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

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

                         COMMISSION FILE NUMBER 0-21511

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

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

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

                                 (301) 515-5200
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

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

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

                    COMMON STOCK, $0.001 PAR VALUE PER SHARE

                                (TITLE OF CLASS)
                      TRADED ON THE NASDAQ NATIONAL MARKET

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

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

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

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


<PAGE>


                       DOCUMENTS INCORPORATED BY REFERENCE

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

Forward-Looking Statements

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

                                     PART I

ITEM 1. BUSINESS

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

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

FINANCING ACTIVITIES

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

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

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


                                       2
<PAGE>

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

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

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

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

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

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

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

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

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


                                       3
<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.  Further  fueling  this  expansion,
carriers and Internet service providers have dramatically  reduced their tariffs
for their high speed  aggregation  services  running over T-1 and T-3  transits,
which have data transfer rates that approximate local area network performance.

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

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

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

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

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

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

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

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

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



                                       4
<PAGE>

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

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

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

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

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

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

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

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

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


                                       5
<PAGE>

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

THE V-ONE SOLUTION

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

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

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

STRATEGY

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

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


                                       6
<PAGE>

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

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

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

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



PRODUCTS AND SERVICES

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

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
                                                                                                   DATE OF
PRODUCT                  CATEGORY             DESCRIPTION                                          INTRODUCTION
<S>                      <C>                  <C>                                                  <C>


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

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

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


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

                                       7
<PAGE>
---------------------------------------------------------------------------------------------------------------

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

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

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

---------------------------------------------------------------------------------------------------------------
</TABLE>

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

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

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

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

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

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



                                       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  SmartPass  client  software.
Together these elements provide smart card-based  encryption and  authentication
services.

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

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

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

TECHNOLOGY

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

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

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


                                       9
<PAGE>

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

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

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

SALES AND MARKETING

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

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

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

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

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



                                       10
<PAGE>

CUSTOMER SERVICE AND SUPPORT

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

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

PRODUCT DEVELOPMENT

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

COMPETITION

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

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

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

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

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

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


                                       11
<PAGE>

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

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

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

BACKLOG

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

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

SUPPLY SOURCES

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

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

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



                                       12
<PAGE>

REGULATION AND GOVERNMENT CONTRACTS

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

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

LICENSE AGREEMENTS

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

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

PATENTS, PROPRIETARY TECHNOLOGY, TRADEMARKS AND LICENSES

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

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


                                       13
<PAGE>

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

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

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

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

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

IMPACT OF THE YEAR 2000 ISSUE ON THE COMPANY

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

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

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



                                       14
<PAGE>

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

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

EMPLOYEES

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

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

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


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

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

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



                                       15
<PAGE>

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

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

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

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

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

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

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

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



                                       16
<PAGE>

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

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

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

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

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

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

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

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



                                       17
<PAGE>

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

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

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

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

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

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

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

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

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


                                       18
<PAGE>

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

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

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

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

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

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

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

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

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

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


                                       19
<PAGE>

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

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

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

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

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

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

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

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

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


                                       20
<PAGE>

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

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

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

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

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

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

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

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

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

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


                                       21
<PAGE>

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

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

ITEM 2. PROPERTIES

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

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

ITEM 3. LEGAL PROCEEDINGS

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

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

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



                                     PART II

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

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


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

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


                                       22
<PAGE>

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

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


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

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

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

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

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

ITEM 6. SELECTED FINANCIAL DATA


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


                                       23
<PAGE>

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

<TABLE>
<CAPTION>
                                                                               Year ended December 31,
                                        --------------- -----------------------------------------------------------------
Statement of Operations Data:                   1994            1995          1996 (1)       1997 (1)         1998
                                                ----            ----         ---------      ---------         ----
<S>                                            <C>           <C>             <C>             <C>             <C>       

Revenues:
   Products                                   $       --    $  1,101,418    $  5,008,523     $  5,470,230    $  5,798,542
   Consulting and services                        59,716           2,083         310,557          502,771         461,263
                                              ----------    ------------    ------------     ------------    ------------
                                                                   
      Total revenues                              59,716       1,103,501       5,319,080        5,973,001       6,259,805
                                              ----------    ------------    ------------     ------------    ------------

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

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

Other (expense) income:
   Interest expense                              (2,360)        (66,615)        (518,965)         (13,130)        (65,372)
   Interest income                                   --           4,513          168,176          341,469         125,030  
                                              ---------     -----------     ------------     ------------   -------------
      Total other expenses                       (2,360)        (62,102)        (350,789)         328,339          59,658 
                                              ---------     -----------     ------------     ------------   -------------
                                                                                 
Net loss                                       (457,088)     (1,122,011)      (7,812,625)     (10,215,339)     (9,193,396)

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

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


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

</TABLE>


                                       24
<PAGE>

<TABLE>
<CAPTION>
                                                                                    December 31,
                                           ------------------------------------------------------------------------------- 
                                                 1994           1995          1996 (1)        1997 (1)           1998
                                                 ----           -----         ---------       ---------          ----
<S>                                             <C>           <C>           <C>               <C>            <C>          

Balance Sheet Data:

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

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


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

OVERVIEW

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

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

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

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

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



                                       25
<PAGE>

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

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

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

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

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                               Year ended December 31,
                                                    1996              1997              1998
                                                    ----              ----              ----
<S>                                                  <C>               <C>               <C>      
Revenues:
Products                                            94.2  %           91.6  %           92.6  %
Consulting and services                              5.8               8.4               7.4
                                                  ------             -----             -----  
Total revenues                                     100.0             100.0             100.0
                                                  ------             -----             -----
Cost of revenues:
Products                                            37.0              31.0              25.9
Consulting and services                              1.1               1.6               1.1
                                                  ------             ------            -----   
Total cost of revenues                              38.1              32.6              27.0
                                                  ------             ------            -----  
Gross profit                                        61.9              67.4              73.0
                                                  ------             ------            -----  
Operating expenses:
Sales and marketing                                 73.6             129.2              97.0


                                       26
<PAGE>

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

Total operating expenses                           202.2              243.9            220.8
                                                  ------             ------            -----
Operating loss                                    (140.3)            (176.5)          (147.8)
                                                  ------             ------            -----  
Other (expense) income:
Interest expense                                    (9.8)              (0.2)            (1.0)
Interest income                                      3.2                5.7              2.0
                                                  ------             ------            -----  
Total other expenses                                (6.6)               5.5              1.0
                                                  ------             ------            -----  
Net loss                                          (146.9)            (171.0)          (146.9)
Dividend on preferred stock                           --                0.2              1.5
                                                   
Deemed dividend on preferred stock                    --               10.0              1.9
                                                  ------             ------            -----  
Loss attributable to holder of common stock       (146.9)  %         (181.3)  %       (150.3)  %
                                                  ======             ======            =====
</TABLE>


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

REVENUES

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


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


COST OF REVENUES

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

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

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


                                       27
<PAGE>

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

OPERATING EXPENSES

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

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

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



                                       28
<PAGE>

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

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

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

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

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

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



                                       29
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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

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



                                       30
<PAGE>

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

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

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

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

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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



                                       31
<PAGE>


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



                                V-ONE CORPORATION

                          INDEX TO FINANCIAL STATEMENTS

                                    --------




Report of Independent Accountants                                      33

Balance Sheets as of December 31, 1997 and 1998                        34

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

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

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

Notes to Financial Statements                                          41

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





                                       32
<PAGE>


                        REPORT OF INDEPENDENT ACCOUNTANTS




      To the Board of Directors of V-ONE Corporation

      In our  opinion,  the  consolidated  financial  statements  listed  in the
      accompanying index present fairly, in all material respects, the financial
      position of V-ONE Corporation (the Company) at December 31, 1997 and 1998,
      and the results of its operations and its cash flows for each of the three
      years in the period ended December 31, 1998, in conformity  with generally
      accepted  accounting  principles.   These  financial  statements  are  the
      responsibility  of the  Company's  management;  our  responsibility  is to
      express an opinion on these financial  statements based on our audits.  We
      conducted  our audits of these  statements in  accordance  with  generally
      accepted  auditing  standards,  which require that we plan and perform the
      audit  to  obtain   reasonable   assurance  about  whether  the  financial
      statements  are  free  of  material   misstatement.   An  audit  includes,
      examining,   on  a  test  basis,   evidence  supporting  the  amounts  and
      disclosures  in  the  financial   statements,   assessing  the  accounting
      principles  used  and  significant  estimates  made  by  management,   and
      evaluating the overall financial statement  presentation.  We believe that
      our audits provide a reasonable basis for the opinion expressed above.


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

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



                                                  /s/ PricewaterhouseCoopers LLP

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



                                       33
<PAGE>

<TABLE>
<CAPTION>
                                                            V-ONE CORPORATION
                                                             BALANCE SHEETS
                                                                --------
                                                                 ASSETS
                                                                                             December 31
                                                                                             -----------

                                                                                        1997
                                                                                   (as adjusted,
                                                                                      NOTE 12)         1998
                                                                                   ------------        ----
<S>                                                                                  <C>            <C>      
Current assets:
    Cash and cash equivalents                                                      $  6,203,525   $   635,959
    Accounts receivable, less allowances of $500,405 and
      $524,638 as of December 31, 1997 and 1998, respectively                           794,395       513,221
    Finished goods inventory, less allowances of $212,700 and $313,356
      as of December 31, 1997 and 1998, respectively                                    583,894       385,481
    Prepaid expenses and other current assets                                           328,261       276,456
                                                                                   ------------   -----------
         Total current assets                                                         7,910,075     1,811,117

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

                                                 LIABILITIES AND SHAREHOLDERS' EQUITY

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

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

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

Shareholders' equity:


                                       34
<PAGE>

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

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



                                       35

<PAGE>


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


                                                                 Year Ended December 31,
                                                    ---------------------------------------------
                                                       1996               1997
                                                    (as adjusted,      (as adjusted,
                                                      Note 12)            Note 12)          1998
                                                     -----------       ------------         ----
              <S>                                    <C>            <C>                <C>        
               Revenues:            
                  Products                           $ 5,008,523     $  5,470,230    $   5,798,542
                  Consulting and services                310,557          502,771          461,263
                                                     -----------     ------------    -------------

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

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

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

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

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

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

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

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

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

</TABLE>


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




                                       36
<PAGE>

<TABLE>
<CAPTION>

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

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

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


                                       37
<PAGE>

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

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


                                       38

<PAGE>


<TABLE>
<CAPTION>

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


                                                                              Year ended
                                                                             December 31,
                                                             --------------------------------------------
                                                                  1996             1997
                                                              (as adjusted,      (as adjusted,
                                                                 Note 12)           Note 12)        1998 
                                                                ---------        ---------         -----
<S>                                                           <C>             <C>               <C>         

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

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

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


                                       39
<PAGE>

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

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



                                       40
<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's principal market is the
         United States,  with  headquarters in Maryland,  and secondary  markets
         located in Europe and Asia.

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

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

 2.   SIGNIFICANT ACCOUNTING POLICIES

         REVENUE RECOGNITION

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

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

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





                                   Continued
                                       41
<PAGE>

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

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

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

         RESEARCH AND DEVELOPMENT AND SOFTWARE DEVELOPMENT COSTS

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

         USE OF ESTIMATES

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

         CASH AND CASH EQUIVALENTS

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

         INVENTORIES

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


                                   Continued
                                       42
<PAGE>

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

         PROPERTY AND EQUIPMENT

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

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

         INCOME TAXES

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

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

         COMPUTATION OF NET LOSS PER COMMON SHARE

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

         RISKS, UNCERTAINTIES AND CONCENTRATIONS

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



                                   Continued
                                       43
<PAGE>

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

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

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

         RECLASSIFICATIONS

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

         NEW ACCOUNTING STANDARDS

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

 3.   NOTES PAYABLE

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

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

 4.   RELATED PARTY TRANSACTIONS

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


                                   Continued
                                       44
<PAGE>

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

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

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

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

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

 5.   SELECTED BALANCE SHEET INFORMATION

      Property and equipment consisted of the following at December 31:




                                   Continued
                                       45
<PAGE>
                                V-ONE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                               ------------------


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






         Other assets consisted of the following at December 31:

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

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

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





                                   Continued
                                       46
<PAGE>
                                V-ONE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                               ------------------

6.       INCOME TAXES

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

<TABLE>
<CAPTION>
                                                                 1997              1998
                                                           ---------------   ----------------
       Deferred tax assets (liabilities):
       <S>                                                 <C>               <C>             
         Deferred revenue                                  $      313,844    $       131,573
         Inventory                                                 82,145            121,018
         Accounts receivable                                      193,256            202,615
         Property and equipment                                         -            (78,178)
         Deferred rent                                             14,243                  -
         Non-deductible accruals                                   59,071             65,739
         Stock-based employee  compensation                       188,388                  -
         Licensing fee                                           (191,305)           (81,989)
         Net operating loss carryforward                        6,768,239          9,087,986
                                                           --------------     --------------

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


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


 7.   SHAREHOLDERS' EQUITY

         OLD SERIES A STOCK

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

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

         MANDATORILY REDEEMABLE PREFERRED STOCK

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


                                   Continued
                                       47
<PAGE>

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

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

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

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

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

         STOCK OFFERING

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

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

         WARRANTS

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


                                   Continued
                                       48
<PAGE>

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

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

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

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

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




                          Warrants
                        Outstanding
                  AS OF DECEMBER 31,

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


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

         STOCK OPTIONS PLANS

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


                                   Continued
                                       49
<PAGE>

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

         1995 NON-STATUTORY STOCK OPTION PLAN

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

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

<TABLE>
<CAPTION>
                                                                   Shares             Price       
                                                                   ------             -----       

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

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

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

        Balance as of December 31, 1998                              64,002           $0.425-$2.505
                                                                   ========
</TABLE>


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

         1996 NON-STATUTORY STOCK OPTION PLAN

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


                                   Continued
                                       50
<PAGE>

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

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

         1996 INCENTIVE STOCK PLAN

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

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

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

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

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

              Balance as of December 31, 1995                 -             -

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


                                   Continued
                                       51
<PAGE>

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

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

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

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


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

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


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


                  OPTIONS OUTSTANDING           EXERCISE PRICE

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

         1998 INCENTIVE STOCK OPTION PLAN

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

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

                                   Continued
                                       52
<PAGE>

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

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

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

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

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

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


<TABLE>
<CAPTION>
                                                     1996             1997             1998
                                                 ------------    --------------    -----------
         <S>                                     <C>             <C>               <C>       
         Loss attributable to holders of common 
         stock:
            As reported                           $7,812,625      $10,827,939       $9,407,030
            Pro forma                            $10,626,435      $11,142,262      $10,464,134
         Basic and diluted loss per share 
         attributable to holders of common
         stock:
            As reported                                $0.85            $0.84            $0.65
            Pro forma                                  $1.15            $0.87            $0.75
</TABLE>

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


                                   Continued
                                       53
<PAGE>

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

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

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

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

 8.  COMMITMENTS

      LEASES

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

                                            OPERATING     CAPITAL  

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

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

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


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

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


                                   Continued
                                       54
<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:

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

         LICENSE AGREEMENTS

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

         EMPLOYMENT AGREEMENTS

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

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


                                   Continued
                                       55
<PAGE>

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

9.    EMPLOYEE 401(K) DEFERRED COMPENSATION PLAN

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

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

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

 10.  WORKING CAPITAL

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

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


11.   SUPPLEMENTAL CASH FLOW DISCLOSURE

      Selected cash payments and noncash activities were as follows:

<TABLE>
<CAPTION>
                                                                               Year Ended December 31,
                                                              1996              1997             1998
                                                              ----              ----             ----

         <S>                                              <C>              <C>               <C>     
         Cash payments for interest                       $   133,042      $    13,130       $      -


                                   Continued
                                       56
<PAGE>

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

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

 12.  RESTATEMENT OF FINANCIAL STATEMENTS

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


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





                                   Continued
                                       57
<PAGE>

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

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

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



 13.  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

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

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


<TABLE>
<CAPTION>

                                                 First           Second              Third            Fourth
                                                Quarter          Quarter             Quarter          Quarter
                                                -------          -------             -------          -------
<S>                                         <C>                <C>               <C>              <C>        

                1996

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

                1997

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


                1998

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

</TABLE>

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


                                   Continued
                                       58
<PAGE>
                                V-ONE CORPORATION
                          NOTES TO FINANCIAL STATEMENTS
                               ------------------


<TABLE>
<CAPTION>
                                                                      Increase (Decrease)
                                                 First           Second               Third           Fourth
                                                Quarter          Quarter             Quarter          Quarter
                                                -------          -------             -------          -------
<S>                                         <C>                <C>               <C>              <C>        
         Effect on:

                1996

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


                1997

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


                1998

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

</TABLE>


 14.  SUBSEQUENT EVENTS

      NOTE PAYABLE


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

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


                                   Continued
                                       59
<PAGE>

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

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

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

Valuation and Qualifying Accounts and Reserves


<TABLE>
<CAPTION>

                                                           V-ONE CORPORATION
                                            SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                                                              
                                         For the years ended December 31, 1996, 1997 and 1998


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

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

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

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

</TABLE>





                                   Continued
                                       60
<PAGE>


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

None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

ITEM 11. EXECUTIVE COMPENSATION

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

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

                                     PART IV

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



                                       61
<PAGE>




(a)   Financial Statement Schedules.


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
















                                       62
<PAGE>



(b)  Exhibits

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

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


                                       63
<PAGE>

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

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


                                       64
<PAGE>

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

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

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

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

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

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

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

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

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

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

(c)   Reports on Form 8-K

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




                                       65
<PAGE>

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

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


















                                       66
<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 26, 1999                  By: /s/ DAVID D. DAWSON 
                                         ---------------------
                                         David D. Dawson
                                         President and Chief Executive Officer


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

Signature                     Title                               Date


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

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


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

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

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

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

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



                                       67