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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549


Form 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

|    |                                                      |                                 | 
|--- | ---------------------------------------------------- | ------------------------------- | 
|[X] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |                                
|    |                                                      | SECURITIES EXCHANGE ACT OF 1934 | 

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

OR

|     |                                                          |                                 | 
|---- | -------------------------------------------------------- | ------------------------------- | 
|[  ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |                                
|     |                                                          | SECURITIES EXCHANGE ACT OF 1934 | 

Commission File No. 000-25120

RSA Security Inc.

(Exact name of registrant as specified in its charter)


|                                                                       |  |                                               
|---------------------------------------------------------------------- |  | ----------------------------------------------
|Delaware(State or other jurisdiction of
Incorporation or Organization) |  | 04-2916506(I.R.S. Employer
Identification No.)

174 Middlesex Turnpike
Bedford, Massachusetts 01730(Address of Principal Executive Offices)

Registrants telephone number, including area code: (781) 515-5000



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Securities Registered Pursuant to Section 12(b) of the Act: None

Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
Common Stock Purchase Rights(Title of class)



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TABLE OF CONTENTS



|                                                  |                                                                                                         |  |  |  |  |  |  | 
|------------------------------------------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                           
|                                                  | ITEM 1. BUSINESS                                                                                       
|                                                  | ITEM 2. PROPERTIES                                                                                     
|                                                  | ITEM 3. LEGAL PROCEEDINGS                                                                              
|                                                  | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                            
|PART II                                          
|                                                  | ITEM 5. MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                                   
|                                                  | ITEM 6.   SELECTED FINANCIAL DATA                                                                      
|                                                  | ITEM 7.   MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS        
|                                                  | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                    
|                                                  | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                    
|REPORT OF MANAGEMENT                             
|INDEPENDENT AUDITORS REPORT                     
|PART III                                         
|                                                  | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF RSA SECURITY                                              
|                                                  | ITEM 11. EXECUTIVE COMPENSATION                                                                        
|                                                  | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|                                                  | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                
|                                                  | ITEM 14. CONTROLS AND PROCEDURES                                                                       
|PART IV                                          
|                                                  | ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                               
|SIGNATURES                                       
|CERTIFICATIONS                                   
|CERTIFICATION PURSUANT TO 18 U.S.C. §1350        
|EXHIBIT INDEX                                    
|EX-10.6 AMEND. TO 2000 DEFERRED COMPENSATION PLAN
|EX-10.17 8TH AMENDMENT TO PARTNER AGREEMENT      
|EX-10.24 AGREEMENT TO SUBLEASE  1/10/03          
|EX-21.1 SUBSIDIARIES OF RSA SECURITY INC.        
|EX-23.1 CONSENT OF DELOITTE & TOUCHE  LLP        
|EX-99.4 STOCK TRADING PLAN  12/11/02             
|EX-99.5 STOCK TRADING PLAN  11/10/02             



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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 the 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.    [X]

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

As of February 14, 2003, the approximate aggregate market value of the common
stock held by non-affiliates of the registrant was $335,450,441 based on the
last reported sale price of the registrants common stock on The NASDAQ
National Market as of the close of business on that date. There were 57,477,281
shares of common stock outstanding as of February 14, 2003.

As of June 28, 2002, the approximate aggregate market value of the common stock
held by non-affiliates of the registrant was $269,516,638 based on the last
reported sale price of the registrants common stock on The NASDAQ National
Market as of the close of business on that date.

DOCUMENTS INCORPORATED BY REFERENCE

|                                                                                         |  |                                  
|---------------------------------------------------------------------------------------- |  | ---------------------------------
|                                                                                         |  | PART OF FORM 10-K                
|DOCUMENT                                                                                 |  | INTO WHICH INCORPORATED          
|Portions of the Registrants Proxy
Statement for the 2002 Annual Meeting
of Stockholders |  | Items 10, 11, 12 & 13 of Part III

This Report contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended. For purposes of these Acts, any statement
that is not a statement of historical fact may be deemed a forward-looking
statement. For example, statements containing the words believes,
anticipates, plans, expects, and similar expressions may be
forward-looking statements. However, we caution investors not to place undue
reliance on any forward-looking statements in this Report because these
statements speak only as of the date when made. We undertake no obligation to
publicly update any forward-looking statements, whether as a result of new
information, future events or otherwise. There are a number of factors that
could cause our actual results to differ materially from those indicated by
these forward-looking statements, including without limitation, the factors set
forth under the caption Certain Factors That May Affect Future Results.

RSA Security, RSA, Keon, ClearTrust, SecurID, BSAFE, ACE/Server, RC2, RC4, RC5,
The Most Trusted Name in e-Security and RSA Secured are either registered
trademarks or trademarks of RSA Security Inc. in the United States and/or other
countries. All other trademarks or trade names referred to in this Report are
the property of their respective owners.

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PART I




ITEM 1.     BUSINESS

COMPANY OVERVIEW

With thousands of customers around the globe, RSA Security Inc. (NASDAQ: RSAS)
provides interoperable solutions for establishing online identities, access
rights and privileges for people, applications and devices. Built to work
seamlessly and transparently in the complex environments of our customers, our
portfolio of identity and access management solutions  including
authentication, Web access management and developer solutions  is designed to
allow customers to confidently exploit new technologies for competitive
advantage. Our strong reputation is built on our history of ingenuity and
leadership, proven technologies and long-standing relationships with more than
1,000 technology partners.

We have two business segments: the e-Security Solutions segment and the RSA
Capital segment. Our e-Security Solutions segment sells Enterprise solutions
and Developer solutions through our four product lines: RSA
SecurID®
authentication, RSA Keon® digital certificates and smart card solutions, RSA
BSAFE® developer tools, and RSA ClearTrust® Web access management software.
Our RSA Capital segment consists of our investment activities.

We maintain a website at www.rsasecurity.com. We are not including the
information contained in our website as part of this Report, nor are we
incorporating the information on our website into this Report by this
reference. As soon as reasonably practicable after filing with or furnishing
to the Securities and Exchange Commission, we make available through our
website, free of charge, our annual reports on Form 10-K, quarterly reports on
Form 10-Q and current reports on Form 8-K, including all amendments to these
reports.

COMPANY HISTORY

Since our inception in 1986 as Security Dynamics Technologies, Inc., we have
focused on the fundamental need for user identification and authentication,
with an initial emphasis on solutions for secure remote access to enterprise
networks (RSA SecurID technology). In July 1996, to further our strategy and
extend our product line, we acquired RSA Data Security, Inc., a privately held
company that developed and delivered cryptographic solutions that address the
need for data privacy and integrity (RSA BSAFE technology).

In January 1999, we introduced the RSA Keon product line, a family of public
key infrastructure products designed to provide organizations with application
security and flexible electronic commerce solutions. In September 1999, we
introduced the next-generation, standards-based implementation of the RSA Keon
solution and changed our name from Security Dynamics Technologies, Inc. to RSA
Security Inc.

In September 2001, we introduced the RSA ClearTrust Web access management
solutions, which we obtained through our purchase of Securant Technologies,
Inc.

Throughout our history, we have made a number of important corporate
acquisitions and dispositions, in addition to the RSA Data Security and
Securant acquisitions described above. We developed our RSA Keon Advanced PKI
and RSA Keon Unix Control product families using technologies we acquired
through our purchase in July 1997 of DynaSoft AB, a privately held company that
developed and delivered platform-independent security solutions for distributed
client/server networks. Xcert Internationals Sentry CA line of products
became part of our RSA Keon digital certificate management product family due
to our February 2001 acquisition Xcert International, Inc., a privately held
company that developed and delivered digital certificate-based products for
securing e-business transactions. We introduced a new smart card
authentication solution called RSA SecurID Passage, which is part of our
authentication product line, as a result of our May 2001 acquisition of 3-G
International, Inc., a privately held company that developed and delivered
smart card and biometric authentication products.

In June 2002, we sold to TFS Technology AB all of the technology that we still
retained from our 1997 acquisition of DynaSoft, including our RSA Keon Advanced
PKI and RSA Keon Unix Control product families. We decided to sell this
technology because it no longer fit our strategic objectives, which emphasize
Web-enabled security solutions. As of December 31, 2002, we have sold, disposed
of or otherwise abandoned all of the technology and other assets that we
originally acquired from DynaSoft.

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BACKGROUND

Historically, e-security solutions have been deployed primarily to defend
corporate networks from malicious intrusion and to detect new forms or
incidents of attack. These proven, mature e-security solutions include
firewalls, anti-virus software, intrusion detection applications and
vulnerability assessment products and services.

As more organizations began to conduct business online to reduce costs and
compete more aggressively and more efficiently, a new class of e-security
applications was deployed to secure the e-business process. This class of
products further enabled e-business, including commerce and communications
conducted through corporate intranets, extranets and other Internet-based
applications.

During this evolution, we believe that organizations traditionally viewed
security as a necessary expense. However, we believe that a fundamental shift
is occurring, as those same organizations are beginning to see security as a
business enabler  a tool that will help their business succeed. In tomorrows
security landscape, we believe that identity and access management technology
will be a primary tool for organizations looking to gain competitive advantage
from their strategic security solutions.

The need for identity and access management technology arises from the business
communitys and governments continued investment in their e-business
infrastructures as the primary platform for conducting many aspects of
business. This growing investment in e-business has resulted in an increase in
access requirements that is characterized by a growing number of users with a
proliferation of mobile devices being used for anytime, anywhere access to
applications and resources. With the adoption of Web services for
application-to-application transactions, online activity has also increased.
We believe that these factors have led to a redefined e-security perimeter,
moving security checkpoints from a few points at the networklevel to many
points at the applicationlevel. This expanding and changing e-business model
presents organizations with many daunting challenges  from unproductive user
experiences and unmanageable infrastructures to shifting security perimeters.

We believe that identity management is critical in this shifting landscape.
When it comes to conducting business online, an organization can only use those
identities that are trusted. That is where the real value of identity
management lies. An effectiveidentity management solution establishes trust
in an organizations online environment. Organizations that wish to do
business online, whether with customers, partners or their own employees, need
to know who users are (authentication) and what users can do (access
management).

We believe that Identity and Access Management will play a critical role in
the advancement of e-business as a primary mode of conducting business. We
believe that this technology may transform the way the industry categorizes
security and that three primary capabilities  Authentication, Authorization
and Administration  will evolve over the next few years. We believe that, as
customers e-business initiatives evolve over time, we are well-positioned to
be their strategic security partner in deriving business value from identity
and access management technology.

In addition, our history and strength in developer solutions is well
recognized, and our solutions are pervasive across the Internet. We believe
Web services are the next step in this e-commerce evolution, and that we are
positioned to help shape the standards and provide the security components and
middleware needed for this stage of transactional security. We believe that
the industry is increasingly turning to Web services, and we will continue to
focus our knowledge and efforts on securing our customers systems, including
the applications necessary for Web services.

THE RSA SECURITY STRATEGY

Focus on Identity and Access Management

We are positioned to address organizations identity and access management
needs  today and in the future. With thousands of customers and a history
spanning nearly two decades, we understand the needs of the security market.
Our heritage is in authentication, authorization and administration  the
foundation of evolving identity and access management technology. We already
offer a comprehensive family of solutions to address todays identity and
access management challenges, and we plan to offer a migration path toward an
identity and access management framework that will be designed to integrate
transparently across heterogeneous e-business infrastructures.

Lead e-Security

With over one billion RSA Security-enabled software units shipped, we are a
trusted, experienced partner. We have a track record of innovation centered on
solving customer problems. We are a pioneer in strong authentication,
encryption and digital certificate management solutions, and we have emerged as
an innovator in access management. Our ingenuity has helped us achieve an
industry-leading market share in strong two-factor authentication and a
population of users under the protection of RSA BSAFE

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cryptography that spans the Internet. We participate actively in the development of industry
standards, such as the Liberty Alliance Project, Security Assertion Markup
Language (SAML) and Public Key Cryptography Standards (PKCS). Our efforts are
designed to ensure that customers working with us get the right solution for
their heterogeneous environment and growing business.

Advance e-Business

We continue to work with our customers to deliver business value, transforming
identity and access management solutions into opportunities for competitive
advantage. Our portfolio of e-security solutions are designed to help
organizations realize the revenue opportunities, operational improvements and
customer service benefits of e-business  while helping protect critical
resources and applications from unauthorized access and other forms of
electronic malice. As identity and access management increasingly becomes a
strategic imperative for many organizations, we will strive to offer our
customers competitive advantage through enhanced security.

Achieve Seamless and Transparent Solutions

We have technology partnerships with industry-leading companies that allow us
to integrate our solutions into many diverse environments, and our technology
is pervasive throughout the Internet. The RSA Secured® technology partner
program, a key part of this initiative, focuses on product integration and
interoperability certification activities as well as joint support strategies
for our mutual customers. Our RSA BSAFE developer solutions are engineered to
enable developers to quickly and effectively integrate encryption, protocols
and electronic signatures into their applications. Most importantly, we are
committed to implementing standards into our products to achieve optimal
integration for our customers. Our current products support a multitude of
standards, including PKCS and RADIUS, and in 2002, we announced support for the
OASIS SAML 1.0 specification.

THE RSA SECURITY SOLUTION: IDENTITY AND ACCESS MANAGEMENT PRODUCTS

With the proliferation of the Internet and new e-business practices, we
believe that there has never been a more critical need for sophisticated
security technologies and solutions that add value to an organizations
business. Today, as public and private networks merge to redefine perimeters
and organizations increasingly Web-enable their applications, our offerings
are addressing the need for trusted e-business processes to help
organizations achieve a competitive advantage. Our identity and access
management solutions are designed to help customers spend more time
exploiting new technologies for business advantage, and less time managing
security.

Authentication

With a nearly 20-year history of performance and innovation, our
authentication solutions remain an industry standard for organizations looking
to protect their mission-critical data assets and enable e-business
applications by ensuring the authenticity of people, devices and transactions.
We offer organizations a wide range of authentication form factors, including
software and hardware tokens, smart cards and digital certificates. These
solutions help our customers positively identify users and devices before they
interact with mission-critical data and applications through VPNs, email,
intranets, extranets, Web servers and other network resources.

We offer a broad range of authentication options that enable enterprises to
choose from varying levels of security based on the information they are
protecting and the risk threshold they are willing to assume, among other
criteria.



| |  | RSA SecurID®. RSA SecurID® products are the leading solution for
two-factor user authentication. RSA SecurID software is designed to
protect an organization by helping to ensure that only authorized users
are granted access to networked resources. The RSA SecurID product
family offers a wide range of easy-to-use authenticators  from
time-synchronous tokens to smart cards  that help to create a strong
barrier against unauthorized access.                                                     
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | RSA® Mobile. The RSA® Mobile technology is an innovative solution that
delivers one-time use access codes to users via their short message
service (SMS) or email infrastructure. The solution is designed to
leverage mobile devices to enable organizations to more securely extend
popular Web applications.                                                                                                                                                                                                
|
| |  | RSA Smart Badging. RSA Smart Badging technology combines the
functionality of smart cards and physical ID badges into a single
integrated device as a way to provide a cost-effective, user-friendly
way to authenticate users and manage access to corporate resources. The
multi-application approach to authentication helps enable
proximity-based physical access protection and strong network
authentication on a single platform, providing enhanced single sign-on
for a positive end user experience.

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| |  | RSA Keon®. RSA Keon® solutions are a family of interoperable software
modules for managing digital certificates and creating an environment
for authenticating people, devices and transactions. The RSA Keon
product family offers specialized solutions, including SSL Web Server
Security, Secure VPN, Secure e-mail and digital signatures. RSA Keon
software is designed to be easy to use and interoperable with other
standards-based solutions.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Web Access Management

Our standards-based approach to Web access management is designed to enable
organizations to improve relationships with their customers, suppliers and
partners and reduce costs by providing secure access to multiple Web-based
applications and services.



| |  | RSA ClearTrust®. The RSA ClearTrust® software is a Web access
management solution that is designed to facilitate secure e-business by
protecting access to mission-critical Web-based applications and
resources that are made available through intranets, extranets,
portals, and exchange infrastructures. RSA ClearTrust software is
designed to enable enterprises to manage and enforce a centralized
authentication policy while enhancing the end-user experience through
its Web Single Sign-On (SSO) functionality engineered to allow users to
seamlessly navigate across multiple applications and domains. The
identity management capabilities inherent in the RSA ClearTrust
software establish trust in identity and enforce the organizations
business policy.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Developer Solutions

Our Developer Solutions are designed to enable companies to quickly and
cost-effectively build privacy, authentication and digital signing technology
into many business applications to secure data and authenticate people,
devices and transactions. Our Developer Solutions offer a wide range of
e-security software components that are intended to empower developers to
secure data in any format on any network  wired or wireless.



| |  | RSA BSAFE®. RSA BSAFE® encryption and digital signing is engineered to
provide superior security, performance and support for industry
standards. The RSA BSAFE line of software development kits (SDKs)
provides components to secure e-business applications, enterprise
software, mobile phones, pocket PCs, PDAs, Web browsers, complex
networking equipment, and cable TV boxes. Over one billion RSA
BSAFE-enabled applications are used to protect business transactions
worldwide, helping developers to roll out mission-critical applications
quickly and with greater confidence.                                                       
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | RSA e-Sign. RSA e-Sign is a digital signature solution that is designed
to close the electronic transaction loop, enabling organizations to
gain speed and efficiencies in their business processes. Engineered
for ease of use, RSA e-Sign solution works via a simple downloadable
applet that enables users to digitally sign and encrypt any form of
Web-delivered data within their Web browser. With RSA e-Sign software,
organizations can replace paper-based forms and extend their e-business
services to include activities requiring signatures, while maintaining
the authenticity, integrity and privacy of the data being exchanged.

Professional Services

Our Professional Services Organization offers depth and breadth of expertise
in helping its partners to plan, design, build, integrate, and implement
high-quality security solutions. From phase to phase, our consultants and
technologists help ensure that customers e-security investments are aligned
with their business objectives.

STRATEGIC PARTNERS

We believe that ensuring that our products interoperate with other technology
vendors products makes our products more competitive. Therefore, we have an
ongoing program in place to establish interoperability between our products and
those of other vendors. To that end, we invest in and support a strategic
partnering program under the name of RSA Secured®. The RSA Secured partner
program helps vendors integrate or establish interoperability between their
products and our products, including the RSA SecurID, RSA ClearTrust, RSA Keon
and RSA BSAFE product lines. The RSA Secured partner program includes four
specific programs:



| |  |  | We offer interoperability testing and certification for
vendors seeking to ensure interoperability between their products
and our RSA SecurID and RSA ACE/Server® products. We have certified
more than 250 vendor applications as part of our RSA Secured SecurID
Ready program, making this program one of the largest certified
strong authentication partner programs in the industry.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | We offer interoperability testing and certification for
vendors seeking to ensure interoperability between their products
and our RSA Keon digital certification management solutions. We
have certified more than 160 vendor applications as part of our RSA
Secured Keon Ready program, making this program one of the largest
certified partner programs in the digital certificate management
industry.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Our newest RSA Secured program is our RSA Secured ClearTrust
Ready program. Under this program, we offer interoperability
testing and certification for vendors seeking to ensure
interoperability between their products and our RSA ClearTrust Web
access management
solutions. To date, we have certified over 50 vendor applications as
part of the RSA Secured ClearTrust Ready program.              
|
| |  |  | We offer benefits for licensees of our RSA BSAFE technology
who incorporate RSA BSAFE software into their products, including
listings in our online RSA Secured Solutions directory, use of the
RSA Secured brand on the licensees product packaging and
advertising and access to joint promotional activities.                                                                                         

We believe that the mandatory certification testing and mutual customer support
in our RSA SecurID, RSA ClearTrust and RSA Keon Ready programs set these
interoperability programs apart from those of our competitors.

Through the RSA Secured program, we foster the use of the RSA Secured logo on
vendor products that incorporate our technologies or are interoperable with our
products. The program also includes listings in online directories, use of
logos on product packaging and promotional materials, and RSA Secured joint
promotional activities, such as tradeshows, advertising, direct mail and joint
press releases.

Collectively, through all of the RSA Secured partner programs, we have
relationships with leading vendors, including Apple Computer, AT&T, BEA, BMC,
Check Point, Cisco Systems, Compaq, Ericsson, IBM, Intel, Microsoft, Nortel
Networks, Nokia, Novell, Oracle, PeopleSoft, Siebel, Sun Microsystems and
others, representing more than 1,000 vendor products that incorporate our
technologies or are interoperable with our products. The end-user customers of
the vendors who have joined the RSA Secured partner program can purchase
authenticators and license our software directly from us. We believe that
these relationships help our customers expand their enterprise network coverage
and assist us in increasing our customer base.

SALES AND MARKETING

We have established a multi-channel distribution and sales network to serve the
e-security market. We sell and license our products directly to end users
through our worldwide sales force, as well as through our RSA SecurWorld
network of original equipment manufacturers, or OEMs, value-added resellers, or
VARs, and distributors. In addition, we support our sales efforts through
strategic marketing relationships with other vendors.

In support of our sales efforts, we conduct sales training courses and targeted
marketing programs, including direct mail, advertising, seminars, trade shows,
interactive marketing, telemarketing and ongoing customer and third-party
communications programs. We also seek to stimulate interest in e-security
through our public relations program, speaking engagements, white papers,
technical notes and other publications, as well as the RSA Conferences held
around the world.

To enhance demand for our products, we have participated in the development of
various industry-specific protocols that incorporate or complement our security
technologies. We also host the industrys premier annual security conference,
the RSA Conference, and participate in other conferences to increase awareness,
education and demand for our products. Through our RSA Laboratories group, we
maintain a leading role in basic cryptographic research and the development of
new encryption technologies. RSA Laboratories also maintains working relations
with leading academic centers and customer development teams.

CUSTOMERS

We have a broad customer base, and no one customer accounted for more than 5%
of our total revenue in 2002, 2001 or 2000. During 2002, we sold our products
to an average of approximately 4,000 customers per quarter, including both new
customers and repeat customers to whom we had sold in previous periods.

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We sell our products to customers in a number of different vertical markets.
We have analyzed approximately 80% of our revenue for the years ended December
31, 2002 and 2001 and determined that the percentage of the analyzed revenue
represented by sales to each of our major vertical markets is as follows:

|                                               |  |      |    |      |  |  |    |  
|---------------------------------------------- |  | ---- | -- | ---- |  |  | -- | -
|Vertical Markets                               |  | 2002 |    | 2001
|                                               |  |      |    |     
|Technology, hardware and software companies    |  |      | 22 | %    |  |  | 33 | %
|Banking and insurance                          |  |      | 20 | %    |  |  | 21 | %
|Professional services                          |  |      | 13 | %    |  |  | 6  | %
|Telecommunications                             |  |      | 11 | %    |  |  | 14 | %
|Healthcare and pharmaceuticals                 |  |      | 10 | %    |  |  | 6  | %
|Manufacturing, distribution and transportation |  |      | 10 | %    |  |  | 9  | %
|Government, federal, state and local           |  |      | 7  | %    |  |  | 5  | %
|Other                                          |  |      | 7  | %    |  |  | 6  | %

As of December 31, 2002, we have sold more than 13 million RSA SecurID
authenticators and licensed our software to thousands of customers worldwide,
including 82% of the Fortune 100, 63% of the Fortune 500 and 88% of the worlds
top banks. Historically, our customers have sought to secure highly
confidential information, and have been sophisticated and knowledgeable
purchasers of e-security systems. Our customers understand the need to secure
their network applications for employees, partners and customers. We believe
that as corporate networks and Web based services proliferate and become more
complex, the number of industries concerned with e-security will grow.

MAINTENANCE, SUPPORT AND PROFESSIONAL SERVICES

We maintain a customer support help desk, technical support organization and
professional services group at our headquarters in Bedford, Massachusetts, and
at other locations throughout the world. We offer telephone and Web support
for many of our products 24 hours a day, seven days a week. We also have field
technical support personnel who work directly with our sales force,
distributors and customers.

Our standard practice is to provide a warranty on all RSA SecurID hardware
authenticators for the customer-selected programmed life of the authenticator
(generally three to four years) and to replace any defective authenticators
(other than authenticators damaged by a users abuse or alteration) free of
charge. We generally sell each of our other products to customers with a
warranty for product defects for specified periods, generally ninety days.

Customers may elect to purchase a maintenance contract, renewable annually or
for multiple years. Under these contracts, we agree to provide corrections for
documented program errors; version upgrades for both software and, if
applicable, firmware; telephone consultation; and Web-based access to
solutions, patches and documentation.

Our professional services group helps organizations plan and implement secure
e-business solutions. Through this group, we provide our customers with
project management, architecture and design, physical deployment, custom
development, education and practitioner certification services. Customers
typically pay for professional services either at a fixed price or at an hourly
or daily rate for the time it takes us to complete the project.

PRODUCT DEVELOPMENT

Our product development efforts are focused on enhancing the functionality,
reliability, performance and flexibility of our existing products, as well as
developing new products with features and functionality that our current
products do not possess. We are developing architectures and technologies to
continually
enhance the administrative capabilities and scalability of our RSA ACE/Server,
RSA ClearTrust and RSA Keon products and to increase interoperability with
additional network operating systems, applications and directory services. We
are also developing tools to assist customers, strategic partners and other
third-party integrators in integrating our products with custom and other
third-party network or system applications.

We are working to improve our competitive position by developing
standards-based protocols and solutions that address the needs of specific
market segments and build on our industry-leading RSA BSAFE technology.

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In addition to enhancing our existing products, we continue to identify and
prioritize various technologies for potential future product offerings. We may
develop these products internally or enter into arrangements to license or
acquire products or technologies from third parties.

Our product development staff, which works in six development centers
worldwide, engages in software and hardware engineering, testing and quality
assurance, and technical documentation. We also engage outside contractors
where appropriate to supplement our in-house expertise or expedite projects
based on customer or market demand. Research and development expenses were
$55.1 million, $66.2 million and $45.0 million for 2002, 2001 and 2000,
respectively. Our research and development expenses for 2001 include in process
research and development expense of $7.9 million, which we wrote off in
connection with the acquisitions of Securant, Xcert, 3GI and Transindigo.

MANUFACTURING AND SUPPLIERS

We perform assembly, programming and distribution of our products from two
locations, Bedford, Massachusetts, and Shannon, Ireland. We distribute to our
customers in the Americas and the Peoples Republic of China from our
facilities in Bedford, Massachusetts, and we distribute to our customers in
other parts of the world from our facilities in Shannon, Ireland.

We currently contract for the manufacture of RSA SecurID authenticators with
two suppliers, one in China and one in Thailand, and for the manufacture of
various components, such as the batteries and microchips in the authenticators,
from several other suppliers.

RSA ACE/Server, RSA ClearTrust, RSA Keon and RSA BSAFE software products are
distributed on standard magnetic diskettes, compact disks and tapes together
with documentation. We contract with media duplication subcontractors for the
majority of our media duplication. We have the capability to do all media
duplication in-house but limit this use to small production runs such as beta
programs.

Although we generally use standard parts and components for our products, some
components are currently available only from limited sources. For example,
Sanyo Electric Co., Ltd. and Epson Electronics are our only suppliers for the
microprocessor chips contained in our RSA SecurID products, and Flextronics and
CalComp are our only manufacturers for RSA SecurID authenticators. If we were
unable to obtain a sufficient supply of these or any other components and/or
RSA SecurID authenticators, then we might be unable to fill customer orders and
might have to expend significant resources to find new suppliers and/or
manufacturers. As a result, we attempt to maintain a three-to-four month supply
in inventory. We believe that it could take approximately six months to
identify and commence production of suitable replacements for the
microprocessor chip used in RSA SecurID authenticators.

We are currently working to establish new vendor relationships in order to
increase the number of suppliers from which we buy our authenticators and
authenticator components, in order to reduce our vulnerability to potential
supply problems. For example, during 2002 we encountered some quality control
problems with our battery vendor. As a result, we have redesigned our product
to include longer life and better quality batteries. In addition, we have
replaced the supplier that shipped us the faulty batteries with two other
battery suppliers and no longer buy batteries from the original supplier.

COMPETITION

The market for e-security products is competitive and subject to rapid change.
We currently experience direct and indirect competition from a number of
sources, including:



| |  |  | software operating systems suppliers and application software
vendors that offer e-security products or features, either as
stand-alone products or incorporated into their operating systems or
applications;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | vendors of hardware authenticators and smart cards competitive with RSA SecurID products;                                                                                                                     
|
| |  |  | biometric security device vendors;                                                                                                                                                                            
|
| |  |  | vendors of Web access management solutions;                                                                                                                                                                   
|
| |  |  | PKI and cryptographic software firms;                                                                                                                                                                         
|
| |  |  | application access providers; and                                                                                                                                                                             
|
| |  |  | freeware, i.e., free or low-cost, unpatented e-security technology.                                                                                                                                         

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We believe that the principal competitive factors affecting the market for
e-security products include technical features, ease of use, interoperability,
quality and reliability, level of security, customer service and support and
distribution channels. We believe that we and our products compare favorably
to our competitors and their products with respect to each of these factors.

PROPRIETARY RIGHTS

We rely on a combination of patent, trade secret, copyright and trademark laws,
software licenses, nondisclosure agreements and technical measures to protect
our proprietary technology. We also generally enter into nondisclosure and
assignment of inventions agreements with our employees and confidentiality
and/or license agreements with our distributors, strategic partners and
customers and potential customers, and limit access to and distribution of our
software, documentation and other proprietary information.

Our 33 issued U.S. patents expire at various dates ranging from 2005 to 2019.
Our 32 foreign patents expire at various dates between 2005 and 2014. We have
also filed patent applications on inventions embodied in new technologies that
we developed and on inventions that may be useful in the field of e-security.
There can be no assurance that any of these applications will result in an
issued patent.

We have registered, or are seeking to register, our trademarks and service
marks in most countries where we are selling our products. We may also seek to
purchase or license trademarks from third parties, but there can be no
assurance that we will be able to purchase or license trademarks on
commercially favorable terms or at all.

GOVERNMENT REGULATION AND EXPORT CONTROLS

All of our products are subject to U.S. export control laws and applicable
foreign government import, export and/or use requirements. Minimal U.S. export
restrictions apply to all products, whether or not they perform encryption
functions.

The Export Administration Regulations of the U.S. Department of Commerce
regulate the export of most commercial products with encryption features.
Under regulations issued by the Department of Commerce in January 2000,
encryption products of any key length, including general purpose encryption
toolkits such as our RSA BSAFE products, may be exported, after a one-time
technical review, to non-governmental end-users around the world, except for
embargoed countries and specific prohibited end-users. Encryption products may
be exported to governmental end-users under special Encryption Licensing
Arrangements or individual export licenses that may be issued at the discretion
of the Department of Commerce. In
October 2000, the Department of Commerce further revised the Export
Administration Regulations to relax some reporting requirements and to remove
the export licensing requirement for shipments to governmental end-users in 23
countries, including most of the United States major trading partners. In
June 2002, the Department of Commerce amended the encryption regulations again
to conform them to the control lists implemented by other countries that are
also members of the Wassenaar Arrangement. We believe that we have completed
the necessary technical reviews of the products and services we currently
export, but new products that we acquire or develop may require technical
review before we can export them. For the export of some of our products, we
are subject to various post-shipment reporting requirements.

The changes to the export regulations allow our products to be exported more
quickly and at stronger strength and, therefore, be more competitive with
products from foreign producers. However, the export regulations may be
modified at any time. In light of the ongoing discussions regarding
anti-terrorism legislation in the United States Congress, there may be an
increased risk that export regulations may be modified in the future.
Modifications to the export regulations could reduce or eliminate our ability
to export some or all of our products from the United States without a license
in the future, which could put us at a disadvantage in competing for
international sales compared to companies located outside of the United States
that would not be subject to these restrictions.

BACKLOG

We consider backlog to be orders for products or services evidenced by an
executed contract which have not been fulfilled as of the end of a fiscal
period. Backlog from sale of products and services was $5.9 million at December
31, 2002 and $1.2 million at December 31, 2001. We believe that all backlog
orders at December 31, 2002 will be fulfilled during 2003.

RSA CAPITAL

In January 2000, we formed our RSA Capital segment to make synergistic
investments in both external and internal activities and technologies. During
2002, we reduced our commitment of resources to the RSA Capital segment and
recorded impairment charges on our equity investments to reduce their carrying
value to their fair value. We are currently considering proposals to sell our
investment portfolio. During 2003, we intend to focus our resources on our
e-Security Solutions segment.

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Our RSA Capital segment consists of our investment activities and, until March
31, 2002, also included our New Emerging Security Technologies group, or NEST.
Through our investment activities, we have historically made investments
primarily in equity instruments of e-businesses and other technology companies.
Also included in our investment activities is RSA Ventures, I, L.P. (RSA
Ventures), our venture capital fund, in which we have invested $35.3 million
as of December 31, 2002. Our subscription to invest in RSA Ventures is $50.3
million, leaving a remainder of $15.0 million that we may invest, at our sole
discretion, over the ten year life of RSA Ventures. We currently do not intend
to invest this remaining amount. At December 31, 2002, our investments include
investments in private companies of $1.4 million held at their estimated
realizable value less costs to dispose, and an investment in Crosby Finance,
LLC (Crosby), a qualified special purpose entity, of $0.2 million, accounted
for at fair value, with changes in fair value recorded in the statement of
operations.

Crosby was established specifically to own our shares of VeriSign, Inc.
(VeriSign) common stock, three forward contracts (Forwards) and one
variable delivery forward (VDF) contract, which we contributed to Crosby on
November 27, 2000. We have the right to appoint the members of the Board of
Directors of Crosby, one of whom is required to be an independent director who
is not an employee, director or stockholder of RSA Security or otherwise
affiliated with us and who does not receive any direct or indirect benefit from
us. The other members of the Crosby Board of Directors are two of our
officers. None of the Crosby directors has any ownership or interest in Crosby
or its profits or assets, and with the exception of the independent director,
none of the directors is compensated for serving as a director of Crosby. The
Crosby Board of Directors manages the operations of Crosby, but neither the
Crosby Board nor either of the members of Crosby has the power to cause Crosby
to engage in any business other than holding shares
of VeriSign common stock, the Forwards and the VDF and performing its
obligations under the Forwards and the VDF contracts.

At December 31, 2002 Crosby held 2,027,325 shares of VeriSign and the VDF
contract. Crosby has no liability or obligation to its members or to the
counterparty to the VDF contract other than delivery of shares of VeriSign
common stock to the counterparty upon maturity of the VDF contract in 2006, and
distribution of cash proceeds, if any, to its members. We are not responsible
for any of the financial obligations of Crosby to its creditors. After
settlement of the VDF and distribution of cash proceeds, if any, Crosby will
dissolve. Additional information on our investment in Crosby Finance, LLC may
be found in Note 4 of the Notes to Consolidated Financial Statements.

In the past, our RSA Capital segment competed for investment opportunities with
investment companies, venture capital firms, incubators and other investors.

Before the second quarter of 2002 our RSA Capital segment also included NEST.
Through NEST, we focused on investigating, developing and nurturing new ideas
and technologies into operational businesses. We merged the NEST activities
into our e-Security Solutions segment as of March 31, 2002.

Additional information on our industry segments may be found in Note 14 of the
Notes to Consolidated Financial Statements.

EMPLOYEES

At January 31, 2003, we employed 993 employees. Of these employees,
approximately 383 were involved in sales and marketing, 287 were involved in
research and development, 118 in customer service and support, 98 in
administrative, human resources and finance, 61 in information technology, and
46 in production. There were no employees devoted to our RSA Capital segment.
No employees are covered by any collective bargaining agreements. We believe
that our relationships with our employees are good.

We believe our compensation plans are competitive with other companies in our
industry. We pay our worldwide sales force a base annual salary plus
compensation based upon achievement of sales quotas. All other employees are
paid a base annual salary plus compensation based upon achievement of revenue
and earnings targets.




ITEM 2.     PROPERTIES

Our principal administrative, sales and marketing, research and development and
support headquarter facilities aggregate approximately 328,000 square feet of
office space and are located in Bedford, Massachusetts under non-cancelable
fifteen year leases expiring in December 2017. We moved into these headquarter
facilities in February 2002. Our former headquarter facilities aggregate
approximately 203,000 square feet of office space and are located in Bedford,
Massachusetts under non-cancelable ten year leases expiring in 2009. We also
lease approximately 58,000 square feet of office space for research and
development and sales and marketing in San Mateo, California under
non-cancelable ten-year leases expiring in 2008, and administration and
manufacturing facilities in Shannon, Ireland aggregating approximately 18,750
square feet, which serves as our distribution center for international sales.
We also lease facilities for administration, field sales, research and
development and customer support throughout the United

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States, Canada, Asia, Australia and Europe. In addition, during 2000, we purchased an approximately
31,000 square foot office building in Bracknell, United Kingdom. This building
is used for our United Kingdom and European operations.

We are actively looking to sublease our former headquarters and other excess
facilities that aggregate approximately 250,000 square feet of office space.
During 2002 and 2001, we recorded restructuring charges including approximately
$53.4 million representing lease payments due under excess facilities lease
agreements, net of estimated sublease income, impaired leasehold improvements
and furniture and fixtures, and other associated facilities expense. Based upon
current economic and real estate market conditions, we expect to be able to
enter into sublease agreements for all of our excess facilities within the
next four years. We have existing sublet agreements with third parties for
approximately 90,000 square feet of our excess facilities at various locations,
which expire at various times through June 2009.




ITEM 3.     LEGAL PROCEEDINGS

By notice dated January 23, 2002, the Securities and Exchange Commission
notified us that it is conducting a formal investigation of (1) our disclosure
of a change in our method for estimating our distributor revenue, and (2)
certain trading in our common stock. On or about July 11, 2002, the SEC staff
notified RSA Security and some of its officers that the staff was considering
seeking permission from the SEC to commence a civil injunctive proceeding
against them, and that RSA Security and the officers could submit a written
statement explaining why no such proceeding should be commenced. We and the
officers submitted such a statement in August 2002 and are waiting for the
SECs response. We and the officers are continuing to cooperate with the SEC,
but we cannot predict the ultimate outcome of this matter.

On or about February 2, 2001, Leon Stambler filed a complaint for patent
infringement in U.S. District Court for the District of Delaware against RSA
Security, VeriSign, Inc., First Data Corporation, Openwave Systems Inc., and
Omnisky Corporation, Case Number 01-0065. In September 2001, Mr. Stambler
amended his complaint to add Certicom Corp. as an additional defendant. The
suit was stayed against Omnisky due to Omniskys bankruptcy, and Openwave,
Certicom and First Data settled with Mr. Stambler; therefore, only RSA Security
and VeriSign remained as defendants. In his complaint, Mr. Stambler alleged
that certain products marketed by each of the defendants infringed various
patents that he owns, and he sought unspecified damages as well as a
preliminary and permanent injunction enjoining the defendants from infringing
the claims asserted. The trial took place in March 2003, and the jury
determined that our products did not infringe Mr. Stamblers patents. We
believe that it is likely that Mr. Stambler will appeal the jurys decision.
Even if Mr. Stambler does appeal, we believe that the final disposition of this
matter will not have a material adverse effect on our continuing operations and
consolidated financial position.

On or about July 17, 2001, Digital Privacy, Inc. filed a complaint for patent
infringement in the U.S. District Court for the Eastern District of Virginia
against RSA Security, Case Number 2:01cv529. In its complaint, Digital Privacy
alleged that certain products of 3-G International, Inc. (3GI), a private
company that RSA Security acquired in May 2001, infringed various patents that
Digital Privacy owns, and Digital Privacy sought unspecified damages as well as
a permanent injunction enjoining us from infringing the claims asserted. On
April 5, 2002, the court granted our motion for summary judgment and dismissed
the case. In May 2002, Digital Privacy appealed the dismissal. In February
2003, we signed a settlement agreement with Digital Privacy, under which we
have no further obligation or liability, and Digital Privacy dismissed its
appeal.

On or about December 20, 2001, France Telecom and Telediffusion de France
(FT) filed a Request for Arbitration with the International Court of
Arbitration. FT claims that we breached a license agreement with FT and seeks
unspecified damages including payment of a $20.0 million advance plus the legal
fees and other costs associated with the arbitration. We believe that FTs
claims are without merit, and we intend to defend the arbitration vigorously.
In a related matter, FT has also filed a patent infringement suit in Delaware
against Novell, Inc., one of our licensees. In August 2002, we signed a letter
agreement with Novell agreeing that if a court requires Novell to pay FT
damages, we will reimburse Novell for 50% of the damages, up to a maximum
payment of $2.5 million by us. If the damages payable by Novell exceed $5.0
million, then the indemnification provisions of our license agreement with
Novell will govern our indemnification obligations. Although we believe that
FTs claims against Novell are without merit, we cannot predict the ultimate
outcome of this matter. However, we believe that neither the disposition of
our arbitration with FT nor the disposition of the litigation between Novell
and FT will have a material adverse effect on our continuing operations and
consolidated financial position.

From time to time, we have been named as a defendant in other legal actions
arising from our normal business activities, which we believe will not have a
material adverse effect on us or our business.




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

None.

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PART II




ITEM 5.     MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The following sales prices have been adjusted to reflect our three-for-two
stock split effected as a dividend on our common stock in March 2001. Our
common stock has been trading on The NASDAQ National Market under the symbol
RSAS (formerly SDTI) since our initial public offering on December 14,
1994. The following table indicates the high and low sales prices per share of
our common stock for each of our fiscal quarters during the last two completed
fiscal years, as reported on The NASDAQ National Market.

|               |  |      |       |     |  |   |       | 
|-------------- |  | ---- | ----- | --- |  | - | ----- | 
|2001           |  | High |       | Low
|               |  |      |       |    
|First Quarter  |  | $    | 44.33 |     |  | $ | 23.25 | 
|Second Quarter |  | $    | 37.94 |     |  | $ | 18.44 | 
|Third Quarter  |  | $    | 31.30 |     |  | $ | 12.87 | 
|Fourth Quarter |  | $    | 17.90 |     |  | $ | 6.79  | 

|               |  |      |       |     |  |   |      | 
|-------------- |  | ---- | ----- | --- |  | - | ---- | 
|2002           |  | High |       | Low
|               |  |      |       |    
|First Quarter  |  | $    | 19.60 |     |  | $ | 8.85 | 
|Second Quarter |  | $    | 7.95  |     |  | $ | 3.85 | 
|Third Quarter  |  | $    | 4.70  |     |  | $ | 2.23 | 
|Fourth Quarter |  | $    | 7.42  |     |  | $ | 2.54 | 

There were 450 stockholders of record of our common stock as of February 14,
2003. We estimate that we have a total of approximately 80,000 stockholders,
including stockholders who hold their shares in street name.

We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain earnings, if any, to support our growth strategy and
do not anticipate paying cash dividends in the foreseeable future. Payment of
future dividends, if any, will be at the discretion of our Board of Directors
after taking into account various factors, including our financial condition,
operating results, current and anticipated cash needs and plans for expansion.

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ITEM 6.   SELECTED FINANCIAL DATA
(in thousands, except per share data)

|                                         |                                       |   |          |         |                          |         |         |         |      |         |         |         |      |         |         |         |  |         |         |         |  |         | 
|---------------------------------------- | ------------------------------------- | - | -------- | ------- | ------------------------ | ------- | ------- | ------- | ---- | ------- | ------- | ------- | ---- | ------- | ------- | ------- |  | ------- | ------- | ------- |  | ------- | 
|                                         |                                       |   |          |         | Years Ended December 31,
|                                         |                                       |   |          |         |                         
|                                         |                                       |   |          |         | 2002                     |         | 2001    |         | 2000 |         | 1999    |         | 1998
|                                         |                                       |   |          |         |                          |         |         |         |      |         |         |         |     
|Statement of Operations Data             |                                       |   |          |         |                          |         |         |         |      |         |         |         |      |         |         |         |  |         |         |        
|Revenue                                  |                                       |   |          |         |                          |         |         |         |      |         |         |         |      |         |         |         |  |         |         |        
|                                         | Products                              |   | $        | 168,954 |                          |         | $       | 222,382 |      |         | $       | 238,027 |      |         | $       | 190,736 |  |         | $       | 154,092 | 
|                                         | Maintenance and professional services |   |          | 63,130  |                          |         |         | 60,338  |      |         |         | 42,164  |      |         |         | 27,388  |  |         |         | 17,242  | 
|                                         |                                       |   |          |         |                          |         |         |         |      |         |         |         |      |         |         |         |  |         |         |        
|Total revenue                            |                                       |   | 232,084  |         |                          |         | 282,720 |         |      |         | 280,191 |         |      |         | 218,124 |         |  |         | 171,334 |        
|                                         |                                       |   |          |         |                          |         |         |         |      |         |         |         |      |         |         |         |  |         |         |        
|Cost
of revenue                          |                                       |   |          |         |                          |         |         |         |      |         |         |         |      |         |         |         |  |         |         |        
|Products                                 |                                       |   | 35,772   |         |                          |         | 38,226  |         |      |         | 33,158  |         |      |         | 30,813  |         |  |         | 30,890  |        
|                                         | Maintenance and professional services |   |          | 22,207  |                          |         |         | 28,456  |      |         |         | 21,825  |      |         |         | 14,348  |  |         |         | 9,891   | 
|                                         |                                       |   |          |         |                          |         |         |         |      |         |         |         |      |         |         |         |  |         |         |         | 
|Total cost of revenue                    |                                       |   | 57,979   |         |                          |         | 66,682  |         |      |         | 54,983  |         |      |         | 45,161  |         |  |         | 40,781  |        
|                                         |                                       |   |          |         |                          |         |         |         |      |         |         |         |      |         |         |         |  |         |         |         | 
|Gross profit                             |                                       |   | 174,105  |         |                          |         | 216,038 |         |      |         | 225,208 |         |      |         | 172,963 |         |  |         | 130,553 |        
|Costs
and expenses                       |                                       |   |          |         |                          |         |         |         |      |         |         |         |      |         |         |         |  |         |         |        
|Research and development                 |                                       |   | 55,061   |         |                          |         | 58,345  |         |      |         | 45,032  |         |      |         | 37,640  |         |  |         | 31,981  |        
|Marketing and selling                    |                                       |   | 100,673  |         |                          |         | 122,915 |         |      |         | 102,788 |         |      |         | 89,943  |         |  |         | 66,788  |        
|General and administrative               |                                       |   | 30,256   |         |                          |         | 39,127  |         |      |         | 35,409  |         |      |         | 27,261  |         |  |         | 19,007  |        
|Restructurings                           |                                       |   | 56,036   |         |                          |         | 19,956  |         |      |         | (2,079  | )       |      |         | 11,350  |         |  |         |        |        
|Impairment of intangible assets          |                                       |   | 19,140   |         |                          |         |        |         |      |         |        |         |      |         |        |         |  |         |        |        
|Amortization of goodwill and intangibles |                                       |   | 9,924    |         |                          |         | 14,452  |         |      |         |        |         |      |         |        |         |  |         |        |        
|In process research and development      |                                       |   |         |         |                          |         | 7,891   |         |      |         |        |         |      |         |        |         |  |         |        |        
|Merger and integration                   |                                       |   |         |         |                          |         |        |         |      |         |        |         |      |         |        |         |  |         | 2,600   |        
|Legal settlement                         |                                       |   |         |         |                          |         |        |         |      |         |        |         |      |         |        |         |  |         | 1,872   |        
|                                         |                                       |   |          |         |                          |         |         |         |      |         |         |         |      |         |         |         |  |         |         |         | 
|                                         |                                       |   | Total    |         |                          | 271,090 |         |         |      | 262,686 |         |         |      | 181,150 |         |         |  | 166,194 |         |         |  | 122,248 | 
|                                         |                                       |   |          |         |                          |         |         |         |      |         |         |         |      |         |         |         |  |         |         |         | 
|(Loss) income from operations            |                                       |   | (96,985  | )       |                          |         | (46,648 | )       |      |         | 44,058  |         |      |         | 6,769   |         |  |         | 8,305   |        
|Interest (expense) income and other      |                                       |   | (8,778   | )       |                          |         | 5,860   |         |      |         | 12,864  |         |      |         | 10,007  |         |  |         | 8,676   |        
|(Loss) income from investing activities  |                                       |   | (30,937  | )       |                          |         | 40,836  |         |      |         | 272,853 |         |      |         | 285,952 |         |  |         | 35,427  |        
|                                         |                                       |   |          |         |                          |         |         |         |      |         |         |         |      |         |         |         |  |         |         |        
|(Loss) income before (benefit) provision |                                       |   |          |         |                          |         |         |         |      |         |         |         |      |         |         |         |  |         |         |        
|for income taxes                         |                                       |   | (136,700 | )       |                          |         | 48      |         |      |         | 329,775 |         |      |         | 302,728 |         |  |         | 52,408  |        
|(Benefit) provision for income taxes     |                                       |   | (39,876  | )       |                          |         | 2,555   |         |      |         | 124,012 |         |      |         | 118,982 |         |  |         | 23,571  |        
|Minority interests                       |                                       |   |         |         |                          |         |        |         |      |         |        |         |      |         | 16      |         |  |         | 578     |        
|                                         |                                       |   |          |         |                          |         |         |         |      |         |         |         |      |         |         |         |  |         |         |         | 
|Net (loss) income                        |                                       | $ | (96,824  | )       |                          | $       | (2,507  | )       |      | $       | 205,763 |         |      | $       | 183,762 |         |  | $       | 29,415  |        
|                                         |                                       |   |          |         |                          |         |         |         |      |         |         |         |      |         |         |         |  |         |         |        
|Basic (loss) earnings per share (1)      |                                       |   |          |         |                          |         |         |         |      |         |         |         |      |         |         |         |  |         |         |        
|Per share amount                         |                                       | $ | (1.71    | )       |                          | $       | (0.04   | )       |      | $       | 3.50    |         |      | $       | 3.13    |         |  | $       | 0.48    |        
|                                         |                                       |   |          |         |                          |         |         |         |      |         |         |         |      |         |         |         |  |         |         |        
|Weighted average shares                  |                                       |   | 56,621   |         |                          |         | 56,259  |         |      |         | 58,051  |         |      |         | 58,757  |         |  |         | 61,363  |        
|                                         |                                       |   |          |         |                          |         |         |         |      |         |         |         |      |         |         |         |  |         |         |        
|Diluted (loss) earnings per share (1)    |                                       |   |          |         |                          |         |         |         |      |         |         |         |      |         |         |         |  |         |         |        
|Per share amount                         |                                       | $ | (1.71    | )       |                          | $       | (0.04   | )       |      | $       | 3.21    |         |      | $       | 2.92    |         |  | $       | 0.46    |        
|                                         |                                       |   |          |         |                          |         |         |         |      |         |         |         |      |         |         |         |  |         |         |        
|Weighted average shares                  |                                       |   | 56,621   |         |                          |         | 56,259  |         |      |         | 58,051  |         |      |         | 58,757  |         |  |         | 61,363  |        
|Effect of dilutive equity instruments    |                                       |   |         |         |                          |         |        |         |      |         | 5,976   |         |      |         | 4,213   |         |  |         | 2,382   |        
|                                         |                                       |   |          |         |                          |         |         |         |      |         |         |         |      |         |         |         |  |         |         |        
|Adjusted weighted average shares         |                                       |   | 56,621   |         |                          |         | 56,259  |         |      |         | 64,027  |         |      |         | 62,970  |         |  |         | 63,745  |        
|                                         |                                       |   |          |         |                          |         |         |         |      |         |         |         |      |         |         |         |  |         |         |        

|                                                 |  |              |         |      |  |      |         |      |  |      |         |  |  |   |           |  |  |   |         | 
|------------------------------------------------ |  | ------------ | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | --------- |  |  | - | ------- | 
|                                                 |  | December 31,
|                                                 |  |             
|                                                 |  | 2002         |         | 2001 |  | 2000 |         | 1999 |  | 1998
|                                                 |  |              |         |      |  |      |         |      |  |     
|Balance Sheet Data                               |  |              |         |      |  |      |         |      |  |      |         |  |  |   |           |  |  |   |         | 
|Cash,
cash equivalents and
marketable securities |  | $            | 103,030 |      |  | $    | 63,120  |      |  | $    | 335,102 |  |  | $ | 1,383,281 |  |  | $ | 158,236 | 
|Working capital                                  |  |              | 95,894  |      |  |      | 72,184  |      |  |      | 305,667 |  |  |   | 553,307   |  |  |   | 180,885 | 
|Total assets                                     |  |              | 484,400 |      |  |      | 529,677 |      |  |      | 599,220 |  |  |   | 1,520,901 |  |  |   | 282,784 | 
|Long term obligations                            |  |              | 106,384 |      |  |      | 81,670  |      |  |      |        |  |  |   |          |  |  |   |        | 
|Stockholders equity                             |  |              | 263,434 |      |  |      | 353,413 |      |  |      | 481,004 |  |  |   | 611,024   |  |  |   | 242,720 | 



| |  | (1)  Per share and share amounts have been adjusted to reflect the three-for-two
stock split effected as a dividend in March 2001.
| |  | ----------------------------------------------------------------------------------------------------------------------------------

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

This Report contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the
Securities Act of 1933, as amended. For purposes of these Acts, any statement
that is not a statement of historical fact may be a forward-looking statement.
For example, statements containing the words believes, anticipates,
plans, expects, and similar expressions may be forward-looking statements.
However, we caution investors not to place undue reliance on any
forward-looking statements in this Report because these statements speak only
as of the date when made. Furthermore, we are not obligated to publicly update
any forward-looking statements, whether as a result of new information, future
events or otherwise. There are a number of factors that could cause our actual
results to differ materially from those indicated by these forward-looking
statements, including without limitation the factors described below under the
caption Certain Factors That May Affect Future Results.

Overview

RSA Security Inc. is a leading provider of electronic security, or e-security,
solutions. With thousands of customers around the globe, we provide
interoperable solutions for establishing online identities, access rights and
privileges for people, applications and devices. Built to work seamlessly and
transparently in the complex environments of our customers, our comprehensive
portfolio of identity and access management solutions - including
authentication, Web access management and developer solutions  are designed to
allow customers to confidently exploit new technologies for competitive
advantage. We sell our two-factor user authentication, Web access management
and encryption products and solutions to corporate enterprise users seeking
turnkey security solutions, and to original equipment manufacturers and
developers seeking software development components for embedding security in a
range of software applications or hardware devices.

We conduct our business in two segments: e-Security Solutions and RSA Capital.
Through our e-Security Solutions segment, we derive our operating revenue
primarily from two distinct product groups: Enterprise solutions, which
includes RSA SecurID® authenticators, RSA ACE/Server® software, RSA ClearTrust®
software, RSA Keon® software, and maintenance and professional services for
those products, and Developer solutions, which includes RSA BSAFE® encryption
software and protocol products, RSA Keon components, and maintenance and
professional services for those products.

Sales of our RSA SecurID authenticator products continue to be strong, while
our less mature Enterprise software products continue to build revenue and
market share. Over the last two years, we have seen a decrease in revenue
from our Developer solutions, which we believe is primarily attributable to a
decrease in the number of technology companies funding development, as well as
the availability of free, open source products that compete with our RSA
BSAFE product line; however, we have seen an emerging trend in developer
solutions selling to enterprise customers. Our product line synergies create
opportunities to sell additional products to existing customers.

Typically, our Enterprise solutions customers place an initial order for a
limited number of users, for either our RSA SecurID authenticators or any of
our software products. As the use of our products grows within the enterprise,
our customers may place additional orders with us to add more users. As
authenticators expire, typically three to four years after their initial
purchase, our customers may order additional replacement authenticators. In
most cases, the customer will also enter into a customer support agreement with
us at the time of initial purchase and renew this support agreement annually.
We typically base our RSA ACE/Server, RSA Keon and RSA ClearTrust software
license fees on the number of users authorized under each customers license.

With respect to Developer solutions, RSA BSAFE software licensing terms vary by
product and customer. Typical licensing terms may include an initial prepaid
license fee and ongoing royalties paid as a percentage of the developers
product or service revenue, or payment of annual license fees, or a single
fully paid-up license fee. Often, our existing developer customers go on to
license new software or technology from us or wish to increase the field of use
rights for the technology they have already licensed. In such a case, we amend
our license agreement with the customer and charge additional licensing fees,
thus deriving additional revenue.

We have contracted with outside manufacturing organizations to produce our RSA
SecurID authenticators, and many of our products contain technology that is
licensed from third parties. Our cost of revenue consists primarily of costs
associated with the manufacture and delivery of RSA SecurID authenticators and
royalty fees that we pay for the licensed technology. Cost of revenue also
includes professional service, customer support, and production costs.
Production costs include the programming labor, shipping, inspection and
quality control functions associated with the RSA SecurID authenticators. We
are currently working to establish new vendor relationships in order to
increase the number of suppliers from which we buy our authenticators and
authenticator components, in order to reduce our vulnerability to potential
supply problems.

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Our direct sales to our customers in countries outside of the United States are
denominated in U.S. dollars and local currency, with the majority of our sales
denominated in U.S. dollars. Our sales through indirect distribution channels
are generally denominated in U.S. dollars. For countries outside the United
States, we generally pay our operating expenses in local currency. Where we do
invoice customers in local currency, we are exposed to foreign exchange rate
fluctuations from the time of invoice until collection occurs. We are also
exposed to foreign currency fluctuations between the time we collect in U.S.
dollars and the time we pay our operating expenses in local currency.
Fluctuations in currency exchange rates could affect the profitability and cash
flows in U.S. dollars of our products sold in international markets.

Our RSA Capital segment consists of our investment activities, and was formed
to make synergistic investments in both external and internal activities and
technologies. Through our investment activities, we have historically made
investments primarily in equity instruments of e-businesses and other
technology companies. During 2002 we reduced our commitment of resources to
the RSA Capital segment and recorded impairment charges on our equity
investments to reduce their carrying value to their estimated realizable value,
less costs to dispose. We are currently considering proposals to sell our
investment portfolio, and we currently do not intend to make any new
investments. During 2003, we intend to focus our resources on our e-Security
Solutions segment. Expenses incurred in connection with our investment
activities are primarily for general and administration and management and
professional fees. Also included in our RSA Capital segment is our interest in
Crosby Finance, LLC, a qualified special purpose entity, with a carrying value
of $0.2 million at December 31, 2002. Information on our investment in Crosby
Finance, LLC may be found in Note 4 of the Notes to Consolidated Financial
Statements.

Our RSA Capital segment also included our New Emerging Security Technologies
group, or NEST, which was merged into our e-Security Solutions segment prior to
the second quarter of 2002. Through NEST we focused on investigating,
developing and nurturing new ideas and technologies into operational
businesses. Expenses incurred in connection with NEST activities included
general and administration expenses, as well as the operations of 3-G
International, Inc. and Transindigo Inc (Transindigo).

Information on our segments may be found in Note 14 of the Notes to
Consolidated Financial Statements.

Application of Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these consolidated financial
statements requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenue and expense during the reporting period. On an
ongoing basis, we evaluate our estimates, including those related to revenue
recognition, sales returns, allowance for doubtful accounts, investments,
intangible assets, income taxes, financing operations, warranty obligations,
restructurings, contingencies and litigation. We base our estimates on
historical experience and on various other assumptions that we believe are
reasonable under the circumstances. However, our actual results could differ
from those estimates.

We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.

Revenue Recognition We derive our revenue primarily from two sources: sales
of products, including hardware and software licenses, and services, including
maintenance, support and professional services. Our management must make and
use judgments and estimates in connection with the revenue recognized in any
reporting period. The amount and timing of our revenue for any period may
materially differ if our management made different judgments or utilized
different estimates in establishing our allowance for sales returns.

We recognize revenue from the sale of our products in accordance with American
Institute of Certified Public Accountants Statement of Position ( SOP) 97-2,
Software Revenue Recognition, and SOP 98-9, Modification of SOP 97-2 With
Respect to Certain Transactions, as amended and interpreted. We recognize
revenue from the sale of products when persuasive evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable, and collection
is considered probable. Revenue is reduced by provisions for estimated sales
returns.

For all sales, we use a binding contract, purchase order or another form of
documented agreement as evidence of an arrangement with the customer. Sales to
our distributors are evidenced by a master agreement governing the
relationship, together with binding purchase orders on a
transaction-by-transaction basis.

We consider delivery to occur when we ship the product, so long as title and
risk of loss have passed to the customer.

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At the time of a transaction, we assess whether the sale amount is fixed or
determinable and whether collection is probable. If we determine the fee is not
fixed or determinable, we recognize revenue when the fee is determined and
payment becomes due. We assess collection based on a number of factors,
including past transaction history with the customer and the creditworthiness
of the customer. If we determine that collection is not probable, we do not
record revenue until such time when collection becomes probable, which is
generally upon the receipt of cash.

In our arrangements with our customers, we generally do not include acceptance
provisions, which would give the customer the right to accept or reject the
product after we ship it. However, if an arrangement includes an acceptance
provision, we recognize revenue upon the customers acceptance of the product,
which occurs upon the earlier of receipt of a written customer acceptance or
expiration of the acceptance period. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 48, Revenue Recognition when Right of Return
Exists, we recognize revenue upon shipment of product to stocking distributors
for sales to distributors who have only limited return rights, and record a
sales return reserve to provide for estimated product returns.

When arrangements contain multiple elements and vendor specific objective
evidence (VSOE) of fair value exists for all undelivered elements, we
recognize revenue for the delivered elements using the residual method. Our
determination of fair value of each of the undelivered elements in
multi-element arrangements is based on VSOE of fair value. VSOE of fair value
for each element is either the price we charge when the same element is sold
separately or the price established by the members of our management, who have
the relevant authority to set prices, for an element not yet sold separately.
For arrangements containing multiple elements where VSOE of fair value does not
exist for all undelivered elements, revenue for the delivered and undelivered
elements is deferred until VSOE of fair value exists or all elements have been
delivered.

Maintenance service revenue, whether sold separately or as part of a multiple
element arrangement, is deferred and recognized ratably over the term of the
maintenance contract, generally twelve months. Revenue allocated to
professional service elements is recognized as the services are performed.

Allowance for Sales Returns We record allowances for estimated sales returns
and allowances on products and maintenance and professional service related
revenue in the same period as the related revenue is recorded. These estimates
are based on historical sales returns, analysis of credit memo data, current
economic trends, product line and customer industry and other known factors.
Our historical experience with sales returns varies by product line depending
on the customers industries and markets. We must make judgments and estimates
in connection with establishing the allowances for estimated sales returns in
any reporting period. The amount and timing of our revenue for any reporting
period may materially differ if actual sales returns and allowances differ from
our estimates.

Allowance for Doubtful Accounts We maintain allowances for doubtful accounts
for estimated losses resulting from the inability of our customers to make
required payments. We analyze accounts receivable and the composition of the
accounts receivable aging, historical bad debts, customer creditworthiness,
current economic trends, foreign currency exchange rate fluctuations, changes
in our customer payment terms, and other known factors when evaluating the
adequacy of the allowance for doubtful accounts. Based upon the analysis and
estimates of the uncollectibility of our accounts receivable, we record an
increase in the allowance for doubtful accounts when the prospect of collecting
a specific account receivable becomes doubtful. Actual results could differ
from the allowances for doubtful accounts recorded, and this difference may
have a material effect on our financial position and results of operations.
Recoveries of accounts previously written off as uncollectible are recorded as
increases to the allowance for doubtful accounts.

Income taxes The preparation of our consolidated financial statements
requires us to estimate our income taxes in each of the jurisdictions in which
we operate, including those outside the United States which may be subject to
certain risks that ordinarily would not be expected in the United States. The
income tax accounting process involves our estimating our actual current
exposure together with assessing temporary differences resulting from differing
treatment of items for tax and accounting purposes. These differences result
in the recognition of deferred tax assets and liabilities. We must then record
a valuation allowance to reduce our deferred tax assets to the amount that is
more likely than not to be realized.

Management judgment is required in determining our provision for income taxes,
our deferred tax assets and liabilities and any valuation allowance recorded
against deferred tax assets. We have recorded a valuation allowance of $25.4
million as of December 31, 2002 due to uncertainties related to our ability to
utilize some of our deferred tax assets, primarily consisting of acquisition
related net operating losses carried forward. The valuation allowance is based
on our estimates of taxable income by jurisdiction in which we operate and the
period over which our deferred tax assets will be recoverable. In the event
that actual results differ from these estimates or we adjust these estimates in
future periods we may need to adjust our valuation allowance, which could
materially impact our consolidated financial position and results of
operations.

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Valuation of Goodwill and Other Intangible Assets In assessing the
recoverability of our goodwill and other intangibles, we must make assumptions
regarding estimated future cash flows and earnings and other factors to
determine the fair value of the respective assets. If these estimates or their
related assumptions change in the future, we may be required to record
impairment charges against these assets in the reporting period in which the
impairment is determined. We will record an impairment charge in the amount by
which the carrying value of the assets exceeds their fair value. Fair value is
determined generally based on estimated discounted future cash flows or a
market multiple valuation method. Any such impairment charge could be
significant and could have a material adverse effect on our consolidated
financial position and results of operations. During the fourth quarter of
2002, we determined the fair value of our intangible assets was zero and
accordingly, we recorded a $19.1 million impairment charge to reduce the
carrying value of our intangible assets, other than goodwill, to their fair
value. At December 31, 2002, we had approximately $191.7 million of goodwill
which accounted for approximately 40% of our total assets. Any goodwill
impairment test could result in a decrease to the carrying value of goodwill
and could have a material effect on our results of operations and consolidated
financial position.

The adoption of SFAS No. 142, Goodwill and Other Intangible Assets, requires
us to analyze the carrying value of goodwill and other intangible assets for
impairment on an annual basis. We perform this annual test for impairment as
of November 30 of each year and, if events or circumstances occur that would
more likely than not reduce the fair value of the goodwill below its carrying
amount, will perform an interim impairment test. The test for impairment is
performed under a two step process. The first step tests for impairment, and
the second step (if necessary) measures impairment. Goodwill is included in our
e-Security Solutions segment, which contains one reporting unit (Reporting
Unit). We completed the required annual goodwill impairment test as of
November 30, 2002, by comparing the carrying amount of the Reporting Unit to
the estimated fair value of the Reporting Unit. Estimated fair value of the
Reporting Unit was determined based upon independent appraisal using the market
multiple valuation method. As of November 30, 2002 the fair value of the
Reporting Unit was greater than the carrying amount of the Reporting Unit.
Therefore, the annual goodwill impairment test performed as of November 30,
2002 did not result in an impairment.

Long-Term Investments Our long-term investments include investments in
preferred and common stock of privately held companies and our interest in
Crosby Finance, LLC, a qualified special purpose entity. At December 31, 2002,
we had approximately $1.6 million of long-term investments which included $1.4
million for investments in preferred and common stock of privately held
companies and $0.2 million for our interest in Crosby. We carry our investments
in privately held companies at their estimated realizable value less costs to
dispose. We regularly consider available evidence in evaluating potential
impairment of our privately held investments. Because no public market exists
for these investments, we estimate their value based on potential financing
valuations and the investees forecasted financial performance, as well as the
external markets for these types of investments. If the assumptions and
estimates used in assessing the value of these investments are not accurate, or
adverse changes in market conditions occur, or forecasts are not met, we may
have to record additional impairment charges that we have not previously
recognized.

During 2002, we recognized impairment charges of $21.9 million related to our
long-term investments in privately held companies. During the fourth quarter
of 2002 we initiated a process to sell our equity investments, and recorded an
impairment charge of $12.0 million to reflect the investments at their
estimated realizable value, less costs of disposal. During 2002, three of the
companies in which we had invested were in the process of obtaining additional
financing or being sold, and based upon valuations and anticipated cash
proceeds, we recorded an impairment charge of $9.9 million to reduce the
carrying amount of these investments to their estimated fair value.

We account for our investment in Crosby under Emerging Issues Task Force
(EITF) Issue No. 96-12, Recognition of Interest Income and Balance Sheet
Classification of Structured Notes. We are carrying our interest in Crosby at
fair value with all increases and decreases in fair value reported in income
from investing activities in the statement of operations. We determine the fair
value based on the fair value of Crosbys right to potentially receive
additional cash proceeds upon maturity of the VDF contract. At December 31,
2002, our interest in Crosby had a fair value of $0.2 million, and is included
in investments as a long-term asset. Should the fair value of our investment in
Crosby decrease, we would incur a pretax charge of up to $0.2 million, which
would be included in income from investing activities in our consolidated
statements of operations.

Restructurings During 2002, 2001 and 1999, we initiated consolidation of
certain operations in order to enhance operational efficiency and reduce
expenses, and recorded significant restructuring charges in connection with
these actions. Restructuring charges were $56.0 million and $20.0 million for
2002 and 2001, respectively. These restructuring charges require us to make
estimates based upon real estate market conditions, rental rates, future
corporate requirements, general economic conditions and future estimated cash
flows. Included in the restructuring charges recorded in 2002 are facility exit
costs of $44.0 million, which represents estimated shortfalls of sublease
rental income compared to lease payments due through 2009 under certain exited
facilities lease agreements, impaired leasehold improvements and furniture and
fixtures, and other associated facilities expenses. Estimates related to the
length of time to reserve excess facilities are based on assumptions regarding
the period required to locate and contract with suitable subtenants and are
based on market trend information analysis. Estimates of sublease income are
based upon the terms of existing sublease agreements that we have obtained and
market trend information analysis. If the assumptions for these estimates
change due to changes in the real estate and sublease markets, or due to the
terms of sublease agreements that we have obtained, the ultimate restructuring

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expenses for these facilities could vary by material amounts, and could cause
us to record additional restructuring charges in future reporting periods.
Included in the 2002 restructuring charges are facility exit costs of $35.7
million, which arose when we revised the estimates that we had used in
previously recorded restructuring charges. These estimates were revised due to
higher than anticipated operating costs and changes to estimated length of time
we expect it will take to obtain subtenants for certain excess facilities.

New Accounting Pronouncements

SFAS No. 141 and SFAS
No. 142  We adopted SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, on
January 1, 2002, except with respect to the acquisition of
Securant Technologies Inc. (Securant) to which we
applied the provisions of SFAS No. 141 and No. 142 on September 4, 2001 (the
date of acquisition). SFAS No. 141 requires the use of the purchase method of
accounting for all business combinations initiated after June 30, 2001, and
eliminates the pooling of interests method. In addition, SFAS No. 141 further
clarifies the criteria for recognition of intangible assets separately from
goodwill. SFAS No. 142 requires that amortization of goodwill and indefinite
lived intangible assets be discontinued and instead be evaluated at least
annually for impairment under a two step process. Intangible assets with finite
lives continue to be amortized over their useful lives.

We completed the transitional goodwill impairment test as of January 1, 2002,
the date of adoption of SFAS No. 142. Goodwill is included in our e-Security
Solutions segment, which contains one Reporting Unit. The goodwill impairment
test compared the carrying amount of the Reporting Unit to the estimated fair
value of the Reporting Unit. We determined the estimated fair value of the
Reporting Unit based upon an independent appraisal using the market multiple
valuation method. As of the January 1, 2002 transitional goodwill impairment
test, the fair value of our Reporting Unit was greater than the carrying amount
of the Reporting Unit. Therefore, the transitional goodwill impairment test
performed as of January 1, 2002 did not result in an impairment of our
goodwill.

We perform the required annual goodwill impairment test as of November 30 of
every year, and, if events or circumstances occur that would more likely than
not reduce the fair value of the Reporting Unit below its carrying amount, we
will perform an interim impairment test. Accordingly, we completed the required
annual goodwill impairment test as of November 30, 2002. The annual goodwill
impairment test compared the carrying amount of the Reporting Unit to the
estimated fair value of the Reporting Unit. Estimated fair value of the
Reporting Unit was determined based upon independent appraisal using the market
multiple valuation method. As of the November 30, 2002 annual goodwill
impairment test, the fair value of our Reporting Unit was greater than the
carrying amount of the Reporting Unit. Therefore, the annual goodwill
impairment test performed as of November 30, 2002 did not result in an
impairment of our goodwill.

As a result of our adoption of SFAS No. 142 on January 1, 2002, we reclassified
in-place workforce related intangible assets into goodwill, resulting in an
increase to goodwill and a decrease to intangible assets of $8.3 million. Upon
reclassification of in-place workforce related intangible assets to goodwill
and the determination of indefinite lived intangible assets, we reversed the
deferred tax liabilities related to these intangible assets. The reversal
resulted in a decrease to goodwill and deferred tax liabilities of $3.1
million.

We applied the provisions of SFAS No. 141 and No. 142 with respect to the
acquisition of Securant on September 4, 2001 (the date of acquisition). As
part of the application of SFAS No. 141, we recognized identifiable intangible
assets separate from goodwill and have recognized amortization expense on these
intangible assets with finite lives from the date of acquisition.

As a result of our adoption of SFAS No. 142, we discontinued amortizing all
existing goodwill and indefinite lived intangible assets and did not record any
related amortization expense after January 1, 2002. Had the provisions of SFAS
No. 141 and No. 142 been applied for the year ended December 31, 2001, our net
income and earnings per share would have been as follows:

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|                                     |                                     |                                    |      |       |            |  | 
|------------------------------------ | ----------------------------------- | ---------------------------------- | ---- | ----- | ---------- |  | 
|                                     |                                     |                                    |      |       | Year Ended
|(in millions, except per share data) |                                     | December 31, 2001                 
|                                     |                                     |                                   
|Reported net loss                    |                                     | $                                  | (2.5 | )    
|Add:                                 | Goodwill amortization               |                                    |      | 7.6   |           
|                                     | In-place workforce amortization     |                                    |      | 1.6   |           
|                                     | Trademark amortization              |                                    |      | 0.1   |           
|Less: Tax effect                     |                                     |                                    | (3.7 | )    
|                                     |                                     |                                    |      |      
|Adjusted net income                  |                                     | $                                  | 3.1  |      
|                                     |                                     |                                    |      |      
|Per share amounts                    |                                     |                                    |      |      
|                                     | Reported basic loss per share       |                                    | $    | (0.04 | )         
|                                     |                                     | Effect of SFAS No. 141 and No. 142 |      |       | 0.10       | 
|                                     |                                     |                                    |      |      
|                                     | Adjusted basic earnings per share   |                                    | $    | 0.06  |           
|                                     |                                     |                                    |      |      
|                                     | Reported diluted loss per share     |                                    | $    | (0.04 | )         
|                                     |                                     | Effect of SFAS No. 141 and No. 142 |      |       | 0.09       | 
|                                     |                                     |                                    |      |      
|                                     | Adjusted diluted earnings per share |                                    | $    | 0.05  |           
|                                     |                                     |                                    |      |      

We had no intangible asset related amortization expense for the year ended
December 31, 2000. Amortization expense recorded in 2001 related to intangible
assets acquired in connection with acquisitions completed during 2001.

At December 31, 2002, we applied the provisions of SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, to our technology,
customer list, trademark and noncompetition agreement intangible assets due to
circumstances that indicated the carrying value of these intangible assets may
not be recoverable. We determined that the carrying amount of these assets was
not recoverable because the carrying value of these assets exceeded the sum of
the estimated undiscounted cash flows expected to be generated from the use of
these assets. We determined the amount of the impairment loss by comparing the
carrying amount of these assets to their fair value at December 31, 2002. We
determined the fair value based on estimated discounted cash flows expected to
be generated from the use of these assets. The fair value of the intangible
assets was determined to be zero at December 31, 2002, and accordingly, we
recorded a $19.1 million impairment charge for the year ended December 31, 2002
to reduce the carrying amount of our intangible assets to their fair value.

SFAS No. 145  In April 2002, the Financial Accounting Standards Board
(FASB) issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 62,
Amendment of FASB Statement No. 13 and Technical Corrections. For most
companies, SFAS No. 145 will require gains and losses on extinguishments of
debt to be classified as income or loss from continuing operations rather than
as extraordinary items as previously required under SFAS No. 4. Extraordinary
treatment will be required for certain extinguishments as provided in
Accounting Principles Board Opinion No. 30. SFAS No. 145 also amends SFAS No.
13 for certain sales-leaseback and sublease accounting. We were required to
adopt the provisions of SFAS No. 145 on January 1, 2003. We believe the
adoption of SFAS No. 145 will not have a significant impact on our consolidated
financial position or results of operations.

SFAS No. 146  In July 2002, the FASB issued SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires that
a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. SFAS No. 146 nullifies EITF No. 94-3
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity, which required a liability be recognized at the
commitment date to an exit plan. We were required to adopt the provisions of
SFAS No. 146 effective for exit or disposal activities initiated after December
31, 2002. All restructuring activities prior to December 31, 2002, including
those described in Note 13 of the Notes to Consolidated Financial Statements,
are accounted for under EITF No. 94-3.

SFAS No. 148  In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure. SFAS No. 148 amends
SFAS No. 123, Accounting for Stock Based Compensation, and provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In addition,
SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method for accounting for stock based employee compensation and the effect of
the method used on reported results. The transition guidance and annual
disclosure provisions of SFAS No. 148 are effective for fiscal years ending
after December 15, 2002. The interim disclosure provisions are effective for
financial reports containing financial statements for interim periods beginning
after December 15, 2002. As we did not make a voluntary change to the fair
value based method of accounting for stock based employee compensation in 2002,
the adoption of SFAS No. 148 did not have a material impact on our consolidated
financial position and results of operations.

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Interpretation No. 45  In November 2002, the FASB issued Interpretation No. 45
(FIN 45), Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, which clarifies
disclosure and recognition and measurement requirements related to certain
guarantees. The disclosure requirements are effective for financial statements
issued after December 15, 2002 and the recognition and measurement requirements
are effective on a prospective basis for guarantees issued or modified after
December 31, 2002. We believe the adoption of FIN 45 will have no impact on
our consolidated financial position and results of operations.

Interpretation No. 46  In January 2003, the FASB issued Interpretation No. 46
(FIN 46), Consolidation of Variable Interest Entities, which clarifies the
application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, relating to consolidation of certain entities. First, FIN 46 will
require identification of our participation in variable interest entities
(VIE), which are defined as entities with a level of invested equity that is
not sufficient to fund future activities to permit them to operate on a stand
alone basis, or whose equity holders lack certain characteristics of a
controlling financial interest. For entities identified as VIE, FIN 46 sets
forth a model to evaluate potential consolidation based on an assessment of
which party to the VIE, if any, bears a majority of the exposure to its
expected losses, or stands to gain from a majority of its expected returns.
FIN 46 also sets forth certain disclosure regarding interests in VIE that are
deemed significant, even if consolidation is not required. We anticipate the
adoption of FIN 46 will not have a significant impact on our consolidated
financial position or results of operations.

EITF No. 00-21  In November 2002, the EITF issued EITF No. 00-21, Revenue
Arrangements with Multiple Deliverables, which provides guidance on the timing
and method of revenue recognition for sales arrangements that include the
delivery of more than one product or service. EITF 00-21 is effective
prospectively for arrangements entered into in fiscal periods beginning after
June 15, 2003. The effect of adopting this issue is being evaluated.

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Results of Operations

The following table sets forth certain consolidated financial data as a
percentage of our total revenue:

|                                                          |                                                |                                       |       |                          |      |      |       |      |      |   |       |      |      |  
|--------------------------------------------------------- | ---------------------------------------------- | ------------------------------------- | ----- | ------------------------ | ---- | ---- | ----- | ---- | ---- | - | ----- | ---- | ---- | -
|                                                          |                                                |                                       |       | Years Ended December 31,
|                                                          |                                                |                                       |       |                         
|                                                          |                                                |                                       |       | 2002                     |      | 2001 |       | 2000
|                                                          |                                                |                                       |       |                          |      |      |       |     
|Revenue                                                   |                                                |                                       |       |                          |      |      |       |      |      |   |       |     
|                                                          |                                                | Products                              |       |                          | 72.8 | %    |       |      | 78.7 | % |       |      | 85.0 | %
|                                                          |                                                | Maintenance and professional services |       |                          | 27.2 |      |       |      | 21.3 |   |       |      | 15.0 |  
|                                                          |                                                |                                       |       |                          |      |      |       |      |      |   |       |     
|Total revenue                                             |                                                |                                       | 100.0 |                          |      |      | 100.0 |      |      |   | 100.0 |     
|                                                          |                                                |                                       |       |                          |      |      |       |      |      |   |       |     
|Cost of revenue                                           |                                                |                                       |       |                          |      |      |       |      |      |   |       |     
|                                                          |                                                | Products                              |       |                          | 15.4 |      |       |      | 13.5 |   |       |      | 11.8 |  
|                                                          |                                                | Maintenance and professional services |       |                          | 9.6  |      |       |      | 10.1 |   |       |      | 7.8  |  
|                                                          |                                                |                                       |       |                          |      |      |       |      |      |   |       |     
|Total cost of revenue                                     |                                                |                                       | 25.0  |                          |      |      | 23.6  |      |      |   | 19.6  |     
|                                                          |                                                |                                       |       |                          |      |      |       |      |      |   |       |     
|Gross margin                                              |                                                |                                       | 75.0  |                          |      |      | 76.4  |      |      |   | 80.4  |     
|Costs and expenses                                        |                                                |                                       |       |                          |      |      |       |      |      |   |       |     
|                                                          | Research and development                       |                                       |       | 23.7                     |      |      |       | 20.6 |      |   |       | 16.1 |     
|                                                          | Marketing and selling                          |                                       |       | 43.4                     |      |      |       | 43.5 |      |   |       | 36.7 |     
|                                                          | General and administrative                     |                                       |       | 13.1                     |      |      |       | 13.8 |      |   |       | 12.6 |     
|                                                          | Restructurings                                 |                                       |       | 24.1                     |      |      |       | 7.1  |      |   |       | (0.7 | )   
|                                                          | Impairment of intangible assets                |                                       |       | 8.2                      |      |      |       |     |      |   |       |     |     
|                                                          | Amortization of goodwill and intangible assets |                                       |       | 4.3                      |      |      |       | 5.1  |      |   |       |     |     
|                                                          | In process research and development            |                                       |       |                         |      |      |       | 2.8  |      |   |       |     |     
|                                                          |                                                |                                       |       |                          |      |      |       |      |      |   |       |     
|Total                                                     |                                                |                                       | 116.8 |                          |      |      | 92.9  |      |      |   | 64.7  |     
|(Loss) income from operations                             |                                                |                                       | (41.8 | )                        |      |      | (16.5 | )    |      |   | 15.7  |     
|Interest (expense) income and other                       |                                                |                                       | (3.8  | )                        |      |      | 2.1   |      |      |   | 4.6   |     
|(Loss) income from investing activities                   |                                                |                                       | (13.3 | )                        |      |      | 14.4  |      |      |   | 97.4  |     
|                                                          |                                                |                                       |       |                          |      |      |       |      |      |   |       |     
|(Loss) income before (benefit) provision for income taxes |                                                |                                       | (58.9 | )                        |      |      | 0.0   |      |      |   | 117.7 |     
|(Benefit) provision for income taxes                      |                                                |                                       | (17.2 | )                        |      |      | 0.9   |      |      |   | 44.3  |     
|                                                          |                                                |                                       |       |                          |      |      |       |      |      |   |       |     
|Net (loss) income                                         |                                                |                                       | (41.7 | )%                       |      |      | (0.9  | )%   |      |   | 73.4  | %   
|                                                          |                                                |                                       |       |                          |      |      |       |      |      |   |       |     

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2002 Compared with 2001

Revenue

The following tables set forth the amount, percentage of total revenue and
percentage increase (decrease) of our revenue by product group, product type
and product division:

|                  |                                       |         |                          |            |      |         |            |            |   |            |   |       |  |  |  |       |   |  |  |       |   
|----------------- | ------------------------------------- | ------- | ------------------------ | ---------- | ---- | ------- | ---------- | ---------- | - | ---------- | - | ----- |  |  |  | ----- | - |  |  | ----- | --
|                  |                                       |         | Years Ended December 31, |            |      |         |           
|                  |                                       |         |                          |            |      |         |           
|                  |                                       |         | 2002                     |            | 2001 |         | Percentage
|                  |                                       |         |                          |            |      |         | Increase  
|($ in millions)   |                                       | Revenue |                          | Percentage |      | Revenue |            | Percentage |   | (Decrease)
|                  |                                       |         |                          |            |      |         |            |            |   |           
|Product group:    |                                       |         |                          |            |      |         |            |            |   |            |   |       |  |  |  |       |   |  |  |      
|                  | Enterprise solutions                  |         | $                        | 204.7      |      |         |            | 88.2       | % |            | $ | 229.2 |  |  |  | 81.1  | % |  |  | (10.7 | )%
|                  | Developer solutions                   |         |                          | 27.4       |      |         |            | 11.8       | % |            |   | 53.5  |  |  |  | 18.9  | % |  |  | (48.8 | )%
|                  |                                       |         |                          |            |      |         |            |            |   |            |   |       |  |  |  |       |   |  |  |      
|                  | Total                                 |         | $                        | 232.1      |      |         |            | 100.0      | % |            | $ | 282.7 |  |  |  | 100.0 | % |  |  | (17.9 | )%
|                  |                                       |         |                          |            |      |         |            |            |   |            |   |       |  |  |  |       |   |  |  |      
|Product type:     |                                       |         |                          |            |      |         |            |            |   |            |   |       |  |  |  |       |   |  |  |      
|                  | Authenticators                        |         | $                        | 107.8      |      |         |            | 46.5       | % |            | $ | 118.8 |  |  |  | 42.1  | % |  |  | (9.2  | )%
|                  | Software products                     |         |                          | 61.2       |      |         |            | 26.3       | % |            |   | 103.6 |  |  |  | 36.6  | % |  |  | (41.0 | )%
|                  | Maintenance and professional
services |         |                          | 63.1       |      |         |            | 27.2       | % |            |   | 60.3  |  |  |  | 21.3  | % |  |  | 4.6   | % 
|                  |                                       |         |                          |            |      |         |            |            |   |            |   |       |  |  |  |       |   |  |  |      
|                  | Total                                 |         | $                        | 232.1      |      |         |            | 100.0      | % |            | $ | 282.7 |  |  |  | 100.0 | % |  |  | (17.9 | )%
|                  |                                       |         |                          |            |      |         |            |            |   |            |   |       |  |  |  |       |   |  |  |      
|Product division: |                                       |         |                          |            |      |         |            |            |   |            |   |       |  |  |  |       |   |  |  |      
|                  | Authentication products               |         | $                        | 197.7      |      |         |            | 85.2       | % |            | $ | 225.8 |  |  |  | 79.9  | % |  |  | (12.5 | )%
|                  | Encryption products                   |         |                          | 26.3       |      |         |            | 11.3       | % |            |   | 53.1  |  |  |  | 18.8  | % |  |  | (50.4 | )%
|                  | Web access management products        |         |                          | 8.1        |      |         |            | 3.5        | % |            |   | 3.8   |  |  |  | 1.3   | % |  |  | 113.0 | % 
|                  |                                       |         |                          |            |      |         |            |            |   |            |   |       |  |  |  |       |   |  |  |      
|                  | Total                                 |         | $                        | 232.1      |      |         |            | 100.0      | % |            | $ | 282.7 |  |  |  | 100.0 | % |  |  | (17.9 | )%
|                  |                                       |         |                          |            |      |         |            |            |   |            |   |       |  |  |  |       |   |  |  |      

We have reclassified revenue of $13.0 million for the year ended December 31,
2001 from the authentication products division to the encryption products
division in order to conform to current period presentation.

The following tables set forth the amount, percentage of total revenue and
percentage decrease of revenue by regional area:

|                 |         |                          |            |      |         |            |            |   |          |   |       |  |  |  |       |   |  |  |       |   
|---------------- | ------- | ------------------------ | ---------- | ---- | ------- | ---------- | ---------- | - | -------- | - | ----- |  |  |  | ----- | - |  |  | ----- | --
|                 |         | Years Ended December 31, |            |      |         |           
|                 |         |                          |            |      |         |           
|                 |         | 2002                     |            | 2001 |         |            |            |  
|                 |         |                          |            |      |         | Percentage
|($ in
millions)  | Revenue |                          | Percentage |      | Revenue |            | Percentage |   | Decrease
|                 |         |                          |            |      |         |            |            |   |          |  
|United States    |         | $                        | 138.6      |      |         |            | 59.7       | % |          | $ | 162.8 |  |  |  | 57.6  | % |  |  | (14.9 | )%
|Europe and other |         |                          | 70.2       |      |         |            | 30.3       | % |          |   | 91.5  |  |  |  | 32.4  | % |  |  | (23.3 | )%
|Asia Pacific     |         |                          | 23.3       |      |         |            | 10.0       | % |          |   | 28.4  |  |  |  | 10.0  | % |  |  | (17.8 | )%
|                 |         |                          |            |      |         |            |            |   |          |   |       |  |  |  |       |   |  |  |       |   
|Total            |         | $                        | 232.1      |      |         |            | 100.0      | % |          | $ | 282.7 |  |  |  | 100.0 | % |  |  | (17.9 | )%
|                 |         |                          |            |      |         |            |            |   |          |   |       |  |  |  |       |   |  |  |       |   

We believe the decrease in total revenue in 2002 as compared to 2001 was
primarily due to the continued decline in information technology spending by
our existing and prospective customers due to the uncertainty of the economy.
We believe that when and if information technology spending increases from the
current rates of spending we will benefit with increased revenue. We believe
our product revenue will increase if businesses continue the trend toward
permitting remote access to internal resources and Web-enabling existing
applications. We also believe our identity and access management solutions
promote our product synergies and will enable us to generate additional revenue
by selling additional products to existing customers.

We believe revenue from sales of RSA SecurID authenticators declined in 2002 as
compared to 2001 primarily due to the recent and continued downsizing of
businesses. The number of RSA SecurID authenticator units sold decreased 6.9%
in 2002 to 2.5 million from 2.7 million in 2001. In addition, the average
selling price per authenticator unit decreased 1.8% in 2002 to $42.65 from
$43.45 in 2001. The decrease in number of units sold, along with the decrease
in the average selling price in 2002 as compared to 2001, contributed to the
decreased revenue from our RSA SecurID authentication product line. The
decrease in the average selling price can be attributed to an
increase in the number of larger volume transactions during 2002 as compared to
2001, because we tend to give larger discounts on larger volume transactions.
We believe our RSA SecurID authentication products generate and will continue
to generate substantial revenue for us.

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Our authentication products revenue includes revenue from our RSA Keon product
line for all periods presented. RSA Keon revenue decreased in 2002 as compared
to the same period of 2001, which we believe was due primarily to our customers
delaying or canceling the implementation of large infrastructure information
technology projects. In addition, during 2002 we eliminated several products
included in the RSA Keon product line, and this contributed to the decrease in
revenue from our RSA Keon product line. However, due to synergies within our
product lines, RSA Keon product line has generated and, we expect, will
continue to generate strong revenue. We believe that the revenue generated from
our authenticator product division will continue to provide steady overall
growth for us despite the weakened global economy.

As result of the acquisition of Securant in
September 2001, we established the RSA ClearTrust Web access management
solution product division, and generated $3.8 million of Web access management
revenue in the fourth quarter of 2001. Web access management revenue was $8.1
million and accounted for 3.5% of total revenue for 2002. We believe, despite a
highly competitive market, that our Web access management revenue will
contribute approximately 5% to 6% of our total revenue during 2003.

We believe that the decrease in Developer solutions and encryption revenue was
primarily attributable to a decrease in the number of technology companies
funding development and in the development of new information technology
products, as well as the availability of free, open source products that
compete with our RSA BSAFE product line. We believe revenue from sales of
encryption products to enterprise customers has contributed, and will continue
to contribute, to our Developer solutions revenue, and we therefore expect that
our encryption revenue will continue to account for approximately 10% of our
total revenue in 2003.

We believe the increase in service revenue in 2002 as compared to 2001 can
primarily be attributed to continued purchases by new customers coupled with
renewals of annual maintenance contracts from sale of products in prior
periods.

We believe that as the United States government proceeds with its agenda of
increasing awareness of cyber-security issues, and its focus on homeland
security, we will benefit with increased revenue. We believe the government
sector of our business may increase in the future as government agencies seek
e-security partners in order to execute their cyber-security agenda. In
addition, we believe the Health Insurance Portability and Accountability Act of
1996 (HIPAA) privacy and security standards that require security for online
healthcare transactions and clinical trials has increased our revenue from the
healthcare and pharmaceutical vertical market segment.

Gross Profit

The following tables set forth the gross profit and gross margin for products
and maintenance and professional services:

|                                      |              |                          |              |      |              |  |              |   |  |   |       |  |  |  |      |  
|------------------------------------- | ------------ | ------------------------ | ------------ | ---- | ------------ |  | ------------ | - |  | - | ----- |  |  |  | ---- | -
|                                      |              | Years Ended December 31,
|                                      |              |                         
|                                      |              | 2002                     |              | 2001
|                                      |              |                          |              |     
|($ in
millions)                       | Gross Profit |                          | Gross Margin |      | Gross Profit |  | Gross Margin
|                                      |              |                          |              |      |              |  |              |  
|Products                              |              | $                        | 133.2        |      |              |  | 78.8         | % |  | $ | 184.1 |  |  |  | 82.8 | %
|Maintenance and
professional
services |              |                          | 40.9         |      |              |  | 64.8         | % |  |   | 31.9  |  |  |  | 52.8 | %
|                                      |              |                          |              |      |              |  |              |   |  |   |       |  |  |  |      |  
|Total                                 |              | $                        | 174.1        |      |              |  | 75.0         | % |  | $ | 216.0 |  |  |  | 76.4 | %
|                                      |              |                          |              |      |              |  |              |   |  |   |       |  |  |  |      |  

Included in the gross profit for products for 2002 is a $2.9 million charge for
inventory write down related to discontinued product designs and for product
quality warranty accruals. Included in the gross profit for products for 2001
is a write off of prepaid royalties of $5.2 million. These prepaid royalties
were expensed to cost of product revenue when it was determined that they may
not have future realizable value as a result of our acquisition of Xcert
International, Inc. (Xcert) in February 2001. Excluding the inventory write
down and warranty accruals, gross margin for products was 80.5% for 2002.
Excluding the prepaid royalties, total gross margin for products was 85.2% for
2001. We have included these gross margin measures, which are not in
accordance with generally accepted accounting principles (GAAP), for year
over year comparison purposes.

We believe the decrease in gross margin for products for 2002 as compared to
2001, after excluding the items mentioned above, can be primarily attributed to
the decrease in our software revenue. Our software products have higher gross
margins than our other product types, and a decrease in software revenue would
cause our gross margin for products to decrease.

We believe the increase in gross profit from maintenance and professional
services in 2002 as compared to 2001 was primarily attributable to increased
maintenance revenue achieved on decreased customer support costs. Customer
support costs decreased due to cost reduction programs implemented since the
third quarter of 2001.

We expect to maintain total gross margins of between 76% and 78% for 2003.

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Research and Development

Total research and development expenses decreased 5.6% in 2002 to $55.1 million
from $58.3 million in 2001, and represented 23.7% of total revenue for 2002.
For 2002 as compared to 2001, approximately $3.2 million of the decrease in
research and development expenses was from decreased payroll, overheard and
consulting expenses associated with our reduced workforce. RSA Capital expenses
included in total research and development expenses were $0.5 million and $2.5
million for 2002 and 2001, respectively, all of which were attributable to our
NEST group, which merged into our e-Security Solutions segment prior to the
second quarter of 2002. We expect our 2003 research and development
expenditures in absolute dollars to be similar to 2002, and to be between 19%
and 21% of total revenue for 2003.

Marketing and Selling

Total marketing and selling expenses decreased 18.1% in 2002 to $100.7 million
from $122.9 million in 2001, and represented 43.4% of total revenue for 2002.
Marketing and selling expenses decreased in 2002 as compared to 2001 primarily
due to cost reduction measures. For 2002 as compared to 2001, approximately
$8.7 million of the decrease in marketing and selling expenses was from
decreased payroll expenses and overhead costs associated with our reduced
workforce, approximately $6.1 million of the decrease was from decreased
spending on marketing programs, approximately $4.7 million of the decrease was
from a reduction in bad debt expense, and approximately $2.7 million of the
decrease was from decreased commission expense due to decreased revenue. RSA
Capital expenses included in total marketing and selling expenses were $0.4
million for 2001, all of which were attributable to our NEST group, which
merged into our e-Security Solutions segment prior to the second quarter of
2002. We believe marketing and selling expenditures will be 38% to 39% of total
revenue in 2003.

General and Administrative

Total general and administrative expenses decreased 22.7% in 2002 to $30.3
million from $39.1 million in 2001, and represented 13.1% of total revenue for
2002. The decrease in total general and administrative expenses in 2002 as
compared to 2001 was primarily due to cost reduction measures. Included in
total general and administrative expenses for 2002 and 2001 were $0.3 million
and $7.3 million, respectively, of general and administrative costs associated
with our RSA Capital segment, including its NEST group and investment
activities. For 2002 as compared to 2001, approximately $6.9 million of the
decrease was from decreased payroll and overhead costs associated with our
reduced workforce, and approximately $3.9 million of the decrease was from
decreased expenses relating to our investment activities included in our RSA
Capital segment. These decreases were partially offset by an increase of
approximately $2.0 million for professional fees incurred in connection with
on-going litigation. We believe general and administrative expenditures will
be 11% to 13% of total revenue in 2003.

Acquisitions

During 2001, we completed four acquisitions, which were accounted for as
purchases. Accordingly, the results of operations of the acquired companies
have been included in our consolidated statements of operations since
their respective dates of acquisition. Costs related to these acquisitions are
for investment banking, professional fees and other direct costs, including
employee severance and facilities closure. These costs were recorded on the
dates of acquisition and have been included in the allocation of the purchase
prices.

In September 2001, we acquired all of the capital stock of Securant, a
privately held company that developed the ClearTrust Web access management
solution, for an aggregate of $142.4 million in cash including acquisition
costs. In May 2001, we acquired all of the capital stock of 3GI, a privately
held company that developed smart card and biometric authentication products,
and substantially all of the assets of Transindigo, a privately held company
that developed real time Web access management software products, for an
aggregate of $23.8 million in cash including acquisition costs and litigation
expenses. In February 2001, we acquired all of the capital stock of Xcert, a
privately held company that developed digital certificate-based products for
securing e-business transactions, for $69.7 million in cash, including
acquisition costs, plus the assumption of all Xcert stock options.

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Allocation of the purchase prices for all four acquisitions completed during
2001 were based on estimates of the fair value of the assets acquired and
liabilities assumed based on independent appraisals. These allocations were as
follows:

|                                       |          |                       |       |   |             |         |       |   |      |           |      |   |  |   |       |   |  |              |  | 
|-------------------------------------- | -------- | --------------------- | ----- | - | ----------- | ------- | ----- | - | ---- | --------- | ---- | - |  | - | ----- | - |  | ------------ |  | 
|                                       |          | Estimated Fair Values |       |   |             |        
|                                       |          |                       |       |   |             |        
|                                       |          |                       |       |   |             | 3GI and |       |   |      | Estimated
|($ in
millions)                        | Securant |                       | Xcert |   | Transindigo |         | Total |   | Life
|                                       |          |                       |       |   |             |         |       |   |      |          
|Assets and liabilities, including cash |          | $                     | (0.6  | ) |             | $       | 4.8   |   |      | $         | 6.8  |   |  | $ | 11.0  |   |  |              |  | 
|Goodwill (1)                           |          |                       | 126.9 |   |             |         | 57.7  |   |      |           | 13.6 |   |  |   | 198.2 |   |  |              |  | 
|Intangible assets (2)                  |          |                       | 19.6  |   |             |         | 12.9  |   |      |           | 2.9  |   |  |   | 35.4  |   |  | 1 to 7 years
|Deferred tax liabilities, net (2)      |          |                       | (7.3  | ) |             |         | (5.1  | ) |      |           | (1.1 | ) |  |   | (13.5 | ) |  |              |  | 
|In process research and development    |          |                       | 3.8   |   |             |         | 2.5   |   |      |           | 1.6  |   |  |   | 7.9   |   |  |              |  | 
|                                       |          |                       |       |   |             |         |       |   |      |           |      |   |  |   |       |   |  |              |  | 
|Total purchase price                   |          |                       | 142.4 |   |             |         | 72.8  |   |      |           | 23.8 |   |  |   | 239.0 |   |  |              |  | 
|Less: assumption of stock options      |          |                       |      |   |             |         | (3.1  | ) |      |           |     |   |  |   | (3.1  | ) |  |              |  | 
|Less: cash acquired                    |          |                       | (2.1  | ) |             |         | (0.4  | ) |      |           | (6.9 | ) |  |   | (9.4  | ) |  |              |  | 
|                                       |          |                       |       |   |             |         |       |   |      |           |      |   |  |   |       |   |  |              |  | 
|Net cash paid                          |          | $                     | 140.3 |   |             | $       | 69.3  |   |      | $         | 16.9 |   |  | $ | 226.5 |   |  |              |  | 
|                                       |          |                       |       |   |             |         |       |   |      |           |      |   |  |   |       |   |  |              |  | 



|(1) |  | Effective January 1, 2002, the adoption of SFAS No. 142, Goodwill
and Other Intangible Assets, required that the amortization of goodwill
arising from business acquisitions be discontinued, and instead be
evaluated at least annually for impairment.                                                                                                                                                                 
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | We recorded an impairment charge of $19.1 million during 2002 to
reduce the carrying value of these intangible assets to zero at December
31, 2002. Accordingly, we will not record any amortization expense
related to these intangible assets after December 31, 2002. As a result
of this impairment charge, we reduced the deferred tax liabilities
associated with the intangible assets to zero at December 31, 2002.

As a result of our adoption of SFAS No. 142, Goodwill and Other Intangible
Assets, on January 1, 2002 we reclassified in-place workforce related
intangible assets into goodwill, resulting in an increase to goodwill and a
decrease to intangible assets of $8.3 million. In addition, upon
reclassification of in-place workforce related intangible assets to goodwill
and determination of indefinite lived assets, we reversed the deferred tax
liabilities related to these intangible assets. The reversal of deferred tax
liabilities resulted in a decrease to goodwill and deferred tax liabilities of
$3.1 million.

The allocation of the Securant purchase price has been revised since September
4, 2001 (the date of acquisition) for unrecorded liabilities related to
pre-acquisition contingencies and uncollectible accounts receivable, which
resulted in a net decrease to the allocation of assets and liabilities and an
increase to goodwill of $1.1 million. We received $0.4 million from the
Securant escrow fund during 2002 in settlement of several claims. We expect to
record additional adjustments to the Securant purchase price upon finalization
of the post closing adjustment and settlement of any escrow claims.

In June 2002, we paid $0.6 million to Xcert stockholders upon finalization of
the working capital calculation. The cost of the working capital adjustment
has been added to the purchase price of Xcert and resulted in an increase to
goodwill of $0.6 million.

We incurred litigation expenses in connection with patent litigation relating
to the products acquired in our May 2001 acquisition of 3GI and recorded these
expenses as related costs of acquisition. The costs to defend the 3GI lawsuit
are covered by the escrow fund set aside from the 3GI purchase price. We have
submitted claims against the 3GI escrow totaling approximately $3.0 million.
Through December 31, 2002 we have received an aggregate of $2.6 million from
the 3GI escrow to cover these litigation costs and other claims. The selling
stockholders are disputing the remaining claims. The costs of litigation and
disbursements from the 3GI escrow resulted in a net increase to goodwill of
approximately $0.1 million.

We used an independent appraiser to calculate the amounts allocated to assets
and liabilities acquired including intangible assets and in process research
and development (IPR&D). The independent appraiser used established
valuation techniques accepted in the high technology industry, including the
income method, which discounts expected future cash flows to present value, and
the cost method, which uses replacement costs. These methods give consideration
to relevant market sizes and growth factors, expected industry trends, product
sales cycles, and the estimated lives of each of the products underlying
technology. For IPR&D, consideration was also given to the projects stage of
completion, the complexity of the work completed to date, the difficulty of
completing the remaining development and the projected cost to complete the
project.

The amounts allocated to IPR&D projects were expensed in the quarter that the
related acquisition was consummated because technological feasibility of the
IPR&D projects had not been achieved and there were no alternative future uses.
IPR&D expense of $7.9 million for the
year ended December 31, 2001 represents the write off of IPR&D in connection
with the acquisition of Securant, Xcert, 3GI and Transindigo.

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The estimated costs to complete the IPR&D projects are for payroll and related
overhead costs for engineers employed in the completion of these development
projects. We would revise the estimate of remaining costs to be incurred
should the projects fail to meet technological feasibility.

The valuation of the IPR&D was determined using the income method. Revenue and
expense projections as well as technology assumptions were prepared for 5 to 7
years based on information provided by the acquired companies management.
Revenue projections for each IPR&D project were identified as revenue derived
from products relying on current technology, if any, and revenue derived from
projects relying on a new IPR&D project. Expense projections including cost of
products sold and operating expenses varied depending on the IPR&D project.
The discount rates used in the present value calculations were typically
derived from a weighted average cost of capital, adjusted upward to reflect
additional risks inherent in the development life cycle, and resulting in
discount rates in a range of 30.0%  35.0%, depending on the IPR&D project.
The fair value of the IPR&D was determined separately from all other acquired
assets using the percentage of completion method. The percentage of completion
ratios were estimated based on the estimated man hours remaining to complete
each project versus total man hours estimated for each project to achieve
technological feasibility. Management is responsible for estimates of the fair
value of the IPR&D.

The following table summarizes the nature, percentage complete, timing and
estimated cost to complete for each IPR&D project as of December 31, 2002:

|                                                           |  |            |    |                       |  |                       |  |                   |  |  |  | 
|---------------------------------------------------------- |  | ---------- | -- | --------------------- |  | --------------------- |  | ----------------- |  |  |  | 
|                                                           |  |            |    |                       |  |                       |  | Estimated Cost to
|                                                           |  |            |    |                       |  | Release Date or       |  | Complete at      
|Description of Project                                     |  | % Complete |    | Expected Release Date |  | December 31, 2002    
|                                                           |  |            |    |                       |  |                      
|Xcert  Other in process research and development projects |  | Various    |    | Various               |  | $0.8 million         
|Transindigo  Elara                                        |  |            | 30 | %                     |  | Third quarter of 2003 |  | $0.1 million     

Given the risks associated with the uncertainties of the commercialization
process, such as rapidly changing customer needs, complexity of technology and
growing competitive pressures, we cannot assure investors that deviations from
our estimates will not occur or that the projects will meet with commercial
success. We believe there is a reasonable chance of realizing the economic
return expected from the acquired IPR&D.

Restructurings

During 2002 and 2001, we evaluated and initiated restructuring actions in order
to consolidate some of our operations, enhance operational efficiency and
reduce expenses. We continue to monitor and assess our facility obligations,
real estate markets and our operating expenses. As a result of these ongoing
assessments, we have recorded additional restructuring charges or revised
previously recorded restructuring charges. These actions resulted in total
restructuring charges of $56.0 million and $20.0 million for the years ended
December 31, 2002 and 2001, respectively.

During the year ended December 31, 2002, we recorded restructuring charges of
$56.0 million, consisting of facility exit costs, costs associated with the
liquidation of our Swedish development operations and the sale of certain
Swedish assets and the business related to the asset to TFS Technology AB
(TFS), and severance and other costs associated with the reduction of
employee headcount. The 2002 restructuring charges include costs of $37.6
million incurred due to the revision of previously recorded restructuring
charges.

Included in the 2002 restructuring charges are costs of $44.0 million
consisting of facility exit costs and related impairment of leasehold
improvements and furniture and fixtures. Facility exit costs consist of
estimated shortfalls of sublease rental income compared to obligations due
under certain exited facilities leases which are payable over the next 78
months. The remaining unreserved lease obligations related to certain exited
facilities amount to $11.1 million, which represents our estimated sublease
income from these facilities from the end of the reserve period to the end of
the lease term. Impairment of leasehold improvements and furniture and fixtures
included in facility exit costs are for unamortized leasehold improvements and
furniture and fixtures that we believe will not be recoverable upon sublease of
exited facilities. Total facility exit costs for 2002 include costs of $35.7
million we incurred when we revised estimates used in previously recorded
restructuring charges. We revised the estimates included in facility exit
costs due to the extension of the period of time estimated to obtain sublease
tenants for certain exited facilities, based on the terms of finalized
subleases obtained during 2002, due to higher than anticipated operating costs
associated with certain exited facilities, and due to the continued uncertainty
and deterioration in the commercial real estate and sublet markets in the
Boston metropolitan area.

We recorded restructuring charges of $6.3 million during 2002 associated with
the liquidation of our Swedish development operations and the sale of certain
Swedish assets and the business related to the assets to TFS. We sold these
assets and related business to TFS in exchange in part for TFSs assumption of
the liabilities related to the assets and associated business, including the
related support obligations and certain employees. The total number of
employees included in this transaction was 76, of which 67 were employed in
research and development and 9 were employed in general and administrative
functions. The total Sweden liquidation costs include additional costs of $1.9
million incurred upon revision of estimates used in previously recorded
restructuring charges.

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Also included in restructuring charges for 2002 are severance and other costs
associated with the reduction of employee headcount of $5.7 million for 121
employees, of which 15 were employed in manufacturing, customer operations and
technical services, 37 were employed in research and development, 48 were
employed in sales and marketing, and 21 employed in general and administrative
functions.

During the year ended December 31, 2001, we recorded restructuring charges of
$20.0 million, consisting of facility exit costs, prepaid license fees,
severance and other costs associated with the reduction of employee headcount,
and other direct costs.

Included in the 2001 restructuring charges are costs of $9.4 million consisting
of facility exit costs, related impairment of leasehold improvements and other
direct costs. Facility exit costs primarily consist of up to 18 months of
minimum lease payments due under certain exited facilities lease agreements.
Impairment of leasehold improvements included in facility exit costs are for
unamortized leasehold improvements that we believe will not be recoverable upon
sublease of exited facilities.

Prepaid license fees of $4.4 million included in 2001 restructuring charges
were expensed when it was determined that they did not have future realizable
value as a result of our exiting a planned service offering.

Also included in restructuring charges for 2001 are severance and other costs
associated with the reduction of employee headcount of $5.9 million for 320
employees, of which 33 were employed in manufacturing, customer operations and
technical services, 110 were employed in research and development, 110 were
employed in sales and marketing, 60 were employed in general and administrative
functions, and 7 were employed in the RSA Capital segment.

Restructuring charges accrued and unpaid at December 31, 2002 were as follows:

|                                                      |             |                 |       |           |            |             |            |             |       |        |       |   |  |       |      |   |  |   |     |  |  |   |       |  
|----------------------------------------------------- | ----------- | --------------- | ----- | --------- | ---------- | ----------- | ---------- | ----------- | ----- | ------ | ----- | - |  | ----- | ---- | - |  | - | --- |  |  | - | ----- | -
|                                                      |             | Facility Exit   |       |           |            |             |            | Liquidation |       |        |       |   |  |       |      |   |  |   |     | 
|                                                      |             | Costs & Related |       |           |            |             |            | of Sweden   |       |        |       |   |  | Other |      |   |  |   |     | 
|                                                      |             | Asset           |       | Severance |            | Development |            | Purchased   |       | Direct |       |   |  |      
|($ in
millions)                                       | Impairments |                 | Costs |           | Operations |             | Technology |             | Costs |        | Total
|                                                      |             |                 |       |           |            |             |            |             |       |        |       |  
|Balance at January 1, 2001                            |             |                 |      |           |            |             |           |             |       |        |      |   |  |       |     |   |  | $ | 0.4 |  |  | $ | 0.4   |  
|Total restructuring charges  2001                    |             | $               | 9.4   |           |            | $           | 5.9        |             |       |        |      |   |  | $     | 4.4  |   |  |   | 0.3 |  |  |   | 20.0  |  
|Payments and asset write offs  2001                  |             |                 | (0.3  | )         |            |             | (4.6       | )           |       |        |      |   |  | $     | (4.4 | ) |  |   |    |  |  |   | (9.3  | )
|                                                      |             |                 |       |           |            |             |            |             |       |        |       |   |  |       |      |   |  |   |     |  |  |   |       |  
|Balance at December 31, 2001                          |             |                 | 9.1   |           |            |             | 1.3        |             |       |        |      |   |  |       |     |   |  |   | 0.7 |  |  |   | 11.1  |  
|                                                      |             |                 |       |           |            |             |            |             |       |        |       |   |  |       |      |   |  |   |     |  |  |   |       |  
|Restructuring charges - 2002                          |             |                 | 8.3   |           |            |             | 5.7        |             |       | $      | 4.4   |   |  |       |     |   |  |   |    |  |  |   | 18.4  |  
|Revision of previously recorded
restructuring charges |             |                 | 35.7  |           |            |             |           |             |       |        | 1.9   |   |  |       |     |   |  |   |    |  |  |   | 37.6  |  
|                                                      |             |                 |       |           |            |             |            |             |       |        |       |   |  |       |      |   |  |   |     |  |  |   |       |  
|Total restructuring charges  2002                    |             |                 | 44.0  |           |            |             | 5.7        |             |       |        | 6.3   |   |  |       |     |   |  |   |    |  |  |   | 56.0  |  
|                                                      |             |                 |       |           |            |             |            |             |       |        |       |   |  |       |      |   |  |   |     |  |  |   |       |  
|Payments and asset write offs  2002                  |             |                 | (16.3 | )         |            |             | (5.6       | )           |       |        | (5.7  | ) |  |       |     |   |  |   |    |  |  |   | (27.6 | )
|                                                      |             |                 |       |           |            |             |            |             |       |        |       |   |  |       |      |   |  |   |     |  |  |   |       |  
|Balance at December 31, 2002                          |             | $               | 36.8  |           |            | $           | 1.4        |             |       | $      | 0.6   |   |  |       |     |   |  | $ | 0.7 |  |  | $ | 39.5  |  
|                                                      |             |                 |       |           |            |             |            |             |       |        |       |   |  |       |      |   |  |   |     |  |  |   |       |  

In 1999, we commenced and substantially completed consolidation of certain
operations in order to enhance operational efficiency. We recorded facility
exit costs consisting primarily of estimated shortfalls of sublease rental
income compared to minimum lease payments due under a lease agreement.
Remaining facility exit costs of approximately $0.3 million were accrued and
unpaid at December 31, 2002 and are expected to be paid through the first
quarter of 2008.

We expect to pay the remaining restructuring costs accrued at December 31, 2002
as follows:

|                                             |  |       |         | 
|-------------------------------------------- |  | ----- | ------- | 
|Year ending December 31, 2003                |  | $12.2 | million
|Year ending December 31, 2004                |  | 9.8   | million
|Year ending December 31, 2005                |  | 8.8   | million
|Year ending December 31, 2006                |  | 5.8   | million
|Year ending December 31, 2007                |  | 1.6   | million
|Year ending December 31, 2008 and thereafter |  | 1.3   | million

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Interest (Expense) Income and Other

Interest (expense) income and other includes the following:

|                                                  |      |                          |      |   |  |   |      |  
|------------------------------------------------- | ---- | ------------------------ | ---- | - |  | - | ---- | -
|                                                  |      | Years Ended December 31,
|                                                  |      |                         
|($ in
millions)                                   | 2002 |                          | 2001
|                                                  |      |                          |      |  
|Interest expense on 7% convertible debentures     |      | $                        | (5.7 | ) |  | $ | (1.2 | )
|Non cash amortization of deferred financing costs |      |                          | (1.6 | ) |  |   | (0.3 | )
|Non cash accretion of warrant value               |      |                          | (1.4 | ) |  |   | (0.3 | )
|Interest income net of (expense) and other        |      |                          | (0.1 | ) |  |   | 7.7  |  
|                                                  |      |                          |      |   |  |   |      |  
|Total interest (expense) income and other         |      | $                        | (8.8 | ) |  | $ | 5.9  |  
|                                                  |      |                          |      |   |  |   |      |  

Interest expense, non cash amortization of deferred financing costs and non
cash accretion of warrant value included in interest (expense) income and other
were incurred in connection with our 7% convertible debentures, which were
issued in October and November of 2001. The decrease in interest income during
2002 as compared to 2001 was primarily due to significantly lower interest
rates earned on lower average cash and cash equivalents balances.

(Loss) Income from Investing Activities

(Loss) income from investing activities which are included in our RSA Capital
segment includes the following gains (losses):

|                                                            |      |                          |       |   |  |   |      |  
|----------------------------------------------------------- | ---- | ------------------------ | ----- | - |  | - | ---- | -
|                                                            |      | Years Ended December 31,
|                                                            |      |                         
|($ in
millions)                                             | 2002 |                          | 2001 
|                                                            |      |                          |       |  
|Gain from sale of marketable securities, net                |      | $                        | 0.8   |   |  | $ | 6.2  |  
|Loss on sale of investments                                 |      |                          | (3.0  | ) |  |   |     |  
|Decline in fair value of Crosby Finance, LLC                |      |                          | (6.8  | ) |  |   |     |  
|Settlement of forward contracts held by Crosby Finance, LLC |      |                          |      |   |  |   | 41.8 |  
|Investment impairment charges                               |      |                          | (21.9 | ) |  |   | (7.2 | )
|                                                            |      |                          |       |   |  |   |      |  
|Total (loss) income from investing activities               |      | $                        | (30.9 | ) |  | $ | 40.8 |  
|                                                            |      |                          |       |   |  |   |      |  

During 2002, we recognized impairment charges of $21.9 million related to our
long-term investments in privately held companies. During the fourth quarter
of 2002, we initiated a process to sell our equity investments, and recorded an
impairment charge of $12.0 million to reflect the investments at their
estimated realizable value, less costs of disposal. During 2002, three of the
companies in which we had invested were in the process of obtaining additional
financing or being sold, and based upon valuations and anticipated cash
proceeds, we recorded an impairment charge of $9.9 million to reduce the
carrying amount of these investments to their estimated fair value.

In November 2000, we transferred approximately 2.6 million shares of VeriSign
common stock, which were covered by three Forwards and one VDF, to Crosby
Finance, LLC, of which we are a 99% member. Crosby is a bankruptcy-remote
qualified special purpose entity, established specifically to securitize the
shares of VeriSign common stock. The contribution and the transfer have been
accounted for as a sale under SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. Accordingly,
we do not consolidate Crosby for accounting purposes. The counterparty to the
VDF contract holds the remaining 1% interest in Crosby.

During 2001, the three Forwards matured and Crosby received total cash proceeds
of $54.0 million upon delivery of 0.6 million shares of VeriSign common stock
to the counterparty. Crosby distributed the proceeds from the Forwards to us
and the counterparty at our respective membership interest percentages. This
generated cash proceeds of $53.5 million and resulted in a gain of $41.8
million to us, which is included in income from investing activities for 2001.

At December 31, 2002, Crosby held approximately 2.0 million shares of VeriSign
common stock and the VDF contract. The VDF contract entitles Crosby to receive
cash proceeds of up to $35.3 million depending on the market price of VeriSign
common stock on January 3, 2006. The closing price of VeriSigns common stock
on The NASDAQ National Market on December 31, 2002 was $8.02 per share. Unless
the value of VeriSign common stock appreciates to at least $87.16 per share in
January 2006, Crosby will not be entitled to any cash proceeds. Crosby has no
liability or obligation to its members or the counterparty to the VDF contract
other than to deliver the shares of VeriSign common stock to the counterparty
upon maturity of the VDF contract and to distribute the cash proceeds, if any,
to its members. After settlement of the VDF in January 2006, Crosby will
dissolve.

The carrying amount of our 99% interest in Crosby was $0.2 million and $7.0
million at December 31, 2002 and 2001, respectively. We account for our
investment in Crosby under the guidelines of EITF No. 96-12, Recognition of
Interest Income and Balance Sheet Classification of Structured Notes. Before
the settlement of the Forwards, we used the retrospective interest method to
account for our interest in Crosby as we believed we would recover a
substantial amount of our interest. Any increases in the cost basis of our

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interest in Crosby, determined by applying the retrospective interest method,
were recorded in interest income. Any changes in the fair value of our
interest in Crosby were recorded in other comprehensive income in stockholders
equity. In the fourth quarter of 2001, after the settlement of the last
Forward, it became reasonably possible that we could lose all or substantially
all of the value of our remaining interest, and therefore could no longer apply
the retrospective interest method to our interest in Crosby. Accordingly, we
are carrying our interest at fair value with all changes in fair value reported
in income from investing activities. We determine the fair value of our
interest in Crosby based on the fair value of Crosbys right to potentially
receive additional cash proceeds upon maturity of the VDF. The decline in the
fair value of our interest in Crosby was $6.8 million for the year ended
December 31, 2002.

(Benefit) Provision for Income Taxes

We recorded an income tax benefit of $(39.9) million for 2002 compared to a
provision of $2.6 million for 2001. The income tax benefit recorded during 2002
is due to lower pre-tax income in 2002 as compared to 2001, the discontinuation
of amortization of goodwill for financial statement purposes upon adoption of
SFAS No. 142, Goodwill and Intangible Assets, and other non deductible
acquisition related costs incurred in 2001. We believe the income tax benefit
will be recoverable through a carry back claim to previously filed tax returns.

2001 Compared with 2000

Revenue

The following tables set forth the amount, percentage of total revenue and
percentage increase (decrease) of our revenue by product group, product type
and product division:

|                  |                                       |         |                          |            |  |            |  |            |   |            |   |       |  |  |  |       |   |  |  |       |   
|----------------- | ------------------------------------- | ------- | ------------------------ | ---------- |  | ---------- |  | ---------- | - | ---------- | - | ----- |  |  |  | ----- | - |  |  | ----- | --
|                  |                                       |         | Years Ended December 31, |            |  |            | 
|                  |                                       |         |                          |            |  |            | 
|                  |                                       | 2001    |                          | 2000       |  | Percentage
|                  |                                       |         |                          |            |  | Increase  
|($ in
millions)   |                                       | Revenue |                          | Percentage |  | Revenue    |  | Percentage |   | (Decrease)
|                  |                                       |         |                          |            |  |            |  |            |   |           
|Product group:    |                                       |         |                          |            |  |            |  |            |   |            |   |       |  |  |  |       |   |  |  |      
|                  | Enterprise solutions                  |         | $                        | 229.2      |  |            |  | 81.1       | % |            | $ | 211.8 |  |  |  | 75.6  | % |  |  | 8.2   | % 
|                  | Developer solutions                   |         |                          | 53.5       |  |            |  | 18.9       | % |            |   | 68.4  |  |  |  | 24.4  | % |  |  | (21.8 | %)
|                  |                                       |         |                          |            |  |            |  |            |   |            |   |       |  |  |  |       |   |  |  |      
|                  | Total                                 |         | $                        | 282.7      |  |            |  | 100.0      | % |            | $ | 280.2 |  |  |  | 100.0 | % |  |  | 0.9   | % 
|                  |                                       |         |                          |            |  |            |  |            |   |            |   |       |  |  |  |       |   |  |  |      
|Product type:     |                                       |         |                          |            |  |            |  |            |   |            |   |       |  |  |  |       |   |  |  |      
|                  | Authenticators                        |         | $                        | 118.8      |  |            |  | 42.1       | % |            | $ | 114.6 |  |  |  | 40.9  | % |  |  | 3.7   | % 
|                  | Software products                     |         |                          | 103.6      |  |            |  | 36.6       | % |            |   | 123.4 |  |  |  | 44.0  | % |  |  | (16.1 | %)
|                  | Maintenance and professional
services |         |                          | 60.3       |  |            |  | 21.3       | % |            |   | 42.2  |  |  |  | 15.1  | % |  |  | 42.9  | % 
|                  |                                       |         |                          |            |  |            |  |            |   |            |   |       |  |  |  |       |   |  |  |      
|                  | Total                                 |         | $                        | 282.7      |  |            |  | 100.0      | % |            | $ | 280.2 |  |  |  | 100.0 | % |  |  | 0.9   | % 
|                  |                                       |         |                          |            |  |            |  |            |   |            |   |       |  |  |  |       |   |  |  |      
|Product division: |                                       |         |                          |            |  |            |  |            |   |            |   |       |  |  |  |       |   |  |  |      
|                  | Authentication products               |         | $                        | 225.8      |  |            |  | 79.9       | % |            | $ | 211.3 |  |  |  | 75.4  | % |  |  | 6.9   | % 
|                  | Encryption products                   |         |                          | 53.1       |  |            |  | 18.8       | % |            |   | 68.9  |  |  |  | 24.6  | % |  |  | (23.0 | %)
|                  | Web access management products        |         |                          | 3.8        |  |            |  | 1.3        | % |            |   |      |  |  |  |      |   |  |  | 100.0 | % 
|                  |                                       |         |                          |            |  |            |  |            |   |            |   |       |  |  |  |       |   |  |  |      
|                  | Total                                 |         | $                        | 282.7      |  |            |  | 100.0      | % |            | $ | 280.2 |  |  |  | 100.0 | % |  |  | 0.9   | % 
|                  |                                       |         |                          |            |  |            |  |            |   |            |   |       |  |  |  |       |   |  |  |      

We reclassified revenue of $13.0 million and $6.2 million for the years ended
December 31, 2001 and 2000, respectively, from the authentication products
division to the encryption products division in order to conform to current
period presentation.

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The following tables set forth the amount, percentage of total revenue and
percentage increase (decrease) of revenue by regional area:

|                         |         |                          |            |      |         |            |            |   |            |   |       |  |  |  |       |   |  |  |      |   
|------------------------ | ------- | ------------------------ | ---------- | ---- | ------- | ---------- | ---------- | - | ---------- | - | ----- |  |  |  | ----- | - |  |  | ---- | --
|                         |         | Years Ended December 31, |            |      |         |           
|                         |         |                          |            |      |         |           
|                         |         | 2001                     |            | 2000 |         | Percentage
|                         |         |                          |            |      |         | Increase  
|($ in
millions)          | Revenue |                          | Percentage |      | Revenue |            | Percentage |   | (Decrease)
|                         |         |                          |            |      |         |            |            |   |            |  
|United States of America |         | $                        | 162.8      |      |         |            | 57.6       | % |            | $ | 176.7 |  |  |  | 63.1  | % |  |  | (7.9 | )%
|Europe and other         |         |                          | 91.5       |      |         |            | 32.4       | % |            |   | 81.9  |  |  |  | 29.2  | % |  |  | 11.7 | % 
|Asia Pacific             |         |                          | 28.4       |      |         |            | 10.0       | % |            |   | 21.6  |  |  |  | 7.7   | % |  |  | 31.5 | % 
|                         |         |                          |            |      |         |            |            |   |            |   |       |  |  |  |       |   |  |  |      |   
|Total                    |         | $                        | 282.7      |      |         |            | 100.0      | % |            | $ | 280.2 |  |  |  | 100.0 | % |  |  | 0.9  | % 
|                         |         |                          |            |      |         |            |            |   |            |   |       |  |  |  |       |   |  |  |      |   

Enterprise solutions product group revenue increased and Developer solutions
product group revenue decreased in 2001 as compared to 2000, which resulted in
total revenue for 2001 which was approximately the same as the total revenue
for 2000. Revenue earned in connection with our RSA Capital segment was $68
thousand for 2001, all of which was attributable to our NEST group. In
September 2001 we acquired Securant Technologies, Inc. a privately held company
that developed and delivered the ClearTrust Web access management solutions.
In the fourth quarter of 2001, as a result of the Securant acquisition, we
established the RSA ClearTrust Web access management solution as our fourth
product line, which generated revenue of $3.8 million for 2001.

Our stocking distributor program began in 1997. We sell all of our product
lines to stocking distributors, with authentication products comprising most
sales. Our stocking distributors purchase our products, take title upon
shipment and resell the products to their customers. Stocking distributors have
contractual rights of return for stock rotation purposes of generally 10% to
20% of their purchase volume. Prior to January 1, 2001, we believed we lacked
sufficient data to reasonably estimate returns from stocking distributors and
therefore we recognized revenue upon evidence of a sale to the end user. By
the beginning of 2001, we had sufficient data to reasonably estimate stocking
distributor returns and we determined that historically, actual return volumes
have averaged less than 5% of stocking distributor purchase volume. Based on
this experience and the criteria set out in SFAS No. 48, Revenue Recognition
when Right of Return Exists, we began recognizing revenue upon shipment of
product to the stocking distributors, net of estimated returns. Our revenue
recognized from sales to stocking distributors in 2001 increased by $3.0
million due to this change in estimate. The increase in recognized revenue of
$3.0 million resulted in a decrease to net loss of $2.0 million and a decrease
to diluted loss per share of $0.04 for the year ended December 31, 2001.

We believe that our revenue grew at a slower rate in 2001 than it has done
historically, not because of competitive pressures, but instead due to the
general weakening of the global economy. We believe that the general weakening
of the global economy and the hesitant economic climate after the September
11th terrorist attacks resulted in decreases in spending by corporate
information technology departments and by software developers. We also believe
developer spending decreased substantially with the fall off in venture
investing after the collapse of many dot.com companies. We believe the
increase in service revenue can primarily be attributed to increased
maintenance revenue due to an increase in the number of installed users over
the past several years.

The number of RSA SecurID authenticator units sold increased 3.3% in 2001 to
2.7 million from 2.6 million in 2000. The average selling price per
authenticator unit decreased 0.5% in 2001 to $43.45 from $43.68 in 2000. The
increase in number of units sold combined with the decrease in the average
selling price per unit contributed to the increase in RSA SecurID
authentication product line revenue of 5.2% in 2001 to $199.4 million from
$189.6 million in 2000.

We believe that the decrease in Developer revenue can be attributed to the
weakened global economy, a decrease in new software development companies and
the availability of free, open source products that compete with our RSA
BSAFE product line.

Our strong revenue growth in international markets combined with a 7.9%
decrease in United States revenue contributed to the increase in international
revenue as percentage of total revenue for 2001. We believe that a portion of
our increase in international revenue is due to our growing penetration of
international markets.

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Gross Profit

The following tables set forth the gross profit and gross margin for products
and maintenance and professional services for the years ended December 31, 2001
and 2000:

|                                      |              |                          |              |      |              |  |              |   |  |   |       |  |  |  |      |  
|------------------------------------- | ------------ | ------------------------ | ------------ | ---- | ------------ |  | ------------ | - |  | - | ----- |  |  |  | ---- | -
|                                      |              | Years Ended December 31,
|                                      |              |                         
|                                      |              | 2001                     |              | 2000
|                                      |              |                          |              |     
|($ in
millions)                       | Gross Profit |                          | Gross Margin |      | Gross Profit |  | Gross Margin
|                                      |              |                          |              |      |              |  |              |  
|Products                              |              | $                        | 184.1        |      |              |  | 82.8         | % |  | $ | 204.9 |  |  |  | 86.1 | %
|Maintenance and
professional
services |              |                          | 31.9         |      |              |  | 52.8         | % |  |   | 20.3  |  |  |  | 48.2 | %
|                                      |              |                          |              |      |              |  |              |   |  |   |       |  |  |  |      |  
|Total                                 |              | $                        | 216.0        |      |              |  | 76.4         | % |  | $ | 225.2 |  |  |  | 80.4 | %
|                                      |              |                          |              |      |              |  |              |   |  |   |       |  |  |  |      |  

Included in the gross profit for products for 2001 is a one time write off of
prepaid royalties of $5.2 million. These prepaid royalties were expensed to
cost of product revenue when it was determined that they may not have future
realizable value as a result of our acquisition of Xcert in February 2001.
Excluding the prepaid royalties, total gross margin for products was 85.2% for
2001. We have included this gross margin measure, which is not in accordance
with GAAP, for year over year comparison purposes.

The increase in gross profit from maintenance and professional services in 2001
can be primarily attributed to increased maintenance revenue due to an increase
in the number of installed users over the past several years. Included in total
gross profit from maintenance and professional services for 2001 was $0.4
million of cost of maintenance and professional services revenue incurred in
connection with our RSA Capital segment.

Research and Development

Total research and development expenses increased 29.6% in 2001 to $58.3
million from $45.0 million in 2000, and represented 20.6% of total revenue for
2001. For 2001 as compared to 2000 approximately $5.5 million of the increase
in research and development expenses was from increased payroll and overhead
expenses associated with an increased workforce and additional facilities and
approximately $5.3 million of the increase was from the addition of expenses
associated with the operations of Xcert and Securant. Included in total
research and development expenses for 2001 was approximately $2.5 million of
research and development expenses associated with our RSA Capital segment, all
of which were attributable to our NEST group. Research and development expenses
for our NEST group related primarily to payroll expenses for engineers employed
in connection with the development of our Transindigo and 3GI products.

Marketing and Selling

Total marketing and selling expenses increased 19.6% in 2001 to $122.9 million
from $102.8 million in 2000, and represented 43.5% of total revenue for 2001.
For 2001 as compared to 2000, approximately $5.7 million of the increase in
marketing and selling expenses resulted from increased overhead expenses
related to additional facilities; approximately $5.7 million of the increase
was from the addition of expenses associated with operations of Xcert and
Securant; approximately $4.2 million of the increase related to increased
provisions for bad debts; approximately $3.4 million of the increase related to
increased overhead costs allocated to sales and marketing expenses;
approximately $3.3 million of the increase was from increased spending on
marketing programs including $1.0 million from the write off of costs incurred
in connection with the cancellation of the RSA Conference Europe; and
approximately $2.2 million of the increase resulted from increased payroll
expenses associated with an increased workforce. These increases in marketing
and selling expenses in 2001 as compared to 2000 were reduced by a decrease in
commission expense of $4.4 million due to decreased revenue. Included in total
marketing and selling expenses for 2001 was approximately $0.5 million of
marketing and selling expenses associated with our RSA Capital segment, all of
which was attributable to our NEST group. Marketing and selling expenses for
our NEST group related primarily to payroll expenses in connection with the
development of our Transindigo and 3GI products.

General and Administrative

Total general and administrative expenses increased 10.5% in 2001 to $39.1
million from $35.4 million in 2000, and represented 13.8% of total revenue for
2001. Included in total general and administrative expenses were $7.3 million
and $3.9 million for 2001 and 2000, respectively, of general and administrative
costs associated with our RSA Capital segment, including its NEST group and
investment activities. For 2001 as compared to 2000, approximately $3.4
million of the increase in total general and administrative expenses was from
costs associated with our RSA Capital segment. Approximately $1.0 million of
the increase was due to increased legal costs, including approximately $0.5
million of legal settlement expense relating to the settlement of a securities
class action suit, approximately $0.4 million of litigation expense in
connection with patent litigation relating to the products of 3GI which we
acquired in May 2001 and which expenses to defend are covered by an escrow
account, and approximately $0.1 million of other legal expenses. Approximately
$0.5 million of the increase in total general and administrative expenses was
due to costs associated with Securant and Xcert. These increases were partially
offset by a decrease of approximately $1.2 million in payroll, overhead and
consulting expenses.

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Acquisitions

During 2001, we completed four acquisitions, which were accounted for as
purchases. The results of operations of the acquired companies have been
included in our consolidated statement of operations for 2001 from their
respective dates of acquisition. Costs related to these acquisitions are for
investment banking, professional fees and other direct costs, including
employee severance and facilities closure, and were recorded on the dates of
acquisition and have been included in the allocation of the purchase prices.

In September 2001, we acquired all of the capital stock of Securant, a
privately held company that developed the ClearTrust Web access management
solution, for an aggregate of $142.7 million in cash including acquisition
costs. In May 2001, we acquired all of the capital stock of 3GI, a privately
held company that developed smart card and biometric authentication products,
and substantially all of the assets of Transindigo, a privately held company
that developed real time Web access management software products, for an
aggregate of $23.7 million in cash including acquisition costs. In February
2001, we acquired all of the capital stock of Xcert, a privately held company
that developed digital certificate-based products for securing e-business
transactions, for $69.1 million in cash, including acquisition costs, plus the
assumption of all Xcert stock options.

In connection with these acquisitions, we incurred certain operating expenses
which are included in our consolidated statement of operations for the year
ended December 31, 2001. These operating expense items include the write off
of prepaid license fees of $5.2 million, which is included in cost of product
revenue, and stock option compensation expense of $0.8 million, which is
included in cost of service revenue, research and development, marketing and
selling and general and administrative expenses, IPR&D of $7.9 million, and
amortization of goodwill and intangible assets of $14.5 million.

We used an independent appraiser to calculate the amounts allocated to assets
and liabilities acquired including intangible assets and IPR&D. The
independent appraiser used established valuation techniques accepted in the
high technology industry, including the income method, which discounts expected
future cash flows to present value, and the cost method, which uses replacement
costs. These methods give consideration to relevant market sizes and growth
factors, expected industry trends, product sales cycles, and the estimated
lives of each of the products underlying technology. For IPR&D, consideration
was also given to the projects stage of completion, the complexity of the work
completed to date, the difficulty of completing the remaining development and
the projected cost to complete the project.

The acquired IPR&D consists of development projects through the respective
dates of acquisition. IPR&D expense of $7.9 million in 2001 represents the
write off of IPR&D of $3.8 million, $2.5 million, $1.0 million and $0.6 million
in connection with the acquisitions of Securant, Xcert, 3GI and Transindigo,
respectively. The amounts allocated to IPR&D projects were expensed in the
quarter that the related acquisition was consummated because technological
feasibility of the IPR&D projects had not been achieved and there were no
alternative future uses.

The estimated costs to complete the IPR&D projects are for payroll and related
overhead costs for engineers employed in the completion of these development
projects.

Restructurings

During the year ended December 31, 2001, we recorded restructuring charges of
$20.0 million, consisting of facility exit costs, prepaid license fees,
severance and other costs associated with the reduction of employee headcount,
and other direct costs.

Included in the 2001 restructuring charges are costs of $9.4 million consisting
of facility exit costs, related impairment of leasehold improvements and other
direct costs. Facility exit costs primarily consist of up to 18 months of
minimum lease payments due under certain exited facilities lease agreements.
Impairment of leasehold improvements included in facility exit costs are for
unamortized leasehold improvements that we believe will not be recoverable upon
sublease of exited facilities.

Prepaid license fees of $4.4 million included in 2001 restructuring charges
were expensed when it was determined that they did not have future realizable
value as a result of our exiting a planned service offering.

Also included in restructuring charges for 2001 are severance and other costs
associated with the reduction of employee headcount of $5.9 million for 320
employees, of which 33 were employed in manufacturing, customer operations and
technical services, 110 were employed in research and development, 110 were
employed in sales and marketing, 60 were employed in general and administrative
functions, and 7 were employed in the RSA Capital segment.

In addition, in 1999, we commenced and substantially completed consolidation of
certain operations in order to enhance operational efficiency. We recorded
costs of $11.4 million, consisting primarily of severance costs for employees
who were employed primarily in
research and development and general and administrative activities for the
formerly separate operations of Intrusion Detection Inc., a company we acquired
in 1998, and facility exit costs and other direct costs. Facility exit costs
consisted primarily of estimated

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shortfalls of sublease rental income compared
to minimum lease payments due under a lease agreement. During 2000, we
reversed $2.1 million of previously recorded restructuring costs due to revised
estimates of the facility exit costs, including associated legal costs and
other direct costs.

Interest (Expense) Income and Other

Interest (expense) income and other decreased 54.4% in 2001 to $5.9 million
from $12.9 million in 2000. Included in interest (expense) income and other for
2001 is $1.8 million of interest expense, which includes $1.2 million in
interest payable on our 7% convertible debentures issued in October and
November 2001, $0.3 million of non cash amortization of the deferred finance
costs incurred in connection with the issuance of the 7% convertible debentures
and $0.3 million of non cash accretion of the value of warrants issued in
connection with the issuance of the 7% convertible debentures. Interest income
and other was $7.7 million for 2001 as compared to $12.9 million for 2000. The
decrease in interest income for 2001 as compared to 2000 was primarily due to
lower interest rates earned on lower average cash and marketable securities
balances.

Income from Investing Activities

Income from investing activities which are included in our RSA Capital segment
includes the following gains (losses):

|                                                            |      |                          |      |   |  |   |       | 
|----------------------------------------------------------- | ---- | ------------------------ | ---- | - |  | - | ----- | 
|                                                            |      | Years ended December 31,
|                                                            |      |                         
|($ in
millions)                                             | 2001 |                          | 2000
|                                                            |      |                          |      |  
|Marketable securities, net                                  |      | $                        | 6.2  |   |  | $ | 39.4  | 
|Settlement of forward contracts held by Crosby Finance, LLC |      |                          | 41.8 |   |  |   |      | 
|Transfer of assets to Crosby Finance, LLC                   |      |                          |     |   |  |   | 101.4 | 
|Termination of VeriSign collar program                      |      |                          |     |   |  |   | 46.0  | 
|VeriSign collar program                                     |      |                          |     |   |  |   | 86.1  | 
|Investment impairment charges                               |      |                          | (7.2 | ) |  |   |      | 
|                                                            |      |                          |      |   |  |   |       | 
|Total income from investing activities                      |      | $                        | 40.8 |   |  | $ | 272.9 | 
|                                                            |      |                          |      |   |  |   |       | 

At September 30, 1999, we owned 6.0 million shares of VeriSign common stock,
which were classified as available for sale. In the third and fourth quarters
of 1999, we entered into costless collars covering all of our shares of
VeriSign common stock. The collars protected us against declines in the market
value of VeriSign by ensuring that at least a portion of our unrealized gain
was hedged and realizable. Between October 1, 1999 and September 30, 2000 we
settled four collar contracts by delivering 2.0 million shares of VeriSign
common stock and realized gains of $86.1 million and $30.4 million in 2000 and
1999, respectively. On November 27, 2000 we exercised our right to terminate
the collars on the remaining 4.0 million shares of VeriSign common stock. We
delivered 1.4 shares of VeriSign common stock to terminate the collars, which
resulted in no cash proceeds to us and the recognition of a net gain of $46.0
million during 2000. After termination of the collars, we had 2.6 million
shares of VeriSign common stock remaining.

In order to create current liquidity, on November 27, 2000 we entered into
three Forwards with respect to 0.6 million shares of VeriSign common stock and
a VDF contract with respect to 2.0 million shares of VeriSign common stock.

Each Forward contract required us to deliver approximately 0.2 million shares
at specific dates during the first three quarters of 2001. Upon each delivery
of shares, we were entitled to receive $18.0 million, for total proceeds of
$54.0 million in the first three quarters of 2001.

Under the VDF contract, we received cash proceeds of $137.8 million and
committed to deliver 2.0 million shares of VeriSign common stock in January
2006. In addition, the VDF contract entitles us to additional cash proceeds of
up to $35.3 million depending on the market price of VeriSign common stock on
January 3, 2006.

No gain was recognized upon execution of either the Forwards or the VDF.

However, immediately following the execution of the Forwards and the VDF, we
contributed the remaining 2.6 million shares of VeriSign common stock and
transferred our rights and obligations in the Forwards and the VDF to Crosby
and received a 99% interest in Crosby. Crosby is a bankruptcy-remote qualified
special purpose entity, established specifically to securitize the shares of
VeriSign common stock. The contribution and the transfer have been accounted
for as a sale under SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. Accordingly, we
recognized a net gain of $101.4 million and do not consolidate Crosby for
accounting purposes. The counterparty to the VDF contract holds the remaining
1% interest in Crosby.

During 2001, the three Forwards matured and Crosby received total cash proceeds
of $54.0 million upon delivery of 0.6 million shares of VeriSign common stock
to the counterparty. Crosby distributed the proceeds from the Forwards to us
and the counterparty at our respective membership interest percentages. This
generated cash proceeds of $53.5 million and resulted in a gain of $41.8
million to

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us, which is included in income from investing activities for 2001.
At December 31, 2001 Crosby held 2.0 million shares of VeriSign and the VDF
contract.

Crosby has no liability or obligation to its members or counterparty to the VDF
contract other than to deliver the shares of VeriSign common stock to the
counterparty upon maturity of the VDF contract and to distribute the cash
proceeds, if any, to its members. After settlement of the VDF in January 2006,
Crosby will dissolve.

The carrying amount of our 99% interest in Crosby was $7.0 million and $76.0
million and the unrealized gain in accumulated other comprehensive income, net
of tax was zero and $34.7 million at December 31, 2001 and 2000, respectively.
We account for our investment in Crosby under the guidelines of EITF 96-12,
Recognition of Interest Income and Balance Sheet Classification of Structured
Notes. Prior to the settlement of the Forwards, the retrospective interest
method was used to account for our interest in Crosby as we believed it would
recover a substantial amount of its interest. Any increases in the cost basis
of our interest in Crosby, determined by applying the retrospective interest
method, were recorded in interest income. Any changes in the fair value of our
interest in Crosby were recorded in other comprehensive income in shareholders
equity. Upon the distribution of the cash proceeds of the Forwards by Crosby,
a portion of the previously unrealized gain which approximated $40.7 million,
was recognized in income from investing activities for the year ended December
31, 2001. In the fourth quarter of 2001, subsequent to the settlement of the
last Forward, it became reasonably possible that we could lose all or
substantially all of the value of our remaining interest, and therefore could
no longer apply the retrospective interest method to our interest in Crosby.
Accordingly, we are carrying our interest at fair value with all changes in
fair value reported in income from investing activities. We determine the fair
value of our interest in Crosby based on the fair value of Crosbys right to
potentially receive additional cash proceeds upon maturity of the VDF. Unless
the VeriSign stock appreciates substantially in value by January 2006, we will
not be entitled to any cash flows from our remaining interest in Crosby.

Provision for Income Taxes

The provision for income taxes decreased to $2.6 million during 2001, from
$124.0 million during 2000, primarily due to lower pre-tax income for the year
ended December 31, 2001. While we incurred a loss of $2.5 million for the year
ended December 31, 2001 in accordance with accounting principles generally
accepted in the United States, due to the non-deductibility of certain expenses
we had taxable income for 2001. Our effective tax rate increased primarily due
to acquisition related goodwill amortization expenses and in process research
and development charges that are non-deductible for tax purposes.

Liquidity and Capital Resources

Liquidity

We had $103.0 million in cash and cash equivalents at December 31, 2002,
consisting primarily of operating cash and short-term investments. This
represents an increase of $41.1 million in cash and cash equivalents during the
year ended December 31, 2002. The major changes in cash during 2002 were cash
provided by operations of $42.0 million, cash used for investing activities of
$4.3 million and cash provided by financing activities of $3.9 million.

Cash provided by operations for the year ended December 31, 2002 included $18.6
million of cash received from an income tax refund.

Cash used by investing activities of $4.3 million during 2002 consisted
primarily of $4.7 million of cash used to purchase property and equipment, and
$1.0 million of cash used for acquisition related costs, net of cash received
from acquisition escrow accounts. These uses of cash in investing activities
were partially offset by cash provided from sales of marketable securities and
equity investments of $1.4 million.

Cash provided by financing activities of $3.9 million during 2002 consisted
primarily of proceeds from employee exercises and purchases under our stock
option and employee stock purchase plans.

We have commitments for various operating leases worldwide that expire at
various times through 2017 and that are shown below net of existing sublease
agreements, excluding facility exit costs included in restructuring charges.
The lease commitments of $135.3 million shown below include lease commitments
of $11.1 million related to certain exited facilities that have not been
reserved for in restructuring charges. Restructuring commitments shown below
are primarily for facility exit costs of up to 78 months of minimum lease
payments due under certain excess facilities lease agreements, net of related
sublease agreements. The following are our contractual commitments associated
with our lease obligations, restructurings and convertible debentures:

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|                  |                            |      |                           |      |  |      |       |      |  |      |      |            |  |       |      |     |  |   |      |      |  |   |      |      |  |   |       |       | 
|----------------- | -------------------------- | ---- | ------------------------- | ---- |  | ---- | ----- | ---- |  | ---- | ---- | ---------- |  | ----- | ---- | --- |  | - | ---- | ---- |  | - | ---- | ---- |  | - | ----- | ----- | 
|                  |                            |      | Years Ending December 31, |      |  |      |       |      |  |      |     
|                  |                            |      |                           |      |  |      |       |      |  |      |     
|($ in millions)   |                            | 2003 |                           | 2004 |  | 2005 |       | 2006 |  | 2007 |      | Thereafter |  | Total
|                  |                            |      |                           |      |  |      |       |      |  |      |      |            |  |      
|                  | Leases                     |      | $                         | 11.0 |  |      | $     | 9.4  |  |      | $    | 8.3        |  |       | $    | 9.1 |  |   | $    | 13.1 |  |   | $    | 84.4 |  |   | $     | 135.3 | 
|                  | Convertible debt principal |      |                           |     |  |      |       | 80.0 |  |      |      |           |  |       |      |    |  |   |      |     |  |   |      |     |  |   |       | 80.0  | 
|                  | Convertible debt interest  |      |                           | 5.6  |  |      |       | 4.5  |  |      |      |           |  |       |      |    |  |   |      |     |  |   |      |     |  |   |       | 10.1  | 
|                  | Restructurings             |      |                           | 12.2 |  |      |       | 9.8  |  |      |      | 8.8        |  |       |      | 5.8 |  |   |      | 1.6  |  |   |      | 1.3  |  |   |       | 39.5  | 
|                  |                            |      |                           |      |  |      |       |      |  |      |      |            |  |       |      |     |  |   |      |      |  |   |      |      |  |   |       |       | 
|Total commitments |                            | $    | 28.8                      |      |  | $    | 103.7 |      |  | $    | 17.1 |            |  | $     | 14.9 |     |  | $ | 14.7 |      |  | $ | 85.7 |      |  | $ | 264.9 |      
|                  |                            |      |                           |      |  |      |       |      |  |      |      |            |  |       |      |     |  |   |      |      |  |   |      |      |  |   |       |      

During October and November 2001, we issued 7% convertible subordinated
debentures with an aggregate principal amount of $80.0 million, together with
warrants to purchase an aggregate of 873,045 shares of our common stock.
Interest is payable in cash semi-annually on January 1 and July 1, at a fixed
rate of 7% per annum. We made $3.9 million of interest payments during the
year ended December 31, 2002. We expect to make interest payments of
approximately $5.6 million during the year ending December 31, 2003. The
debentures mature on October 17, 2004, unless redeemed earlier by us or
converted into shares of our common stock at the holders option. At any time
and at their option, each holder may convert any outstanding debentures into
shares of our common stock at a conversion price of $13.745 per share.
Conversion of all of the outstanding debentures would result in the issuance of
approximately 5.8 million shares of our common stock. We can redeem all or a
portion of the 7% convertible debentures for cash at any time after October 17,
2002, as long as the arithmetic average of the weighted average price of our
common stock on each trading day during the fifteen trading day period
immediately prior to the election to redeem is 150% of the conversion price.
This conversion feature was not exercisable at December 31, 2002. The
debentures are unsecured and are subordinated to all existing and future senior
indebtedness. The agreements governing the convertible debentures contain
covenants restricting our ability to incur and guarantee additional debt. The
covenants limit the amount of additional debt we may incur to the lesser of 30%
of our consolidated stockholders equity, which was approximately $79.0 million
at December 31, 2002, or a total of $180.0 million including the balance of the
7% convertible debentures outstanding.

We have a $10.0 million line of credit agreement with a major financial
institution against which we may elect to borrow at any time until June 30,
2003, subject to annual extension provisions. Borrowing availability is
reduced by letters of credit issued for purposes such as collateralizing real
estate rental agreements. At December 31, 2002, we had $8.2 million of
borrowing availability under this line of credit. Borrowings under this
agreement will bear interest at either fixed or variable rates linked to either
the London Interbank Offered Rate or the Prime Rate. Borrowings will be
collateralized by our cash deposits.

In July 2001, we filed a shelf Registration Statement on Form S-3 with the
Securities and Exchange Commission. This registration statement, which the SEC
declared effective in August 2001, covers our issuance of various types of
securities, including debt, common stock and warrants, up to an aggregate
offering price of $500 million. As of December 31, 2002, there have been no
issuance of securities under this shelf Registration Statement. We currently
have no plans to issue any securities under this shelf Registration Statement.

Any increase or decrease in our accounts receivable balance and accounts
receivable days outstanding (calculated as net accounts receivable divided by
revenue per day) will affect our cash flow from operations and liquidity. Our
accounts receivable and accounts receivable days outstanding may increase due
to changes in factors such as the amount of international sales and length of
customers payment cycle. We also record deferred maintenance billings as
accounts receivable, and the timing of these billings affects the accounts
receivable days outstanding. Historically, international and indirect customers
pay at a slower rate than domestic and direct customers. An increase in
revenue generated from international and indirect customers may increase our
accounts receivable days outstanding and accounts receivable balance. Due to
the current economic climate, we may observe an increase in the length of our
customers payment cycle. To address increases in accounts receivable balance
and to improve cash flow, we may from time to time take actions to encourage
earlier payment of receivables. Discounts offered to customers to encourage
payment are deducted from revenue. To the extent that our accounts receivable
balance increases, we may incur increased bad debt expense and increased
estimates for reserves against revenue and will be subject to greater general
credit risks.

WorldCom, Inc. has been one of our significant resellers, but represented less
than 5% of our revenue in any period presented. We do not believe WorldComs
bankruptcy filing will have a material impact on our financial position.

During the first quarter of 2003 we sold one of our equity investments in a
privately held company for approximately $2.0 million. In addition, we
received approximately $0.4 million from the liquidation of another of our
equity investments.

We expect to receive a tax refund of approximately $57.0 million by the end of
2003. This tax refund is attributable to the recovery of income taxes paid in
prior years and is available to us due to the carryback of operating losses
incurred in 2002 and 2001. This refund is subject to the timing of the filing
of our tax returns and any Internal Revenue Service review.

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Crosby held approximately 2.0 million shares of VeriSign common stock and a
variable delivery forward contract, or VDF, at December 31, 2002. The gain
recorded for financial reporting purposes upon execution of the VDF contract in
2000 has not been recognized for tax purposes, and accordingly we recorded a
$26.6 million deferred tax liability in 2000. This deferred tax liability will
reverse upon maturity of the VDF contract in 2006 and the gain will be included
in the calculation of our taxable income for 2006. The recognition of that
gain would result in a tax liability to us and may require the payment of cash
to settle such tax liability.

Our subscription to invest in RSA Ventures, our venture capital fund, is $50.3
million. We had invested $35.3 million at December 31, 2002 in RSA Ventures.
Over the ten year life of RSA Ventures, we may invest, at our sole discretion,
up to an additional $15.0 million. We currently do not intend to invest this
amount.

Our plans for future uses of cash may include additional acquisitions of other
entities or technologies, retirement of outstanding debt and additional
purchases of property and equipment. We anticipate capital expenditures for
2003 will be primarily for purchases of property and equipment and will
aggregate up to approximately $5.0 million. Due to realignment of our
manufacturing operations and the implementation of new hardware designs for our
RSA SecurID authenticators, our inventory levels dropped at December 31, 2002.
We typically maintain a three to four months supply of inventory on hand, and
we intend to use cash during the first half of 2003 to re-establish our
inventories to these levels. We expect to fund our capital expenditures and
increase in inventory supply from cash on hand and cash generated from
operations.

We believe that cash generated from our operating activities will be sufficient
to fund our working capital requirements through at least the next twelve
months. However, because of our concern that the current economic conditions
may persist during 2003, if not longer, we have taken and continue to take
steps to reduce our expenses and align our cost structure to our revenue. We
anticipate that current cash on hand, cash generated from operations, and cash
generated from the exercise of employee options and employee stock purchase
plans will be adequate to fund our planned capital and financing expenditures
for at least the next twelve months.

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Quarterly Financial Data (Unaudited)
(in thousands, except per share data)

|                                                |  |               |         |                |  |               |         |                |  |   |         |   |  |   |         |  
|----------------------------------------------- |  | ------------- | ------- | -------------- |  | ------------- | ------- | -------------- |  | - | ------- | - |  | - | ------- | -
|                                                |  | First Quarter |         | Second Quarter |  | Third Quarter |         | Fourth Quarter
|                                                |  |               |         |                |  |               |         |               
|2002                                            |  |               |         |                |  |               |         |                |  |   |         |   |  |   |         |  
|Revenue                                         |  | $             | 55,505  |                |  | $             | 56,530  |                |  | $ | 59,028  |   |  | $ | 61,021  |  
|Gross
profit                                    |  |               | 42,053  |                |  |               | 43,191  |                |  |   | 44,596  |   |  |   | 44,265  |  
|Loss before benefit for
income taxes            |  |               | (19,058 | )              |  |               | (42,957 | )              |  |   | (12,247 | ) |  |   | (62,438 | )
|Net loss                                        |  |               | (13,722 | )              |  |               | (25,041 | )              |  |   | (8,220  | ) |  |   | (49,841 | )
|Basic loss per
share                            |  | $             | (0.24   | )              |  | $             | (0.44   | )              |  | $ | (0.14   | ) |  | $ | (0.88   | )
|Diluted loss per
share                          |  | $             | (0.24   | )              |  | $             | (0.44   | )              |  | $ | (0.14   | ) |  | $ | (0.88   | )
|2001                                            |  |               |         |                |  |               |         |                |  |   |         |   |  |   |         |  
|Revenue                                         |  | $             | 76,340  |                |  | $             | 80,780  |                |  | $ | 62,583  |   |  | $ | 63,017  |  
|Gross
profit                                    |  |               | 56,007  |                |  |               | 64,734  |                |  |   | 46,851  |   |  |   | 48,446  |  
|Income (loss) before
provision for
income taxes |  |               | 16,389  |                |  |               | 23,375  |                |  |   | (21,969 | ) |  |   | (17,747 | )
|Net income
(loss)                               |  |               | 9,793   |                |  |               | 13,271  |                |  |   | (15,494 | ) |  |   | (10,077 | )
|Basic earnings
(loss) per share                 |  | $             | 0.11    |                |  | $             | 0.24    |                |  | $ | (0.28   | ) |  | $ | (0.18   | )
|Diluted earnings
(loss) per share               |  | $             | 0.16    |                |  | $             | 0.22    |                |  | $ | (0.28   | ) |  | $ | (0.18   | )

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CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

Our operating results tend to fluctuate from quarter to quarter.Our quarterly
operating results have fluctuated in the past and may fluctuate significantly
in the future. A variety of factors, many of which are outside of our control,
can cause these fluctuations, including, among others:



| |  |  | the size, timing and shipment of individual orders for our
products;                                                                                       
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | changes in our operating expenses;                                                                                                                         
|
| |  |  | the timing of the introduction or enhancement of our products
and our competitors products;                                                               
|
| |  |  | customers deferring their orders in anticipation of the
introduction of new products by us or our competitors;                                             
|
| |  |  | market acceptance of new products;                                                                                                                         
|
| |  |  | changes in the mix of products sold;                                                                                                                       
|
| |  |  | changes in product pricing, including changes in
competitors pricing policies;                                                                            
|
| |  |  | development and performance of our direct and indirect
distribution channels;                                                                              
|
| |  |  | the amount and timing of charges relating to the impairment or
loss of value of some of our assets, especially goodwill, intangible
assets and investments;
|
| |  |  | the timing of personnel departures and new hires and the rate at
which new personnel become productive; and                                                
|
| |  |  | general economic conditions.                                                                                                                               

We may not be able to achieve, sustain or grow our profitability
from quarter
to quarter. Because our operating expenses are based on anticipated revenue
levels and a high percentage of our expenses are fixed, a small variation in
when revenue is recognized can cause significant variations in operating
results from quarter to quarter. Our business has historically tended to be
seasonal, with the last quarter of the year having the highest amount of
revenue and the first quarter of the year having the lowest amount of revenue.

If we cannot sublease our excess facilities, then we will have to
continue to
make lease payments for these facilities until the leases expire.We currently
lease a number of excess, unused or under-used facilities that we are trying to
sublet, and some of our lease commitments for these facilities will not expire
for several years. The real estate market, especially the real estate market
in the Boston metropolitan area where our headquarters are located, has
deteriorated significantly during the last 12 months, and we do not know when
or whether we will be able to find sublessees for our excess facilities.

If the global economy remains weak, then we may have difficulty
selling our
products and services.The global economy, especially the technology sector,
is still weak and may continue to be in recession for the foreseeable future.
The general economic slowdown has had and may continue to have serious negative
consequences for our business and operating results. We believe that the
economic slowdown is causing some current or potential customers to defer
purchases, to go out of business or to have insufficient capital to buy or pay
for our products. In response to the current economic conditions, many
companies have reduced their budgets for information technology products and
services, which could reduce or eliminate some potential sales of our products
and services. In addition, some of our resellers and distributors are
experiencing financial difficulties due to the weak economy, which affects our
ability to sell to and collect money from those resellers and distributors.

Our stock price has been volatile and is likely to remain
volatile. From
January 1, 2002 through February 14, 2003, our stock price has ranged from a
per share high of $19.60 to a low of $2.23. A number of factors may contribute
to the volatility of our stock price, including:



| |  |  | our ability to meet the expectations of brokerage firms,
industry
analysts and investors with respect to our operating and financial
results;                                                                                                                                                          
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the Securities and Exchange Commission investigation into our
disclosure in the first quarter of 2001 of a change in our method of
estimating distributor revenue and trading in our common stock (for more
information about the investigation see Part I, Item 3 Legal
Proceedings of this Report);
|
| |  |  | our public announcements and our competitors public
announcements;                                                                                                                                                                                                                                    
|
| |  |  | the publics perception of the strength of the e-security
solutions market and technology companies generally;                                                                                                                                                                                         
|
| |  |  | litigation developments;                                                                                                                                                                                                                                                                               
|
| |  |  | the volatility of the stock market in general and of the
technology sector in particular; and                                                                                                                                                                                                          
|
| |  |  | general economic conditions.                                                                                                                                                                                                                                                                           

If the market for e-security solutions does not continue to grow,
then demand
for our products may decrease. The market for some of our e-security solutions
is continuing to develop, and demand for our products depends on, among other
things:



| |  |  | the perceived ability of our products to address real customer
problems;
| | - |  | ------------------------------------------------------------------------

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| |  |  | the continued evolution of electronic commerce as a viable means
of conducting business;                                                                                               
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | market acceptance and use of digital signatures and digital
certificates in business applications;                                                                                     
|
| |  |  | the ability of network infrastructures to support an increasing
number of users and services;                                                                                          
|
| |  |  | the publics perception of the need for secure electronic
commerce and communications over both wired and wireless computer
networks;                                                  
|
| |  |  | the perceived quality, price, availability and interoperability
of our products as compared to our competitors products;                                                              
|
| |  |  | the pace of technological change and our ability to keep up
with these changes; and                                                                                                    
|
| |  |  | general economic conditions, which, among other things,
influence how much money our customers and potential customers are
willing to allocate to their information technology budgets.

If we fail to keep up with changes in e-security technology and
standards, then
our products could become obsolete.The market for e-security products is
rapidly evolving. E-security technology is constantly changing as we and our
competitors introduce new products and retire old ones and as customer
requirements develop and change. In addition, the industry and government
standards for e-commerce and network security continue to evolve. If any
market segments for our products adopt technologies or standards that are
inconsistent with our products and technology, sales of our products in those
market segments could decline.

Our future success will depend in part upon our ability to enhance
our existing
products and to introduce new, competitively priced products and solutions with
features that meet changing customer requirements, all in a timely and
cost-effective manner. We may not be successful in introducing new or enhanced
products. A number of factors, including the following, could have a negative
impact on the success of our products:



| |  |  | quality, reliability or security failures, which could result
in product returns, delays in collecting accounts receivable,
unexpected service or warranty expenses, reduced orders and a decline
in our competitive position;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | undetected software errors or bugs in the final products
shipped to our customers, which could cause market acceptance of our
products to be lost or delayed;                                                                 
|
| |  |  | delays or difficulties in product development;                                                                                                                                                                                
|
| |  |  | our competitors introduction of new products ahead of our
new
products, or their introduction of superior or cheaper products;                                                                                               
|
| |  |  | the availability of free, unpatented implementations of
encryption algorithms and security protocols;                                                                                                                         
|
| |  |  | the markets failure to accept new technologies, including
Web
access management, digital certificate and public and private key
management technologies;                                                                     
|
| |  |  | our failure to include features in our products, or obtain
industry and governmental certifications, that our customers or U.S.
or foreign government regulators may require;                                                 
|
| |  |  | our failure to anticipate changes in customers
requirements; and                                                                                                                                                             
|
| |  |  | the implementation of standards that are inconsistent with the
technology embodied in our products.                                                                                                                           

We may need to purchase or license technology from third parties in
order to
introduce new products or enhance our existing products. We may not be able to
find businesses that have the technology we need and, if we find such
businesses, may not be able to purchase or license the technology on
commercially favorable terms or at all.

Some of our products have long and unpredictable sales cycles.Transactions
for some of our products, especially our digital certificate management and Web
access management products, often involve large expenditures by our customers.
Some of our customers may also need to invest substantial resources and modify
their computer network infrastructures to take advantage of our products.
Therefore, the sales cycles for these transactions are often lengthy and
unpredictable, and the long nature of the sales cycles may impact our quarterly
operating results. The sales cycles for these transactions are subject to a
number of uncertainties such as:



| |  |  | customers budgetary constraints;                                                                         
| | - |  | ----------------------------------------------------------------------------------------------------------
|
| |  |  | the need to educate potential customers about our products
capabilities;                                 
|
| |  |  | customers willingness to make changes in their network
infrastructures to take advantage of our products;
|
| |  |  | the timing of customers budget cycles; and                                                               
|
| |  |  | delays caused by customers internal review
processes.                                                    

In addition, we are currently working on increasing our sales to the
United
States federal government. Federal regulatory, approval and purchasing requirements can greatly
lengthen the sales cycle for sales to
the federal government.

If we fail to remain competitive, then we could lose market
share.Some of our
competitors offer e-security products with features and functionality that our
products do not currently offer. In addition, some computer and software
companies that have not traditionally offered e-security products are now
offering free or low-cost e-security products and functionality bundled with
their own computer and software products. Either of these competitive factors
may cause us to lose potential sales or sell our products at lower prices.

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Furthermore, some of our current and potential competitors have
greater
financial, marketing and technical resources than we do. As a result, they may
be able to leverage an installed customer base, adapt more quickly to new
technologies and changes in customer requirements, or devote greater resources
to the promotion and sale of their products than we can. We believe that we
need to continue investing in research and development and sales and marketing
in order to maintain our competitive position. We may not have sufficient
resources to make these investments and may not be able to make the
technological advances necessary to maintain our competitive position.

In addition, the expiration of some of our patents has permitted the
use and
distribution of freeware, free versions of some of our technology. We
believe that some potential customers may be choosing to use freeware instead
of buying our products. Furthermore, many companies have reduced their
information technology budgets due to the current economic conditions, which
could make competition more intense because we are competing for fewer customer
dollars. Both of these factors could result in lower prices for our products,
reduced margins or the failure of our products to achieve or maintain market
acceptance.

International sales make up a significant portion of our
business.
International sales accounted for more than 30% of our total revenue in each of
the years ended December 31, 2002, 2001 and 2000. We may need to tailor or
localize our products in order to compete in particular international markets
and to comply with foreign laws. We may not be able to develop, market and
distribute localized versions of our products in a timely manner or at all. In
addition, there are certain risks inherent in doing business internationally,
including:



| |  |  | foreign regulatory requirements and the burdens of complying
with a wide variety of foreign laws;        
| | - |  | ---------------------------------------------------------------------------------------------------------
|
| |  |  | legal uncertainty regarding liability and the costs of resolving
or litigating a dispute internationally;
|
| |  |  | difficulties in the enforcement of intellectual property
rights;                                         
|
| |  |  | export and import restrictions on cryptographic technology and
products incorporating that technology;   
|
| |  |  | difficulties and delays in establishing international
distribution channels;                             
|
| |  |  | difficulties in collecting international accounts
receivable;                                            
|
| |  |  | fluctuations in currency exchange rates;                                                                 
|
| |  |  | potentially adverse tax consequences, including restrictions on
the repatriation of earnings;            
|
| |  |  | tariffs and other trade barriers; and                                                                    
|
| |  |  | political instability.                                                                                   

If we fail to obtain a sufficient supply of high-quality RSA
SecurID
authenticators or components, then we may be unable to fill customer orders or
may need to replace defective authenticators shipped to our customers. We have
experienced some problems, and may experience problems in the future, relating
to the quality and reliability of some of our authenticators and authenticator
components. For example, during 2002 we encountered some quality control
problems with some of the batteries contained in our authenticators and also
had to replace some defective tokens. Problems with the availability or
quality of our products could cause our revenue to decrease and our costs to
increase, damage our reputation in the marketplace and subject us to damage
claims from our customers.

We must establish and maintain strategic relationships. We
need to create
relationships with third parties, including some of our competitors, to ensure
that our products will interoperate with the third parties products. If our
products do not work with third-party products used by our customers and
potential customers, then our products could lose or fail to achieve market
acceptance. In addition, one of our business strategies is to enter into
strategic marketing alliances or other similar collaborative relationships in
order to reach a larger customer population than we could reach alone through
our direct sales and marketing efforts. If we cannot create relationships with
strategic partners, then we will need to devote more resources to sales and
marketing.

We may not be able to find appropriate strategic partners or may not
be able to
enter into relationships on commercially favorable terms. Furthermore, the
relationships we do enter into may not be successful. Because our strategic
relationships are generally non-exclusive, our strategic partners may decide to
pursue alternative technologies or to develop alternative products in addition
to or instead of our products, either on their own or in collaboration with our
competitors.

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If we fail to protect our rights in our proprietary technology,
competitors may
use our technology, which could weaken our competitive position, reduce our revenue and increase
our costs.We rely on a
combination of patent, trade secret, copyright and trademark laws, software
licenses, nondisclosure agreements and technical measures to protect our
proprietary technology. We also generally enter into confidentiality or
license agreements with our employees, distributors and strategic partners as
well as with our customers and potential customers seeking proprietary
information, and limit access to and distribution of our software,
documentation and other proprietary information. However, despite our efforts
to protect our proprietary rights, unauthorized third parties may nonetheless
succeed at:



| |  |  | copying aspects of our products;                                 
| | - |  | -----------------------------------------------------------------
|
| |  |  | obtaining and using information that we regard as proprietary;
or
|
| |  |  | infringing upon our patents and other proprietary
rights.        

We rely on patents to protect our proprietary rights in our
technology, but
patents may not provide complete protection:



| |  |  | It is possible that any patent that we or our licensors
hold might be invalidated, circumvented, challenged or
terminated.                                                                                             
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | It is possible that patent examiners might reject the claims
described in our pending or future patent applications.                                                                                                   
|
| |  |  | The laws of some countries in which our products are now, or
may in the future be, developed or sold may not protect our products
and intellectual property rights to the same extent as the laws of
the United States.
|
| |  |  | During the life of a patent, third parties may design and sell
work-around solutions that accomplish the goals of our patented
inventions but do not infringe the patents themselves.                                

Our 33 issued U.S. patents expire at various dates ranging from 2005
to 2019.
When each of our patents expires, competitors may develop and sell products
based on the same or similar technologies as those covered by the expired
patent, which could result in lower prices, reduced margins or the failure of
our products to achieve or maintain market acceptance. In addition, when each
of our patents expires, potential customers may choose to rely on freeware,
free versions of our previously patented technology, rather than buying our
products.

We have registered, or are seeking to register, our trademarks and
service
marks in most countries where we sell our products. However, from time to time
third parties oppose our pending trademark and service mark applications.
Furthermore, some national trademark offices may not permit us to register the
marks on terms that we find acceptable. We will seek to enforce our trademark
and service mark rights against third parties who are marketing goods or
services under marks that we consider confusingly similar to our marks.
However, there can be no assurance that we will prevail in any enforcement
action. We may also seek to purchase or license trademarks from third parties,
but we may not be able to purchase or license trademarks on commercially
favorable terms or at all.

The technology industry is highly litigious.From time to
time, we have been
involved in disputes with third parties who allege that our products may
infringe intellectual property rights held by the third parties. For example,
we recently completed a trial in the patent infringement case that Leon
Stambler brought against us (for more information about the litigation see Part
I, Item 3 Legal Proceedings of this Report). Any litigation carries a number
of significant risks, including:



| |  |  | litigation is often very expensive, even if it is resolved in
our favor; and
| | - |  | ----------------------------------------------------------------------------
|
| |  |  | litigation diverts the attention of management and other
resources.         

Moreover, if a court or other government agency rules against us in
any intellectual property litigation, we might be required to:



| |  |  | discontinue the use of certain processes;                         
| | - |  | ------------------------------------------------------------------
|
| |  |  | cease the manufacture, use and sale of infringing
products;       
|
| |  |  | expend significant resources to develop non-infringing
technology;
|
| |  |  | obtain licenses to the infringing technology; or                  
|
| |  |  | pay significant monetary damages.                                 

Security technologies are under constant attack.The strength
of our
cryptographic and other e-security technologies is constantly being tested by
computer professionals, academics and hackers. Any significant advance in
the techniques for attacking e-security solutions could make some or all of our
products obsolete or unmarketable. From time to time, we have learned of
attempts by third parties to reverse engineer our products to find
vulnerabilities. If a third party successfully hacks any of our products and
makes its findings public, then we may need to dedicate engineering and other
resources to eliminate the published vulnerabilities. For example, if a third
party were to hack our RSA SecurID solution, then some of our customers could
require that we replace some or all of their RSA SecurID authenticators with
authenticators that are more secure. If we are required to make these
replacements or if we cannot

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address the vulnerabilities in our products in a timely fashion,
then our
business and operating results could be adversely impacted. In addition, our
customers and potential customers could perceive our products as unreliable,
making it more difficult for us to sell our products.

We may incur significant expenses and damages because of
liability claims.An
actual or perceived breach of network or data security at our facilities or at
a customers facilities could result in a product liability claim against us.
A substantial product liability claim against us could harm our operating
results and financial condition. In addition, any actual or perceived breach
of network or data security, whether or not caused by the failure of one of our
products, could hurt our reputation and cause potential customers to turn to
our competitors products.

We depend on a limited number of suppliers for some of our
product components.
Although we generally use standard parts and components for our products, some
components are currently available only from limited sources. For example,
Sanyo Electric Co., Ltd. and Epson Electronics are our only suppliers for the
microprocessor chips contained in our RSA SecurID products, and Flextronics and
CalComp are our only manufacturers of RSA SecurID authenticators. If our
suppliers were unable to provide us with a sufficient supply of these or any
other components and/or RSA SecurID authenticators, then we may be unable to
fill customer orders and would have to expend significant resources to find new
suppliers and/or manufacturers. Even if we were able to find new suppliers,
these suppliers may not be able to produce the components in sufficient
quantities or at competitive prices.

Acts of terrorism or war may hurt economic conditions in the
United States and
abroad, which could harm our business.Our business is affected by forces,
pressures and events affecting global economic conditions. After the September
11, 2001 terrorist attacks in New York City and Washington, D.C., we
experienced delays in closing business transactions. We believe these delays
resulted, at least in part, from the September 11 attacks. In addition,
although we can manufacture and ship our products from two locations  Bedford,
Massachusetts, USA and Shannon, Ireland  if we were to lose the ability to
operate one of these facilities, we may not be able to manufacture and ship at
adequate levels to meet demand. If future attacks or acts of war or any acts
of retaliation hurt global economic conditions, our business and operating
results may be harmed.

We may need to make acquisitions to remain competitive.From
time to time, we
may buy businesses, products and technologies that complement or augment our
existing businesses, products and technologies. Acquisitions are difficult to
identify and complete for a number of reasons, including the cost of potential
transactions, competition among prospective buyers and the need for regulatory
approvals. We may not be able to complete any given acquisition. Furthermore,
in order to finance a potential acquisition, we may need to raise additional
funds by selling our stock or borrowing money. We may not be able to find
financing on favorable terms, and the sale of our stock may result in the
dilution of our existing stockholders.

We may need additional financing, which may be difficult to
obtain. If we fail
to obtain necessary financing or do so on unattractive terms, our business and
operating results could be hurt.We may need to raise additional capital in
order to fund the continued development and marketing of our products or to
fund strategic acquisitions or investments. We expect that our current cash
balances, availability under our bank line of credit and cash flows from
operations will be sufficient to meet our working capital, capital expenditure
and other liquidity requirements for at least the next twelve months. However,
we may need to obtain financing if our current plans and projections prove to
be inaccurate or our expected cash flows prove to be insufficient to fund our
operations because of lower-than-expected revenues, unanticipated expenses or
other unforeseen difficulties. Our ability to obtain financing will depend on a
number of factors, including market conditions, our operating performance and
investor interest. These factors may make the timing, amount, terms and
conditions of any financing unattractive. A financing transaction may also
cause us to incur additional indebtedness or accept stockholder dilution. If
adequate funds are not available or are not available on acceptable terms, then
we may have to forego strategic acquisitions or investments, reduce or defer
our development activities, or delay our introduction of new products and
services. Any of these actions may seriously harm our business and operating
results.

Our stockholder rights plan and some provisions of our charter
may inhibit
potential acquisition bids.We have a classified board of directors and have
also adopted a stockholders rights plan, both of which could make it more
difficult for a potential acquiror to complete a merger, tender offer or proxy
contest involving our company. While these provisions are intended to enable
our board to maximize stockholder value, they may have the effect of
discouraging takeovers that could be in the best interest of certain
stockholders and may therefore have an adverse effect on the market price of
our common stock.

In addition, as a Delaware corporation, we are subject to the
anti-takeover
provisions of Section 203 of the Delaware General Corporation Law, which
regulates corporate acquisitions. These provisions could discourage potential
acquisition proposals and could delay or prevent a change in control
transaction. They could also have the effect of discouraging others from
making tender offers for our common stock and preventing changes in our
management.

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ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK

We are exposed to a variety of risks, including changes in the
market value of
our investments, our common stock and foreign exchange rates. Market
fluctuations could impact our results of operations and financial condition. In
the normal course of business, we employ established policies and procedures to
manage these risks.

We generally purchase our marketable securities and cash equivalent
investments
in high credit quality instruments, primarily U.S. Treasury and government
agency obligations, tax-exempt municipal obligations and money market
investments with contractual maturities of one year or less. We do not expect
any material loss from our marketable securities and cash equivalent
investments and therefore believe that our potential interest rate exposure is
not material. We evaluate the realizable value of these investments using
qualitative and quantitative factors including discounted cash flow analysis
and liquidation value assessments.

We have made equity investments approved by our Board of Directors.
These
investments are not publicly traded and are recorded as long-term investments
on the balance sheet and are carried at their estimated realizable value less
costs to dispose. We monitor these investments for impairment and make
appropriate reductions in carrying values when necessary or mark the investment
to fair value and classify them as marketable securities when appropriate. At
December 31, 2002, our investments in private companies had a carrying value of
$1.4 million which are included in investments on our consolidated balance
sheet.

At December 31, 2002 Crosby Finance, LLC, a qualified special
purpose entity of
which we are a 99% member, held approximately 2.0 million shares of VeriSign
common stock and a variable delivery forward contract, or VDF. The VDF contract
held by Crosby will settle in January 2006. The VDF contract entitles us to
additional cash proceeds of up to $35.3 million depending on the market price
of VeriSign common stock on January 3, 2006, as follows:

|                                         |  |                     |  | 
|---------------------------------------- |  | ------------------- |  | 
|Market price of VeriSign Common Stock
on |  |                     |  | 
|January 3, 2006                          |  | Proceeds           
|                                         |  |                    
|$0.00 to
$87.16                          |  | $0                  |  | 
|$87.16 to
$104.59                        |  | $0 to $35.3 million
|Over
$104.59                             |  | $35.3 million      

We account for our investment in Crosby under EITF Issue
No. 96-12,
Recognition of Interest Income and Balance Sheet Classification of Structured
Notes. We are carrying our interest at fair value with all changes in fair
value reported in income from investing activities in the statement of
operations. We determine the fair value based on the fair value of Crosbys
right to potentially receive additional cash proceeds under the VDF. The
closing price of VeriSigns common stock on The NASDAQ National Market on
December 31, 2002 was $8.02 per share. Unless the VeriSign stock appreciates
to at least $87.16 per share in January 2006, we will not be entitled to any
cash flows from our remaining interest in Crosby. During 2002 we recognized a
charge of $6.8 million representing the decline in the fair value of our
interest in Crosby during 2002. Our remaining investment in Crosby has a fair
value of $0.2 million at December 31, 2002, and is recorded in investments as a
long-term asset. Should the value of our investment in Crosby decrease, we
would incur a pretax charge of up to $0.2 million, which would be included in
income from investing activities in the statement of operations.

During 2001, we issued 7% convertible subordinated debentures due
October 17,
2004 with an aggregate principal amount of $80.0 million, together with
warrants to purchase an aggregate of approximately 0.9 million shares of our
common stock. At any time and at their option, each holder may convert any
outstanding debentures into shares of our common stock at a conversion price of
$13.745 per share, which upon conversion of all of the outstanding debentures
would result in the issuance of approximately 5.8 million shares of our common
stock. The holders of the warrants issued with the debentures may exercise the
warrants at any time until October 17, 2006 at an exercise price of $13.745 per
share. The conversion price of the debentures and the exercise price of the
warrants may be adjusted under certain circumstances, such as events that would
cause dilution of the holders interest. We may redeem all or a portion of the
debentures for cash at any time after October 17, 2002 as long as the
arithmetic average of the weighted average price of our common stock on each
trading day during the fifteen trading day period immediately prior to the
election to redeem is at least 150% of the conversion price. The conversion
feature was not exercisable at December 31, 2002. If the 7% convertible
debentures are redeemed in part or total prior to their maturity date we will
record a non cash charge for unamortized deferred financing costs and the
unamortized value of the warrants. At December 31, 2002, unamortized deferred
financing costs were $2.9 million and the unamortized value of the warrants was
$2.5 million. Interest is payable in cash semi-annually at a fixed rate of 7%
per annum, and therefore we believe we have no interest rate exposure with
these debentures.

As a global concern, we face exposure to adverse movements in
foreign currency
exchange rates. These exposures may change over time as business practices
evolve and could have a material adverse impact on our financial results.
Historically, our primary exposures to fluctuations in foreign currency exchange rates related to
sales
and operating expenses denominated in local currencies. Our direct sales to our
customers in countries outside of the United States are denominated in U.S.
dollars and local currencies, with

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the majority of our direct sales denominated
in U.S. dollars. Our sales through indirect distribution channels are
generally denominated in U.S. dollars. For countries outside the United
States, we generally pay our operating expenses in local currency. When we do
invoice customers in local currency, we are exposed to foreign exchange rate
fluctuations from the time of invoice until collection occurs. We are also
exposed to foreign currency rate fluctuations between the time we collect in
U.S. dollars and the time we pay our operating expenses in local currency.
Fluctuations in foreign currency exchange rates could affect the profitability
and cash flows in U.S. dollars of our products sold in international markets.

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ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF MANAGEMENT

To the Board of Directors and Stockholders of
RSA Security Inc. and Subsidiaries:

Management is responsible for preparing the RSA Security Inc.
financial
statements and the other information that appears in this annual report.
Management believes that the financial statements fairly reflect the form and
substance of transactions and reasonably present the Companys financial
condition and results of operations in conformity with accounting principles
generally accepted in the United States. Management has included in the
Companys financial statements amounts that are based on estimates and
judgments, which it believes are reasonable under the circumstances.

The Company maintains a system of internal accounting policies,
procedures,
and controls intended to provide reasonable assurance, at appropriate cost,
that transactions are executed in accordance with Company authorization and
are properly recorded and reported in the financial statements, and that
assets are adequately safeguarded.

Deloitte & Touche LLP, the independent auditing firm, is
retained to audit
the Companys consolidated financial statements. Their accompanying report is
based on an audit conducted in accordance with auditing standards generally
accepted in the United States of America.

The RSA Security Inc. Board of Directors has an Audit Committee
composed of
nonmanagement Directors. The Committee meets with financial management and
the independent auditors to review internal accounting controls and
accounting, auditing, and financial reporting matters.

/s/ Arthur W. Coviello, Jr.
Arthur W. Coviello, Jr.
Chief Executive Officer and President

/s/ Jeffrey D. Glidden
Jeffrey D. Glidden
Senior Vice President, Finance and Operations,
and Chief Financial Officer and Treasurer

January 22, 2003

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INDEPENDENT AUDITORS REPORT

To the Board of Directors and Stockholders of
  RSA Security Inc. and Subsidiaries:

We have audited the accompanying consolidated balance sheets of RSA
Security
Inc. and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of operations, stockholders equity, and cash flows for
each of the three years in the period ended December 31, 2002. Our audits also
included the financial statement schedule listed in Item 15 (a) (2). These
financial statements and financial statement schedule are the responsibility of
the Companys management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards
generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements 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, such consolidated financial statements present
fairly, in all
material respects, the financial position of RSA Security Inc. and subsidiaries
as of December 31, 2002 and 2001, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2002 in
conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.

As discussed in Note 2 of the Notes to Consolidated Financial
Statements, in
2002 the Company adopted the provisions of Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets.

/s/ DELOITTE & TOUCHE LLP

Boston, Massachusetts
January 22, 2003
(March 7, 2003 as to the third paragraph of Note 18)

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RSA SECURITY INC. AND
SUBSIDIARIESConsolidated Balance Sheets(In thousands, except share data)

|                                  |                                                                                                                                                                        |                            |                                      |          |              |   |         |          |         |  | 
|--------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------ | -------- | ------------ | - | ------- | -------- | ------- |  | 
|                                  |                                                                                                                                                                        |                            |                                      |          | December 31,
|                                  |                                                                                                                                                                        |                            |                                      |          |             
|                                  |                                                                                                                                                                        |                            |                                      |          | 2002         |   | 2001   
|                                  |                                                                                                                                                                        |                            |                                      |          |              |   |        
|ASSETS                            |                                                                                                                                                                        |                            |                                      |          |              |   |         |         
|Current
assets                    |                                                                                                                                                                        |                            |                                      |          |              |   |         |         
|                                  | Cash and cash
equivalents                                                                                                                                              |                            | $                                    | 103,030  |              |   | $       | 61,946   |        
|                                  | Marketable
securities                                                                                                                                                  |                            |                                      |         |              |   |         | 1,174    |        
|                                  | Accounts
receivable (less allowance for doubtful accounts
of $2,494 in 2002 and $2,659 in 2001)                                                                        |                            |                                      | 35,666   |              |   |         | 56,396   |        
|                                  | Inventory                                                                                                                                                              |                            |                                      | 2,334    |              |   |         | 8,954    |        
|                                  | Prepaid
expenses and other assets                                                                                                                                      |                            |                                      | 7,974    |              |   |         | 12,859   |        
|                                  | Refundable
income taxes                                                                                                                                                |                            |                                      | 57,643   |              |   |         | 20,563   |        
|                                  | Deferred
taxes                                                                                                                                                         |                            |                                      | 3,829    |              |   |         | 4,886    |        
|                                  |                                                                                                                                                                        |                            |                                      |          |              |   |         |          |        
|                                  |                                                                                                                                                                        | Total current
assets       |                                      |          | 210,476      |   |         |          | 166,778 | 
|                                  |                                                                                                                                                                        |                            |                                      |          |              |   |         |          |        
|Property and
equipment, net       |                                                                                                                                                                        |                            | 74,928                               |          |              |   | 94,840  |         
|Other
assets                      |                                                                                                                                                                        |                            |                                      |          |              |   |         |         
|                                  | Goodwill,
net                                                                                                                                                          |                            |                                      | 191,742  |              |   |         | 185,674  |        
|                                  | Intangible
assets, net                                                                                                                                                 |                            |                                      |         |              |   |         | 37,346   |        
|                                  | Investments                                                                                                                                                            |                            |                                      | 1,586    |              |   |         | 33,522   |        
|                                  | Deferred
taxes                                                                                                                                                         |                            |                                      |         |              |   |         | 4,400    |        
|                                  | Other                                                                                                                                                                  |                            |                                      | 5,668    |              |   |         | 7,117    |        
|                                  |                                                                                                                                                                        |                            |                                      |          |              |   |         |          |        
|                                  |                                                                                                                                                                        | Total other
assets         |                                      |          | 198,996      |   |         |          | 268,059 | 
|                                  |                                                                                                                                                                        |                            |                                      |          |              |   |         |          |        
|                                  |                                                                                                                                                                        | $                          | 484,400                              |          |              | $ | 529,677 |         
|                                  |                                                                                                                                                                        |                            |                                      |          |              |   |         |          |        
|                                  |                                                                                                                                                                        |                            | LIABILITIES AND STOCKHOLDERS EQUITY |          |              |   |         |          |         |  | 
|Current
liabilities               |                                                                                                                                                                        |                            |                                      |          |              |   |         |         
|                                  | Accounts
payable                                                                                                                                                       |                            | $                                    | 6,966    |              |   | $       | 6,887    |        
|                                  | Accrued payroll
and related benefits                                                                                                                                   |                            |                                      | 11,256   |              |   |         | 11,206   |        
|                                  | Accrued
expenses and other liabilities                                                                                                                                 |                            |                                      | 17,543   |              |   |         | 14,527   |        
|                                  | Current portion
of accrued restructurings                                                                                                                              |                            |                                      | 12,163   |              |   |         | 5,517    |        
|                                  | Income taxes
accrued and payable                                                                                                                                       |                            |                                      | 33,484   |              |   |         | 25,952   |        
|                                  | Deferred
revenue                                                                                                                                                       |                            |                                      | 33,170   |              |   |         | 30,505   |        
|                                  |                                                                                                                                                                        |                            |                                      |          |              |   |         |          |        
|                                  |                                                                                                                                                                        | Total current
liabilities  |                                      |          | 114,582      |   |         |          | 94,594  | 
|                                  |                                                                                                                                                                        |                            |                                      |          |              |   |         |          |        
|Deferred taxes,
long-term         |                                                                                                                                                                        |                            | 1,592                                |          |              |   |        |         
|Accrued
restructurings, long-term |                                                                                                                                                                        |                            | 27,315                               |          |              |   | 5,568   |         
|Convertible
debentures            |                                                                                                                                                                        |                            | 77,477                               |          |              |   | 76,102  |         
|                                  |                                                                                                                                                                        |                            |                                      |          |              |   |         |          |        
|                                  |                                                                                                                                                                        | Total
liabilities          |                                      |          | 220,966      |   |         |          | 176,264 | 
|                                  |                                                                                                                                                                        |                            |                                      |          |              |   |         |          |        
|Commitments and
Contingencies     |                                                                                                                                                                        |                            |                                      |          |              |   |         |         
|Stockholders equity              |                                                                                                                                                                        |                            |                                      |          |              |   |         |         
|                                  | Common stock,
$0.01 par value; authorized, 300,000,000 shares; issued, 62,144,158
shares;
outstanding, 57,066,695 and 56,409,882 shares in 2002 and 2001, respectively |                            |                                      | 621      |              |   |         | 621      |        
|                                  | Additional
paid-in capital                                                                                                                                             |                            |                                      | 100,824  |              |   |         | 124,022  |        
|                                  | Retained
earnings                                                                                                                                                      |                            |                                      | 354,496  |              |   |         | 451,320  |        
|                                  | Treasury stock,
at cost; 5,077,463 and 5,734,276 shares in 2002 and 2001, respectively                                                                                 |                            |                                      | (190,554 | )            |   |         | (218,081 | )      
|                                  | Accumulated
other comprehensive loss                                                                                                                                   |                            |                                      | (1,953   | )            |   |         | (4,469   | )      
|                                  |                                                                                                                                                                        |                            |                                      |          |              |   |         |          |        
|                                  |                                                                                                                                                                        | Total
stockholders equity |                                      |          | 263,434      |   |         |          | 353,413 | 
|                                  |                                                                                                                                                                        |                            |                                      |          |              |   |         |          |        
|                                  |                                                                                                                                                                        | $                          | 484,400                              |          |              | $ | 529,677 |         
|                                  |                                                                                                                                                                        |                            |                                      |          |              |   |         |          |        

See accompanying notes to consolidated financial
statements.

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RSA SECURITY INC. AND
SUBSIDIARIESConsolidated Statements of Operations
(In thousands, except per share data)

|                                                          |                                                |       |          |                          |         |      |         |         |         |   |         |         |         | 
|--------------------------------------------------------- | ---------------------------------------------- | ----- | -------- | ------------------------ | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                          |                                                |       |          | Years Ended December
31,
|                                                          |                                                |       |          |                         
|                                                          |                                                |       |          | 2002                     |         | 2001 |         | 2000   
|                                                          |                                                |       |          |                          |         |      |         |        
|Revenue                                                   |                                                |       |          |                          |         |      |         |         |         |   |         |        
|                                                          | Products                                       |       | $        | 168,954                  |         |      | $       | 222,382 |         |   | $       | 238,027 |        
|                                                          | Maintenance and
professional services          |       |          | 63,130                   |         |      |         | 60,338  |         |   |         | 42,164  |        
|                                                          |                                                |       |          |                          |         |      |         |         |         |   |         |         |        
|Total
revenue                                             |                                                |       | 232,084  |                          |         |      | 282,720 |         |         |   | 280,191 |        
|                                                          |                                                |       |          |                          |         |      |         |         |         |   |         |         |        
|Cost of
revenue                                           |                                                |       |          |                          |         |      |         |         |         |   |         |        
|                                                          | Products                                       |       |          | 35,772                   |         |      |         | 38,226  |         |   |         | 33,158  |        
|                                                          | Maintenance and
professional services          |       |          | 22,207                   |         |      |         | 28,456  |         |   |         | 21,825  |        
|                                                          |                                                |       |          |                          |         |      |         |         |         |   |         |         |        
|Total cost of
revenue                                     |                                                |       | 57,979   |                          |         |      | 66,682  |         |         |   | 54,983  |        
|                                                          |                                                |       |          |                          |         |      |         |         |         |   |         |         |        
|Gross
profit                                              |                                                |       | 174,105  |                          |         |      | 216,038 |         |         |   | 225,208 |        
|                                                          |                                                |       |          |                          |         |      |         |         |         |   |         |         |        
|Costs and
expenses                                        |                                                |       |          |                          |         |      |         |         |         |   |         |        
|                                                          | Research and
development                       |       |          | 55,061                   |         |      |         | 58,345  |         |   |         | 45,032  |        
|                                                          | Marketing and
selling                          |       |          | 100,673                  |         |      |         | 122,915 |         |   |         | 102,788 |        
|                                                          | General and
administrative                     |       |          | 30,256                   |         |      |         | 39,127  |         |   |         | 35,409  |        
|                                                          | Restructurings                                 |       |          | 56,036                   |         |      |         | 19,956  |         |   |         | (2,079  | )      
|                                                          | Impairment of
intangible assets                |       |          | 19,140                   |         |      |         |        |         |   |         |        |        
|                                                          | Amortization of
goodwill and intangible assets |       |          | 9,924                    |         |      |         | 14,452  |         |   |         |        |        
|                                                          | In process
research and development            |       |          |                         |         |      |         | 7,891   |         |   |         |        |        
|                                                          |                                                |       |          |                          |         |      |         |         |         |   |         |         |        
|                                                          |                                                | Total |          |                          | 271,090 |      |         |         | 262,686 |   |         |         | 181,150 | 
|                                                          |                                                |       |          |                          |         |      |         |         |         |   |         |         |        
|(Loss) income
from operations                             |                                                |       | (96,985  | )                        |         |      | (46,648 | )       |         |   | 44,058  |        
|Interest
(expense) income and other                       |                                                |       | (8,778   | )                        |         |      | 5,860   |         |         |   | 12,864  |        
|(Loss) income
from investing activities                   |                                                |       | (30,937  | )                        |         |      | 40,836  |         |         |   | 272,853 |        
|                                                          |                                                |       |          |                          |         |      |         |         |         |   |         |         |        
|(Loss) income
before (benefit) provision for income taxes |                                                |       | (136,700 | )                        |         |      | 48      |         |         |   | 329,775 |        
|(Benefit)
provision for income taxes                      |                                                |       | (39,876  | )                        |         |      | 2,555   |         |         |   | 124,012 |        
|                                                          |                                                |       |          |                          |         |      |         |         |         |   |         |         |        
|Net
(loss) income                                         |                                                | $     | (96,824  | )                        |         | $    | (2,507  | )       |         | $ | 205,763 |        
|                                                          |                                                |       |          |                          |         |      |         |         |         |   |         |         |        
|Basic
(loss) earnings per share                           |                                                |       |          |                          |         |      |         |         |         |   |         |        
|                                                          | Per share
amount                               |       | $        | (1.71                    | )       |      | $       | (0.04   | )       |   | $       | 3.50    |        
|                                                          |                                                |       |          |                          |         |      |         |         |         |   |         |         |        
|                                                          | Weighted
average shares                        |       |          | 56,621                   |         |      |         | 56,259  |         |   |         | 58,051  |        
|                                                          |                                                |       |          |                          |         |      |         |         |         |   |         |         |        
|Diluted
(loss) earnings per share                         |                                                |       |          |                          |         |      |         |         |         |   |         |        
|                                                          | Per share
amount                               |       | $        | (1.71                    | )       |      | $       | (0.04   | )       |   | $       | 3.21    |        
|                                                          |                                                |       |          |                          |         |      |         |         |         |   |         |         |        
|                                                          | Weighted
average shares                        |       |          | 56,621                   |         |      |         | 56,259  |         |   |         | 58,051  |        
|                                                          | Effect of
dilutive equity instruments          |       |          |                         |         |      |         |        |         |   |         | 5,976   |        
|                                                          |                                                |       |          |                          |         |      |         |         |         |   |         |         |        
|                                                          | Adjusted
weighted average shares               |       |          | 56,621                   |         |      |         | 56,259  |         |   |         | 64,027  |        
|                                                          |                                                |       |          |                          |         |      |         |         |         |   |         |         |        

See accompanying notes to consolidated financial
statements.

49



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##### Table of Contents



RSA SECURITY INC. AND
SUBSIDIARIESConsolidated Statements of Stockholders Equity
(In thousands, except share data)

|                                                                  |  |              |            |          |  |          |     |                |  |               |         |               |  |        |         |        |  |  |            |   |  |   |          |       |  |             |          |   |  |   |          |  
|----------------------------------------------------------------- |  | ------------ | ---------- | -------- |  | -------- | --- | -------------- |  | ------------- | ------- | ------------- |  | ------ | ------- | ------ |  |  | ---------- | - |  | - | -------- | ----- |  | ----------- | -------- | - |  | - | -------- | -
|                                                                  |  |              |            |          |  |          |     |                |  |               |         |               |  |        |         |        |  |  |            |   |  |   |          |       |  | Accumulated |          |   |  |  
|                                                                  |  |              |            |          |  |          |     |                |  | Additional    |         |               |  |        |         |        |  |  |            |   |  |   |          | Other |  | Total      
|                                                                  |  | Common Stock |            | Paid-in- |  | Retained |     | Treasury Stock |  | Comprehensive |         | Stockholders'
|                                                                  |  | Shares       |            | Amount   |  | Capital  |     | Earnings       |  | Shares        |         | Amount        |  | Income |         | Equity
|                                                                  |  |              |            |          |  |          |     |                |  |               |         |               |  | (Loss) |         |       
|                                                                  |  |              |            |          |  |          |     |                |  |               |         |               |  |        |         |       
|Balance, January 1,
2000                                          |  |              | 62,144,158 |          |  | $        | 621 |                |  | $             | 200,817 |               |  | $      | 248,064 |        |  |  | 3,775,818  |   |  | $ | (74,144  | )     |  | $           | 235,666  |   |  | $ | 611,024  |  
|                                                                  |  |              |            |          |  |          |     |                |  |               |         |               |  |        |         |        |  |  |            |   |  |   |          |       |  |             |          |   |  |   |          |  
|Issuance of common stock
and warrants                             |  |              |            |          |  |          |     |                |  |               | (33,978 | )             |  |        |         |        |  |  | (3,699,762 | ) |  |   | 72,256   |       |  |             |          |   |  |   | 38,278   |  
|Tax benefit on the exercise
of stock options                      |  |              |            |          |  |          |     |                |  |               | 30,241  |               |  |        |         |        |  |  |            |   |  |   |          |       |  |             |          |   |  |   | 30,241   |  
|Stock
compensation                                                |  |              |            |          |  |          |     |                |  |               | 563     |               |  |        |         |        |  |  |            |   |  |   |          |       |  |             |          |   |  |   | 563      |  
|Share repurchase
program                                          |  |              |            |          |  |          |     |                |  |               |         |               |  |        |         |        |  |  | 5,901,750  |   |  |   | (217,074 | )     |  |             |          |   |  |   | (217,074 | )
|Put option
premiums                                               |  |              |            |          |  |          |     |                |  |               | 17,630  |               |  |        |         |        |  |  |            |   |  |   |          |       |  |             |          |   |  |   | 17,630   |  
|Equity of forward equity
contracts                                |  |              |            |          |  |          |     |                |  |               | (1,447  | )             |  |        |         |        |  |  |            |   |  |   |          |       |  |             |          |   |  |   | (1,447   | )
|Comprehensive
income:                                             |  |              |            |          |  |          |     |                |  |               |         |               |  |        |         |        |  |  |            |   |  |   |          |       |  |             |          |   |  |   |          |  
|Translation
adjustment                                            |  |              |            |          |  |          |     |                |  |               |         |               |  |        |         |        |  |  |            |   |  |   |          |       |  |             | (1,381   | ) |  |   | (1,381   | )
|Unrealized loss on
marketable securities, net                     |  |              |            |          |  |          |     |                |  |               |         |               |  |        |         |        |  |  |            |   |  |   |          |       |  |             | (202,593 | ) |  |   | (202,593 | )
|Net
income                                                        |  |              |            |          |  |          |     |                |  |               |         |               |  |        | 205,763 |        |  |  |            |   |  |   |          |       |  |             |          |   |  |   | 205,763  |  
|                                                                  |  |              |            |          |  |          |     |                |  |               |         |               |  |        |         |        |  |  |            |   |  |   |          |       |  |             |          |   |  |   |          |  
|Total comprehensive
income                                        |  |              |            |          |  |          |     |                |  |               |         |               |  |        |         |        |  |  |            |   |  |   |          |       |  |             |          |   |  |   | 1,789    |  
|                                                                  |  |              |            |          |  |          |     |                |  |               |         |               |  |        |         |        |  |  |            |   |  |   |          |       |  |             |          |   |  |   |          |  
|Balance, December 31,
2000                                        |  |              | 62,144,158 |          |  |          | 621 |                |  |               | 213,826 |               |  |        | 453,827 |        |  |  | 5,977,806  |   |  |   | (218,962 | )     |  |             | 31,692   |   |  |   | 481,004  |  
|                                                                  |  |              |            |          |  |          |     |                |  |               |         |               |  |        |         |        |  |  |            |   |  |   |          |       |  |             |          |   |  |   |          |  
|Issuance of common
stock                                          |  |              |            |          |  |          |     |                |  |               | (57,261 | )             |  |        |         |        |  |  | (2,457,030 | ) |  |   | 90,855   |       |  |             |          |   |  |   | 33,594   |  
|Tax benefit on the exercise
of stock options                      |  |              |            |          |  |          |     |                |  |               | 15,828  |               |  |        |         |        |  |  |            |   |  |   |          |       |  |             |          |   |  |   | 15,828   |  
|Assumption of Xcert
International Inc. stock
options              |  |              |            |          |  |          |     |                |  |               | 3,730   |               |  |        |         |        |  |  |            |   |  |   |          |       |  |             |          |   |  |   | 3,730    |  
|Issuance of warrants in
connection with convertible
debt issuance |  |              |            |          |  |          |     |                |  |               | 4,149   |               |  |        |         |        |  |  |            |   |  |   |          |       |  |             |          |   |  |   | 4,149    |  
|Share repurchase
program                                          |  |              |            |          |  |          |     |                |  |               |         |               |  |        |         |        |  |  | 2,213,500  |   |  |   | (89,974  | )     |  |             |          |   |  |   | (89,974  | )
|Put option
premiums                                               |  |              |            |          |  |          |     |                |  |               | 7,565   |               |  |        |         |        |  |  |            |   |  |   |          |       |  |             |          |   |  |   | 7,565    |  
|Put option
settlements                                            |  |              |            |          |  |          |     |                |  |               | (63,815 | )             |  |        |         |        |  |  |            |   |  |   |          |       |  |             |          |   |  |   | (63,815  | )
|Comprehensive
loss:                                               |  |              |            |          |  |          |     |                |  |               |         |               |  |        |         |        |  |  |            |   |  |   |          |       |  |             |          |   |  |   |          |  
|Translation
adjustment                                            |  |              |            |          |  |          |     |                |  |               |         |               |  |        |         |        |  |  |            |   |  |   |          |       |  |             | (2,188   | ) |  |   | (2,188   | )
|Unrealized loss on
marketable securities, net                     |  |              |            |          |  |          |     |                |  |               |         |               |  |        |         |        |  |  |            |   |  |   |          |       |  |             | (33,973  | ) |  |   | (33,973  | )
|Net loss                                                          |  |              |            |          |  |          |     |                |  |               |         |               |  |        | (2,507  | )      |  |  |            |   |  |   |          |       |  |             |          |   |  |   | (2,507   | )
|                                                                  |  |              |            |          |  |          |     |                |  |               |         |               |  |        |         |        |  |  |            |   |  |   |          |       |  |             |          |   |  |   |          |  
|Total comprehensive
loss                                          |  |              |            |          |  |          |     |                |  |               |         |               |  |        |         |        |  |  |            |   |  |   |          |       |  |             |          |   |  |   | (38,668  | )
|                                                                  |  |              |            |          |  |          |     |                |  |               |         |               |  |        |         |        |  |  |            |   |  |   |          |       |  |             |          |   |  |   |          |  
|Balance, December 31,
2001                                        |  |              | 62,144,158 |          |  |          | 621 |                |  |               | 124,022 |               |  |        | 451,320 |        |  |  | 5,734,276  |   |  |   | (218,081 | )     |  |             | (4,469   | ) |  |   | 353,413  |  
|                                                                  |  |              |            |          |  |          |     |                |  |               |         |               |  |        |         |        |  |  |            |   |  |   |          |       |  |             |          |   |  |   |          |  
|Issuance of common
stock                                          |  |              |            |          |  |          |     |                |  |               | (23,566 | )             |  |        |         |        |  |  | (656,813   | ) |  |   | 27,527   |       |  |             |          |   |  |   | 3,961    |  
|Tax benefit on the exercise
of stock options                      |  |              |            |          |  |          |     |                |  |               | 328     |               |  |        |         |        |  |  |            |   |  |   |          |       |  |             |          |   |  |   | 328      |  
|Stock
compensation                                                |  |              |            |          |  |          |     |                |  |               | 40      |               |  |        |         |        |  |  |            |   |  |   |          |       |  |             |          |   |  |   | 40       |  
|Comprehensive
loss:                                               |  |              |            |          |  |          |     |                |  |               |         |               |  |        |         |        |  |  |            |   |  |   |          |       |  |             |          |   |  |   |          |  
|Translation
adjustment                                            |  |              |            |          |  |          |     |                |  |               |         |               |  |        |         |        |  |  |            |   |  |   |          |       |  |             | 2,938    |   |  |   | 2,938    |  
|Unrealized loss on
marketable securities, net                     |  |              |            |          |  |          |     |                |  |               |         |               |  |        |         |        |  |  |            |   |  |   |          |       |  |             | (422     | ) |  |   | (422     | )
|Net loss                                                          |  |              |            |          |  |          |     |                |  |               |         |               |  |        | (96,824 | )      |  |  |            |   |  |   |          |       |  |             |          |   |  |   | (96,824  | )
|                                                                  |  |              |            |          |  |          |     |                |  |               |         |               |  |        |         |        |  |  |            |   |  |   |          |       |  |             |          |   |  |   |          |  
|Total comprehensive
loss                                          |  |              |            |          |  |          |     |                |  |               |         |               |  |        |         |        |  |  |            |   |  |   |          |       |  |             |          |   |  |   | (94,308  | )
|                                                                  |  |              |            |          |  |          |     |                |  |               |         |               |  |        |         |        |  |  |            |   |  |   |          |       |  |             |          |   |  |   |          |  
|Balance, December 31,
2002                                        |  |              | 62,144,158 |          |  | $        | 621 |                |  | $             | 100,824 |               |  | $      | 354,496 |        |  |  | 5,077,463  |   |  | $ | (190,554 | )     |  | $           | (1,953   | ) |  | $ | 263,434  |  
|                                                                  |  |              |            |          |  |          |     |                |  |               |         |               |  |        |         |        |  |  |            |   |  |   |          |       |  |             |          |   |  |   |          |  

See accompanying notes to consolidated financial
statements.

50



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##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES


Consolidated Statements of Cash Flows


(in thousands)


|                                                                                                      |                                                                                 |                                                              |                                                      |        |         |                          |          |          |         |          |         |          |         |          |   | 
|----------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | ------------------------------------------------------------ | ---------------------------------------------------- | ------ | ------- | ------------------------ | -------- | -------- | ------- | -------- | ------- | -------- | ------- | -------- | - | 
|                                                                                                      |                                                                                 |                                                              |                                                      |        |         | Years Ended December
31,
|                                                                                                      |                                                                                 |                                                              |                                                      |        |         |                         
|                                                                                                      |                                                                                 |                                                              |                                                      |        |         | 2002                     |          | 2001     |         | 2000    
|                                                                                                      |                                                                                 |                                                              |                                                      |        |         |                          |          |          |         |         
|Cash flows
from operating activities                                                                  |                                                                                 |                                                              |                                                      |        |         |                          |          |          |         |          |         |         
|Net
(loss) income                                                                                     |                                                                                 | $                                                            | (96,824                                              | )      |         | $                        | (2,507   | )        |         | $        | 205,763 |         
|Adjustments to
reconcile net (loss) income to net cash provided by (used for) operating
  activities: |                                                                                 |                                                              |                                                      |        |         |                          |          |          |         |          |         |         
|                                                                                                      | Depreciation                                                                    |                                                              |                                                      | 16,612 |         |                          |          | 15,184   |         |          |         | 9,971    |        
|                                                                                                      | Amortization of
goodwill and intangible assets                                  |                                                              |                                                      | 9,924  |         |                          |          | 14,452   |         |          |         |         |        
|                                                                                                      | In process
research and development                                             |                                                              |                                                      |       |         |                          |          | 7,891    |         |          |         |         |        
|                                                                                                      | Non cash
restructuring                                                          |                                                              |                                                      | 9,242  |         |                          |          |         |         |          |         | (2,079   | )      
|                                                                                                      | Non cash stock
option compensation                                              |                                                              |                                                      |       |         |                          |          | 751      |         |          |         | 563      |        
|                                                                                                      | Amortization of
convertible debentures deferred financing costs                 |                                                              |                                                      | 1,611  |         |                          |          | 329      |         |          |         |         |        
|                                                                                                      | Non cash
warrant accretion                                                      |                                                              |                                                      | 1,375  |         |                          |          | 251      |         |          |         |         |        
|                                                                                                      | Tax benefit
from exercise of stock options                                      |                                                              |                                                      | 328    |         |                          |          | 15,828   |         |          |         | 30,241   |        
|                                                                                                      | Loss
(income) from investing activities                                         |                                                              |                                                      | 2,249  |         |                          |          | (48,008  | )       |          |         | (272,853 | )      
|                                                                                                      | Investment
valuation impairment                                                 |                                                              |                                                      | 28,689 |         |                          |          | 7,172    |         |          |         |         |        
|                                                                                                      | Impairment of
intangible assets                                                 |                                                              |                                                      | 19,140 |         |                          |          |         |         |          |         |         |        
|                                                                                                      | Deferred
taxes                                                                  |                                                              |                                                      | 2,204  |         |                          |          | 6,665    |         |          |         | 3,704    |        
|                                                                                                      | Increase
(decrease) in cash from changes in, net of the effect of acquisitions: |                                                              |                                                      |        |         |                          |          |          |         |          |         |          |        
|                                                                                                      |                                                                                 | Accounts
receivable                                          |                                                      |        | 22,782  |                          |          |          | 1,657   |          |         |          | (13,141 | )       
|                                                                                                      |                                                                                 | Inventory                                                    |                                                      |        | 6,923   |                          |          |          | (5,221  | )        |         |          | 4,150   |         
|                                                                                                      |                                                                                 | Prepaid
expenses and other assets                            |                                                      |        | 5,482   |                          |          |          | 12,600  |          |         |          | (8,054  | )       
|                                                                                                      |                                                                                 | Accounts
payable                                             |                                                      |        | (198    | )                        |          |          | (3,206  | )        |         |          | 94      |         
|                                                                                                      |                                                                                 | Accrued payroll
and related benefits                         |                                                      |        | (472    | )                        |          |          | (7,328  | )        |         |          | 3,060   |         
|                                                                                                      |                                                                                 | Accrued
expenses and other liabilities                       |                                                      |        | 3,037   |                          |          |          | (4,656  | )        |         |          | (3,195  | )       
|                                                                                                      |                                                                                 | Accrued
restructurings                                       |                                                      |        | 27,566  |                          |          |          | 10,739  |          |         |          | 2,537   |         
|                                                                                                      |                                                                                 | Refundable
income taxes and income taxes accrued and payable |                                                      |        | (21,459 | )                        |          |          | (33,451 | )        |         |          | 34,180  |         
|                                                                                                      |                                                                                 | Deferred
revenue                                             |                                                      |        | 3,825   |                          |          |          | 3,173   |          |         |          | 8,580   |         
|                                                                                                      |                                                                                 |                                                              |                                                      |        |         |                          |          |          |         |          |         |         
|                                                                                                      |                                                                                 |                                                              | Net cash provided by
(used for) operating activities |        |         | 42,036                   |          |          |         | (7,685   | )       |          |         | 3,521    |  
|                                                                                                      |                                                                                 |                                                              |                                                      |        |         |                          |          |          |         |          |         |         
|Cash flows
from investing activities                                                                  |                                                                                 |                                                              |                                                      |        |         |                          |          |          |         |          |         |         
|                                                                                                      | Purchases of
marketable securities                                              |                                                              |                                                      |       |         |                          |          | (36,411  | )       |          |         | (79,805  | )      
|                                                                                                      | Sales and
maturities of marketable securities                                   |                                                              |                                                      | 1,150  |         |                          |          | 75,593   |         |          |         | 471,490  |        
|                                                                                                      | Purchases of
property and equipment                                             |                                                              |                                                      | (4,665 | )       |                          |          | (36,173  | )       |          |         | (39,511  | )      
|                                                                                                      | Proceeds from
Crosby Finance, LLC                                               |                                                              |                                                      |       |         |                          |          | 53,460   |         |          |         |         |        
|                                                                                                      | Investments                                                                     |                                                              |                                                      | 317    |         |                          |          | (23,231  | )       |          |         | (11,692  | )      
|                                                                                                      | Acquisitions,
net of cash acquired                                              |                                                              |                                                      | (997   | )       |                          |          | (226,146 | )       |          |         |         |        
|                                                                                                      | Other                                                                           |                                                              |                                                      | (117   | )       |                          |          | 515      |         |          |         | (527     | )      
|                                                                                                      |                                                                                 |                                                              |                                                      |        |         |                          |          |          |         |          |         |         
|                                                                                                      |                                                                                 |                                                              | Net cash
(used for) provided by investing activities |        |         | (4,312                   | )        |          |         | (192,393 | )       |          |         | 339,955  |  
|                                                                                                      |                                                                                 |                                                              |                                                      |        |         |                          |          |          |         |          |         |         
|Cash flows
from financing activities                                                                  |                                                                                 |                                                              |                                                      |        |         |                          |          |          |         |          |         |         
|                                                                                                      | Proceeds from
exercise of stock options and purchase plans                      |                                                              |                                                      | 3,961  |         |                          |          | 33,594   |         |          |         | 38,278   |        
|                                                                                                      | Share
repurchase program                                                        |                                                              |                                                      |       |         |                          |          | (89,974  | )       |          |         | (217,074 | )      
|                                                                                                      | Issuance of
convertible debentures, net                                         |                                                              |                                                      |       |         |                          |          | 75,235   |         |          |         |         |        
|                                                                                                      | Settlement of
put option contracts                                              |                                                              |                                                      |       |         |                          |          | (63,815  | )       |          |         |         |        
|                                                                                                      | Sale of put
options                                                             |                                                              |                                                      |       |         |                          |          | 7,565    |         |          |         | 17,630   |        
|                                                                                                      | Equity of
forward equity contracts                                              |                                                              |                                                      |       |         |                          |          |         |         |          |         | (1,447   | )      
|                                                                                                      | Other                                                                           |                                                              |                                                      | (18    | )       |                          |          |         |         |          |         |         |        
|                                                                                                      |                                                                                 |                                                              |                                                      |        |         |                          |          |          |         |          |         |         
|                                                                                                      |                                                                                 |                                                              | Net cash
provided by (used for) financing activities |        |         | 3,943                    |          |          |         | (37,395  | )       |          |         | (162,613 | )
|                                                                                                      |                                                                                 |                                                              |                                                      |        |         |                          |          |          |         |          |         |         
|Effect of
exchange rate changes on cash and cash equivalents                                          |                                                                                 |                                                              | (583                                                 | )      |         |                          | (2,478   | )        |         |          | (1,136  | )       
|                                                                                                      |                                                                                 |                                                              |                                                      |        |         |                          |          |          |         |          |         |         
|Net increase
(decrease) in cash and cash equivalents                                                  |                                                                                 |                                                              | 41,084                                               |        |         |                          | (239,951 | )        |         |          | 179,727 |         
|Cash and
cash equivalents, beginning of year                                                          |                                                                                 |                                                              | 61,946                                               |        |         |                          | 301,897  |          |         |          | 122,170 |         
|                                                                                                      |                                                                                 |                                                              |                                                      |        |         |                          |          |          |         |          |         |         
|Cash and
cash equivalents, end of year                                                                |                                                                                 | $                                                            | 103,030                                              |        |         | $                        | 61,946   |          |         | $        | 301,897 |         
|                                                                                                      |                                                                                 |                                                              |                                                      |        |         |                          |          |          |         |          |         |         

Cash payments for interest expense were $3,947 for the year ended
December 31, 2002 and zero for the years ended December 31,
     2001 and 2000, respectively.

Cash payments for income taxes were approximately $1,791, $11,357
and $63,964 in 2002, 2001 and 2000, respectively.

See accompanying notes to consolidated financial statements

51



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##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)

1.     Nature of Business and Summary of Significant Accounting Policies

Nature of Business  RSA Security Inc. and its subsidiaries (the Company)
provide interoperable solutions for establishing online identities, access
rights and privileges for people, applications and devices. Built to work
seamlessly and transparently in the complex environments of its customers, the
Companys portfolio of identity and access management solutions includes
authentication, Web access management and developer solutions. The Company
sells to Enterprise customers seeking turnkey security solutions, and to
Developers seeking software development components for embedding security in
software applications or hardware devices. In addition to providing e-security
solutions, the Company also has the RSA Capital segment whose activities
historically have related to investments in external and internal activities
and technologies.

Principles of Consolidation  The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.

Use of Estimates  The preparation of the Companys consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting periods. On
an ongoing basis, the Company evaluates its estimates. The Company bases its
estimates on historical experience and on various other assumptions that the
Company believes are reasonable under the circumstances. Actual results could
differ from those estimates.

Revenue Recognition  Revenue is recognized when earned. The Companys revenue
recognition policies are in compliance with all applicable accounting
principles generally accepted in the United States of America, including the
American Institute of Certified Public Accountants Statement of Position
(SOP) 97-2, Software Revenue Recognition, and SOP 98-9, Modification of
SOP 97-2 With Respect to Certain Transactions. Revenue from the sale of
products is recognized when persuasive evidence of an arrangement exists,
delivery has occurred, the fee is fixed or determinable, and collection is
considered probable. Revenue from licensing other intellectual property is
recognized when evidence of an arrangement exists, the fee is fixed or
determinable and collection is considered probable. Revenue is reduced by
provisions for estimated returns. When arrangements contain multiple elements
and vendor specific objective evidence of fair value exists for all undelivered
elements, the Company recognizes revenue for the delivered elements using the
residual method. For arrangements containing multiple elements where vendor
specific objective evidence of fair value does not exist for all undelivered
elements, revenue for the delivered and undelivered elements is deferred until
vendor specific objective evidence of fair value exists or all elements have
been delivered. In accordance with Statement of Financial Accounting Standards
(SFAS) No. 48, Revenue Recognition when Right of Return Exists, the Company
recognizes revenue upon shipment of product to its stocking distributors, net
of estimated returns. Maintenance services revenue, whether sold separately or
as part of a multiple element arrangement, is deferred and recognized ratably
over the term of the maintenance contract, generally twelve months.
Professional service revenue is recognized as services are provided. No
customer accounted for 5% or more of the Companys revenue in any period
reported.

The Companys stocking distributor program began in 1997. All of the Companys
products are sold to stocking distributors, with authentication products
comprising most sales. The Companys stocking distributors purchase its
products, take title upon shipment and resell the products to their customers.
Stocking distributors have contractual rights of return for stock rotation
purposes of generally 10% to 20% of their purchase volume. Prior to January 1,
2001 the Company believed it lacked sufficient data to reasonably estimate
returns from stocking distributors and therefore recognized revenue upon
evidence of a sale to the end user. By the beginning of 2001, the Company had
sufficient data to reasonably estimate stocking distributor returns and
determined that, historically, actual return volumes have averaged less than 5%
of stocking distributor purchase volume. Based on this experience and the
criteria set out in SFAS No. 48 the Company began recognizing revenue upon
shipment of product to the stocking distributors, net of estimated returns.
Revenue recognized from sales to stocking distributors in 2001 increased by
$3,013 due to this change in estimate. The increase in recognized revenue of
$3,013 resulted in a decrease to net loss of $2,019 and a decrease to diluted
loss per share of $0.04 for the year ended December 31, 2001.

Allowance for Sales Returns  Allowances for estimated sales returns and
allowances on products and maintenance and professional service revenue are
recorded in the same period as the related revenue is recorded. These
estimates are based on historical sales returns, analysis of credit memo data,
current economic trends, product line and customer industry and other known
factors.

Allowance for Doubtful Accounts  The Company maintains allowances for doubtful
accounts for estimated losses resulting from the inability of the Companys
customers to make required payments. Accounts receivable and the composition
of the accounts

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receivable aging, historical bad debts, customer creditworthiness, current
economic trends, foreign currency exchange rate fluctuations, and changes in
customer payment terms are utilized when evaluating the adequacy of the
allowance for doubtful accounts. Bad debt expense of $1,553, $6,227 and $2,933
for the years ended December 31 2002, 2001 and 2000, respectively, has been
included in marketing and selling expenses in the consolidated statements of
operations. Uncollectible accounts receivable written off were $3,159, $5,777
and $1,996 for the years ended December 31, 2002, 2001 and 2000, respectively.
Recoveries of accounts previously written off as uncollectible are recorded as
increases to the allowance for doubtful accounts and were $1,441, $203 and $37
for the years ended December 31, 2002, 2001 and 2000, respectively.

Warranty Policy  Reserves are provided for warranties based upon historical
experience and estimates of future liabilities. Included in cost of revenue
for the year ended December 31, 2002 is warranty expense of $1,422 primarily
for product quality warranty accruals and discontinued product designs.

Cash Equivalents  All highly liquid investments purchased with a remaining
maturity of three months or less are considered cash equivalents.

Inventory  Inventory consists primarily of RSA SecurID authenticators and is
stated at the lower of cost (first-in, first-out method) or market. Included in
cost of revenue for the year ended December 31, 2002 is $1,693 for inventory
write downs related to discontinued product designs.

Property and Equipment  Property and equipment are stated at cost and
revalued for effects of foreign currency translation. Furniture and equipment
are depreciated by the straight-line method over the estimated useful lives of
the assets, generally two to ten years. Leasehold improvements are depreciated
by the straight-line method over the lease term or estimated useful live of the
related asset, whichever is shorter. Buildings are depreciated over fifty
years, the estimated useful life. Property and equipment sold or retired is
eliminated from the accounts in the year of disposition and the resulting gain
or loss is reflected in earnings.

Goodwill and Intangible Assets  Goodwill and other acquisition related
identifiable intangible assets are stated at fair value as of the date acquired
in a business acquisition accounted for as a purchase, net of accumulated
amortization. Acquired intangible assets with finite lives are amortized on a
straight-line basis over their estimated useful lives of between one and seven
years. For acquisitions that were completed before June 30, 2001, goodwill was
amortized on a straight-line basis over seven years. Effective January 1, 2002,
the adoption of SFAS No. 142, Goodwill and Other Intangible Assets, required
the amortization of goodwill and indefinite lived intangible assets arising
from business acquisitions be discontinued, and instead be evaluated at least
annually for impairment. Accordingly, the Company discontinued amortizing all
existing goodwill and indefinite lived intangible assets and did not record any
amortization expense on any goodwill and indefinite lived intangible assets
after January 1, 2002.

In accordance with SFAS No. 142, the Company is required to analyze the
carrying value of goodwill and other intangible assets annually for impairment.
The Company performs this annual test for impairment as of November 30 of each
year and, if events or circumstances occur that would more likely than not
reduce the fair value of the goodwill below its carrying amount, will perform
an interim impairment test. The test for impairment is performed under a two
step process. The first step tests for impairment, and the second step (if
necessary) measures the impairment. The Company evaluates the carrying value of
goodwill and other intangible assets against the estimated fair value of its
assets and records an impairment charge in the amount by which the carrying
value of the assets exceed their estimated fair value. Estimated fair value is
determined based on an estimated discounted future cash flow or a market
multiple valuation method.

Information on the Companys adoption of SFAS No. 141 and No. 142 may be found
in Note 2 of the Notes to Consolidated Financial Statements.

Deferred Financing Costs  Deferred financing costs include investment bank
fees, legal fees and other financing costs paid in connection with the issuance
of convertible debentures and are included on the consolidated balance sheet in
other assets. Deferred financing costs are amortized over the period the
convertible debentures are outstanding using the straight line method, which is
not materially different from the effective interest rate method.

Financial Instruments  The carrying amounts of cash and cash equivalents,
marketable securities, accounts receivable and accounts payable approximate
fair value due to the short-term nature of these instruments. The carrying
value of the convertible debentures is the principal balance of the debentures
outstanding less the fair value of the warrants outstanding, net of accumulated
accretion of the warrants fair value. The Company believes the carrying value
of the convertible debentures approximates the fair value.

The Company accounts for its investment in Crosby Finance, LLC (Crosby) under
Emerging Issues Task Force (EITF) Issue No. 96-12, Recognition of Interest Income and Balance Sheet Classification of
Structured Notes. The Company is carrying its interest at fair value with all
changes in fair value included in income from investing activities in the
consolidated statements of operations. The

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Company determines the fair value based on the fair value of Crosbys right to potentially receive additional
cash proceeds under a variable delivery forward contract that it holds.

Investments where ownership is less than 20% and the Company does not have
significant influence on the operating or financial decisions of the investee
are accounted for using the cost method. The carrying value of investments is
equal to cost less investment valuation impairment charges. The Company
regularly considers available evidence in evaluating its investments for
potential impairment. Certain events, such as an initial public offering, could
result in the reclassification of an investment to an available for sale
marketable security.

Derivative Financial Instruments  Derivative financial instruments are entered
into for purposes other than trading and consist of foreign currency forward
contracts. These contracts are accounted for under SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, which requires that all
derivatives be recorded on the balance sheet at fair value. Changes in the fair
value of derivatives that qualify for hedge treatment are reported, to the
extent they are effective, as a component of other comprehensive income.
Changes in the fair value of derivatives that do not qualify for hedge
treatment, as well as the ineffective portion of a particular hedge, are
recognized currently in earnings.

In accordance with SFAS No. 133, hedges relating to anticipated transactions
are designated and documented at the inception of the respective hedge as cash
flow hedges and evaluated for effectiveness quarterly. As the terms of the
forward contract and the underlying transaction are matched at inception,
forward contract effectiveness is calculated by comparing the fair value of the
contract to the change in the forward value of the anticipated transaction,
with the effective portion of the gain or loss on the derivative instrument
reported as a component of other comprehensive income and reclassified into
earnings in the same period during which the hedged transaction affects
earnings.

Impairment of Long-lived Assets  Long-lived assets are tested for
recoverability whenever events or changes in circumstances indicate that their
carrying amount may not be recoverable. The recoverability of long-lived assets
is assessed by comparing the undiscounted cash flows expected to be generated
to the carrying value of the assets. If the sum of the undiscounted cash flows
is less than the carrying value of the assets, an impairment charge is
recognized. The amount of an impairment charge is determined by comparing the
carrying amount of the long-lived asset to its fair value. Fair value is
determined based on estimated discounted cash flows.

Research and Development  Research and development costs are expensed as
incurred. SFAS No. 86, Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed, does not materially affect the Company.

Advertising  Advertising costs are expensed as incurred and were
approximately $2,950, $4,496, and $5,548 in 2002, 2001 and 2000, respectively.

Income Taxes  Deferred income taxes are recognized based on temporary
differences between the financial statement and tax bases of assets and
liabilities. Deferred tax assets and liabilities are measured using the
statutory tax rates and laws expected to apply to taxable income in the years
in which the temporary differences are expected to reverse. Valuation
allowances are provided against net deferred tax assets if, based upon the
available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income and the timing
of the temporary differences becoming deductible. Management considers, among
other available information, scheduled reversals of deferred tax liabilities,
projected future taxable income, and other matters in making this assessment.

Income taxes are provided on undistributed earnings of foreign subsidiaries
where such earnings are expected to be remitted to the U.S. parent company.
The Company determines annually the amount of unremitted earnings of foreign
subsidiaries to invest indefinitely in its non-U.S. operations. Unrecognized
provisions for taxes on undistributed earnings of foreign subsidiaries, which
are considered permanently invested, are not material to the Companys
consolidated financial position or results of operations.

Foreign Currency  The financial statements of the Companys foreign branches
and subsidiaries are measured using the local currencies as the functional
currencies. Assets and liabilities of these branches and subsidiaries are
translated to their U.S. dollar equivalents at balance sheet date exchange
rates and translation adjustments are recorded in accumulated other
comprehensive income. Statements of operations of foreign branches and
subsidiaries are translated from functional currencies to U.S. dollar
equivalents at average exchange rates in effect during the year and any gain or
loss from these translations are also included in accumulated other
comprehensive income. Foreign currency transaction gains and losses are
included in interest income and other in the consolidated statements of operations.

Earnings (Loss) Per Share  Basic earnings (loss) per share is computed using
net income (loss) less financing costs on outstanding forward equity contracts,
as applicable, divided by the weighted average number of common shares
outstanding. Diluted earnings per

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share is computed using the weighted average
number of shares outstanding plus the effect of potential outstanding shares,
including options and warrants, using the treasury stock method. Diluted loss
per share for the years ended December 31, 2002 and 2001 excludes the effect of
equity instruments including convertible debentures, options and warrants, as
such instruments are antidilutive.

Common Stock Split  On February 1, 2001, the Companys Board of Directors
declared a three-for-two stock split, which was effected in the form of a
common stock dividend. Shares were distributed on March 26, 2001 to
stockholders of record on March 9, 2001. All references to common stock and
per share amounts in this Annual Report on Form 10-K have been adjusted to
reflect the three-for-two common stock split on a retroactive basis.

Common Stock Warrants  Warrants to purchase shares of the Companys common
stock are recorded at fair value. The Company estimates the fair value of
warrants using the Black-Scholes model. The fair value of the warrants is
amortized over the expected life of the related 7% convertible debentures using
the straight-line method, which is not materially different than the effective
interest rate method.

Treasury Stock  Shares of the Companys common stock that are repurchased are
recorded in treasury stock at cost and included as a component of stockholders
equity. The Company relieves the costs associated with the reissuance of
shares of common stock out of treasury using the first-in first-out method.

Concentration of Credit Risk  The Company provides e-security solutions to
various customers in diverse industries. The Company performs ongoing credit
evaluations of its customers and maintains allowances for potential credit
losses. The Company has a non-recourse arrangement with a major financial
institution, under which certain of the Companys qualified customers can
obtain financing directly from the financial institution at their own
discretion.

Stock-Based Compensation Plans  Stock-based compensation cost is accounted
for using the intrinsic value method in accordance with Accounting Principles
Board Opinion No. 25 Accounting for Stock Issued to Employees. Accordingly,
no accounting recognition is given to stock options granted at fair market
value until they are exercised. Upon exercise, net proceeds, including the tax
benefits realized, are credited to shareholders equity.

Pro Forma Disclosure  Had the Company recognized compensation costs for its
stock option and purchase plans based on the fair value for awards under those
plans, in accordance with SFAS No. 123 Accounting for Stock Based
Compensation, pro forma net (loss) income and pro forma net (loss) income per
share would have been as follows:

|                                                                                                                     |                                                 |   |                          |       |      |   |         |       |   |   |         |      | 
|-------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------- | - | ------------------------ | ----- | ---- | - | ------- | ----- | - | - | ------- | ---- | 
|                                                                                                                     |                                                 |   | Years Ended December 31,
|                                                                                                                     |                                                 |   |                         
|                                                                                                                     |                                                 |   | 2002                     |       | 2001 |   | 2000   
|                                                                                                                     |                                                 |   |                          |       |      |   |        
|Net (loss) income as reported                                                                                        |                                                 | $ | (96,824                  | )     |      | $ | (2,507  | )     |   | $ | 205,763 |     
|Add: stock based compensation expense included in reported net income,
net of related tax effects                    |                                                 |   |                         |       |      |   | 488     |       |   |   | 366     |     
|Less:
stock based compensation expense determined under fair value
method for all awards, net of related tax effects |                                                 |   | 37,676                   |       |      |   | 25,711  |       |   |   | 58,145  |     
|                                                                                                                     |                                                 |   |                          |       |      |   |         |       |   |   |         |     
|Pro forma net (loss) income                                                                                          |                                                 | $ | (134,500                 | )     |      | $ | (27,730 | )     |   | $ | 147,984 |     
|                                                                                                                     |                                                 |   |                          |       |      |   |         |       |   |   |         |     
|Net (loss) income per share:                                                                                         |                                                 |   |                          |       |      |   |         |       |   |   |         |     
|                                                                                                                     | Basic (loss) earnings per share  as reported   |   | $                        | (1.71 | )    |   | $       | (0.04 | ) |   | $       | 3.50 | 
|                                                                                                                     |                                                 |   |                          |       |      |   |         |       |   |   |         |     
|                                                                                                                     | Basic (loss) earnings per share  pro forma     |   | $                        | (2.38 | )    |   | $       | (0.49 | ) |   | $       | 2.55 | 
|                                                                                                                     |                                                 |   |                          |       |      |   |         |       |   |   |         |     
|                                                                                                                     | Diluted (loss) earnings per share  as reported |   | $                        | (1.71 | )    |   | $       | (0.04 | ) |   | $       | 3.21 | 
|                                                                                                                     |                                                 |   |                          |       |      |   |         |       |   |   |         |     
|                                                                                                                     | Diluted (loss) earnings per share  pro forma   |   | $                        | (2.38 | )    |   | $       | (0.49 | ) |   | $       | 2.31 | 
|                                                                                                                     |                                                 |   |                          |       |      |   |         |       |   |   |         |     

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The fair values used to compute pro forma net (loss) income and net (loss)
income per share were estimated fair value at grant date using the
Black-Scholes option-pricing model with the following weighted average
assumptions:

|                                                     |  |                          |       |      |  |      |       |   |  |   |       |  
|---------------------------------------------------- |  | ------------------------ | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                                                     |  | Years Ended December 31,
|                                                     |  |                         
|                                                     |  | 2002                     |       | 2001 |  | 2000
|                                                     |  |                          |       |      |  |     
|Stock Option Plans:                                  |  |                          |       |      |  |      |       |   |  |   |       |  
|Risk-free interest rate                              |  |                          | 3.8   | %    |  |      | 4.6   | % |  |   | 6.1   | %
|Expected life of option grants (years)               |  |                          | 4.4   |      |  |      | 4.1   |   |  |   | 4.2   |  
|Expected volatility of underlying stock              |  |                          | 90.0  | %    |  |      | 83.0  | % |  |   | 82.0  | %
|Expected dividend payment rate                       |  |                          | 0.0   | %    |  |      | 0.0   | % |  |   | 0.0   | %
|Expected forfeiture rate                             |  |                          | 7.5   | %    |  |      | 7.5   | % |  |   | 7.5   | %
|Weighted average fair value of stock options granted |  | $                        | 3.11  |      |  | $    | 18.93 |   |  | $ | 22.62 |  
|Employee Stock Purchase Plan:                        |  |                          |       |      |  |      |       |   |  |   |       |  
|Risk-free interest rate                              |  |                          | 1.7   | %    |  |      | 5.7   | % |  |   | 6.1   | %
|Expected life of option grants (years)               |  |                          | 0.5   |      |  |      | 0.5   |   |  |   | 0.5   |  
|Expected volatility of underlying stock              |  |                          | 112.0 | %    |  |      | 83.0  | % |  |   | 82.0  | %
|Expected dividend payment rate                       |  |                          | 0.0   | %    |  |      | 0.0   | % |  |   | 0.0   | %
|Weighted average fair value of stock options granted |  | $                        | 2.14  |      |  | $    | 14.91 |   |  | $ | 14.46 |  

Reclassification  Certain previously disclosed and prior year amounts have
been reclassified to conform to the 2002 presentation.

2.     New Accounting Pronouncements/Policies

SFAS No. 141 and SFAS No. 142  The Company adopted SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets, on
January 1, 2002, except with respect to the acquisition of Securant
Technologies, Inc. (Securant) to which the Company applied the provisions of
SFAS No. 141 and No. 142 on September 4, 2001 (the date of acquisition). SFAS
No. 141 requires the use of the purchase method of accounting for all business
combinations initiated after June 30, 2001, and eliminates the pooling of
interests method. In addition, SFAS No. 141 further clarifies the criteria for
recognition of intangible assets separately from goodwill. SFAS No. 142
requires that amortization of goodwill and indefinite lived intangible assets
be discontinued and instead be evaluated at least annually for impairment under
a two step process. Intangible assets with finite lives continue to be
amortized over their useful lives.

The Company completed the transitional goodwill impairment test as of January
1, 2002, the date of adoption of SFAS No. 142. Goodwill is included in the
Companys e-Security Solutions segment, which contains one reporting unit
(Reporting Unit). The goodwill impairment test compared the carrying amount
of the Reporting Unit to the estimated fair value of the Reporting Unit. The
Company determined the estimated fair value of the Reporting Unit based upon an
independent appraisal using the market multiple valuation method. As of the
January 1, 2002 transitional goodwill impairment test, the fair value of the
Companys Reporting Unit was greater than the carrying amount of the Reporting
Unit. Therefore, the transitional goodwill impairment test performed as of
January 1, 2002 did not result in an impairment of the Companys goodwill.

The Company performs the required annual goodwill impairment test as of
November 30 of every year, and, if events or circumstances occur that would
more likely than not reduce the fair value of the Reporting Unit below its
carrying amount, performs an interim impairment test. The Company completed the
required annual goodwill impairment test as of November 30, 2002. The annual
goodwill impairment test compared the carrying amount of the Reporting Unit to
the estimated fair value of the Reporting Unit. The Company determined the
estimated fair value of the Reporting Unit based upon an independent appraisal
using the market multiple valuation method. As of the November 30, 2002 annual
goodwill impairment test, the fair value of the Companys Reporting Unit was
greater than the carrying amount of the Reporting Unit. Therefore, the annual
goodwill impairment test performed as of November 30, 2002 did not result in an
impairment of the Companys goodwill.

As a result of its adoption of SFAS No. 142 on January 1, 2002, the Company
reclassified in-place workforce related intangible assets of $5,689, $2,021 and $569 arising from the acquisitions of Xcert
International, Inc. (Xcert), 3-G International, Inc. (3GI), and Transindigo
Inc (Transindigo), respectively, into goodwill, resulting in an increase to
goodwill and a decrease to intangible assets of $8,279. Upon reclassification
of in-place workforce related intangible assets to goodwill and the
determination of indefinite lived intangible assets, the Company reversed the
deferred tax liabilities related to these intangible assets. The reversal of
deferred tax liabilities of $2,269 and $808 relating to the Xcert and 3GI
acquisitions, respectively, resulted in a decrease to goodwill and deferred tax
liabilities of $3,077.

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The Company applied the provisions of SFAS No. 141 and No. 142 with respect to
the acquisition of Securant on September 4, 2001 (the date of acquisition). As
part of the application of SFAS No. 141, the Company recognized identifiable
intangible assets separate from goodwill and has recognized amortization
expense on these intangible assets with finite lives from the date of
acquisition.

As a result of its adoption of SFAS No. 142, the Company discontinued
amortizing all existing goodwill and indefinite lived intangible assets and did
not record any related amortization expense after January 1, 2002. Had the
provisions of SFAS No. 141 and No. 142 been applied the Companys net (loss)
income and (loss) earnings per share would have been as follows:

|                           |                                            |                                    |                                 |       |                          |   |        |       |      |       |         |      |   |   | 
|-------------------------- | ------------------------------------------ | ---------------------------------- | ------------------------------- | ----- | ------------------------ | - | ------ | ----- | ---- | ----- | ------- | ---- | - | - | 
|                           |                                            |                                    |                                 |       | Years Ended December 31,
|                           |                                            |                                    |                                 |       |                         
|                           |                                            |                                    |                                 |       | 2002                     |   | 2001   |       | 2000
|                           |                                            |                                    |                                 |       |                          |   |        |       |     
|Reported net (loss) income |                                            | $                                  | (96,824                         | )     |                          | $ | (2,507 | )     |      | $     | 205,763 |     
|Add: Goodwill amortization |                                            |                                    |                                |       |                          |   | 7,667  |       |      |       |        |     
|                           |                                            |                                    | In-place workforce amortization |       |                          |  |        |       |      | 1,575 |         |      |   |  | 
|                           |                                            |                                    | Trademark amortization          |       |                          |  |        |       |      | 100   |         |      |   |  | 
|Less: Tax effect           |                                            |                                    |                                |       |                          |   | (3,737 | )     |      |       |        |     
|                           |                                            |                                    |                                 |       |                          |   |        |       |      |       |         |     
|Adjusted net (loss) income |                                            | $                                  | (96,824                         | )     |                          | $ | 3,098  |       |      | $     | 205,763 |     
|                           |                                            |                                    |                                 |       |                          |   |        |       |      |       |         |     
|Per share amounts          |                                            |                                    |                                 |       |                          |   |        |       |      |       |         |     
|                           | Reported basic (loss) earnings per share   |                                    | $                               | (1.71 | )                        |   | $      | (0.04 | )    |       | $       | 3.50 |  
|                           |                                            | Effect of SFAS No. 141 and No. 142 |                                 |       |                         |   |        |       | 0.10 |       |         |      |  |  
|                           |                                            |                                    |                                 |       |                          |   |        |       |      |       |         |     
|                           | Adjusted basic (loss) earnings per share   |                                    | $                               | (1.71 | )                        |   | $      | 0.06  |      |       | $       | 3.50 |  
|                           |                                            |                                    |                                 |       |                          |   |        |       |      |       |         |     
|                           | Reported diluted (loss) earnings per share |                                    | $                               | (1.71 | )                        |   | $      | (0.04 | )    |       | $       | 3.21 |  
|                           |                                            | Effect of SFAS No. 141 and No. 142 |                                 |       |                         |   |        |       | 0.09 |       |         |      |  |  
|                           |                                            |                                    |                                 |       |                          |   |        |       |      |       |         |     
|                           | Adjusted diluted (loss) earnings per share |                                    | $                               | (1.71 | )                        |   | $      | 0.05  |      |       | $       | 3.21 |  
|                           |                                            |                                    |                                 |       |                          |   |        |       |      |       |         |     

The Company had no intangible asset related amortization expense for the year
ended December 31, 2000. Amortization expense recorded in 2001 related to
intangible assets acquired in connection with acquisitions completed during
2001.

At December 31, 2002, the Company applied the provisions of SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, to its
technology, customer list, trademark and non compete agreement intangible
assets due to circumstances that indicated the carrying value of these
intangible assets may not be recoverable. The Company determined that the
carrying amount of these assets was not recoverable because the carrying value
of these assets exceeded the sum of the estimated undiscounted cash flows
expected to be generated from the use of these assets. The Company determined
the amount of the impairment loss by comparing the carrying amount of these
assets to their fair value at December 31, 2002. The Company determined the
fair value based on estimated discounted cash flows expected to be generated
from the use of these assets. The fair value of the intangible assets was
determined to be zero at December 31, 2002, and accordingly, the Company
recorded a $19,140 impairment charge for the year ended December 31, 2002 to
reduce the carrying amount of its intangible assets to their fair value.

Intangible assets other than goodwill consisted of the following at December
31, 2002:

|                                                                   |                        |   |          |        |              |   |            |       |               |   |              |        |  |   |              |        |              |  |   |   | 
|------------------------------------------------------------------ | ---------------------- | - | -------- | ------ | ------------ | - | ---------- | ----- | ------------- | - | ------------ | ------ |  | - | ------------ | ------ | ------------ |  | - | - | 
|                                                                   |                        |   |          |        |              |   |            |       |               |   | Net Carrying |        |  |   |              |        | Net Carrying
|                                                                   |                        |   | Gross    |        |              |   |            |       | Amount Before |   |              |        |  |   | Amount After
|                                                                   |                        |   | Carrying |        | Accumulated  |   | Impairment |       | Impairment    |   | Impairment  
|                                                                   |                        |   | Amount   |        | Amortization |   | Charge     |       | Charge        |   | Charge      
|                                                                   |                        |   |          |        |              |   |            |       |               |   |             
|Amortized intangible assets:                                       |                        |   |          |        |              |   |            |       |               |   |              |        |  |   |              |        |              |  |   |  
|                                                                   | Technology             |   | $        | 24,200 |              |   | $          | 9,867 |               |   | $            | 14,333 |  |   | $            | 14,333 |              |  |   |  | 
|                                                                   | Customer lists         |   |          | 5,002  |              |   |            | 2,271 |               |   |              | 2,731  |  |   |              | 2,731  |              |  |   |  | 
|                                                                   | Trademarks             |   |          | 1,506  |              |   |            | 447   |               |   |              | 1,059  |  |   |              | 1,059  |              |  |   |  | 
|                                                                   | Non compete agreements |   |          | 2,750  |              |   |            | 2,446 |               |   |              | 304    |  |   |              | 304    |              |  |   |  | 
|                                                                   | Other                  |   |          | 1,575  |              |   |            | 1,575 |               |   |              |       |  |   |              |       |              |  |   |  | 
|Intangible assets not subject to
amortization other than goodwill: |                        |   |          |        |              |   |            |       |               |   |              |        |  |   |              |        |              |  |   |  
|                                                                   | Trademarks             |   |          | 882    |              |   |            | 169   |               |   |              | 713    |  |   |              | 713    |              |  |   |  | 
|                                                                   |                        |   |          |        |              |   |            |       |               |   |              |        |  |   |              |        |              |  |   |  
|Total intangible assets                                            |                        | $ | 35,915   |        |              | $ | 16,775     |       |               | $ | 19,140       |        |  | $ | 19,140       |        |              |  |  |  
|                                                                   |                        |   |          |        |              |   |            |       |               |   |              |        |  |   |              |        |              |  |   |  

SFAS No. 145  In April 2002, the Financial Accounting Standards Board
(FASB) issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 62,
Amendment of FASB Statement No. 13 and Technical Corrections. For most
companies, SFAS No. 145 will require gains and losses on extinguishments of
debt to be classified as income or loss from continuing operations rather than
as extraordinary items as previously required under SFAS No. 4. Extraordinary
treatment will be required for certain extinguishments

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as provided in Accounting Principles Board Opinion No. 30. SFAS No. 145 also amends SFAS No.
13 for certain sales-leaseback and sublease accounting. The Company is required
to adopt the provisions of SFAS No. 145 on January 1, 2003. The Company
believes the adoption of SFAS No. 145 will not have a significant impact on the
Companys consolidated financial position or results of operations.

SFAS No. 146  In July 2002, the FASB issued SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires that
a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. SFAS No. 146 nullifies EITF No. 94-3
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity, which required a liability be recognized at the
commitment date to an exit plan. The Company is required to adopt the
provisions of SFAS No. 146 effective for exit or disposal activities initiated
after December 31, 2002. All restructuring activities prior to December 31,
2002, including those described in Note 13, are accounted for under EITF No.
94-3.

SFAS No. 148  In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure. SFAS No. 148 amends
SFAS No. 123, Accounting for Stock Based Compensation, and provides
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In addition,
SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock based employee compensation and the effect of
the method used on reported results. The transition guidance and annual
disclosure provisions of SFAS No. 148 are effective for fiscal years ending
after December 15, 2002. The interim disclosure provisions are effective for
financial reports containing financial statements for interim periods beginning
after December 15, 2002. As the Company did not make a voluntary change to the
fair value based method of accounting for stock based employee compensation in
2002, the adoption of SFAS No. 148 did not have a material impact on the
Companys consolidated financial position and results of operations.

Interpretation No. 45  In November 2002, the FASB issued Interpretation No. 45
(FIN 45), Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, which clarifies disclosure, recognition and
measurement requirements related to certain guarantees. The disclosure
requirements are effective for financial statements issued after December 15,
2002 and the recognition and measurement requirements are effective on a
prospective basis for guarantees issued or modified after December 31, 2002.
The Company believes the adoption of FIN 45 will have no impact on its
consolidated financial position and results of operations.

Interpretation No. 46  In January 2003, the FASB issued Interpretation No. 46
(FIN 46), Consolidation of Variable Interest Entities, which clarifies the
application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, relating to consolidation of certain entities. First, FIN 46 will
require identification of the Companys participation in variable interest
entities (VIE), which are defined as entities with a level of invested equity
that is not sufficient to fund future activities to permit them to operate on a
stand alone basis, or whose equity holders lack certain characteristics of a
controlling financial interest. For entities identified as VIE, FIN 46 sets
forth a model to evaluate potential consolidation based on an assessment of
which party to the VIE, if any, bears a majority of the exposure to its
expected losses, or stands to gain from a majority of its expected returns.
FIN 46 also sets forth certain disclosure regarding interests in VIE that are
deemed significant, even if consolidation is not required. The Company
anticipates the adoption of FIN 46 will not have a significant impact on its
consolidated financial position or results of operations.

EITF No. 00-21  In November 2002, the EITF issued EITF No. 00-21, Revenue
Arrangements with Multiple Deliverables, which provides guidance on the timing
and method of revenue recognition for sales arrangements that include the
delivery of more than one product or service. EITF 00-21 is effective
prospectively for arrangements entered into in fiscal periods beginning after
June 15, 2003. The effect of adopting this issue is being evaluated.

3.     Acquisitions

During 2001 the Company completed four acquisitions, which were accounted for
as purchases. Accordingly, the results of operations of the acquired companies
have been included in the consolidated statements of operations since their
respective dates of acquisition. Costs related to these acquisitions are for
investment banking, professional fees and other direct costs, including
employee severance and facilities closure. These costs were recorded on the
dates of acquisition and have been included in the allocation of the purchase
prices.

On September 4, 2001, the Company completed its acquisition of all of the
capital stock of Securant Technologies, Inc., a privately held company that
developed the ClearTrust Web access management solution; on May 16, 2001, the
Company completed its acquisition of all of the capital stock of 3-G
International, Inc., a privately held company that developed smart card and
biometric authentication products; on May 22, 2001, the Company

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completed its acquisition of substantially all the assets of Transindigo Inc, a privately
held company that developed real time Web access management software products;
and on February 12, 2001, the Company completed its acquisition of all of the
capital stock of Xcert International, Inc., a privately held company that
developed digital certificate-based products for securing e-business
transactions.

The purchase prices and costs of the Securant, 3GI, Transindigo and Xcert
acquisitions were as follows:

|                                     |  |          |         |       |  |             |        |       |  |         |        |  |  |   |         | 
|------------------------------------ |  | -------- | ------- | ----- |  | ----------- | ------ | ----- |  | ------- | ------ |  |  | - | ------- | 
|                                     |  |          |         |       |  |             |        |       |  | 3GI and |        |  |  |  
|                                     |  | Securant |         | Xcert |  | Transindigo |        | Total
|                                     |  |          |         |       |  |             |        |      
|Cash paid to sellers or shareholders |  | $        | 134,503 |       |  | $           | 64,366 |       |  | $       | 19,822 |  |  | $ | 218,691 | 
|Stock options assumed                |  |          |        |       |  |             | 3,095  |       |  |         |       |  |  |   | 3,095   | 
|Acquisition costs                    |  |          | 7,924   |       |  |             | 5,357  |       |  |         | 1,421  |  |  |   | 14,702  | 
|Litigation costs                     |  |          |        |       |  |             |       |       |  |         | 2,525  |  |  |   | 2,525   | 
|                                     |  |          |         |       |  |             |        |       |  |         |        |  |  |   |         | 
|Total purchase price                 |  | $        | 142,427 |       |  | $           | 72,818 |       |  | $       | 23,768 |  |  | $ | 239,013 | 
|                                     |  |          |         |       |  |             |        |       |  |         |        |  |  |   |         | 

Pursuant to two separate escrow agreements entered into in connection with the
Securant acquisition, $21,000 of the cash purchase price otherwise payable to
Securants shareholders was placed in escrow, pending the completion of a post
closing adjustment to the purchase price, if any, and the settlement of any
claims for breach of representations, warranties or covenants in the merger
agreement. One escrow agreement put $20,000 of the purchase price into an
escrow fund. The Company received $364 from this Securant escrow fund during
the year ended December 31, 2002 in settlement of several claims it had
submitted against the escrow fund. In addition, during February 2003, the
Company reached an agreement with the selling shareholders to release
approximately $3,300 to the Company in settlement of outstanding escrow fund
claims. The remainder of the $20,000 escrow fund will be released to the
selling shareholders during March 2003. The second escrow agreement put $1,000
of the Securant purchase price into an escrow fund. The remaining unclaimed
balance of the $1,000 Securant escrow fund not subject to a pending claim is
scheduled to be released to the selling shareholders during 2005.

Pursuant to an escrow agreement, $3,000 of the cash purchase price otherwise
payable to 3GIs stockholders was placed in escrow, pending settlement of any
claims for breaches of representations, warranties or covenants in the merger
agreement. The Company has submitted claims against the 3GI escrow totaling
approximately $3,000, and expects to recover these claims from the 3GI escrow
fund. The Company received an aggregate of $2,567 from the 3GI escrow fund
during 2002 in settlement of several claims it had submitted against the escrow
fund. Included in the amounts received from the 3GI escrow fund during 2002 is
an arbitration settlement of $2,407 for legal costs incurred in connection with
the Digital Privacy litigation described in Note 18 of the Notes to
Consolidated Financial Statements. The selling stockholders are disputing the
remaining claims.

Pursuant to an escrow agreement, $10,500 of the cash purchase price otherwise
payable to Xcerts stockholders was placed in escrow, pending settlement of any
claims for breaches of representations, warranties or covenants in the merger
agreement. The Company released all but $500 of the Xcert escrow fund to the
selling stockholders in August 2002. During February 2003, the Company reached
an agreement with the selling stockholders to release approximately $64 to the
Company in settlement of certain tax issues. The remainder of the $500 held in
escrow will be released to the selling shareholders during March 2003.

Allocation of the purchase prices for all four acquisitions completed during
2001 was based on estimates of the fair value of the assets acquired and
liabilities assumed based on independent appraisals. These allocations were as
follows:

|                                       |  |          |         |       |  |                       |        |       |  |         |        |   |  |   |         |           |  |              |  | 
|-------------------------------------- |  | -------- | ------- | ----- |  | --------------------- | ------ | ----- |  | ------- | ------ | - |  | - | ------- | --------- |  | ------------ |  | 
|                                       |  |          |         |       |  | Estimated Fair Values |        |       |  |         |        |   |  |  
|                                       |  |          |         |       |  |                      
|                                       |  |          |         |       |  |                       |        |       |  | 3GI and |        |   |  |   |         | Estimated
|                                       |  | Securant |         | Xcert |  | Transindigo           |        | Total |  | Life   
|                                       |  |          |         |       |  |                       |        |       |  |        
|Assets and liabilities, including cash |  | $        | (584    | )     |  | $                     | 4,756  |       |  | $       | 6,791  |   |  | $ | 10,963  |           |  |              |  | 
|Goodwill (1)                           |  |          | 126,897 |       |  |                       | 57,783 |       |  |         | 13,665 |   |  |   | 198,345 |           |  |              |  | 
|Intangible assets (2)                  |  |          | 19,650  |       |  |                       | 12,856 |       |  |         | 2,851  |   |  |   | 35,357  |           |  | 1 to 7 years
|Deferred tax liabilities, net (2)      |  |          | (7,286  | )     |  |                       | (5,148 | )     |  |         | (1,109 | ) |  |   | (13,543 | )         |  |              |  | 
|In process research and development    |  |          | 3,750   |       |  |                       | 2,571  |       |  |         | 1,570  |   |  |   | 7,891   |           |  |              |  | 
|                                       |  |          |         |       |  |                       |        |       |  |         |        |   |  |   |         |           |  |              |  | 
|Total purchase price                   |  |          | 142,427 |       |  |                       | 72,818 |       |  |         | 23,768 |   |  |   | 239,013 |           |  |              |  | 
|Less: assumption of stock options      |  |          |        |       |  |                       | (3,095 | )     |  |         |       |   |  |   | (3,095  | )         |  |              |  | 
|Less: cash acquired                    |  |          | (2,136  | )     |  |                       | (377   | )     |  |         | (6,883 | ) |  |   | (9,396  | )         |  |              |  | 
|                                       |  |          |         |       |  |                       |        |       |  |         |        |   |  |   |         |           |  |              |  | 
|Net cash paid                          |  | $        | 140,291 |       |  | $                     | 69,346 |       |  | $       | 16,885 |   |  | $ | 226,522 |           |  |              |  | 
|                                       |  |          |         |       |  |                       |        |       |  |         |        |   |  |   |         |           |  |              |  | 



|(1) |  | Effective January 1, 2002 the adoption of SFAS No. 142,
Goodwill and Other Intangible Assets, required that the
amortization of goodwill and indefinite lived intangible assets be
discontinued, and instead be evaluated at least annually for
impairment.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The Company recorded an impairment charge of $19,140 during
2002, which reduced the carrying value of these intangible assets to
zero at December 31, 2002. Accordingly, the Company will not record
any amortization expense                                

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| |  | related to these intangible assets after
December 31, 2002. As a result of this impairment charge, the
Company reduced the related deferred tax liabilities to zero at
December 31, 2002.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As a result of the Companys adoption of SFAS No. 142, Goodwill and Other
Intangible Assets, on January 1, 2002 the Company reclassified in-place
workforce related intangible assets of $5,689, $2,021 and $569 arising from the
acquisitions of Xcert, 3GI and Transindigo, respectively, into goodwill,
resulting in an increase to goodwill and a decrease to the carrying value of
intangible assets of $8,279. In addition, upon reclassification of in-place
workforce related intangible assets to goodwill and the determination of
indefinite lived assets, the Company reversed the deferred tax liabilities
related to these intangible assets. The reversal of deferred tax liabilities of
$2,269 and $808 relating to the Xcert and 3GI acquisitions, respectively,
resulted in a decrease to goodwill and deferred tax liabilities of $3,077.

The allocation of the Securant purchase price has been revised since September
4, 2001 (the date of acquisition) for unrecorded liabilities related to
pre-acquisition contingencies and uncollectible accounts receivable, which
resulted in a net decrease to the allocation of assets and liabilities and an
increase to the carrying value of goodwill of $1,105. The Company expects to
record additional adjustments to the Securant purchase price upon settlement of
any escrow claims.

In June 2002, the Company paid $591 to Xcert stockholders upon finalization of
the working capital calculation. The cost of the working capital adjustment
has been added to the purchase price of Xcert and resulted in an increase to
goodwill of $591.

The Company incurred litigation expenses in connection with a patent litigation
relating to the products acquired in the May 2001 acquisition of 3GI and
recorded these expenses as related costs of acquisition. The costs to defend
the 3GI lawsuit are covered by the escrow fund set aside from the 3GI purchase
price. Through December 31, 2002, the Company has received an aggregate of
$2,567 from the 3GI escrow to cover these litigation costs and other claims against
3GI escrow. The costs of litigation and disbursements from the 3GI escrow
resulted in a net increase to goodwill of $39.

The Company used an independent appraiser to calculate the amounts allocated to
assets and liabilities acquired including intangible assets and in process
research and development (IPR&D). The independent appraiser used established
valuation techniques accepted in the high technology industry, including the
income method, which discounts expected future cash flows to present value, and
the cost method, which uses the replacement costs. These methods give
consideration to relevant market sizes and growth factors, expected industry
trends, product sales cycles, and the estimated lives of each products
underlying technology. For IPR&D, consideration was also given to the
projects stage of completion, the complexity of the work completed to date,
the difficulty of completing the remaining development and the projected cost
to complete the project.

The amounts allocated to IPR&D projects were expensed in the quarter that the
related acquisition was consummated if technological feasibility of the IPR&D
projects had not been achieved and no alternate future uses had been
established. Research and development costs to bring the acquired products to
technological feasibility are not expected to have a material impact on the
Companys future results of operations or cash flows. IPR&D expense of $7,891
for the year ended December 31, 2001 represents the write off of IPR&D in
connection with the acquisitions of Securant, Xcert, 3GI and Transindigo.

The discount rates used in the present value calculations were derived from a
weighted average cost of capital, adjusted upward to reflect additional risks
inherent in the development life cycle, and resulted in discount rates in a
range of 30.0%  35.0% based upon an income stream of between 5 and 7 years.

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Pro forma revenue, net (loss) income and diluted (loss) earnings per share for
the years ended December 31, 2001 and 2000 as if the Securant, Xcert, 3GI and
Transindigo acquisitions had been consummated as of January 1, 2001 and 2000 is
presented below. The pro forma results include estimates and assumptions
regarding increased amortization of goodwill and intangible assets related to
the acquisitions and decreased interest income related to cash paid for
acquisition purchase prices, which the Company believes are reasonable.
However, pro forma results are not necessarily indicative of the results that
would have occurred if the acquisitions had occurred on the dates indicated, or
that may result in the future. These pro forma results are based upon the
respective historical financial statements of the respective companies, and do
not incorporate, nor do they assume, any benefits from cost savings or
synergies of operations of the combined company.

|                                  |  |                          |         |      |  |   |         | 
|--------------------------------- |  | ------------------------ | ------- | ---- |  | - | ------- | 
|                                  |  | Years Ended December 31,
|                                  |  |                         
|                                  |  | 2001                     |         | 2000
|                                  |  |                          |         |     
|                                  |  | (unaudited)             
|Revenue                           |  | $                        | 295,379 |      |  | $ | 289,547 | 
|                                  |  |                          |         |      |  |   |         | 
|Net (loss) income                 |  | $                        | (50,446 | )    |  | $ | 153,886 | 
|                                  |  |                          |         |      |  |   |         | 
|Basic (loss) earnings per share   |  | $                        | (0.90   | )    |  | $ | 2.65    | 
|                                  |  |                          |         |      |  |   |         | 
|Diluted (loss) earnings per share |  | $                        | (0.90   | )    |  | $ | 2.40    | 
|                                  |  |                          |         |      |  |   |         | 

4.      Investments and Financial Instruments

The Companys investments were as follows at December 31,:

|                                                 |  |      |         |      |  |   |         |  
|------------------------------------------------ |  | ---- | ------- | ---- |  | - | ------- | -
|                                                 |  | 2002 |         | 2001
|                                                 |  |      |         |     
|Equity securities recorded at cost               |  | $    | 26,220  |      |  | $ | 39,852  |  
|Impairment of equity securities recorded at cost |  |      | (24,820 | )    |  |   | (13,355 | )
|                                                 |  |      |         |      |  |   |         |  
|Total equity securities recorded at cost         |  |      | 1,400   |      |  |   | 26,497  |  
|                                                 |  |      |         |      |  |   |         |  
|Investment in Crosby Finance, LLC                |  |      | 186     |      |  |   | 7,025   |  
|                                                 |  |      |         |      |  |   |         |  
|Total investments                                |  | $    | 1,586   |      |  | $ | 33,522  |  
|                                                 |  |      |         |      |  |   |         |  

Equity securities recorded at cost include preferred stock and common stock
which is not publicly traded or whose sale is prohibited by contractual or
statutory restrictions.

(Loss) income from investing activities includes the following gains (losses):

|                                                            |  |                          |         |      |  |      |        |   |  |   |         | 
|----------------------------------------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------ | - |  | - | ------- | 
|                                                            |  | Years Ended December 31,
|                                                            |  |                         
|                                                            |  | 2002                     |         | 2001 |  | 2000
|                                                            |  |                          |         |      |  |     
|Gain on sale of marketable securities, net                  |  | $                        | 834     |      |  | $    | 6,165  |   |  | $ | 39,351  | 
|Loss on sale of investments                                 |  |                          | (3,082  | )    |  |      |       |   |  |   |        | 
|Decline in fair value of Crosby Finance, LLC                |  |                          | (6,823  | )    |  |      |       |   |  |   |        | 
|Settlement of forward contracts held by Crosby Finance, LLC |  |                          |        |      |  |      | 41,843 |   |  |   |        | 
|Transfer of assets to Crosby Finance, LLC                   |  |                          |        |      |  |      |       |   |  |   | 101,427 | 
|Termination of VeriSign collar program                      |  |                          |        |      |  |      |       |   |  |   | 46,000  | 
|VeriSign collar program                                     |  |                          |        |      |  |      |       |   |  |   | 86,075  | 
|Investment impairment charges                               |  |                          | (21,866 | )    |  |      | (7,172 | ) |  |   |        | 
|                                                            |  |                          |         |      |  |      |        |   |  |   |         | 
|Total (loss) income from investing activities               |  | $                        | (30,937 | )    |  | $    | 40,836 |   |  | $ | 272,853 | 
|                                                            |  |                          |         |      |  |      |        |   |  |   |         | 

During 2002, the Company recognized impairment charges totaling $21,866 related
to its investments in privately held companies. During the fourth quarter of
2002, the Company initiated a process to sell its equity investments that are
held in the RSA Capital segment. The Company recorded an impairment charge of
$11,966 to reflect the investments at their estimated realizable value, less
costs of disposal. The Company considered offers to buy, recent valuations and
current financial positions of the investments in estimating realizable value.
Estimated realizable value of these investments less costs of disposal is
$1,400 and has been included in investments on the consolidated balance sheet
at December 31, 2002. The Company expects to complete the sale of these
investments during 2003.

During 2002, three of the companies in which the Company had invested were in
the process of obtaining additional financing or being sold, and based upon
valuations and anticipated cash proceeds, the Company reduced the carrying
amount of these investments to their estimated fair value. Accordingly, the
Company recorded investment valuation impairment charges of $9,900 related to its

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equity investments, which have been included in loss from investment
activities in the consolidated statements of operations for the year ended
December 31, 2002.

In November 2000, the Company transferred 2,636,916 shares of VeriSign, Inc.
(VeriSign) common stock, which were covered by three forward contracts
(Forwards) and one variable delivery forward contract (VDF), to Crosby
Finance, LLC, of which the Company is a 99% member. Crosby is a
bankruptcy-remote qualified special purpose entity, established specifically to
securitize the shares of VeriSign common stock. The contribution and the
transfer have been accounted for as a sale under SFAS No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. Accordingly, the Company does not consolidate Crosby for
accounting purposes. The counterparty to the VDF contract holds the remaining
1% interest in Crosby.

At December 31, 2002, Crosby held 2,027,325 shares of VeriSign common stock and
the VDF contract. The VDF contract entitles Crosby to receive cash proceeds of
up to $35,336 depending on the market price of VeriSign common stock on January
3, 2006. The closing price of VeriSigns common stock on The NASDAQ National
Market on December 31, 2002 was $8.02 per share. Unless the value of the
VeriSign stock appreciates to at least $87.16 per share in January 2006, Crosby
will not be entitled to any cash proceeds. Crosby has no liability or
obligation to its members or to the counterparty to the VDF contract other than
to deliver the shares of VeriSign common stock to the counterparty upon
maturity of the VDF contract and to distribute the cash proceeds, if any, to
its members. After settlement of the VDF in January 2006, Crosby will
dissolve.

The carrying amount of the Companys 99% interest in Crosby was $186 and $7,025
at December 31, 2002 and 2001, respectively. The Company accounts for its
investment in Crosby under the guidelines of EITF No. 96-12, Recognition of
Interest Income and Balance Sheet Classification of Structured Notes. Before
the settlement of the Forwards, the Company used the retrospective interest
method to account for the Companys interest in Crosby as the Company believed
it would recover a substantial amount of its interest. Any increases in the
cost basis of the Companys interest in Crosby, determined by applying the
retrospective interest method, were recorded in interest income. Any changes
in the fair value of the Companys interest in Crosby were recorded in other
comprehensive income in stockholders equity. In the fourth quarter of 2001,
after the settlement of the last Forward, it became reasonably possible that
the Company could lose all or substantially all of the value of its remaining
interest, and therefore could no longer apply the retrospective interest method
to its interest in Crosby. Accordingly, the Company is carrying its interest
at fair value with all changes in fair value reported in income from investing
activities in the statement of operations. The Company determines the fair
value of its interest in Crosby is being determined based on the fair value of
Crosbys right to potentially receive additional cash proceeds upon maturity of
the VDF. The decline in the fair value of the Companys interest in Crosby was
$6,823 for the year ended December 31, 2002.

The gain recorded for financial reporting purposes upon contribution of the VDF
contract to Crosby in 2000 has not been recognized for tax purposes, and
accordingly, the Company recorded a $26,619 deferred tax liability. This
deferred tax liability will reverse upon maturity of the VDF contract in 2006, and the gain will be included in the
calculation of the Companys taxable income for 2006. The recognition of that
gain will result in a tax liability to the Company and may require the payment
of cash to settle the tax liability.

The Company has the right to appoint the members of the Board of Directors of
Crosby, one of whom is required to be an independent director who is not an
employee, director or stockholder of the Company or otherwise affiliated with
the Company and who does not receive any direct or indirect benefit from the
Company. The other members of the Crosby Board of Directors are two of the
Companys officers. None of the Crosby directors has any ownership or interest
in Crosby or its profits or assets, and with the exception of the independent
director, none of the directors is compensated for serving as a director of
Crosby. The Crosby Board of Directors manages the operations of Crosby, but
neither the Crosby Board nor either of the members of Crosby has the power to
cause Crosby to engage in any business other than holding shares of VeriSign
common stock, the Forwards and the VDF and performing its obligations under the
Forwards and the VDF contracts.

5.     Property and Equipment

Property and equipment were as follows at:

|                                                |       |   |              |         |      |   |         |         | 
|----------------------------------------------- | ----- | - | ------------ | ------- | ---- | - | ------- | ------- | 
|                                                |       |   | December 31,
|                                                |       |   | 2002         |         | 2001
|                                                |       |   |              |         |     
|Land                                            |       | $ | 6,371        |         |      | $ | 5,972   |        
|Building                                        |       |   | 18,664       |         |      |   | 17,508  |        
|Furniture and equipment                         |       |   | 80,358       |         |      |   | 83,149  |        
|Leasehold improvements                          |       |   | 31,778       |         |      |   | 38,056  |        
|                                                |       |   |              |         |      |   |         |        
|                                                | Total |   |              | 137,171 |      |   |         | 144,685 | 
|Less: Accumulated depreciation and amortization |       |   | (62,243      | )       |      |   | (49,845 | )      
|                                                |       |   |              |         |      |   |         |        
|Property and equipment, net                     |       | $ | 74,928       |         |      | $ | 94,840  |        
|                                                |       |   |              |         |      |   |         |        

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6.     Convertible Debentures

In October and November 2001, the Company issued 7% convertible subordinated
debentures due October 17, 2004 with an aggregate principal amount of $80,000,
which generated proceeds of $75,204, net of financing issuance costs. The
debentures mature on October 17, 2004, unless redeemed earlier by the Company
as described below or converted into shares of the Companys common stock at
the holders option.

Interest is payable in cash semi-annually in arrears on January 1 and July 1 of
each year at a fixed rate of 7% per annum. At any time and at their option,
each holder may convert any outstanding debentures it holds into shares of the
Companys common stock at a conversion price of $13.745 per share, which upon
conversion of all of the outstanding debentures would result in the issuance of
approximately 5,820,298 shares of the Companys common stock. The conversion
price of the debentures may be adjusted under certain circumstances, such as
events that would cause dilution of the debenture holders interest. The
Company may redeem all or a portion of the debentures for cash at any time
after October 17, 2002 as long as the arithmetic average of the weighted
average price of the Companys common stock on each trading day during the
fifteen trading day period immediately before the election to redeem is at
least 150% of the conversion price. The conversion feature was not exercisable
at December 31, 2002. The debentures are unsecured and are subordinated to all
existing and future senior indebtedness. The agreements governing the
convertible debentures contain covenants including restrictions on the
Companys ability to incur and guarantee additional debt. The covenants limit
the amount of additional debt the Company may incur to the lesser of 30% of the
Companys consolidated stockholders equity, which was $79,030 at December 31,
2002, or a total of $180,000 including the balance of the 7% convertible
debentures outstanding.

In connection with the issuance of the convertible debentures, and as described
in Note 8, the Company issued warrants on its common stock to the holders of
the convertible debentures. The Company recorded the fair market value of the
warrants as additional paid-in capital during the year ended December 31, 2001
and is amortizing the fair market value through October 2004. In addition, in
connection with the issuance of the 7% convertible debentures, the Company paid
investment bank fees, legal fees and other financing costs of $4,796 which are
being amortized through October 2004 using the straight-line method, which is
not materially different from the effective interest rate method. Unamortized
deferred financing costs of $2,876 are included in other assets on the
consolidated balance sheet at December 31, 2002. The carrying value of the 7%
convertible debentures is as follows at December 31, 2002:

|                                              |  |   |        |  
|--------------------------------------------- |  | - | ------ | -
|Principal amount of 7% convertible debentures |  | $ | 80,000 |  
|Less: value of warrants                       |  |   | (4,149 | )
|Add: accumulated accretion                    |  |   | 1,626  |  
|                                              |  |   |        |  
|Carrying value, December 31, 2002             |  | $ | 77,477 |  
|                                              |  |   |        |  

7.     Line of Credit

During 2002, the Company extended its $10,000 line of credit agreement with a
major financial institution to June 30, 2003, subject to annual extension
provisions. Borrowing availability is reduced by letters of credit issued for
purposes such as collateralizing real estate rental agreements. As of December
31, 2002, the Company had $8,223 of borrowing availability under this line of
credit. Borrowings under this agreement will bear interest, at the Companys
option, at either fixed or variable rates linked to either the London Interbank
Offered Rate or the Prime Rate. Borrowings will be collateralized by cash
deposits of the Company.

8.     Stockholders Equity

Common Stock Warrants  In connection with the issuance of the 7% convertible
debentures in October and November 2001, the Company issued warrants to
purchase shares of its common stock to the holders of the convertible
debentures. The holders may exercise the warrants for an aggregate of 873,045
shares of the Companys common stock at an exercise price of $13.745 per share.
The exercise price of the warrants may be adjusted under certain circumstances,
such as events that would cause dilution of the holders interest. The
warrants were immediately exercisable upon issuance and expire on October 17,
2006. The fair value of the warrants of $4,149 was estimated using the
Black-Scholes model with the following assumptions: risk free interest rate of
2.5%, expected life of 2.5 years, dividend yield of 0%, and expected volatility
of 83%. The Company recorded the fair market value of the warrants as
additional paid-in capital. As of December 31, 2002, none of the warrants had
been exercised.

Stockholder Rights Plan  On July 20, 1999, the Companys Board of Directors
adopted a Stockholder Rights Plan, and a Rights Agreement to govern the Plan,
under which common stock purchase rights (each, a Right) were distributed to
the Companys stockholders at the rate of one Right for each share of the
Companys common stock. Each Right entitles the stockholder that owns the
Right to purchase one share of the Companys common stock at a purchase price
of $83.33 per share, subject to adjustment (the Purchase Price). The
Companys stockholders may exercise the Rights (1) if another party acquires,
or obtains the right to acquire, beneficial ownership of 15% or more of the
Companys common stock, or (2) upon the commencement of a tender or exchange
offer

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that, if consummated, would result in another party acquiring 15% or more
of the Companys common stock. In the event of such an acquisition or similar
event, each Right, other than those owned by the acquiring party, will enable
the stockholder that owns the Right to purchase the number of shares of the
Companys common stock that equals the Purchase Price divided by one-half of
the current market price (as defined in the Rights Agreement) of the common
stock.

In addition, if the Company is involved in a merger or other transaction with
another company in which the Company is not the surviving corporation, or if
the Company sells or transfers 50% or more of its assets or earning power to
another company, each Right will entitle the stockholder that owns it to
purchase the number of shares of common stock of the acquiring company that
equals the Purchase Price divided by one-half of the current market price of
the acquiring companys common stock. The Company is generally entitled to
redeem the Rights at $0.001 per Right at any time until the tenth business day
after the later of (1) a public announcement that an acquiring party has
acquired, or obtained the right to acquire, 15% or more of the Companys common
stock or (2) the actual knowledge by an executive officer of the Company of
such an acquisition. Unless the Rights are redeemed or exchanged earlier, they
will expire on July 20, 2009.

Share Repurchase Program  The Company had a common stock repurchase program
from October 1998 to October 2001. Repurchased shares are used for stock
option and employee stock purchase plans, and for general corporate purposes.
Under the repurchase program, the Company repurchased, in total, 15,817,000
shares of its common stock for an aggregate amount of $422,156, or an average
cost of $26.69 per share.

At December 31, 2002 and 2001, the Company had zero shares of its common stock
covered by outstanding put options. The Company received $7,565 from the sale
of put options on its common stock during the year ended December 31, 2001.
During 2001 and upon maturity of one of the Companys put options contracts
covering 375,000 shares of its common stock, the Company repurchased 375,000
shares of its common stock for $13,943 or $37.18 per share. The put options
with strike prices in excess of the average closing market value of the
Companys common stock for the year ended December 31, 2000, of $38.87, would
be considered dilutive. Accordingly the put options outstanding at December
31, 2000 did have a dilutive effect on the calculation of earnings per share
for the year ended December 31, 2000.

During 2000, the Company entered into forward equity contracts for 1,500,000
shares of its common stock in order to set purchase prices for its future
repurchase of shares under its share repurchase program. Upon maturity of the
forward equity contracts in May 2001, the Company chose to settle the contracts
by repurchasing 1,500,000 shares of its common stock for $65,020 or $43.35 per
share. Contracts with forward purchase prices above the closing fair value of
the Companys common stock at December 31, 2000 of $35.25 would be considered dilutive. Accordingly, the forward purchase
contracts did have a dilutive effect on the earnings per share calculation at
December 31, 2000.

During September and October 2001, the Company received notices terminating put
options covering an aggregate of 3,000,000 shares of the Companys stock from
counterparties to the put options. The cost to the Company to settle the
terminated put options was $57,647. In addition, during August 2001 the
Company net settled one of its put options contracts covering 375,000 shares of
its common stock and paid $6,168. The Company did not repurchase any shares of
its common stock in connection with these settlements.

9.     Stock Option and Purchase Plans

Stock Option Exchange Programs  In November 2001, the Company offered to all
of its employees and directors the opportunity to request that the Company
exchange the employees and directors outstanding stock options in return for
new stock options to be granted by the Company no sooner than six months and
one day from November 12 and December 17, 2001, the dates on which each
exchange offer terminated. In exchange for existing options, each option
holder received a commitment for new options to be issued for shares of common
stock equal to three fifths (3/5) of the total number of shares subject to the
options tendered by the option holder and accepted for exchange. Options
covering a total of 8,871,919 shares were accepted for exchange under the
exchange offers and, accordingly, were canceled on November 12 and December 17,
2001. The Company granted the new options, covering a total of 5,021,321
shares, on May 13 and June 18, 2002. On May 13, 2002, the Company granted new
options to its non-employee directors with an exercise price of $6.15 per
share, the closing price of the Companys common stock on the NASDAQ National
Market on that date. The new non-employee director options are exercisable in
full on the date of grant. On June 18, 2002, the Company granted new options
to its employees with an exercise price of $4.42 share, the closing price of
the Companys common stock on the NASDAQ National Market on that date. The new
employee options became exercisable as to 25% of the shares represented by the
options on the date of grant and in equal quarterly amounts thereafter for
three years.

The 1994 Stock Option Plan, as amended  1998 Restatement, as amended (1994
Plan), allows the Company to grant to its employees, officers, directors and
consultants options to purchase common stock intended to qualify as incentive
stock options, options that do not qualify as incentive stock options
(non-statutory options), restricted stock awards and other stock-based awards.

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Option exercise prices for incentive stock options granted under the 1994 Plan
may not be less than 100% of the fair market value of the shares. In general,
1994 Plan option grants become exercisable as to 25% on the first anniversary
of the grant date, and in equal quarterly amounts thereafter for three years.
In general, no installment is exercisable after the fourth anniversary of the
date on which such installment first becomes exercisable, and options generally
expire eight years from the grant date.

The 1994 Director Stock Option Plan, as amended (Director Plan), allows the
Company to grant non-statutory stock options to purchase common stock to
non-employee members of the Board of Directors. The exercise price of the
options may not be less than 100% of the fair market value on the date of the
grant. Options granted under the Director Plan become exercisable at the date
of grant and expire ten years from the date of grant.

The Amended and Restated 1998 Non-Officer Employee Stock Incentive Plan, as
amended (1998 Plan), allows the Company to grant non-statutory stock options,
restricted stock awards, and other stock-based awards to its employees,
consultants and advisors, other than those who are also officers within the
meaning of Section 16 of the Securities Exchange Act of 1934, as amended. In
general, stock options granted under the 1998 Plan become exercisable as to 25%
on the first anniversary of the grant date and in equal quarterly installments
thereafter for three years. In general, no installment is exercisable after
the fourth anniversary of the date on which such installment first becomes
exercisable, and options generally expire eight years from the grant date.

At December 31, 2002, there were 17,355,000 shares of the Companys common
stock authorized and 1,992,678 shares available for grant under the 1994 Plan,
750,000 shares authorized and 110,250 shares available for grant under the
Director Plan, and 21,062,764 shares authorized and 9,206,154 shares available
for grant under the 1998 Plan.

A summary of stock option activity under all plans follows:

|                                 |  |        |             |                 |  |                  |       | 
|-------------------------------- |  | ------ | ----------- | --------------- |  | ---------------- | ----- | 
|                                 |  |        |             |                 |  | Weighted Average
|                                 |  |        |             |                 |  | Exercise        
|                                 |  | Shares |             | Price Per Share
|                                 |  |        |             |                
|Outstanding at January 1, 2000   |  |        | 15,653,092  |                 |  | $                | 14.55 | 
|Granted                          |  |        | 8,936,787   |                 |  |                  | 34.95 | 
|Exercised                        |  |        | (3,173,193  | )               |  |                  | 10.31 | 
|Canceled and expired             |  |        | (1,443,675  | )               |  |                  | 16.18 | 
|                                 |  |        |             |                 |  |                  |       | 
|Outstanding at December 31, 2000 |  |        | 19,973,011  |                 |  |                  | 24.10 | 
|Granted                          |  |        | 6,547,363   |                 |  |                  | 28.80 | 
|Exercised                        |  |        | (2,325,828  | )               |  |                  | 12.86 | 
|Canceled and expired             |  |        | (12,246,527 | )               |  |                  | 31.99 | 
|                                 |  |        |             |                 |  |                  |       | 
|Outstanding at December 31, 2001 |  |        | 11,948,019  |                 |  |                  | 21.07 | 
|Granted                          |  |        | 8,516,721   |                 |  |                  | 4.61  | 
|Exercised                        |  |        | (218,399    | )               |  |                  | 6.95  | 
|Canceled and expired             |  |        | (3,718,092  | )               |  |                  | 21.54 | 
|                                 |  |        |             |                 |  |                  |       | 
|Outstanding at December 31, 2002 |  |        | 16,528,249  |                 |  | $                | 12.48 | 
|                                 |  |        |             |                 |  |                  |       | 
|Exercisable at December 31, 2000 |  |        | 4,764,196   |                 |  | $                | 15.44 | 
|                                 |  |        |             |                 |  |                  |       | 
|Exercisable at December 31, 2001 |  |        | 4,982,928   |                 |  | $                | 17.06 | 
|                                 |  |        |             |                 |  |                  |       | 
|Exercisable at December 31, 2002 |  |        | 8,648,763   |                 |  | $                | 14.45 | 
|                                 |  |        |             |                 |  |                  |       | 

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The following table sets forth information regarding stock options outstanding
at December 31, 2002 under all plans:

|                |                |           |  |                |  |                  |   |             |          |             |           |     |                  |  |                    |           |  |  |                  |       |  |  | 
|--------------- | -------------- | --------- |  | -------------- |  | ---------------- | - | ----------- | -------- | ----------- | --------- | --- | ---------------- |  | ------------------ | --------- |  |  | ---------------- | ----- |  |  | 
|                |                |           |  |                |  |                  |   |             |          |             |           |     | Weighted Average |  |                    |           |  |  | Weighted Average
|                |                |           |  |                |  |                  |   |             | Weighted |             | Remaining |     | Number           |  | Exercise Price for
|Range of        |                | Number of |  | Average        |  | Contractual Life |   | Currently   |          | Currently  
|Exercise Prices |                | Shares    |  | Exercise Price |  | (Years)          |   | Exercisable |          | Exercisable
|                |                |           |  |                |  |                  |   |             |          |            
|                | $0.30          |           |  | 1,725          |  |                  | $ | 0.30        |          |             |           | 0.4 |                  |  |                    | 1,725     |  |  | $                | 0.30  | 
|                | 1.97  2.93    |           |  | 306,588        |  |                  |   | 2.91        |          |             |           | 7.4 |                  |  |                    | 6,588     |  |  |                  | 1.97  | 
|                | 3.42  4.42    |           |  | 6,572,396      |  |                  |   | 4.25        |          |             |           | 6.9 |                  |  |                    | 1,474,430 |  |  |                  | 4.41  | 
|                | 5.85  8.04    |           |  | 2,578,591      |  |                  |   | 7.29        |          |             |           | 5.0 |                  |  |                    | 2,463,841 |  |  |                  | 7.27  | 
|                | 9.99  14.67   |           |  | 1,218,128      |  |                  |   | 11.85       |          |             |           | 4.6 |                  |  |                    | 893,643   |  |  |                  | 12.09 | 
|                | 15.00  19.88  |           |  | 2,430,727      |  |                  |   | 17.96       |          |             |           | 4.3 |                  |  |                    | 1,941,831 |  |  |                  | 17.85 | 
|                | 22.69  32.96  |           |  | 2,935,315      |  |                  |   | 28.10       |          |             |           | 5.5 |                  |  |                    | 1,580,781 |  |  |                  | 28.08 | 
|                | 34.03  49.38  |           |  | 484,779        |  |                  |   | 37.38       |          |             |           | 5.4 |                  |  |                    | 285,924   |  |  |                  | 37.47 | 
|                |                |           |  |                |  |                  |   |             |          |             |           |     |                  |  |                    |           |  |  |                  |       | 
|                | $0.30  $49.38 |           |  | 16,528,249     |  |                  | $ | 12.48       |          |             |           | 5.8 |                  |  |                    | 8,648,763 |  |  | $                | 14.45 | 
|                |                |           |  |                |  |                  |   |             |          |             |           |     |                  |  |                    |           |  |  |                  |       | 

The Company cancelled certain stock options assumed in connection with the
acquisition of Xcert in February 2001 and recognized compensation expense of
$751 in 2001. For certain options and stock awards granted prior to 1999, the
Company recognized compensation expense based on the excess of fair market
value over the option exercise or award prices at dates of grant. Compensation
was recognized ratably over the vesting periods and amounted to $563 in 2000.

The 1994 Employee Stock Purchase Plan, as amended (Purchase Plan), provides
for sales of common stock to participating employees at prices of not less than
85% of the closing price on either the first day or the last day of the
offering period, whichever is lower. At December 31, 2002, 2,100,000 shares
were authorized under the Purchase Plan, and 717,164 shares were available for
purchase. The cumulative total shares purchased under the plan through 2002,
2001 and 2000 were 1,382,835, 962,230, and 821,467, respectively.

Pro Forma Disclosure  See Stock-Based Compensation Plans in Note 1 of the
Notes to Consolidated Financial Statements for the pro forma disclosures of net
income and earnings per share required under SFAS No. 123.

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10.     Comprehensive (Loss) Income

Comprehensive (loss) income was as follows:

|                                         |                                                                    |   |                          |       |      |   |         |         |   |   |         |          |  
|---------------------------------------- | ------------------------------------------------------------------ | - | ------------------------ | ----- | ---- | - | ------- | ------- | - | - | ------- | -------- | -
|                                         |                                                                    |   | Years Ended December 31,
|                                         |                                                                    |   |                         
|                                         |                                                                    |   | 2002                     |       | 2001 |   | 2000   
|                                         |                                                                    |   |                          |       |      |   |        
|Net (loss) income                        |                                                                    | $ | (96,824                  | )     |      | $ | (2,507  | )       |   | $ | 205,763 |         
|Comprehensive (loss) income, net of tax: |                                                                    |   |                          |       |      |   |         |         |   |   |         |         
|                                         | Holding losses arising during period                               |   |                          |      |      |   |         | (6,250  | ) |   |         | (657     | )
|                                         | Less: reclassification adjustment for gains included in net income |   |                          | (422  | )    |   |         | (27,723 | ) |   |         | (201,936 | )
|                                         |                                                                    |   |                          |       |      |   |         |         |   |   |         |         
|                                         | Decrease in net unrealized gains on marketable securities          |   |                          | (422  | )    |   |         | (33,973 | ) |   |         | (202,593 | )
|                                         |                                                                    |   |                          |       |      |   |         |         |   |   |         |         
|                                         | Foreign currency translation adjustments                           |   |                          | 2,938 |      |   |         | (2,188  | ) |   |         | (1,381   | )
|                                         |                                                                    |   |                          |       |      |   |         |         |   |   |         |         
|Comprehensive (loss) income              |                                                                    | $ | (94,308                  | )     |      | $ | (38,668 | )       |   | $ | 1,789   |         
|                                         |                                                                    |   |                          |       |      |   |         |         |   |   |         |         

The tax benefit of holding losses on marketable securities was $4,166 and $438
for 2001 and 2000, respectively.

11.     (Loss) Earnings Per Share

The following table sets forth the computation of basic and diluted (loss)
earnings per share:

|                                               |                                                    |                                                          |       |                          |        |      |       |        |        |   |      |         |        | 
|---------------------------------------------- | -------------------------------------------------- | -------------------------------------------------------- | ----- | ------------------------ | ------ | ---- | ----- | ------ | ------ | - | ---- | ------- | ------ | 
|                                               |                                                    |                                                          |       | Years Ended December 31,
|                                               |                                                    |                                                          |       |                         
|                                               |                                                    |                                                          |       | 2002                     |        | 2001 |       | 2000  
|                                               |                                                    |                                                          |       |                          |        |      |       |       
|Numerator:                                     |                                                    |                                                          |       |                          |        |      |       |        |        |   |      |        
|                                               | Net (loss) income                                  |                                                          | $     | (96,824                  | )      |      | $     | (2,507 | )      |   | $    | 205,763 |       
|                                               | Interest on convertible debentures                 |                                                          |       |                         |        |      |       |       |        |   |      |        |       
|                                               | Financing costs on forward equity contracts (1)    |                                                          |       |                         |        |      |       |       |        |   |      | (2,353  | )     
|                                               |                                                    |                                                          |       |                          |        |      |       |        |        |   |      |        
|Numerator for basic (loss) earnings per share: |                                                    |                                                          |       |                          |        |      |       |        |        |   |      |        
|                                               | Net (loss) income available to common stockholders |                                                          | $     | (96,824                  | )      |      | $     | (2,507 | )      |   | $    | 203,410 |       
|                                               |                                                    |                                                          |       |                          |        |      |       |        |        |   |      |        
|Denominator:                                   |                                                    |                                                          |       |                          |        |      |       |        |        |   |      |        
|                                               | Denominator for basic (loss) earnings per share:   |                                                          |       |                          |        |      |       |        |        |   |      |         |       
|                                               |                                                    | Weighted average shares                                  |       |                          | 56,621 |      |       |        | 56,259 |   |      |         | 58,051 | 
|                                               |                                                    | Effect of options, warrants and forward equity
contracts |       |                          |       |      |       |        |       |   |      |         | 5,976  | 
|                                               |                                                    |                                                          |       |                          |        |      |       |        |        |   |      |        
|                                               | Denominator for diluted (loss) earnings per share: |                                                          |       |                          |        |      |       |        |        |   |      |         |       
|                                               |                                                    | Adjusted weighted average shares                         |       |                          | 56,621 |      |       |        | 56,259 |   |      |         | 64,027 | 
|                                               |                                                    |                                                          |       |                          |        |      |       |        |        |   |      |        
|Basic (loss) earnings per share                |                                                    | $                                                        | (1.71 | )                        |        | $    | (0.04 | )      |        | $ | 3.50 |        
|                                               |                                                    |                                                          |       |                          |        |      |       |        |        |   |      |        
|Diluted (loss) earnings per share              |                                                    | $                                                        | (1.71 | )                        |        | $    | (0.04 | )      |        | $ | 3.21 |        
|                                               |                                                    |                                                          |       |                          |        |      |       |        |        |   |      |        



|(1) |  | Financing costs on forward equity contracts are excluded from the
computation of diluted earnings per share.
|--- |  | ------------------------------------------------------------------------------------------------------------

Equity instruments that were considered antidilutive and therefore were not
included in the computation of diluted loss per share include 16,528,249,
11,948,019 and 1,101,375 shares of the Companys common stock related to
employee stock options for the years ended December 31, 2002, 2001 and 2000,
respectively. Equity instruments that were considered antidilutive and
therefore were not included in the computation of diluted loss per share
include 5,820,298 and 1,240,003 shares of the Companys common stock related to
the convertible debentures for the years ended December 31, 2002 and 2001,
respectively. Equity instruments that were considered antidilutive and
therefore were not included in the computation of diluted loss per share
include 873,045 shares of the Companys common stock related to the common
stock warrants for the years ended December 31, 2002 and 2001.

12.      Income Taxes

Components of (loss) income before (benefit) provision for income taxes:

|                                                          |  |                          |          |      |  |      |        |   |  |   |         |  
|--------------------------------------------------------- |  | ------------------------ | -------- | ---- |  | ---- | ------ | - |  | - | ------- | -
|                                                          |  | Years Ended December 31,
|                                                          |  |                         
|                                                          |  | 2002                     |          | 2001 |  | 2000
|                                                          |  |                          |          |      |  |     
|Domestic                                                  |  | $                        | (143,808 | )    |  | $    | (1,440 | ) |  | $ | 386,102 |  
|Foreign                                                   |  |                          | 7,108    |      |  |      | 1,488  |   |  |   | (56,327 | )
|                                                          |  |                          |          |      |  |      |        |   |  |   |         |  
|(Loss) income before (benefit) provision for income taxes |  | $                        | (136,700 | )    |  | $    | 48     |   |  | $ | 329,775 |  
|                                                          |  |                          |          |      |  |      |        |   |  |   |         |  

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The (benefit) provision for income taxes consisted of the following:

|          |                                 |       |         |                          |         |      |       |        |        |   |         |         |         | 
|--------- | ------------------------------- | ----- | ------- | ------------------------ | ------- | ---- | ----- | ------ | ------ | - | ------- | ------- | ------- | 
|          |                                 |       |         | Years Ended December 31,
|          |                                 |       |         |                         
|          |                                 |       |         | 2002                     |         | 2001 |       | 2000  
|          |                                 |       |         |                          |         |      |       |       
|Current:  |                                 |       |         |                          |         |      |       |        |        |   |         |        
|          | Federal                         |       | $       | (43,315                  | )       |      | $     | (4,276 | )      |   | $       | 114,981 |        
|          | State                           |       |         |                         |         |      |       |       |        |   |         | 3,484   |        
|          | Foreign                         |       |         | 1,235                    |         |      |       | 166    |        |   |         | 1,843   |        
|          |                                 |       |         |                          |         |      |       |        |        |   |         |         |        
|          |                                 | Total |         |                          | (42,080 | )    |       |        | (4,110 | ) |         |         | 120,308 | 
|          |                                 |       |         |                          |         |      |       |        |        |   |         |        
|Deferred: |                                 |       |         |                          |         |      |       |        |        |   |         |        
|          | Federal                         |       |         | 2,246                    |         |      |       | 6,954  |        |   |         | 29,017  |        
|          | State                           |       |         |                         |         |      |       |       |        |   |         | 185     |        
|          | Foreign                         |       |         | (42                      | )       |      |       | (289   | )      |   |         |        |        
|          | Reversal of valuation allowance |       |         |                         |         |      |       |       |        |   |         | (25,498 | )      
|          |                                 |       |         |                          |         |      |       |        |        |   |         |        
|          |                                 | Total |         |                          | 2,204   |      |       |        | 6,665  |   |         |         | 3,704   | 
|          |                                 |       |         |                          |         |      |       |        |        |   |         |        
|Total     |                                 | $     | (39,876 | )                        |         | $    | 2,555 |        |        | $ | 124,012 |        
|          |                                 |       |         |                          |         |      |       |        |        |   |         |        

Significant components of the Companys deferred tax assets and liabilities
were as follows at December 31,:

|                                                    |                                                   |   |        |         |      |   |       |         |  
|--------------------------------------------------- | ------------------------------------------------- | - | ------ | ------- | ---- | - | ----- | ------- | -
|                                                    |                                                   |   | 2002   |         | 2001
|                                                    |                                                   |   |        |         |     
|Deferred tax assets (liabilities)  current:        |                                                   |   |        |         |      |   |       |        
|                                                    | Revenue related items and other                   |   | $      | 3,829   |      |   | $     | 4,886   |  
|                                                    |                                                   |   |        |         |      |   |       |         |  
|Net deferred tax assets  current                   |                                                   | $ | 3,829  |         |      | $ | 4,886 |        
|                                                    |                                                   |   |        |         |      |   |       |        
|Deferred tax assets (liabilities)  non current:    |                                                   |   |        |         |      |   |       |        
|                                                    | Foreign acquisition asset                         |   |        |        |      |   | $     | 30,239  |  
|                                                    | Net operating loss carryforwards                  |   | $      | 25,430  |      |   |       | 25,430  |  
|                                                    | Deferred gain  Investment in Crosby Finance, LLC |   |        | (26,289 | )    |   |       | (26,619 | )
|                                                    | Acquired intangible assets                        |   |        | (862    | )    |   |       | (14,258 | )
|                                                    | Investment valuation reserve                      |   |        | 6,808   |      |   |       | 5,342   |  
|                                                    | Compensation                                      |   |        | 4,413   |      |   |       | 5,043   |  
|                                                    | Restructurings                                    |   |        | 15,176  |      |   |       | 4,395   |  
|                                                    | Merger expenses                                   |   |        | (3,946  | )    |   |       | (1,199  | )
|                                                    | Other                                             |   |        | 928     |      |   |       | (1,221  | )
|                                                    | Purchased research and development                |   |        | 2,180   |      |   |       | 2,678   |  
|                                                    | Less: valuation allowance                         |   |        | (25,430 | )    |   |       | (25,430 | )
|                                                    |                                                   |   |        |         |      |   |       |        
|Net deferred tax assets (liabilities)  non
current |                                                   | $ | (1,592 | )       |      | $ | 4,400 |        
|                                                    |                                                   |   |        |         |      |   |       |        

Tax benefits arising from the exercise of stock options were $328, $15,828 and
$30,241 in 2002, 2001 and 2000, respectively. The tax benefits are allocated
directly to additional paid-in capital in stockholders equity when realized.

Cash payments for income taxes were approximately $1,791, $11,357 and $63,964
in 2002, 2001 and 2000, respectively.

The Company has net operating loss carryforwards of approximately $72,655
expiring on various dates through 2021. The Company acquired these operating
loss carryforwards as a result of the acquisitions that it completed during
2001. Internal Revenue Code Section 382 may limit the utilization of the net
operating losses attributable to the pre acquisition periods of acquired
subsidiaries. Furthermore, pre acquisition net operating losses may not be
utilizable in future years in the event of a substantial discontinuation of the
acquired business.

The valuation allowance applies to deferred tax assets relating to acquisition
related net operating loss carryforwards, where management believes that based
on the weight of available evidence, it is more likely than not that these
assets will not be realized. Management periodically reviews the available
evidence and the valuation allowance. Tax benefits relating to the acquisition
related net operating loss carryforwards valuation allowance realized in the
future will reduce the carrying value of the goodwill and other intangible
assets which arose from the acquisitions that the Company completed during
2001.

In the fourth quarter of 1998, the Company made certain elections for U.S. tax
reporting purposes that resulted in a deferred tax asset of approximately
$39,333 relating to the DynaSoft acquisition, a taxable business combination in
1997 which was accounted for as a pooling of interests. In accordance with
provisions of SFAS No. 109, Accounting for Income Taxes, the Company
simultaneously recorded a $25,498 valuation allowance, reducing the deferred
tax asset to an amount that management believed was more likely than

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not to be realized. The net deferred tax asset of $13,835 was recorded with a
corresponding increase to additional paid-in capital. During 2000, the Company
reversed the valuation allowance of $25,498 due to revised estimates of what
management believes will more likely than not be realized.

The reconciliation between the statutory and effective income tax rates is as
follows for the years ended December 31, 2002 and 2000:

|                                                     |  |      |      |      |  |  |      |  
|---------------------------------------------------- |  | ---- | ---- | ---- |  |  | ---- | -
|                                                     |  | 2002 |      | 2000
|                                                     |  |      |      |     
|Statutory tax rate                                   |  |      | 35.0 | %    |  |  | 35.0 | %
|State income taxes net of federal benefit            |  |      |     |      |  |  | 1.0  |  
|Reversal of valuation allowance                      |  |      |     |      |  |  | (7.7 | )
|Transfer of licensing rights to a foreign subsidiary |  |      |     |      |  |  | 6.4  |  
|Change in estimated deferred tax rate                |  |      | (3.2 | )    |  |  |     |  
|Foreign tax rate differentials                       |  |      | (0.9 | )    |  |  |     |  
|Other                                                |  |      | (1.7 | )    |  |  | 2.9  |  
|                                                     |  |      |      |      |  |  |      |  
|Effective income tax rate                            |  |      | 29.2 | %    |  |  | 37.6 | %
|                                                     |  |      |      |      |  |  |      |  

For the year ended December 31, 2001, the Companys effective income tax rate
is in excess of the statutory tax rate primarily due to certain expenses which
are not deductible for tax purposes, including non deductible goodwill
amortization expense and non deductible in process research and development.

13.     Restructurings

During 2002 and 2001, the Company evaluated and initiated restructuring actions
in order to consolidate some of its operations, enhance operational efficiency
and reduce expenses. The Company continues to monitor and assess its facility
obligations, real estate markets and its operating expenses. As the result of
these ongoing assessments, the Company has recorded additional restructuring
charges or revised previously recorded restructuring charges. These actions
resulted in total restructuring charges of $56,036 and $19,956 for the years
ended December 31, 2002 and 2001, respectively.

During the year ended December 31, 2002, the Company recorded restructuring
charges of $56,036, consisting of facility exit costs, costs associated with
the liquidation of the Companys Swedish development operations and the sale of
certain Swedish assets and the business related to the asset to TFS Technology
AB (TFS), and severance and other costs associated with the reduction of
employee headcount. The 2002 restructuring charges include costs of $37,656
incurred due to the revision of previously recorded restructuring charges.

Included in the 2002 restructuring charges are costs of $44,014 consisting of
facility exit costs and related impairment of leasehold improvements and
furniture and fixtures. Facility exit costs consist of estimated shortfalls of
sublease rental income compared to obligations due under certain exited
facilities leases which are payable over the next 78 months. The remaining
unreserved lease obligations related to certain exited facilities amount to
$11,090, which represents the Companys estimated sublease income from these
facilities from the end of the reserve period to the end of the lease term.
Impairment of leasehold improvements and furniture and fixtures included in
facility exit costs are for unamortized leasehold improvements and furniture
and fixtures that the Company believes will not be recoverable upon sublease of
exited facilities. Total facility exit costs for 2002 include costs of $35,718
that the Company incurred when it revised estimates used in previously recorded
restructuring charges. The Company revised the estimates included in facility
exit costs due to the extension of the period of time estimated to obtain
sublease tenants for certain exited facilities, based on the terms of finalized
subleases obtained during 2002, due to higher than anticipated operating costs
associated with certain exited facilities, and due to the continued uncertainty
and deterioration in the commercial real estate and sublet markets in the
Boston metropolitan area.

The Company recorded restructuring charges of $6,318 during 2002 associated
with the liquidation of the Companys Swedish development operations and the
sale of certain Swedish assets and the business related to the assets to TFS.
The Company sold these assets and related business to TFS in exchange in part
for TFSs assumption of the liabilities related to the assets and associated
business, including the related support obligations and certain employees. The
total number of employees included in this transaction was 76, of which 67 were
employed in research and development and 9 were employed in general and
administrative functions. The total Sweden liquidation costs include costs of
$1,938 the Company incurred upon revision of estimates used in previously recorded restructuring charges.

Also included in restructuring charges for 2002 are severance and other costs
associated with the reduction of employee headcount of $5,704 for 121
employees, of which 15 were employed in manufacturing, customer operations and
technical services, 37 were employed in research and development, 48 were
employed in sales and marketing, and 21 employed in general and administrative
functions.

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During the year ended December 31, 2001, the Company recorded restructuring
charges of $19,956, consisting of facility exit costs, prepaid license fees,
severance and other costs associated with the reduction of employee headcount,
and other direct costs.

Included in the 2001 restructuring charges are costs of $9,412 consisting of
facility exit costs, related impairment of leasehold improvements and other
direct costs. Facility exit costs primarily consist of up to 18 months of
minimum lease payments due under certain exited facilities lease agreements.
Impairment of leasehold improvements included in facility exit costs is for
unamortized leasehold improvements that the Company believes will not be
recoverable upon sublease of exited facilities.

Prepaid license fees of $4,350 included in 2001 restructuring charges were
expensed when it was determined that they did not have future realizable value
as a result of the Companys exiting a planned service offering.

Also included in restructuring charges for 2001 are severance and other costs
associated with the reduction of employee headcount of $5,875 for 320
employees, of which 33 were employed in manufacturing, customer operations and
technical services, 110 were employed in research and development, 110 were
employed in sales and marketing, 60 were employed in general and administrative
functions, and 7 were employed in the RSA Capital segment.

Restructuring charges accrued and unpaid at December 31, 2002 were as follows:

|                                                      |  |                 |         |           |  |             |        |             |  |        |        |       |  |       |        |   |  |   |     |   |  |   |         |  
|----------------------------------------------------- |  | --------------- | ------- | --------- |  | ----------- | ------ | ----------- |  | ------ | ------ | ----- |  | ----- | ------ | - |  | - | --- | - |  | - | ------- | -
|                                                      |  | Facility Exit   |         |           |  |             |        | Liquidation |  |        |        |       |  |       |        |   |  |   |     |  
|                                                      |  | Costs & Related |         |           |  |             |        | of Sweden   |  |        |        |       |  | Other |        |   |  |  
|                                                      |  | Asset           |         | Severance |  | Development |        | Purchased   |  | Direct |        |       |  |      
|                                                      |  | Impairments     |         | Costs     |  | Operations  |        | Technology  |  | Costs  |        | Total
|                                                      |  |                 |         |           |  |             |        |             |  |        |        |      
|Balance at January 1, 2001                            |  |                 |        |           |  |             |       |             |  |        |       |       |  |       |       |   |  | $ | 347 |   |  | $ | 347     |  
|Total restructuring charges  2001                    |  | $               | 9,412   |           |  | $           | 5,875  |             |  |        |       |       |  | $     | 4,350  |   |  |   | 319 |   |  |   | 19,956  |  
|Payments and asset write offs  2001                  |  |                 | (269    | )         |  |             | (4,592 | )           |  |        |       |       |  | $     | (4,350 | ) |  |   | (7  | ) |  |   | (9,218  | )
|                                                      |  |                 |         |           |  |             |        |             |  |        |        |       |  |       |        |   |  |   |     |   |  |   |         |  
|Balance at December 31, 2001                          |  |                 | 9,143   |           |  |             | 1,283  |             |  |        |       |       |  |       |       |   |  |   | 659 |   |  |   | 11,085  |  
|                                                      |  |                 |         |           |  |             |        |             |  |        |        |       |  |       |        |   |  |   |     |   |  |   |         |  
|Restructuring charges - 2002                          |  |                 | 8,296   |           |  |             | 5,704  |             |  | $      | 4,380  |       |  |       |       |   |  |   |    |   |  |   | 18,380  |  
|Revision of previously recorded
restructuring charges |  |                 | 35,718  |           |  |             |       |             |  |        | 1,938  |       |  |       |       |   |  |   |    |   |  |   | 37,656  |  
|                                                      |  |                 |         |           |  |             |        |             |  |        |        |       |  |       |        |   |  |   |     |   |  |   |         |  
|Total restructuring charges  2002                    |  |                 | 44,014  |           |  |             | 5,704  |             |  |        | 6,318  |       |  |       |       |   |  |   |    |   |  |   | 56,036  |  
|                                                      |  |                 |         |           |  |             |        |             |  |        |        |       |  |       |        |   |  |   |     |   |  |   |         |  
|Payments and asset write offs  2002                  |  |                 | (16,346 | )         |  |             | (5,590 | )           |  |        | (5,700 | )     |  |       |       |   |  |   | (7  | ) |  |   | (27,643 | )
|                                                      |  |                 |         |           |  |             |        |             |  |        |        |       |  |       |        |   |  |   |     |   |  |   |         |  
|Balance at December 31, 2002                          |  | $               | 36,811  |           |  | $           | 1,397  |             |  | $      | 618    |       |  |       |       |   |  | $ | 652 |   |  | $ | 39,478  |  
|                                                      |  |                 |         |           |  |             |        |             |  |        |        |       |  |       |        |   |  |   |     |   |  |   |         |  

In 1999, the Company commenced and substantially completed consolidation of
certain operations in order to enhance operational efficiency. The Company
recorded facility exit costs consisting primarily of estimated shortfalls of
sublease rental income compared to minimum lease payments due under a lease
agreement. Remaining facility exit costs of approximately $347 were accrued and
unpaid at December 31, 2002 and are expected to be paid through the first
quarter of 2008.

The Company expects to pay the remaining restructuring costs accrued at
December 31, 2002 as follows:

|                                             |  |   |        | 
|-------------------------------------------- |  | - | ------ | 
|Year ending December 31, 2003                |  | $ | 12,163 | 
|Year ending December 31, 2004                |  |   | 9,845  | 
|Year ending December 31, 2005                |  |   | 8,843  | 
|Year ending December 31, 2006                |  |   | 5,762  | 
|Year ending December 31, 2007                |  |   | 1,553  | 
|Year ending December 31, 2008 and thereafter |  |   | 1,312  | 

14.      Segment Information

The Company has two reportable segments, e-Security Solutions and RSA Capital.
The segments were determined primarily on how management views and evaluates
the business. It is the Companys intention to focus its resources on the
e-Security Solutions segment during 2003.

The operations of the e-Security Solutions segment consist of the sale of
software licenses, hardware, maintenance and professional services through two
product groups, Enterprise solutions and Developer solutions. Enterprise
solutions include sales of RSA SecurID® authenticators, RSA ACE/Server®
software, RSA Keon® software, RSA ClearTrust® software, and maintenance and
professional services associated with these products. Developer solutions
include sales of RSA BSAFE® encryption software and protocol products, RSA Keon
components, and maintenance and professional services associated with these
products.

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The RSA Capital segment consists of the Companys investment activities and was
formed to make synergistic investments in both external and internal activities
and technologies. The Company formed its RSA Capital segment in January 2000
during a period in which it perceived a favorable investment climate. During
2002 the Company reduced its commitment of resources to the RSA Capital segment
and recorded impairment charges on its equity investments to reduce their
carrying value to their estimated realizable value, less costs to dispose. The
Company is currently considering proposals to sell its investment portfolio,
and does not intend to make any new investments. Total expenses incurred in
connection with the Companys RSA Capital segment total $762 and $10,652 for
the years ended December 31, 2002 and 2001, respectively, and have been
included in (loss) income from operations.

Through its investment activities, the Company has historically made
investments primarily in equity instruments of e-businesses and other
technology companies. Also included in the Companys investment activities is
RSA Ventures, I, L.P. (RSA Ventures), the Companys venture capital fund, in
which the Company had invested approximately $35,274 as of December 31, 2002.
The Companys subscription to invest in RSA Ventures is $50,276, leaving a
remainder of approximately $15,002 that the Company may invest, at its sole
discretion, over the ten year life of RSA Ventures. The Company currently does
not intend to invest this amount. Expenses incurred in connection with the
Companys investment activities are primarily for general and administration
and management and professional fees, and are included in general and
administrative expenses in the statements of operations. These expenses were
$232 and $4,130 for the years ended December 31, 2002 and 2001, respectively.
At December 31, 2002, the Companys investments include investments in private
companies of $1,400 held at their estimated realizable value less costs to
dispose, and its investment in Crosby Finance, LLC, a qualified special purpose
entity, had a carrying value of $186, accounted for at fair value, as described
in Note 4.

Before the second quarter of 2002, the Companys RSA Capital segment also
included the New Emerging Security Technologies group (NEST). Through NEST
the Company focused on investigating, developing and nurturing new ideas and
technologies into operational businesses. The Company merged the NEST
activities into its e-Security Solutions segment as of March 31, 2002. Costs of
$6,103 and revenue of $68 for year ended December 31, 2001, related to the
Companys NEST activities and included in income (loss) from operations below,
have been reclassified from the RSA Capital segment to the e-Security Solutions
segment in order to conform to current period presentation. Expenses incurred
in connection with NEST were $530 and $6,522 for the years ended December 31,
2002 and 2001, respectively, and have been included in income (loss) from
operations. Expenses incurred in connection with NEST for the years ended
December 31, 2002 and 2001 include general and administration expenses, as well
as the operations of 3GI and Transindigo.

Certain expense items included in loss from operations that are not
identifiable to the Companys segments have been included in Other below, and
total $89,137 for the year ended December 31, 2002. These expense items include
restructuring charges of $56,036 as described in Note 13, intangible asset
impairment charges of $19,140 as described in Note 2, amortization of
intangible assets of $9,924 arising from the Companys acquisitions of
Securant, Xcert, 3GI and Transindigo during 2001, a charge of $2,893 for
inventory write down and product quality warranty accruals related to
discontinued product designs and $1,145 of costs incurred during the transition
period prior to the transfer of certain Swedish employees and assets to TFS in
2002.

Certain expense items included in income (loss) from operations that are not
identifiable to the Companys segments have been included in Other below, and
total $50,628 for the year ended December 31, 2001. These expense items include
items expensed in connection with the Companys acquisition Securant, Xcert,
3GI and Transindigo, which include the write off of prepaid license fees of
$5,221, stock option compensation expense of $751, IPR&D of $7,891 and
amortization of goodwill and intangible assets of $14,452 for the year ended
December 31, 2001. Other expense items that are not identifiable to the
Companys segments for the year ended December 31, 2001 include restructuring
charges of $19,956 as described in Note 13, the write off of $1,000 in
connection with the cancellation of the Companys annual European security
conference, RSA Conference Europe, and the write off of $375 in connection with
the cancellation of the Companys annual sales conference. Litigation,
settlement and other legal expenses of $982 are also expense items that are not
identifiable to the Companys segments.

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The tables below present information about the Companys reportable segments:

|                               |  |                              |         |         |  |       |         |              |  |   |         |   |  |   |         |  
|------------------------------ |  | ---------------------------- | ------- | ------- |  | ----- | ------- | ------------ |  | - | ------- | - |  | - | ------- | -
|                               |  | Year Ended December 31, 2002
|                               |  |                             
|                               |  | e-Security                   |         | RSA     |  |       |         |              |  |   |         |  
|                               |  | Solutions                    |         | Capital |  | Other |         | Consolidated
|                               |  |                              |         |         |  |       |         |             
|Revenue                        |  | $                            | 232,084 |         |  |       |        |              |  |   |        |   |  | $ | 232,084 |  
|                               |  |                              |         |         |  |       |         |              |  |   |         |   |  |   |         |  
|Loss from operations           |  | $                            | (7,086  | )       |  | $     | (762    | )            |  | $ | (89,137 | ) |  | $ | (96,985 | )
|                               |  |                              |         |         |  |       |         |              |  |   |         |   |  |   |         |  
|Interest expense and other     |  | $                            | (5,791  | )       |  |       |        |              |  | $ | (2,987  | ) |  | $ | (8,778  | )
|                               |  |                              |         |         |  |       |         |              |  |   |         |   |  |   |         |  
|Loss from investing activities |  |                              |        |         |  | $     | (30,937 | )            |  |   |        |   |  | $ | (30,937 | )
|                               |  |                              |         |         |  |       |         |              |  |   |         |   |  |   |         |  
|Depreciation and amortization  |  | $                            | 16,612  |         |  |       |        |              |  | $ | 9,924   |   |  | $ | 26,536  |  
|                               |  |                              |         |         |  |       |         |              |  |   |         |   |  |   |         |  
|Identifiable assets            |  | $                            | 482,814 |         |  | $     | 1,586   |              |  |   |        |   |  | $ | 484,400 |  
|                               |  |                              |         |         |  |       |         |              |  |   |         |   |  |   |         |  

|                                    |  |                              |         |         |  |       |        |              |  |   |         |   |  |   |         |  
|----------------------------------- |  | ---------------------------- | ------- | ------- |  | ----- | ------ | ------------ |  | - | ------- | - |  | - | ------- | -
|                                    |  | Year Ended December 31, 2001
|                                    |  |                             
|                                    |  | e-Security                   |         | RSA     |  |       |        |              |  |   |         |  
|                                    |  | Solutions                    |         | Capital |  | Other |        | Consolidated
|                                    |  |                              |         |         |  |       |        |             
|Revenue                             |  | $                            | 282,720 |         |  |       |       |              |  |   |        |   |  | $ | 282,720 |  
|                                    |  |                              |         |         |  |       |        |              |  |   |         |   |  |   |         |  
|Income (loss) from operations       |  | $                            | 8,529   |         |  | $     | (4,549 | )            |  | $ | (50,628 | ) |  | $ | (46,648 | )
|                                    |  |                              |         |         |  |       |        |              |  |   |         |   |  |   |         |  
|Interest income (expense) and
other |  | $                            | 6,440   |         |  |       |       |              |  | $ | (580    | ) |  | $ | 5,860   |  
|                                    |  |                              |         |         |  |       |        |              |  |   |         |   |  |   |         |  
|Income from investing activities    |  |                              |        |         |  | $     | 40,836 |              |  |   |        |   |  | $ | 40,836  |  
|                                    |  |                              |         |         |  |       |        |              |  |   |         |   |  |   |         |  
|Depreciation and amortization       |  | $                            | 15,184  |         |  |       |       |              |  | $ | 14,452  |   |  | $ | 29,636  |  
|                                    |  |                              |         |         |  |       |        |              |  |   |         |   |  |   |         |  
|Identifiable assets                 |  | $                            | 494,981 |         |  | $     | 34,696 |              |  |   |        |   |  | $ | 529,677 |  
|                                    |  |                              |         |         |  |       |        |              |  |   |         |   |  |   |         |  

The Companys operations are conducted throughout the world. Operations in the
United States represent more than 10% of revenue and loss from operations. The
Companys operations in other countries have been grouped by regional area
below. The following tables present information about e-Security Solutions
revenue:

|                           |  |                          |         |      |  |      |         |  |  |   |         | 
|-------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                           |  | Years Ended December 31,
|                           |  |                         
|Product and service groups |  | 2002                     |         | 2001 |  | 2000
|                           |  |                          |         |      |  |     
|Enterprise solutions       |  | $                        | 204,671 |      |  | $    | 229,170 |  |  | $ | 211,835 | 
|Developer solutions        |  |                          | 27,413  |      |  |      | 53,550  |  |  |   | 68,356  | 
|                           |  |                          |         |      |  |      |         |  |  |   |         | 
|                           |  | $                        | 232,084 |      |  | $    | 282,720 |  |  | $ | 280,191 | 
|                           |  |                          |         |      |  |      |         |  |  |   |         | 

|                         |  |                          |         |      |  |      |         |  |  |   |         | 
|------------------------ |  | ------------------------ | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                         |  | Years Ended December 31,
|                         |  |                         
|Geographic areas         |  | 2002                     |         | 2001 |  | 2000
|                         |  |                          |         |      |  |     
|United States of America |  | $                        | 138,539 |      |  | $    | 162,799 |  |  | $ | 176,692 | 
|Europe and other         |  |                          | 70,224  |      |  |      | 91,553  |  |  |   | 81,959  | 
|Asia Pacific             |  |                          | 23,321  |      |  |      | 28,368  |  |  |   | 21,540  | 
|                         |  |                          |         |      |  |      |         |  |  |   |         | 
|                         |  | $                        | 232,084 |      |  | $    | 282,720 |  |  | $ | 280,191 | 
|                         |  |                          |         |      |  |      |         |  |  |   |         | 

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The tables below present information about the Companys long lived assets by
regional area:

|                            |  |                      |         |               |  |        |         |              |  |   |        |  |  |   |       | 
|--------------------------- |  | -------------------- | ------- | ------------- |  | ------ | ------- | ------------ |  | - | ------ |  |  | - | ----- | 
|                            |  | At December 31, 2002
|                            |  |                     
|                            |  | Total                |         | United States |  | Europe |         | Asia Pacific
|                            |  |                      |         |               |  |        |         |             
|Property and equipment, net |  | $                    | 74,928  |               |  | $      | 42,680  |              |  | $ | 29,036 |  |  | $ | 3,212 | 
|Goodwill, net               |  |                      | 191,742 |               |  |        | 191,742 |              |  |   |       |  |  |   |      | 
|Other assets                |  |                      | 5,668   |               |  |        | 3,799   |              |  |   | 154    |  |  |   | 1,715 | 

|                            |  |                      |         |               |  |        |         |              |  |   |        |  |  |   |       | 
|--------------------------- |  | -------------------- | ------- | ------------- |  | ------ | ------- | ------------ |  | - | ------ |  |  | - | ----- | 
|                            |  | At December 31, 2001
|                            |  |                     
|                            |  | Total                |         | United States |  | Europe |         | Asia Pacific
|                            |  |                      |         |               |  |        |         |             
|Property and equipment, net |  | $                    | 94,840  |               |  | $      | 59,881  |              |  | $ | 31,285 |  |  | $ | 3,674 | 
|Goodwill, net               |  |                      | 185,674 |               |  |        | 185,674 |              |  |   |       |  |  |   |      | 
|Intangible assets, net      |  |                      | 37,346  |               |  |        | 37,346  |              |  |   |       |  |  |   |      | 
|Other assets                |  |                      | 7,117   |               |  |        | 5,274   |              |  |   | 165    |  |  |   | 1,678 | 

|                            |  |                      |        |               |  |        |        |              |  |   |        |  |  |   |       | 
|--------------------------- |  | -------------------- | ------ | ------------- |  | ------ | ------ | ------------ |  | - | ------ |  |  | - | ----- | 
|                            |  | At December 31, 2000
|                            |  |                     
|                            |  | Total                |        | United States |  | Europe |        | Asia Pacific
|                            |  |                      |        |               |  |        |        |             
|Property and equipment, net |  | $                    | 64,207 |               |  | $      | 35,899 |              |  | $ | 26,966 |  |  | $ | 1,342 | 
|Other assets                |  |                      | 2,719  |               |  |        | 1,809  |              |  |   | 180    |  |  |   | 730   | 

The Company purchased land and a building during 2000 in the United Kingdom
which had a net carrying value of $23,968 at December 31, 2002.

15.      Retirement and Savings Plan

The Company has a 401(k) retirement and savings plan that allows each
participant to defer up to 20% of the participants annual earnings up to an
annual statutory maximum amount. The Company may make, at its discretion,
matching and profit-sharing contributions to the plan. Generally, matching and
profit-sharing contributions made by the Company vest annually over four years.
Matching contributions are paid in cash and were $1,360, $1,354 and $857 in
2002, 2001 and 2000, respectively. Profit sharing contributions are paid in
cash and were $608 for 2000. No profit sharing contributions were made for 2002
and 2001.

The Company also has a non-qualified deferred compensation program which
permits key employees to annually elect to defer, for their personal income tax
purposes, a portion of their compensation for not less than three years or
until their retirement, termination, death or disability. To assist in the
financing of the funding of the deferred compensation program, the Company
invests the compensation that is withheld and deferred in Company-owned life
insurance policies. Amounts withheld and deferred for key employees under the
Companys deferred compensation program were $868, $2,445 and $1,192 in 2002,
2001 and 2000, respectively, and are included in operating expenses.

16.      Commitments

The Company leases office facilities and equipment under non-cancelable
operating leases expiring through 2017. Future minimum rental payments net of
existing sublease agreements and excluding facility exit costs included in
restructuring charges are as follows:

|                          |  |             |        |                |  |                     |        |   |  |   |        | 
|------------------------- |  | ----------- | ------ | -------------- |  | ------------------- | ------ | - |  | - | ------ | 
|                          |  |             |        |                |  | Facility Exit Costs |        |   |  |  
|                          |  | Gross Lease |        | included in    |  | Net Lease          
|Years Ending December 31, |  | Commitments |        | Restructurings |  | Commitments        
|                          |  |             |        |                |  |                    
|2003                      |  | $           | 20,852 |                |  | $                   | (9,843 | ) |  | $ | 11,009 | 
|2004                      |  |             | 19,252 |                |  |                     | (9,845 | ) |  |   | 9,407  | 
|2005                      |  |             | 17,123 |                |  |                     | (8,843 | ) |  |   | 8,280  | 
|2006                      |  |             | 14,857 |                |  |                     | (5,762 | ) |  |   | 9,095  | 
|2007                      |  |             | 14,694 |                |  |                     | (1,553 | ) |  |   | 13,141 | 
|2008 and thereafter       |  |             | 85,321 |                |  |                     | (965   | ) |  |   | 84,356 | 

Net rent expense was approximately $13,764, $12,603 and $8,319 in 2002, 2001
and 2000, respectively. Rent collected from existing subleases and not included
in restructuring charges was $700, $656, and $582 in 2002, 2001 and 2000,
respectively.

In November 2000, the Company entered into fifteen year non-cancelable
operating leases for a new corporate headquarters facility located in Bedford,
Massachusetts and moved into these facilities in February 2002. The Company is
actively looking to sublease its former headquarters and other exited
facilities. During 2002 and 2001, the Company recorded restructuring charges
totaling $53,426,

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which represent lease obligations due through 2009 under certain excess
facilities lease agreements, net of estimated sublease rental income, impaired
leasehold improvements and furniture and fixtures for certain exited
facilities, and other associated facilities expense.

Until its expiration in September 2000, the Company had an exclusive license
for the patented RSA public key cryptosystem from the Massachusetts Institute
of Technology. Since September 2000, when the patent on the RSA public key
cryptosystem expired, the Company has continued to use the technology but is no
longer required to pay royalties. The Company is also required to pay royalties
under various other licensing agreements. Total royalty expense under all
agreements was $5,978, $5,538 and $7,329 in 2002, 2001 and 2000, respectively.

17.      Related Party Transactions

Some of the Companys employees and directors have invested in the general
partner limited partnership of RSA Ventures including Charles R. Stuckey, Jr.
and James K. Sims, members of the Companys Board of Directors, and five former
employees including the managing director of RSA Ventures. Mr. Stuckey
invested approximately $11 in the partnership, Mr. Sims invested approximately
$7, and the five employees invested a total of approximately $70. None of
the investors has received any proceeds or been allocated any profits from this
entity since its inception. In December 2001, in connection with the Companys
reduction of the investing activities of RSA Ventures, the interest in gains
from the general partner that each of Messrs. Stuckey and Sims would be
entitled to receive in the future following a return of their invested capital
was reduced to less than one one thousandth of a percent.

In 1997, the Company entered into a license agreement with VeriSign under
which, among other things, the Company had the exclusive right to distribute
some of VeriSigns certificate authority software. The agreement also gave the
Company the right to terminate the agreement at any time if the Company paid
specified termination fees to VeriSign. The Company paid VeriSign $2,700 as an
initial license fee, $500 at the execution of the distributor agreement, and
license fees of $2,250 in 2000 and $1,100 in 1999. In November 2000 the
Company elected to cancel its exclusive distribution agreement with VeriSign
and paid additional license fees of $1,380. Prior to 2001, the license fees
were recorded as a component of cost of product revenue as the related products
were sold. Unamortized prepaid license fees were $5,221 at December 31, 2000.
During the year ended December 31, 2001 the Company expensed $5,221 in prepaid
license fees to cost of product revenue when it was determined that they did
not have future realizable value as a result of the Companys acquisition of
Xcert in February 2001. A former director of the Company who is also a
director of VeriSign provided consulting services to the Company and received
$60 and $260 in 2001 and 2000, respectively. This consulting agreement expired
in February 2001, and the director resigned from the Companys Board of
Directors in May 2002.

Gen3 Partners, Inc. provided consulting services to the Company and received
$311 in 2000. A member of the Companys Board of Directors also serves as
member of the Board of Directors of Gen3 Partners, Inc.

18.      Litigation

By notice dated January 23, 2002, the Securities and Exchange Commission
notified the Company that it is conducting a formal investigation of (1) the
Companys disclosure of a change in its method for estimating its distributor
revenue, and (2) certain trading in the Companys common stock. On or about
July 11, 2002, the SEC staff notified the Company and some of its officers that
the staff was considering seeking permission from the SEC to commence a civil
injunctive proceeding against them, and that the Company and the officers could
submit a written statement explaining why no such proceeding should be
commenced. The Company and the officers submitted such a statement in August
2002 and are waiting for the SECs response. The Company and the officers are
continuing to cooperate with the SEC, but the Company cannot predict the
ultimate outcome of this matter.

On or about February 2, 2001, Leon Stambler filed a complaint for patent
infringement in U.S. District Court for the District of Delaware against the
Company, VeriSign, Inc., First Data Corporation, Openwave Systems Inc., and
Omnisky Corporation, Case Number 01-0065. In September 2001, Mr. Stambler
amended his complaint to add Certicom Corp. as an additional defendant. The
suit was stayed against Omnisky due to Omniskys bankruptcy, and Openwave,
Certicom and First Data settled with Mr. Stambler; therefore, only RSA Security
and VeriSign remained as defendants. In his complaint, Mr. Stambler alleged
that certain products marketed by each of the defendants infringed various
patents that he owns, and he sought unspecified damages as well as a
preliminary and permanent injunction enjoining the defendants from infringing
the claims asserted.

The trial took place in March 2003, and on March 7, 2003 the jury determined
that the Companys products did not infringe Mr. Stamblers patents. The
Company believes that it is likely that Mr. Stambler will appeal the jurys
decision. Even if Mr. Stambler
does appeal, the Company believes that the final disposition of this matter
will not have a material adverse effect on its continuing operations and
consolidated financial position.

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On or about July 17, 2001, Digital Privacy, Inc. filed a complaint for patent
infringement in the U.S. District Court for the Eastern District of Virginia
against RSA Security, Case Number 2:01cv529. In its complaint, Digital Privacy
alleged that certain products of 3-G International, Inc., a private company
that the Company acquired in May 2001, infringed various patents that Digital
Privacy owns, and Digital Privacy sought unspecified damages as well as a
permanent injunction enjoining the Company from infringing the claims asserted.
On April 5, 2002, the court granted the Companys motion for summary judgment
and dismissed the case. In May 2002, Digital Privacy appealed the dismissal.
In February 2003, the Company signed a settlement agreement with Digital
Privacy, under which the Company has no further obligation or liability, and
Digital Privacy dismissed its appeal.

On or about December 20, 2001, France Telecom and Telediffusion de France
(FT) filed a Request for Arbitration with the International Court of
Arbitration. FT claims that the Company breached a license agreement with FT
and seeks unspecified damages including payment of a $20,000 advance plus the
legal fees and other costs associated with the arbitration. The Company
believes that FTs claims are without merit and intends to defend the
arbitration vigorously. In a related matter, FT has also filed a patent
infringement suit in Delaware against Novell, Inc., one of the Companys
licensees. In August 2002, the Company signed a letter agreement with Novell
agreeing that if a court requires Novell to pay FT damages, the Company will
reimburse Novell for 50% of the damages, up to a maximum payment of $2,500 by
the Company. If the damages payable by Novell exceed $5,000, then the
indemnification provisions of the Companys license agreement with Novell will
govern the Companys indemnification obligations. Although the Company believes
that FTs claims against Novell are without merit, it cannot predict the
ultimate outcome of this matter. However, the Company believes that neither
the disposition of its arbitration with FT nor the disposition of the
litigation between Novell and FT will have a material adverse effect on the
Companys continuing operations and consolidated financial position.

From time to time, the Company has been named as a defendant in other legal
actions arising from its normal business activities, which it believes will not
have a material adverse effect on the Company or its business.

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

Not applicable.

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PART III




ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF RSA SECURITY

The information required by this item is contained in our Proxy Statement for
our Annual Meeting of Stockholders to be held on May 20, 2003 (our 2003 Proxy
Statement) under the captions Our Board of Directors, Our Executive
Officers and Section 16(a) Beneficial Ownership Reporting Compliance. This
information is incorporated by reference into this Report.




ITEM 11.      EXECUTIVE COMPENSATION

The information required by this item is contained under the captions
Compensation of our Directors, Compensation of our Executive Officers and
Comparative Stock Performance in the 2003 Proxy Statement and is incorporated
by reference into this Report.






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

The information required by this item is contained under the captions
Securities Authorized for Issuance under our Equity Compensation Plans and
Stock Ownership of Certain Beneficial Owners and Management in the 2003 Proxy
Statement and is incorporated by reference into this Report.




ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is contained under the caption Certain
Relationships and Related Transactions in the 2003
Proxy Statement and is incorporated by reference into this Report.




ITEM
14.     CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures During the 90 days before
the filing date of this report, our Chief Executive Officer and Chief Financial
Officer evaluated our disclosure controls and procedures (as defined in the SEC
rules promulgated under the Securities Exchange Act of 1934, as amended), which
are designed to ensure that information required to be disclosed in our
Securities and Exchange Commission reports is properly and timely recorded,
processed, summarized and reported. The officers concluded that these controls
and procedures are operating in an effective manner.

Changes in internal controls There were no significant changes in our
internal controls or in other factors that could significantly affect these
controls since the date of the last evaluation of the controls.

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PART IV




ITEM 15.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)     Documents filed as a part of this Report:



| | 1. |  | Financial Statements. The Consolidated Financial Statements are
filed as part of this Report. The Consolidated Financial Statements
include:
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Independent Auditors Report
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. |  | Financial Statement Schedule. Financial Statement Schedule II
Valuation and Qualifying Accounts immediately following the Exhibit
Index is filed as part of this Report.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 3. |  | Exhibits. The Exhibits listed in the Exhibit Index following
the signature page to this Report are filed as part of this Report.                                          

(b)     Current Reports on Form 8-K:

On October 17, 2002, we filed a Current Report on Form 8-K reporting our
financial results for the quarter and nine months ended

September 30,
2002.


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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, RSA Security Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

| |  |     |                                                                                         
| |  | --- | ----------------------------------------------------------------------------------------
| |  |     | RSA Security Inc.                                                                       
|
| |  | By: | /s/ ARTHUR W. COVIELLO, JR.Arthur W. Coviello, Jr.
Chief Executive Officer and President

Date: March 25, 2003

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

|                                                     |  |                                                                                                                                   |  |               
|---------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------- |  | --------------
|Signature                                            |  | Title                                                                                                                             |  | Date          
|                                                     |  |                                                                                                                                   |  |               
|/s/ ARTHUR W. COVIELLO, JR.

Arthur W. Coviello, Jr. |  | Chief Executive Officer, President and
Director (Principal Executive Officer)                                                     |  | March 25, 2003
|                                                     |  |                                                                                                                                   |  |               
|/s/ JEFFREY D. GLIDDEN

Jeffrey D. Glidden           |  | Senior Vice President, Finance and
Operations, Chief Financial Officer
and Treasurer (Principal Financial and
Accounting Officer) |  | March 25, 2003
|                                                     |  |                                                                                                                                   |  |               
|/s/ CHARLES R. STUCKEY, JR.

Charles R. Stuckey, Jr. |  | Chairman of the Board of Directors                                                                                                |  | March 25, 2003
|                                                     |  |                                                                                                                                   |  |               
|/s/ JAMES K. SIMS

James K. Sims                     |  | Vice Chairman of the Board of Directors                                                                                           |  | March 25, 2003
|                                                     |  |                                                                                                                                   |  |               
|/s/ ROBERT P. BADAVAS

Robert P. Badavas             |  | Director                                                                                                                          |  | March 25, 2003
|                                                     |  |                                                                                                                                   |  |               
|/s/ RICHARD A. DEMILLO

Richard A. DeMillo           |  | Director                                                                                                                          |  | March 25, 2003
|                                                     |  |                                                                                                                                   |  |               
|/s/ RICHARD L. EARNEST

Richard L. Earnest           |  | Director                                                                                                                          |  | March 25, 2003
|                                                     |  |                                                                                                                                   |  |               
|/s/ TAHER ELGAMAL

Taher Elgamal                     |  | Director                                                                                                                          |  | March 25, 2003
|                                                     |  |                                                                                                                                   |  |               
|/s/ GLORIA C. LARSON

Gloria C. Larson               |  | Director                                                                                                                          |  | March 25, 2003
|                                                     |  |                                                                                                                                   |  |               
|/s/ JOSEPH B. LASSITER, III

Joseph B. Lassiter, III |  | Director                                                                                                                          |  | March 25, 2003

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CERTIFICATIONS

I, Arthur W. Coviello, Jr., certify that:

1.     I have reviewed this annual report on Form 10-K of RSA Security Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:



| |  |  | a)  Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | b)  Evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the Evaluation Date); and                                                                                                  
|
| |  |  | c)  Presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;                                                                                                                        

5.     The registrants other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrants auditors and the audit committee of
registrants board of directors:



| |  |  | a)  All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | b)  Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and                                                                                                                                        

6.     The registrants other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | /s/ ARTHUR W. COVIELLO, JR.Arthur W. Coviello, Jr.
President and Chief Executive Officer

Date: March 25, 2003

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CERTIFICATIONS

I, Jeffrey D. Glidden, certify that:

1.     I have reviewed this annual report on Form 10-K of RSA Security Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:



| |  |  | a)  Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being prepared;
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | b)  Evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the Evaluation Date); and                                                                                                  
|
| |  |  | c)  Presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;                                                                                                                        

5.     The registrants other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrants auditors and the audit committee of
registrants board of directors:



| |  |  | a)  All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrants ability to record,
process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | b)  Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and                                                                                                                                        

6.     The registrants other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | /s/ JEFFREY D. GLIDDENJeffrey D. Glidden
Senior Vice President, Finance and Operations,
Chief Financial Officer and Treasurer

Date: March 25, 2003

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CERTIFICATION PURSUANT TO 18 U.S.C. §1350

Pursuant to 18 U.S.C. §1350, each of the undersigned certifies that this annual
report on Form 10-K for the period ended December 31, 2002 fully complies with
the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934 and that the
information contained in this Report fairly presents, in all material respects,
the financial condition and results of operations of RSA Security Inc. and its
wholly owned subsidiaries.

| |                                                                                         
| | ----------------------------------------------------------------------------------------
| | /s/ ARTHUR W. COVIELLO, JR.Arthur W. Coviello, Jr.
President and Chief Executive Officer

Date: March 25, 2003

| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | /s/ JEFFREY D. GLIDDENJeffrey D. Glidden
Senior Vice President, Finance and Operations,
Chief Financial Officer and Treasurer

Date: March 25, 2003

81



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EXHIBIT INDEX

|       |  |                                                                                                                                                                                                                                                                                                                                                                      
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1    |  | RSAs Third Restated Certificate of Incorporation, as amended, is incorporated herein by
reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q for the quarter ended June 30,
2000.                                                                                                                                                                          
|       |  |                                                                                                                                                                                                                                                                                                                                                                      
|3.2    |  | RSAs Amended and Restated By-Laws, as amended, is incorporated herein by reference to
Exhibit 3.3 to our Registration Statement on Form S-1 (File No. 33-85606) (the Form S-1).                                                                                                                                                                                   
|       |  |                                                                                                                                                                                                                                                                                                                                                                      
|4.1    |  | Specimen Certificate for shares of our common stock, $.01 par value per share, is
incorporated herein by reference to Exhibit 4.1 to our Current Report on Form 8-K dated
September 10, 1999.                                                                                                                                                                        
|       |  |                                                                                                                                                                                                                                                                                                                                                                      
|4.2    |  | Rights Agreement, dated as of July 20, 1999, between RSA and State Street Bank and Trust
Company, which includes as Exhibit A the Form of Rights Certificate and as Exhibit B the
Summary of Rights to Purchase Common Stock, is incorporated herein by reference to Exhibit 1
to our Registration Statement on Form 8-A (File No. 000-25120) filed on July 23, 1999.
|       |  |                                                                                                                                                                                                                                                                                                                                                                      
|4.3    |  | Amendment to Rights Agreement, dated as of November 2, 2001, among RSA, State Street Bank
and Trust Company and EquiServe Trust Company, N.A. is incorporated herein by reference to
Exhibit 4.1 to our Current Report on Form 8-K dated November 2, 2001.                                                                                                           
|       |  |                                                                                                                                                                                                                                                                                                                                                                      
|4.4    |  | Amendment No. 2 to Rights Agreement, dated as of March 19, 2002, between RSA and EquiServe
Trust Company, N.A. is incorporated herein by reference to Exhibit 4.2 to our Current Report
on Form 8-K dated November 2, 2001.                                                                                                                                          
|       |  |                                                                                                                                                                                                                                                                                                                                                                      
|4.5    |  | Securities Purchase Agreement, dated as of October 17, 2001, among RSA and the Investors
named therein is incorporated herein by reference to Exhibit 99.1 to our Current Report on
Form 8-K dated October 17, 2001.                                                                                                                                                 
|       |  |                                                                                                                                                                                                                                                                                                                                                                      
|4.6    |  | Securities Purchase Agreement, dated as of October 29, 2001, among RSA and the Investors
named therein is incorporated herein by reference to Exhibit 99.1 to our Current Report on
Form 8-K dated October 29, 2001.                                                                                                                                                 
|       |  |                                                                                                                                                                                                                                                                                                                                                                      
|4.7    |  | Securities Purchase Agreement, dated as of November 5, 2001, among RSA and the Investors
named therein is incorporated herein by reference to Exhibit 99.1 to our Current Report on
Form 8-K dated November 5, 2001.                                                                                                                                                 
|       |  |                                                                                                                                                                                                                                                                                                                                                                      
|4.8    |  | Second Amended and Restated Registration Rights Agreement, dated as of November 5, 2001,
among RSA and the Investors named therein is incorporated herein by reference to Exhibit
99.2 to our Current Report on Form 8-K dated November 5, 2001.                                                                                                                     
|       |  |                                                                                                                                                                                                                                                                                                                                                                      
|4.9    |  | Form of 7% Convertible Subordinated Debenture due October 17, 2004 is incorporated herein by
reference to Exhibit 99.3 to our Current Report on Form 8-K dated November 5, 2001.                                                                                                                                                                                     
|       |  |                                                                                                                                                                                                                                                                                                                                                                      
|4.10   |  | Form of Warrant to Purchase Common Stock is incorporated herein by reference to Exhibit 99.4
to our Current Report on Form 8-K dated November 5, 2001.                                                                                                                                                                                                               
|       |  |                                                                                                                                                                                                                                                                                                                                                                      
|*10.1  |  | 1994 Stock Option Plan, as amended  1998 Restatement, as amended, is incorporated herein by
reference to Appendix A to our Preliminary Schedule 14A filed March 5, 1999.                                                                                                                                                                                            
|       |  |                                                                                                                                                                                                                                                                                                                                                                      
|*10.2  |  | 1994 Director Stock Option Plan, as amended, is incorporated herein by reference to Exhibit
10.1 to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2001.                                                                                                                                                                                          
|       |  |                                                                                                                                                                                                                                                                                                                                                                      
|*10.3  |  | Amended and Restated 1998 Non-Officer Employee Stock Incentive Plan, as amended, is
incorporated herein by reference to Exhibit 10.4 to our Annual Report on Form 10-K for the
year ended December 31, 2001.                                                                                                                                                         
|       |  |                                                                                                                                                                                                                                                                                                                                                                      
|*10.4  |  | 1994 Employee Stock Purchase Plan, as amended, is incorporated herein by reference to
Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2001.                                                                                                                                                                                        
|       |  |                                                                                                                                                                                                                                                                                                                                                                      
|*10.5  |  | 2000 Deferred Compensation Plan is incorporated herein by reference to Exhibit 10.1 to our
Quarterly Report on Form 10-Q for the quarter ended March 31, 2000.                                                                                                                                                                                                       
|       |  |                                                                                                                                                                                                                                                                                                                                                                      
|*10.6  |  | First Amendment to the 2000 Deferred Compensation Plan.                                                                                                                                                                                                                                                                                                              
|       |  |                                                                                                                                                                                                                                                                                                                                                                      
|*10.7  |  | RSA Security Inc. Grantor Trust Agreement, dated March 13, 2000, between RSA and Wachovia
Bank, N.A. is incorporated herein by reference to Exhibit 10.2 to our Quarterly Report on
Form 10-Q for the quarter ended March 31, 2000.                                                                                                                                  
|       |  |                                                                                                                                                                                                                                                                                                                                                                      
|*10.8  |  | Employment Agreement, dated as of April 1, 2000, between RSA and Arthur W. Coviello, Jr. is
incorporated herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for
the quarter ended June 30, 2000.                                                                                                                                               
|       |  |                                                                                                                                                                                                                                                                                                                                                                      
|*10.9  |  | Third Amended and Restated Employment Agreement, dated as of December 27, 2001, between RSA
and Charles R. Stuckey, Jr. is incorporated herein by reference to Exhibit 10.9 to our
Annual Report on Form 10-K for the year ended December 31, 2001.                                                                                                                  
|       |  |                                                                                                                                                                                                                                                                                                                                                                      
|10.10 |  | Progress Software Application Partner Agreement, dated December 5, 1994, as amended, between
RSA and Progress Software Corporation is incorporated herein by reference to Exhibit 10.17
to the Form S-1.                                                                                                                                                             
|       |  |                                                                                                                                                                                                                                                                                                                                                                      
|10.11 |  | Second Amendment to Progress Software Application Partner Agreement, dated as of November
29, 1995, between RSA and Progress Software Corporation is incorporated herein by reference
to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 1997
(SEC file no. 000-25120).                                                             

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|       |  |                                                                                                                                                                                                                                                                                                        
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.12 |  | Third Amendment to Progress Software Application Partner Agreement, dated as of November 15,
1996, between RSA and Progress Software Corporation is incorporated herein by reference to
Exhibit 10.4 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 (SEC
file no. 000-25120).
|       |  |                                                                                                                                                                                                                                                                                                        
|10.13 |  | Fourth Amendment to Progress Software Application Partner Agreement, dated as of April 1,
1998, between RSA and Progress Software Corporation is incorporated herein by reference to
Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (SEC
file no. 000-25120).   
|       |  |                                                                                                                                                                                                                                                                                                        
|10.14 |  | Fifth Amendment to Progress Software Application Partner Agreement, dated as of February 18,
1999, between RSA and Progress Software Corporation is incorporated herein by reference to
Exhibit 10.22 to our Annual Report on Form 10-K for the year ended December 31, 1999.                          
|       |  |                                                                                                                                                                                                                                                                                                        
|10.15 |  | Sixth Amendment to Progress Software Application Partner Agreement, dated as of October 26,
1999, between RSA and Progress Software Corporation is incorporated herein by reference to
Exhibit 10.23 to our Annual Report on Form 10-K for the year ended December 31, 1999.                           
|       |  |                                                                                                                                                                                                                                                                                                        
|10.16 |  | Seventh Amendment to Progress Software Application Partner Agreement, dated as of November
28, 2001, between RSA and Progress Software Corporation is incorporated herein by reference
to Exhibit 10.16 to our Annual Report on Form 10-K for the year ended December 31, 2001.                        
|       |  |                                                                                                                                                                                                                                                                                                        
|#10.17 |  | Eighth Amendment to Progress Software Application Partner Agreement, dated as of November
27, 2002, between RSA and Progress Software Corporation.                                                                                                                                                     
|       |  |                                                                                                                                                                                                                                                                                                        
|10.18  |  | Indenture of Lease, dated as of March 11, 1996, between RSA and Beacon Properties, L.P. is
incorporated herein by reference to Exhibit 10.17 to our Registration Statement on Form S-4
(File No. 333-7265).                                                                                            
|       |  |                                                                                                                                                                                                                                                                                                        
|10.19  |  | Rider to Indenture of Lease, dated as of March 11, 1996 between RSA and Beacon Properties,
L.P. is incorporated herein by reference to Exhibit 10.6 to our Quarterly Report on Form
10-Q for the quarter ended March 31, 1998 (SEC file no. 000-25120).                                                
|       |  |                                                                                                                                                                                                                                                                                                        
|10.20  |  | First Amendment to Lease, dated as of May 10, 1997, between RSA and Beacon Properties, L.P.
is incorporated herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for
the quarter ended June 30, 1997 (SEC file no. 000-25120).                                                     
|       |  |                                                                                                                                                                                                                                                                                                        
|10.21  |  | Second Amendment to Lease, dated as of April 8, 1998, between RSA and EOP  Crosby Corporate
Center, L.L.C. is incorporated herein by reference to Exhibit 10.5 to our Quarterly Report
on Form 10-Q for the quarter ended March 31, 1998 (SEC file no. 000-25120).                                    
|       |  |                                                                                                                                                                                                                                                                                                        
|10.22  |  | Third Amendment to Lease, dated as of May 9, 2000, between RSA and EOP  Crosby Corporate
Center, L.L.C. is incorporated herein by reference to Exhibit 10.4 to our Quarterly Report
on Form 10-Q for the quarter ended June 30, 2000.                                                                 
|       |  |                                                                                                                                                                                                                                                                                                        
|10.23  |  | Sublease Agreement, dated as of September 19, 2002, between RSA and NVIDIA Corporation is
incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for
the quarter ended September 30, 2002.                                                                              
|       |  |                                                                                                                                                                                                                                                                                                        
|10.24  |  | Agreement of Sublease, dated as of January 10, 2003, between RSA and Atex Media Command, Inc.                                                                                                                                                                                                          
|       |  |                                                                                                                                                                                                                                                                                                        
|10.25  |  | Lease Agreement, dated as of August 15, 1997, between RSA and Peninsula Office Park
Associates, L.P. is incorporated herein by reference to Exhibit 10.7 to our Quarterly Report
on Form 10-Q for the quarter ended March 31, 1998 (SEC file no. 000-25120).                                           
|       |  |                                                                                                                                                                                                                                                                                                        
|10.26  |  | Lease Agreement, dated as of December 19, 1997, between RSA and Peninsula Office Park
Associates, L.P. is incorporated herein by reference to Exhibit 10.8 to our Quarterly Report
on Form 10-Q for the quarter ended March 31, 1998 (SEC file no. 000-25120).                                         
|       |  |                                                                                                                                                                                                                                                                                                        
|10.27  |  | Sublease Agreement, dated as of January 22, 2002, between RSA and Serena Software, Inc. is
incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002.                                                                                 
|       |  |                                                                                                                                                                                                                                                                                                        
|10.28  |  | Lease, dated as of November 16, 2000, between RSA and Bedford Woods Limited Partnership I is
incorporated herein by reference to Exhibit 10.31 to our Annual Report on Form 10-K for the
year ended December 31, 2000.                                                                                 
|       |  |                                                                                                                                                                                                                                                                                                        
|10.29  |  | Lease, dated as of November 17, 2000, between RSA and Bedford Woods Limited Partnership I is
incorporated herein by reference to Exhibit 10.32 to our Annual Report on Form 10-K for the
year ended December 31, 2000.                                                                                 
|       |  |                                                                                                                                                                                                                                                                                                        
|10.30  |  | Limited Partnership Agreement of RSA Partners I, L.P., dated as of April 10, 2001, is
incorporated herein by reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q for
the quarter ended March 31, 2001.                                                                                      
|       |  |                                                                                                                                                                                                                                                                                                        
|10.31  |  | Certificate of Revised Schedule A of RSA Partners I, L.P., dated November 28, 2001 is
incorporated herein by reference to Exhibit 10.27 to our Annual Report on Form 10-K for the
year ended December 31, 2001.                                                                                        
|       |  |                                                                                                                                                                                                                                                                                                        
|10.32  |  | Amendment No. 1 to the Limited Partnership Agreement of RSA Partners I, L.P., dated December
1, 2001 is incorporated herein by reference to Exhibit 10.28 to our Annual Report on Form
10-K for the year ended                                                                                         

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|      |  |                                                                                                                                                                                                                                                                                                        
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |  | December 31, 2001.                                                                                                                                                                                                                                                                                     
|      |  |                                                                                                                                                                                                                                                                                                        
|10.33 |  | Limited Partnership Agreement of RSA Ventures I, L.P., dated as of April 10, 2001, is
incorporated herein by reference to Exhibit 10.5 to our Quarterly Report on Form 10-Q for
the quarter ended March 31, 2001.                                                                                      
|      |  |                                                                                                                                                                                                                                                                                                        
|10.34 |  | Amendment No. 1 to the Limited Partnership Agreement of RSA Ventures I, L.P., dated November
27, 2001, among Barry Rosenbaum, RSA Investments Inc. and RSA Partners I, L.P is
incorporated herein by reference to Exhibit 10.30 to our Annual Report on Form 10-K for the
year ended December 31, 2001.
|      |  |                                                                                                                                                                                                                                                                                                        
|10.35 |  | Amendment No. 2 to the Limited Partnership Agreement of RSA Ventures I, L.P., dated November
28, 2001, between RSA Investments Inc. and RSA Partners I, L.P is incorporated herein by
reference to Exhibit 10.31 to our Annual Report on Form 10-K for the year ended December 31,
2001.               
|      |  |                                                                                                                                                                                                                                                                                                        
|21.1  |  | Subsidiaries of RSA Security.                                                                                                                                                                                                                                                                          
|      |  |                                                                                                                                                                                                                                                                                                        
|23.1  |  | Consent of Deloitte & Touche LLP, Independent Auditors.                                                                                                                                                                                                                                                
|      |  |                                                                                                                                                                                                                                                                                                        
|99.1  |  | Letter agreement, dated August 5, 2002, between RSA Security and Novell, Inc. is
incorporated herein by reference to Exhibit 99.1 to our Quarterly Report on Form 10-Q for
the quarter ended September 30, 2002.                                                                                       
|      |  |                                                                                                                                                                                                                                                                                                        
|99.2  |  | Stock trading plan, pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as
amended, adopted by Margaret K. Seif on August 28, 2002 is incorporated herein by reference
to Exhibit 99.2 to our Quarterly Report on Form 10-Q for the quarter ended September 30,
2002.                   
|      |  |                                                                                                                                                                                                                                                                                                        
|99.3  |  | Stock trading plan, pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as
amended, adopted by Charles R. Stuckey, Jr. on May 30, 2002 is incorporated herein by
reference to Exhibit 99.1 to our Quarterly Report on Form 10-Q for the quarter ended June
30, 2002.                    
|      |  |                                                                                                                                                                                                                                                                                                        
|99.4  |  | Stock trading plan, pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as
amended, adopted by Joseph Uniejewski on December 11, 2002.                                                                                                                                                  
|      |  |                                                                                                                                                                                                                                                                                                        
|99.5  |  | Stock trading plan, pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as
amended, adopted by Vivian M. Vitale on November 10, 2002.                                                                                                                                                   



---

|* |  | Management contract or compensatory plan or arrangement filed in response
to Item 14(a)(3) of the instructions to Form 10-K.
|- |  | ----------------------------------------------------------------------------------------------------------------------------
| 
| |  | Confidential treatment previously granted by the Securities and Exchange
Commission as to certain portions.                 
| 
|# |  | Confidential treatment requested as to certain portions.                                                                    

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SCHEDULE II

RSA SECURITY INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS
(In thousands)

|                                     |  |              |       |            |  |            |       |            |  |        |       |            |  |   |       |     |  |   |       | 
|------------------------------------ |  | ------------ | ----- | ---------- |  | ---------- | ----- | ---------- |  | ------ | ----- | ---------- |  | - | ----- | --- |  | - | ----- | 
|                                     |  | Balance at   |       | Charged to |  | Charged to |       |            |  |        |       | Balance at
|                                     |  | Beginning of |       | Costs and  |  | Other      |       |            |  |        |       | End of    
|                                     |  | Period       |       | Expenses   |  | Accounts   |       | Deductions |  | Period
|                                     |  |              |       |            |  |            |       |            |  |       
|Allowance for doubtful accounts      |  |              |       |            |  |            |       |            |  |        |       |            |  |   |       |     |  |   |       | 
|For the year ended December 31, 2002 |  | $            | 2,659 |            |  | $          | 1,553 |            |  | $      | 1,441 | (A)        |  | $ | 3,159 | (B) |  | $ | 2,494 | 
|For the year ended December 31, 2001 |  |              | 2,006 |            |  |            | 6,227 |            |  |        | 203   | (A)        |  |   | 5,777 | (B) |  |   | 2,659 | 
|For the year ended December 31, 2000 |  |              | 1,032 |            |  |            | 2,933 |            |  |        | 37    | (A)        |  |   | 1,996 | (B) |  |   | 2,006 | 
|Inventory Allowance                  |  |              |       |            |  |            |       |            |  |        |       |            |  |   |       |     |  |   |       | 
|For the year ended December 31, 2002 |  | $            | 451   |            |  | $          | 1,693 |            |  | $      | 22    |            |  | $ | 1,693 |     |  | $ | 473   | 
|For the year ended December 31, 2001 |  |              | 221   |            |  |            | 130   |            |  |        | 100   |            |  |   |      |     |  |   | 451   | 
|For the year ended December 31, 2000 |  |              | 563   |            |  |            |      |            |  |        | 8     |            |  |   | 350   |     |  |   | 221   | 
|Accrued warranty costs               |  |              |       |            |  |            |       |            |  |        |       |            |  |   |       |     |  |   |       | 
|For the year ended December 31, 2002 |  | $            | 124   |            |  | $          | 1,442 |            |  |        |      |            |  |   |      |     |  | $ | 1,566 | 
|For the year ended December 31, 2001 |  |              | 105   |            |  |            | 19    |            |  |        |      |            |  |   |      |     |  |   | 124   | 
|For the year ended December 31, 2000 |  |              | 105   |            |  |            |      |            |  |        |      |            |  |   |      |     |  |   | 105   | 

(A) Reflects recoveries of previously written-off accounts receivable balances

(B) Reflects write-off of uncollectible accounts receivable

85