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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 Form 10-K
 ANNUAL REPORT PURSUANT TO SECTIONS 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
 OR
 o
    
    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
 
 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)
 þ o
 o þ
 þ o
 o
  þ o o
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE
 PART OF FORM 10-KDOCUMENT
    
    INTO WHICH INCORPORATEDPortions of the Registrants Proxy
Statement for the 2006 Annual Meeting
of Stockholders
    
    Items 10, 11, 12, 13 & 14 of Part III
  RSA Security, RSA, Keon, ClearTrust, SecurID, BSAFE, ACE/Server, Confidence Inspired, The Most
Trusted Name in e-Security, RSA Secured ,FraudAction, eStamp and SecureSuite 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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TABLE OF CONTENTS  PART IITEM 1. BUSINESSITEM 1A. RISK FACTORSITEM 1B. UNRESOLVED STAFF COMMENTSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIESITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESITEM 9B. OTHER INFORMATIONPART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF RSA SECURITYITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESPART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULESSIGNATURESEXHIBIT INDEXEX-10.2 Form of Non-Statutory Stock Option AgreementEX-10.3 Form of Restricted Stock AgreementEX-10.12 Fourth Admt. to the 2000 Deferred Comp. PlanEX-10.29 Admt.1, dated January 20, 2006EX-21.1 Subsidiaries of RSA SecurityEX-23.1 Consent of Deloitte & Touche LLPEX-31.1 Certification of CEOEX-31.2 Certification of CFOEX-32.1 Certification of CEO & CFO pursuant to U.S.C. Sec. 1350    Table of Contents  
 PART I
 
 ITEM 1. BUSINESS
 COMPANY OVERVIEW
   COMPANY HISTORY
 ® ®
 ® ®
 ®
    BACKGROUND
  2




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THE RSA SECURITY STRATEGY
 Secure Information Access
  Lead e-Security
  Provide Seamless Solutions
 ®
 Path to the Future
  ®
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THE RSA SECURITY SOLUTION: SECURE INFORMATION EXCHANGE AND IDENTITY MANAGEMENT
  Authentication and Credential Management
  
    
    RSA SecurID®hardware and software authenticators and RSA®Authentication
Manager server softwareare more secure alternatives to passwords, providing ease of use and
the added protection of two-factor authentication.
    
    RSA SecurID® Appliance, designed for businesses with up to 50,000 users, is an
integrated, rack mountable, hardware appliance with RSA Authentication Manager software
pre-loaded.
    
    RSA SecurID for Microsoft®Windows®softwarehelps to provide
greater security than weak, static passwords. By combining something the user knows (i.e., a
secret PIN) with something the user possesses (i.e., a unique RSA SecurID token that
generates a one-time password every 60 seconds), Microsoft Windows customers can gain an
effective way to secure user access to valuable company resources.
    
    RSA®Sign-On Manageris our single sign-on (SSO) solution that provides a
secure way to manage passwords for enterprise applications and web sites. Users can
authenticate with their password, or for enhanced security, with a strong two factor
authentication device.
    
    RSA SecurID®Smart Card and USB solutionsare designed to allow an
organization to store credentials and combine multiple security functions  such as employee
badging, building access and network access  on one portable device.
    
    RSA®Certificate Manager solutionsenable an organization to issue, validate
and manage credentials that are based on x.509 digital certificates.
 Access Management
  
    
    RSA ClearTrust web access management solutionis designed to facilitate secure single
sign-on (SSO), while protecting access to web-based applications and resources through the
management of user identities and their access rights.
    
    RSA®Federated Identity Managerenables organizations to share trusted
identities across the boundaries of the corporate network  with business partners,
autonomous business units and remote offices. Standards-based and designed for broad
compatibility, RSA Federated Identity Manager allows an organization to interact
electronically with its business relationships while maintaining consistent and centralized
control over the policies associated with its users and applications.
    
    We work with technology partners to address customer requirements for provisioning across
the enterprise. Our reseller agreement with Thor Technologies permits us to both bundle with
our RSA ClearTrust product and resell separately Thors
Xellerate® provisioning software.
 Data Protection
  
    
    RSA BSAFE®encryption and digital signing softwareis engineered to provide
security, performance and support for industry
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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, consumer electronics, and cable TV boxes.
 Cyota
  
    
    Cyota FraudAction softwareis an end-to-end solution to financial institution email
fraud and phishing, which is the practice of inducing individuals to divulge their
sensitive personal information to identity thieves by sending legitimate- looking e-mails
requesting the information.
    
    Cyota eSphinx softwareis a risk-based two-factor authentication solution for online
banking.
    
    Cyota eVision softwareis designed to detect, analyze, score and manage online banking
and services fraud in real time, to help banks detect, flag and investigate online fraud.
    
    Cyota eStamp softwareis designed to present an organizations accountholders with their
own personalized watermark graphics to confirm that they are communicating with the
legitimate banking site and not a fraudster.
    
    Cyota SecureSuite softwareis a modular online payment security platform designed to
support a wide range of authentication and card security products.
 STRATEGIC PARTNERS
 ®
  SALES AND MARKETING
   5




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CUSTOMERS
   Vertical Markets
    
    2005
    
    2004Banking and insurance
    
    
    21
    %
    
    
    22
    %Technology, hardware and software companies
    
    
    19
    %
    
    
    20
    %Professional services
    
    
    13
    %
    
    
    12
    %Manufacturing, distribution and transportation
    
    
    12
    %
    
    
    10
    %Telecommunications
    
    
    9
    %
    
    
    9
    %Other
    
    
    9
    %
    
    
    9
    %Government, federal, state and local
    
    
    9
    %
    
    
    8
    %Healthcare and pharmaceuticals
    
    
    8
    %
    
    
    10
    %
  MAINTENANCE, SUPPORT AND PROFESSIONAL SERVICES
     PRODUCT DEVELOPMENT
  6




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MANUFACTURING AND SUPPLIERS
   ®
   COMPETITION
  
    
    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 enterprise single sign-on solutions;
    
    public key infrastructure (PKI) and cryptographic software firms;
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
    
    application access providers; and
    
    freeware, i.e., free or low-cost, unpatented e-security technology.
  PROPRIETARY RIGHTS
    GOVERNMENT REGULATION AND EXPORT CONTROLS
    BACKLOG
  EMPLOYEES
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ITEM 1A. RISK FACTORS
 Our operating results tend to fluctuate from quarter to quarter.
 
    
    the size, timing and shipment of individual orders for our products;
    
    changes in our operating expenses;
    
    the timing of personnel departures and new hires and the rate at which new personnel become productive;
    
    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 our competitors pricing policies;
    
    development and performance of our direct and indirect distribution channels and changes
in the mix of vertical markets to which we sell our products;
    
    the amount and timing of charges relating to restructurings and the impairment or loss of
value of some of our assets, especially goodwill and intangible assets; and
    
    general economic conditions.
  Our failure to successfully integrate Cyota into our business and operations could hurt our
business.
 
    
    retain key Cyota personnel;
    
    integrate, both from an engineering and a sales and marketing perspective, Cyotas
products and services into our suite of product and service offerings;
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
    
    coordinate research and development efforts;
    
    train and integrate our sales forces;
    
    integrate our business processes and systems; and
    
    eliminate redundant costs and consolidate redundant facilities.
 To remain competitive we may need to acquire other companies or purchase or license technology
from third parties in order to introduce new products and services or enhance our existing products
and services
 Some of our products have long and unpredictable sales cycles, which may impact our quarterly
operating results.
 
    
    customers willingness to invest potentially substantial resources and modify their
network infrastructures to take advantage of our products;
    
    customers budgetary constraints;
    
    the need to educate potential customers about our products capabilities;
    
    the timing of customers budget cycles;
    
    delays caused by customers internal review processes; and
    
    for sales to government customers, governmental regulatory, approval and purchasing requirements.
 During times when the global economy experiences weakness or uncertainty, we may have
difficulty selling our products and services.
 If we fail to remain competitive, then we could lose market share for our established products
or fail to gain market share for our less mature products and services.
 
    
    Some of our competitors offer e-security products with features and functionality that
our products do not currently offer or at lower prices than we offer. In addition, our
customers and potential customers may perceive some of our competitors products and
services as being more convenient and easier to use than ours.
    
    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.
    
    Some of our current and potential competitors have greater financial, marketing and
technical resources than we do, allowing
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them to leverage an installed customer base and distribution network, adapt more quickly to
new technologies and changes in customer requirements, or devote greater resources to the
promotion and sale of their products and services than we can.
    
    Our industry is undergoing consolidation, with larger firms acquiring some of our
competitors. A larger firm that acquires a competitor may be a greater threat to us than the
original, smaller competitor was for the reasons described in the immediately preceding
bullet point.
    
    Our issued U.S. patents expire at various dates ranging from 2006 to 2023. 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.
    
    The expiration of some of our patents has also permitted the use and distribution of
freeware, free versions of some of our technology, and we believe that some potential
customers may be choosing to use freeware instead of buying our products.
    
    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.
 We depend heavily on key, talented employees in a competitive labor market.
 Our stock price has been volatile and is likely to remain volatile
 
    
    our ability to meet the expectations of brokerage firms, industry analysts and investors
with respect to our operating and financial results;
    
    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
and services may decrease
 
    
    the perceived ability of our products and services to address real customer problems;
    
    the perceived quality, price, ease-of-use and interoperability of our products and
services as compared to those of our competitors;
    
    the markets perception of how easy or difficult it is to deploy our products, especially
in complex, heterogeneous network environments;
    
    the continued evolution of electronic commerce as a viable means of conducting business;
    
    market acceptance and use of new technologies and standards;
    
    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
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networks;
    
    the U.S. governments continued focus on e-security as a means to counteract terrorism and other hostile acts;
    
    the pace of technological change and our ability to keep up with these changes;
    
    the markets perception of our products ability to address the e-security aspects of various laws; 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.
 Unless we keep up with the ongoing changes in e-security technology and standards, our
products and services could become obsolete.
 
    
    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;
    
    delays or difficulties in the development of our products and services;
    
    our competitors introduction of new products or services ahead of our new products or
services, or their introduction of superior or cheaper products or services;
    
    the availability of free, unpatented implementations of encryption algorithms and
security protocols;
    
    the markets failure to accept new technologies, including consumer authentication,
connected authentication devices, smart cards, enterprise strong authentication, Web access
management and digital certificates;
    
    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 industry or government standards that are inconsistent with the
technology embodied in our products and services.
 If any of our products are found to have, or suspected to have, security vulnerabilities, then
we could incur significant costs and damage to our reputation.
 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
 
    
    In 2002 and 2003, our quarterly analysis of historical failure and defective return rates
indicated that certain RSA SecurID authenticators produced between 2000 and 2002 were
subject to higher defect and failure rates.
    
    Many of our suppliers are located outside of the United States. If political, economic,
health-related or natural events, such as the U.S. actions in Iraq or the 2004 earthquake
and tsunami disasters in Asia, were to affect international trade, then we could experience
difficulties in obtaining product components from our international suppliers.
    
    We depend on a limited number of suppliers for some of our product components. If our
existing suppliers were unable to provide us with a sufficient supply of quality components,
then we would have to expend significant resources to find new
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suppliers, and it is possible that we would be unable to find new suppliers in a timely
manner.
 International sales make up a significant portion of our business.
 
    
    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;
    
    the need to tailor or localize our products in order to compete in particular
international markets and to comply with foreign laws;
    
    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 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.
 
    
    copying aspects of our products;
    
    obtaining and using information that we regard as proprietary; or
    
    infringing upon our patents and other proprietary rights.
  
    
    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.
    
    All patents expire after a period of years. When each of our patents expires, other
companies may develop and sell products based on our previously patented technology.
    
    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 industry is highly litigious.
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
    
    litigation is often very expensive, even if it is resolved in our favor; and
    
    litigation diverts the attention of management and other resources.
  
    
    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.
 Our excess facilities are costly.
 We must establish and maintain strategic relationships.
 Security technologies are under constant attack.
 We may incur significant expenses and damages because of liability claims.
 Our stockholder rights plan and some provisions of our charter may inhibit potential
acquisition bids.
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ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
    
 ITEM 3. LEGAL PROCEEDINGS
   
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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PART II
 
 ITEM
5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
  2004
    
    High
    
    
    LowFirst Quarter
    
    $
    18.90
    
    
    $
    14.19Second Quarter
    
    $
    21.32
    
    
    $
    15.63Third Quarter
    
    $
    20.54
    
    
    $
    14.51Fourth Quarter
    
    $
    23.91
    
    
    $
    18.73
 2005
    
    High
    
    
    LowFirst Quarter
    
    $
    20.39
    
    
    $
    15.51Second Quarter
    
    $
    16.04
    
    
    $
    9.99Third Quarter
    
    $
    13.86
    
    
    $
    11.21Fourth Quarter
    
    $
    13.52
    
    
    $
    10.50
     ISSUER PURCHASES OF EQUITY SECURITIES
 Total Number of
    
    
    Maximum NumberShares Purchased
    
    
    of Shares that MayTotal Number
    
    
    
    
    
    
    as Part of Publicly
    
    
    Yet Be Purchasedof Shares
    
    
    Average Price
    
    
    Announced
    
    
    Under thePeriod
    
    Purchased (1)
    
    
    Paid per Share
    
    
    Program
    
    
    ProgramOctober 1-31, 2005
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    6,674,021November 1-30, 2005
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    6,674,021December 1-31, 2005
    
    
    178,750
    
    
    $
    12.06
    
    
    
    178,750
    
    
    
    6,495,271Total
    
    
    178,750
    
    
    $
    12.06
    
    
    
    178,750
    
    
    
    6,495,271
 
 (1)
    
    All shares were purchased in open market transactions. 16




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ITEM 6. SELECTED FINANCIAL DATA
  Years Ended December 31,2005
    
    2004
    
    2003
    
    2002
    
    2001Statement of Operations DataRevenueProducts
    
    $
    222,145
    
    
    $
    232,497
    
    
    $
    193,664
    
    
    $
    168,954
    
    
    $
    222,382Maintenance and professional services
    
    
    87,970
    
    
    
    75,010
    
    
    
    66,202
    
    
    
    63,130
    
    
    
    60,338Total revenue
    
    
    310,115
    
    
    
    307,507
    
    
    
    259,866
    
    
    
    232,084
    
    
    
    282,720Cost of revenueProducts
    
    
    39,016
    
    
    
    31,423
    
    
    
    32,329
    
    
    
    35,772
    
    
    
    38,226Maintenance and professional services
    
    
    25,389
    
    
    
    23,302
    
    
    
    20,877
    
    
    
    22,207
    
    
    
    28,456Impairment of technology related
intangible assets (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,333
    
    
    
    Amortization of technology related
intangible assets (1)
    
    
    1,224
    
    
    
    508
    
    
    
    7
    
    
    
    6,587
    
    
    
    3,281Total cost of revenue
    
    
    65,629
    
    
    
    55,233
    
    
    
    53,213
    
    
    
    78,899
    
    
    
    69,963Gross profit
    
    
    244,486
    
    
    
    252,274
    
    
    
    206,653
    
    
    
    153,185
    
    
    
    212,757Costs and expensesResearch and development
    
    
    62,523
    
    
    
    61,887
    
    
    
    53,629
    
    
    
    55,061
    
    
    
    58,345Marketing and selling
    
    
    112,113
    
    
    
    110,248
    
    
    
    94,298
    
    
    
    100,673
    
    
    
    122,915General and administrative
    
    
    32,380
    
    
    
    32,637
    
    
    
    33,776
    
    
    
    30,256
    
    
    
    39,127Restructurings
    
    
    2,051
    
    
    
    783
    
    
    
    
    
    
    
    56,036
    
    
    
    19,956Impairment of intangible assets (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,807
    
    
    
    Amortization of intangible assets (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,337
    
    
    
    11,171In process research and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,891Total
    
    
    209,067
    
    
    
    205,555
    
    
    
    181,703
    
    
    
    250,170
    
    
    
    259,405Income (loss) from operations
    
    
    35,419
    
    
    
    46,719
    
    
    
    24,950
    
    
    
    (96,985
    )
    
    
    (46,648
    )Interest income(expense) and other
    
    
    9,955
    
    
    
    (3,278
    )
    
    
    (7,962
    )
    
    
    (8,778
    )
    
    
    5,860Income (loss) from investing activities
    
    
    
    
    
    
    210
    
    
    
    1,568
    
    
    
    (30,937
    )
    
    
    40,836Income (loss) before provision (benefit)
for income taxes
    
    
    45,374
    
    
    
    43,651
    
    
    
    18,556
    
    
    
    (136,700
    )
    
    
    48Provision (benefit) for income taxes
    
    
    2,940
    
    
    
    8,669
    
    
    
    3,720
    
    
    
    (39,876
    )
    
    
    2,555Net income (loss)
    
    $
    42,434
    
    
    $
    34,982
    
    
    $
    14,836
    
    
    $
    (96,824
    )
    
    $
    (2,507
    )Basic
earnings (loss) per sharePer share amount
    
    $
    0.60
    
    
    $
    0.54
    
    
    $
    0.25
    
    
    $
    (1.71
    )
    
    $
    (0.04
    )Weighted average shares
    
    
    71,052
    
    
    
    64,309
    
    
    
    58,758
    
    
    
    56,621
    
    
    
    56,259Diluted earnings (loss) per share
Per share amount
    
    $
    0.58
    
    
    $
    0.51
    
    
    $
    0.24
    
    
    $
    (1.71
    )
    
    $
    (0.04
    )Weighted average shares
    
    
    71,052
    
    
    
    64,309
    
    
    
    58,758
    
    
    
    56,621
    
    
    
    56,259Effect of dilutive equity instruments
    
    
    2,022
    
    
    
    4,329
    
    
    
    3,546
    
    
    
    
    
    
    
    Adjusted weighted average shares
    
    
    73,074
    
    
    
    68,638
    
    
    
    62,304
    
    
    
    56,621
    
    
    
    56,259
 17




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##### Table of Contents



2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Balance Sheet DataCash, cash equivalents and
marketable securities
    
    $
    187,752
    
    
    $
    289,719
    
    
    $
    207,323
    
    
    $
    103,030
    
    
    $
    63,120Working capital
    
    
    137,445
    
    
    
    232,429
    
    
    
    70,394
    
    
    
    94,049
    
    
    
    69,657Total assets
    
    
    657,784
    
    
    
    624,827
    
    
    
    529,577
    
    
    
    482,848
    
    
    
    529,677Long term obligations (2)
    
    
    25,855
    
    
    
    25,864
    
    
    
    25,907
    
    
    
    105,394
    
    
    
    81,670Stockholders equity
    
    
    506,860
    
    
    
    476,532
    
    
    
    308,775
    
    
    
    263,434
    
    
    
    353,413
 
 (1)
    
    Total cost of revenue, gross profit and total operating expenses reflect the reclassification
of amortization of technology related intangible assets from operating expense to cost of revenue
of $6,587 and $3,281 for the years ended December 31, 2002 and 2001, respectively, and also reflect
the reclassification of impairment of technology related intangible assets of $14,333 from
operating to cost of revenue expense for the year ended December 31, 2002.(2)
    
    Long term obligations reflect the reclassification of deferred revenue  long term from current
deferred revenue of $6,125 for the
year ended December 31, 2004. 18




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 We make statements in this Report that are forward looking, that is, statements that are not
historical facts but that convey projections about the future. For example, statements containing
the words believes, anticipates, plans, expects, estimates, intends, may, projects,
will, would, and similar expressions may be forward-looking statements. 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 above under Part I, Item 1A Risk Factors.
 Overview
   ® ® ® ® ® ® ®
  
    
    Our authentication product line contributes more than 80% of our revenue, while our less
mature Enterprise software products continue to build revenue.
    
    Our Developer solutions continue to contribute between 7% and 12% of our total revenue
despite the availability of free, open source products that compete with our RSA BSAFE
product line. Our Developer solutions revenue tends to fluctuate from quarter to quarter,
depending on the number of large transactions in any given quarter.
    
    Although the majority of our customers utilize our products to secure and to manage
network and application access for their employees and partners, our sales of
authentication credentials for use by consumers are increasing. We sell most of our
consumer authentication credentials on a subscription basis, with revenue being recognized
over the course of several years. Accordingly, our deferred revenue balance will likely
increase as we build consumer revenue.
    
    Our product line synergies and the strength of our customer base create opportunities
for us to sell additional products to existing customers and broader, multi-product
solutions to new customers.
 19




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##### Table of Contents




    
    Information technology budgets remain constrained, which has had and could continue to
have a direct effect on the sale of our products.
    
    Some of our products, especially our single sign-on solutions and Web access management
products, have long and unpredictable sales cycles, in part because our customers may need
to invest potentially substantial resources and modify their network infrastructures to
take advantage of the products.
    
    Increased competitive activity is putting pressure on our product prices and lengthening
our sales cycles.
       20




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Application of Critical Accounting Policies and Estimates
   Revenue Recognition
 ®
   Allowance for Sales Returns
 Allowance for Doubtful Accounts
 21




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##### Table of Contents



Allowance for Warranty Obligations
  Income Taxes
     Valuation of Goodwill and Other Intangible Assets
 22




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Restructurings
   Recent
Accounting Pronouncements 
  2005 Compared with 2004
 Summary of Financial Performance for the year ended December 31, 2005
 
    
    Our revenue for the year ended December 31, 2005 was $310.1 million, an
increase of $2.6 million, or 0.9%, compared to revenue of $307.5 million for the year ended
December 31, 2004.
    
    Our gross profit for the year ended December 31, 2005 was $244.5 million, a
decrease of $7.8 million, or 3%, compared to gross profit of $252.3 million for the year
ended December 31, 2004.
    
    Our net income for the year ended December 31, 2005 was $42.4 million, an increase
of $7.4 million, or 21%, compared to net income of $35.0 million for the year ended
December 31, 2004.
 23




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##### Table of Contents




    
    During 2005, the United States Internal Revenue Service (IRS) issued tax refunds and
associated interest payments to us totaling $9.9 million. The tax refunds received
during 2005 were associated with our IRS audit for the years 1996 through 2002.
    
    Our cash, cash equivalents, and marketable securities were $187.8 million at
December 31, 2005, compared to $289.7 million at December 31, 2004. The reduction to the
balance at December 31, 2005 reflects $123.2 million in cash payments associated with the
acquisition of Cyota, Inc., net of the $5.6 million in cash and cash equivalents on Cyotas
balance sheet as of the December 30, 2005 closing date. Additionally, we repurchased
2,154,729 shares of our common stock for $29.0 million during the year ended December 31,
2005.
 24




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##### Table of Contents



Results of Operations
  Years Ended December 31,2005
    
    2004
    
    2003RevenueProducts
    
    
    71.6
    %
    
    
    75.6
    %
    
    
    74.5
    %Maintenance and professional services
    
    
    28.4
    
    
    
    24.4
    
    
    
    25.5Total revenue
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Cost of revenueProducts
    
    
    12.6
    
    
    
    10.2
    
    
    
    12.5Maintenance and professional services
    
    
    8.2
    
    
    
    7.6
    
    
    
    8.0Amortization of technology related
intangible assets
    
    
    0.4
    
    
    
    0.2
    
    
    
    Total cost of revenue
    
    
    21.2
    
    
    
    18.0
    
    
    
    20.5Gross margin
    
    
    78.8
    
    
    
    82.0
    
    
    
    79.5Costs and expensesResearch and development
    
    
    20.2
    
    
    
    20.1
    
    
    
    20.6Marketing and selling
    
    
    36.2
    
    
    
    35.8
    
    
    
    36.3General and administrative
    
    
    10.4
    
    
    
    10.6
    
    
    
    13.0Restructurings
    
    
    0.7
    
    
    
    0.3
    
    
    
    Total
    
    
    67.4
    
    
    
    66.8
    
    
    
    69.9Income from operations
    
    
    11.4
    
    
    
    15.2
    
    
    
    9.6Interest (expense) income and other
    
    
    3.2
    
    
    
    (1.1
    )
    
    
    (3.1
    )Income from investing activities
    
    
    
    
    
    
    0.1
    
    
    
    0.6Income before provision for income taxes
    
    
    14.6
    
    
    
    14.2
    
    
    
    7.1Provision for income taxes
    
    
    0.9
    
    
    
    2.8
    
    
    
    1.4Net income
    
    
    13.7
    %
    
    
    11.4
    %
    
    
    5.7
    %
 25




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Revenue
  Years Ended December 31,($ in millions)
    
    2005
    
    2004

    
    PercentageIncreaseRevenue
    
    
    Percentage
    
    
    Revenue
    
    
    Percentage
    
    

(Decrease)Product group:Enterprise solutions
    
    $
    282.6
    
    
    
    91.1
    %
    
    $
    279.2
    
    
    
    90.8
    %
    
    
    1.2
    %Developer solutions
    
    
    27.5
    
    
    
    8.9
    %
    
    
    28.3
    
    
    
    9.2
    %
    
    
    (2.9
    )%Total
    
    $
    310.1
    
    
    
    100.0
    %
    
    $
    307.5
    
    
    
    100.0
    %
    
    
    0.9
    %Product type:Authenticators
    
    $
    148.3
    
    
    
    47.8
    %
    
    $
    151.2
    
    
    
    49.2
    %
    
    
    (1.9
    )%Software products
    
    
    73.8
    
    
    
    23.8
    %
    
    
    81.3
    
    
    
    26.4
    %
    
    
    (9.2
    )%Maintenance and professional
services
    
    
    88.0
    
    
    
    28.4
    %
    
    
    75.0
    
    
    
    24.4
    %
    
    
    17.3
    %Total
    
    $
    310.1
    
    
    
    100.0
    %
    
    $
    307.5
    
    
    
    100.0
    %
    
    
    0.9
    %Product line:Authentication products
    
    $
    257.2
    
    
    
    82.9
    %
    
    $
    257.6
    
    
    
    83.8
    %
    
    
    (0.2
    )%Encryption products
    
    
    27.4
    
    
    
    8.9
    %
    
    
    28.0
    
    
    
    9.1
    %
    
    
    (2.0
    )%Web access management products
    
    
    25.5
    
    
    
    8.2
    %
    
    
    21.9
    
    
    
    7.1
    %
    
    
    16.2
    %Total
    
    $
    310.1
    
    
    
    100.0
    %
    
    $
    307.5
    
    
    
    100.0
    %
    
    
    0.9
    %
  Years Ended December 31,($ in millions)
    
    2005

    
    2004

    
    PercentageIncreaseRevenue
    
    
    Percentage
    
    
    Revenue
    
    
    Percentage
    
    
    (Decrease)United States
    
    $
    170.2
    
    
    
    54.9
    %
    
    $
    172.7
    
    
    
    56.2
    %
    
    
    (1.5
    )%Europe and other
    
    
    103.6
    
    
    
    33.4
    %
    
    
    100.6
    
    
    
    32.7
    %
    
    
    3.0
    %Asia Pacific
    
    
    36.3
    
    
    
    11.7
    %
    
    
    34.2
    
    
    
    11.1
    %
    
    
    6.2
    %Total
    
    $
    310.1
    
    
    
    100.0
    %
    
    $
    307.5
    
    
    
    100.0
    %
    
    
    0.9
    %
  26




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##### Table of Contents



Percentage2005
    
    2004
    
    IncreaseNumber of credentials licensed
    
    
    4,673
    
    
    
    3,887
    
    
    
    20.2
    %
      
    
    As new, lower cost remote access technologies become available and as employment rates
increase, we believe that we will benefit with increased total product revenue.
    
    We believe the increased awareness of digital identity theft will drive organizations
and consumers to adopt technologies such as strong authentication, and we believe we will
benefit from this trend.
    
    We believe that governmental regulations regarding the access to and distribution of
private information will drive demand for our products. For example, we believe our
revenue from the healthcare and financial services markets will increase as companies work
to bring their information technology systems into compliance with industry-specific
privacy and security laws and standards.
    
    We believe that as the United States government proceeds with its agenda of increasing
awareness and funding of cyber-security issues and focusing on homeland security, we may
benefit with increased revenue.
    
    However, information technology budgets continue to be constrained, and the continued
uncertainty in the economy and global affairs may affect revenue generated from the sales
of our products in future quarters.
    
    In addition, we are seeing increased competitive activity, which is putting pressure on
our product prices. We believe that increased competition is lengthening our sales cycles.
    
    Growth in our consumer authentication credentials will increase the mix of our
subscription revenue recognized ratably over the life of the contracts.
    
    In 2005, we instituted a major new program for our resellers and distributors and
reorganized our sales force. Our future revenue will depend on the rate at which our
current resellers and distributors participate in the new program, our ability to attract
new resellers and distributors to the program and the effectiveness of our reorganized
sales force.
 27




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Gross Profit
  Years Ended December 31,2005
    
    
    2004($ in millions)
    
    Gross Profit
    
    
    Gross Margin
    
    
    Gross Profit
    
    
    Gross MarginProducts
    
    $
    181.9
    
    
    
    81.9
    %
    
    $
    200.6
    
    
    
    86.3
    %Maintenance and
professional
services
    
    
    62.6
    
    
    
    71.1
    %
    
    
    51.7
    
    
    
    68.9
    %Total
    
    $
    244.5
    
    
    
    78.8
    %
    
    $
    252.3
    
    
    
    82.0
    %
   Research and Development
  December 31,%($ in millions)
    
    2005
    
    2004
    
    ChangeResearch and development
    
    $
    62,523
    
    
    $
    61,887
    
    
    
    1.0
    %Percentage of revenue
    
    
    20.2
    %
    
    
    20.1
    %
  Marketing and Selling
  December 31,%($ in millions)
    
    2005
    
    2004
    
    ChangeMarketing and selling
    
    $
    112,113
    
    
    $
    110,248
    
    
    
    1.7
    %Percentage of revenue
    
    
    36.2
    %
    
    
    35.9
    %
  28




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General and Administrative
  December 31,%($ in millions)
    
    2005
    
    2004
    
    ChangeGeneral and administrative
    
    $
    32,380
    
    
    $
    32,638
    
    
    
    (0.8
    )%Percentage of revenue
    
    
    10.4
    %
    
    
    10.6
    %
  Restructurings
  Facility Exit
    
    
    
    
    
    LiquidationCosts & Related
    
    
    
    
    
    of SwedenAsset
    
    Severance
    
    Development($ in millions)
    
    Impairments
    
    Costs
    
    Operations
    
    TotalBalance at January 1, 2003
    
    $
    35.9
    
    
    $
    1.4
    
    
    $
    0.6
    
    
    $
    37.9Revision of previously recorded
restructuring charges  2003
    
    
    0.8
    
    
    
    (0.6
    )
    
    
    (0.2
    )
    
    
    Payments  2003
    
    
    (8.8
    )
    
    
    (0.6
    )
    
    
    (0.4
    )
    
    
    (9.8
    )Write offs  2003
    
    
    (0.2
    )
    
    
    
    
    
    
    
    
    
    
    (0.2
    )Balance at December 31, 2003
    
    
    27.7
    
    
    
    0.2
    
    
    
    
    
    
    
    27.9Revision of previously recorded
restructuring charges  2004
    
    
    1.0
    
    
    
    (0.2
    )
    
    
    
    
    
    
    0.8Payments  2004
    
    
    (9.0
    )
    
    
    
    
    
    
    
    
    
    
    (9.0
    )Balance at December 31, 2004
    
    
    19.7
    
    
    
    
    
    
    
    
    
    
    
    19.7Restructuring charges  2005
    
    
    
    
    
    
    2.1
    
    
    
    
    
    
    
    2.1Payments  2005
    
    
    (5.1
    )
    
    
    (0.9
    )
    
    
    
    
    
    
    (6.0
    )Balance at December 31, 2005
    
    $
    14.6
    
    
    $
    1.2
    
    
    $
    
    
    
    $
    15.8
    29




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##### Table of Contents



Year ending December 31, 2006
    
    $  5.9 millionYear ending December 31, 2007
    
    4.3 millionYear ending December 31, 2008
    
    3.4 millionYear ending December 31, 2009
    
    2.2 millionTotal
    

$15.8 million
 Interest Income (Expense) and Other, Net
  Years Ended December 31,($ in millions)
    
    2005
    
    2004Interest expense on 7% convertible debentures
    
    $
    
    
    
    $
    (4.2
    )Non cash amortization of deferred financing costs
    
    
    
    
    
    
    (1.3
    )Non cash accretion of warrant value
    
    
    
    
    
    
    (1.1
    )Interest income and other, net
    
    
    2.2
    
    
    
    0.4Investment income
    
    
    7.2
    
    
    
    3.2Unrealized gain (loss) from foreign currency translation
    
    
    0.5
    
    
    
    (0.3
    )Total interest income (expense) and other, net
    
    $
    9.9
    
    
    $
    (3.3
    )
   Provision for Income Taxes
   30




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2004 Compared with 2003
 Revenue
  Years Ended December 31,2004

    
    2003

    
    Percentage($ in millions)
    
    Revenue
    
    
    Percentage
    
    
    Revenue
    
    
    Percentage
    
    
    IncreaseProduct group:Enterprise solutions
    
    $
    279.2
    
    
    
    90.8
    %
    
    $
    235.8
    
    
    
    90.7
    %
    
    
    18.4
    %Developer solutions
    
    
    28.3
    
    
    
    9.2
    %
    
    
    24.1
    
    
    
    9.3
    %
    
    
    17.4
    %Total
    
    $
    307.5
    
    
    
    100.0
    %
    
    $
    259.9
    
    
    
    100.0
    %
    
    
    18.3
    %Product type:Authenticators
    
    $
    151.2
    
    
    
    49.2
    %
    
    $
    129.8
    
    
    
    49.9
    %
    
    
    16.5
    %Software products
    
    
    81.3
    
    
    
    26.4
    %
    
    
    63.9
    
    
    
    24.6
    %
    
    
    27.2
    %Maintenance and professional
services
    
    
    75.0
    
    
    
    24.4
    %
    
    
    66.2
    
    
    
    25.5
    %
    
    
    13.3
    %Total
    
    $
    307.5
    
    
    
    100.0
    %
    
    $
    259.9
    
    
    
    100.0
    %
    
    
    18.3
    %Product line:Authentication products
    
    $
    259.0
    
    
    
    84.2
    %
    
    $
    223.4
    
    
    
    86.0
    %
    
    
    15.9
    %Encryption products
    
    
    28.0
    
    
    
    9.1
    %
    
    
    24.0
    
    
    
    9.2
    %
    
    
    16.7
    %Web access management products
    
    
    20.5
    
    
    
    6.7
    %
    
    
    12.5
    
    
    
    4.8
    %
    
    
    64.0
    %Total
    
    $
    307.5
    
    
    
    100.0
    %
    
    $
    259.9
    
    
    
    100.0
    %
    
    
    18.3
    %
 31




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Years Ended December 31,2004

    
    2003

    
    Percentage($ in millions)
    
    Revenue
    
    
    Percentage
    
    
    Revenue
    
    
    Percentage
    
    
    IncreaseUnited States
    
    $
    172.7
    
    
    
    56.2
    %
    
    $
    155.0
    
    
    
    59.6
    %
    
    
    11.4
    %Europe and other
    
    
    100.6
    
    
    
    32.7
    %
    
    
    80.2
    
    
    
    30.9
    %
    
    
    25.4
    %Asia Pacific
    
    
    34.2
    
    
    
    11.1
    %
    
    
    24.7
    
    
    
    9.5
    %
    
    
    38.5
    %Total
    
    $
    307.5
    
    
    
    100.0
    %
    
    $
    259.9
    
    
    
    100.0
    %
    
    
    18.3
    %
  
    
    We had observed that businesses are continuing the trend toward permitting remote access
to internal resources and Web-enabling existing applications.
    
    Our identity and access management solutions promote our product synergies and enabled
us to generate additional revenue by selling additional products to existing customers.
    
    An increasing number of small and mid-size businesses adopted our authentication products.
    
    Some of our existing larger customers had expanded their deployments of our products.
    
    Our sales to the financial services and technology vertical markets continued to provide increased revenue for us.
  Percentage2004
    
    2003
    
    IncreaseNumber of credentials licensed
    
    
    3,887
    
    
    
    3,132
    
    
    
    24.1
    %
      Gross Profit
  Years Ended December 31,2004
    
    
    2003($ in millions)
    
    Gross Profit
    
    
    Gross Margin
    
    
    Gross Profit
    
    
    Gross MarginProducts
    
    $
    200.6
    
    
    
    86.3
    %
    
    $
    161.4
    
    
    
    83.3
    %Maintenance and
professional
services
    
    
    51.7
    
    
    
    68.9
    %
    
    
    45.3
    
    
    
    68.5
    %Total
    
    $
    252.3
    
    
    
    82.0
    %
    
    $
    206.7
    
    
    
    79.5
    %
 32




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Research and Development
  December 31,%($ in millions)
    
    2004
    
    2003
    
    ChangeResearch and development
    
    $
    61,887
    
    
    $
    53,629
    
    
    
    15.4
    %Percentage of revenue
    
    
    20.1
    %
    
    
    20.6
    %
  Marketing and Selling
  December 31,%($ in millions)
    
    2004
    
    2003
    
    ChangeMarketing and selling
    
    $
    110,248
    
    
    $
    94,298
    
    
    
    16.9
    %Percentage of revenue
    
    
    35.9
    %
    
    
    36.3
    %
  33




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General and Administrative
  December 31,%($ in millions)
    
    2004
    
    2003
    
    ChangeGeneral and administrative
    
    $
    32,638
    
    
    $
    33,776
    
    
    
    (3.4
    )%Percentage of revenue
    
    
    10.6
    %
    
    
    13.0
    %
  Restructurings
  Facility Exit
    
    
    
    
    
    
    LiquidationCosts & Related
    
    
    
    
    
    
    of SwedenAsset
    
    
    Severance
    
    
    Development($ in millions)
    
    Impairments
    
    
    Costs
    
    
    Operations
    
    
    TotalBalance at January 1, 2002
    
    $
    9.8
    
    
    $
    1.3
    
    
    $
    
    
    
    $
    11.1Restructuring charges - 2002
    
    
    8.3
    
    
    
    5.7
    
    
    
    4.4
    
    
    
    18.4Revision of previously
recorded restructuring
charges  2002
    
    
    35.7
    
    
    
    
    
    
    
    1.9
    
    
    
    37.6Payments  2002
    
    
    (5.8
    )
    
    
    (5.6
    )
    
    
    (5.7
    )
    
    
    (17.1
    )Write offs  2002
    
    
    (12.1
    )
    
    
    
    
    
    
    
    
    
    
    (12.1
    )Balance at December 31, 2002
    
    
    35.9
    
    
    
    1.4
    
    
    
    0.6
    
    
    
    37.9Revision of previously
recorded restructuring
charges  2003
    
    
    0.8
    
    
    
    (0.6
    )
    
    
    (0.2
    )
    
    
    Payments  2003
    
    
    (8.8
    )
    
    
    (0.6
    )
    
    
    (0.4
    )
    
    
    (9.8
    )Write offs  2003
    
    
    (0.2
    )
    
    
    
    
    
    
    
    
    
    
    (0.2
    )Balance at December 31, 2003
    
    
    27.7
    
    
    
    0.2
    
    
    
    
    
    
    
    27.9Revision of previously
recorded restructuring
charges  2004
    
    
    1.0
    
    
    
    (0.2
    )
    
    
    
    
    
    
    0.8Payments  2004
    
    
    (9.0
    )
    
    
    
    
    
    
    
    
    
    
    (9.0
    )Write offs  2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance at December 31, 2004
    
    $
    19.7
    
    
    $
    
    
    
    $
    
    
    
    $
    19.7
    34




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##### Table of Contents



Interest Expense and Other
  ($ in millions)
    
    Years Ended December 31,2004
    
    
    2003Interest expense on 7% convertible debentures
    
    $
    (4.2
    )
    
    $
    (5.7
    )Non cash amortization of deferred financing costs
    
    
    (1.3
    )
    
    
    (1.6
    )Non cash accretion of warrant value
    
    
    (1.1
    )
    
    
    (1.4
    )Interest income net of expense and other
    
    
    3.6
    
    
    
    1.3Unrealized loss from foreign currency translation
    
    
    (0.3
    )
    
    
    (0.6
    )Total interest expense and other
    
    $
    (3.3
    )
    
    $
    (8.0
    )
  35




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##### Table of Contents



Income from Investing Activities
  Provision for Income Taxes
    Liquidity and Capital Resources
 Summary of Sources and Uses of Cash
  ($ in millions)
    
    Years Ended December 31,2005
    
    2004Net cash provided by operating activities
    
    $
    56.1
    
    
    $
    53.0Net cash used for investing activities
    
    
    (36.7
    )
    
    
    (234.0
    )Net cash (used for) provided by financing activities
    
    
    (18.0
    )
    
    
    42.5Increase (decrease) in cash and cash equivalents
    
    
    0.8
    
    
    
    (139.1
    )
    36




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##### Table of Contents



Payments Due by PeriodLess Than
    
    
    1 - 3
    
    
    3  5
    
    
    More Than($ in millions)
    
    Total
    
    
    1 Year
    
    
    Years
    
    
    Years
    
    
    5 YearsOperating leases
    
    $
    128.8
    
    
    $
    14.7
    
    
    $
    41.6
    
    
    $
    61.6
    
    
    $
    10.9Restructurings
    
    
    15.8
    
    
    
    6.0
    
    
    
    9.8
    
    
    
    
    
    
    
    Purchase obligations
    
    
    2.6
    
    
    
    0.7
    
    
    
    1.9
    
    
    
    
    
    
    
    Royalty commitments
    
    
    6.2
    
    
    
    3.0
    
    
    
    2.7
    
    
    
    0.5
    
    
    
    Total commitments
    
    $
    153.4
    
    
    $
    24.4
    
    
    $
    56.0
    
    
    $
    62.1
    
    
    $
    10.9
     Off Balance Sheet Arrangements
  37




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##### Table of Contents



Quarterly Financial Data (Unaudited)
 2005
    
    First Quarter
    
    Second Quarter
    
    Third Quarter
    
    Fourth QuarterRevenue
    
    $
    75,618
    
    
    $
    76,528
    
    
    $
    76,237
    
    
    $
    81,732Gross profit
    
    
    60,811
    
    
    
    60,273
    
    
    
    60,112
    
    
    
    63,290Income before provision
for income taxes
    
    
    9,259
    
    
    
    10,856
    
    
    
    11,781
    
    
    
    13,479Net income
    
    
    7,222
    
    
    
    8,468
    
    
    
    15,063
    
    
    
    11,682Basic earnings per share
    
    $
    0.10
    
    
    $
    0.12
    
    
    $
    0.21
    
    
    $
    0.16Diluted earnings per share
    
    $
    0.10
    
    
    $
    0.12
    
    
    $
    0.21
    
    
    $
    0.162004Revenue
    
    $
    71,968
    
    
    $
    75,577
    
    
    $
    76,731
    
    
    $
    83,231Gross profit
    
    
    58,142
    
    
    
    62,114
    
    
    
    62,905
    
    
    
    69,113Income before provision
for income taxes
    
    
    8,069
    
    
    
    9,971
    
    
    
    11,056
    
    
    
    14,555Net income
    
    
    6,455
    
    
    
    7,976
    
    
    
    8,741
    
    
    
    11,810Basic earnings per share
    
    $
    0.11
    
    
    $
    0.13
    
    
    $
    0.14
    
    
    $
    0.17Diluted earnings per share
    
    $
    0.10
    
    
    $
    0.12
    
    
    $
    0.13
    
    
    $
    0.16
 38




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##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     39




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    Internal ControlIntegrated
Framework
 Deloitte & Touche LLP
 
 40




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##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share data)
 December 31,2005
    
    
    2004ASSETSCurrent assetsCash and cash equivalents
    
    $
    69,050
    
    
    $
    68,210Marketable securities
    
    
    118,702
    
    
    
    221,509Accounts receivable (less allowance for doubtful accounts
of $1,600 in 2005 and $1,672 in 2004)
    
    
    55,738
    
    
    
    53,494Inventory
    
    
    4,813
    
    
    
    3,465Prepaid expenses and other assets
    
    
    11,459
    
    
    
    8,702Refundable income taxes
    
    
    
    
    
    
    3,146Deferred taxes
    
    
    2,752
    
    
    
    2,459Total current assets
    
    
    262,514
    
    
    
    360,985Property and equipment, net
    
    
    69,764
    
    
    
    70,700Other assetsDeferred taxes
    
    
    8,108
    
    
    
    8,222Intangible and other assets, net
    
    
    41,534
    
    
    
    12,184Goodwill
    
    
    275,864
    
    
    
    172,736Total other assets
    
    
    325,506
    
    
    
    193,142$
    657,784
    
    
    $
    624,827LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    14,706
    
    
    $
    10,995Accrued payroll and related benefits
    
    
    15,679
    
    
    
    18,964Accrued expenses and other liabilities
    
    
    22,827
    
    
    
    18,952Current portion of accrued restructurings
    
    
    5,962
    
    
    
    6,031Income taxes accrued and payable
    
    
    18,442
    
    
    
    22,479Deferred revenue
    
    
    47,453
    
    
    
    45,010Total current liabilities
    
    
    125,069
    
    
    
    122,431Accrued restructurings, long-term
    
    
    9,793
    
    
    
    13,682Deferred revenue, long-term
    
    
    7,429
    
    
    
    6,125Other
    
    
    8,633
    
    
    
    6,057Total liabilities
    
    
    150,924
    
    
    
    148,295Commitments and Contingencies (Note 14)Stockholders equityCommon stock, $0.01 par value: authorized, 300,000,000 shares; issued 71,836,757 and
71,567,587 shares, outstanding 71,026,880 and 71,567,587 shares in 2005 and 2004,
respectively
    
    
    718
    
    
    
    716Additional paid-in capital
    
    
    122,150
    
    
    
    119,527Retained earnings
    
    
    395,777
    
    
    
    353,343Treasury stock, at cost: 809,877 and zero shares in 2005 and 2004, respectively
    
    
    (10,107
    )
    
    
    Accumulated other comprehensive income
    
    
    (1,678
    )
    
    
    2,946Total stockholders equity
    
    
    506,860
    
    
    
    476,532$
    657,784
    
    
    $
    624,827
 See notes to consolidated financial statements.
 41




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##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share data)
 Years Ended December 31,2005
    
    
    2004
    
    
    2003RevenueProducts
    
    $
    222,145
    
    
    $
    232,497
    
    
    $
    193,664Maintenance and professional services
    
    
    87,970
    
    
    
    75,010
    
    
    
    66,202Total revenue
    
    
    310,115
    
    
    
    307,507
    
    
    
    259,866Cost of revenueProducts
    
    
    39,016
    
    
    
    31,423
    
    
    
    32,329Maintenance and professional services
    
    
    25,389
    
    
    
    23,302
    
    
    
    20,877Amortization of technology related intangible assets
    
    
    1,224
    
    
    
    508
    
    
    
    7Total cost of revenue
    
    
    65,629
    
    
    
    55,233
    
    
    
    53,213Gross profit
    
    
    244,486
    
    
    
    252,274
    
    
    
    206,653Costs and expensesResearch and development
    
    
    62,523
    
    
    
    61,887
    
    
    
    53,629Marketing and selling
    
    
    112,113
    
    
    
    110,248
    
    
    
    94,298General and administrative
    
    
    32,380
    
    
    
    32,638
    
    
    
    33,776Restructurings
    
    
    2,051
    
    
    
    782
    
    
    
    Total
    
    
    209,067
    
    
    
    205,555
    
    
    
    181,703Income from operations
    
    
    35,419
    
    
    
    46,719
    
    
    
    24,950Interest income (expense), and other
    
    
    9,955
    
    
    
    (3,278
    )
    
    
    (7,962
    )Income from investing activities
    
    
    
    
    
    
    210
    
    
    
    1,568Income before provision for income taxes
    
    
    45,374
    
    
    
    43,651
    
    
    
    18,556Provision for income taxes
    
    
    2,940
    
    
    
    8,669
    
    
    
    3,720Net income
    
    $
    42,434
    
    
    $
    34,982
    
    
    $
    14,836Basic earnings per sharePer share amount
    
    $
    0.60
    
    
    $
    0.54
    
    
    $
    0.25Weighted average shares for basic
    
    
    71,052
    
    
    
    64,309
    
    
    
    58,758Diluted earnings per sharePer share amount
    
    $
    0.58
    
    
    $
    0.51
    
    
    $
    0.24Weighted average shares for basic
    
    
    71,052
    
    
    
    64,309
    
    
    
    58,758Effect of dilutive equity instruments
    
    
    2,022
    
    
    
    4,329
    
    
    
    3,546Weighted average shares for diluted
    
    
    73,074
    
    
    
    68,638
    
    
    
    62,304
 See notes to consolidated financial statements.
 42




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##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders Equity and Comprehensive Income (Loss)
(In thousands, except share data)
 AccumulatedAdditional
    
    
    
    
    
    
    
    
    Other
    
    
    TotalCommon Stock
    
    Paid-in-
    
    Retained
    
    Treasury Stock
    
    Comprehensive
    
    StockholdersShares
    
    Amount
    
    Capital
    
    Earnings
    
    Shares
    
    Amount
    
    Income
    
    Equity(Loss)Balance, January 30, 2003
    
    
    62,144,158
    
    
    $
    621
    
    
    $
    100,824
    
    
    $
    354,496
    
    
    
    5,077,463
    
    
    $
    (190,554
    )
    
    $
    (1,953
    )
    
    $
    263,434Issuance of common stock
from exercise of stock
options and purchase plans, net of shares issued from treasury
    
    
    
    
    
    
    
    
    
    
    (106,309

    )
    
    
    (9,602

    )
    
    
    (3,803,895

    )
    
    
    136,702

    
    
    
    
    
    
    
    20,791Tax benefit on the exercise
Of stock options
    
    
    
    
    
    
    
    
    
    
    5,485
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,485Comprehensive income:Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,229
    
    
    
    4,229Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,836
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,836Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,065Balance, December 31, 2003
    
    
    62,144,158
    
    
    
    621
    
    
    
    
    
    
    
    359,730
    
    
    
    1,273,568
    
    
    
    (53,852
    )
    
    
    2,276
    
    
    
    308,775Issuance of common stock
from exercise of stock
options and purchase plans, net of shares issued from treasury
    
    
    3,602,029
    
    
    
    37
    
    
    
    30,013
    
    
    
    (41,369

    )
    
    
    (1,323,568

    )
    
    
    54,763

    
    
    
    
    
    
    
    43,444Issuance of common stock
from debt conversion
    
    
    5,820,297
    
    
    
    58
    
    
    
    79,942
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80,000Tax benefit on the exercise
of stock options (net of
valuation allowance of
$5,125)
    
    
    
    
    
    
    
    
    
    
    9,552
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,552Stock compensation
    
    
    1,103
    
    
    
    
    
    
    
    20
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20Share repurchase program
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    (911
    )
    
    
    
    
    
    
    (911
    )Comprehensive income:Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    942
    
    
    
    942Unrealized loss on
marketable securities, net
of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (272
    )
    
    
    (272
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,982
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,982Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,652Balance, December 31, 2004
    
    
    71,567,587
    
    
    
    716
    
    
    
    119,527
    
    
    
    353,343
    
    
    
    
    
    
    
    
    
    
    
    2,946
    
    
    
    476,532Issuance of common stock
from exercise of stock
options and purchase plans, net of shares issued from treasury
    
    
    215,957
    
    
    
    2
    
    
    
    (7,891

    )
    
    
    
    
    

    
    (1,344,852

    )


    
    

    18,866
    

    
    
    
    
    
    
    10,977Tax benefit on the exercise
Of stock options
    
    
    
    
    
    
    
    
    
    
    3,723
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,723Stock compensation
    
    
    3,213
    
    
    
    
    
    
    
    39
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39Deferred stock compensation
    
    
    
    
    
    
    
    
    
    
    (4,138
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,138
    )Share repurchase program
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,154,729
    
    
    
    (28,973
    )
    
    
    
    
    
    
    (28,973
    )Restricted stock
    
    
    50,000
    
    
    
    
    
    
    
    607
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    607Stock
options assumed in Cyota acquisition
    
    
    
    
    
    
    
    
    
    
    10,283
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,283Comprehensive income:Translation adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,330
    )
    
    
    (4,330
    )Unrealized loss on
marketable securities, net
of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (294
    )
    
    
    (294
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,434
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,434Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,810Balance, December 31, 2005
    
    
    71,836,757
    
    
    $
    718
    
    
    $
    122,150
    
    
    $
    395,777
    
    
    
    809,877
    
    
    $
    (10,107
    )
    
    $
    (1,678
    )
    
    $
    506,860
 See notes to consolidated financial statements.
 43




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##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
 Years Ended December 31,2005
    
    2004
    
    2003Cash flows from operating activitiesNet income
    
    $
    42,434
    
    
    $
    34,982
    
    
    $
    14,836Adjustments to reconcile net income to net cash provided by operating
activities:Depreciation
    
    
    12,525
    
    
    
    11,174
    
    
    
    13,223Tax benefit from exercise of stock options
    
    
    3,723
    
    
    
    9,552
    
    
    
    5,485Stock compensation
    
    
    39
    
    
    
    20
    
    
    
    Amortization of convertible debentures deferred financing costs
    
    
    
    
    
    
    1,271
    
    
    
    1,605Warrant accretion
    
    
    
    
    
    
    1,123
    
    
    
    1,400Loss from investing activities
    
    
    
    
    
    
    (390
    )
    
    
    (1,542
    )Investment valuation impairment
    
    
    
    
    
    
    180
    
    
    
    (26
    )Deferred taxes
    
    
    3,375
    
    
    
    1,891
    
    
    
    11,825Increase (decrease) in cash from changes in, net of the effect of acquisitions:Accounts receivable
    
    
    335
    
    
    
    (18,968
    )
    
    
    2,082Inventory
    
    
    (1,348
    )
    
    
    546
    
    
    
    (1,676
    )Prepaid expenses and other assets
    
    
    (3,803
    )
    
    
    (1,917
    )
    
    
    (846
    )Accounts payable
    
    
    1,345
    
    
    
    2,870
    
    
    
    916Accrued payroll and related benefits
    
    
    (4,550
    )
    
    
    2,358
    
    
    
    4,201Accrued expenses and other liabilities
    
    
    3,369
    
    
    
    (1,019
    )
    
    
    1,945Accrued restructurings
    
    
    (3,958
    )
    
    
    (8,191
    )
    
    
    (9,781
    )Refundable income taxes and income taxes accrued and payable
    
    
    (656
    )
    
    
    1,270
    
    
    
    36,657Deferred revenue
    
    
    3,270
    
    
    
    16,209
    
    
    
    1,202Cash flows from operating activities
    
    
    56,100
    
    
    
    52,961
    
    
    
    81,506Cash flows from investing activitiesPurchases of marketable securities
    
    
    (159,585
    )
    
    
    (427,878
    )
    
    
    Sales and maturities of marketable securities
    
    
    261,940
    
    
    
    205,950
    
    
    
    Purchases of property and equipment
    
    
    (12,150
    )
    
    
    (11,088
    )
    
    
    (4,247
    )Investments
    
    
    
    
    
    
    28
    
    
    
    3,041Acquisitions, net of cash acquired
    
    
    (124,407
    )
    
    
    
    
    
    
    3,370Other
    
    
    (2,530
    )
    
    
    (1,001
    )
    
    
    (1,377
    )Cash flows from investing activities
    
    
    (36,732
    )
    
    
    (233,989
    )
    
    
    787Cash flows from financing activitiesProceeds from exercise of stock options and purchase plans
    
    
    10,977
    
    
    
    43,444
    
    
    
    20,791Share repurchase program
    
    
    (28,973
    )
    
    
    (911
    )
    
    
    Cash flows from financing activities
    
    
    (17,996
    )
    
    
    42,533
    
    
    
    20,791Effect of exchange rate changes on cash and cash equivalents
    
    
    (532
    )
    
    
    (618
    )
    
    
    1,209Net increase (decrease) in cash and cash equivalents
    
    
    840
    
    
    
    (139,113
    )
    
    
    104,293Cash and cash equivalents, beginning of year
    
    
    68,210
    
    
    
    207,323
    
    
    
    103,030Cash and cash equivalents, end of year
    
    $
    69,050
    
    
    $
    68,210
    
    
    $
    207,323Other cash flow information:Cash payments for interest expense
    
    $
    
    
    
    $
    7,103
    
    
    $
    5,724Cash payments for income taxes
    
    $
    4,866
    
    
    $
    3,238
    
    
    $
    1,749
   See notes to consolidated financial statements
 44




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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


Principles of Consolidation


Reclassification 


Use of Estimates


Revenue Recognition


®






Allowance for Sales Returns and Rebates


45



---



##### Table of Contents



Years Ended December 31,2005
    
    
    2004
    
    
    2003Balance, beginning of period
    
    $
    2,490
    
    
    $
    3,123
    
    
    $
    4,848Provision for sales returns and rebates
    
    
    6,604
    
    
    
    4,913
    
    
    
    3,727Deductions
    
    
    (6,568
    )
    
    
    (5,546
    )
    
    
    (5,452
    )Balance, end of period
    
    $
    2,526
    
    
    $
    2,490
    
    
    $
    3,123
 Allowance for Doubtful Accounts
  Years Ended December 31,2005
    
    
    2004
    
    
    2003Balance, beginning of period
    
    $
    1,672
    
    
    $
    1,849
    
    
    $
    2,494Provision for doubtful accounts
    
    
    (70
    )
    
    
    
    
    
    
    Write-offs and other
    
    
    (2
    )
    
    
    (177
    )
    
    
    (645
    )Balance, end of period
    
    $
    1,600
    
    
    $
    1,672
    
    
    $
    1,849
 Allowance for Warranty Obligations ®
   46




---



##### Table of Contents



Years Ended December 31,2005
    
    
    2004
    
    
    2003Balance, beginning of period
    
    $
    1,899
    
    
    $
    3,878
    
    
    $
    1,566Provision for warranty expense
    
    
    259
    
    
    
    209
    
    
    
    4,614Deductions
    
    
    (855
    )
    
    
    (2,188
    )
    
    
    (2,302
    )Balance, end of period
    
    $
    1,303
    
    
    $
    1,899
    
    
    $
    3,878
 Cash Equivalents 
 Marketable Securities 
 Inventory
  Years Ended December 31,2005
    
    2004
    
    2003Balance, beginning of period
    
    $
    321
    
    
    $
    455
    
    
    $
    473Provisions
    
    
    159
    
    
    
    (115
    )
    
    
    132Deductions
    
    
    (203
    )
    
    
    (19
    )
    
    
    (150
    )Balance, end of period
    
    $
    277
    
    
    $
    321
    
    
    $
    455
 Property and Equipment
 Goodwill and Intangible Assets
  47




---



##### Table of Contents



2005
    
    2004Balance, beginning of period
    
    $
    172,736
    
    
    $
    189,260Tax benefit from utilization of acquisition net
operating losses, for which valuation allowances
had been provided
    
    
    (3,544
    )
    
    
    (12,578
    )Tax benefit of deductible acquisition costs
    
    
    
    
    
    
    (3,946
    )Reduction in valuation allowances resulting from
business combination
    
    
    (8,418
    )
    
    
    Cyota acquisition
    
    
    115,090
    
    
    
    Balance, end of period
    
    $
    275,864
    
    
    $
    172,736
    Impairment of Long-Lived Assets Other Than Goodwill and Intangible Assets
 Financial Instruments
 Research
and Development
 Advertising
 Income Taxes
  48




---



##### Table of Contents



Foreign Currency
 Earnings Per Share
 Common Stock Warrants
 Treasury Stock
 Concentration of Credit Risk
 Stock-Based Compensation Plans
   Years Ended December 31,2005
    
    2004
    
    2003Net income as reported
    
    $
    42,434
    
    
    $
    34,982
    
    
    $
    14,836Add: stock-based compensation expense included in reported net
income, net of related tax effects
    
    
    39
    
    
    
    20
    
    
    
    Less: stock based compensation expense determined under fair value
method for all awards, net of related tax effects
    
    
    (26,260
    )
    
    
    (27,598
    )
    
    
    (36,178
    )Pro forma net income (loss)
    
    $
    16,213
    
    
    $
    7,404
    
    
    $
    (21,342
    )Net income (loss) per share:Basic earnings per share  as reported
    
    $
    0.60
    
    
    $
    0.54
    
    
    $
    0.25Basic earnings (loss) per share  pro forma
    
    $
    0.23
    
    
    $
    0.12
    
    
    $
    (0.36
    )Diluted earnings per share  as reported
    
    $
    0.58
    
    
    $
    0.51
    
    
    $
    0.24Diluted earnings (loss) per share  pro forma
    
    $
    0.23
    
    
    $
    0.11
    
    
    $
    (0.36
    )
 49




---



##### Table of Contents



Years Ended December 31,2005
    
    2004
    
    2003Stock Option Plans:Risk-free interest rate
    
    
    4.0
    %
    
    
    3.0
    %
    
    
    2.8
    %Expected life of option grants (years)
    
    
    3.5
    
    
    
    4.2
    
    
    
    4.3Expected volatility of underlying stock
    
    
    73.2
    %
    
    
    84.0
    %
    
    
    87.0
    %Expected dividend payment rate
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected forfeiture rate
    
    
    5.2
    %
    
    
    7.5
    %
    
    
    7.5
    %Weighted average fair value of stock options granted
    
    $
    6.25
    
    
    $
    10.98
    
    
    $
    6.57Employee Stock Purchase Plan:Risk-free interest rate
    
    
    2.8
    %
    
    
    1.0
    %
    
    
    1.1
    %Expected life of option grants (years)
    
    
    0.50
    
    
    
    0.50
    
    
    
    0.50Expected volatility of underlying stock
    
    
    45.3
    %
    
    
    40.0
    %
    
    
    77.0
    %Expected dividend payment rate
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Weighted average fair value of purchase rights granted
    
    $
    4.21
    
    
    $
    3.99
    
    
    $
    2.68
  Recent Accounting Pronouncements 
  2. Acquisition
    50




---



##### Table of Contents



Cash paid for capital stock
    
    $
    128,835Fair value of outstanding stock options assumed
    
    
    10,283Direct acquisition costs
    
    
    1,437Intrinsic value of unvested options
    
    
    (3,531
    )Total purchase price
    
    $
    137,024
   Cash and equivalents
    
    
    
    
    
    $
    5,600Restricted cash
    
    
    
    
    
    
    291Accounts receivable, net
    
    
    
    
    
    
    2,928Prepaid expenses and other current assets
    
    
    
    
    
    
    1,012Property and equipment
    
    
    
    
    
    
    1,234Other assets
    
    
    
    
    
    
    459Accounts payable
    
    
    
    
    
    
    (1,229
    )Other payable & accrued expenses
    
    
    
    
    
    
    (2,877
    )Deferred revenue
    
    
    
    
    
    
    (522
    )Deferred tax liabilities
    
    
    
    
    
    
    (8,418
    )Accrued severance liability
    
    
    
    
    
    
    (594
    )Amortizable intangible assets:Existing technology
    
    
    16,400Customer relationships
    
    
    6,860Other
    
    
    790Total amortizable intangible assets
    
    
    
    
    
    
    24,050Goodwill
    
    
    
    
    
    
    115,090Total purchase price allocation
    
    
    
    
    
    $
    137,024
    51




---



##### Table of Contents



December 31,2005
    
    2004Revenue
    
    $
    321,499
    
    
    $
    314,255Net income
    
    $
    34,481
    
    
    $
    29,709Basic earnings per share
    
    $
    0.49
    
    
    $
    0.46Diluted earnings per share
    
    $
    0.47
    
    
    $
    0.43
 3. Investments and Financial Instruments
  NetUnrealized
    
    
    RecordedCost Basis
    
    
    Losses
    
    
    BasisDebt securities recorded at market, maturingWithin one year
    
    $
    69,134
    
    
    $
    (348
    )
    
    $
    68,786Between 1 and 15 years
    
    
    50,439
    
    
    
    (523
    )
    
    
    49,916Total marketable securities
    
    $
    119,573
    
    
    $
    (871
    )
    
    $
    118,702
 Amortized
    
    Accrued
    
    Unrealized
    
    Unrealized
    
    EstimatedCost
    
    Interest
    
    Gains
    
    Losses
    
    Fair ValueUS Government and agency securities
    
    $
    63,775
    
    
    $
    466
    
    
    $
    
    
    
    $
    (503
    )
    
    $
    63,738Corporate debt securities
    
    
    40,176
    
    
    
    689
    
    
    
    
    
    
    
    (368
    )
    
    
    40,497Auction rate securities
    
    
    14,450
    
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    14,467Total marketable securities
    
    $
    118,401
    
    
    $
    1,172
    
    
    $
    
    
    
    $
    (871
    )
    
    $
    118,702
  NetUnrealized
    
    
    RecordedCost Basis
    
    
    Losses
    
    
    BasisDebt securities recorded at market, maturingWithin one year
    
    $
    70,111
    
    
    $
    (133
    )
    
    $
    69,978Between 1 and 15 years
    
    
    151,816
    
    
    
    (285
    )
    
    
    151,531Total marketable securities
    
    $
    221,927
    
    
    $
    (418
    )
    
    $
    221,509
 Amortized
    
    Accrued
    
    Unrealized
    
    Unrealized
    
    EstimatedCost
    
    Interest
    
    Gains
    
    Losses
    
    Fair ValueUS Government and agency securities
    
    $
    50,809
    
    
    $
    440
    
    
    $
    30
    
    
    $
    (285
    )
    
    $
    50,994Corporate debt securities
    
    
    27,780
    
    
    
    147
    
    
    
    
    
    
    
    (163
    )
    
    
    27,764Auction rate securities
    
    
    142,550
    
    
    
    201
    
    
    
    
    
    
    
    
    
    
    
    142,751Total marketable securities
    
    $
    221,139
    
    
    $
    788
    
    
    $
    30
    
    
    $
    (448
    )
    
    $
    221,509
  52




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##### Table of Contents



Years Ended December 31,2005
    
    2004
    
    2003Income on sale of investments
    
    $
    
    
    
    $
    398
    
    
    $
    1,542(Decline) increase in fair value of Crosby Finance, LLC
    
    
    
    
    
    
    (188
    )
    
    
    26Total income from investing activities
    
    $
    
    
    
    $
    210
    
    
    $
    1,568
     4. Property and Equipment
  December 31,2005
    
    2004Land
    
    $
    6,809
    
    
    $
    7,593Building
    
    
    19,960
    
    
    
    22,257Furniture and equipment
    
    
    77,137
    
    
    
    90,387Construction in progress
    
    
    5,683
    
    
    
    3,357Leasehold improvements
    
    
    33,401
    
    
    
    32,811Total
    
    
    142,990
    
    
    
    156,405Less: Accumulated depreciation and amortization
    
    
    (73,226
    )
    
    
    (85,705
    )Property and equipment, net
    
    $
    69,764
    
    
    $
    70,700
  5. Intangible Assets, Net
  December 31,2005
    
    2004Licensed technologies
    
    $
    26,117
    
    
    $
    3,454Customer relationships
    
    
    6,860
    
    
    
    Other
    
    
    790
    
    
    
    Accumulated amortization
    
    
    (1,724
    )
    
    
    (515
    )Total intangible assets, net
    
    $
    32,043
    
    
    $
    2,939
 53




---



##### Table of Contents



Year ending December 31, 2006
    
    $
    5,162Year ending December 31, 2007
    
    
    6,310Year ending December 31, 2008
    
    
    5,852Year ending December 31, 2009
    
    
    4,892Year ending
December 31, 2010 and thereafter
    
    
    9,827Total
    
    $
    32,043
 6. Convertible Debentures
   7. Stockholders Equity
 Common Stock Warrants
 Stockholder Rights Plan
  Share Repurchase Program
 54




---



##### Table of Contents



8. Stock Option and Purchase Plans
     Weighted AverageExerciseShares
    
    Price Per ShareOutstanding at January 1, 2003
    
    
    16,528,249
    
    
    

    $
    12.48Granted
    
    
    4,955,700
    
    
    
    

    9.96Exercised
    
    
    (3,033,433
    )
    
    
    

    5.90Canceled or expired
    
    
    (1,557,309
    )
    

    
    

    14.48Outstanding at December 31, 2003
    
    
    16,893,207
    
    
    
    

    12.70Granted
    
    
    3,289,950
    
    
    
    

    17.46Exercised
    
    
    (4,624,726
    )
    
    
    

    8.62Canceled or expired
    
    
    (1,069,587
    )
    
    
    

    17.29Outstanding at December 31, 2004
    
    
    14,488,844
    
    
    

    $

    14.68Granted
    
    
    3,319,900
    
    
    
    

    11.63Options assumed through acquisition
    
    
    951,506
    
    
    
    

    0.51Exercised
    
    
    (1,242,272
    )
    
    
    

    5.55Canceled or expired
    
    
    (2,770,429
    )
    
    
    

    17.73Outstanding at December 31, 2005
    
    
    14,747,549
    
    
    

    $
    13.27Exercisable at December 31, 2003
    
    
    8,450,301
    
    
    

    $
    15.99Exercisable at December 31, 2004
    
    
    6,949,440
    
    
    

    $
    17.44Exercisable at December 31, 2005
    
    
    9,628,563
    
    
    

    $
    14.75
 55




---



##### Table of Contents



Weighted Average
    
    
    
    
    
    Weighted AverageWeighted
    
    Remaining
    
    Number
    
    Exercise Price forRange of
    
    Number of
    
    Average
    
    Contractual Life
    
    Currently
    
    CurrentlyExercise Prices
    
    Shares
    
    Exercise Price
    
    (Years)
    
    Exercisable
    
    Exercisable$  0.02
   3.21
    
    
    993,586
    
    
    $
    0.57
    
    
    
    6.8
    
    
    
    682,590
    
    
    
    $

    0.66$  3.22
   6.41
    
    
    2,811,660
    
    
    $
    4.69
    
    
    
    3.3
    
    
    
    2,148,856
    
    
    

    $
    4.73$  6.42
   9.62
    
    
    553,618
    
    
    $
    8.39
    
    
    
    4.8
    
    
    
    488,054
    
    
    

    $
    8.57$  9.63  12.03
    
    
    1,992,058
    
    
    $
    10.65
    
    
    
    5.5
    
    
    
    144,211
    
    
    

    $
    10.66$12.04  16.03
    
    
    3,014,621
    
    
    $
    12.91
    
    
    
    4.9
    
    
    
    1,111,025
    
    
    

    $
    13.22$16.04  19.24
    
    
    2,799,853
    
    
    $
    17.09
    
    
    
    4.1
    
    
    
    2,487,928
    
    
    

    $
    16.95$19.25  22.44
    
    
    718,283
    
    
    $
    20.49
    
    
    
    2.1
    
    
    
    702,029
    
    
    

    $
    20.47$22.45  28.86
    
    
    1,592,445
    
    
    $
    28.04
    
    
    
    1.3
    
    
    
    1,592,445
    
    
    

    $
    28.04$32.07  45.37
    
    
    271,425
    
    
    $
    36.23
    
    
    
    1.3
    
    
    
    271,425
    
    
    

    $
    36.23$0.02 
  45.37
    
    
    14,747,549
    
    
    $
    13.27
    
    
    
    3.79
    
    
    
    9,628,563
    
    
    

    $
    14.75
  9. Earnings Per Share
  Years Ended December 31,2005
    
    2004
    
    2003Employee stock options
    
    
    5,486,631
    
    
    
    3,787,724
    
    
    
    8,497,066Convertible debentures
    
    
    0
    
    
    
    4,316,090
    
    
    
    5,820,298Common stock warrants
    
    
    873,045
    
    
    
    0
    
    
    
    873,045
 10. Income Taxes
  Years Ended December 31,2005
    
    2004
    
    2003United States of America
    
    $
    20,258
    
    
    $
    20,087
    
    
    $
    5,834Foreign
    
    
    25,116
    
    
    
    23,564
    
    
    
    12,722Income before provision for income taxes
    
    $
    45,374
    
    
    $
    43,651
    
    
    $
    18,556
  56




---



##### Table of Contents



Years Ended December 31,2005
    
    2004
    
    2003Current:Federal
    
    $
    (4,133
    )
    
    $
    3,037
    
    
    $
    (9,335
    )Foreign
    
    
    3,698
    
    
    
    3,264
    
    
    
    1,230State
    
    
    
    
    
    
    477
    
    
    
    Total
    
    
    (435
    )
    
    
    6,778
    
    
    
    (8,105
    )Deferred:Federal
    
    
    3,946
    
    
    
    1,814
    
    
    
    11,825Foreign
    
    
    (571
    )
    
    
    77
    
    
    
    Total
    
    
    3,375
    
    
    
    1,891
    
    
    
    11,825Total
    
    $
    2,940
    
    
    $
    8,669
    
    
    $
    3,720
  2005
    
    2004
    
    2003Statutory U.S. tax rate
    
    
    35
    %
    
    
    35.0
    %
    
    
    35.0
    %Foreign tax rate differentials
    
    
    (12.6
    )
    
    
    (11.3
    )
    
    
    (16.2
    )Increase in valuation allowance
    
    
    
    
    
    
    13.0
    
    
    
    Reduction of tax contingency reserve
    
    
    (5.5
    )
    
    
    (16.9
    )
    
    
    Settlement of IRS audit (net)
    
    
    (11.2
    )
    
    
    
    
    
    
    Repatriation of foreign earnings under IRC
Section 965
    
    
    2.2
    
    
    
    
    
    
    
    State income taxes
    
    
    
    
    
    
    1.1
    
    
    
    Other, net
    
    
    (1.4
    )
    
    
    (1.0
    )
    
    
    1.2Effective income tax rate
    
    
    6.5
    %
    
    
    19.9
    %
    
    
    20.0
    %
  December 31,2005
    
    2004Deferred tax assets  current:Revenue related items and other
    
    $
    2,752
    
    
    $
    2,459Net deferred tax assets   current
    
    $
    2,752
    
    
    $
    2,459Deferred tax assets (liabilities)  non current:Net operating loss carryforwards
    
    $
    22,770
    
    
    $
    19,174Acquired intangible assets
    
    
    (10,386
    )
    
    
    (1,878
    )Investment valuation reserve
    
    
    350
    
    
    
    Compensation
    
    
    896
    
    
    
    700Restructurings
    
    
    7,350
    
    
    
    9,711Merger expenses
    
    
    (326
    )
    
    
    Other
    
    
    5,784
    
    
    
    2,280Purchased research and development
    
    
    158
    
    
    
    1,900Less: valuation allowance
    
    
    (18,488
    )
    
    
    (23,665
    )Net deferred tax assets (liabilities)  non
current
    
    $
    8,108
    
    
    $
    8,222
  57




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##### Table of Contents



11. Restructurings
  Facility Exit Costs &
    
    
    
    
    
    Liquidation ofRelated Asset
    
    Severance
    
    Sweden DevelopmentImpairments
    
    Costs
    
    Operations
    
    TotalBalance at January 1, 2003
    
    $
    35,911
    
    
    $
    1,397
    
    
    $
    618
    
    
    $
    37,926Revision of previously recorded
restructuring charges  2003
    
    
    774
    
    
    
    (566
    )
    
    
    (208
    )
    
    
    Payments  2003
    
    
    (8,789
    )
    
    
    (581
    )
    
    
    (410
    )
    
    
    (9,780
    )Write offs  2003
    
    
    (242
    )
    
    
    
    
    
    
    
    
    
    
    (242
    )Balance at December 31, 2003
    
    
    27,654
    
    
    
    250
    
    
    
    
    
    
    
    27,904Revision of previously recorded
restructuring charges  2004
    
    
    1,032
    
    
    
    (250
    )
    
    
    
    
    
    
    782Payments  2004
    
    
    (8,973
    )
    
    
    
    
    
    
    
    
    
    
    (8,973
    )Balance at December 31, 2004
    
    
    19,713
    
    
    
    
    
    
    
    
    
    
    
    19,713Restructuring charges  2005
    
    
    
    
    
    
    2,051
    
    
    
    
    
    
    
    2,051Payments  2005
    
    
    (5,109
    )
    
    
    (900
    )
    
    
    
    
    
    
    (6,009
    )Balance at December 31, 2005
    
    $
    14,604
    
    
    $
    1,151
    
    
    $
    
    
    
    $
    15,755
  58




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##### Table of Contents



Year ending December 31, 2006
    
    $
    5,962Year ending December 31, 2007
    
    
    4,283Year ending December 31, 2008
    
    
    3,352Year ending December 31, 2009
    
    
    2,158Total
    
    $
    15,755
 12. Segment Information
 ® ® ®
  Years Ended December 31,Product and service groups
    
    2005
    
    2004
    
    2003Enterprise solutions
    
    $
    282,651
    
    
    $
    279,226
    
    
    $
    235,739Developer solutions
    
    
    27,464
    
    
    
    28,281
    
    
    
    24,127$
    310,115
    
    
    $
    307,507
    
    
    $
    259,866
 Years Ended December 31,Geographic areas
    
    2005
    
    2004
    
    2003United States of America
    
    $
    170,172
    
    
    $
    172,699
    
    
    $
    155,021Europe and other
    
    
    103,649
    
    
    
    100,644
    
    
    
    80,163Asia Pacific
    
    
    36,294
    
    
    
    34,164
    
    
    
    24,682$
    310,115
    
    
    $
    307,507
    
    
    $
    259,866
 59




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##### Table of Contents



At December 31, 2005Total
    
    United States
    
    Europe
    
    Asia PacificProperty and equipment, net
    
    $
    69,764
    
    
    $
    40,127
    
    
    $
    27,958
    
    
    $
    1,679Goodwill
    
    
    275,864
    
    
    
    275,864
    
    
    
    
    
    
    
    Other assets
    
    
    41,534
    
    
    
    40,444
    
    
    
    68
    
    
    
    1,022
 At December 31, 2004Total
    
    United States
    
    Europe
    
    Asia PacificProperty and equipment, net
    
    $
    70,700
    
    
    $
    36,706
    
    
    $
    31,498
    
    
    $
    2,496Goodwill
    
    
    172,736
    
    
    
    172,736
    
    
    
    
    
    
    
    Other assets
    
    
    12,184
    
    
    
    10,965
    
    
    
    54
    
    
    
    1,165
 At December 31, 2003Total
    
    United States
    
    Europe
    
    Asia PacificProperty and equipment, net
    
    $
    68,149
    
    
    $
    35,104
    
    
    $
    29,852
    
    
    $
    3,193Goodwill
    
    
    189,260
    
    
    
    189,260
    
    
    
    
    
    
    
    Other assets
    
    
    6,879
    
    
    
    5,278
    
    
    
    67
    
    
    
    1,534
 13. Retirement and Savings Plan
    14. Commitments
  60




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##### Table of Contents



Facility Exit Costsincluded inGross Lease
    
    
    Restructuring
    
    
    Net LeaseYears Ending December 31,
    
    Commitments
    
    
    Accruals
    
    
    Commitments2006
    
    $
    20,660
    
    
    $
    5,961
    
    
    $
    14,6992007
    
    
    19,855
    
    
    
    4,284
    
    
    
    15,5712008
    
    
    17,962
    
    
    
    3,352
    
    
    
    14,6102009
    
    
    13,546
    
    
    
    2,158
    
    
    
    11,3882010 and thereafter
    
    
    72,483
    
    
    
    
    
    
    
    72,483Total
    
    $
    144,506
    
    
    $
    15,755
    
    
    $
    128,751
   Years Ending December 31,2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Thereafter
    
    
    TotalPurchase obligations
    
    $
    650
    
    
    $
    1,950
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2,600Royalty commitments
    
    
    2,952
    
    
    
    1,042
    
    
    
    846
    
    
    
    909
    
    
    
    477
    
    
    
    6,226Total
    
    $
    3,602
    
    
    $
    2,992
    
    
    $
    846
    
    
    $
    909
    
    
    $
    477
    
    
    $
    8,826
  15. Litigation
   
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND
FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures.
 61




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##### Table of Contents



Managements Report on Internal Control Over Financial Reporting
 Internal Control  Integrated Framework Internal Control  Integrated Framework,
  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Managements Report on Internal Control Over Financial
Reporting, Internal
ControlIntegrated Framework Managements Report on Internal Control Over
Financial Reporting,
    Internal Control  Integrated
Framework Internal Control  Integrated Framework
  Deloitte & Touche llp
 
 Changes in Internal Control Over Financial Reporting.
 
 ITEM 9B. OTHER INFORMATION
  
 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
  62




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##### Table of Contents



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  
 PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
  Financial Statements.
      Financial Statement Schedule.
 Exhibits.
 63




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##### Table of Contents



SIGNATURES
  RSA Security Inc.By:
    
    /s/ Arthur W. Coviello, Jr.Arthur W. Coviello, Jr.Chief Executive Officer and President
   Signature
    
    Title
    
    Date/s/ Arthur W. Coviello, Jr.

Arthur W. Coviello, Jr.
    
    Chief Executive Officer, President,
acting Chief
Financial Officer and Director
(Principal Executive Officer and
Principal Financial Officer)
    
    March 13, 2006/s/ John M. Parsons

John M. Parsons
    
    Vice President, Finance and Accounting (Principal
Accounting Officer)
    
    March 13, 2006/s/ James K. Sims

James K. Sims
    
    Chairman of the Board of Directors
    
    March 13, 2006/s/ Robert P. Badavas

Robert P. Badavas
    
    Director
    
    March 13, 2006/s/ Richard A. DeMillo

Richard A. DeMillo
    
    Director
    
    March 13, 2006Richard L. Earnest
    
    Director/s/ Gloria C. Larson

Gloria C. Larson
    
    Director
    
    March 13, 2006/s/ Joseph B. Lassiter, III

Joseph B. Lassiter, III
    
    Director
    
    March 13, 2006/s/ Charles R. Stuckey, Jr.

Charles R. Stuckey, Jr.
    
    Director
    
    March 13, 2006/s/ Orson G. Swindle, III

Orson G. Swindle, III
    
    Director
    
    March 13, 2006
 64




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##### Table of Contents



EXHIBIT INDEX
 2.1
    
    Agreement and Plan of Merger, dated December 2, 2005, among RSA Security Inc., Cyota,
Inc., Powder Acquisition Corporation and Andrew Zalasin in his capacity as the Cyota
stockholders representative is incorporated herein by reference to Exhibit 2.1 to
Amendment No. 1 to RSA Securitys Current Report on Form 8-K/A filed with the SEC on
December 7, 2005.3.1
    
    Our 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 (SEC file no. 000-25120).3.2
    
    Our Amended and Restated By-Laws, as amended, is incorporated herein by reference to
Exhibit 3.3 to our Registration Statement on Form S-1 (SEC 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 (SEC file no. 000-25120).4.2
    
    Rights Agreement, dated as of July 20, 1999, between RSA Security 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 (SEC file no.
000-25120) filed on July 23, 1999.4.3
    
    Amendment to Rights Agreement, dated as of November 2, 2001, among RSA Security, 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 Security
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
    
    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
    
    2005 Stock Incentive Plan is incorporated herein by reference to Appendix B to our
Definitive Schedule 14A filed with the SEC on April 15, 2005 (SEC file no. 000-25120).*10.2
    
    Form of Non-Statutory Stock Option Agreement under our 2005 Stock Incentive Plan.*10.3
    
    Form of Restricted Stock Agreement under our 2005 Stock Incentive Plan.*10.4
    
    Amended and Restated 1998 Non-Officer Employee Stock Incentive Plan, as amended, is
incorporated herein by reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q
for the quarter ended June 30, 2005.*10.5
    
    1994 Employee Stock Purchase Plan, as amended, is incorporated herein by reference to
Exhibit 10 to our Current Report on Form 8-K dated January 16, 2006.*10.6
    
    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.
(SEC file no. 000-25120)*10.7
    
    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, 2003.*10.8
    
    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 (SEC file no.
000-25120).
 65




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##### Table of Contents



*10.9
    
    First Amendment to our 2000 Deferred Compensation Plan is incorporated herein by
reference to Exhibit 10.6 to our Annual Report on Form 10-K for the year ended December
31, 2002.*10.10
    
    Second Amendment to our 2000 Deferred Compensation Plan is incorporated herein by
reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarter ended
March 31, 2003.*10.11
    
    Third Amendment to our 2000 Deferred Compensation Plan is incorporated herein by
reference to Exhibit 10.1 to our Current Report on Form 8-K dated September 28, 2004.*10.12
    
    Fourth Amendment to our 2000 Deferred Compensation Plan.*10.13
    
    RSA Security Inc. Grantor Trust Agreement, dated March 13, 2000, between RSA Security
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 (SEC file no.
000-25120).*10.14
    
    Employment Agreement, dated as of April 1, 2000, between RSA Security 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 (SEC file no. 000-25120).*10.15
    
    Third Amended and Restated Employment Agreement, dated as of December 27, 2001, between
RSA Security 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.*10.16
    
    Letter agreement, dated July 19, 2005, between RSA Security Inc. and Charles R.
Stuckey, Jr. is incorporated herein by reference to Exhibit 10.1 to our Current Report
on Form 8-K dated July 19, 2005.*10.17
    
    A summary of our 2006 Executive Incentive Compensation Plan is incorporated herein by
reference to Exhibit 10.1 to our Current Report on Form 8-K dated February 14, 2006.10.18
    
    Progress Software Application Partner Agreement, dated December 5, 1994, as amended,
between RSA Security and Progress Software Corporation is incorporated herein by
reference to Exhibit 10.17 to the Form S-1.10.19
    
    Second Amendment to Progress Software Application Partner Agreement, dated as of
November 29, 1995, between RSA Security 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).10.20
    
    Third Amendment to Progress Software Application Partner Agreement, dated as of
November 15, 1996, between RSA Security 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).10.21
    
    Fourth Amendment to Progress Software Application Partner Agreement, dated as of April
1, 1998, between RSA Security 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).10.22
    
    Fifth Amendment to Progress Software Application Partner Agreement, dated as of
February 18, 1999, between RSA Security 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. (SEC file no. 000-25120).10.23
    
    Sixth Amendment to Progress Software Application Partner Agreement, dated as of October
26, 1999, between RSA Security 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 (SEC file no. 000-25120).10.24
    
    Seventh Amendment to Progress Software Application Partner Agreement, dated as of
November 28, 2001, between RSA Security 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.10.25
    
    Eighth Amendment to Progress Software Application Partner Agreement, dated as of
November 27, 2002, between RSA Security and Progress Software Corporation is
incorporated herein by reference to Exhibit 10.17 to our Annual Report on Form 10-K for
the year ended December 31, 2002.
 66




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##### Table of Contents



10.26
    
    Ninth Amendment to Progress Software Application Partner Agreement, dated as of
December 2, 2003, between RSA Security and Progress Software Corporation is
incorporated herein by reference to Exhibit 10.19 to our Annual Report on Form 10-K for
the year ended December 31, 2003.10.27
    
    Tenth Amendment to Progress Software Application Partner Agreement, dated as of
November 30, 2004, between RSA Security 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, 2004.10.28
    
    Eleventh Amendment to Progress Software
Application Partner Agreement, dated as
of June 1, 2005, between RSA Security
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,
2005.#10.29
    
    Amendment One, dated January 20, 2006, to Manufacturing Agreement between RSA Security
and Flextronics International Marketing (L) Ltd.10.30
    
    Lease, dated as of November 16, 2000, between RSA Security 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 (SEC file no. 000-25120).10.31
    
    Lease, dated as of November 17, 2000, between RSA Security 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 (SEC file no. 000-25120).10.32
    
    Indenture of Lease, dated as of March 11, 1996, between RSA Security 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).10.33
    
    Rider to Indenture of Lease, dated as of March 11, 1996 between RSA Security 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).10.34
    
    First Amendment to Lease, dated as of May 10, 1997, between RSA Security 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).10.35
    
    Second Amendment to Lease, dated as of April 8, 1998, between RSA Security 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).10.36
    
    Third Amendment to Lease, dated as of May 9, 2000, between RSA Security 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 (SEC file no.
000-25120).10.37
    
    Agreement of Sublease, dated as of December 10, 2003, between RSA Security and 170
Systems, Inc. is incorporated herein by reference to Exhibit 10.29 to our Annual Report
on Form 10-K for the year ended December 31, 2003.10.38
    
    Agreement of Sublease, dated as of May 4, 2004, between RSA Security and Empirix Inc.
is incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form
10-Q for the quarter ended June 30, 2003.10.39
    
    Agreement of Sublease, dated as of March 31, 2004 between RSA Security and iPhrase
Technologies, Inc. is incorporated herein by reference to Exhibit 10.2 to our Quarterly
Report on Form 10-Q for the quarter ended June 30, 2003.21.1
    
    Subsidiaries of RSA Security.23.1
    
    Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm.31.1
    
    Certification of our CEO pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as amended.31.2
    
    Certification of our CFO pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934, as amended.32.1
    
    Certifications of our CEO and CFO pursuant to 18 U.S.C. §1350.
 67




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##### Table of Contents



*
    
    Management contract or compensatory plan or arrangement.
    
    Confidential treatment previously granted by the Securities and Exchange Commission as to certain portions.#
    
    Confidential treatment requested as to certain portions. 68