     97,135             ---         81,635       $    15,500

 DEFERRED TAX ASSET
 VALUATION ALLOWANCE

    December 31, 2001            $ 16,479,336   $   2,668,612            ---        19,147,948
    December 31, 2002            $ 19,147,948       3,765,142            ---       $22,913,090
    December 31, 2003            $ 22,913,090          38,037            ---       $22,951,127

 ALLOWANCE FOR
 NON-SALABLE INVENTORY

    December 31, 2001            $     78,656         120,000        169,063       $    29,593
    December 31, 2002            $     29,593          42,148         27,003       $    44,738
    December 31, 2003            $     44,738           1,035         36,872       $     8,901
</TABLE>

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

On October 2, 2003, the Company determined to dismiss its independent  auditors,
Ernst & Young LLP,  and to engage the  services  of Aronson & Company as its new
independent  auditors.  This  determination  followed the  Company's  efforts to
contain costs and seek an independent  public  accounting  firm better suited to
its  size,  and was  approved  by the  Company's  Board  of  Directors  upon the
recommendation  of its Audit Committee.  Aronson & Company audited the Company's
financial statements for the fiscal years ended December 31, 2002 and 2003.

During  the fiscal  year  ended  December  31,  2001 and the  fiscal  year ended
December  31,  2002  (which  was not  audited  by  Ernst & Young  LLP),  and the
subsequent  interim period through October 2, 2003,  there were no disagreements
between the Company and Ernst & Young LLP on any matter of accounting principles
or practices,  financial statement  disclosure,  or auditing scope or procedure,
which disagreements, if not resolved to Ernst & Young LLP's satisfaction,  would
have caused  Ernst & Young LLP to make  reference  to the subject  matter of the
disagreement in connection  with its reports on the financial  statements of the
Company for the year ended December 31, 2001. There were no "reportable  events"
as that term is described in Item 304(a)(1)(v) of Regulation S-K.

                                       55

<PAGE>

The  audit  reports  of Ernst & Young  LLP on the  financial  statements  of the
Company as of and for the fiscal years ended  December 31, 2000 and 2001 did not
contain any adverse opinion or disclaimer of opinion, nor were they qualified or
modified as to uncertainty, audit scope or accounting principles.

During the two fiscal years of the Company  ended  December  31,  2002,  and the
subsequent  interim period through  October 2, 2003, the Company did not consult
with Aronson & Company  regarding any of the matters or events set forth in Item
304(a)(2)(i) and (ii) of Regulation S-K.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The  information  required  by this  Item  concerning  directors  and  executive
officers is incorporated  herein by reference to the Company's  definitive proxy
statement for its annual stockholders' meeting to be held on May 13, 2004.

ITEM 11.  EXECUTIVE COMPENSATION

The  information  required by this Item  concerning  executive  compensation  is
incorporated herein by reference to the Company's definitive proxy statement for
its annual stockholders' meeting to be held on May 13, 2004.


ITEM 12.  SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT AND
          RELATED STOCKHOLDER MATTERS

The information  required by this Item concerning  security ownership of certain
beneficial owners and management and related stockholder matters is incorporated
herein by reference to the Company's  definitive  proxy statement for its annual
stockholders' meeting to be held on May 13, 2004.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The  information  required by this Item  concerning  certain  relationships  and
related  transactions  is  incorporated  herein by  reference  to the  Company's
definitive  proxy statement for its annual  stockholders'  meeting to be held on
May 13, 2004.

ITEM 14.  CONTROLS AND PROCEDURES

Within the ninety-day  day period prior to the date of this report,  the Company
carried out an evaluation,  under the supervision and with the  participation of
the Company's  management,  including the Company's  President,  Chief Executive
Officer and Principal  Financial Officer, of the effectiveness of the design and
operation of the Company's  disclosure  controls and procedures pursuant to Rule
13a-14 promulgated under the Securities Exchange Act of 1934, as amended.  Based
upon that  evaluation,  the Company's  President,  Chief  Executive  Officer and
Principal Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting  management to material  information
relating to the  Company  required  to be  included  in the  Company's  periodic
filings with the SEC.  There have been no  significant  changes in the Company's
internal controls or in other factors that could  significantly  affect internal
controls subsequent to the date the Company carried out its evaluation.

                                       56

<PAGE>

ITEM 15.  PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Audit Fees
----------

Audit fees for the fiscal  years ended  December  31, 2002 and 2003 were $95,000
and approximately $45,000, respectively.

Audit Related Fees
------------------

Audit  related fees for the fiscal  years ended  December 31, 2002 and 2003 were
$27,050 and $24,000, respectively. Audit related services generally include fees
for  pension   and   statutory   audits,   business   acquisitions,   accounting
consultations, internal audits and SEC reporting obligations.

Tax Fees
--------

Tax fees for the fiscal years ended December 31, 2002 and 2003 were $0.

All Other Fees
--------------

All other fees for  products  and  services  provided by Aronson & Company,  the
Company's principal accountant, for the fiscal years ended December 31, 2002 and
2003 were $0.

All audit  related  services were  pre-approved  by the Audit  Committee,  which
concluded  that  the  provision  of such  services  by  Aronson  &  Company  was
compatible  with the  maintenance of that firm's  independence in the conduct of
its auditing functions.


                                       57

<PAGE>

                                     PART IV

ITEM 16.  EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON  FORM 8-K

(a)(1), (a)(2) and (d) Financial Statements and Financial Statement Schedule.

See Index to Financial  Statements on page 27. All required financial statements
and financial  statement  schedules of the Company are set forth under Item 8 of
this Annual Report on Form 10-K.

(a)(3) 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 (3)
3.5        Certificate of Designations  of Series A Convertible  Preferred Stock
           (3)
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)
3.9        Certificate of Designations of Series D Convertible  Preferred Stock,
           dated February 14, 2001(14)
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  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. (3)

                                       58

<PAGE>

10.20      Registration  Rights  Agreement  dated as of December 3, 1997 between
           V-ONE and Advantage Fund II Ltd. (3)
10.21      Commitment  Letter dated December 8, 1997 between V-ONE and Advantage
           Fund II Ltd. (3)
10.22      Registration  Rights  Agreement  dated as of December 8, 1997 between
           V-ONE and Wharton Capital Partners, Ltd. (3)
10.23      Warrant to Purchase  60,000 shares of Common Stock Issued on December
           8, 1997 by V-ONE to Wharton Capital Partners, Ltd. (3)
10.24      Letter  Agreement  between V-ONE and Wharton Capital  Partners,  Ltd.
           dated October 22, 1997 (3)
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 (2)
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)

                                       59

<PAGE>

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)
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 (13)
10.65      Series D  Convertible  Preferred  Stock  and  Non-Detachable  Warrant
           Purchase Agreement dated February 14, 2001 (14)
10.66      Form of Warrant Granted to Holders of Series D Convertible  Preferred
           Stock, dated February 14, 2001 (14)
10.67      2001 Employee Stock Purchase Plan (14)
10.68      Form of  Subscription  Agreement  between the  Company and  Employees
           under the 2001 Employee Stock Purchase Plan (14)
10.69      Agreement  for Purchase and Sale of Stock between the Company and NFR
           Security, Inc., dated March 13, 2001 (14)
10.70      Form of Note Purchase Agreement dated July 23, 2002 (15)
10.71      Form of Promissory Note dated July 23, 2002 (15)
10.72      Form of Warrant dated July 23, 2002 (15)
10.73      Company Disclosures (15)
10.74      Term Sheet for Proposed Offering (15)
10.75      Company Disclosures (15)
10.76      Company Disclosures (15)
10.77      Form of Placement Agency Agreement dated July 23, 2002 (15)
10.78      Form of Legal Opinion dated July 23, 2002 (15)
10.79      Form of Note Purchase Agreement dated July 26, 2002 (15)
10.80      Form of Promissory Note dated July 26, 2002 (15)
10.81      Form of Warrant dated July 26, 2002 (15)
10.82      Company Disclosures (15)
10.83      Term Sheet for Proposed Offering (15)
10.84      Company Disclosures (15)
10.85      Company Disclosures (15)
10.86      Form of Placement Agency Agreement dated July 23, 2002 (15)
10.87      Form of Legal Opinion dated July 26, 2002 (15)
10.88      Form of Note Purchase Agreement dated August 2, 2002 (15)
10.89      Form of Promissory Note dated August 2, 2002 (15)
10.90      Form of Warrant dated August 2, 2002 (15)
10.91      Company Disclosures (15)

                                       60

<PAGE>

10.92      Term Sheet for Proposed Offering (15)
10.93      Company Disclosures (15)
10.94      Company Disclosures (15)
10.95      Form of Placement Agency Agreement dated July 23, 2002 (15)
10.96      Form of Legal Opinion dated August 2, 2002 (15)
10.97      Note and Warrant  Purchase  Agreement  dated as of February  27, 2004
           (16)
10.98      Registration Rights Agreement dated as of February 27, 2004 (16)
10.99      Form of Subordinated Convertible Note dated February 27, 2004
10.100     Form of Warrant to Purchase Shares of Common Stock dated February 27,
           2004
16         Letter on change in  certifying  accountants  from Ernst & Young LLP,
           dated October 7, 2003 (17)
23.1       Consent of Aronson & Company
23.2       Consent of Ernst & Young LLP
31         Certification  of Chief  Executive  Officer and  Principal  Financial
           Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32         Certification  of Chief  Executive  Officer and  Principal  Financial
           Officer  Pursuant to Title 18, United  States Code,  Section 1350, as
           Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


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

(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 10-Q for the three months ended June 30, 1997.

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

                                       61

<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.

(13)  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, 1999.

(14) The  information  required by this exhibit is  incorporated by reference to
V-ONE's Form 10-K for the twelve months ended December 31, 2000.

(15) The  information  required by this exhibit is  incorporated by reference to
V-ONE's Registration Statement on Form S-2 (No. 333-98521).

(16) The  information  required by this exhibit is  incorporated by reference to
V-ONE's Form 8-K dated March 5, 2004.

(17) The  information  required by this exhibit is  incorporated by reference to
V-ONE's Form 8-K dated October 8, 2003.

(b) Reports on Form 8-K

Form 8-K filed October 8, 2003, reporting under Items 4 and 7.

                                       62

<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 25, 2004
                                      By:  /s/ Margaret E. Grayson
                                           -------------------------------------
                                           Margaret E. Grayson
                                           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/ Margaret E. Grayson            President, Chief               March 25, 2004
------------------------          Executive Officer,
Margaret E. Grayson               Principal Financial
                                  Officer and Director


/s/ Molly G. Bayley                    Director                   March 24, 2004
------------------------
Molly G. Bayley


/s/ Heidi B. Heiden                    Director                   March 25, 2004
------------------------
Heidi B. Heiden


/s/ William E. Odom                    Director                   March 25, 2004
-------------------------------
William E. Odom


                                       63