UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934
                                    FORM 10-K 

       For Fiscal Year Ended: December 31, 1996 Commission File No.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.)

            1803 Research Blvd., Suite 305, Rockville, Maryland 20850
            ---------------------------------------------------------
               (Address of principal executive offices) (Zip Code)

                                 (301) 838-8900
                                 --------------
              (Registrant's telephone number, including area code)

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

           SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

                    Common Stock, $0.001 par value per share
                    ----------------------------------------
                                (Title of class)
                      Traded on the Nasdaq National Market

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

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

         The aggregate  market value of the Common Stock held by  non-affiliates
of the registrant on February 28, 1997, based upon the closing sale price of the
Common Stock on the Nasdaq  National Market on that date as reported in The Wall
Street Journal was approximately $85,486,880.  This calculation does not reflect
a determination that persons are affiliates for any other purposes.

Registrant had 12,664,723  shares of Common Stock outstanding as of February 28,
1997.



                       DOCUMENTS INCORPORATED BY REFERENCE

Part III -- Portions of the registrant's definitive proxy statement to be issued
in conjunction with registrant's 1997 annual stockholder's meeting to be held on
May 15, 1997.



<PAGE>


Forward-Looking Statements

In  addition  to   historical   information,   this   Annual   Report   contains
forward-looking   statements  that  involve  risks  and   uncertainties.   These
statements may differ in a material way from actual future events. For instance,
factors  that could cause  results to differ from future  events  include  rapid
rates of technological change and intense competition, among others. Readers are
cautioned not to place undue reliance on these forward-looking statements. V-ONE
Corporation  undertakes no obligation to publicly  revise these  forward-looking
statements  or to reflect  events or  circumstances  that  arise  after the date
hereof.  Readers are also referred to the documents  filed by V-ONE  Corporation
with  the  Securities  and  Exchange  Commission,   specifically  the  Company's
registration  statement  as filed on Form S-1 and the last  report on Form 10-Q,
which identify important risk factors for the Company.


                                     PART I

Item 1. BUSINESS

V-ONE Corporation  ("V-ONE" or the "Company")  develops,  markets and licenses a
comprehensive  suite of network security  products that enable  organizations to
conduct secured electronic  transactions and information  exchange using private
enterprise  networks and public  networks,  such as the Internet.  The Company's
suite of products  address  network  user  authentication,  perimeter  security,
access control and data integrity through the use of smart cards,  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 future network security standards.  In
addition,  the Company's products enable organizations to deploy and scale their
solutions from small single-site networks to large multi-site environments.

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

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 1803 Research  Boulevard,
Suite 305,  Rockville,  Maryland 20850. The Company's  telephone number is (301)
838-8900.


                                       2
<PAGE>



BACKGROUND

OVERVIEW. Over the last decade,  decentralized computing has emerged as a result
of the widespread adoption of personal  computers,  local area networks and wide
area networks.  This emergence has enabled users to communicate  with each other
and share data throughout an entire organization. With the recent popularization
of the Internet and  increased  performance  capabilities  offered by high-speed
modems, ISDN services and frame relay technology, the volume of data transferred
over networks has increased dramatically.

In addition,  leading  hardware  and  software  vendors have adopted and support
TCP/IP, the Internet's  non-proprietary  communications  protocol,  for computer
communications  and  information  exchange.  This open platform,  along with the
emergence of the Internet, allows increasing numbers of businesses and consumers
to engage in electronic  commerce,  such as home banking,  credit  verification,
securities trading and home shopping.

Organizations are increasingly using public networks,  such as the Internet,  as
an  extension  of  their   enterprise   networks.   Public   networks   offer  a
cost-effective means of connecting branch offices and remote and mobile users to
mission  critical  applications  and  corporate  resources  such  as  groupware,
customer databases and inventory control systems. Also, the Internet can be used
as a lower cost alternative to value-added networks as a means to link companies
with  customers,  suppliers and trading  partners.  In addition,  businesses are
deploying  intranets,  internal networks using TCP/IP  protocols,  to facilitate
geographically  dispersed  communications  and the  transmission  of information
throughout an enterprise in a cost-effective manner.

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

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

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

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


                                       3
<PAGE>



-  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.

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

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

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

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

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

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

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


                                       4
<PAGE>



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

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

As organizations increase their dependence on the Internet and deploy intranets,
the Company  believes that there will be an increasing  need for a comprehensive
enterprise-wide  network  security  solution.  Many  network  security  vendors,
however,  have focused on developing products that address only one or a limited
number of specific security  requirements.  In addition,  products  developed by
different  vendors are often  difficult  to  integrate  with each other and pose
interoperability problems. Consequently, the Company believes that organizations
will increasingly demand comprehensive  network security solutions that are easy
to implement and transparent to the user.  These solutions must have the ability
to integrate with existing applications, networks and/or mainframe applications,
while being  flexible and powerful  enough to address the needs created by newly
developed technologies.

THE V-ONE SOLUTION

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

The  Company's  suite of products  can be  combined  and  configured  to provide
network  perimeter  security,  secure remote  access and  intra/inter-enterprise
security to facilitate secured electronic commerce and information exchange. The
Company's principal products are SmartGATE,  a client/server product that offers
identification and authentication, integrity, non-repudiation, authorization and
encryption;  and  SmartWall,  an  application-level  firewall that  incorporates
SmartGATE's  functionality.  The  Company  provides  customers  with  two-factor


                                       5
<PAGE>



identification,   mutual   authentication,   fine-grained   access  control  and
encryption  by  combining  SmartCAT,  V-ONE's  smart card  technology,  with the
SmartGATE  server. In addition,  SmartGATE users can access enterprise  networks
from remote locations using SmartCAT.

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

STRATEGY

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

- Provide an Interoperable,  Scaleable and Open Solution. The Company intends to
continue to provide network security  products that operate on leading platforms
and that are interoperable and compatible with other network security  products.
The flexible and open architecture of the Company's  products enable the Company
to deliver component  technologies for a seamless and  interoperable  system. In
addition,  the Company's  technology is scaleable,  application-independent  and
designed  both to integrate  with  existing  technologies  as well as to support
emerging standards and applications.

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

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


                                       6
<PAGE>


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

PRODUCTS AND SERVICES

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

<TABLE>
<CAPTION>



                                                                                         DATE OF
      PRODUCT          CATEGORY              DESCRIPTION                                 INTRODUCTION
      <S>              <C>                   <C>                                          <C>

      DMSGATE(TM)      X.400 Mail Guard      A  multi-platform security  gateway          Q4 1996
                                             meeting the National Security Agency's DMS
                                             Firewall Plus requirements

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

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

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

      Online           Client/server token   A system that allows remote creation and     Q2 1996
      Registration     distribution          management of secure tokens and
      Service(TM)                             workstation configuration files

      Wallet           Electronic commerce   Electronic technology that enables secure    Q3 1995
      Technology(TM)                          payment transactions containing credit
                                             card information

</TABLE>

                                       7
<PAGE>



DMSGATE --  DMSGATE is a platform  independent  security  gateway  for  flexible
deployment of defense  messaging system (DMS) security  services.  DMSGATE meets
the National  Security  Agency's DMS Firewall Plus requirements and is available
as a software module hosted on leading vendor firewalls.

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

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

SmartGATE  server  software  versions  are  available  on a variety  of  leading
operating systems,  including Berkeley Software Development,  Inc.'s BSD/OS, Sun
Microsystems,  Inc.'s SunOS and Solaris,  and  Hewlett-Packard  Company's HP-UX.
SmartGATE client supports Microsoft  Corporation's Windows versions 3.0 and 3.1,
Windows 95 and Windows NT. A turnkey  version of  SmartGATE  server is available
for BSD/OS on an Intel Pentium hardware platform.

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

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


                                       8
<PAGE>



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

Online  Registration  Service  --  A  user  must  be  registered  to  access  an
authentication-based system. The Online Registration Service product is a system
for  efficient  on-line  enrollment  of  large  user  communities.   The  Online
Registration  Service  completely  automates  the  creation  and exchange of the
user's keys and  initializes  the user's default access  privileges.  The Online
Registration  Service  either creates a virtual smart card or formats a physical
smart card that contains a shared secret key that is PIN code protected.  Online
registration service is now incorporated in SmartGATE version 2.2.

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

Network Security  Consulting -- The Company's  consulting staff provides pre-and
post-sales  support,   vulnerability  analysis,  performance  analysis,  systems
integration and system security  architecture  support. The Company's consulting
staff also provides fee-based  engineering  services.  The Company believes that
maintaining a staff of nationally  recognized  consultants  greatly enhances its
position as an innovative supplier of network security products.

TECHNOLOGY

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

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


                                       9
<PAGE>



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

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

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

SALES AND MARKETING

The Company markets its network security products through its direct sales force
and, to a lesser extent,  through  systems  integrators,  value-added  resellers
("VARs") and  international  distributors.  The Company is currently  seeking to
expand its sales and marketing staff and intends to devote additional  resources
to  marketing  and  business  development  activities  in  order to  expand  its
third-party distribution channels.

Direct Marketing  Effort -- The Company has  concentrated its initial  marketing
and direct sales efforts on key industry  participants  within certain  industry
and  market  segments,  including  financial  services,  telecommunications  and


                                       10
<PAGE>



information  services companies and government  agencies.  The Company employs a
direct sales force to market its  products to these key  industry  participants.
The Company's  direct sales force  solicits  prospective  customers and provides
technical advice and support with respect to the Company's products. The Company
anticipates hiring additional direct sales  representatives and opening regional
sales offices in select cities.  In July 1996, the Company opened regional sales
offices in New York, New York and San Francisco, California.

Indirect  Marketing  Effort -- An  important  component of the  Company's  sales
strategy is the development of indirect sales channels such as Internet  Service
Providers   ("ISPs"),   systems  integrators  and  value-added  network  service
providers.  The Company utilizes indirect sales channels to leverage the efforts
of its direct  sales  force.  The  Company  has  initiated  sales and  marketing
programs to sign up  integrators,  value added  resellers  ("VARs") and original
equipment  manufacturers  within the United  States.  The Company has signed VAR
agreements with MCI  Telecommunications  Corporation  ("MCI") and GE Information
Services,  Inc.  ("GEIS").  The  Company  has  established   relationships  with
international  distributors in the United  Kingdom,  Sweden,  Germany,  Belgium,
South  Africa,  Korea  and  Australia,  including  relationships  with  Internet
Solutions, Ltd. in the United Kingdom and Kexin in Korea.

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

CUSTOMER SERVICE AND SUPPORT

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

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


                                       11
<PAGE>



PRODUCT DEVELOPMENT

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

COMPETITION

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

     Currently, the Company competes in several different markets:  Internet and
intranet   perimeter   security   and   access   control   (firewalls),    token
authentication,  smart card-based security  applications and electronic commerce
applications.  The  Company's  principal  competitors  for Internet and intranet
perimeter  security and access control include  Advanced Network and Services (a
subsidiary of America Online,  Inc.),  AXENT  Technologies,  Inc., Bay Networks,
Inc., Border Network  Technologies,  Inc., Check Point Software Technology Ltd.,
Cisco Systems,  Inc.,  Digital  Equipment  Corporation,  Harris Computer Systems
Corporation,  International  Business  Machines  Corporation,  Milkyway Networks
Corporation, Morningstar Technologies, Inc., Network Systems Corporation, Raptor
Systems, Inc., Secure Computing Corporation, Sun Microsystems,  Inc. and Trusted
Information  Systems,  Inc.  ("TIS"),  which  owns the  Gauntlet(R)  kernel  and
licenses it to the Company.

The Company competes to a lesser degree with token vendors because the Company's
SmartGATE product supports many vendor tokens.  Token vendors include CRYPTOCard
Inc., AXENT Technologies,  Inc., Leemah DataCom Security  Corporation,  National
Semiconductor  Inc.,  Racal-Guardata,  Inc. and Security Dynamics  Technologies,
Inc.  ("Security  Dynamics").  Security  Dynamics has acquired  RSA.  RSA's data
encryption and authentication  technology is licensed to and incorporated within
certain  products of the Company.  As a result,  Security  Dynamics may become a
more substantial competitor of the Company.

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

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


                                       12
<PAGE>



Because of the rapid expansion of the network security market,  the Company will
face  competition  from  existing  and  new  entrants,  possibly  including  the
Company's customers,  suppliers and/or resellers. There can be no assurance that
the Company's competitors will not develop network security products that may be
more  effective  than the  Company's  current  or  future  products  or that the
Company's  technologies  and  products  would not be  rendered  obsolete by such
developments.

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

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

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

SUPPLY SOURCES

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

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


                                       13
<PAGE>



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

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.
For example,  there are two versions of the SmartGATE  client.  One supports DES
for  bulk  encryption  and can  only be  exported  from the  United  States  for
financial  transactions.  The other supports RC4 (an  encryption  algorithm) for
bulk encryption and is exportable.  In addition, these 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.

LICENSE AGREEMENTS

     Trusted  Information  Systems,  Inc.  Agreement -- The Company's  SmartWall
product  incorporates  TIS's  Gauntlet(R)  kernel under a license agreement with
TIS. The Company's  license agreement with TIS requires the Company to pay a fee
(which  varies  based on the  number  of units  licensed)  for each  unit of the
Gauntlet(R)  product  licensed  for use in  SmartWall.  The  license  expires on
December 31, 1996; however,  the agreement provides for the automatic renewal of
the Company's  license rights for successive three year terms.  Either party may
terminate  the agreement  upon the default of the other party if the  defaulting
party has failed to cure the  default  within 30 days of the  receipt of written
notice of  default;  however,  the  agreement  also  provides  TIS with  certain
accelerated termination rights in the event of a subsequent breach.

RSA Data Security, Inc. Agreement.  The Company's SmartCAT and Wallet Technology
software incorporate data encryption and authentication technology owned by RSA.
The Company has a perpetual  license  agreement with RSA, which became effective
as of December 30, 1994. On May 23, 1996,  RSA exercised an option granted under
the agreement to convert its right to receive  future  royalties  into 2% of the
Company's outstanding voting securities,  after giving effect to the issuance to
RSA,  until the date of the  Company's  IPO.  Pursuant  to a separate  agreement
between RSA and MIT, MIT is entitled to receive a portion of any royalties  that
RSA receives.  As a result,  the Company issued directly to MIT a portion of the
shares of Common Stock to which RSA was entitled  under the RSA  Agreement.  The
Company issued 188,705 shares of Common Stock to RSA and MIT  immediately  prior
to consummation of the IPO. RSA has recently been acquired by Security Dynamics.
There is no  assurance  that the  change in  control  of RSA will not  adversely
affect the Company's business relationship with RSA.

     There can be no  assurance  that the Company  will be able to maintain  its
license  rights for the TIS  Gauntlet(R)  kernel or the RSA data  encryption and
authentication  technology,  and the loss of such  rights  could have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations. If either TIS or RSA terminate or fail to renew the respective


                                       14
<PAGE>



license  agreement  or take any other  action  that  results  in the loss of, or
inability  to maintain,  such  licensed  technology,  the Company may incur lost
sales,  delays in delivery of the  Company's  current  products  and services or
delays in the  introduction  of new  products and  services,  which could have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations.

PATENTS, PROPRIETARY TECHNOLOGY, TRADEMARKS AND LICENSES

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

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


                                       15
<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 in order to effectively develop, produce
and market commercially viable products.  Failure to obtain those licenses could
have a material  adverse effect on the Company's  ability to market its software
security  products.  There  can be no  assurance  that  such  licenses  will  be
obtainable  on  commercially  reasonable  terms,  if at all,  that  the  patents
underlying  such licenses will be valid and  enforceable or that the proprietary
nature  of the  unpatented  technology  underlying  such  licenses  will  remain
proprietary.

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

EMPLOYEES

As  of  February  28,  1997,  the  Company  had  79  full-time  employees  and 3
consultants. Of these employees and consultants, 38 were in sales and marketing,
28 were in development  and 16 were in finance and  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

The Company  operates in a rapidly changing  environment that involves  numerous
risks, some of which are beyond the Company's control.  The following discussion
highlights some of the risks the Company faces. Readers are also referred to the
documents  filed  by  V-ONE   Corporation   with  the  Securities  and  Exchange
Commission,  specifically the Company's  registration statement as filed on Form
S-1 and the last report on Form 10-Q which  identify  important risk factors for
the Company.

Limited Operating History; Accumulated Deficit.

The Company was founded in February  1993 and  introduced  its first  product in
December  1994.  Accordingly,  the  Company  did not  generate  any  significant
revenues until 1995 when it commenced  sales of its SmartWall  firewall  product
and introduced its SmartGATE  client/server  system.  Revenues for 1995 and 1996


                                       16
<PAGE>



were  approximately  $1,104,000 and $6,266,000.  The Company's  growth in recent
periods may not be an accurate  indication  of future  results of  operations in
light of the  Company's  short  operating  history,  the evolving  nature of the
network  security  market and the  uncertainty  of the demand for  Internet  and
intranet  products in general and the Company's  products in  particular.  As of
December  31,  1996,  the Company  had  accumulated  a deficit of  approximately
$8,340,000.  The  Company  currently  expects to incur net losses  over the next
several  quarters  as a result of greater  operating  expenses  incurred to fund
research and development and to increase its sales and marketing efforts.

Because of the Company's  limited operating  history,  there can be no assurance
that the Company will achieve or sustain  profitability or significant revenues.
To address  these risks,  the Company  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.  There can be no  assurance  that the Company  will
successfully  address these risks and the failure to do so could have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations.

Dependence on Key Personnel.
The Company's  success will depend,  to a large extent,  upon the performance of
its senior management and its technical,  sales and marketing personnel, many of
whom have only recently  joined the Company.  There is keen  competition  in the
software  security  industry  to hire and  retain  qualified  personnel  and the
Company is actively searching for additional qualified personnel.  The Company's
success  will  depend  upon  its  ability  to  retain  and hire  additional  key
personnel. The loss of the services of key personnel or the inability to attract
additional  qualified  personnel  could have a material  adverse effect upon the
Company's  results of operations and product  development  efforts.  The Company
currently  has $1.0  million "key man" life  insurance  policies on the lives of
each of James F. Chen,  its  founder,  President  and Chief  Executive  Officer,
Jieh-Shan Wang, its Senior Vice President of  Engineering,  and Marcus J. Ranum,
its Chief  Scientist (Mr. Ranum is no longer an employee of the Company,  but is
serving in this capacity as a consultant).  This coverage,  however,  may not be
sufficient to mitigate the impact that the loss of the services of Mr. Chen, Mr.
Wang or Mr.  Ranum would have on the  Company.  Although the Company has entered
into  employment  agreements  with Mr. Chen and Mr. Wang that  provide for fixed
terms of  employment,  the Company has not  historically  provided such types of
employment agreements to its other employees,  including its executive officers.
This may  adversely  impact the  Company's  ability  to  attract  and retain the
necessary  technical,  management  and other key  personnel,  which could have a
material  adverse  effect upon the Company's  results of operations  and product
development efforts.

Management of Growth.
The Company has recently experienced and may continue to experience  substantial
growth in the number of its employees and the scope of its operations, resulting
in increased responsibilities for management and added pressure on the Company's
operating and financial systems.  As of February 28, 1997, the Company had grown


                                       17
<PAGE>



to 79 employees, from 34 employees on January 1, 1996 and 7 employees on January
1, 1995.  To manage  growth  effectively,  the Company  will need to continue to
improve its operational,  financial and management  information systems and will
need to  hire,  train,  motivate  and  manage a  growing  number  of  employees.
Competition  is  intense  for  qualified  technical,  marketing  and  management
personnel. There can be no assurance that the Company will be able to achieve or
manage  any  future  growth,  and  its  failure  to do so  could  delay  product
development  cycles and marketing  efforts or otherwise have a material  adverse
effect on the Company's business, financial condition and results of operations.
Although  the  Company  is  not  currently  involved  in  negotiations  for  any
acquisitions,  the Company may undertake  acquisitions  in the future.  Any such
transaction  would  place  additional  strains  upon  the  Company's  management
resources.

Anticipated Fluctuations in Quarterly Results.
As a result of the Company's  limited  operating  history,  the Company does not
have historical  financial data for a significant  number of periods on which to
base planned operating expenses.  Accordingly,  the Company's expense levels are
based in part on its expectations as to future revenues. The Company's quarterly
sales and operating  results  generally  depend on the volume and timing of, and
ability to fill,  orders  received  within the quarter,  which are  difficult to
forecast.  The  Company may be unable to adjust  spending in a timely  manner to
compensate for any unexpected  revenue shortfall.  Accordingly,  any significant
shortfall  of demand for the  Company's  products in  relation to the  Company's
expectations  could have an immediate adverse impact on the Company's  business,
financial condition and results of operations. In addition, the Company plans to
increase  its  operating  expenses  to fund the  rapid  growth  of its sales and
marketing operations,  distribution channels,  customer support capabilities and
research and development activities. To the extent that such expenses precede or
are not subsequently  followed by increased  revenues,  the Company's  business,
financial  condition  and  results of  operations  may be  materially  adversely
affected.

The Company expects to experience  significant  fluctuations in future quarterly
operating  results,  which may be caused  by a number  of  factors,  such as the
pricing and mix of products and services sold, the  introduction of new products
by the Company  and its  competitors,  the timing of orders and the  shipment of
products,  market  acceptance  of the  Company's  products,  the  ability of the
Company's direct sales force and resellers to market its products  successfully,
the mix of  distribution  channels used and other factors that may be beyond the
Company's  control.  Thus,  the Company  believes that  comparisons of quarterly
operating  results are not  meaningful  and should not be relied upon,  nor will
they  necessarily  reflect  the  Company's  future  performance.  Because of the
foregoing  factors,  it is likely that in some  future  quarters  the  Company's
operating  results will be below the  expectations of public market analysts and
investors.  In such event,  the price of the Company's Common Stock would likely
be materially adversely affected.


                                       18
<PAGE>



Dependence on the Internet and Intranets.
The Company's  success depends  substantially  upon the market acceptance of the
Internet and intranets as mediums for commerce and  communication.  Although the
Company believes that its software security products will facilitate and fortify
commerce and  communication  over the Internet  and  intranets,  there can be no
assurance that commerce and  communication  over the Internet and intranets will
expand or that the Company's products will be adopted for security purposes.  In
addition,  the  Internet  may not  prove to be a viable  commercial  marketplace
because of inadequate  development  of the necessary  infrastructure,  such as a
reliable  network backbone or timely  development of complementary  products and
services.  If the Internet  and  intranets do not develop as mediums of commerce
and  communication  or the  Internet  does not  develop  as a viable  commercial
marketplace due to inadequate  development of  infrastructure  or  complementary
products and services,  or for other reasons beyond the Company's  control,  the
Company's  business,  financial  condition  and  results  of  operations  may be
materially adversely affected. See "Business -- Background."

Risks Associated with the Emerging Network Security Market.
The market for the Company's  products is in an early stage of development.  The
rapid  development of Internet and intranet  computing has increased the ability
of users to  access  proprietary  information  and  resources  and has  recently
increased demand for network security  products.  Because the market for network
security  products is only  beginning to develop,  it is difficult to assess the
size of the market,  the  product  features  desired by the market,  the optimal
price structure for the Company's products,  the optimal  distribution  strategy
and the competitive  environment  that will develop in this market.  Declines in
demand  for  the  Company's  products,  whether  as  a  result  of  competition,
technological change, the public's perception of the need for security products,
developments  in the hardware and software  environments in which these products
operate,  general  economic  conditions  or other  factors  beyond the Company's
control,  could  have a  material  adverse  effect  on the  Company's  business,
financial condition or results of operations. See "Business -- Background."

Dependence on Principal Products; Uncertainty of Product Acceptance.
The Company  currently  generates  most of its revenues  from its  SmartWall and
SmartGATE  products.  Accordingly,  any factor that  adversely  affects sales of
these  products  could  have a material  adverse  effect on the  Company.  While
SmartWall  has met with a  favorable  degree of market  acceptance  since  sales
commenced in the first quarter of 1995, there can be no assurance that SmartWall
will  continue  to be  accepted  in the  future.  In  addition,  there can be no
assurance  that  there  will be market  acceptance  of the  Company's  SmartGATE
product,  which was  introduced  in the fourth  quarter  of 1995,  or any of the
Company's  products that may be introduced in the future.  The Company's success
will,  in part,  depend  upon the  Company's  ability  to  design,  develop  and
introduce  new  products,  services and  enhancements  on a timely basis to meet
changing  customer  needs,  technological  developments  and  evolving  industry
standards.



                                       19
<PAGE>


Intellectual Property Rights; Infringement Claims.
The  Company  relies on  trademark,  copyright,  patent and trade  secret  laws,
employee and third-party  non-disclosure agreements and other methods to protect
the  proprietary  rights of the Company and the companies from which the Company
licenses  technology.  Prosecution of patent  applications  and any other patent
applications  that the Company may  subsequently  determine to file, may require
the expenditure of substantial resources. The issuance of a patent from a patent
application may require 24 months or longer.  There can be no assurance that the
Company's  technology will not become obsolete while the Company's  applications
for  patents are  pending.  There also can be no  assurance  that any pending or
future patent  application will be granted,  that any future patents will not be
challenged,  invalidated or circumvented  or that the rights granted  thereunder
will provide competitive advantages to the Company. Further, the Company has not
pursued  patent  protection  outside  of the United  States  for the  technology
covered by two of the pending patent applications. The Company currently intends
to pursue  patent  protection  outside of the United  States for the  technology
covered by the most recently filed patent  application  although there can be no
assurance that any such protection will be granted or, if granted,  that it will
adequately protect the technology  covered thereby.  The Company currently holds
patents on its Wallet Technology and its SmartGATE technology.

The Company's  success is also dependent in part upon its  proprietary  software
technology and technology  licensed from others.  There can be no assurance that
the Company's trade secrets or license or non-disclosure agreements will provide
meaningful or contractually  required protection for the proprietary  technology
and other  proprietary  information  of the Company and the companies from which
the Company licenses  technology.  Further,  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.  In  addition,  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 the Company  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  developed by the Company may
not  be  protectable  in  such  foreign  jurisdictions  in  circumstances  where
protection is ordinarily available in the United States.

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

                                       20
<PAGE>



As  the  number  of  security  products  in  the  industry   increases  and  the
functionality of these products further overlap,  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 in order to develop,  produce and market
commercially viable products effectively. 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.

Any  claims or  litigation,  with or  without  merit,  could be costly and could
result in a diversion  of  management's  attention,  which could have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations.  Adverse determinations in such claims or litigation could also have
a material  adverse effect on the Company's  business,  financial  condition and
results of operations.

Risk of Errors or Failures; Product Liability Risks.
The complex nature of the Company's products can make the detection of errors or
failures in certain of its software  products  difficult  when such products are
introduced,  which may result in delays and lost revenues  during the correction
process. In addition,  there can be no assurance that any technology licensed by
the Company for use in its products does not contain errors that would adversely
affect such products. Despite testing by the Company and current and prospective
customers,  there can be no assurance  that errors will not be discovered in new
products  or releases  after  commencement  of  commercial  shipments,  possibly
resulting in delay,  adverse  publicity,  loss of market  acceptance  and claims
against the Company.

A malfunction or the inadequate design of the Company's products could result in
tort or warranty claims.  The Company  generally  attempts to reduce the risk of
such  losses to itself  and to the  companies  from which the  Company  licenses
technology through warranty  disclaimers and liability limitation clauses in its
license  agreements.  There can be no  assurance  that the Company has  obtained
adequate  contractual  protection in all instances or where  otherwise  required
under  agreements  V-ONE has entered into with others or that such measures will
be  effective  in  limiting  the  Company's  liability  to end  users and to the
companies from which the Company licenses technology. The Company also relies on
"shrink  wrap"  license  agreements  that are not  signed  by the end user  and,
therefore,  may be unenforceable  under the laws of certain  jurisdictions.  The
Company  currently has product  liability  insurance.  There can be no assurance

                                       21
<PAGE>



that  adequate  insurance  coverage  was  obtained by the  Company.  Any product
liability claim against the Company for damages resulting from security breaches
could be substantial  and could have a material  adverse effect on the Company's
business,  financial  condition  and  results  of  operations.  In  addition,  a
well-publicized  actual or perceived  security breach could adversely affect the
market's  perception of security products in general,  or the Company's products
in  particular,  regardless  of  whether  such  breach  is  attributable  to the
Company's  products.  This could result in a decline in demand for the Company's
products,  which could have a material adverse effect on the Company's business,
financial condition and results of operations.

Changes in Technology and Industry Standards; Risk of New Product Introduction.
The network  security  industry is  characterized  by rapid  changes,  including
evolving  industry  standards,  frequent new product  introductions,  continuing
advances in technology  and changes in customer  requirements  and  preferences.

Advances in techniques by individuals and entities seeking to gain  unauthorized
access to  networks  could  expose the  Company's  existing  products to new and
unexpected  attacks  and  require  accelerated  development  of new  products or
enhancements  to existing  products.  There can be no assurance that the Company
will be able to counter  challenges to its current products,  that the Company's
future product offerings will keep pace with technological  changes  implemented
by competitors or persons seeking to breach network security,  that its products
will  satisfy  evolving  consumer  preferences  or  that  the  Company  will  be
successful  in  developing  and  marketing  products for any future  technology.
Failure to develop and  introduce  new  products and product  enhancements  in a
timely fashion could have a material  adverse effect on the Company's  business,
financial condition and results of operations.

Risk of Defects and Development Delays.
The Company may experience schedule overruns in software  development  triggered
by  factors   such  as   insufficient   staffing   or  the   unavailability   of
development-related software, hardware or technologies. Further, when developing
new software products,  the Company's  development schedules may be altered as a
result of the discovery of software bugs, performance problems or changes to the
product specification in response to customer requirements,  market developments
or  Company  initiated  changes.  Changes in  product  specifications  may delay
completion of  documentation,  packaging or testing,  which may, in turn, affect
the release schedule of the product.  When developing complex software products,
the  technology  market may shift during the  development  cycle,  requiring the
Company  either  to  enhance  or  change a  product's  specifications  to meet a
customer's changing needs. 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.

                                       22
<PAGE>


Evolving Distribution Channels.
Currently,  the Company relies  primarily on its direct sales force for the sale
and  marketing of its products.  The Company plans to add to its internal  sales
and marketing  staff in order to increase its direct sales effort.  There can be
no assurance that such internal expansion will be successfully  completed,  that
the cost of such  expansion  will not exceed the revenues  generated or that the
Company's sales and marketing organization will successfully compete against the
more extensive and well-funded sales and marketing  operations of certain of its
current and future competitors.

The Company has developed a distribution  strategy that involves the development
of strategic  alliances with resellers and international  distributors to enable
the Company to achieve  broad  market  penetration.  The Company is beginning to
establish its reseller distribution channel.  There can be no assurance that the
Company will be able to attract  integrators  and resellers that will be able to
market the  Company's  products  effectively  and will be  qualified  to provide
timely and cost-effective  customer support and service. The Company anticipates
that it will ship  products to  distributors,  integrators  and  resellers  on a
purchase-order  basis,  and its  distributors,  integrators  and resellers  will
likely carry competing product lines. Therefore,  there can be no assurance that
any distributor, integrator or reseller will continue to represent the Company's
products.  The inability to recruit,  or the loss of, important sales personnel,
distributors,  integrators or resellers could  materially  adversely  affect the
Company's business, financial condition and results of operations in the future.

Long Sales Cycle; Seasonality.
Sales of the Company's  products  generally involve a significant  commitment of
capital by customers, with the attendant delays frequently associated with large
capital  expenditures.  Prior to such sales, the Company often permits customers
to evaluate products being considered for license,  generally for a period of up
to 30 days. For these and other  reasons,  the sales cycle  associated  with the
Company's  products  is  likely  to  be  lengthy  and  subject  to a  number  of
significant  risks over which the  Company  has little or no control  and,  as a
result,  the  Company  believes  that its  quarterly  results are likely to vary
significantly  in the future.  The  Company  may be  required  to ship  products
shortly after it receives orders and,  consequently,  order backlog,  if any, at
the beginning of any period may represent  only a small portion of that period's
expected  revenues.  As a  result,  product  revenues  in  any  period  will  be
substantially dependent on orders booked and shipped in that period. The Company
plans its  production  and  inventory  levels  based on  internal  forecasts  of
customer demand, which is highly unpredictable and can fluctuate  substantially.


                                       23
<PAGE>



If revenues fall significantly below anticipated levels, the Company's financial
condition and results of operations could be materially and adversely  affected.
In addition, the Company may experience significant seasonality in its business,
and the Company's  financial condition and results of operations may be affected
by such trends in the future.  Such  trends may include  higher  revenues in the
third and fourth quarters of the year and lower revenues in the first and second
quarters.  The Company believes that revenues may tend to be higher in the third
quarter  due to the  fiscal  year end of the U.S.  government  and higher in the
fourth quarter due to year-end budgetary  pressures on the Company's  commercial
customers and the tendency of certain of its existing and prospective  customers
to  implement  changes in computer or network  security  prior to the end of the
calendar year.

Liquidity and Capital Requirements; Dependence on the Public Offering.
The Company  anticipates that its existing capital resources,  including the net
proceeds  of the sale of the  shares of Common  Stock  offered  hereby,  will be
adequate to satisfy its capital  requirements  at least  through March 31, 1998.
The Company's future capital requirements, however, will depend on many factors,
including  its  ability to  successfully  market and sell its  products.  To the
extent  that the  funds  generated  by the IPO and from the  Company's  on-going
operations are insufficient to fund the Company's future operating requirements,
it may be  necessary  to  raise  additional  funds  through  public  or  private
financings.  Any equity or debt financings, if available at all, may be on terms
that are not  favorable  to the Company  and, in the case of equity  financings,
could result in dilution to the Company's  shareholders.  If adequate capital is
not   available,   the  Company  may  be  required  to  curtail  its  operations
significantly.

Risk of Sales to U.S. Government.
In 1995, the Company derived a substantial  portion of its revenue from the sale
of SmartWall to departments  and agencies of the U.S.  government and government
contractors. In 1996, the Company's revenues will be attributable, in part, to a
contract  with NSA.  Because no  government  agency has an  obligation  to award
contracts  to, or to purchase  products  from,  the  Company in the future,  the
Company  believes  that future  government  contracts and orders for its network
security  products  will in part  be  dependent  upon  the  continued  favorable
reaction of government  agencies to the development  capabilities of the Company
and the  reliability  and perception of its products.  There can be no assurance
that the Company will be able to sell its products to  departments  and agencies
of the U.S.  government and government  contractors or that such sales,  if any,
will result in commercial acceptance of the Company's products. There also is no
assurance  that the Company  will be able to procure an extension of its current
NSA  contract  when it expires in  September  1996 or  additional  contracts  of
similar  magnitude in the future.  In addition,  reductions or delays in federal
funds  available  for  projects  the Company is  performing  or to purchase  its
products  could have an adverse  impact on the  Company's  government  contracts
business.


                                       24
<PAGE>



Contracts  involving  the U.S.  government  are  also  subject  to the  risks of
disallowance of costs upon audit,  changes in government  procurement  policies,
the  necessity  to  participate  in  competitive  bidding  and,  with respect to
contracts involving prime contractors or  government-designated  subcontractors,
the inability of such parties to perform under their  contracts.  The Company is
also exposed to the risk of increased or  unexpected  costs,  causing  losses or
reduced profits, under government and certain third-party contracts.  Any of the
foregoing events could have a material adverse effect on the Company's business,
financial condition and results of operations.

International Sales.
The Company  plans to increase  its  presence in overseas  markets by  expanding
international  distribution  relationships  for its  suite of  network  security
products, including SmartWall and SmartGATE. There can be no assurance, however,
that  the  Company  will be  successful  in  expanding  its  relationships  with
international  distributors or in gaining commercial  acceptance of its products
abroad.  To the extent that the Company expands  international  sales,  currency
fluctuations  could make its products less  competitive  in foreign  markets and
contribute  to  fluctuations  in  the  Company's  operating  results.  Political
instability,  difficulties  in staffing and managing  international  operations,
potential insolvency of international  resellers,  longer receivable  collection
periods and difficulty in collecting  accounts receivable also pose risks to the
development of international  marketing efforts.  Moreover,  the laws of certain
countries,  or the enforcement  thereof,  may not protect the Company's products
and  intellectual  property  rights to the same extent as the laws of the United
States.  There can be no assurance  that these  factors will not have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations.

Effect of Government  Regulation of Technology  Exports.  
The  Company  currently  sells its  products  abroad and  intends to continue to
expand its  relationships  with  international  distributors for the sale of its
products  overseas.  The Company's  international  sales and operations could be
subject to risks such as the imposition of governmental controls, export license
requirements,   restrictions  on  the  export  of  critical  technology,   trade
restrictions and changes in tariffs.  In particular,  the Company's  information
security  products are subject to the export  restrictions  administered  by the
U.S.  Department of Commerce,  which,  in the case of some products,  permit the
export of encryption products only with a specific export license.  These export
laws also prohibit the export of  encryption  products to a number of countries,
individuals  and entities and may restrict  exports of some products to a narrow
range of end-users. In certain foreign countries, the Company's distributors are
required to secure licenses or formal permission before encryption  products can
be imported. There is no assurance


                                       25
<PAGE>



that the Company or its distributors will be able to secure required licenses in
a timely  manner,  if at all. As a result,  foreign  competitors  that face less
stringent  controls on their  products may be able to compete  more  effectively
than  the  Company  in the  global  network  security  market.  There  can be no
assurance  that these  factors  will not have a material  adverse  effect on the
Company's business, financial condition and results of operations.

Market Volatility.
The market price of the Company's  Common Stock could be subject to  significant
fluctuations in response to variations in quarterly  operating results and other
factors, such as announcements of new products by the Company or its competitors
and changes in  financial  estimates  by  securities  analysts or other  events.
Moreover,   the  stock  market  has  experienced  extreme  volatility  that  has
particularly  affected the market prices of equity securities of many technology
companies  and  that  has  often  been  unrelated  and  disproportionate  to the
operating performance of such companies.  Broad market fluctuations,  as well as
economic  conditions  generally and in the software industry  specifically,  may
adversely affect the market price of the Company's Common Stock. There can be no
assurance  that the market  price of the Common  Stock  offered  hereby will not
decline below the initial public offering price.

Item 2.  PROPERTIES

The  Company  leases  approximately  16,261  square  feet  of  office  space  in
Rockville,  Maryland under lease  agreements  that will expire on April 26, 1997
and April 17, 2001.  The Company  expects that this space will be sufficient for
its needs  through April 26, 1997.  In March 1997,  the Company  entered into an
operating lease agreement for new office space for  approximately  28,312 square
feet in  Germantown,  Maryland  that will  expire on July 1, 2003.  The  Company
anticipates moving into this new office space in July 1997.

The Company also leases office space in New York, New York and in San Francisco,
California under leases that expired on January 14, 1997. These leases have been
extended on a month to month basis.

Item 3.  LEGAL PROCEEDINGS

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

Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS

No matters were submitted to a vote of the Company's security holders during the
quarter ended December 31, 1996.


                                       26
<PAGE>



EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT

The executive  officers and directors of the Company,  and their respective ages
at December 31, 1996, are as follows:


<TABLE>
<CAPTION>

NAME                                    AGE        POSITION
<S>                                     <C>          <C>

James F. Chen........................   46     President, Chief Executive Officer and Director
Jieh-Shan Wang.......................   42     Senior Vice President and Chief Technical Officer
William C. Wilson....................   41     Vice President of Network Services
Barnaby M. Page......................   33     Vice President of Financial Services
Charles B. Griffis...................   52     Senior Vice President, Chief Financial Officer and
                                                 Treasurer
Christopher T. Brook.................   57     Vice President of Product Development
Charles C. Chen......................   42     Director
Hai Hua Cheng........................   48     Director
Harry S. Gruner......................   37     Director
William E. Odom......................   64     Director

</TABLE>

JAMES F. CHEN  founded the Company in February  1993 and has since served as its
President,  Chief Executive Officer and a director.  From 1980 to 1990, Mr. Chen
managed INTELSAT's world-wide ground network engineering projects.  From 1990 to
January 1993, he managed the INTELSAT Ground Network Engineering Department and,
from March 1992 to January  1993, he also  directed its  Management  Information
Systems  Division.  Mr.  Chen holds an M.S.  in  Computer  Science  from  George
Washington  University  and  a  B.S.  in  Electrical  Engineering  from  Georgia
Institute of Technology. He is Charles C. Chen's brother.

JIEH-SHAN  WANG,  PH.D.  has been with the Company  since its  inception and has
served as the Company's  Senior Vice President of Engineering  since April 1996.
From August 1995 to April 1996,  Dr. Wang served as the Company's Vice President
of Engineering and, from April 1994 to August 1995, he served as Chief Engineer.
Dr.  Wang was with  INTELSAT  from June 1991 to April  1994,  as Senior  Systems
Engineer,  where  he led a team  of  engineers  in the  development  of  network
applications.  Dr. Wang holds a Ph.D. in Physics from the University of Maryland
and a B.S. in Physics from National Taiwan University.

WILLIAM C. WILSON has served as the Company's Vice President of Network Services
since  January  1997.  From May 1996 to December  1996 Mr.  Wilson served as the
Company's Vice President of Business  Development,  from April 1995 to May 1996,
Mr.  Wilson  served as the  Company's  Vice  President of  Operations  and, from
December  1994 to April 1995,  he served as  Director  of Business  Development.
Prior to joining the Company,  Mr. Wilson  provided  consulting  services to the
Company  from  August  1994  to  December  1994  and  served  as an  independent
consultant  from  August  1985 to  November  1994.  Mr.  Wilson  holds a B.S. in
Journalism and Economics from Ohio State University, School of Agriculture.

BARNABY M. PAGE has served as the Company's Vice President of Financial Services
since  January  1997.  From June 1996 to December  1996,  Mr. Page served as the
Company's  Vice  President of Direct Sales,  from October 1995 to June 1996, Mr.
Page  served as the  Company's  Director  of Sales and,  and from August 1995 to
October  1995, he served as Manager of  Commercial  Sales.  Prior to joining the
Company,  Mr. Page served as Regional  Sales  Manager for  DiBiasio & Edgington,
Inc. from January 1993 to August 1995 and as Regional Sales  Representative  for
Thompson  Financial  Services from July 1992 to December 1992. From July 1990 to
July 1992, Mr. Page was a Sales Representative with Bloomberg Financial Markets.
Mr. Page earned a Certificate in International  Relations and Economics from the
University of  Copenhagen,  Denmark,  and holds a B.A. in Political  Science and
Journalism from the University of Massachusetts at Amherst.

CHARLES B. GRIFFIS has served as the Company's  Senior Vice  President and Chief
Financial  Officer  since  September  1996 and began  serving  as the  Company's
Treasurer  as of January 1, 1997.  Prior to joining  the  Company,  Mr.  Griffis
served as Senior Vice President and Chief  Financial  Officer of Masstor Systems
Corporation, a company that filed a petition for reorganization under Chapter 11
of the United States  Bankruptcy  Code on September 8, 1994,  from April 1990 to
September  1996.  From  November  1983 to April 1990,  Mr.  Griffis  served as a
General  Partner of Griffis,  Sandler & Co., a private venture capital firm, and
as President of Charles  Griffis & Co.,  Inc., a business  consulting  firm. Mr.
Griffis  holds an M.B.A.  in Finance  from  Columbia  University  and a B.A.  in
History from Yale University.


                                       27
<PAGE>



CHRISTOPHER  T.  BROOK has served as the  Company's  Vice  President  of Product
Development since February 1997. From September 1996 to February 1997, Mr. Brook
served as the Company's Director of Product Development. Mr. Brook was with GEIS
for  approximately  27 years prior to joining the  Company,  holding a number of
technology-related positions including Manager of Directory Services and Network
Architecture,  Manager of Network  Architecture  and most  recently,  Manager of
Emerging  Technology,  where Mr. Brook was  responsible  for  investigating  new
information  technologies.  Mr. Brook graduated from Clifton  College  (Bristol,
England) with an emphasis in the Classics.

CHARLES C. CHEN,  D.D.S., has served as a director of the Company since February
1993 and as the Company's  Secretary  since December 12, 1995.  Since July 1982,
Dr. Chen has practiced  periodontics with Zupnik, Winson & Chen, D.D.S.P.A.  Dr.
Chen holds a D.D.S. from the Baltimore College of Dental Surgery,  University of
Maryland,  and a B.S. in Chemistry from the University of Maryland.  He is James
F. Chen's brother.

HAI HUA CHENG has served as a director of the Company since  September 1995. Mr.
Cheng is the majority  owner of Scientek  Corporation in Taiwan and since August
1979 has served as Vice  President and a director of that company.  Mr. Cheng is
also the principal owner of Scientek Private Venture Capital and has served as a
director of that company since March 1990. In addition,  Mr. Cheng has served as
a director of United Test Center Inc. (Taiwan) since March 1995. Mr. Cheng holds
a B.S. in Computer and Control Engineering from National Chiao Tung University.

HARRY S. GRUNER has served as a director of the Company  since June 1996.  Since
November  1992,  he has been a general  partner  of JMI Equity  Fund,  a private
equity investment partnership.  From August 1986 to October 1992, Mr. Gruner was
a principal with Alex. Brown & Sons Incorporated.  Mr. Gruner is also a director
of Brock  International,  Inc., a developer,  marketer and supporter of software
systems, Jackson Hewitt, Inc., an income tax processing company, the META Group,
Inc.,  a  syndicated  information  technology  research  company,  and  Hyperion
Software,  Inc., a financial software company, and numerous other privately held
companies. Mr. Gruner holds an M.B.A. from Harvard Business School and a B.A. in
History from Yale University.

(RETIRED) LT. GEN. WILLIAM E. ODOM has served as a director of the Company since
June 1996.  Since October 1988,  General Odom has served as Director of National
Security  Studies  at the  Hudson  Institute.  He has also  served as an adjunct
professor at Yale  University  since January 1989.  Prior to his retirement from
the  military in 1988,  General  Odom held  several  military  posts  including,
Director  of  the  National  Security  Agency,  Assistant  Chief  of  Staff  for
Intelligence and Military  Assistant to the National Security Advisor during the
Carter  Administration.  He is also a director of Nichols Research  Corporation.
General Odom holds an M.A. and Ph.D.  from Columbia  University  and a B.S. from
the United States Military Academy at West Point.


                                       28
<PAGE>



                                     PART II

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

The Company's  Common Stock has been traded in the Nasdaq  National Market since
the  Company's  IPO on October 24, 1996.  According to records of the  Company's
transfer agent, the Company had  approximately  1,291  stockholders of record on
March 18,  1997.  Because  many of such  shares  are held by  brokers  and other
institutions  on behalf of  stockholders,  the Company is unable to estimate the
total number of stockholders  represented by these record holders. The following
table sets  forth the low and high sale  prices as of the close of market of the
Company's Common Stock from the time of the Company's IPO for the quarter ending
December 31, 1996.

Fiscal 1996:

<TABLE>
<CAPTION>

                                    Low Sale Price                     High Sale Price
<S>                                    <C>                                 <C>

         Fourth Quarter.............$4.875                             $7.75

</TABLE>

The Company has never  declared or paid cash  dividends  on its Common  Stock or
other securities.  The Company anticipates that all of its net earnings, if any,
will be retained for use in its operations  and does not anticipate  paying cash
dividends on its Common Stock in the foreseeable future. Payments of future cash
dividends, if any, will be at the discretion of the Company's Board of Directors
after taking into account  various  factors,  including the Company's  financial
condition, operating results and current and anticipated cash needs.

Item 6.  SELECTED FINANCIAL DATA

The  following  selected  financial  data set forth  below  with  respect to the
Company's  statement of operations from February 16, 1993 (date of inception) to
December 31, 1993 and for the years ended  December 31, 1994,  1995 and 1996 and
balance sheets as of December 31, 1993, 1994, 1995 and 1996 are derived from the
financial  statements of the Company  included  elsewhere in this Annual Report.
The  financial  data set  forth  below  should be read in  conjunction  with the
Company's financial  statements and the notes thereto included elsewhere in this
Annual Report and "Management's  Discussion and Analysis of Financial  Condition
and Results of Operations."

                                       29
<PAGE>

<TABLE>
<CAPTION>

                                                 For the
                                                 Period                Period ended December 31,
                                              February 16,
                                               1993 (date
                                                   of
                                               inception)
                                               to December
                                                   31,

                                                  1993           1994            1995            1996
<S>                                            <C>            <C>             <C>              <C>

    Statement of Operations Data:

    Revenues:
       Products                                 $       ---    $        --    $  1,101,418      $5,955,592
       Consulting and services                       76,183         59,716           2,083         310,557
          Total revenues                             76,183         59,716       1,103,501       6,266,149

    Cost of revenues:
       Products                                         ---            ---         376,359       1,969,117
       Consulting and services                       38,090         35,114             800          56,502
          Total cost of revenues                     38,090         35,114         377,159       2,025,619
    Gross profit                                     38,093         24,602         726,342       4,240,530

    Operating expenses:
       Sales and marketing                            6,652         36,212         130,917       3,744,630
       General and administrative                    74,212        315,192       1,350,361       4,879,940
       Research and development                      21,000        127,926         304,973       1,960,727
          Total operating expenses                  101,864        479,330       1,786,251      10,585,297
    Operating loss                                  (63,771)      (454,728)     (1,059,909)     (6,344,767)

    Other (expense) income:
       Interest expense                              (1,913)        (2,360)        (66,615)       (518,965)
       Interest income                                  ---            ---           4,513         168,176
          Total other expens es                      (1,913)        (2,360)        (62,102)       (350,789)
    Net loss                                     $  (65,684)    $ (457,088)    $(1,112,011)    $(6,695,556)
    Net loss per share                           $     (.01)    $    (0.06)    $     (0.12)    $     (0.66)
    Weighted average shares outstanding           6,186,978      8,046,766       9,567,509      10,209,340


                                                                      December 31,

                                                  1993           1994            1995            1996

    Balance Sheet Data:

    Working capital (deficit)                    $  (19,436)    $  245,598     $  (168,311)   $ 12,643,160
    Total assets                                     28,182        394,906       2,050,602      15,697,415
    Long-term debt, less current portion                ---            ---         126,908         134,704
    Total shareholder's equity                      (11,523)       318,028        (139,938)     13,993,745

</TABLE>


                                       30
<PAGE>



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

                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The Company offered  3,000,000 shares of Common Stock,  par value $0.001,  in an
IPO on October 24, 1996 at $5.00 per share.  On November 22, 1996, the Company's
underwriters  exercised their option to purchase an additional 200,000 shares of
Common Stock,  par value $0.001,  from the Company and certain  shareholders for
$5.00 per share.  Net of the  underwriting  discount and related  expenses,  the
Company raised approximately $12,645,000.

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

Under  the  Company's  revenue  recognition   policy,   revenues  are  generally
recognized  from the  license of  software  upon  shipment,  net of  allowances,
provided that no significant vendor obligations remain. In addition, the Company
often permits  customers to evaluate  products  being  considered  for purchase,
generally  for a period of up to 30 days,  in which event the  Company  does not
recognize revenues until the customer has accepted the product. Accordingly, the
Company's  revenue  recognition  policy does not necessarily  correlate with the
signing of a contract or the shipment of a product.

As of December 31, 1996, the Company had an accumulated deficit of approximately
$8,340,000.  The  Company  currently  expects to incur net losses  over the next
several  quarters  as a result of greater  operating  expenses  incurred to fund
research and  development  and to increase its senior  management  and sales and
marketing  efforts.  To date, the Company has expensed all development  costs as
incurred in compliance with Statement of Financial  Accounting Standards No. 86,
"Accounting for the Costs of Computer  Software to Be Sold,  Leased or Otherwise
Marketed." The Company  believes that it will be able to continue to expense all
development costs as incurred.

The Company recently has hired and intends to continue to hire additional senior
level personnel.  In addition,  general and administrative  costs have increased
significantly since the Company's date of inception and the Company expects such
costs to continue to increase in the future.


                                       31
<PAGE>



In 1996,  product  revenues from MCI and the National  Security  Agency  ("NSA")
accounted for approximately  12% and 12%,  respectively,  of total revenues.  In
1995, product revenues from GEIS, NCTS Washington,  a division of the Department
of the Navy,  and the U.S.  Defense  Information  Systems  Agency  accounted for
approximately  19%,  10%, and 10%,  respectively,  of total  revenues.  In 1994,
consulting and services  revenues from the U.S.  Department of Energy and MacTec
accounted for approximately 37% and 29%, respectively, of total revenues.

RESULTS OF OPERATIONS

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


<TABLE>
<CAPTION>

                                                      
                                                      For the Period Ended
                                       Dec. 31,             Dec. 31,             Dec. 31,
                                         1994                 1995                 1996
                                   -----------------    -----------------    -----------------
<S>                                <C>                  <C>                  <C>
Revenues:
Products                                        ---%                99.8%                95.0%
Consulting and services                       100.0                  0.2                  5.0
Total revenues                                100.0                100.0                100.0
Cost of revenues:
Products                                        ---                 34.1                 31.4
Consulting and services                        58.8                  0.1                  0.9
Total cost of revenues                         58.8                 34.2                 32.3
Gross profit                                   41.2                 65.8                 67.7
Operating expenses:
Sales and marketing                            60.6                 11.9                 59.8
General and administrative                    527.8                122.4                 77.9
Research and development                      214.2                 27.6                 31.3
Total operating expenses                      802.6                161.9                169.0
Operating loss                               (761.4)               (96.1)              (101.3)
Other (expense) income:
Interest expense                               (4.0)                (6.0)                (8.3)
Interest income                                 ---                  0.4                  2.7
Total other expenses                           (4.0)                (5.6)                (5.6)
Net loss                                     (765.4)%             (101.7)%             (106.9)%
</TABLE>

COMPARISON OF YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996

REVENUES

Total revenues  increased from  approximately  $60,000 in 1994 to  approximately
$1,104,000 in 1995 and increased to approximately $6,266,000 in 1996.


                                       32
<PAGE>



Product revenues are derived  principally from software licenses and the sale of
hardware  products.  The Company had no revenues from products in 1994.  Product
revenues  increased  significantly  from  approximately  $1,101,000  in  1995 to
approximately  $5,956,000 in 1996. The increase was due principally to increased
sales of the Company's  SmartWall  product and the introduction of its SmartGATE
product in December 1995, along with increased sales and marketing efforts.

Consulting and services revenues are derived  principally from fees for services
complementary to the Company's products,  including consulting,  maintenance and
training.  Consulting and services revenues decreased from approximately $60,000
in  1994  to  approximately  $2,000  in  1995  and  increased  significantly  to
approximately  $311,000 in 1996.  Revenues from consulting and services declined
from  1994 to  1995  due to the  Company's  focus  on  product  development  and
subsequent  sales  and  marketing  efforts.  Consulting  and  services  revenues
increased  from  1995 to 1996  as the  Company  increased  staffing  to  support
consulting and services and product sales.

COST OF REVENUES

Total cost of revenues as a percentage of total  revenues were 58.8%,  34.2% and
32.3% in 1994, 1995 and 1996, respectively.

Cost of product revenues consists principally of the costs of computer hardware,
licensed  technology,  manuals and labor  associated with the  distribution  and
support of the Company's  products.  The Company had no product revenue in 1994.
Cost of  product  revenues  increased  from  approximately  $376,000  in 1995 to
approximately  $1,969,000 in 1996.  Cost of product  revenues as a percentage of
product revenues was 34.2% and 33.1% for 1995 and 1996, respectively. The dollar
increase  and  percentage  decrease in 1996 were  primarily  attributable  to an
increase in revenues from  increased  sales and  marketing  efforts and from the
introduction  of  SmartGATE,  combined  with a higher  product  mix of  software
licenses to turnkey hardware sales.

Cost of consulting and services revenues  consists  principally of personnel and
related costs incurred in providing consulting, support and training services to
customers. Cost of consulting and services revenues decreased from approximately
$35,000 in 1994 to  approximately  $800 in 1995 and increased  significantly  to
approximately  $57,000 in 1996.  Cost of consulting  and services  revenues as a
percentage of consulting  and services  revenues was 58.8%,  38.4% and 18.2% for
1994, 1995 and 1996, respectively.  The dollar increase in 1996 was attributable
to  increased  staffing  to support  consulting  and  services.  The  percentage
decrease was principally due to allocation over a larger revenue base.

OPERATING EXPENSES

Sales and Marketing -- Sales and marketing  expenses consist  principally of the
costs of sales and marketing personnel, advertising, promotions and trade shows.
Sales and marketing  expenses  increased from  approximately  $36,000 in 1994 to
approximately  $131,000 in 1995 and  increased to  approximately  $3,745,000  in

                                       33
<PAGE>



1996. Sales and marketing expenses as a percentage of total revenues were 60.6%,
11.9% and 59.8% in 1994,  1995 and 1996,  respectively.  The dollar  increase in
1995 was principally due to increased  personnel and marketing efforts and costs
associated  with the sales of  SmartWall.  The  percentage  decrease in 1995 was
principally due to allocation over a larger revenue base. The dollar increase in
1996 was  principally  due to increased  personnel,  higher  levels of sales and
marketing  efforts  and  sales  associated  with  the  sales  of  SmartWall  and
SmartGATE.  The percentage  increase was due to  significantly  higher expenses.
Sales and  marketing  expenses can be expected to increase both in the aggregate
and as a  percentage  of  total  revenues  in the near  term as a result  of the
Company's increased sales and marketing efforts.

General  and  Administrative  -- General  and  administrative  expenses  consist
principally of the costs of finance, management and administrative personnel and
facilities expenses. General and administrative expenses increased substantially
from  approximately  $315,000 in 1994 to approximately  $1,350,000 and increased
significantly to approximately  $4,880,000 in 1996.  General and  administrative
expenses as a percentage  of total  revenues  were  527.8%,  122.4% and 77.9% in
1994, 1995 and 1996, respectively. The dollar increase in 1995 was primarily due
to increased  staffing levels,  leasing of additional  office space,  additional
travel  expense,  establishing an allowance for  potentially  uncollectible  and
non-saleable  inventory and increased  professional  fees. In 1996,  the Company
recorded   non-cash   compensation   expense  of  approximately   $2,515,000  in
conjunction with the grant of options to purchase 590,394 shares of Common Stock
at an exercise price of $3.75 per share and options to purchase 10,000 shares of
Common Stock at an exercise price of $4.50 per share,  each granted  pursuant to
the Company's  1996  Incentive  Stock Plan, and the grant of options to purchase
383,965  shares of Common Stock at an exercise price of $0.75 per share pursuant
to the Company's 1996 Non-Statutory  Stock Option Plan, the underlying shares of
which were funded by a  contribution  of 383,965 shares of Common Stock by James
F. Chen,  the Company's  founder,  President and Chief  Executive  Officer.  The
non-cash  compensation  expense was recognized in the second quarter of 1996. In
the fourth  quarter of 1996,  the  Company  recognized  a non-cash  compensation
expense of  approximately  $264,000 in conjunction  with a  contribution  to the
Company of 52,885 shares of Common Stock by James F. Chen.  The remainder of the
dollar increase was principally  attributable to additional hiring of management
and  administrative  personnel and  professional  and legal fees. The percentage
decrease was primarily due to allocation over a larger revenue base. The Company
anticipates  that general and  administrative  expenses  will increase in future
periods.

Research  and   Development  --  Research  and  development   expenses   consist
principally  of the  costs of  research  and  development  personnel  and  other
expenses  associated  with the  development  of new products and  enhancement of
existing   products.   Research  and   development   expenses   increased   from


                                       34
<PAGE>



approximately  $128,000 in 1994 to approximately  $305,000 in 1995 and increased
to  approximately  $1,961,000 in 1996.  Research and  development  expenses as a
percentage  of total  revenues  were 214.2%,  27.6% and 31.3% in 1994,  1995 and
1996,  respectively.  The dollar and percentage  increases in 1995 and 1996 were
primarily  due to  increases  in the  number of  personnel  associated  with the
Company's product  development  efforts.  The Company believes that a continuing
commitment  to research  and  development  is  required  to remain  competitive.
Accordingly,  the Company intends to allocate substantial  resources to research
and development,  but research and development expenses may vary as a percentage
of total revenues.

Interest  Income and Expense -- Interest  income  represents  interest earned on
cash, cash equivalents and marketable  securities.  There was no interest income
in 1994.  Interest income in 1995 was approximately  $5,000 from interest earned
on the net proceeds  from the Company's  private  financings  and  approximately
$168,000 in 1996 from interest earned on the net proceeds from the Company's IPO
and private financings. Interest expense represents interest payable or accreted
on promissory  notes and capitalized  lease  obligations.  Interest  expense was
approximately $2,000 in 1994 and was approximately $67,000 in 1995. The increase
was primarily due to the Company's issuance of $1,250,000 in promissory notes in
1995. Interest expense increased substantially to $519,000 in 1996. The increase
was primarily due to the Company's issuance of $1,250,000 in promissory notes in
1995, the issuance of approximately  $1,250,000 promissory notes in 1996 and the
issuance of the JMI note of $1,500,000 in 1996.

Income  Taxes -- The Company did not incur  income tax  expenses in December 31,
1994,  1995 and 1996 as a result of the net loss incurred  during these periods.
As of December 31, 1996,  the Company had net operating  loss carry  forwards of
approximately $7,496,000 as a result of net losses incurred since inception.

QUARTERLY RESULTS OF OPERATIONS

The  following  table  sets  forth  selected  financial  data  for  the  periods
indicated.  This information  (other than the three months ended March 31, 1996)
has been derived from the Company's  unaudited financial  statements,  which, in
management's  opinion,  reflect all adjustments necessary to fairly present this
information  when read in  conjunction  with the financial  statements and notes
thereto included elsewhere in this Annual Report.


                                       35
<PAGE>

<TABLE>
<CAPTION>

                                       Mar. 31,            June 30,             Sept. 30,             Dec. 31,
                                        1995                1995                  1995                 1995
                                     (unaudited)         (unaudited)          (unaudited)           (unaudited)
                                    ------------        ------------         ------------          ------------ 
<S>                                 <C>                 <C>                 <C>                    <C>        
Revenues:
Products                             $   150,257         $   218,961          $   356,021           $   376,179
Consulting and services                      ---                 ---                  ---                 2,083
Total revenues                           150,257             218,961              356,021               378,262
Cost of revenues:
Products                                  52,590              78,560              125,482               119,727
Consulting and services                      ---                 ---                  ---                   800
Total cost of revenues                    52,590              78,560              125,482               120,527
Gross profit                              97,667             140,401              230,539               257,735
Operating expenses:
Sales and marketing                       40,730              25,312               24,030                40,845
General and administrative               163,282             297,881              176,903               712,295
Research and development                  48,446              62,344               90,142               104,041
Total operating expenses                 252,458             385,537              291,075               857,181
Operating loss                          (154,791)           (245,136)             (60,536)             (599,446)
Other (expense) income:
Interest expense                             ---                 ---                  ---               (66,615)
Interest income                              ---                 ---                  ---                 4,513
Total other expenses                         ---                 ---                  ---               (62,102)
Net loss                             $  (154,791)        $  (245,136)         $   (60,536)          $  (661,548)


   
                                                          June 30,             Sept. 30,              Dec. 31,
                                       Mar. 31,             1996                 1996                   1996
                                        1996            (unaudited)           (unaudited)            (unaudited)
                                    ------------       ------------          ------------           ------------
Revenues:
Products                             $   981,642       $  1,302,402           $  1,578,620           $ 2,092,928
Consulting and services                   40,169             52,174                141,923                76,291
Total revenues                         1,021,811          1,354,576              1,720,543             2,169,219
Cost of revenues:
Products                                 310,693            462,636                503,484               692,304
Consulting and services                   11,305             15,917                 11,954                17,326
Total cost of revenues                   321,998            478,553                515,438               709,630
Gross profit                             699,813            876,023              1,205,105             1,459,589
Operating expenses:
Sales and marketing                      709,111            963,326                898,543             1,173,650
General and administrative               592,967          2,756,546                507,079             1,023,348
Research and development                 310,952            393,357                607,305               649,113
Total operating expenses               1,613,030          4,113,229              2,012,927             2,846,111
Operating loss                          (913,217)        (3,237,206)              (807,822)           (1,386,522)
Other (expense) income:
Interest expense                        (104,934)          (176,092)              (191,723)              (46,216)
Interest income                           23,491             19,897                 22,031               102,757
Total other expenses                     (81,443)          (156,195)              (169,692)                56,541
Net loss                              $ (994,660)       $(3,393,401)           $  (977,514)          $ (1,329,981)

</TABLE>

                                       36
<PAGE>



The Company's  total  revenues and operating  results have varied  substantially
from quarter to quarter and should not be relied upon as an indication of future
results.  Several  factors  may affect the  ability to  forecast  the  Company's
quarterly  operating  results,  including  the size  and  timing  of  individual
transactions;  the length of the Company's sales cycle; changes in the Company's
budget  authorizations;   the  level  of  sales  and  marketing,   research  and
development and administrative  expenses;  and general economic conditions.  For
example, the Company made significant sales during the latter part of the second
quarter of 1996,  and a  significant  portion of those sales were not  collected
until the third quarter of 1996. As a result, the Company's accounts  receivable
during  the second  quarter  of 1996  increased  to an amount  greater  than its
revenues for that period.  This pattern has been followed in subsequent quarters
of 1996 and may continue in subsequent quarters of 1997.

Operating results for a given period could be disproportionately affected by any
shortfall  in expected  revenues.  In  addition,  fluctuation  in revenues  from
quarter to quarter will likely have an  increasingly  significant  impact on the
Company's results of operations.  The Company's growth in recent periods may not
be an  accurate  indication  of future  results  of  operations  in light of the
Company's short operating  history,  the evolving nature of the network security
market and the  uncertainty of the demand for Internet and intranet  products in
general and the Company's products in particular.

The Company may  experience  significant  seasonality  in its business,  and the
Company's  financial condition and results of operations may be affected by such
trends in the future.  Such trends may include higher  revenues in the third and
fourth quarters of the year and lower revenues in the first and second quarters.
The Company believes that revenues may be higher in the third quarter due to the
fiscal year end of the U.S.  government  and higher in the fourth quarter due to
year end  budgetary  pressures on the  Company's  commercial  customers  and the
tendency  of certain of the  Company's  existing  or  prospective  customers  to
implement  changes  in  computer  or  network  security  prior to the end of the
calendar year. Because the Company's operating expenses are based on anticipated
revenue  levels,  a small  variation in the time of  recognition of revenues can
cause significant variations in operating results from quarter to quarter.

LIQUIDITY AND CAPITAL RESOURCES

On October 24,  1996,  the Company  commenced  an IPO of its Common  Stock which
provided  the Company  with net  proceeds of  approximately  $12,645,000.  As of
December  31,  1996,  the  Company  had  nominal  debt  and had  cash  and  cash
equivalents of  approximately  $10,894,000 and working capital of  approximately
$12,643,000.

                                       37
<PAGE>



Prior to its IPO, the Company had financed  its  operations  through the private
sale of equity securities,  notes to shareholders and short-term borrowings.  In
1994  and  1995,  the  Company  raised  approximately   $750,000  and  $400,000,
respectively,  through the sale of Common Stock.  In addition,  in December 1995
and January 1996,  the Company raised  $2,500,000  from the sale of 7% unsecured
promissory  notes  scheduled to mature on June 30, 1996.  In addition,  in April
1996,  the Company  raised  approximately  $1,000,000  by selling an  additional
222,222  shares of Series A  Convertible  Preferred  Stock  ("Series A Stock) at
$4.50 per share.  In April and May of 1996, the Company  exchanged all of the 7%
unsecured  promissory  notes for Series A Stock.  Upon  consummation of the IPO,
each share of Series A Stock automatically  converted into 1.20 shares of Common
Stock.  In June 1996, the Company raised an additional  $1,500,000 by issuing to
JMI an 8%  unsecured  senior  subordinated  note  with  detachable  warrants  to
purchase  333,332  shares of Common Stock of which 266,666 were  exercisable  at
$4.50 per share ("$4.50  Warrants")  and 66,666 were  exercisable  at $0.015 per
share ("$0.015  Warrants").  The note was redeemed upon  consummation of the IPO
and the $0.015  Warrants were exercised on June 28, 1996.  Pursuant to the terms
of the  $4.50  Warrants,  upon  consummation  of the IPO at a price per share of
$5.00,  the $4.50  Warrants  were  adjusted to entitle  JMI to purchase  319,999
shares of Common Stock at $3.75 per share.

The  Company's  operating  activities  used  cash  of  approximately   $353,000,
$1,121,000 and  $5,119,000 in 1994,  1995 and 1996,  respectively.  Cash used in
operating  activities  was  principally  a result of net losses and increases in
accounts  receivable and inventory,  which were partially offset by increases in
accounts   payable,   the   establishment   of  an  allowance  for   potentially
uncollectible  accounts  receivable  and  non-saleable  inventory  and  non-cash
expenses related to the issuance of certain stock options.

Capital  expenditures  for property and equipment  were  approximately  $13,000,
$20,000 and $562,000 in 1994, 1995 and 1996,  respectively.  These  expenditures
have generally been for computer  workstations  and personal  computers,  office
furniture and equipment,  and leasehold additions and improvements.  The Company
expects  to  purchase  additional  computer  equipment,   office  furniture  and
leasehold improvements in 1997.

The Company  believes that its current cash and cash  equivalents and funds that
may be generated  from  on-going  operations  will be  sufficient to finance the
Company's operations at least through March 31, 1998.


                                       38
<PAGE>



Item 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA








                                V-ONE CORPORATION
                              FINANCIAL STATEMENTS
                                    --------

                      As of December 31, 1995 and 1996 and
            and for the years ended December 31, 1994, 1995, and 1996

                                       AND
                                 REPORT THEREON
                                    --------



















                                       39
<PAGE>


                         INDEPENDENT ACCOUNTANTS' REPORT




To the Board of Directors of V-ONE Corporation:


We have  audited  the  accompanying  balance  sheets of V-ONE  Corporation  (the
"Company")  as of December  31, 1995 and 1996,  and the  related  statements  of
income,  changes  in  stockholders'  equity and cash flows for each of the three
years in the period ended  December 31, 1996. We have also audited the financial
statement  schedules  listed in the index on page F-1 of this Form  10-K.  These
financial statements and financial statement schedules are the responsibility of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits.

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

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,  the  financial  position  of V-ONE  Corporation  as of
December 31, 1995 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended  December 31, 1996 in conformity
with generally accepted accounting principles.  In addition, in our opinion, the
financial  statement schedules referred to above, when considered in relation to
the basic financial statements taken as a whole, present fairly, in all material
respects, the information required to be included therein.



                                    /s/ Coopers & Lybrand L.L.P.
    


McLean, Virginia
March 24, 1997












                                       40
<PAGE>




<TABLE>
<CAPTION>
                                V-ONE CORPORATION
                                 BALANCE SHEETS
                                    --------


                                     ASSETS

                                                                                         December 31,
                                                                                -------------------------------
                                                                                    1995            1996
                                                                                --------------  ----------------
<S>                                                                             <C>             <C>            
  Current assets:
     Cash and cash equivalents                                                    $ 1,328,385     $ 10,894,375
     Accounts receivable, less allowances of $23,620 and $252,395 as of
       December 31, 1995 and 1996, respectively                                       242,392        2,647,195
     Inventory                                                                        257,630          418,870
     Prepaid expenses and other current assets                                         13,955          173,411
                                                                                  -----------     ------------
            Total current assets                                                    1,842,362       14,133,851
                                                                                  -----------     ------------

  Property and equipment:
     Office and computer equipment                                                    219,044          790,373
     Furniture and fixtures                                                            14,958           98,579
                                                                                  -----------     ------------
                                                                                      234,002          888,952
  Less accumulated depreciation                                                       (35,952)        (132,365)
                                                                                  -----------     ------------
                                                                                      198,050          756,587
  Licensing fee, net of accumulated amortization of $0 and $70,764 as of                    -          778,409
     December 31, 1995 and 1996, respectively
  Other assets                                                                         10,190           28,568
                                                                                  -----------     ------------
            Total assets                                                          $ 2,050,602     $ 15,697,415
                                                                                  ===========     ============

                 LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)

  Current liabilities:
     Accounts payable and accrued expenses                                        $   227,545     $  1,311,044
     Deferred income                                                                   12,500           97,748
     Notes payable - current                                                        1,255,556           16,667
     Notes payable to related parties                                                 474,144                -
     Capital lease obligations - current                                               40,928           65,232
                                                                                  -----------      -----------
            Total current liabilities                                               2,010,673        1,490,691

  Notes payable - noncurrent                                                           44,444           22,222
  Deferred rent                                                                        52,959           78,275
  Capital lease obligations - noncurrent                                               82,464          112,482
                                                                                  -----------      -----------
            Total liabilities                                                       2,190,540        1,703,670
                                                                                  ------------     ------------

  Commitments and contingencies

  Shareholders' equity (deficit)
  Common stock,  $0.001 par value;  33,333,333 shares 
     authorized;  8,304,426 and 12,658,347 shares 
     issued and outstanding, as of December 31, 1995                                    
     and 1996, respectively                                                             8,304           12,658
  Additional paid-in capital                                                        1,496,541       22,608,866
  Notes receivable from sales of Common Stock                                               -         (287,400)
  Accumulated deficit                                                              (1,644,783)      (8,340,379)
                                                                                  -----------     -------------
            Total shareholders' equity (deficit)                                     (139,938)      13,993,745
                                                                                  -----------     -------------
            Total liabilities and shareholders' equity (deficit)                  $ 2,050,602     $ 15,697,415
                                                                                  ============    =============
</TABLE>

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

                                       41

<PAGE>


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





                                                     For the years ended
                                                        December 31,
                                      --------------------------------------------------
                                          1994             1995            1996
                                      --------------   ------------- ------------------
<S>                                   <C>              <C>           <C>              
 Revenues:
    Products                          $         -      $ 1,101,418        $   5,955,592
    Consulting and services                59,716            2,083              310,557
                                      -----------      -----------        -------------

        Total revenues                 $   59,716        1,103,501            6,266,149
                                       ----------      -----------        -------------

 Cost of revenues:
    Products                                    -          376,359            1,969,117
    Consulting and services                35,114              800               56,502
                                        ---------      -----------        -------------

        Total cost of revenues             35,114          377,159            2,025,169
                                      --------------   ------------- ------------------

 Gross profit                              24,602          726,342            4,240,530
                                      --------------   ------------- ------------------

 Operating expenses:
    Sales and marketing                    36,212          103,917            3,744,630
    General and administrative            315,192        1,350,361            4,879,940
    Research and development              127,926          304,973            1,960,727
                                      --------------   ------------- ------------------

        Total operating expenses          479,330        1,786,251           10,585,297
                                      --------------   ------------- ------------------

 Operating loss                          (454,728)      (1,059,909)          (6,344,767)
                                      --------------   ------------- ------------------

 Other (expense) income:
    Interest expense                       (2,360)         (66,615)            (518,965)
    Interest income                             -            4,513              168,176
                                      --------------   ------------- ------------------

    Total other expenses                   (2,360)         (62,102)            (350,789)
                                      --------------   ------------- ------------------

 Net loss                             $  (457,088)     $ (1,122,011) $       (6,695,556)
                                      ==============   ============= ==================

 Net loss per common share            $     (0.06)     $      (0.12) $            (0.66)
                                      ==============   ============= ==================

 Weighted average shares
    outstanding                         8,046,766         9,567,509          10,209,340
                                      ==============   ============= ==================
               
</TABLE>

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

                                       42

<PAGE>


<TABLE>
<CAPTION>

                                V-ONE CORPORATION
                  STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                                    --------


                                                                              Notes
                                                              Additional    Receivable
                                         Common Stock           Paid-in        from       Accumulated
                                       Shares      Amount       Capital    Stock Sales      Deficit         Total
                                    ------------- ---------- --------------------------- -------------- --------------
<S>                                      <C>      <C>        <C>           <C>           <C>            <C>           
 Balance, December 31, 1993            5,666,666  $   5,667  $      34,333 $          -  $     (65,684) $     (25,684)
 Sale of common stock                  2,176,473      2,176        747,824            -              -        750,000
 Contribution of common stock
    from related party                  (333,333)      (333)           333            -              -              -
 Issuance of common stock as
    payment for services                 353,333        353            447            -              -            800
 Contributed capital in lieu in
    cash compensation                          -          -         50,000            -              -         50,000
 Net loss                                      -          -              -            -       (457,088)      (457,088)
                                    ------------- ---------- --------------------------- -------------- --------------

 Balance, December 31, 1994            7,863,139      7,863        832,937            -       (522,772)       318,028
 Sale of common stock                    107,954        108        399,892            -              -        400,000
 Contribution capital in lieu of
    cash compensation                   (132,666)      (133)           133            -              -              -
 Issuance of common stock in
    accordance with anti-dilution
    agreement                             56,000         56            (56)           -              -              -
 Issuance of common stock as
    payment for accrued interest          76,666         77         32,468            -              -         32,545
 Issuance of common stock as
    payment for services                 333,333        333        141,167            -              -        141,500
 Contributed capital in lieu of
    cash compensation                          -          -         90,000            -              -         90,000
 Net loss                                      -          -              -            -     (1,122,011)    (1,122,011)
                                  --------------- ---------- --------------------------- -------------- --------------

 Balance, December 31, 1995            8,304,426      8,304      1,496,541            -     (1,644,783)      (139,938)
 Contribution of common stock
    from related party                  (383,965)      (384)       288,360            -              -        287,976
 Issuance of common stock
    related to 1996 Non-Statutory
    Stock Option Plan                    383,965        384      1,727,459     (287,400)             -      1,440,443


                                       43
<PAGE>




 Issuance of common stock
    as payment for services               11,111         11         49,989            -              -         50,000
 Issuance of non-qualified stock
    options below fair market
    value                                      -          -        487,796            -              -        487,796
 Issuance of warrants to purchase
    common stock                               -          -        299,000            -              -        299,000
 Exercise of warrants to purchase
    common stock                          66,666         67            933            -              -          1,000
 Issuance of common stock as
    payment of a note                     73,333         74        329,926            -              -        330,000
 Contribution of common stock
    from related party                  (153,333)      (153)           153            -              -              -
 Issuance of common stock as
    payment on accrued interest          153,333        153         64,937            -              -         65,090
 Repurchase of fractional shares
    of common stock related to
    the reverse stock split                   (9)         -            (41)           -            (40)           (81)
 Issuance of common stock as
    payment of licensing fees            188,705        188        848,985            -              -        849,173
 Public sale of common stock
    at $5.00 per share, net of
    issuance costs                     3,000,000      3,000     12,641,755            -              -     12,644,755
 Contribution of common stock
    from related party                   (52,885)       (53)       264,531            -              -        264,478
 Conversion of preferred stock to
    common stock at 1-to-1.2
    ratio                                949,209        949      3,558,605            -              -      3,559,554
 Issuance of common stock due
    to exercise of overallotment
    option                               117,791        118        540,937            -              -        550,055
 Net loss                                      -          -              -            -     (6,695,556)    (6,695,556)
                                    ------------- ---------- --------------------------- -------------- --------------

 Balance, December  31, 1996          12,658,347  $  12,658  $  22,608,866 $   (287,400) $  (8,340,379) $  13,993,745
                                    ============= ========== ============= ============= ============== ==============

</TABLE>

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


                                       44
<PAGE>



<TABLE>
<CAPTION>

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




                                                                      For the years ended
                                                                          December 31
                                                        ------------------------------------------------
                                                            1994           1995             1996
                                                        -------------- --------------   --------------
<S>                                                     <C>            <C>              <C>           
 Cash flows from operating activities:
    Net loss                                            $    (457,088) $  (1,122,011)   $  (6,695,556)
 Adjustments to reconcile net loss to net cash from
      used in operating activities:
    Provision for doubtful accounts receivable                      -         23,620          228,775
    Provision for obsolete inventory                                -         50,000                -
    Depreciation and amortization                              10,307         24,623          172,582
    Interest expense on accretion of note payable                   -              -          299,000
    Consulting expense satisfied by issuance of
      common stock                                                  -              -           45,833
    Compensation expense satisfied by issuance of
      common stock                                                800        141,500          487,796
    Compensation expense recognized for  receipt
      of contributed capital                                   50,000         90,000                -
    Compensation expense for common stock
      contributed to stock option plan                              -              -          287,976
    Compensation expense for issuance of common
      stock related to 1996 non-statutory stock
      option plan                                                   -              -        1,440,443
    Compensation expense recognized for conversion
      of preferred stock to common                                  -              -          264,425
    Accrued interest satisfied with common stock                    -         32,545           65,090
    Accrued interest satisfied with preferred stock                 -              -           59,554
 Changes in assets and liabilities:
    Accounts receivable                                          (840)      (265,172)      (2,633,578)
    Inventory                                                       -       (307,630)        (161,240)
    Prepaid expenses and other                                      -        (24,145)        (173,667)
    Accounts payable and accrued  expenses                     43,424        235,919        1,194,035
                                                        -------------- --------------   --------------

        Net cash used in operating activities                (353,397)    (1,120,751)      (5,118,532)
                                                        -------------- --------------   --------------

 Cash flows from investing activities:
    Purchase of property and equipment                        (13,300)       (19,840)        (562,190)
                                                        -------------- --------------   --------------
                                                              (13,200
        Net cash used in investing activities                 (13,300)       (19,840)        (562,190)
                                                        -------------- --------------   --------------

                                       45
<PAGE>




 Cash flows from financing activities:
    Issuance of common stock                                  700,000        400,000                -
    Issuance of common stock in public sale                         -              -       15,000,000
    Payment of stock issuance costs                                 -              -       (2,355,245)
    Issuance of common stock due to exercise
      of overallotment option                                       -              -          550,055

    Issuance of preferred stock                                     -              -        1,000,000
    Issuance of debt with detachable warrants                       -              -        1,500,000
    Exercise of options and warrants                                -              -            1,000
    Issuance of notes payable                                       -      1,300,000        1,250,000
    Issuance of notes payable to related parties                    -        454,351                -
    Principal payments on capitalized lease obligations             -         (7,011)         (43,843)
    Repayment of notes payable                                      -              -          (11,111)
    Repayment of notes payable to related parties             (20,412)             -       (1,644,144)
                                                        -------------- --------------   --------------
        Net cash provided by financing activities             679,588      2,147,340       15,246,712
                                                        -------------- --------------   --------------

 Net increase (decrease) in cash and cash equivalents         312,891      1,006,749        9,565,990

 Cash and cash equivalents at end of period                     8,745        321,636        1,328,385
                                                        -------------- --------------   --------------

 Cash and cash equivalents at beginning of period       $     321,636  $   1,328,385    $  10,894,375
                                                        ============== ==============   ==============
</TABLE>

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


                                       46
<PAGE>


<TABLE>
<CAPTION>

                                V-ONE CORPORATION
                     STATEMENTS OF CASH FLOWS - (Continued)
                                    --------


                                                                           Year ended December 31,
                                                                     1994           1995            1996
                                                                 -------------- --------------  --------------
    <S>                                                          <C>            <C>             <C>          
    Noncash investing and financing activities:
       Property and equipment acquired through capital leases    $           -  $   123,392     $      98,165
                                                                 ============== ==============  ==============
       Property and equipment acquired through the
         issuance of common stock                                $      50,000  $         -     $           -
                                                                 ============== ==============  ==============
       Retirement of fully depreciated property and equipment    $           -  $           -   $       5,405
                                                                 ============== ==============  ==============
       Issuance of common stock as compensation                  $         800  $   141,500     $           -
                                                                 ============== ==============  ==============
       Accrued interest satisfied with common stock              $           -  $    32,545     $      65,090
                                                                 ============== ==============  ==============
       Notes received for stock options exercised                $           -  $         -     $     287,400
                                                                 ============== ==============  ==============
       Consulting expense recognized by issuance of
         common stock                                            $           -  $         -     $      50,000
                                                                 ============== ==============  ==============
       Notes payable plus accrued interest satisfied with
         preferred stock                                         $           -  $         -     $   2,559,554
                                                                 ============== ==============  ==============
       Issuance of common stock to satisfy note payable
         to related party                                        $           -  $         -     $     330,000
                                                                 ============== ==============  ==============
       Issuance of common stock payment of licensing fee         $           -  $         -     $     849,173
                                                                 ============== ==============  ==============
       Conversion of preferred stock to common stock             $           -  $         -     $   3,559,554
                                                                 ============== ==============  ==============
       Repurchase of fractional shares of common
         stock related to the reverse stock split                $           -  $         -     $          81
                                                                 ============== ==============  ==============

    Supplemental cash flow disclosure:
       Cash paid for interest                                    $           -  $       182     $     133,042
                                                                 ============== ==============  ==============
</TABLE>


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


                                       47
<PAGE>



                               V-ONE CORPORATION
                         NOTES TO FINANCIAL STATEMENTS


  1.     NATURE OF BUSINESS

         V-ONE  Corporation  ("V-ONE" or the  "Company")  develops,  markets and
         licenses a comprehensive suite of network security products that enable
         organizations   to  conduct   secured   electronic   transactions   and
         information  exchange  using  private  enterprise  networks  and public
         networks, such as the Internet.

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

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


  2.     SIGNIFICANT ACCOUNTING POLICIES

              REVENUE RECOGNITION

              Revenues  are  generally  recognized  from the license of software
              upon  shipment,  net of  allowances,  provided that no significant
              vendor obligations remain. In addition,  the Company often permits
              customers to evaluate  products  being  considered  for  purchase,
              generally  for a period up to 30 days,  in which event the Company
              does not  recognize  revenues  until the customer has accepted the


                                       48
<PAGE>



                               V-ONE CORPORATION
                         NOTES TO FINANCIAL STATEMENTS


              product.  Accordingly,  the Company's revenue  recognition  policy
              does not  necessarily  correlate with the signing of a contract or
              the  shipment  of  a  product.  Allowances  for  estimated  future
              returns, credits and doubtful accounts are netted against accounts
              receivable.  Service and training  revenues are  recognized as the
              services are performed.

              Maintenance and support  revenues are recognized  ratably over the
              contract term, typically one year. Payments received in advance of
              revenue recognition are included in deferred income.

              In some instances,  the Company recognizes  revenues from the sale
              of systems using the  percentage of completion  method as the work
              is  performed,  measured  primarily  by the  ratio of labor  hours
              incurred  to  total   estimated  labor  hours  for  each  specific
              contract.  When the total estimated cost of a contract is expected
              to exceed the contract price,  the total estimated loss is charged
              to expense in the period when the information becomes known.

              RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS

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


                                       49
<PAGE>



                               V-ONE CORPORATION
                         NOTES TO FINANCIAL STATEMENTS


              USE OF ESTIMATES

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

              CASH AND CASH EQUIVALENTS

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

              INVENTORIES

              Inventories  are valued at the lower of cost or market and consist
              primarily of computer  equipment for sale on orders  received from
              customers,  items  held  for  stock  and  training  kits.  Cost is
              determined based on specific identification.

              PROPERTY AND EQUIPMENT

              Office and  computer  equipment  and  furniture  and  fixtures are
              recorded at cost.  Depreciation  and  amortization of property and
              equipment  is  calculated  using the  straight-line  method over a
              useful  life  of the  assets,  generally  three  to  seven  years.
              Depreciation  expense was  $10,307,  $24,623 and  $101,818 for the
              years ended December 31, 1994, 1995 and 1996, respectively.

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


                                       50
<PAGE>




                               V-ONE CORPORATION
                         NOTES TO FINANCIAL STATEMENTS


              INCOME TAXES

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

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

              COMPUTATION OF NET LOSS PER COMMON SHARE

              Primary net loss per common share has been computed based upon the
              weighted   average   number  of  common  stock  and  common  stock
              equivalents   outstanding   during  each   period.   Common  stock
              equivalents  recognize  the potential  dilutive  effects of future
              exercise  of common  stock  options.  Pursuant to the rules of the
              Securities and Exchange  Commission,  common and common equivalent
              shares issued during the 12 months immediately  preceding the date
              of the initial filing of the  registration  statement  relating to
              the Company's  initial public offering  ("IPO") have been included
              in the  calculation of common and common  equivalent  shares as if
              they were  outstanding  for the  periods  prior to the date of the
              initial public  offering  (using the treasury stock method and the
              public offering price of $5.00 per share).

              RISKS, UNCERTAINTIES AND CONCENTRATIONS

              The  preparation  of  financial   statements  in  conformity  with
              generally accepted  accounting  principles  requires management to


                                       51
<PAGE>



                               V-ONE CORPORATION
                         NOTES TO FINANCIAL STATEMENTS



              make estimates and assumptions that affect the reported amounts of
              assets and liabilities  and  disclosures of contingent  assets and
              liabilities  at the  date  of the  financial  statements  and  the
              reported  amounts of revenues  and expenses  during the  reporting
              period. Actual results could differ from those estimates and could
              impact future results of operations and cash flows.

              Financial  instruments  that  potentially  subject  the Company to
              significant concentration of credit risk consist primarily of cash
              equivalents and accounts  receivable.  The Company's cash balances
              exceed  federally  insured  amounts.  The Company invests its cash
              primarily in money market funds with an  international  commercial
              bank.  The Company had a balance in these funds of $1,175,279  and
              $10,875,652  as of December 31, 1995 and 1996,  respectively.  The
              Company  has not  experienced  any losses to date on its  invested
              cash.

              The Company  sells its product to a wide variety of customers in a
              variety  of  industries.   The  Company  performs  ongoing  credit
              evaluations  of its customers  but does not require  collateral or
              other  security  to  support  customer  accounts  receivable.   In
              management's   opinion,   the  Company  has  provided   sufficient
              provisions to prevent a significant impact of credit losses to the
              financial statements.

              In 1994, two customers  accounted for  approximately  65% of total
              revenues,  respectively.  In 1995,  three customers  accounted for
              approximately  39% of  total  revenues.  In  1996,  two  customers
              accounted for approximately 24% of total revenues.

              One customer accounted for 36% of total accounts  receivable as of
              December 31, 1995. Three customers accounted for approximately 41%
              of total accounts receivable as of December 31, 1996.

              Fair Value of Financial Instruments:

              The  carrying  amounts of the  Company's  assets  and  liabilities
              approximate  fair value due to either the  short-term  maturity of
              those financial instruments or their negotiated market terms.


                                       52
<PAGE>



                               V-ONE CORPORATION
                         NOTES TO FINANCIAL STATEMENTS



              STOCK-BASED COMPENSATION

              In October 1995, the Financial  Accounting  Standards Board issued
              Statement of Financial  Accounting  Standards No. 123 ("SFAS 123")
              Accounting for  Stock-Based  Compensation,  which is effective for
              the  Company's  financial  statements  for fiscal years  beginning
              after  December  15,  1995.  SFAS 123 allows  companies  to either
              account for stock-based  compensation  under the new provisions of
              SFAS 123 or under the  provisions of Accounting  Principles  Board
              Opinion  No.  25  ("APB  25"),  Accounting  for  Stock  Issued  to
              Employees,  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 continued to account for its
              stock-based  compensation in accordance with the provisions of APB
              25.

              RECLASSIFICATIONS

              Certain  reclassifications  have  been  made to the  prior  years'
              financial statements to conform to the classifications used in the
              current period.


  3.     INVENTORY

                      The Company  has  provided an  allowance  for  potentially
         non-salable  inventory  in the amounts of $50,000 at December  31, 1995
         and 1996.


  4.     NOTES PAYABLE

                      In October 1995,  the Company  entered into a $50,000 loan
         agreement  with  an  international  financial  institution.   The  loan
         requires   monthly  payments  of  interest  at  a  rate  equal  to  the
         institution's  prime lending rate for the first twelve months (8.25% as
         of December 31, 1996).  In October 1996, the interest rate increased to
         1.5% over  prime  (9.75% as of  December  31,  1996).  The  Company  is
         required to repay the loan through 36 monthly  payments  commencing May
         1996. The loan is collateralized by the assets of the Company.


                                       53
<PAGE>




                               V-ONE CORPORATION
                         NOTES TO FINANCIAL STATEMENTS



                      In both December 1995 and January 1996, the Company issued
         $1,250,000  in  7%   uncollateralized   promissory  notes  to  fourteen
         individual  investors.  During April 1996,  the  principal  and accrued
         interest  was  converted   into  shares  of  the  Company's   Series  A
         Convertible Preferred Stock. (See Note 8.)

                      Maturities of notes payable as of December 31, 1996 are as
follows:

                     1997               $16,667
                     1998                16,667
                     1999                 5,555
                                       --------
                                        $38,889
                                        =======


  5.     NOTES PAYABLE TO RELATED PARTIES

                      On May 15,  1995,  Scientek  Corporation,  through Hai Hua
         Cheng, a director of the Company,  invested  $500,000 in the Company in
         consideration for ownership of 15% of the Company's  outstanding Common
         Stock after giving effect to this issuance.

                      On  June 1,  1995,  the  Company  borrowed  $330,000  from
         Scientek Corporation and issued a promissory note, bearing no interest,
         due June 1, 1996.  The note was  assigned  to Hai Hua Cheng by Scientek
         Corporation.   The  terms  of  the  note  provided   that,  as  further
         consideration  for the loan,  the Company would issue 153,333 shares of
         Common Stock to Mr. Cheng  immediately  after repayment of the loan. On
         June 12, 1996, in consideration for Mr. Cheng's agreement not to demand
         payment  of the  note  until  May 31,  1997,  the  Board  of  Directors
         authorized  the Company to offer Mr. Cheng the option to receive Common
         Stock  based on a $4.50 per share  conversion  price in lieu of cash in
         payment of the note.  The Board reserved and authorized the issuance of
         73,333 shares of Common Stock for this purpose.  On June 28, 1996,  the
         Company repaid the loan made by Mr. Cheng by issuing  226,666 shares of
         Common Stock to Mr. Cheng in full repayment of the note,  including the
         153,333 shares of Common Stock described above. In connection with this
         loan, the Company  recognized  interest  expense of $56,954 and $40,681
         during the years ended December 31, 1995 and 1996, respectively.



                                       54
<PAGE>



                               V-ONE CORPORATION
                         NOTES TO FINANCIAL STATEMENTS



                      During December 1995, the Company's founder, President and
         Chief  Executive  Officer  contributed  132,666 shares of the Company's
         Common  Stock,  of which  56,000  shares  related  to an  anti-dilution
         agreement  with Mr. Cheng.  The remaining  76,666 shares were issued to
         Mr. Cheng in lieu of a portion of the accrued  interest on the $330,000
         note for the period from June 1, 1995 through December 31, 1995.

                      The Company's  President and Chief Executive Officer,  who
         is the majority shareholder, advanced the Company operating funds under
         three separate  promissory  notes which are updated on an annual basis.
         The notes  bear  interest  at 8% and are due on demand.  Following  the
         consummation of the IPO, the Company repaid the outstanding  balance of
         the notes and all accrued interest. The amount outstanding was $143,644
         as of December 31, 1995.

                      During June 1996,  the  Company  borrowed  $1,500,000  and
         issued an 8%  uncollateralized  senior  subordinated  note due June 18,
         2000, with 333,332 detachable warrants to purchase Common Stock. Of the
         original 333,332 detachable warrants, 266,666 were exercisable at $4.50
         per share, and 66,666 were exercisable at $0.015 per share. Because the
         initial  offering  price per share of Common  Stock in the IPO was less
         than $7.00,  each share of Series A Stock was  automatically  converted
         into  1.20  shares  of  Common  Stock  and the  266,666  warrants  were
         converted into 319,999 warrants  exercisable at $3.75 per share.  James
         F. Chen, the Company's founder,  President, and Chief Executive Officer
         contributed  13,333  shares of Common  Stock due to the increase in the
         Series A Stock's conversion ratio. The Company has allocated $1,201,000
         and  $299,000  to  notes  payable  and  additional   paid-in   capital,
         respectively,  based  upon  the  pro-rata  fair  market  value  of  the
         instruments.  As of December 31, 1996,  the Company has  amortized  the
         entire $299,000 allocated to additional paid-in capital.  Following the
         consummation of the IPO, the Company repaid the outstanding  balance of
         the note and all accrued interest.  The 66,666 detachable warrants with
         an exercise  price of $0.015 were  exercised on June 28, 1996,  and the
         319,999  detachable  warrants  with an exercise  price of $3.75  remain
         outstanding at December 31, 1996.



                                       55
<PAGE>




                               V-ONE CORPORATION
                         NOTES TO FINANCIAL STATEMENTS


  6.  ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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



                                                 1995             1996
                                                 ----             ----

        Accounts payable                      $ 179,384        $  645,602
        Accrued payroll and vacation             10,000           172,299
        Accrued interest                         38,161            -
        Accrued IPO costs                                         139,679
        Accrued contract costs                                    155,000
        Accrued marketing costs                                    55,000
        Sales taxes payable                                       118,464
        Other accrued expenses                                     25,000
                                              ---------        ----------

                                              $ 227,545        $1,311,044
                                              =========        ==========







                                       56
<PAGE>



                               V-ONE CORPORATION
                         NOTES TO FINANCIAL STATEMENTS



  7.  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,


                                                    1995              1996
                                                    ----              ----
         Deferred tax assets (liabilities):
             Deferred income                    $    4,828      $     37,750
             Inventory allowance                    19,310            19,310
             Allowance for bad debts                 9,122            97,475
             Deferred rent                          20,453            30,230
             Non-deductible accruals                -                 93,993
             Stock-based employee
                compensation                        -                188,388
             Licensing fee                          -               (300,622)
             Net operating loss carryforward       635,215         2,894,848
                                                 ---------       -----------

             Total gross deferred tax asset        688,928         3,061,372
             Less valuation allowance             (688,928)       (3,061,372)
                                                 ---------       -----------

             Net deferred tax asset              $      -       $         -
                                                 ==========     =============

                      The net  change in the  valuation  allowance  from 1995 to
         1996 is due  principally  to increases in net operating  losses and the
         difference  in  the  tax  treatment  for  the  acquisition  of  certain
         licensing rights.  Valuation allowances have been recognized due to the
         uncertainty   of   realizing   the  benefit  of  net   operating   loss
         carryforwards.  As of December 31, 1996,  the Company had net operating
         loss  carryforwards of  approximately  $7,496,000 for Federal and state
         income tax purposes  available to offset future taxable income. The net
         operating loss carryforwards begin expiring from 2008 to 2011.


                                       57
<PAGE>



                               V-ONE CORPORATION
                         NOTES TO FINANCIAL STATEMENTS



  8.     SHAREHOLDERS' EQUITY

              COMMON STOCK

              On  February  16,  1993,  the  Company  was  authorized  to  issue
              5,666,666  shares  of Common  Stock,  all one  class,  with no par
              value.  On January 1, 1994,  the Company  amended the  Articles of
              Incorporation  to increase the  authorized  shares of Common Stock
              from  5,666,666 to 13,333,333  and establish a par value of $0.001
              per share. Each holder of Common Stock has one vote for each share
              of Common Stock held and shall participate  proportionately in the
              assets  upon  dissolution  in  accordance  with  their  respective
              ownership.

              During February 1994, the Company's  founder,  President and Chief
              Executive  Officer  agreed  to  contribute  333,333  shares of the
              Company's  Common  Stock to the Company and the Company  agreed to
              issue  those  shares of Common  Stock to an  employee  at the then
              current fair market value of the shares,  which  equaled par value
              at that  time,  in  consideration  for  services  rendered  to the
              Company  by  the  employee.   In  connection  with  the  Company's
              commitment  to issue  the  333,333  shares of  Common  Stock,  the
              Company recorded  compensation  expense of $500 for the year ended
              December 31, 1994.  The  Company's  founder,  President  and Chief
              Executive  Officer  contributed these shares to the Company in May
              1995 and the Company  issued  such shares to the  employee at that
              time.

              In October 1996,  the Company  completed an  underwritten  initial
              public  offering of  3,000,000  shares of its common  stock,  at a
              public offering price of $5.00 per share (the "Offering"). The net
              proceeds from the Offering of approximately  $12,645,000 were used
              to repay  indebtedness  outstanding  under  the  Company's  senior
              subordinated  note  and  promissory  notes  due to  the  Company's
              President and Chief Executive Officer (See Note 5).

              In November  1996,  the  Company's  underwriters  exercised  their
              option to purchase an additional 200,000 shares of Common Stock of
              which 117,791  shares were issued by the Company and 82,209 shares


                                       58
<PAGE>



                               V-ONE CORPORATION
                         NOTES TO FINANCIAL STATEMENTS


              were  sold by  certain  shareholders,  for $5.00  per  share.  The
              Company  did not  receive  any of the  proceeds  from  the sale of
              shares by the selling shareholders.

              STOCK SPLITS

              On November 11, 1995,  the Board of Directors  authorized  and the
              shareholders approved a ten-for-one stock split of the outstanding
              shares  of the  Company's  Common  Stock.  On June 12 and June 28,
              1996,  respectively,  the Board of  Directors  authorized  and the
              shareholders  approved a two-for-three  reverse stock split of the
              outstanding  shares of the  Company's  Preferred and Common Stock,
              which was effective  July 2, 1996. All references to Common Stock,
              Preferred Stock,  options and per share data have been restated to
              give effect to both stock splits.

              STOCK OPTIONS PLANS

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

              1995 NON-STATUTORY STOCK OPTION PLAN

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


                                       59
<PAGE>



                               V-ONE CORPORATION
                         NOTES TO FINANCIAL STATEMENTS



                     Option  activity  for  the  period  from  the  1995  Plan's
               inception to December 31, 1996 was as follows:

                                                   Shares         Price
                                                   ------         -----
              Balance as of December 31, 1994         -             -
                 Granted                           350,293    $0.4245-$2.505
                 Exercised                            -             -
                 Canceled                             -             -
                                                   -------

              Balance as of December 31, 1995      350,293    $0.4245-$2.505
                 Granted                             2,000        $4.50
                 Exercised                            -             -
                 Canceled                           (2,000)       $4.50
                                                   -------

              Balance as of December 31, 1996      350,293    $0.4245-$2.505
                                                   =======

              The Compensation  Committee,  which administers the 1995 Plan, was
              authorized  by the Board of Directors to grant options for a total
              of  352,293  shares of Common  Stock  under the 1995  Plan.  As of
              December 31, 1996, the Compensation  Committee had granted a total
              of 352,293  options,  of which  213,331 were issued at $0.4245 per
              share,  136,962  were  issued at $2.505  per share and 2,000  were
              issued at $4.50  per  share.  As of  December  31,  1995 and 1996,
              44,445 and 229,087,  respectively,  of the options were vested and
              exercisable. As of December 31, 1996, the Company had no shares of
              Common Stock available for grant under the 1995 Plan.

              1996 NON-STATUTORY STOCK OPTION PLAN

              The   Compensation   Committee,   which   administers   the   1996
              Non-Statutory   Stock   Option   Plan   ("Non-Statutory    Plan"),
              established  the options  price to be the fair market value of the
              stock on the date of grant. The options are not transferable,  are
              subject to various restrictions outlined in the Non-Statutory Plan
              and must be exercised by December 31, 1996. During April 1996, the
              Company's   founder,   President  and  Chief   Executive   Officer


                                       60
<PAGE>




                               V-ONE CORPORATION
                         NOTES TO FINANCIAL STATEMENTS



              contributed  383,965 shares of Common Stock to the Company and the
              Company  issued those shares to employees in  connection  with the
              exercise of stock options  granted under the  Non-Statutory  Plan.
              The Company  recognized  compensation  expense of $287,976  with a
              corresponding  increase to  additional  paid-in  capital to record
              this transaction.

              Option  activity  for the  period  from the  Non-Statutory  Plan's
              inception to December 31, 1996 was as follows:

                                                          Shares          Price
                                                          ------          -----
              Balance as of December 31, 1995               -               -
                 Granted                                  383,965        $0.75
                 Exercised                               (383,965)       $0.75
                 Canceled                                   -               -
                                                         --------

              Balance as of December 31, 1996               -               -
                                                         ========

              As of December 31, 1996,  383,965  options were granted  under the
              Non-Statutory  Plan. No additional options are available for grant
              under the plan.  The options  were  exercised on April 22, 1996 at
              $0.75 a share in  exchange  for notes  and par value in cash.  The
              Company recognized  $1,439,867 in compensation  expense based upon
              the difference  between the fair market value of $4.50 at the date
              of issuance and the exercise  price of $0.75 per share.  The notes
              are full  recourse  promissory  notes  bearing  interest at 6% per
              annum and are  collateralized by the stock issued upon exercise of
              the  stock   options.   Principal   and  interest  is  payable  in
              installments.  Maturities range from April 1997 to April 2006. The
              Company  has   accounted   for  these  notes  as  a  reduction  to
              shareholders' equity as of December 31, 1996.

              1996 INCENTIVE STOCK PLAN

              During June 1996,  the Company  adopted the 1996  Incentive  Stock
              Plan  ("1996  Plan"),   under  which   incentive   stock  options,
              non-qualified  stock  options and  restricted  share awards may be
              made to the  Company's  key  employees,  directors,  officers  and


                                       61
<PAGE>




                               V-ONE CORPORATION
                         NOTES TO FINANCIAL STATEMENTS



              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,  which administers the 1996 Plan, determines the number
              of options granted to a key employee,  officer or consultant,  the
              vesting  period and the  exercise  price  provided  that it is not
              below market value.  The 1996 Plan will terminate during June 2006
              unless terminated earlier by the Board of Directors.

              The  1996  Plan  also  provides  for  the  automatic  grant  of  a
              Non-Qualified  Option to purchase  6,666 shares of Common Stock to
              each new non-employee  director. All options have a five year term
              and are exercisable on the date of grant. As of December 31, 1996,
              two of the Company's directors were eligible to participate in the
              1996 Plan and each director was granted a Non-Qualified  Option to
              purchase 6,666 shares of Common Stock.

              Option  activity for the period from the 1996 Plan's  inception to
              December 31, 1996 was as follows:

<TABLE>
<CAPTION>
                                                              Incentive               Non-Qualified
                                                            Stock  Options            Stock Options
                                                         Shares       Price         Share        Price
                                                         ------       -----         -----        -----
              <S>                                        <C>       <C>             <C>         <C> 
              Balance as of December 31, 1995
                   Granted                               386,310   $4.50-$9.00     837,903     $3.75-$9.00
                   Exercised                              -         -               -           -
                   Canceled                              (41,476)  $4.50-$9.00     (29,066)          $3.75
                                                        --------                  --------

              Balance as of December 31, 1996            344,834   $4.50-$9.00     808,837     $3.75-$9.00
                                                         =======                   =======
</TABLE>

              The  Compensation  Committee  authorized the Board of Directors to
              grant  options  for a total of  2,333,333  shares of Common  Stock
              under the 1996 Plan.  As of December  31, 1996,  the  Compensation
              Committee had granted a total of 837,903 Non-Qualified Options, of


                                       62
<PAGE>




                               V-ONE CORPORATION
                         NOTES TO FINANCIAL STATEMENTS



              which 590,394 were issued at $3.75 per share,  155,509 were issued
              at $4.50  per  share,  78,668  were  issued at $5.00 per share and
              13,332  were  issued at $9.00  per  share.  Of the  total  837,903
              Non-Qualified  Options,  486,447 are vested and  exercisable as of
              December 31, 1996.  The  Compensation  Committee  had also granted
              386,310  incentive stock options,  of which 190,642 were issued at
              $4.50 per share,  175,000  were  issued at $5.00,  and 20,668 were
              issued at $9.00.  Of the total 386,310  incentive  stock  options,
              71,312 were vested and  exercisable as of December 31, 1996. As of
              December  31,  1996,  the Company had  1,179,662  shares of Common
              Stock available for grant under the 1996 Plan.

              The Company  accounts  for the fair value of its grants  under the
              Plans in  accordance  with APB 25.  Accordingly,  no  compensation
              expense  has  been  recognized  for the  Plans.  Had  compensation
              expense been determined based on the fair value at the grant dates
              for awards under the Plans consistent with the method of SFAS 123,
              the  Company's  net loss and loss per common share would have been
              increased to the pro forma amounts indicated below:

                                                  1995              1996
                                                  ----              ----
              Net loss
                 As reported                $1,122,011        $6,695,556
                 Pro forma                  $1,154,939        $9,509,366
              Loss per common share
                 As reported                     $0.12             $0.66
                 Pro forma                       $0.12             $0.93



                                       63
<PAGE>




                               V-ONE CORPORATION
                         NOTES TO FINANCIAL STATEMENTS



                     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, 1995 and 1996,  respectively:  dividend
              yield of 0%, expected  volatility of 43%,  risk-free interest rate
              of 6.2%  and  6.5%  and  expected  terms  of 3.0  and  3.4  years,
              respectively.

              A summary of the status of the Plans is presented below:

<TABLE>
<CAPTION>
                                                                 Year ended December 31,
                                                            1995                     1996
                                                    -----------------------  ---------------------
                                                                  Weighted                Weighted
                                                                  Average                 Average
                                                                  Exercise                Exercise
                                                    Shares         Price     Shares        Price
                                                    ------         -----     ------        -----
              <S>                                   <C>            <C>     <C>             <C>
              Options outstanding beginning
                 of period                           -              -        350,293       $1.238
              Options exercised                      -              -       (383,965)      $0.75
              Options canceled                       -              -        (72,542)      $5.480
              Options granted                       350,293        $1.238  1,610,178       $2.438
              Options outstanding end
                 of period                          350,293        $1.239  1,503,964       $2.433
              Options exercisable at end
                 of period                           44,445        $0.425    786,846       $3.118
              Weighted-average fair value
                 of options granted
                 during the period                   -             $0.094     -            $1.758

</TABLE>

              As  of  December  31,  1996,   the  weighted   average   remaining
              contractual  life of the options that range from $3.75 to $9.00 is
              7.1 years.

              As of December 31, 1995 and 1996,  the pro forma tax effects under
              SFAS 109 would  include an increase to both the deferred tax asset
              and  the   valuation   allowance   of  $12,700   and   $1,086,700,
              respectively, and no impact to the statement of operations.


                                       64
<PAGE>




                               V-ONE CORPORATION
                         NOTES TO FINANCIAL STATEMENTS



              SERIES A CONVERTIBLE PREFERRED STOCK

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

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



                                       65
<PAGE>



                               V-ONE CORPORATION
                         NOTES TO FINANCIAL STATEMENTS



  9.  COMMITMENTS

         LEASES

                      The  Company is  obligated  under  various  operating  and
         capital  lease  agreements,  primarily  for office space and  equipment
         through 2003. Future minimum lease payments under these  non-cancelable
         operating and capital leases as of December 31, 1996 are as follows:

                                                        Operating     Capital
                                                        ---------     -------

               1997                                       $371,317     $ 82,388
               1998                                        714,684       49,682
               1999                                        734,457       40,038
               2000                                        747,870       36,357
               2001                                        621,417       36,357
               thereafter                                  870,235        7,364
                                                         ---------     --------

               Total minimum payments                   $4,059,980      215,829
                                                        ==========

               Interest                                                 (38,115)
                                                                       --------
               Present value of capital lease
                    obligations                                         177,714
               Less:  current portion                                   (65,232)
                                                                       --------
               Capital lease obligations non-current                   $112,482
                                                                       ========

                      Rent expense was $12,366,  $92,785 and  $258,607,  for the
         years ended December 31, 1994, 1995 and 1996, respectively.

                      In March 1997, the Company entered into an operating lease
         agreement for new office space.  Payments under the lease will commence
         on or about July 1, 1997 and will  continue  through the initial  lease
         term of six years.  The Company was required to pay a security  deposit
         of $370,000,  a portion of which will be returned to the Company at the
         end of each lease year.


                                       66
<PAGE>




                               V-ONE CORPORATION
                         NOTES TO FINANCIAL STATEMENTS



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

                                                       1995           1996
                                                       ----           ----

                   Furniture                        $     8,752    $   8,752
                   Computers and equipment              114,640      209,725
                                                     ----------     --------
                                                        123,392      218,477
                   Accumulated depreciation              (3,192)     (34,221)
                                                    -----------    ---------
                                                    $   120,200     $184,256
                                                    ===========     ========

              LICENSE AGREEMENTS

              In 1994, the Company entered into two licensing agreements whereby
              the  Company  obtained  the  right  to  modify  and  sell  certain
              technology  used  in its  product  line.  One  of  the  agreements
              requires the Company to pay fees based on product and subscription
              sales for any product  using the  licensed  technology.  The other
              agreement  provides for payment of fees based upon gross  revenues
              of the Company.  This latter  agreement also gives the other party
              ("Licensor")  the  right  to  forfeit  future  licensing  fees  in
              exchange for 2% of the Company's  outstanding  voting stock, after
              giving  effect to the  issuance.  The Licensor  elected to receive
              voting  stock in May 1996.  In October  1996,  the Company  issued
              188,705  shares of Common Stock to the  Licensor.  The fair market
              value of the stock  issued is  recorded as an asset by the Company
              and is being  amortized  over the period of its  estimated  useful
              life, 3 years. The Company incurred expenses totaling $0, $110,860
              and $135,779  relating to these agreements in 1994, 1995 and 1996,
              respectively.



                                       67
<PAGE>



                               V-ONE CORPORATION
                         NOTES TO FINANCIAL STATEMENTS



  10.    FINANCING

                      The  Company  has   incurred   net  losses  of   $457,088,
         $1,122,011 and $6,695,556,  for the years ended December 31, 1994, 1995
         and 1996.  Management  considers the Company's  current working capital
         position sufficient to cover operating losses over their next operating
         cycle. Management has historically been successful in obtaining outside
         financing to meet obligations and funding working capital  requirements
         as they  come  due.  Most  recently,  the  Company  closed  on  several
         transactions  that provided  additional cash flow. These are summarized
         below.

                      During June 1996,  the  Company  borrowed  $1,500,000  and
         issued an 8%  uncollateralized  senior  subordinated  note due June 18,
         2000, with 333,332  detachable  warrants to purchase Common Stock. (See
         Notes 4 and 5.)

                      The Company also raised an additional  $999,999 by issuing
         222,222 shares of Series A Stock at $4.50 per share.  During June 1996,
         the Company  signed a software  license  contract  with a customer  for
         $2,000,000,  with payment terms of $750,000 to be received  during 1996
         and the remaining  $1,250,000  to be paid over the  remaining  contract
         period.

                      During October 1996, the Company successfully  consummated
         an IPO. Net proceeds to the Company were approximately  $12,645,000,  a
         portion  of which was used to repay the  senior  subordinated  note and
         promissory notes to the President and Chief Executive Officer.

                      In November  1996,  the Company's  underwriters  exercised
         their option to purchase an additional  200,000  shares of Common Stock
         of which  117,791  shares were issued by the Company and 82,209  shares
         were  purchased  from selling  shareholders,  for $5.00 per share.  The
         Company did not receive any of the proceeds  from the sale of shares by
         the selling shareholders.



                                       68
<PAGE>



                               V-ONE CORPORATION
                         NOTES TO FINANCIAL STATEMENTS



  11.    Quarterly Results of Operations (Unaudited)

<TABLE>
<CAPTION>

                                             First            Seconded            Third           Fourth
                                            Quarter            Quarter           Quarter          Quarter
                                         ---------------   ----------------   --------------- -----------------
<S>                                      <C>               <C>                <C>             <C>           
            1995

Net revenues                             $      150,257    $       218,961    $      356,021  $      378,262
Gross profit                                     97,667            140,401           230,539         257,735
Net loss                                       (154,791)          (245,136)          (60,536)       (661,548)
Net loss per share                                (0.02)             (0.03)            (0.01)          (0.07)

            1996

Net revenues                             $    1,021,811    $     1,354,576    $    1,720,543  $    2,169,219
Gross profit                                    699,813            876,023         1,205,105       1,459,589
Net loss                                       (994,660)        (3,393,401)         (977,514)     (1,329,978)
Net loss per share                                (0.10)             (0.34)            (0.11)          (0.11)


</TABLE>



                                       69
<PAGE>




Item 9. CHANGES IN AND  DISAGREEMENT  WITH ACCOUNTS ON ACCOUNTING  AND FINANCIAL
DISCLOSURE

None.

                                    PART III

Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The  information  required  by this  Item  concerning  directors  and  executive
officers is incorporated  herein by reference to the Company's  definitive proxy
statement for its annual stockholders' meeting to be held on May 15, 1997.

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 15, 1997.

Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information  required by this Item concerning  security ownership of certain
beneficial  owners and  management  is  incorporated  herein by reference to the
Company's definitive proxy statement for its annual stockholders'  meeting to be
held on May 15, 1997.

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 15, 1997.

                                    PART IV.

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

(a)  Financial Statements and Schedules

The financial statement schedules filed as part of this report are listed in the
Index to Financial  Statements and Schedules on page F-1  immediately  following
the signatures to this report.

(b)  Exhibits


                                       70
<PAGE>



The following exhibits are filed as part of this report:

<TABLE>
<CAPTION>

Number                      Description
<S>                <C>
3.1                Amended and Restated Certificate of Incorporation as of July 2, 1996*
3.2                Amended and Restated Bylaws dated as of February 6, 1997
3.3                Certificate of Amendment to Certificate of Designation, Preferences, and Rights of Series A
                   Convertible Preferred Stock dated September 9, 1996*
9.1                Voting Trust Agreement between Hai Hua Cheng and James F. Chen, Trustee*
9.2                Voting Trust Agreement between Robert Zupnik and James F. Chen, Trustee*
9.3                Voting Trust Agreement between Dennis Winson and James F. Chen, Trustee*
10.1               Employment Agreement between V-ONE and James F. Chen dated as of June 12, 1996*
10.2               V-ONE 1995 Non-Statutory Stock Option Plan*
10.3               V-ONE 1996 Non-Statutory Stock Option Plan*
10.4               V-ONE 1996 Incentive Stock Plan*
10.5               Software License Agreement between Trusted Information Systems, Inc. ("TIS") and V-ONE executed
                   October 6, 1994*
10.6               First Amendment to the Software License Agreement between TIS and V-ONE*
10.7               Second Amendment to the Software License Agreement between TIS and V-ONE*
10.8               Third Amendment to the Software License Agreement between TIS and V-ONE*
10.9               Fourth Amendment to the Software License Agreement between TIS and V-ONE*
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*
10.11              Amendment  Number Two to the OEM Master License Agreement between RSA and V-ONE and Conversion
                   Agreement dated May 23, 1996*
10.12              Promissory Note for Hai Hua Cheng with Allonge and Amendment dated June 12, 1996*
10.13              Form of Exchange and Purchase Agreement dated April 1996*
10.14              Registration Rights Agreement between V-ONE and JMI Equity Fund II, L.P. ("JMI")*
10.15              8% Senior Subordinated Note due June 18, 2000 issued by V-ONE to JMI*
10.16              Warrant to Purchase 100,000 shares of Common Stock (now 66,666 shares of Common Stock) Issued by
                   V-ONE to JMI*
10.17              Warrant to Purchase 400,000 shares of Common Stock (now 319,999 shares of Common Stock) Issued
                   by V-One to JMI*
10.18              Employment Agreement between V-ONE and Jieh-Shan Wang dated as of July 8, 1996*
11                 Computation of Primary and Fully Diluted Loss Per Share
23.1               Consent of Coopers & Lybrand L.L.P.
27                 Financial Data Schedule for the year ended December 31, 1996


-------------------------------------------------------------------------------------------------------------------
*        The information required by this exhibit is incorporated herein by reference to the
         Company's Registration Statement and Form S-1 (No. 333-06535).
</TABLE>


No reports on Form 8-K were filed during the quarter ended December 31, 1996.


                                       71
<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 28, 1997                                 By: /S/   James F. Chen
                                                        --------------------
                                                         James F. Chen
                                                         President and Chief 
                                                         Executive Officer


Pursuant to the requirements of Securities Exchange Act of 1934, this report has
been signed below as of March 28, 1997 by the following persons on behalf of the
registrant and in the capacities indicated.

<TABLE>
<CAPTION>

Signature                           Title                                       Date
<S>                                 <C>                                        <C>

/S/  James F. Chen                  President, Chief Executive
-------------------------           Officer and Director                        March 28, 1997

/s/  Charles B. Griffis             Senior Vice President, Chief
------------------------            Financial Officer and Treasurer             March 28, 1997

/S/  Charles C. Chen                Director*                                   March 28, 1997
------------------------

/S/  Hai Hua Cheng                  Director*                                   March 28, 1997
-------------------------

/S/  Harry S. Gruner                Director*                                   March 28, 1997
-------------------------

/S/  William E. Odom                Director*                                   March 28, 1997
-------------------------

*By:  James F. Chen
    -----------------
    Attorney-in-fact

</TABLE>

                                       72
<PAGE>



                                V-ONE CORPORATION

                   INDEX TO FINANCIAL STATEMENTS AND SCHEDULES



                                                                           Page
                                                                           ----

Financial Statement Schedules:

Schedule II       Valuation and Qualifying Accounts and Reserves            F-2














                                       F-1






<PAGE>



                                                                     SCHEDULE II

                        VALUATION AND QUALIFYING ACCOUNTS
                                V-ONE CORPORATION
             (For the years ended December 31, 1994, 1994 and 1996)

<TABLE>
<CAPTION>

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

ALLOWANCE FOR DOUBTFUL ACCOUNTS
   December 31, 1994                            $        ---    $        ---    $        ---   $        ---
   December 31, 1995                                     ---          23,620             ---         23,620
   December 31, 1996                                  23,620         228,775             ---        252,395
DEFERRED TAX ASSET VALUATION ALLOWANCE
   December 31, 1994                                     ---         165,804             ---        165,804
   December 31, 1995                                 165,804         340,489             ---        506,293
   December 31, 1996                                 506,293       2,555,079             ---      3,061,372
ALLOWANCE FOR NON-SALABLE INVENTORY
   December 31, 1994                                     ---             ---             ---            ---
   December 31, 1995                                     ---          50,000             ---         50,000
   December 31, 1996                                  50,000             ---             ---         50,000



</TABLE>








































                                       F-2



<PAGE>