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, 1997

[    ]      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
February  27, 1998 was  approximately  $35,840,000.  This  calculation  does not
reflect a determination that persons are affiliates for any other purposes.

Registrant had 13,033,043  shares of Common Stock outstanding as of February 27,
1998.


<PAGE>


                       DOCUMENTS INCORPORATED BY REFERENCE

Part III -- Portions of the registrant's definitive proxy statement to be issued
in conjunction with registrant's 1998 annual stockholder's meeting to be held on
May 14, 1998.


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  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 is  convertible  into
shares of Common Stock and Series A Warrants. For additional information, please
refer to Item 5. "Market for Registrant's  Common Equity and Related Stockholder
Matters - Series A Convertible Preferred Stock" in the Company's Form 10-K.

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.

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


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<PAGE>

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 WANs.

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  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.


                                       3
<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,


                                        4
<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,   and  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
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.


                                       5
<PAGE>

- - Augment and Integrate  with  Existing  Security  Products.  The Company will
continue to offer products that  interoperate with a wide variety of third-party
security products,  including 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>

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

PRODUCT                 CATEGORY             DESCRIPTION                                          DATE OF
                                                                                                  INTRODUCTION
<S>                      <C>                 <C>                                                  <C>
DMSGate(TradeMark)      X.400 Mail Guard     A  multi-platform security  gateway meeting the      Q4 1996
                                             National Security Agency's DMS Firewall Plus
                                             requirements

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

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

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



                                       6

<PAGE>

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

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(R)
                                             technology

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

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

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

SmartGate -- SmartGate is designed to interoperate easily with most TCP/IP-based
applications  and to allow the end user to  securely  use  existing  and  future
software  applications  over  the  Internet  and  intranets.  SmartGate  employs
two-factor   identification   (two   independent   components  are  combined  to
authenticate  a user) and mutual  authentication  (both the  server and  client,
SmartPass(TM),  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 Berkeley Software Development,  Inc.'s BSD/OS, Sun
Microsystems,  Inc.'s SunOS and Solaris,  and  Hewlett-Packard  Company's HP-UX.
SmartGate client supports Microsoft  Corporation's Windows versions 3.0 and 3.1,
Windows 95 and Windows NT. A turnkey  version of  SmartGate  server is available
for BSD/OS on an Intel Pentium hardware platform.

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

                                       7
<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 2.4 and
SmartPass client version 3.0.

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


                                       8
<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.  The  Company is  currently  seeking to
expand its sales and marketing staff and intends to devote additional  resources
to  marketing  and  business  development  activities  in  order to  expand  its
third-party distribution channels.

Direct Marketing  Effort -- The Company has 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.   The  Company   anticipates   hiring   additional   sales
representatives  and opening  regional sales offices in select cities.  In 1996,
the  Company  opened  regional  sales  offices  in New  York,  New  York and San
Francisco,  California  and added a Chicago,  Illinois  regional sales office in
1997.

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

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.

                                       9


<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  Advanced
Network  and  Services  (a  subsidiary   of  America   Online,   Inc.),   Ascend
Communications,  Inc., AXENT Technologies, Inc., Bay Networks, Inc., Check Point
Software  Technology Ltd., Cisco Systems,  Inc., Digital Equipment  Corporation,
Harris   Computer   Systems   Corporation,   International   Business   Machines
Corporation,  Milkyway Networks Corporation, Network Systems Corporation, Secure
Computing Corporation,  Sun Microsystems,  Inc. and Trusted Information Systems,
Inc. ("TIS").

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

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

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



                                       10
<PAGE>

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

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

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

BACKLOG

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 1997, product revenues from Internet Solutions Ltd. and Government Technology
Services,  Inc. ("GTSI") accounted for approximately 23% and 11%,  respectively,
of total revenues.  In 1996, product revenues from MCI and the National Security
Agency ("NSA") accounted for approximately 12% and 12%,  respectively,  of total
revenues.  In 1995,  product revenues from GEIS, NCTS Washington,  a division of
the  Department of the Navy,  and the U.S.  Defense  Information  Systems Agency
accounted for approximately 19%, 10%, and 10%, respectively, of total revenues.


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


                                       11
<PAGE>

future could result in delays or reductions in product shipments that could have
a material  adverse effect on the Company's  business,  financial  condition and
results of operations.

REGULATION AND GOVERNMENT CONTRACTS

The  Company's   information   security  products  are  subject  to  the  export
restrictions  administered by the U.S. Department of Commerce,  which permit the
export of encryption  products only with the required level of export license 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 or fails
to renew the respective  license agreement or take any other action that results
in the loss of, or inability to maintain, such licensed technology,  the Company
may incur lost sales,  delays in delivery of the Company's  current products and
services or delays in the introduction of new products and services, which could
have a material adverse effect on the Company's  business,  financial  condition
and results of operations.

PATENTS, PROPRIETARY TECHNOLOGY, TRADEMARKS AND LICENSES

The  Company  relies on  trademark,  copyright,  patent and trade  secret  laws,
employee and third-party  non-disclosure agreements and other methods to protect
its proprietary rights. The Company has received three patents,  which expire in
2013 and 2014, 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

                                       12


<PAGE>

protection will be granted or, if granted,  that it will adequately  protect the
technology covered thereby.

The Company's  success is also dependent in part upon its  proprietary  software
technology.  There can be no  assurance  that the  Company's  trade  secrets  or
non-disclosure agreements will provide meaningful protection for its proprietary
technology and other proprietary information. In addition, the Company relies on
"shrink wrap" license  agreements that are not signed by the end user to license
the Company's products and,  therefore,  may be unenforceable  under the laws of
certain  jurisdictions.  Further, there can be no assurance that others will not
independently develop similar technologies or duplicate any technology developed
by the Company or that its technology will not infringe upon patents, copyrights
or other intellectual property rights owned by others.

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

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 is the result of computer  programs  being written using two
digits rather than four digits to define the applicable  year. Based on a recent
assessment, the Company has determined that its principle management information
system software,  Dynamics and Dynamics C/S+, provided by Great Plains Software,
Inc., Fargo, ND, is year 2000 qualified.

V-ONE's products are year 2000 qualified.

EMPLOYEES

As  of  February  27,  1998,  the  Company  had  71  full-time  employees  and 3
consultants. Of these employees and consultants, 37 were in sales and marketing,


                                       13

<PAGE>

25 were in development  and 12 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

The Company  operates in a rapidly changing  environment that involves  numerous
risks, some of which are beyond the Company's control.  The following discussion
highlights some of the risks the Company faces.

LIMITED  OPERATING  HISTORY;  ACCUMULATED  DEFICIT.  The  Company was founded in
February 1993 and introduced  its first product in December  1994.  Accordingly,
the  Company  did not  generate  any  significant  revenues  until  1995 when it
commenced sales of its SmartWall  firewall  product and introduced its SmartGate
client/server  system.  Revenues  for  1995,  1996 and  1997  are  approximately
$1,104,000,  $6,266,000,  and $9,403,000. The Company's growth in recent periods
may not be an accurate  indication  of future  results of operations in light of
the  Company's  short  operating  history,  the  evolving  nature of the network
security  market and the  uncertainty  of the demand for  Internet  and intranet
products in general and the Company's products in particular. As of December 31,
1997, the Company had accumulated a deficit of  approximately  $18,339,000.  The
Company  currently  expects to incur additional net losses over the next several
quarters  as a result  of  operating  expenses  incurred  to fund  research  and
development and to increase its sales and marketing efforts.

Because of the Company's  limited operating  history,  there can be no assurance
that the Company will achieve or sustain  profitability or significant revenues.
To address  these risks,  the Company  must,  among other  things,  continue its
emphasis on research and  development,  successfully  execute and  implement its
marketing strategy,  respond to competitive developments and seek to attract and
retain  talented  personnel.  There can be no  assurance  that the Company  will
successfully  address these risks and the failure to do so could have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations.

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

MANAGEMENT OF GROWTH. The Company has experienced and may continue to experience
substantial  growth and turnover in the number of its employees and the scope of
its operations, resulting in increased responsibilities for management and added
pressure on the Company's  operating and financial  systems.  As of February 27,


                                       14
<PAGE>

1998,  the Company had 71  employees,  as compared to 75 employees on January 1,
1997 and 34  employees on January 1, 1996.  To manage  growth  effectively,  the
Company  will  need to  continue  to  improve  its  operational,  financial  and
management information systems and will need to hire, train, motivate and manage
a growing number of employees.  Competition is intense for qualified  technical,
marketing and management  personnel.  There can be no assurance that the Company
will be able to achieve or manage any future  growth,  and its  failure to do so
could delay product development cycles and marketing efforts or otherwise have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of  operations.  Although  the  Company  is not  currently  involved  in
negotiations for any acquisitions, the Company may undertake acquisitions in the
future.  Any such transaction would place additional  strains upon the Company's
management resources.

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

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

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

RISKS ASSOCIATED WITH THE EMERGING  NETWORK SECURITY MARKET.  The market for the
Company's products is in an early stage of development. The rapid development of
Internet and Intranet  computing  has  increased  the ability of users to access


                                       15
<PAGE>

proprietary  information  and  resources and has recently  increased  demand for
network security  products.  Because the market for network security products is
only beginning to develop, it is difficult to assess the size of the market, the
product  features  desired by the market,  the optimal  price  structure for the
Company's  products,  the  optimal  distribution  strategy  and the  competitive
environment  that will  develop  in this  market.  Declines  in  demand  for the
Company's products,  whether as a result of competition,  technological  change,
the public's  perception of the need for security products,  developments in the
hardware and software  environments  in which these  products  operate,  general
economic conditions or other factors beyond the Company's control,  could have a
material  adverse  effect on the  Company's  business,  financial  condition  or
results of operations.

DEPENDENCE ON PRINCIPAL PRODUCTS;  UNCERTAINTY  PRODUCT ACCEPTANCE.  The Company
currently  generates  most of its  revenues  from its  SmartWall  and  SmartGate
products. Accordingly, any factor that adversely affects sales of these products
could  have a  material  adverse  effect on the  Company.  While  SmartWall  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,  respectively,  there  can be no
assurance  that  SmartWall  or  SmartGate  will  continue  to be accepted in the
future.  In  addition,  there  can be no  assurance  that  there  will be market
acceptance  of any of the  Company's  products  that  may be  introduced  in the
future.  The Company's  success will, in part, depend upon the Company's ability
to design,  develop and introduce new products,  services and  enhancements on a
timely basis to meet changing  customer needs,  technological  developments  and
evolving industry standards.

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

The Company's  success is also dependent in part upon its  proprietary  software
technology and technology  licensed from others.  There can be no assurance that
the Company's trade secrets or license or non-disclosure agreements will provide
meaningful or contractually  required protection for the proprietary  technology
and other  proprietary  information  of the Company and the companies from which
the Company licenses  technology.  Further,  the Company relies on "shrink wrap"
license  agreements that are not signed by the end user to license the Company's
products  and,  therefore,  may be  unenforceable  under  the  laws  of  certain
jurisdictions.  In  addition,  there can be no  assurance  that  others will not
independently develop similar technologies or duplicate any technology developed
by the Company or that its technology will not infringe upon patents, copyrights
or other intellectual property rights owned by others.

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



                                       16
<PAGE>

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

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

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

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

A malfunction or the inadequate design of the Company's products could result in
tort or warranty claims.  The Company  generally  attempts to reduce the risk of
such  losses to itself  and to the  companies  from which the  Company  licenses
technology through warranty  disclaimers and liability limitation clauses in its
license  agreements.  There can be no  assurance  that the Company has  obtained
adequate  contractual  protection in all instances or where  otherwise  required
under  agreements the Company has entered into with others or that such measures
will be effective in limiting  the  Company's  liability to end users and to the
companies from which the Company licenses technology. The Company also relies on
"shrink  wrap"  license  agreements  that are not  signed  by the end user  and,
therefore,  may be unenforceable  under the laws of certain  jurisdictions.  The
Company  currently has product  liability  insurance.  However,  there can be no
assurance that adequate insurance coverage was obtained by the Company,  and any
product  liability claim against the Company for damages resulting from security
breaches  could be substantial  and could have a material  adverse effect on the
Company's business,  financial condition and results of operations. In addition,
a well-publicized actual or perceived security breach could adversely affect the
market's  perception of security products in general,  or the Company's products
in  particular,  regardless  of  whether  such  breach  is  attributable  to the
Company's  products.  This could result in a decline in demand for the Company's
products,  which could have a material adverse effect on the Company's business,
financial condition and results of operations.

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

                                       17

<PAGE>

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

RISK OF DEFECTS AND  DEVELOPMENT  COSTS.  The Company  may  experience  schedule
overruns in  software  development  triggered  by factors  such as  insufficient
staffing or the  unavailability  of  development-related  software,  hardware or
technologies.  Further,  when  developing new software  products,  the Company's
development  schedules  may be altered as a result of the  discovery of software
bugs,  performance problems or changes to the product  specification in response
to customer  requirements,  market  developments or Company  initiated  changes.
Changes  in  product  specifications  may  delay  completion  of  documentation,
packaging  or testing,  which may, in turn,  affect the release  schedule of the
product.  When developing complex software  products,  the technology market may
shift during the development  cycle,  requiring the Company either to enhance or
change a product's  specifications  to meet a customer's  changing needs.  These
factors  may cause a product  to enter the  market  behind  schedule,  which may
adversely affect market  acceptance of the product or place it at a disadvantage
to a  competitor's  product  that has  already  gained  market  share or  market
acceptance during the delay.

EVOLVING DISTRIBUTION  CHANNELS.  The Company has previously relied primarily on
its direct sales force for the sale and  marketing of its  products,  but is now
focusing  on a  channel  distribution  strategy.  The  Company  has added to its
internal  sales and  marketing  staff in orders to increase  this sales  effort.
There  can be no  assurance  the  cost of such  expansion  will not  exceed  the
revenues  generated or that the Company's sales and marketing  organization will
successfully  compete  against  the more  extensive  and  well-funded  sales and
marketing operations of certain of its current and future competitors.

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

In addition, the Company has experienced  difficulty in collecting,  on a timely
basis,  receivables from these  distributors.  Although the Company has begun to
make efforts to collect these  receivables  on a timely  basis,  there can be no
assurance that the Company will be able to do so and the failure to collect such
receivables  could have a material  adverse  effect on the  Company's  financial
condition and results of operations.

INTERNATIONAL  SALES. The Company has increased its presence in overseas markets
by expanding international  distribution  relationships for its suite of network
security products, including SmartWall and SmartGate. There can be no assurance,
however, that the Company will be successful in expanding its relationships with
international  distributors or in gaining commercial  acceptance of its products
abroad.  To the extent that the Company expands  international  sales,  currency
fluctuations  could make its products less  competitive  in foreign  markets and
contribute  to  fluctuations  in  the  Company's  operating  results.  Political


                                       18
<PAGE>

instability,  difficulties  in staffing and managing  international  operations,
potential insolvency of international  resellers,  longer receivable  collection
periods and difficulty in collecting  accounts receivable also pose risks to the
development of international  marketing efforts.  Moreover,  the laws of certain
countries,  or the enforcement  thereof,  may not protect the Company's products
and  intellectual  property  rights to the same extent as the laws of the United
States.  There can be no assurance  that these  factors will not have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations.

LONG SALES CYCLE; SEASONALITY. Sales of the Company's products generally involve
a  significant  commitment of capital by  customers,  with the attendant  delays
frequently associated with large capital expenditures.  Prior to such sales, the
Company  often  permits  customers to evaluate  products  being  considered  for
license,  generally for a period of up to 30 days.  For these and other reasons,
the sales cycle  associated with the Company's  products is likely to be lengthy
and subject to a number of  significant  risks over which the Company has little
or no control and, as a result,  the Company believes that its quarterly results
are likely to vary  significantly in the future.  The Company may be required to
ship products shortly after it receives orders and, consequently, order backlog,
if any, at the  beginning of any period may  represent  only a small  portion of
that period's  expected  revenues.  As a result,  product revenues in any period
will be substantially dependent on orders booked and shipped in that period. The
Company plans its production and inventory levels based on internal forecasts of
customer demand, which is highly unpredictable and can fluctuate  substantially.
If revenues fall significantly below anticipated levels, the Company's financial
condition and results of operations could be materially and adversely  affected.
In addition, the Company may experience significant seasonality in its business,
and the Company's  financial condition and results of operations may be affected
by such trends in the future.  Such  trends may include  higher  revenues in the
third and fourth quarters of the year and lower revenues in the first and second
quarters.  The Company believes that revenues may tend to be higher in the third
quarter  due to the  fiscal  year end of the U.S.  Government  and higher in the
fourth quarter due to year-end budgetary  pressures on the Company's  commercial
customers and the tendency of certain of its existing and prospective  customers
to  implement  changes in computer or network  security  prior to the end of the
calendar year.

LIQUIDITY  AND CAPITAL  REQUIREMENTS;  DEPENDENCE  ON THE PUBLIC  OFFERING.  The
Company  anticipates  that its existing  capital  resources  will be adequate to
satisfy its capital  requirements at least through March 31, 1999. The Company's
future capital requirements, however, will depend on many factors, including its
ability to  successfully  market and sell its  products.  To the extent that the
funds  generated by the Company's  initial  public  offering in 1996, the recent
sale of 4,000  shares of Series A Stock (see  "Market  for  Registrant's  Common
Equity  and  Related  Stockholder  Matters"),  and from the  Company's  on-going
operations are insufficient to fund the Company's future operating requirements,
it may be  necessary  to  raise  additional  funds  through  public  or  private
financings.  Any equity or debt financings, if available at all, may be on terms
that are not  favorable  to the Company  and, in the case of equity  financings,
could result in dilution to the Company's  shareholders.  If adequate capital is
not   available,   the  Company  may  be  required  to  curtail  its  operations
significantly.

RISK OF SALES TO U.S.  GOVERNMENT.  In 1995,  the Company  derived a substantial
portion of its revenue from the sale of SmartWall to departments and agencies of
the U.S. Government and government contractors.  In 1996, the Company's revenues
were attributable,  in part, to a contract with the National Security Agency. In
1997,  approximately one-third of the Company's total sales were attributable to
contracts with various agencies and departments of the United States  government
and of state and local  governments.  Because no government agency or department
has an  obligation  to award  contracts to, or to purchase  products  from,  the
Company in the future, the Company believes that future government contracts and
orders for its network  security  products  will in part be  dependent  upon the
continued  favorable  reaction of  government  agencies and  departments  to the
development  capabilities  of the Company and the  reliability and perception of
its  products.  There can be no assurance  that the Company will be able to sell
its products to government  departments and agencies and government  contractors
or that  such  sales,  if any,  will  result  in  commercial  acceptance  of the
Company's  products.  In addition,  reductions or delays in funds  available for

                                       19

<PAGE>

projects the Company is  performing  or to purchase  its products  could have an
adverse impact on the Company'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.  The Company is
also exposed to the risk of increased or  unexpected  costs,  causing  losses or
reduced profits, under government and certain third-party contracts.  Any of the
foregoing events could have a material adverse effect on the Company's business,
financial condition and results of operations.

EFFECT OF GOVERNMENT  REGULATIONS OF TECHNOLOGY  EXPORTS.  The Company currently
sells its  products  abroad and intends to continue to expand its  relationships
with  international  distributors  for the sale of its  products  overseas.  The
Company's  international  sales and operations could be subject to risks such as
the  imposition  of   governmental   controls,   export  license   requirements,
restrictions  on the  export of  critical  technology,  trade  restrictions  and
changes in tariffs. In particular,  the Company's  information security products
are subject to the export  restrictions  administered by the U.S.  Department of
Commerce,  which, in the case of some products,  permit the export of encryption
products only with a specific  export  license.  These export laws also prohibit
the export of  encryption  products to a number of  countries,  individuals  and
entities  and may  restrict  exports  of some  products  to a  narrow  range  of
end-users. In certain foreign countries, the Company's distributors are required
to secure  licenses  or formal  permission  before  encryption  products  can be
imported.  While the Company has obtained a license  exception to export  strong
encryption from the U. S. Department of Commerce, there is no assurance that the
Company or its distributors will be able to secure required licenses in a timely
manner,  if at all. As a result,  foreign  competitors  that face less stringent
controls on their  products  may be able to compete  more  effectively  than the
Company in the global network  security  market.  There can be no assurance that
these factors will not have a material adverse effect on the Company's business,
financial condition and results of operations.

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


EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT

The executive  officers and directors of the Company,  and their respective ages
at December 31, 1997, are as follows:

<TABLE>
<CAPTION>

NAME                                    AGE              POSITION
<S>                                     <C>              <C>
James F. Chen                           47               Chairman of the Board and Director
David D. Dawson                         50               President, Chief Executive Officer and Director
Jieh-Shan Wang                          43               Senior Vice President and Chief Technical Officer
Charles B. Griffis                      53               Senior Vice President, Chief Financial Officer and Treasurer
Christopher T. Brook                    58               Vice President of Product Development



                                       20

<PAGE>

Charles C. Chen                         43               Director
Harry S. Gruner                         38               Director
William E. Odom                         65               Director

</TABLE>

JAMES F. CHEN  founded the Company in  February  1993 and has since  served as a
director.  From  inception  until  November  21,  1997,  Mr.  Chen served as the
Company's  President and Chief Executive Officer. On November 21, 1997, Mr. Chen
was  elected  Chairman  of the  Board.  From  1980 to  1990,  Mr.  Chen  managed
INTELSAT's worldwide ground network engineering  projects.  From 1990 to January
1993, he managed the INTELSAT  Ground Network  Engineering  Department and, from
March 1992 to January 1993, he also directed its Management  Information Systems
Division.  Mr.  Chen holds an M.S. in Computer  Science  from George  Washington
University  and a B.S. in  Electrical  Engineering  from  Georgia  Institute  of
Technology. He is Charles C. Chen's brother.

DAVID D. DAWSON has served as the President and Chief  Executive  Officer of the
Company since November 21, 1997 and as a director since December 12, 1997.  From
March  1996  until  November  1997,  he  served  as  General  Manager  of Ascend
Communications,  Inc., a data communications  hardware company.  From April 1994
until March 1996, he served as Chief Operating  Officer,  and from November 1995
until  March  1996,  he  served  as Chief  Executive  Officer  of  Morning  Star
Technologies,  a firewall and  communications  company.  From October 1992 until
April 1994, he was Vice President of Development for Net Express Systems, a data
communications  hardware  company.  Mr. Dawson holds an M.S. in Computer Science
from Fairleigh  Dickinson  University,  an M.S. in Operations  Research from Air
Force  Institute of Technology,  and a B.S. in Electrical  Engineering  from the
United States Military Academy at West Point.

JIEH-SHAN  WANG,  Ph.D.  has been with the Company  since its  inception and has
served as the Company's Senior Vice President and Chief Technical  Officer since
January 1997. From April 1996 to December 1996, Dr. Wang served as the Company's
Senior Vice  President and Chief  Technical  Officer,  from August 1995 to April
1996, Dr. Wang served as the Company's  Vice President of Engineering  and, from
April  1994 to  August  1995,  he served as Chief  Engineer.  Dr.  Wang was with
INTELSAT from June 1991 to April 1994, as Senior Systems Engineer,  where he led
a team of engineers in the development of network applications. Dr. Wang holds a
Ph.D.  in Physics  from the  University  of Maryland  and a B.S. in Physics from
National Taiwan University.

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

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


                                       21

<PAGE>

CHARLES C. CHEN,  D.D.S has served as a director of the Company  since  February
1993 and as the Company's  Secretary  from  December 12, 1995 until  February 2,
1998. Since July 1982, Dr. Chen has practiced periodontics with Zupnik, Winson &
Chen,  D.D.S.P.A.  Dr. Chen holds a D.D.S.  from the Baltimore College of Dental
Surgery,  University of Maryland, and a B.S. in Chemistry from the University of
Maryland. He is James F. Chen's brother.

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

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


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, 1999. 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 Rochelle  Park,  New Jersey,  Chicago,
Illinois  and Walnut  Creek,  California  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.



                                       22
<PAGE>



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

No matters were submitted to a vote of the Company's security holders during the
quarter ended December 31, 1997.


                                     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 73 stockholders of record on March
23, 1998.  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 from the time of the  Company's  IPO for each quarter  through the quarter
ending December 31, 1997 and through the period ended March 23, 1998.


                                              1996
                                              ----

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

Fourth Quarter            $7.750                         $4.750



                                              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


                                              1998
                                              ----

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

First Quarter through
March 23, 1998            $4.125                         $2.250


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  may be  paid  on the  Common  Stock  until  all  accrued  and  unpaid
dividends, if any, are paid on the Series A Stock.


                                       23


<PAGE>


SERIES A CONVERTIBLE PREFERRED STOCK

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 is
convertible  into shares of Common  Stock and  warrants  to  purchase  shares of
Common Stock ("Series A Warrants").

As a result of the issuance of the 4,000  shares of Series A Stock,  the Company
issued to Wharton  Capital  Partners,  Ltd.  ("Wharton") for its services as the
Company's exclusive financial consultant,  warrants  ("Consultant  Warrants") to
purchase 60,000 shares of Common Stock at an exercise price of $4.725 per share.
As of January 5, 1998, Wharton assigned  Consultant  Warrants to purchase 12,000
shares of Common Stock to Dennis Rush. The number of shares issuable on exercise
of the  Consultant  Warrants  and the  exercise  price per share is  subject  to
adjustment  in certain  circumstances.  The Company  also paid  Wharton a fee of
$200,000.  The Consultant  Warrants expire on December 8, 2002. The terms of the
Series A Stock and the  Consultant  Warrants  were  determined  by the Company's
Board of Directors.

The shares of Series A Stock,  Series A Warrants and  Consultant  Warrants  were
issued in reliance on Rule 506 of Regulation D.

On December 8, 1997, the Company and Advantage  entered into a commitment letter
("Commitment Letter") pursuant to which Advantage agreed to purchase shares of a
new series of preferred stock for $4 million on the same terms and conditions as
the Series A Stock,  subject to certain  conditions,  some of which are that (1)
the Company  obtain  shareholder  approval  with  respect to the issuance of the
Series A Stock and any new series of preferred  stock  pursuant to certain rules
of the Nasdaq National Market, (2) the Company's stockholders' equity, including
the  Series  A  Stock,  is at  least  $13.5  million,  and (3) the  ratio of the
Company's  total  liabilities to  stockholders'  equity,  including the Series A
Stock, is not less than 1:4. The commitment becomes effective April 21, 1998 and
expires on December 8, 1998. The Company may terminate the Commitment  Letter at
any time, on ten days' prior notice.  Advantage  also has the right to terminate
the Commitment Letter in certain circumstances.  The Company is obligated to pay
Advantage a non-refundable  commitment fee of $3,333 per month during the stated
commitment period.

Under the  Subscription  Agreement  dated as of  December  3, 1997  between  the
Company and Advantage,  (1) the Company agreed not to sell any equity securities
or  securities  convertible  into  equity  securities  entitling  the  holder to
purchase shares of the Company's  Common Stock at a price below the market price
of the Common  Stock on the date of such  issuance or  acquisition  ("Discounted
Securities")  until April 21, 1998 and (2) the Company granted Advantage a right
of first refusal on sales of Discounted Securities until December 8, 1998. Under
a letter  dated  October  22, 1997  between  the  Company and Wharton  ("Wharton
Letter"), the Company retained Wharton as its exclusive financial consultant and
granted Wharton an exclusive on certain offshore or discounted  financings for a
period that ended on March 22, 1998 and a right of first refusal on any offshore
or discounted  financings until June 8, 1998. Wharton has agreed that its rights
as described in the  preceding  sentence are subject and secondary to the rights
of  Advantage  and do not apply to any sale of preferred  stock  pursuant to the
Commitment Letter.

Under the Wharton Letter, the Company is obligated to issue additional  warrants
to  Wharton to  purchase  15,000  shares of Common  Stock for each $1 million of
additional  financing  provided by persons  introduced by Wharton (including the
transaction  contemplated  by the  Commitment  Letter) at an  exercise  price of
$4.725 per share and to pay Wharton a  consulting  fee equal to 5% of the amount
raised.

The net proceeds of the offering  ($3.8 million) have been, and the net proceeds
of any additional  issuance  pursuant to the Commitment Letter will be, used for
general working capital purposes.

On December 3, 1997, the Company  entered into a registration  rights  agreement
with Advantage  ("Advantage  Registration Rights Agreement") and, on December 8,


                                       24
<PAGE>

1997,  the Company  entered into a  registration  rights  agreement with Wharton
("Wharton  Registration  Rights Agreement" and,  collectively with the Advantage
Registration  Rights Agreement,  the "Registration  Rights  Agreements").  As of
January 5, 1998,  Dennis Rush became a beneficiary  of the Wharton  Registration
Rights  Agreement.  Under the Registration  Rights  Agreements,  the Company was
obligated to file a  registration  statement  with the  Securities  and Exchange
Commission  ("SEC") by January 7, 1998  registering  the shares of Common  Stock
issuable  upon  conversion  of the Series A Stock and the shares of Common Stock
issuable on exercise of the Series A Warrants and the Consultant Warrants.  This
registration  statement was timely filed and has been declared  effective by the
SEC.  Advantage,  Wharton  and Rush  have also been  granted  certain  piggyback
registration rights.

The following is a summary of the terms and features of the Series A Stock:

DIVIDENDS.  Each share of Series A Stock is entitled to receive  dividends  at a
rate of $50.00 per annum,  which are  cumulative  and  accrue  without  interest
(other than with  respect to dividends  in  arrears).  Dividends  are payable on
March 1, June 1,  September 1 and  December 1 of each year.  Dividends  not paid
when due bear  interest at 12% per annum.  The Company may pay  dividends on the
Series A Stock in shares of Common Stock valued at the  "Computed  Price" of the
Common Stock.  The "Computed Price" of a share of Common Stock is the product of
the applicable  "Conversion  Percentage" (which term is described below) and the
"Average  Market Price." The "Average Market Price" is the average of the lowest
sale price on the Nasdaq National Market on each of the five trading days having
the  lowest  sale  price  during the 25  consecutive  trading  days prior to the
measurement date, which in the case of a dividend paid in shares of Common Stock
is the dividend payment date.

No dividends may be paid on any parity  dividend stock or junior  dividend stock
(such as the Common  Stock) until all accrued and unpaid  dividends  are paid on
the Series A Stock.

CONVERSION RIGHTS.  Each share of Series A Stock is convertible at the option of
the holder  into  shares of Common  Stock and Series A  Warrants.  The number of
Series A Warrants  issuable  on  conversion  of a share of Series A Stock is the
number  of shares of Common  Stock  issued on  conversion  per share of Series A
Stock  divided by 5. The  exercise  price per share of each  Series A Warrant is
$4.77 per share.  Each Series A Warrant is exercisable for 5 years from the date
of conversion.  The number of shares of Common Stock issuable on exercise of the
Series A Warrants and the exercise  price per share is subject to  adjustment in
certain circumstances.

The  number of shares of Common  Stock  issuable  per share of Series A Stock is
determined by dividing the sum of (a) $1,000,  (b) accrued and unpaid dividends,
and (c) interest on dividends in arrears ("Conversion  Amount") by the lesser of
(1) $4.77  ("Ceiling  Price") and (2) the product of the  applicable  Conversion
Percentage and the Average Market Price on the conversion  date. The "Conversion
Percentage" is generally 85%; however, if (1) the registration  statement ceases
to be available for use by any holder of Series Stock that is named therein as a
selling  stockholder  for any reason,  or (2) a holder of Series A Stock becomes
unable  to  convert  any  shares  of  Series  A Stock  in  accordance  with  the
Certificate of Designations  of Series A Convertible  Preferred Stock ("Series A
Certificate")  (other than by reason of the 4.9%  limitation  described  below),
then (A) the applicable  Conversion  Percentage is permanently reduced by 2% per
month up to a maximum  aggregate  reduction in the Conversion  Percentage of 10%
and (B) the  Ceiling  Price is  permanently  reduced by $.0954 per month up to a
maximum aggregate  reduction in the Ceiling Price of $.477.  However, in lieu of
each such  reduction,  the  Company  can make cash  payments  equal to 2% of the
aggregate  subscription  price per share  ($1,000  per  share) of Series A Stock
(which  amount is  limited  to 10% of the  aggregate  subscription  price).  The
Conversion  Amount is adjusted in the event the Company issues certain rights or
warrants  or  distributes  to the holders of  securities  junior to the Series A
Stock evidences of indebtedness or assets.


                                       25


<PAGE>

No holder of Series A Stock is  entitled  to receive  shares of Common  Stock on
conversion  of its Series A Stock or on exercise of its Series A Warrants to the
extent  that the sum of (1) the shares of Common  Stock owned by such holder and
its  affiliates and (2) the shares of Common Stock issuable on conversion of the
Series  A Stock  and on  exercise  of its  Series A  Warrants  would  result  in
beneficial  ownership by such holder and its affiliates of more than 4.9% of the
outstanding  shares of Common  Stock.  Beneficial  ownership for this purpose is
determined in accordance  with Section 13(d) of the  Securities  Exchange Act of
1934, excluding shares of Common Stock so owned through ownership of unconverted
shares of Series A Stock and unexercised Series A Warrants.

If a holder  tenders his or her shares of Series A Stock for conversion and does
not  receive  certificates  for all of the  shares of Common  Stock and Series A
Warrants to which such  holder is  entitled  when  required,  then,  among other
things, the Ceiling Price otherwise  applicable to such conversion is reduced by
$.0954 and the Conversion  Percentage otherwise applicable to such conversion is
reduced by 2%.

RANKING.  The  Series A Stock  ranks (1) senior to the  Common  Stock,  (2) on a
parity with any additional series of the class of preferred stock,  which series
the Board of Directors may from time to time authorize, (3) on a parity with the
shares of any additional  class of preferred stock (or series of preferred stock
of such class) that the Board of Directors or the  stockholders may from time to
time  authorize,  which class (or series thereof) by its terms ranks on a parity
with the shares of Series A Stock and (4) senior to any other class or series of
preferred stock (other than as stated in the immediately  preceding  clauses (2)
and (3)) of the Company.

STATED CAPITAL. Under the Series A Certificate,  the amount to be represented in
stated  capital at all times for each share of Series A Stock is  required to be
the greater of (i) the quotient  obtained by dividing (a) the sum of (1) $1,000,
(2) to the extent legally  available,  the accrued but unpaid  dividends on such
share of  Series A Stock,  and (3) an amount  equal to the  accrued  and  unpaid
interest on dividends in arrears  through the date of  determination  by (b) the
applicable  Conversion  Percentage  and  (ii) an  amount  equal  to the  product
obtained by multiplying  (x) the number of shares of Common Stock that would, at
the time of such determination, be issuable on conversion of one share of Series
A Stock and any accrued and unpaid dividends  thereon and any accrued and unpaid
interest on dividends thereon in arrears  (determined without regard to the 4.9%
limitation)  times (y) the  arithmetic  average of the  closing bid price of the
Common Stock for the five consecutive  trading days ending one trading day prior
to the date of such  determination.  The Company is required to take such action
as may be required to maintain  the required  amount of stated  capital not less
frequently than monthly.

VOTING  RIGHTS.  The Series A Stock  generally  has no voting  rights  except as
otherwise  provided  by the  Delaware  General  Corporation  Law.  However,  the
affirmative  vote or consent of the  holders  of a majority  of the  outstanding
shares of the Series A Stock, voting separately as a class, will be required for
(1) any amendment,  alteration or repeal,  whether by merger or consolidation or
otherwise,  of the Company's  Certificate  of  Incorporation  if the  amendment,
alteration or repeal materially and adversely affects the powers, preferences or
special  rights of the Series A Stock,  or (2) the  creation and issuance of any
security  of the  Company  that is senior to the  Series A Stock as to  dividend
rights or liquidation  preference;  provided,  however, that any increase in the
authorized  preferred  stock of the Company or the  creation and issuance of any
stock that is both junior as to dividend  rights and  liquidation  preference is
not deemed to affect  materially  and  adversely  such  powers,  preferences  or
special  rights and any such  increase  or  creation  and  issuance  may be made
without  any such  vote by the  holders  of Series A Stock  except as  otherwise
required by law.

MANDATORY REDEMPTION.  The Series A Certificate provides that the Company is not
obligated to issue,  upon conversion of the Series A Stock, more than the number
of shares of Common  Stock that the Company  may issue  pursuant to the rules of
Nasdaq  ("Maximum Share Amount"),  less the aggregate number of shares of Common
Stock issued by the Company as  dividends on the Series A Stock.  The Company is



                                      26
<PAGE>

seeking  approval  from the  holders of Common  Stock to issue  shares of Common
Stock in connection  with the Series A Stock in excess of the amounts  permitted
by Nasdaq Rule 4460(i)(1)(D).

If the  Company  would  not be  obligated  to  convert  shares of Series A Stock
because of the Maximum Share Amount limitation,  the Company is required to give
a notice to that  effect to each  holder of  Series A Stock.  In such  event,  a
holder may require the Company to redeem such portion of its Series A Stock that
cannot be  converted  as a result of this  limitation  at the "Share  Limitation
Redemption  Price" per share.  The "Share  Limitation  Redemption  Price" is the
greater of (i) the quotient obtained by dividing (a) the sum of (1) $1,000,  (2)
an amount  equal to the  accrued but unpaid  dividends  on the share of Series A
Stock to be redeemed, and (3) an amount equal to the accrued and unpaid interest
on dividends in arrears on such share through the applicable  redemption date by
(b) the applicable Conversion Percentage and (ii) an amount equal to the product
obtained by multiplying (x) the number of shares of Common Stock that would, but
for the redemption  pursuant to this  provision of the Series A Certificate,  be
issuable on conversion of one share of Series A Stock and any accrued and unpaid
dividends  thereon and any accrued and unpaid  interest on dividends  thereon in
arrears  (determined  without  regard  to the  4.9%  limitation)  times  (y) the
arithmetic  average of the  closing  bid price of the Common  Stock for the five
consecutive trading days ending one trading day prior to the redemption date.

In addition, the Company is obligated to redeem all outstanding shares of Series
A Stock on December 8, 2000 at the "Redemption Price" per share. The "Redemption
Price" is the greater of (i) the  quotient  obtained by dividing  (a) the sum of
(1) $1,000, (2) an amount equal to the accrued but unpaid dividends on the share
of Series A Stock to be  redeemed,  and (3) an amount  equal to the  accrued and
unpaid  interest on  dividends in arrears on such share  through the  applicable
redemption date by (b) the applicable  Conversion  Percentage and (ii) an amount
equal to the product  obtained by multiplying (x) the number of shares of Common
Stock that  would,  but for the  redemption  pursuant to this  provision  of the
Series A  Certificate,  be issuable on conversion of one share of Series A Stock
and any accrued and unpaid dividends thereon and any accrued and unpaid interest
on  dividends  thereon  in  arrears  (determined  without  regard  to  the  4.9%
limitation)  times (y) the  arithmetic  average of the  closing bid price of the
Common Stock for the five consecutive  trading days ending one trading day prior
to the redemption date.

OPTIONAL  REDEMPTION BY THE COMPANY.  As long as the Company is in compliance in
all  material  respects  with its  obligations  to the holders of Series A Stock
under the Series A Certificate and the Advantage  Registration Rights Agreement,
the Company may redeem all or, from time to time, part of the outstanding shares
of Series A Stock at the Redemption Price per share.

OPTIONAL  REDEMPTION BY THE HOLDERS OF SERIES A STOCK. In the event an "Optional
Redemption Event" occurs, each holder of Series A Stock has the right to require
the  Company  to  redeem  all or a portion  its  shares of Series A Stock at the
"Optional Redemption Price" per share. "Optional Redemption Event" means any one
of the following:  (1) for any period of five consecutive  trading days there is
no closing bid price of the Common Stock on any national  securities exchange or
the Nasdaq National Market; (2) the Common Stock ceases to be listed for trading
on the  Nasdaq  National  Market,  the New York  Stock  Exchange  ("NYSE"),  the
American  Stock  Exchange  ("AMEX")  or the  Nasdaq  SmallCap  Market;  (3)  the
inability  for 30 or more days  (whether  or not  consecutive)  of any holder of
shares of Series A Stock who is entitled to optional  redemption  rights to sell
such shares of Common Stock issued or issuable on conversion of shares of Series
A Stock pursuant to the registration statement for any reason on each of such 30
days;  (4) the  Company  fails or  defaults  in the  timely  performance  of any
material  obligation  to a holder of shares of Series A Stock under the terms of
the Series A Certificate or under the Advantage Registration Rights Agreement or
any other  agreements or documents  entered into in connection with the issuance
of shares of Series A Stock; (5) any consolidation or merger of the Company with
or into another entity (other than a merger or  consolidation of a subsidiary of
the Company into the Company or a wholly owned  subsidiary of the Company) where
the  shareholders of the Company  immediately  prior to such  transaction do not
collectively  own at  least  51% of the  outstanding  voting  securities  of the


                                       27
<PAGE>

surviving corporation of such consolidation or merger immediately following such
transaction or the common stock of such surviving  corporation is not listed for
trading on the Nasdaq National Market, the NYSE, the AMEX or the Nasdaq SmallCap
Market;  or (6)  the  taking  of any  action,  including  any  amendment  to the
Company's  Certificate of  Incorporation,  that materially and adversely affects
the rights of any holder of shares of Series A Stock.

The "Optional  Redemption  Price" is the greater of (i) the quotient obtained by
dividing  (a) the sum of (1)  $1,000,  (2) an amount  equal to the  accrued  but
unpaid  dividends  on the  share of  Series A Stock to be  redeemed,  and (3) an
amount equal to the accrued and unpaid  interest on dividends in arrears on such
share through the applicable  redemption  date by (b) the applicable  Conversion
Percentage and (ii) an amount equal to the product  obtained by multiplying  (x)
the number of shares of Common Stock that would, but for the redemption pursuant
to this provision of the Series A Certificate,  be issuable on conversion of one
share of Series A Stock and any  accrued  and unpaid  dividends  thereon and any
accrued and unpaid interest on dividends thereon in arrears  (determined without
regard to the 4.9% limitation)  times (y) the arithmetic  average of the closing
bid price of the Common Stock for the five  consecutive  trading days ending one
trading day prior to the redemption date.

LIMITATIONS  ON  REDEMPTIONS  AND TENDER  OFFERS.  Neither  the  Company nor any
subsidiary of the Company may redeem, repurchase or otherwise acquire any shares
of Common Stock or other  securities of the Company junior to the Series A Stock
in dividend rights or liquidation  preference  ("Junior Stock") if the number of
shares so  repurchased,  redeemed or otherwise  acquired in such  transaction or
series of related transactions  (excluding any shares surrendered to the Company
in accordance  with one of its stock option plans) is more than either (x) 5% of
the number of shares of Common Stock or such Junior  Stock,  as the case may be,
outstanding   immediately  prior  to  such  transaction  or  series  of  related
transactions  or (y) 1% of the number of shares of Common Stock or Junior Stock,
as the case may be, outstanding  immediately prior to such transaction or series
of related transactions if such transaction or series of related transactions is
with any one person or group of affiliated  persons,  unless the Company or such
subsidiary  offers to  purchase  for cash from each holder of shares of Series A
Stock  at the  time of such  redemption,  repurchase  or  acquisition  the  same
percentage  of such holder's  shares of Series A Stock as the  percentage of the
number of  outstanding  shares of Common Stock or Junior Stock,  as the case may
be, to be so redeemed,  repurchased or acquired at a purchase price per share of
Series A Stock equal to the greater of (i) the quotient obtained by dividing (a)
the sum of (1) $1,000,  (2) an amount equal to the accrued but unpaid  dividends
on such share of Series A Stock,  plus (3) an amount  equal to the  accrued  and
unpaid  interest on dividends in arrears through the date of purchase by (b) the
applicable  Conversion  Percentage  and  (ii) an  amount  equal  to the  product
obtained by multiplying (x) the number of shares of Common Stock that would, but
for this purchase,  be issuable on conversion of one share of Series A Stock and
any accrued and unpaid dividends  thereon and any accrued and unpaid interest on
dividends thereon in arrears  (determined without regard to the 4.9% limitation)
times (y) the  arithmetic  average of the closing bid price of the Common  Stock
for the five  consecutive  trading days ending one trading day prior to the date
of purchase.

Neither the Company  nor any  subsidiary  of the Company may (1) make any tender
offer or exchange offer ("Tender Offer") for outstanding shares of Common Stock,
unless the Company contemporaneously therewith makes an offer, or (2) enter into
an agreement  regarding a Tender Offer for outstanding shares of Common Stock by
any person other than the Company or any subsidiary of the Company,  unless such
person  agrees  with the  Company to make an offer,  in either such case to each
holder of outstanding  shares of Series A Stock to purchase for cash at the time
of purchase in such Tender Offer the same percentage of shares of Series A Stock
held by such holder as the  percentage  of  outstanding  shares of Common  Stock
offered to be  purchased  in such Tender  Offer at a price per share of Series A
Stock equal to the greater of (i) the quotient  obtained by dividing (a) the sum
of (1) $1,000,  (2) an amount equal to the accrued but unpaid  dividends on such
share of  Series A Stock,  and (3) an amount  equal to the  accrued  and  unpaid
interest  on  dividends  in  arrears  through  the date of  purchase  by (b) the
applicable  Conversion  Percentage  and  (ii) an  amount  equal  to the  product
obtained by multiplying (x) the number of shares of Common Stock that would, but


                                       28
<PAGE>

for this purchase,  be issuable on conversion of one share of Series A Stock and
any accrued and unpaid dividends  thereon and any accrued and unpaid interest on
dividends thereon in arrears  (determined without regard to the 4.9% limitation)
times (y) the  highest  price per share of Common  Stock  offered in such Tender
Offer.

SINKING FUND. The shares of Series A Stock are not subject to the operation of a
purchase, retirement or sinking fund.

LIQUIDATION  PREFERENCE.  The  holders of the Series A Stock are  entitled  to a
liquidation  preference  of $1,000 per share plus  accrued and unpaid  dividends
plus interest on accrued and unpaid dividends in arrears.

WARRANT GRANTED TO DAVID D. DAWSON

On November 21, 1997, the Company issued warrants to purchase  300,000 shares of
Common Stock at an exercise price of $3.125 per share to its President and Chief
Executive  Officer,  David D. Dawson,  in connection  with his employment by the
Company. These  warrants  were  issued  in reliance on Rule 506 of Regulation D.

WARRANT GRANTED TO SVG

On November 4, 1997,  the Company issued  warrants to purchase  25,000 shares of
Common Stock at an exercise price of $3.875 per share to SVG in connection  with
the  execution of a  consulting  agreement  between SVG and the  Company.  These
warrants  were issued in reliance on Section 4(2) of the Securities Act of 1933.


ITEM 6.  SELECTED FINANCIAL DATA

The  following  selected  financial  data set forth  below  with  respect to the
Company's Statements of Operations from February 16, 1993 (date of inception) to
December 31, 1993 and for the years ended December 31, 1994, 1995, 1996 and 1997
and balance  sheets as of  December  31,  1993,  1994,  1995,  1996 and 1997 are
derived from the financial  statements of the Company included elsewhere in this
Annual Report.  The financial data set forth below should be read in conjunction
with the Company's financial statements and the notes thereto included elsewhere
in this Annual  Report and  "Management's  Discussion  and Analysis of Financial
Condition and Results of Operations."

<TABLE>
<CAPTION>

                                         For the Period
                                          February 16,                        Year ended December 31,
                                          1993 (date of
                                          inception) to
                                          December 31,
                                                          ------------------------------------------------------------
                                                1993           1994           1995          1996             1997
                                                ----           ----           ----          ----             ----

    Statement of Operations Data:
<S>                                          <C>            <C>            <C>             <C>            <C>
    Revenues:
       Products                            $     ---        $     ---      $1,101,418     $ 5,955,592    $ 8,899,973
       Consulting and services                76,183           59,716           2,083         310,557        502,771
                                           ---------        ---------      ----------     -----------    -----------
          Total revenues                      76,183           59,716       1,103,501       6,266,149      9,402,744
                                           ---------        ---------      ----------     -----------    -----------



                                       29
<PAGE>

    Cost of revenues:
       Products                                  ---              ---         376,359      1,969,117       2,064,645
       Consulting and services                38,090           35,114             800         56,502          96,949
                                          ----------        ---------       ---------     ----------      ----------
          Total cost of revenues              38,090           35,114         377,159      2,025,619       2,161,594
                                          ----------        ---------       ---------     ----------      ----------
    Gross profit                              38,093           24,602         726,342      4,240,530       7,241,150
                                          ----------        ---------       ---------     ----------      ----------

    Operating expenses:
       Sales and marketing                     6,652           36,212         130,917      3,744,630       9,341,208
       General and administrative             74,212          315,192       1,350,361      4,879,940       3,801,828
       Research and development               21,000          127,926         304,973      1,960,727       3,012,051
       Restructuring costs                       ---              ---             ---            ---         800,000
                                          ----------       ----------      ----------     ----------      ----------
          Total operating expenses           101,864          479,330       1,786,251     10,585,297      16,955,087
                                          ----------       ----------      ----------     ----------      ----------
    Operating loss                           (63,771)        (454,728)     (1,059,909)    (6,344,767)     (9,713,937)
                                          ----------       ----------      ----------    -----------      ----------
    Other (expense) income:
       Interest expense                       (1,913)          (2,360)        (66,615)      (518,965)        (13,130)
       Interest income
                                                 ---              ---           4,513        168,176         341,469
                                          ----------       ----------     -----------    -----------      ----------
          Total other expenses                (1,913)          (2,360)        (62,102)      (350,789)        328,339
                                          ----------       ----------     -----------    -----------      ----------
    Net loss                                 (65,684)        (457,088)     (1,122,011)    (6,695,556)     (9,385,598)

    Dividend on preferred stock                  ---              ---             ---            ---          12,600
    Deemed dividend on preferred stock           ---              ---             ---            ---         600,000
                                          ----------       ----------     -----------    -----------     -----------
    Loss attributable to holder of
    common stock                          $  (65,684)      $ (457,088)    $(1,122,011)   $(6,695,556)    $(9,998,198)
                                          ==========       ==========     ===========    ===========     ===========

    Basic loss per share attributable
    to holder of common stock             $     (.01)      $     (.06)          (0.14)   $     (0.72)    $     (0.78)
                                          ==========       ==========     ===========    ===========     ===========

    Weighted average shares outstanding
                                           6,186,978        8,046.766       8,099,223      9,245,305      12,868,859
                                          ==========       ==========     ===========    ===========     ===========



                                                                           December 31,
                                         ----------------------------------------------------------------------------
                                            1993             1994            1995          1996              1997
                                            ----             ----           -----         -----              ----

    Balance Sheet Data:

    Working capital (deficit)           $ (19,436)       $  245,598      $  (168,311)    $12,643,160     $ 7,858,856
    Total assets                           28,182           394,906        2,050,602      15,697,415      11,860,086
    Long-term debt, less current              ---               ---          126,908         134,704         300,861
    portion
    Series A Convertible Preferred            ---               ---              ---             ---       3,766,297
    Stock
    Total shareholder's equity            (11,523)          318,028         (139,938)     13,993,745       6,158,020
    (deficit)
    Cash dividends per common share           ---               ---              ---             ---             ---

</TABLE>

                                       30

<PAGE>

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.

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 is
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.

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

Under  the  Company's  revenue  recognition   policy,   revenues  are  generally
recognized  from the license of software  upon the signing of a contract and the
product shipment. 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, 1997, the Company had an accumulated deficit of approximately
$18,339,000.  The  Company  currently  expects to incur net losses over the next
several  quarters  as a result of greater  operating  expenses  incurred to fund
research and  development  and to increase its sales and marketing  efforts.  To
date, the Company has expensed all  development  costs as incurred in compliance
with Statement of Financial  Accounting  Standards No. 86,  "Accounting  for the
Costs of  Computer  Software  to Be Sold,  Leased or  Otherwise  Marketed."  The
Company  believes that with its current  development  cycle,  it will be able to
continue to expense all development costs as incurred.

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

In 1997, product revenues from Internet Solutions Ltd. and Government Technology
Services,  Inc. ("GTSI") accounted for approximately 23% and 11%,  respectively,
of  total  revenues.  In 1996,  product  revenues  from  MCI  Telecommunications
Corporation  ("MCI") and the National  Security  Agency  ("NSA")  accounted  for
approximately 12% and 12%,  respectively,  of total revenues.  In 1995,  product
revenues from GEIS, NCTS  Washington,  a division of the Department of the Navy,
and the U.S. Defense Information Systems Agency accounted for approximately 19%,
10%, and 10%, respectively, of total revenues.

RESULTS OF OPERATIONS

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


                                       31
<PAGE>

                                                For the Period Ended
                                   Dec. 31,            Dec. 31,         Dec. 31,
                                   1995                1996             1997
                                   ---------           --------         --------
Revenues:

Products                             99.8 %              95.0 %           94.7 %

Consulting and services               0.2                 5.0              5.3
                                   ------              ------           ------
Total revenues                      100.0               100.0            100.0
                                   ------              ------           ------
Cost of revenues:

Products                             34.1                31.4             22.0

Consulting and services               0.1                 0.9              1.0
                                   ------              ------           ------
Total cost of revenues               34.2                32.3             23.0
                                   ------              ------           ------
Gross profit                         65.8                67.7             77.0
                                   ------              ------           ------
Operating expenses:

Sales and marketing                  11.9                59.8             99.3

General and administrative          122.4                77.9             40.4

Research and development             27.6                31.3             32.0

Restructuring costs                     -                   -              8.5
                                   ------              ------           ------
Total operating expenses            161.9               169.0            180.3
                                   ------              ------           ------
Operating loss                      (96.1)             (101.3)          (103.3)
                                   ------              ------           ------
Other (expense) income:

Interest expense                     (6.0)               (8.3)            (0.1)

Interest income                       0.4                 2.7              3.6
                                   ------              ------           ------
Total other expenses                 (5.6)               (5.6)             3.5
                                   ------              ------           ------
Net loss                           (101.7)             (106.9)           (99.8)

Dividend on preferred stock             -                   -             (0.1)

Deemed dividend on                      -                   -             (6.4)
preferred stock
                                   ------              ------           ------
Loss attributable to holders of    (101.7)%            (106.9)%         (106.3)%
common stock                       ======              ======           ======





                                       32

<PAGE>

COMPARISON OF YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997

REVENUES

Total revenues increased from approximately $1,104,000 in 1995, to approximately
$6,266,000 in 1996 and to approximately $9,403,000 in 1997. Product revenues are
derived  principally from software  licenses and the sale of hardware  products.
Product revenues increased significantly from approximately  $1,101,000 in 1995,
to approximately $5,956,000 in 1996 and to approximately $8,900,000 in 1997. The
increase  from  1995 to 1996  was due  principally  to  increased  sales  of the
Company's  SmartWall  product and the  introduction of its SmartGate  product in
December 1995,  along with increased sales and marketing  efforts.  The increase
from  1996 to 1997 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   substantially  from
approximately  $2,000  in  1995,  to  approximately  $311,000  in  1996  and  to
approximately  $503,000 in 1997. Consulting and services revenues increased from
1995 to 1996 and from 1996 to 1997 as the Company increased  staffing to support
consulting and services and product sale installations.

COST OF REVENUES

Total cost of revenues as a percentage of total  revenues were 34.2%,  32.3% and
23% in 1995, 1996 and 1997, 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
increased from  approximately  $376,000 in 1995, to approximately  $1,969,000 in
1996 and to  approximately  $2,065,000  in 1997.  Cost of product  revenues as a
percentage  of product  revenues was 34.2%,  33.0% and 23.2% for 1995,  1996 and
1997,  respectively.  The dollar  increase and percentage  decrease in 1996 were
primarily  attributable  to an  increase in revenues  from  increased  sales and
marketing efforts and from the introduction of SmartGate, combined with a higher
product mix of software  licenses to turnkey hardware sales. The dollar increase
and substantial  percentage  decrease in 1997 were primarily  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 significantly from
approximately  $800 in 1995, to approximately  $57,000 in 1996 and to $97,000 in
1997. Cost of consulting and services revenues as a percentage of consulting and
services  revenues  was  38.4%,  18.2%,  and  19.3%  for  1995,  1996 and  1997,
respectively.  The dollar increases in 1996 over 1995 and in 1997 over 1996 were
attributable  to increased  staffing to support  consulting  and  services.  The
percentage  decrease from 1995 to 1996 was  principally due to allocation over a
larger revenue base. The percentage  increase from 1996 to 1997 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  $131,000 in 1995, to
approximately  $3,745,000 in 1996 and to approximately $9,341,000 in 1997. Sales
and marketing  expenses as a percentage of total revenues were 11.9%,  59.8% and
99.3% in 1995,  1996 and 1997,  respectively.  The dollar  increase  in 1996 was
principally  due to increased  personnel,  higher  levels of sales and marketing
efforts and sales  associated  with the sales of SmartWall  and  SmartGate.  The
percentage  increase  was  due to  significantly  higher  expenses.  The  dollar
increase in 1997 was  principally due to increased  personnel,  higher levels of
sales and marketing efforts, the recognition of approximately $1,332,000 for bad


                                       33

<PAGE>

debt expenses and an increase of  approximately  $1,248,000  in  allowances  for
accounts  receivable.  The percentage  increase was due to significantly  higher
expenses.  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 the Company's  Form
10-K.

General  and  Administrative  -- General  and  administrative  expenses  consist
principally of the costs of finance, management and administrative personnel and
facilities expenses. General and administrative expenses increased substantially
from  approximately  $1,350,000 in 1995 to approximately  $4,880,000 in 1996 and
decreased  significantly  to  approximately  $3,802,000  in  1997.  General  and
administrative expenses as a percentage of total revenues were 122.4%, 77.9% and
40.4% in 1995,  1996 and  1997,  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 and Chairman of the Board. The non-cash compensation
expense was  recognized in the second  quarter of 1996. In the fourth quarter of
1996, the Company  recognized a non-cash  compensation  expense of approximately
$264,000 in conjunction  with a contribution  to the Company of 52,885 shares of
Common Stock by James F. Chen. The remainder of the dollar  increase in 1996 was
principally  attributable to additional hiring of management and  administrative
personnel and professional and legal fees. The percentage decrease was primarily
due to allocation  over a larger revenue base.  The dollar  decrease in 1997 was
due to the absence of non-cash compensation expenses, partially offset by higher
costs for the recruitment of senior management, 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 "4.  Related  Party
Transactions" in the Notes to Financial Statements). The percentage decrease was
primarily  due to the reduced level of  expenditure  and the  allocation  over a
larger revenue base.  The Company  anticipates  that general and  administrative
expenses will  increase 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 the Company's  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  $305,000  in 1995,  to  approximately  $1,961,000  in 1996 and to
approximately  $3,012,000  in  1997.  Research  and  development  expenses  as a
percentage of total revenues were 27.6%, 31.3% and 32.0% in 1995, 1996 and 1997,
respectively.  The  dollar  and  percentage  increases  in 1996  and  1997  were
primarily  due to  increases  in the  number of  personnel  associated  with the
Company's product  development  efforts.  The Company believes that a continuing
commitment  to research  and  development  is  required  to remain  competitive.
Accordingly,  the Company intends to allocate substantial  resources to research
and development,  but research and development expenses may vary as a percentage
of total  revenues.  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 the Company's Form 10-K.


                                       34

<PAGE>

Restructuring  Charge  --  Restructuring  charge  expense  consist  of the costs
associated with the Company's shift in its sales and marketing  efforts toward a
channel distribution strategy. Accordingly, the Company recognized in the second
quarter  of 1997 a  restructuring  charge of  $800,000,  comprised  of  $400,000
relating to certain  marketing  expenses and $400,000  relating to reductions in
the Company's  workforce.  The  restructuring  and its associated  expenses were
completed by the end of 1997.

Interest  Income and Expense -- Interest  income  represents  interest earned on
cash, cash  equivalents and marketable  securities.  Interest income in 1995 was
approximately $5,000 from interest earned on the net proceeds from the Company's
private financings,  approximately  $168,000 in 1996 from interest earned on the
net proceeds  from the Company's IPO and private  financings  and  approximately
$341,000 in 1997 from interest earned on the net proceeds from the Company's IPO
and the private  placement.  Interest  expense  represents  interest  payable or
accreted on promissory notes and capitalized lease obligations. Interest expense
was approximately  $67,000 in 1995. Interest expense increased  substantially to
approximately  $519,000 in 1996. The increase was primarily due to the Company's
issuance  of  $1,250,000  in   promissory   notes  in  1995,   the  issuance  of
approximately  $1,250,000  promissory  notes  in  1996  and  the  issuance  of a
promissory  note in the  amount of  $1,500,000  in 1996.  Interest  expense  was
approximately   $13,000  in  1997  was  attributable  to  interest  accreted  on
promissory notes and capitalized lease obligations.

Income  Taxes -- The Company did not incur  income tax  expenses in December 31,
1995,  1996 and 1997 as a result of the net loss incurred  during these periods.
As of December 31, 1997,  the Company had net operating  loss carry  forwards of
approximately $15,395,000 as a result of net losses incurred since inception.

Dividend on Preferred Stock -- The Company provided  approximately $13,000 for a
dividend on preferred stock.

Deemed  Dividend on Preferred  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 which is convertible at a discount to the market
price for common stock.


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,  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 is  convertible
into  shares of Common  Stock and  Series A  Warrants.  Net of fees and  related
expenses, the Company raised approximately  $3,766,000. As of December 31, 1997,
the Company had nominal debt and had cash and cash  equivalents of approximately
$6,203,000 and working capital of approximately $7,858,000.

The  Company's  operating  activities  used  cash of  approximately  $1,121,000,
$5,119,000,  and $8,823,000 in 1995, 1996 and 1997,  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  $20,000,
$562,000 and $669,000 in 1995, 1996 and 1997,  respectively.  These expenditures


                                      35
<PAGE>

have generally been for computer  workstations  and personal  computers,  office
furniture and equipment,  and leasehold additions and improvements.  The Company
expects  capital  expenditures  to be  less in  1998,  as it has  completed  its
relocation  to  Germantown,  Maryland and intends  primarily  to lease  computer
equipment  and office  furniture  in the future.  In 1997,  the  Company  paid a
security  deposit of $370,000 as part of the six year operating  lease agreement
for its  principle  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 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 further  adjusted on November  21, 1997 to entitle JMI to purchase  383,999
shares of  Common  Stock at $3.125  per  share as a result  of the  issuance  of
warrants  to David D. Dawson to purchase  300,000  shares of Common  Stock at an
exercise price of $3.125 per share. As of March 18, 1998, 276 shares of Series A
Stock had been converted at an exercise price of $2.1144, which will result in a
further  adjustment of the $4.50 Warrants and a further  non-cash expense during
the first  quarter of 1998.  The $4.50  Warrants  may be further  adjusted  as a
result of  subsequent  conversions  of the Series A Stock and/or the issuance of
options under the Company's proposed 1998 Incentive Stock Plan.

Financing activities include cash received of approximately  $1,261,000 from the
exercise of stock options  during 1997.  Also in the second quarter of 1997, the
Company  received  6,020  shares of Common  Stock as payment  for stock  options
issued under the 1996  Non-Statutory  Stock Option Plan. The Company retired the
6,020 shares of Common Stock.

The Company  believes that its current cash and cash  equivalents and funds that
may be generated  from  on-going  operations  will be  sufficient to finance the
Company's operations at least through March 31, 1999.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Not Applicable


                                       36
<PAGE>


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA













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

                          As of December 31, 1996 and
                     1997 and for the years ended December
                            31, 1995, 1996, and 1997

                                      AND
                                 REPORT THEREON
                                    --------













                                       37
<PAGE>
Coopers                                             Coopers & Lybrand L.L.P.
& Lybrand                                           a professional services firm


                        REPORT OF INDEPENDENT ACCOUNTANTS





To the Board of Directors of V-ONE Corporation

We have  audited  the  accompanying  balance  sheets of V-ONE  Corporation  (the
Company)  as of  December  31,  1996  and  1997 and the  related  statements  of
operations, shareholders' equity and cash flows for the years ended December 31,
1995, 1996, and 1997. 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 have  conducted our audits in accordance  with  generally  accepted  auditing
standards.  These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects,  the financial position of the Company as of December 31,
1996 and 1997 and the results of its operations and its cash flows for the years
ended December 31, 1995,  1996, and 1997, in conformity with generally  accepted
accounting principles.


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



McLean, Virginia
March 13, 1998








                                       38
<PAGE>


                                                            V-ONE CORPORATION
                                                             BALANCE SHEETS
                                                                --------

                                                                 ASSETS



<TABLE>
<CAPTION>

                                                                                            December 31,
                                                                                       1996          1997
                                                                                       ----          ----
Current assets:
<S>                                                                                 <C>           <C>
    Cash and cash equivalents                                                       $10,894,375   $ 6,203,525
    Accounts receivable, less allowances of $252,395 and
      $1,500,405 as of December 31, 1996 and 1997, respectively                       2,647,195     2,556,979
    Finished goods inventory, less allowances of $50,000 and $212,700
      as of December 31, 1996 and 1997, respectively                                    418,870       368,120
    Prepaid expenses and other current assets                                           173,411       328,261
                                                                                    -----------  ------------
         Total current assets                                                        14,133,851     9,456,885

Property and equipment:
    Office and computer equipment                                                       790,373     1,251,922
    Furniture and fixtures                                                               98,579       165,316
                                                                                    -----------  ------------
                                                                                        888,952     1,417,238
Less accumulated depreciation                                                          (132,365)     (415,657)
                                                                                    -----------  -------------
                                                                                        756,587     1,001,581
Licensing fee, net of accumulated amortization of $70,764 and $353,820
    as ofDecember 31, 1996 and 1997, respectively                                       778,409       538,434
Other assets                                                                             28,568       863,186
                                                                                    -----------  ------------
         Total assets                                                               $15,697,415   $11,860,086
                                                                                    ===========  ============


                                                 LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
    Accounts payable and accrued expenses                                           $ 1,311,044   $  1,151,589
    Deferred revenue                                                                     97,748        412,647
    Notes payable - current                                                              16,667        16,667
    Capital lease obligations - current                                                  65,232        17,126
                                                                                    -----------  ------------
         Total current liabilities                                                    1,490,691     1,598,029

Notes payable - noncurrent                                                               22,222         5,555
Deferred rent                                                                            78,275        36,879
Capital lease obligations - noncurrent                                                  112,482       295,306
                                                                                    -----------  ------------
         Total liabilities                                                            1,703,670     1,935,769

Commitments and contingencies



                                       39

<PAGE>

Mandatorily redeemable series A convertible  preferred  stock, $0.001 par value;
    13,333,333 shares authorized; -0- and 4,000 shares issued and outstanding as
    of  December  31, 1996 and 1997,  respectively  (liquidation  preference  of
    $4,012,600)                                                                               -     3,766,297

Shareholders' equity:
Common stock,  $0.001 par value;  33,333,333 shares  authorized;  12,658,347 and
    13,070,235  shares issued and  outstanding;  -0- and 1,476,000  reserved for
    conversion, as of December 31, 1996 and 1997,
    respectively                                                                         12,658        13,070
Additional paid-in capital                                                           22,608,866    24,649,538
Notes receivable from sales of common stock                                            (287,400)     (166,011)
Accumulated deficit                                                                  (8,340,379)  (18,338,577)
                                                                                    -----------   -----------
Total shareholders' equity                                                           13,993,745     6,158,020
                                                                                    -----------   -----------
Total liabilities and shareholders' equity                                          $15,697,415   $11,860,086
                                                                                    ===========   ===========
</TABLE>



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













                                       40
<PAGE>


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


<TABLE>
<CAPTION>

                                                            1995             1996             1997
                                                            ----             ----             ----
               Revenues:
<S>                                                 <C>               <C>              <C>
                  Products                          $  1,101,418      $ 5,955,592      $ 8,899,973
                  Consulting and services                  2,083          310,557          502,771
                                                    ------------      -----------      -----------

                       Total revenues                  1,103,501        6,266,149        9,402,744
                                                    ------------      -----------      -----------
               Cost of revenues:
                  Revenues:
                  Products                               376,359        1,969,117        2,064,645
                  Consulting and services                    800           56,502           96,949
                                                    ------------      -----------      -----------
                       Total cost of revenues            377,159        2,025,619        2,161,594
                                                    ------------      -----------      -----------
               Gross profit                              726,342        4,240,530        7,241,150
                                                    ------------      -----------      -----------
               Operating expenses:
                  Sales and marketing                    130,917        3,744,630        9,341,208
                  General and administrative           1,350,361        4,879,940        3,801,828
                  Research and development               304,973        1,960,727        3,012,051
                  Restructuring costs                        -                  -          800,000
                                                    ------------      -----------      -----------
                  Total operating expenses             1,786,251       10,585,297       16,955,087

               Operating loss                         (1,059,909)      (6,344,767)      (9,713,937)
                                                    ------------      -----------      -----------
               Other (expense) income:
                  Interest expense                       (66,615)        (518,965)         (13,130)
                  Interest income                          4,513          168,176          341,469
                                                    ------------      -----------      -----------
               Total other (expense) income              (62,102)        (350,789)         328,339
                                                    ------------      -----------      -----------
               Net loss                               (1,122,011)      (6,695,556)      (9,385,598)

               Dividend on preferred stock                -                  -              12,600

               Deemed dividend on
                  preferred stock                         -                  -             600,000
                                                    ------------      -----------      -----------
               Loss attributable to holders of
                  common stock                      $ (1,122,011)     $(6,695,556)     $(9,998,198)
                                                    ============      ===========      ===========
               Basic loss per share attributable
                  To holder of common stock         $      (0.14)           (0.72)     $     (0.78)
                                                    ============      ===========      ===========
               Weighted average number of
               common shares outstanding               8,099,223        9,245,305       12,868,859
                                                    ============      ===========      ===========

</TABLE>

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


                                       41

<PAGE>


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

<TABLE>
<CAPTION>
                                                                               Notes
                                                               Additional    Receivable
                                            Common Stock        Paid-in        from        Accumulated
                                        Shares       Amount     Capital     Stock Sales     Deficit          Total
                                        ------       ------     -------     -----------     -------          -----

<S>                                    <C>         <C>         <C>          <C>           <C>            <C>
Balance, January 1, 1995               7,863,139   $  7,863    $  832,937   $    -        $ (522,772)    $  318,028
Sale of common stock                     107,954        108       399,892        -              -           400,000
Contribution capital in lieu of
    cash compensation                   (132,666)      (133)          133        -              -             -
Issuance of common stock in
    accordance with anti-dilution
    agreement                             56,000         56           (56)       -              -             -
Issuance of common stock as
    payment for accrued interest          76,666         77        32,468        -              -            32,545
Issuance of common stock as
    payment for services                 333,333        333       141,167        -              -           141,500
Contributed capital in lieu of
    cash compensation                     -             -          90,000        -              -            90,000
Net loss                                  -             -               -        -        (1,122,011)    (1,122,011)
                                      ----------    -------    ----------   ---------     ----------    -----------

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



                                       42

<PAGE>

Public sale of common stock
    at $5.00 per share, net of
    issuance costs                     3,000,000      3,000    12,641,755        -              -        12,644,755
Contribution of common stock
    from related party                   (52,885)       (53)      264,531        -              -           264,478
Conversion of preferred stock to
    common stock at 1-to-1.2
    ratio                                949,209        949     3,558,605        -              -         3,559,554
Issuance of common stock due
    to exercise of overallotment
    option                               117,791        118       549,937        -              -           550,055
Net loss                                    -            -              -        -        (6,695,556)    (6,695,556)
                                      ----------     ------    ----------     ---------   ----------     ----------
Balance, December  31, 1996           12,658,347     12,658    22,608,866      (287,400)  (8,340,379)    13,993,745
Issuance of common stock
    related to 1995 and 1996 Stock
    Option Plans                         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 warrants to purchase
     common stock                         -            -          200,000        -              -           200,000
Dividend and deemed dividend
     on preferred stock                   -            -          612,600        -              -           612,600
Net loss                                  -            -                -        -         (9,998,198)   (9,998,198)
                                      ----------   --------   -----------     ---------  ------------    ----------
Balance, December  31, 1997           13,070,235   $ 13,070   $24,649,538     $(166,011) $(18,338,577)   $6,158,020
                                      ==========   ========   ===========     =========   ===========    ==========

</TABLE>


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











                                       43

<PAGE>


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

<TABLE>
<CAPTION>

                                                                              For the years ended
                                                                                December 31,
                                                                     1995             1996             1997
                                                                     ----             ----             ----

<S>                                                           <C>              <C>              <C>
  Cash flows from operating activities:
  Net loss attributable to common stock                       $(1,122,011)     $(6,695,556)     $(9,998,198)
  Adjustments to reconcile net loss to net cash from
         used in operating activities:
  Provision for doubtful accounts receivable                       23,620          228,775        1,248,010
  Provision for obsolete inventory                                 50,000            -              162,700
  Depreciation and amortization                                    24,623          172,582          591,965
     Loss on disposal of assets                                    -                 -              101,354
     Interest expense on accretion of note payable                 -               299,000           -
     Consulting expense satisfied by issuance of
         common stock                                              -                45,833           -
     Compensation expense satisfied by issuance of
         common stock                                             141,500           -                -
     Compensation expense for issuance of
         non-qualified stock options                               -               487,796           -
     Compensation expense recognized for receipt
         of contributed capital                                    90,000           -                -
     Compensation expense for common stock
         contributed to stock option plan                          -               287,976           -
     Compensation expense for issuance of common
         stock related to 1996 non-statutory stock
         option plan                                               -             1,440,443           -
     Compensation expense recognized for conversion
         of preferred stock to common                              -               264,425           -
     Noncash charges for preferred stock dividends
         and accretion of preferred stock to common                -                -               612,600
     Noncash charge related to issuance of warrants
         of preferred stock to common                              -                -               200,000
     Accrued interest satisfied with common stock                  32,545           65,090           -
     Accrued interest satisfied with preferred stock               -                59,554           -
  Changes in assets and liabilities:
     Accounts receivable                                         (265,172)      (2,633,578)      (1,157,794)
     Inventory                                                   (307,630)        (161,240)        (111,950)
     Prepaid expenses and other                                   (24,145)        (173,667)        (782,549)
     Accounts payable and accrued expenses                        235,919        1,194,035          114,048
                                                            -------------      -----------      -----------
  Net cash used in operating activities                        (1,120,751)      (5,118,532)      (9,019,814)
                                                            -------------      -----------      -----------
  Cash flows from investing activities:
     Purchase of property and equipment                           (19,840)        (562,190)        (353,110)
     Investment in affiliate                                       -                -              (250,000)
     Collection of note receivable                                 -                 -               88,480
                                                            -------------     -------------    ------------
         Net cash used in investing activities                    (19,840)        (562,190)        (514,630)
                                                            -------------     ------------     ------------



                                       44
<PAGE>

  Cash flows from financing activities:
  Issuance of common stock                                        400,000           -                -
     Issuance of common stock in public sale                       -            15,000,000           -
     Payment of stock issuance costs                               -            (2,355,245)        (233,703)
     Issuance of common stock due to exercise
         of overallotment option                                   -               550,055           -
     Issuance of preferred stock                                   -             1,000,000        4,000,000
     Issuance of debt with detachable warrants                     -             1,500,000           -
  Exercise of options and warrants                                 -                 1,000        1,261,393
     Issuance of notes payable                                  1,300,000        1,250,000           -
     Issuance of notes payable to related parties                 454,351           -                -
     Principal payments on capitalized lease obligations           (7,011)         (43,843)        (167,429)
     Repayment of notes payable                                    -               (11,111)         (16,667)
     Repayment of notes payable to related parties                 -            (1,644,144)            -
                                                               ----------      -----------      -----------
         Net cash provided by financing activities              2,147,340       15,246,712        4,843,594
                                                               ----------      -----------      -----------

  Net increase (decrease) in cash and cash equivalents          1,006,749        9,565,990       (4,690,850)

  Cash and cash equivalents at beginning of period                321,636        1,328,385       10,894,375
                                                               ----------      -----------      -----------

  Cash and cash equivalents at end of period                   $1,328,385      $10,894,375      $ 6,203,525
                                                               ==========      ===========      ===========

</TABLE>


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



                                     45
<PAGE>


                                V-ONE CORPORATION
                     STATEMENTS OF CASH FLOWS - (Continued)
                                    --------
<TABLE>
<CAPTION>


                                                                               For the years ended
                                                                                   December 31,
                                                                     1995             1996             1997
                                                                     ----             ----             ----

  Noncash investing and financing activities:
<S>                                                             <C>           <C>               <C>
     Property and equipment acquired through
         capital leases                                         $  123,392     $   98,165      $   302,147
                                                                ==========     ==========      ===========
     Retirement of fully depreciated property and
         equipment                                              $        -     $    5,405      $         -
                                                                ==========     ==========      $==========
     Retirement of common stock                                 $        -     $        -      $    32,909
                                                                ==========     ==========      ===========
     Deemed dividend and dividend on preferred stock            $        -     $        -      $   612,600
                                                                ==========     ==========      ===========
     Issuance of common stock as compensation                   $  141,500     $        -      $         -
                                                                ==========     ==========      ===========
     Issuance of stock purchase warrants                        $        -     $        -      $   200,000
                                                                ==========     ==========      ===========
     Accrued interest satisfied with common stock               $   32,545     $   65,090      $         -
                                                                ==========     ==========      ===========
     Notes received for stock options exercised                 $        -     $  287,400      $         -
                                                                ==========     ==========      ===========
     Consulting expense recognized by issuance of
         common stock                                           $        -     $   50,000      $         -
                                                                ==========     ==========      ===========
  Notes payable plus accrued interest satisfied with
         preferred stock                                        $        -     $2,559,554      $         -
                                                                ==========     ==========      ===========
  Issuance of common stock to satisfy note payable
         to related party                                       $        -     $  330,000      $         -
                                                                ==========     ==========      ===========
  Issuance of common stock payment of licensing fee             $        -     $  849,173      $         -
                                                                ==========     ==========      ===========
  Conversion of preferred stock to common stock                 $        -     $3,559,554      $         -
                                                                ==========     ==========      ===========
  Repurchase of fractional shares of common
         stock related to the reverse stock split               $        -     $       81      $         -
                                                                ==========     ==========      ===========
  Supplemental cash flow  disclosure:
     Cash paid for interest                                     $      182     $  133,042      $    13,130
                                                                ==========     ==========      ===========
</TABLE>


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




                                       46
<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 regional offices in
         New York and  California;  and secondary  markets located in Europe and
         Japan.

         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

              Revenues  are  generally  recognized  from the license of software
              upon the signing of a contract and  shipment of the  product.  The
              Company  often  permits   customers  to  evaluate  products  being
              considered for purchase,  generally for a period up to 30 days, in
              which  event the Company  does not  recognize  revenues  until the
              customer  has accepted the  product.  Accordingly,  the  Company's
              revenue recognition policy does not necessarily correlate with the
              signing of a contract or the shipment of a product. Allowances for
              estimated future returns, credits and doubtful accounts are netted
              against  accounts  receivable.  Service and training  revenues are
              recognized as the services are performed.

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

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

              In October  1997,  the  American  Institute  of  Certified  Public
              Accountants  issued Statement of Position 97-2 (SOP 97-2) SOFTWARE
              REVENUE RECOGNITION, which requires specific criteria be met prior


                                       47
<PAGE>

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

              to  the   recognition   of  revenue  from  software   arrangements
              consisting of multiple elements.  This statement becomes effective
              for fiscal years  beginning  after  December 15, 1997. The Company
              believes that future  adoption of this  statement  will not have a
              significant  impact on its  results  of  operations  or  financial
              position.

              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,  items  held  for  stock  and  training  kits.  Cost is
              determined based on specific identification.

              PROPERTY AND EQUIPMENT

              Office and  computer  equipment  and  furniture  and  fixtures are
              recorded at cost.  Depreciation  and  amortization of property and
              equipment  is  calculated  using the  straight-line  method over a
              useful  life  of the  assets,  generally  three  to  seven  years.
              Depreciation  expense was  $24,623,  $101,818 and $285,213 for the
              years ended December 31, 1995, 1996 and 1997, respectively.


                                       48
<PAGE>



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

              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.





                                       49
<PAGE>

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

              INCOME TAXES

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

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

              COMPUTATION OF NET LOSS PER COMMON SHARE

              The Company adopted  Statement of Financial  Accounting  Standards
              No. 128,  EARNINGS PER SHARE ("SFAS 128")  effective  December 31,
              1997.  All  prior  period  net loss per  share  amounts  have been
              restated to comply with the provisions of SFAS 128. 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,  determined in the following
              table.  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.

<TABLE>
<CAPTION>

                                                         1995           1996         1997
                                                         ----           ----         ----
              <S>                                        <C>            <C>         <C>
              Weighted average shares outstanding
                 used to compute basic earnings per
                  share                                  8,099,223      9,245,305   12,868,859

              Incremental shares issuable upon the
                assumed conversion of convertible
                preferred stock                             -               -             -

              Incremental shares issuable upon the
                assumed exercise of stock options and
                warrants                                    -               -             -
                                                        ----------     ----------   ----------

              Shares used to compute diluted
                earnings per share                       8,099,223      9,245,305   12,868,859
                                                        ==========     ==========   ==========
</TABLE>


              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


                                       50
<PAGE>

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

              exceed  federally  insured  amounts.  The Company invests its cash
              primarily in money market funds with an  international  commercial
              bank.  The Company had cash invested in these funds of $1,175,279,
              $10,875,652,  and  $5,981,688  as of December 31,  1995,  1996 and
              1997, respectively.  The Company has not experienced any losses to
              date on its invested cash.

              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.

              In 1995, three customers  accounted for approximately 39% of total
              revenues.  In 1996, two customers  accounted for approximately 24%
              of  total  revenues   and, when  combined  with a third  customer,
              aggregated 41% of total accounts  receivable at December 31, 1996.
              As of December 31, 1997 and for the year then ended, two customers
              comprised 34% and 56% of total  revenues and accounts  receivable,
              respectively.

              The Company had  significant  purchases  of product from one major
              supplier in the amount of  approximately  $307,000  during  fiscal
              1996 and  approximately  $1,201,000  from the  same  supplier  and
              another major supplier during fiscal year 1997,  representing  16%
              and 58% of total  product  cost of  revenues  for  those  periods,
              respectively.  No  supplier  accounted  for more than 10% of total
              product cost of revenues in 1995.


 3.      NOTES PAYABLE

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

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

             Maturities of notes payable as of December 31, 1997 are as follows:

                                        1998           $     16,667
                                        1999                  5,555
                                                       ------------
                                                       $     22,222
                                                       ============



                                       51
<PAGE>

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

  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 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 $56,954 and $40,681 during
         the years ended December 31, 1995 and 1996, respectively.

         The Company's founder, Chairman of the Board, 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, 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  and  Chairman  of the  Board,
         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  market  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  arising  from 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.  These  warrants  may be further  adjusted as a result of
         subsequent  conversions  of the  Company's  new  Series  A  Convertible
         Preferred  Stock (see Note 7) and/or the issuance of options  under the
         Company's 1998 Incentive Stock Plan.

         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

         Other assets consist of the following at December 31:


                                       52
<PAGE>

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

                                                       1996           1997
                                                   -----------    ------------
               Deposits                            $    28,568    $    613,186
               Investment in NFR                             -         250,000
                                                   -----------    ------------
                                                   $    28,568    $    863,186
                                                   ===========    ============


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

                                                       1996           1997
                                                   -----------    ------------
               Accounts payable                    $   645,602    $    601,046
               Accrued compensation                    172,299         473,507
               Accrued IPO costs                       139,679               -
               Accrued contract costs                  155,000               -
               Accrued marketing costs                  55,000          48,193
               Sales tax payable                       118,464          28,843
               Other accrued expenses                   25,000               -
                                                   -----------    ------------
                                                   $ 1,311,044    $  1,151,589
                                                   ===========    ============


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:

                                                    1996             1997
                                                ------------     ------------
        Deferred tax assets (liabilities):
          Deferred revenue                      $     37,750     $          -
          Inventory allowance                         19,310           82,145
          Allowance for bad debts                     97,475          579,456
          Deferred rent                               30,230           14,243
          Non-deductible accruals                     93,993           59,071
          Stock-based employee  compensation         188,388          188,388
          Licensing fee                             (300,622)        (123,980)
          Net operating loss carryforward          2,894,848        5,698,817
                                                ------------     ------------

        Total gross deferred tax asset             3,061,372        6,416,243
        Valuation allowance                       (3,061,372)      (6,416,243)
                                                ------------     ------------

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

         The net  change  in the  valuation  allowance  from 1996 to 1997 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, 1997, the
         Company  had  net  operating  loss   carryforwards   of   approximately
         $15,395,000  for Federal and state  income tax  purposes  available  to
         offset future  taxable  income.  The net operating  loss  carryforwards
         begin to expire in 2008.



                                       53
<PAGE>

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

  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 and
              Chairman of the Board,  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 Series A
              Stock to Advantage Fund II Ltd. ("Advantage") for $4 million, less
              issuance costs of approximately  $234,000.  Each share of Series A
              Stock is  convertible  into shares of Common Stock and warrants to
              purchase shares of Common Stock ("Series A Warrants").

              The  holders of Series A Stock are  entitled  to  receive,  at the
              discretion  of the Board of  Directors,  dividends  at the rate of
              $50.00 per annum per  share,  which are fully  cumulative,  accrue
              without  interest  from  the  date of  original  issuance  and are
              payable  quarterly  commencing  March 1,  1998.  The amount of the
              dividends  payable per share of Series A Stock for each  quarterly
              dividend is computed by  dividing  the annual  dividend  amount by
              four.  Dividends not paid on a payment  date,  whether or not such
              dividends  have been  declared,  will bear interest at the rate of
              twelve  percent  per annum  until  paid.  The Company can elect to
              issue shares of the Company's Common Stock in payment of dividends
              on the Series A Stock.

              In the event of any liquidation,  dissolution or winding up of the
              Company, whether voluntary or involuntary, the holders of Series A
              Stock are entitled to receive out of the assets of the Company, an
              amount  per  share  of  Series A Stock  equal  to the  liquidation
              preference  before  any  payment  shall be made to  holders of any
              class of Common Stock or any stock ranking on  liquidation  junior
              to the  Series  A  Stock,  an  amount  equal to the sum of (1) all
              dividends  accrued  and  unpaid  thereon  to  the  date  of  final
              distribution  to such holders,  (2) accrued and unpaid interest on
              dividends in arrears and (3) $1,000. The liquidation preference of


                                       54
<PAGE>

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


              the Series A Stock is  $4,012,600  as of December 31, 1997. In the
              event,   the  assets  of  the  Company  are  insufficient  to  pay
              liquidation  preference amounts,  then all of the assets available
              for distribution shall be distributed ratably among the holders of
              Series A Stock.

              CONVERSION RIGHTS.  Each share of Series A Stock is convertible at
              the option of the holder into shares of Common  Stock and warrants
              to purchase  Common  Stock  ("Series A  Warrants").  The number of
              Series A Warrants  issuable on  conversion  of a share of Series A
              Stock is the number of shares of Common Stock issued on conversion
              per share of Series A Stock  divided by 5. The exercise  price per
              share of each  Series A Warrant is $4.77 per share.  Each Series A
              Warrant is  exercisable  for 5 years from the date of  conversion.
              The number of shares of Common  Stock  issuable on exercise of the
              Series A Warrants and the  exercise  price per share is subject to
              adjustment in certain circumstances.

              The number of shares of Common Stock  issuable per share of Series
              A Stock is  determined  by  dividing  the sum of (a)  $1,000,  (b)
              accrued and unpaid  dividends,  and (c)  interest on  dividends in
              arrears ("Conversion Amount") by the lesser of (1) $4.77 ("Ceiling
              Price")  and  (2)  the  product  of  the   applicable   Conversion
              Percentage and the Average  Market Price on the  conversion  date.
              The "Conversion  Percentage" is generally 85%; however, if (1) the
              registration  statement  ceases  to be  available  for  use by any
              holder  of  Series  Stock  that  is  named  therein  as a  selling
              stockholder  for any  reason,  or (2) a holder  of  Series A Stock
              becomes  unable  to  convert  any  shares  of  Series  A Stock  in
              accordance  with  the  Certificate  of  Designations  of  Series A
              Convertible  Preferred Stock ("Series A Certificate")  (other than
              by reason of the 4.9% limitation  described  below),  then (A) the
              applicable  Conversion Percentage is permanently reduced by 2% per
              month  up to a  maximum  aggregate  reduction  in  the  Conversion
              Percentage of 10% and (B) the Ceiling Price is permanently reduced
              by $.0954  per month up to a maximum  aggregate  reduction  in the
              Ceiling Price of $.477.  However,  in lieu of each such reduction,
              the Company can make cash  payments  equal to 2% of the  aggregate
              subscription  price per share ($1,000 per share) of Series A Stock
              (which  amount is  limited  to 10% of the  aggregate  subscription
              price). The Conversion Amount is adjusted in the event the Company
              issues certain rights or warrants or distributes to the holders of
              securities  junior to the Series A Stock evidences of indebtedness
              or assets. The "Average Market Price" is the average of the lowest
              sale  price  on the  Nasdaq  National  Market  on each of the five
              trading   days  having  the  lowest  sale  price   during  the  25
              consecutive  trading days prior to the measurement  date, which in
              the case of a  dividend  paid in  shares  of  Common  Stock is the
              dividend payment date.

              No holder  of  Series A Stock is  entitled  to  receive  shares of
              Common Stock on conversion of its Series A Stock or on exercise of
              its Series A Warrants to the extent that the sum of (1) the shares
              of Common  Stock owned by such holder and its  affiliates  and (2)
              the shares of Common Stock  issuable on conversion of the Series A
              Stock and on  exercise  of its Series A Warrants  would  result in
              beneficial  ownership  by such holder and its  affiliates  of more
              than 4.9% of the  outstanding  shares of Common Stock.  Beneficial
              ownership  for this  purpose  is  determined  in  accordance  with
              Section 13(d) of the  Securities  Exchange Act of 1934,  excluding
              shares of Common Stock so owned through  ownership of  unconverted
              shares of Series A Stock and unexercised Series A Warrants.

              If a holder  tenders  his or her  shares  of  Series  A Stock  for
              conversion and does not receive certificates for all of the shares
              of Common  Stock and  Series A Warrants  to which  such  holder is


                                       55
<PAGE>

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

              entitled when  required,  then,  among other  things,  the Ceiling
              Price otherwise applicable to such conversion is reduced by $.0954
              and  the  Conversion   Percentage  otherwise  applicable  to  such
              conversion is reduced by 2%.

              MANDATORY  REDEMPTION.  The Series A Certificate provides that the
              Company is not obligated to issue, upon conversion of the Series A
              Stock,  more than the  number of shares of Common  Stock  that the
              Company may issue pursuant to the rules of Nasdaq  ("Maximum Share
              Amount"),  less the  aggregate  number of  shares of Common  Stock
              issued by the  Company as  dividends  on the  Series A Stock.  The
              Company is seeking  approval  from the holders of Common  Stock to
              issue shares of Common Stock in connection with the Series A Stock
              in excess of the amounts permitted by Nasdaq Rule 4460(i)(1)(D).

              If the Company would not be obligated to convert  shares of Series
              A Stock  because  of the  Maximum  Share  Amount  limitation,  the
              Company is required to give a notice to that effect to each holder
              of Series A Stock. In such event, a holder may require the Company
              to  redeem  such  portion  of its  Series A Stock  that  cannot be
              converted as a result of this limitation at the "Share  Limitation
              Redemption  Price" per share.  The  "Share  Limitation  Redemption
              Price" is the greater of (i) the quotient obtained by dividing (a)
              the sum of (1)  $1,000,  (2) an amount  equal to the  accrued  but
              unpaid  dividends  on the share of Series A Stock to be  redeemed,
              and (3) an amount  equal to the  accrued  and unpaid  interest  on
              dividends  in  arrears  on  such  share  through  the   applicable
              redemption  date by (b) the applicable  Conversion  Percentage and
              (ii) an amount equal to the product  obtained by  multiplying  (x)
              the  number  of shares of Common  Stock  that  would,  but for the
              redemption pursuant to this provision of the Series A Certificate,
              be issuable on  conversion  of one share of Series A Stock and any
              accrued  and unpaid  dividends  thereon and any accrued and unpaid
              interest  on  dividends  thereon  in arrears  (determined  without
              regard to the 4.9% limitation) times (y) the arithmetic average of
              the closing bid price of the Common Stock for the five consecutive
              trading days ending one trading day prior to the redemption date.

              In addition,  the Company is  obligated to redeem all  outstanding
              shares of Series A Stock on  December  8, 2000 at the  "Redemption
              Price" per share. The "Redemption Price" is the greater of (i) the
              quotient  obtained by dividing  (a) the sum of (1) $1,000,  (2) an
              amount  equal to the accrued but unpaid  dividends on the share of
              Series  A Stock to be  redeemed,  and (3) an  amount  equal to the
              accrued and unpaid  interest on dividends in arrears on such share
              through  the  applicable  redemption  date by (b)  the  applicable
              Conversion  Percentage  and (ii) an  amount  equal to the  product
              obtained by  multiplying  (x) the number of shares of Common Stock
              that would,  but for the redemption  pursuant to this provision of
              the Series A  Certificate,  be issuable on conversion of one share
              of Series A Stock and any accrued and unpaid dividends thereon and
              any accrued and unpaid  interest on  dividends  thereon in arrears
              (determined  without regard to the 4.9% limitation)  times (y) the
              arithmetic  average of the closing  bid price of the Common  Stock
              for the five consecutive trading days ending one trading day prior
              to the redemption date.

              OPTIONAL  REDEMPTION BY THE COMPANY.  As long as the Company is in
              compliance in all material  respects with its  obligations  to the
              holders of Series A Stock under the Series A  Certificate  and the
              registration  rights  agreement  with  Advantage,  the Company may
              redeem all or, from time to time, part of the  outstanding  shares
              of Series A Stock at the Redemption Price per share.


                                       56
<PAGE>

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

              OPTIONAL REDEMPTION BY THE HOLDERS OF SERIES A STOCK. In the event
              an "Optional  Redemption  Event"  occurs,  each holder of Series A
              Stock has the right to  require  the  Company  to redeem  all or a
              portion its shares of Series A Stock at the  "Optional  Redemption
              Price" per share. "Optional Redemption Event" means any one of the
              following:  (1) for any period of five  consecutive  trading  days
              there is no closing bid price of the Common  Stock on any national
              securities  exchange or the Nasdaq National Market; (2) the Common
              Stock  ceases to be listed  for  trading  on the  Nasdaq  National
              Market, the New York Stock Exchange  ("NYSE"),  the American Stock
              Exchange ("AMEX") or the Nasdaq SmallCap Market; (3) the inability
              for 30 or more days (whether or not  consecutive) of any holder of
              shares of Series A Stock who is entitled  to  optional  redemption
              rights to sell such shares of Common  Stock  issued or issuable on
              conversion   of  shares  of  Series  A  Stock   pursuant   to  the
              registration statement for any reason on each of such 30 days; (4)
              the Company  fails or defaults  in the timely  performance  of any
              material  obligation to a holder of shares of Series A Stock under
              the terms of the Series A  Certificate  or under the  registration
              rights  agreement  with  Advantage  or  any  other  agreements  or
              documents  entered into in connection  with the issuance of shares
              of Series A Stock; (5) any  consolidation or merger of the Company
              with or into another entity (other than a merger or  consolidation
              of a subsidiary  of the Company into the Company or a wholly owned
              subsidiary of the Company) where the  shareholders  of the Company
              immediately  prior to such  transaction do not collectively own at
              least 51% of the  outstanding  voting  securities of the surviving
              corporation of such consolidation or merger immediately  following
              such transaction or the common stock of such surviving corporation
              is not listed for trading on the Nasdaq National Market, the NYSE,
              the AMEX or the Nasdaq SmallCap  Market;  or (6) the taking of any
              action,  including any amendment to the Company's  Certificate  of
              Incorporation, that materially and adversely affects the rights of
              any holder of shares of Series A Stock.

              The "Optional Redemption Price" is the greater of (i) the quotient
              obtained  by  dividing  (a) the sum of (1)  $1,000,  (2) an amount
              equal to the accrued but unpaid dividends on the share of Series A
              Stock to be  redeemed,  and (3) an amount equal to the accrued and
              unpaid  interest on dividends in arrears on such share through the
              applicable  redemption  date  by  (b)  the  applicable  Conversion
              Percentage  and (ii) an amount  equal to the  product  obtained by
              multiplying  (x) the number of shares of Common  Stock that would,
              but for the redemption  pursuant to this provision of the Series A
              Certificate,  be issuable on  conversion  of one share of Series A
              Stock and any accrued and unpaid dividends thereon and any accrued
              and unpaid  interest on dividends  thereon in arrears  (determined
              without  regard to the 4.9%  limitation)  times (y) the arithmetic
              average of the closing bid price of the Common  Stock for the five
              consecutive  trading  days  ending  one  trading  day prior to the
              redemption date.

              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 and  Chairman of the Board.  (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.


                                       57
<PAGE>

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


              STOCK SPLITS

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

              WARRANTS

              In addition to the  warrants  discussed in Note 4, the Company has
              issued other warrants during fiscal 1997.

              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 25,000 warrants to purchase Common Stock at an exercise
              price of $3.875 per share, exercisable as of November 4, 1997.

              As of December  31,  1997,  warrants  aggregating  768,999  remain
              outstanding.

              STOCK OPTIONS PLANS

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

              1995 NON-STATUTORY STOCK OPTION PLAN

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

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

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



                                       58
<PAGE>

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


             Balance as of December 31, 1995     350,293      $0.4245-$2.505
                 Granted                           2,000               $4.50
                 Exercised                        -                        -
                 Canceled                         (2,000)              $4.50
                                                --------
              Balance as of December 31, 1996    350,293      $0.4245-$2.505
                 Granted                          -
                 Exercised                      (119,070)     $0.4245-$2.505
                 Canceled                         -
                                                --------
              Balance as of December 31, 1997    231,223
                                                ========

              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,  1996,   the
              Compensation Committee had granted a total of 352,293 options with
              a ten year term, of which 213,331 are  exercisable  at $0.4245 per
              share,  136,962 are  exercisable at $2.505 per share and 2,000 are
              exercisable at $4.50 per share.  As of December 31, 1995, 1996 and
              1997, 44,445,  229,087 and 231,223,  respectively,  of the options
              were vested.

              As of  December  31,  1996 and 1997,  the Company had no shares of
              Common Stock available for grant under the 1995 Plan.

              1996 NON-STATUTORY STOCK OPTION PLAN

              The   Compensation   Committee,   which   administers   the   1996
              Non-Statutory   Stock   Option   Plan   ("Non-Statutory    Plan"),
              established  the 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  and  Chairman  of the Board
              contributed  383,965 shares of Common Stock to the Company and the
              Company  issued those shares to employees in  connection  with the
              exercise of stock options  granted under the  Non-Statutory  Plan.
              The Company  recognized  compensation  expense of $287,976  with a
              corresponding  increase to  additional  paid-in  capital to record
              this transaction.

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

                                                       Shares            Price
                                                     ----------        ---------
              Balance as of December 31, 1995                 -               -
                 Granted                                383,965           $0.75
                 Exercised                             (383,965)          $0.75
                 Canceled                                     -               -
                                                     ----------
              Balance as of December 31, 1996                -                -
                                                     ==========


                                       59
<PAGE>

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


              The options  were  exercised on April 22, 1996 at $0.75 a share in
              exchange for notes and par value in cash.  No  additional  options
              are available for grant under the Non-Statutory  Plan. 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 as of December 31,
              1996 and 1997.

              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.

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

              Option  activity for the period from the 1996 Plan's  inception to
              December 31, 1997 was as follows:
<TABLE>
<CAPTION>
                                                                Incentive              Non-Qualified
                                                             Stock Options              Stock Options
                                                         Shares       Price         Share          Price
                                                         ------       -----         -----          -----
<S>                                                      <C>       <C>             <C>         <C>
              Balance as of December 31, 1995                  -            -             -              -

                   Granted                               386,310   $4.50-$9.00     837,903     $3.75-$9.00
                   Exercised                                   -             -           -               -
                   Canceled                              (41,476)  $4.50-$9.00     (29,066)          $3.75
                                                      ----------                ----------
              Balance as of December 31, 1996            344,834   $4.50-$9.00     808,837     $3.75-$9.00

                   Granted                               703,501   $4.50-$5.88     612,000     $3.75-$5.88
                   Exercised                             (28,196)  $4.50-$5.00    (270,642)          $3.75
                   Canceled                              (88,202)  $4.50-$9.00    (110,097)    $3.75-$9.00
                                                      ----------                ----------
              Balance as of December 31, 1997            931,937   $4.50-$9.00   1,040,098     $3.75-$9.00
                                                      ==========                ==========

</TABLE>

                                       60
<PAGE>

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


              Awards may be granted  under the 1996 Plan with respect to a total
              of  2,333,333  shares of Common  Stock under the 1996 Plan.  As of
              December 31, 1997, of the total 1,040,098  non-qualified  options,
              395,435 are vested and  exercisable as of December 31, 1997. As of
              December  31,  1997,  the Company had 62,460 share of Common Stock
              available for grant under the 1996 Plan.

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


                                              1995          1996          1997
                                              -----         -----         ----
              Net loss
                 As reported            $1,122,011    $6,695,556     $9,998,198
              Pro forma                 $1,154,939    $9,509,366    $10,312,521
              Loss per common share
                 As reported                 $0.14         $0.72          $0.78
                 Pro forma                   $0.14         $1.03          $0.80


              The fair value of each  option is  estimated  on the date of grant
              using  a type of  Black-Scholes  option  pricing  model  with  the
              following weighted-average  assumptions used for grants during the
              years  ended  December  31,  1995,  1996 and  1997,  respectively:
              dividend yield of 0% in all periods;  expected  volatility of 43%,
              43%, and 56%; risk-free interest rate of 6.2%, 6.5%, and 6.0%; and
              expected terms of 3.0, 3.4, and 4.0 years, respectively.

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

<TABLE>
<CAPTION>
                                                                      Year ended December 31,

                                                         1995                  1996               1997
                                                          ----                 ----                ----
                                                       Weighted               Weighted           Weighted
                                                        Average                Average            Average
                                                       Exercise               Exercise           Exercise
                                              Shares    Price      Shares      Price    Shares    Price
                                              ------    -----      ------      -----    ------    -----
<S>                                          <C>       <C>         <C>          <C>     <C>         <C>
              Options outstanding beginning
                 of period                         -         -     350,293      $1.238  1,503,964   $2.433
              Options exercised                    -         -    (383,965)     $0.750  (417,908)   $3.018
              Options canceled                     -         -     (72,542)     $5.480  (198,299)   $4.977
              Options granted                350,293    $1.238   1,610,178      $2.438  1,315,501   $4.146
                                             -------   -------   ---------              ---------
              Options outstanding end
                  of period                  350,293    $1.238   1,503,964      $2.433  2,203,258   $3.960
              Options exercisable at end
                 of period                    44,445    $0.425     786,846      $3.118    746,858   $3.621
              Weighted-average fair value
                 of options granted
                 during the period                 -    $0.094           -      $1.758          -   $2.039


</TABLE>

                                       61
<PAGE>

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


              As  of  December  31,  1997,   the  weighted   average   remaining
              contractual  life of the options that range from $3.75 to $9.00 is
              9 years.

              As of December 31, 1995,  1996 and 1997, the pro forma tax effects
              under SFAS 109 would  include an increase to both the deferred tax
              asset and the  valuation  allowance  of  $12,700,  $1,086,700  and
              $121,392,   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, 1997 are as follows:

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

               1998                        $  915,021            $  96,188
               1999                           943,293               93,249
               2000                           886,197               91,188
               2001                           575,807               85,428
               2002                           818,547               69,345
                                           ----------            ---------

               Total minimum payments      $4,138,865              435,398
                                           ==========

               Interest                                           (122,966)
                                                                 ---------

               Present value of capital lease
                    obligations                                    312,432
               Less:  current portion                              (17,126)
                                                                  --------
               Capital lease obligations non-current             $ 295,306
                                                                 =========

         Rent expense was $92,785,  $258,607,  and $550,693, for the years ended
         December 31, 1995, 1996 and 1997, respectively.

         At December 31, 1997,  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:

                      1998                              $144,462
                      1999                               204,043
                      2000                               214,489
                      2001                                74,712
                      ----                              --------
                      Total minimum payments            $637,706
                                                        ========

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


                                       62
<PAGE>

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

                                                         1996           1997
                                                         -----          ----

                      Furniture                     $   8,752      $   8,752
                      Computers and equipment         209,725        440,147
                                                    ---------      ---------
                                                      218,477        448,899
                      Accumulated depreciation        (34,192)       (86,428)
                                                    ---------      ---------
                                                    $ 184,256      $ 362,471
                                                    =========      =========

              LICENSE AGREEMENTS

              In 1994, the Company entered into two licensing agreements whereby
              the  Company  obtained  the  right  to  modify  and  sell  certain
              technology  used  in its  product  line.  One  of  the  agreements
              requires the Company to pay fees based on product and subscription
              sales for any product  using the  licensed  technology.  The other
              agreement  provides for payment of fees based upon gross  revenues
              of the Company.  This latter  agreement also gives the other party
              ("Licensor")  the  right  to  forfeit  future  licensing  fees  in
              exchange for 2% of the Company's  outstanding  voting stock, after
              giving  effect to the  issuance.  The Licensor  elected to receive
              voting  stock in May 1996.  In October  1996,  the Company  issued
              188,705  shares of Common Stock to the  Licensor.  The fair market
              value of the stock  issued,  $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  and  fees  totaling  $110,860,   $135,779,  and  $775,356
              relating to these agreements in 1995, 1996 and 1997, 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,  the Company  amended  the  Chairman of the Board of
              Directors and certain senior executives of the Company's  standing
              employment agreements.  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  six  covered
              executives  be  terminated   is   approximately   $662,000  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.



                                       63
<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, 1997.

         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.    FINANCING

         The Company has  incurred  net losses of  $1,122,011,  $6,695,556,  and
         $9,998,198  for the  years  ended  December  31,  1995,  1996 and 1997.
         Management  considers the Company's  current working  capital  position
         sufficient to cover  operating  losses over the next  operating  cycle.
         Management  has  historically  been  successful  in  obtaining  outside
         financing to meet obligations and funding working capital  requirements
         as they come due.

  11.    QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
                                                 First           Second              Third           Fourth
                                                Quarter          Quarter             Quarter          Quarter
                1995
<S>                                            <C>                <C>               <C>              <C>
         Net revenues                          $150,257           $218,961          $356,021         $378,262
         Gross profit                            97,667            140,401           230,539          257,735
         Net loss                              (154,791)          (245,136)          (60,536)        (661,548)
         Net loss per common share                (0.02)             (0.03)           (0.01)            (0.08)

                1996

         Net revenues                         1,021,811          1,354,576         1,720,543        2,169,219
         Gross profit                           699,813            876,023         1,205,105        1,459,589
         Net loss                              (994,660)        (3,393,401)         (977,514)      (1,329,978)
         Net loss per common share                (0.12)             (0.40)           (0.11)            (0.11)

                1997

         Net revenues                         2,414,015          2,134,581         2,764,352        2,089,807
         Gross profit                         1,852,711          1,815,739         2,070,376        1,502,334
         Net loss                              (871,219)        (3,149,492)         (433,643)      (5,543,844)
         Net loss per common share                (0.07)             (0.25)           (0.03)            (0.43)

</TABLE>


                                       64
<PAGE>

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



  12.    SUBSEQUENT EVENTS

         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"),  subject to
         approval  of  the  shareholders  at  the  annual  shareholders  meeting
         scheduled for May 14, 1998.  The purpose of the 1998 Plan is to advance
         the  interests of the Company by providing  for the  acquisition  of an
         equity interest in the Company by non-employee directors, officers, key
         employees  and  consultants.  If  approved,  the 1998 Plan will  become
         effective  February 2, 1998 and terminate February 2, 2008. The Company
         has reserved 2,500,000 shares of Common Stock  for awards granted under
         the 1998 Plan.

         Incentive  stock  options may be granted to  purchase  shares of Common
         Stock at a price not less than fair market  value on the date of grant.
         Only employees may receive incentive stock options; all other qualified
         participants may receive  non-qualified  stock options with an exercise
         price  determined  by a Committee or the Board.  Options are  generally
         exercisable  after one or more years and expire no later than ten years
         from the date of grant.  The 1998 Plan also provides for reload options
         and  restricted  share awards to  employee and consultant  participants
         subject to various terms.

         On the effective date of the 1998 Plan, each  non-employee  director of
         the Board (excluding  Messrs.  Charles Chen, Harry Gruner,  and William
         Odom) shall be granted  non-qualified options to purchase 10,000 shares
         of  Common  Stock,  with an  exercise  price of fair  market at date of
         grant.  Such  options  are fully  vested at grant date and shall have a
         five year expiration term.

         REPRICING OF OUTSTANDING  STOCK OPTIONS UNDER THE 1996 INCENTIVE  STOCK
         OPTION PLAN

         On  February  17,  1998,  the Board  authorized  the offer to reset the
         exercise  price  of  all  full-time   employees'   (exclusive  of  Vice
         Presidents and the President) incentive stock options and non-qualified
         stock options  granted under the 1996  Incentive  Stock Option Plan. If
         accepted by the option  holder,  such  options are to be replaced  with
         non-qualified options at the new exercise price of $2.625 per share. To
         be  eligible  for  repricing,  a  participant  must:  1) be a full-time
         employee on February 17, 1998,  2) agree to remain in the employ of the
         Company  until August 17, 1998,  and 3)  acceptance  of this offer must
         have been  exercised by February 24, 1998.  At the close of business on
         February 24, 1998, employees holding options to purchase 451,736 shares
         of Common Stock in the aggregate  had exercised  their right to reprice
         at the new exercise price of $2.625 per share.

         CONVERSION OF SERIES A PREFERRED STOCK

         During  March  1998,  holders of Series A Stock  elected to convert 276
         shares into 130,774  shares of Common  Stock at a  conversion  price of
         $2.1144 per share,  and received  warrants to purchase 26,155 shares of
         Common Stock at an exercise price of $4.77 per share. Had the preferred
         stock transaction occurred on January 1, 1997, pro forma basic loss per
         share  would  have been  approximately  $(0.77)  per share for the year
         ended December 31, 1997.

         The  above  transaction  triggers  a change in the  383,999  detachable
         warrants with an exercise price of $3.125,  outstanding at December 31,
         1997 as a result of the anti-dilution  clause. Such detachable warrants

                                       65
<PAGE>

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



         are now  exercisable  for 567,535 shares of Common Stock at an exercise
         price of  $2.1144  per  share and will  result  in a noncash  charge to
         income of approximately $388,000 in the first quarter of fiscal 1998.
















                                       66




<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 14, 1998.

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 14, 1998.

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 14, 1998.


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 14, 1998.


                                     PART IV

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

(a)  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
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)
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)

                                       67
<PAGE>



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)
10.25               V-ONE 1998 Incentive Stock Plan
10.26               Warrants dated November 21, 1997 to Purchase 300,000 shares
                    of Common Stock granted to David D. Dawson
10.27               Employment Agreement dated November 21, 1997 between V-ONE
                    and David D. Dawson
10.28               Amendment to Employment Agreement dated November 7, 1997
                    between V-ONE and Charles B. Griffis
10.29               Amendment to Section 2.08 of 1996 Incentive Stock Plan
10.30               Lease Agreement dated March 24, 1997 between Bellemead
                    Development Corporation and V-ONE (3)
23.1                Consent of Coopers & Lybrand L.L.P.
27                  Financial Data Schedule for the Year Ended December 31, 1997
--------------------------------------------------------------------------------

(1)      The information required by this exhibit is incorporated herein by
         reference to V-ONE's Registration Statement and 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.



                                       68
<PAGE>


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


(b) Financial Statement Schedules

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

(c) Reports on Form 8-K

         (ii)     Form 8-K dated December 3, 1997  reporting,  under Item 5, the
                  retaining of David D. Dawson to serve as  President  and Chief
                  Executive Officer  replacing James F. Chen,  founder of V-ONE,
                  who will continue in his role as Chairman, and the resignation
                  of H.H. Cheng as a director of V-ONE.

          (ii)    Form 8-K dated December 8, 1997  reporting,  under Item 5, the
                  issuance of the Series A Convertible Preferred Stock.


















                                       69
<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 27, 1998                    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/ James F. Chen         Chairman of the Board                March 27, 1998
---------------------     And Director
James F. Chen

/s/ David D. Dawson       President, Chief Executive           March 27, 1998
---------------------     Officer and Director
David D. Dawson

/s/ Charles B. Griffis    Senior Vice President, Chief         March 27, 1998
----------------------    Financial Officer and Treasurer
Charles B. Griffis        (Principal Financial Officer)


/s/ Mark R. Fields        Controller (Principal                March 27, 1998
---------------------     Accounting Officer)
Mark R. Fields

/s/ Charles C. Chen       Director                             March 27, 1998
---------------------
Charles C. Chen

/s/ Harry S. Gruner       Director                             March 27, 1998
---------------------
Harry S. Gruner

/s/ William E. Odom       Director                             March 27, 1998
---------------------
William E. Odom






                                       70
<PAGE>



                                V-ONE CORPORATION

                   INDEX TO FINANCIAL STATEMENTS AND SCHEDULES


                                                                      Page
                                                                      ----

Financial Statement Schedules:

Schedule II       Valuation and Qualifying Accounts and Reserves      F-2


















                                      F-1



<PAGE>





                                                                     SCHEDULE II

                        VALUATION AND QUALIFYING ACCOUNTS
                                V-ONE CORPORATION
             (For the years ended December 31, 1995, 1996 and 1997)

<TABLE>
<CAPTION>

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

<S>                                                <C>             <C>                   <C>      <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
   December 31, 1995                                     ---          23,620             ---         23,620
   December 31, 1996                                  23,620         228,775             ---        252,395
   December 31, 1997                                 252,395       1,248,010             ---      1,500,405
DEFERRED TAX ASSET VALUATION ALLOWANCE
   December 31, 1995                                 165,804         340,489             ---        506,293
   December 31, 1996                                 506,293       2,555,079             ---      3,061,372
   December 31, 1997                               3,061,372       3,779,331             ---      6,416,243
ALLOWANCE FOR NON-SALABLE INVENTORY
   December 31, 1995                                     ---          50,000             ---         50,000
   December 31, 1996                                  50,000             ---             ---         50,000
   December 31, 1997                                  50,000         162,700             ---        212,700

</TABLE>

















                                      F-2

<PAGE>
                                 EXHIBIT INDEX


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
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)
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)

<PAGE>

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)
10.25               V-ONE 1998 Incentive Stock Plan
10.26               Warrants dated November 21, 1997 to Purchase 300,000 shares
                    of Common Stock granted to David D. Dawson
10.27               Employment Agreement dated November 21, 1997 between V-ONE
                    and David D. Dawson
10.28               Amendment to Employment Agreement dated November 7, 1997
                    between V-ONE and Charles B. Griffis
10.29               Amendment to Section 2.08 of 1996 Incentive Stock Plan
10.30               Lease Agreement dated March 24, 1997 between Bellemead
                    Development Corporation and V-ONE (3)
23.1                Consent of Coopers & Lybrand L.L.P.
27                  Financial Data Schedule for the Year Ended December 31, 1997
--------------------------------------------------------------------------------

(1)      The information required by this exhibit is incorporated herein by
         reference to V-ONE's Registration Statement and 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.