##### Table of Contents









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549


Form 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13
OR

15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




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

SECURITIES EXCHANGE ACT OF 1934


FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

OR



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

SECURITIES EXCHANGE ACT OF 1934


Commission File No. 000-25120

RSA Security Inc.

(Exact name of registrant as specified in its
charter)


|                                                                |  |                                      
|--------------------------------------------------------------- |  | -------------------------------------
|                                                               
|                                                               
|                                                               
|                                                               
|Delaware                                                        |  | 04-2916506                           
|(State or other jurisdiction of
	Incorporation or Organization) |  | (I.R.S. Employer
	Identification No.)
|                                                               
|                                                               
|                                                               
|                                                               
|                                                               
|36 Crosby Drive
	Bedford, Massachusetts                         |  | 01730                                
|(Address of Principal Executive Offices)                        |  | (Zip Code)                           

Registrants telephone number, including area code:
(781) 301-5000



---

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


(Title of class)




---






---



##### Table of Contents



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

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

The approximate aggregate market value of the common stock held
by non-affiliates of the registrant was $2,474,938,600 based on
the last reported sale price of the registrants common
stock on The Nasdaq National Market as of the close of business
on January 29, 2001. There were 38,710,100 shares of common
stock outstanding as of January 29, 2001, without taking
into account the three-for-two stock split, payable in the form
of a stock dividend on the registrants common stock to
holders of record as of March 9, 2001, which was announced
in February 2001. Adjusted for such three-for-two stock
split, there were 58,065,150 shares of common stock outstanding
on January 29, 2001.

DOCUMENTS INCORPORATED BY REFERENCE

|                                                                                          |  |                                  
|----------------------------------------------------------------------------------------- |  | ---------------------------------
|                                                                                          |  | PART OF FORM 10-K                
|DOCUMENT                                                                                  |  | INTO WHICH INCORPORATED          
|                                                                                          |  |                                  
|Portions of the Registrants Proxy Statement for the 2001
	Annual Meeting of Stockholders |  | Items 10, 11, 12 & 13 of Part III

This Annual Report on Form 10-K contains forward-looking
statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, and
Section 27A of the Securities Act of 1933, as amended. For
this purpose, any statements contained herein that are not
statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the
words believes, anticipates,
plans, expects and similar expressions
are intended to identify forward-looking statements. The factors
discussed under the caption Certain Factors That May
Affect Future Results, among others, could cause actual
results to differ materially from those indicated by
forward-looking statements made herein and presented elsewhere
by management. Such forward-looking statements represent
managements current expectations and are inherently
uncertain. Investors are warned that actual results may differ
from managements expectations.

RSA, Keon, SecurID, BSAFE, ACE/ Server, RC2, RC4 and RC5 are
registered trademarks, and RSA Security, RSA Secured, RC6, and
The Most Trusted Name in e-Security are trademarks of RSA
Security Inc. All other trademarks or trade names referred to in
this Annual Report on Form 10-K are the property of their
respective owners.

2



---

TABLE OF CONTENTS



|                                                   |                                                                                               |  |  |  |  |  |  | 
|-------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                            
|                                                   | ITEM 1. BUSINESS                                                                             
|                                                   | ITEM 2. PROPERTIES                                                                           
|                                                   | ITEM 3. LEGAL PROCEEDINGS                                                                    
|                                                   | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|EXECUTIVE OFFICERS OF RSA SECURITY                
|PART II                                           
|                                                   | ITEM 5. MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                         
|                                                   | ITEM 6. SELECTED FINANCIAL DATA                                                              
|                                                   | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                   | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|                                                   | ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                           
|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                       
|                                                   | ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                       
|PART IV                                           
|                                                   | ITEM 14.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                      
|SIGNATURES                                        
|EXHIBIT INDEX                                     
|SCHEDULE II                                       
|Ex-10.5 Amend & Restated 1998 Stock Plan          
|Ex-10.13 Employment Agreement w/ Thomas L Schuster
|Ex-10.31 Lease dated 11/16/00 w/ Bedford Woods    
|Ex-10.32 Lease dated 11/17/00 w/ Bedford Woods    
|Ex-21.1 Subsidiaries of RSA Security Inc.         
|Ex-23.1 Consent of Deloitte & Touche  LLP         



---






PART I




ITEM 1.  BUSINESS

RSA Security Inc. is a leading provider of electronic security
(e-security) solutions. We help organizations ensure
the authenticity of the people, devices and transactions
involved in electronic business (e-business) through
the use of our authentication, encryption and public key
infrastructure (PKI) solutions. We sell to
enterprise customers seeking turnkey security solutions, and to
developers seeking software development components for embedding
security in software applications or hardware devices.

As used in this Report, we, us,
our and RSA Security refer to RSA
Security Inc. and its subsidiaries.

INDUSTRY BACKGROUND

Historically, e-security solutions have been deployed primarily
to protect corporate networks from malicious intrusion and to
preserve the integrity of data as it passed over insecure
networks. E-security was typically the focus of businesses in
security-conscious industries such as banking,
telecommunications, aerospace and defense. Today, e-security is
widely regarded as a fundamental requirement for conducting all
forms of e-business, including commerce and communications
conducted through corporate intranets, extranets and other
Internet-based applications. Many organizations, in a wide range
of industries, are conducting e-business to reduce costs,
compete more aggressively, and more efficiently meet the
increased business demand for speed, accuracy and delivery of
information.

E-business requires e-security to create the same trust
relationships that currently exist on paper in the
brick-and-mortar world, so organizations can conduct e-business
with the same confidence with which they conduct traditional
commerce. There are several essential requirements for
e-security:



| |   |                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | User Identification and Authentication.First,
	a users identity must be reliably authenticated. This
	ensures that unauthorized users do not gain access to computer
	networks and applications, and also ensures that organizations
	are certain of the identities of those with whom they are doing
	business. There are a number of popular methods of user
	identification, including:



| |   |                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | something secret the user knows, such as a word, phrase,
	personal identification number (PIN), code or fact;                                                      
|
| |  | something physical the user possesses, such as a key, token,
	smart card, badge or other form of discrete
	authenticator, which is resistant to counterfeiting;
	or
|
| |  | something unique to the user, such as a fingerprint, signature,
	retinal pattern, voice print or other measurable personal
	characteristic or biometric.           



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | We believe the use of a strong, two-factor user authentication
	system, combining two of the three generally accepted methods of
	user identification, is required for reliable e-security.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Access Control and Privilege Management.Once
	the users identity has been established, an organization
	must verify that the user is authorized to access the specific
	information he or she is seeking. One of the key challenges
	facing organizations is the proliferation of passwords required
	for users to access disparate operating systems, applications
	and databases. Products providing access control and privilege
	management must protect and manage access to corporate
	information and applications, and control user privileges at
	multiple levels within the enterprise, including networks,
	applications and data levels. We believe that PKI systems can
	help organizations meet these criteria.
|
| |  | Data Privacy, Integrity and Authentication.In
	addition to authenticating the identity of users and ensuring
	that only authorized users access, view or modify certain data,
	a comprehensive e-security solution must ensure that the data
	transmitted over networks are not disclosed to unauthorized
	persons (data privacy), have not been altered or compromised by
	unauthorized manipulation (data integrity) and were actually
	transmitted by the purported sender (data authentication). Such
	data privacy, integrity and authentication solutions are
	provided by encryption technologies.                                                                                                                     

3



---



##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Legal Standing.Finally, organizations need to
	be confident that the transactions they conduct online have the
	same legal standing as those they conduct using traditional,
	paper-based processes. Many countries around the world,
	including the United States, have recently passed laws that give
	electronic or digital signatures the
	same legal standing as hand-written signatures for many types of
	binding transactions. A PKI solution is intended to enable users
	to digitally sign forms and documents to create
	legally binding transactions.

COMPANY HISTORY

We are a leading provider of e-security solutions. Our products
are designed to help organizations ensure the authenticity of
the people, devices and transactions involved in e-business. Our
core competencies are in strong, two-factor user authentication
solutions, encryption software and public key infrastructure
solutions. We believe that through the unique synergies offered
by our RSA SecurID®, RSA BSAFE® and RSA Keon®
product lines, we directly address the most critical e-security
requirements for e-business.

Since our inception in 1986, we have focused on the fundamental
need for user identification and authentication, with an
emphasis on solutions for secure remote access to enterprise
networks. In July 1996, to further our strategy and extend
our product line, we acquired RSA Data Security, Inc., a leader
in cryptography solutions that address the need for data privacy
and integrity.

In July 1997, we acquired DynaSoft AB, a vendor of
platform-independent security solutions for distributed
client/server networks. The DynaSoft BoKS product family
included public key technologies for access control and
privilege management. In January 1999, we introduced the
RSA Keon product line, a family of public key
infrastructure-based products, initially based on the BoKS
technology and designed to provide organizations with
application security and flexible electronic commerce solutions.
As part of this introduction, we renamed the DynaSoft BoKS
product family RSA Keon. In September 1999, we
introduced the next-generation, standards-based implementation
of the RSA Keon solution.

Also in September 1999, we changed our name from Security
Dynamics Technologies, Inc. to RSA Security Inc. We took this
step because we had combined the management structure of
Security Dynamics Technologies, Inc. and RSA Data Security, Inc.
into an integrated team, with sales executives dedicated to
meeting the needs of both enterprise and developer markets,
unified marketing and engineering organizations, and a tight
linkage within customer and professional services to serve
customers developing solutions, deploying solutions or both.

In January 2000 we formed our RSA Capital segment, whose
activities relate to our existing and future investments in
e-businesses and other technology companies.

In February 2001, we acquired Xcert International, Inc., a
company that develops and delivers digital certificate-based
products for securing e-business transactions. We acquired Xcert
to increase our PKI market share and revenue, to enhance our
ability to secure applications that serve the
business-to-business and Internet markets, and to add talent
that will assist with the acceleration of our PKI product
calendar. As a result of the acquisition, Xcerts Sentry CA
line of products became part of our RSA Keon PKI product family.

COMPANY STRATEGY

Our objective is to continue to be a leading provider of
e-security solutions. Key elements of our strategy to achieve
this objective include:



| |   |                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Focus on Solutions.We believe customers
	purchase e-security solutions only when they can use them to
	enable new business applications or secure existing
	applications. We offer comprehensive e-security solutions that
	are focused on four application targets: wireless, Web
	transactions, VPNs and reduced sign-on.



| |   |                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Wireless applications offer unique security challenges.
	Wireless transmissions, as with any form of communication, may
	be susceptible to interception and tampering. Portable devices
	with no fixed connection offer tempting access points to
	hackers. Portable devices also contain valuable

4



---



##### Table of Contents



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | information and credentials that must be protected in case of
	theft or loss of a device. We believe RSA SecurID authentication
	solutions are an effective way to secure wireless Web access to
	valuable company information and provide proof of identity for a
	secure Web transaction. Since RSA BSAFE products are the de
	facto security infrastructure throughout the Internet, they
	provide seamless interoperability between wireless devices and
	all wired applications and services.                                                           
|
| |  | Web transactions typically take the form of payment
	processing, secure document delivery, forms processing and
	supply chain management. These applications are at the forefront
	of PKI deployments and each requires data confidentiality and
	integrity, legally binding transactions and strong user
	authentication. We believe the unique combination of our RSA
	SecurID authentication solutions, RSA Keon PKI solutions and RSA
	BSAFE cryptographic software provides customers with a high
	level of e-security for Web transactions.              
|
| |  | VPNs represent another significant application for our
	e-security solutions, as PKI, encryption and user authentication
	provide enhanced security by protecting data privacy and
	integrity during transmission, as well as mutually
	authenticating the individuals and devices engaged in
	communication sessions involving high-value information. We
	believe that adding a PKI solution to an organizations VPN
	provides additional leverage in the return on investment
	calculations that are a crucial factor in any technology
	purchase decision.
|
| |  | Reduced sign-on is a compelling application for PKI
	because it consolidates authentication mechanisms and
	streamlines the log-on process, reducing frustration for the end
	user. We believe that it also offers organizations a
	substantial, near-term return on their investment by reducing
	the huge support costs associated with password management.
	Plus, using PKI for reduced sign-on can offer a long-term
	migration path to conducting digitally signed transactions for
	those organizations migrating to a B2B environment.                 



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Leverage Product Synergies.We believe that
	one of our competitive advantages is the synergy shared by our
	RSA SecurID, RSA BSAFE and RSA Keon product lines. We believe we
	are the only e-security vendor that can offer
	application-specific solutions comprised of products from
	complementary authentication, encryption and PKI product lines.
	The synergy shared by our product lines gives us the
	opportunity, once we sell one product to a customer, to sell
	additional complementary products from other product lines to
	the same customer. As a result, our customers have increased
	choice and greater flexibility when deciding how to deploy
	e-security solutions with their current and future applications.                                                                                                        
|
| |  | Maintain Technological Leadership.We plan to
	continue to add new capabilities and features to our e-security
	products to meet our customers evolving needs. We expect
	to maintain a leading role in basic cryptographic research,
	develop new encryption technologies and maintain close working
	relationships with leading academic centers and custom
	development teams. We intend to support the proliferation of PKI
	as a key element of e-business through the marketing of and
	participation in industry initiatives such as the PKI Forum, an
	industry-led collaboration to accelerate the adoption of PKI
	technology and PKI-based solutions as a trusted, secure
	foundation for e-business applications.                                                                                                                 
|
| |  | Expand Market Opportunities.We intend to
	expand our market opportunities through investments and
	partnerships, industry initiatives and marketing designed to
	heighten awareness of e-security issues. Through our RSA Capital
	segment, we make investments in companies that are delivering
	the infrastructure, tools and applications to accelerate the
	growth of e-business. Through our RSA Secured partner program,
	we have established strategic partnerships with more than 500
	industry-leading vendors and plan to continue to foster and
	leverage these partnerships and enter into additional
	relationships with companies that can provide complementary
	technologies for our solutions. We also seek to heighten
	awareness regarding e-security issues through marketing programs
	such as our annual RSA Conference.
|
| |  | Expand Indirect Sales and Support Channel.We
	currently sell our products through a direct sales force and
	through relationships with a significant number of original
	equipment manufacturers and developers, value-added resellers
	(VARs) and distributors. We believe that an expanded
	indirect                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

5



---



##### Table of Contents



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | sales and support channel enables us to enter new markets and
	gain access to a larger installed base of potential customers in
	a cost-effective manner.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Expand International Presence.We believe that
	international markets present a large, relatively new market for
	e-security products. Sales outside North America as a percentage
	of total revenue were approximately 34.6% in 1998, 30.3% in 1999
	and 33.2% in 2000. We have offices throughout the United States,
	Canada, Europe, Asia, Japan and Australia and plan to continue
	to expand our international business by establishing new
	offices, hiring additional sales personnel, establishing
	additional distribution arrangements, primarily in Europe and
	Asia, and developing local presences in new markets.

PRODUCTS

Through our e-Security Solutions segment, we deliver a range of
products and technologies that are designed to help
organizations ensure the authenticity of the people, devices and
transactions involved in e-business. Our core competencies are
in three product lines  RSA SecurID, RSA BSAFE and RSA
Keon  which deliver two-factor user authentication,
encryption and public key infrastructure solutions,
respectively. We derive our operating revenue primarily from two
distinct product groups: Enterprise solutions, which includes
RSA SecurID authenticators, RSA ACE/ Server software, RSA Keon
software, and maintenance and professional services, and
Developer solutions, which includes RSA BSAFE cryptographic
software and protocol products, RSA Keon components, and
maintenance and professional services.

RSA SecurID Authenticators

RSA SecurID solutions provide centrally managed, strong,
two-factor user authentication services for enterprise networks,
operating systems, e-business Web sites and other information
technologies infrastructure, designed to ensure that only
authorized users gain access to data, applications and
communications. Supporting a range of authentication devices,
including hardware tokens, key fobs, smart cards, cellular
telephones, personal digital assistants and software tokens, RSA
SecurID solutions are designed to create a barrier against
unauthorized access, protecting network and data resources from
potentially devastating accidental or malicious intrusion. RSA
SecurID installations are managed through RSA ACE/ Server®
authentication management software, which has the ability to
scale deployments for hundreds of thousands of users.

RSA SecurID user identification and authentication products
combine two methods of user identification  something
secret the user knows (a personal identification number) and
something the user physically has (the RSA SecurID
authenticator). To gain access to a protected resource, a user
enters his or her PIN and the authenticator code
that is automatically computed and displayed on the users
RSA SecurID authenticator. The PIN and the authenticator code
together form the users pass code. With a
valid pass code, the authorized user is identified,
authenticated and granted access to appropriate information
resources.

Each RSA SecurID authenticator contains our proprietary
technology and is programmed with a secret, randomly generated
seed number unique to the individual users authenticator.
The seed number and Greenwich Mean Time are used to generate
code sequences at set intervals (typically every 60 seconds)
which are then matched to the RSA ACE/ Server software using the
same seed number and Greenwich Mean Time to generate a server
code corresponding to the users authenticator code.

6



---



##### Table of Contents



RSA BSAFE Cryptographic Software

RSA BSAFE software is a family of platform-independent
cryptographic security developer tools and components that are
designed to enable software developers to reliably incorporate
e-security into a wide range of software applications and
hardware devices. RSA BSAFE encryption components are used to
secure applications for electronic commerce and services over
the Internet and intranets, enterprise security, entertainment,
wireless communications, delivery of digital information over
cable and other uses. We believe that the RSA BSAFE product line
is the most widely deployed cryptographic software in the world,
with more than 800 million licenses in use today. RSA BSAFE
products include:



| |   |                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | RSA BSAFE Crypto-C and Crypto-J, popular core cryptography
	components for the C and Java programming languages;                                        
|
| |  | RSA BSAFE Cert-C and Cert-J, standards-based certificate
	processing tools for C and Java;                                                              
|
| |  | RSA BSAFE S/ MIME-C, for adding e-security to messaging
	applications;                                                                                  
|
| |  | RSA BSAFE SSL-C and SSL-J, protocol tools that are designed to
	enable secure point-to-point communications over the Internet,
	based on C and Java; and
|
| |  | RSA BSAFE WTLS-C, for adding cryptographic and certificate
	management technologies to wireless applications, devices and
	systems.                     

RSA Keon PKI Software

Our RSA Keon PKI solutions are a family of interoperable,
standards-based PKI software modules for managing digital
certificates and creating an environment for authenticated,
private and legally binding electronic communications and
transactions. RSA Keon software is designed to be easy to use
and interoperable with other standards-based PKI solutions, and
to feature enhanced security through its synergy with the RSA
SecurID authentication and RSA BSAFE encryption product families.

RSA Keon technology provides a common foundation for securing
Internet and e-business applications. The RSA Keon family
contains software modules for both enterprise customers who need
turnkey solutions, and for enterprise customers and developers
who want to build their own standards-based, native PKI
applications or take advantage of PKI-aware applications. RSA
Keon components include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | RSA Keon Certificate Server,a powerful and flexible
	module for issuing digital certificates, managing their life
	cycle and making them available in public directories. The RSA
	Keon Certificate Server is an advanced system for conducting
	business online, and supports PKI-aware applications such as
	email or browsers. The RSA Keon Certificate Server also includes
	RSA Keon One Step, a software module designed to simplify the
	registration and issuance of certificates.                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | RSA Keon Advanced PKI,a set of software modules designed
	to be built on top of the RSA Keon Certificate Server, or any
	other standards-based certificate source, such as VeriSign
	Onsite, Netscape Certificate Management Software or Baltimore
	UniCERT. RSA Keon Advanced PKI provides a variety of services
	designed to remove common barriers to PKI deployment by making
	digital certificates transparent across multiple applications,
	enforcing security policies for certificate and credential use
	and enabling the integration of multiple certificate and
	directory sources. RSA Keon Advanced PKI comprises the RSA Keon
	Security Server and RSA Keon Desktop components, as well as RSA
	Keon agents, RSA Keon Application Integration software developer
	kits and RSA BSAFE Cert-C and Cert-J encryption tools for
	integrating non-PKI applications with RSA Keon software.
|
| |  | RSA Keon Web PassPort,a standards-based product that is
	designed to make PKI easy to use. RSA Keon Web PassPort is
	designed for environments where a desktop footprint is not
	appropriate and interoperability with applications like
	browsers, mail clients, and Web authorization systems is a must.
	The small, downloaded plug-in seamlessly integrates with
	browsers, mail clients, and other applications to enable digital
	signing, user-authenticated SSL, secure email (S/ MIME) and VPNs.                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | RSA Keon Sentry CA,a PKI product line that became part
	of the RSA Keon family as a result of our acquisition of Xcert
	International, Inc. RSA Keon Sentry offers advanced CA features,
	including hardware-based key recovery, scalability to
	8 million seats, a distributed RA/ CA architecture and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

7



---



##### Table of Contents



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | flexible trust management options including cross-certificate
	support. RSA Keon Certificate Server and RSA Keon Sentry CA each
	possess a different set of features, making each stronger in
	particular applications. We plan to offer and enhance both
	products, while working towards the release of an integrated CA
	product that marries the best features of both. We expect to
	release this integrated product in the fourth quarter of 2001.

STRATEGIC PARTNERS

Historically, we have placed a premium on establishing
interoperability between our products and those of other
vendors. To that end, we invest in and support a strategic
partnering program under the name of RSA Secured.
The RSA Secured partner program is designed to help vendors
integrate or establish interoperability between partner products
and our products, including the RSA SecurID, RSA BSAFE and RSA
Keon product lines. The RSA Secured partner program includes a
specific program for each of our product lines:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We test and certify interoperability between our RSA SecurID and
	RSA ACE/ Server products and the products from vendors of remote
	access devices, Internet firewalls, network and applications
	software and virtual private network products. We have certified
	over 225 vendor applications as part of our RSA Secured SecurID
	Ready program, making this program one of the largest certified
	strong authentication partner programs in the industry.                                                                                                                                                                                    
|
| |  | We also offer interoperability testing and certification for
	vendors seeking to ensure interoperability between their
	products and our RSA Keon PKI solutions. We have certified over
	135 vendor applications as part of our RSA Secured Keon Ready
	program, making this program one of the largest certified
	partner programs in the PKI industry. We believe that the
	mandatory certification testing in our RSA Secured SecurID and
	Keon Ready programs sets these interoperability programs apart
	from those of our competitors, some of whom do not test the
	interoperability between their products and their partners
	products.
|
| |  | We offer specific programs for licensees of our RSA BSAFE
	technology, who incorporate RSA BSAFE software into their
	products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

Collectively, through all of the RSA Secured partner programs,
we have strategic relationships with more than 500
vendors  including Apple Computer, AT&T, Check
Point, Cisco Systems, Compaq, IBM, Intel, Microsoft, Nortel
Networks, Novell, Oracle, Sun Microsystems and others  who
have integrated our technologies into more than 1,000 products.
The end-user customers of the vendors who have joined the RSA
Secured partner program can purchase authenticators and license
RSA ACE/ Server software directly from us. We believe that these
relationships help RSA Security and its customers expand their
enterprise network coverage and assist us in increasing our
customer base.

We have created marketing programs to foster the use of the RSA
Secured logo on vendor products that incorporate our
technologies or are interoperable with our products. These
programs include but are not limited to listings in online
directories, use of logos on product packaging and promotional
materials, RSA Secured advertising, and access to marketing
funds and joint promotional activities, such as tradeshows,
advertising, direct mail and joint press releases.

SALES AND MARKETING

We have established a multi-channel distribution and sales
network to serve the e-security market. We sell and license our
products directly to end users through our direct sales force
and indirectly through a network of original equipment
manufacturers (OEMs), VARs and distributors. In
addition, we support our direct and indirect sales efforts
through strategic marketing relationships and public relations
programs, trade shows and other marketing activities.

In support of our sales efforts, we conduct sales training
courses and comprehensive targeted marketing programs, including
direct mail, public relations, advertising, seminars, trade
shows, interactive marketing, telemarketing and ongoing customer
and third-party communications programs. We also seek to
stimulate

8



---



##### Table of Contents





Our direct sales staff focuses on major accounts, provides
technical advice and support with respect to our products and
works closely with our customers, developers, VARs and
distributors.

We also market, sell and license our products indirectly through
our RSA SecurWorld network of OEMs, VARs and distributors.
As of December 31, 2000, we had distributor and reseller
relationships with approximately 350 OEMs, VARs and distributors.

Generally, we sell our RSA BSAFE products to developers through
our direct sales force, rather than through distributors. We
have historically sold our RSA BSAFE products primarily to
developers, but our sales staff is currently focusing on
increasing sales of these products to enterprise customers as
well.

To enhance demand for our products, we have participated in the
development of various industry-specific protocols that
incorporate our RSA BSAFE cryptographic data security
technologies. We also host our own annual industry conferences,
the RSA Conference, and participate in other conferences to
increase demand for our products. Through our RSA Laboratories
division, we maintain a leading role in basic cryptographic
research, develop new encryption technologies and maintain close
working relations with leading academic centers and customer
development teams.

Our business has historically tended to be seasonal, with the
last quarter of the year having the highest amount of revenue
and the first quarter of the year having the lowest amount of
revenue. We believe that the higher amounts of revenue in the
last quarter is due to our quota-based compensation plans, year
end budgetary pressures on our customers and the tendency of
some of our customers to implement changes in enterprise network
or data security just before the end of the calendar year. In
addition, revenue tends to slow in the summer months,
particularly in Europe, when businesses defer purchase decisions.

CUSTOMERS

As of December 31, 2000, we had sold more than 8,000,000
RSA SecurID authenticators to more than 7,000 customers
worldwide. Historically, our principal customers have been in
the telecommunications, pharmaceutical, financial and healthcare
industries as well as academic institutions, research
laboratories and government organizations. These customers
generally work with highly confidential information and are
sophisticated and knowledgeable purchasers of e-security
systems. We believe that as corporate networks proliferate and
become more complex, the number of industries concerned with
e-security will grow.

As of December 31, 2000, we had licensed our RSA BSAFE
encryption engine and patented technology to more than 900
organizations that typically incorporate the encryption
technology into their products. RSA BSAFE encryption technology
is embedded in current versions of Microsoft Windows NT®,
Microsoft Internet Explorer®, Netscape Navigator®,
Quicken® by Intuit®, Lotus Notes® and numerous
other products, including mobile phones, pagers and other
wireless products of Ericsson, Nokia, Matsushita, Symbian and
Openwave Systems (formerly Phone.com). We also license RSA BSAFE
encryption technology directly to enterprise customers for
incorporation into their business, financial and electronic
commerce networks. RSA BSAFE technologies are part of existing
and proposed standards for the Internet and World Wide Web, ITU,
ISO, ANSI and IEEE.

No customer accounted for more than 5% of our total revenue in
1998, 1999 or 2000.

CUSTOMER SERVICE AND SUPPORT

We maintain a customer support help desk, technical support
organization and professional services group at our headquarters
in Bedford, Massachusetts and at other locations throughout the
world. We offer telephone and Web support for certain of our
products 24 hours a day, seven days a week. We continue to add
advanced technical support and professional service personnel to
our staff to address anticipated additional demands arising from
the deployment of our e-security solutions into larger and more
complex user

9



---



##### Table of Contents





Our standard practice is to provide a warranty on all RSA
SecurID authenticators for the customer-selected programmed life
of the authenticator (generally three to four years) and to
replace any damaged authenticators (other than authenticators
damaged by a users abuse or alteration) free of charge. We
generally sell each of our other products to customers with a
warranty for product defects for specified periods. At the time
of purchase, customers may elect to purchase a maintenance
contract for 12-month renewable periods. Under these contracts,
we agree to provide corrections for documented program errors;
version upgrades for both software and, if applicable, firmware;
telephone consultation; and Web-based access to solutions,
patches and documentation.

PRODUCT DEVELOPMENT

Our product development efforts are focused on enhancing the
functionality, reliability, performance and flexibility of our
existing products. We are developing architectures and
technologies to continually enhance the administrative
capabilities and scalability of our RSA ACE/ Server and RSA Keon
products and to increase interoperability with additional
network operating systems, applications and directory services.
We are also developing tools to assist customers, strategic
partners and other third-party integrators in integrating our
products with custom and other third-party network or system
applications.

We are working to increase our competitive position by
developing standards-based protocols and solutions that address
the needs of specific market segments and build on our
industry-leading RSA BSAFE technology. In the latter case, we
may choose to enter into strategic partnerships with other
parties to develop and/or market the products. In addition, we
have developed enhanced RSA BSAFE Cert-C and Cert-J tools to
enable both developers and enterprise developers to make new
applications PKI aware.

In addition to enhancing our existing products, we continue to
identify and prioritize various technologies for potential
future product offerings. We may develop these products
internally or enter into arrangements to license or acquire
products or technologies from third parties. There can be no
assurance, however, that we will be successful in enhancing or
developing existing products or identifying and successfully
acquiring new technologies.

Our product development staff, which consists of approximately
290 employees working in five development centers worldwide,
engages in software and hardware engineering, testing and
quality assurance and technical documentation. We also engage
outside contractors where appropriate to supplement our in-house
expertise or expedite projects based on customer or market
demand.

MANUFACTURING AND SUPPLIERS

Manufacturing

RSA SecurID Authenticators. We currently contract for the
manufacture of RSA SecurID authenticators with two suppliers,
one in China and one in Thailand. We have generally been able to
obtain adequate supplies of RSA SecurID authenticators in a
timely manner and believe that alternate vendors can be
identified if current vendors are unable to fulfill our needs.
However, delays or failure to identify alternate vendors, if
required, or a reduction or interruption in supply or a
significant increase in the manufacturing costs could adversely
affect our financial condition or results of operations and
could impact customer relations.

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

10



---



##### Table of Contents



Suppliers

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

COMPETITION

The market for e-security products is highly competitive and
subject to rapid change. We believe that competition in this
market is likely to intensify as a result of increasing demand
for e-security products. We currently experience direct and
indirect competition from a number of sources, including
software operating systems suppliers and application software
vendors that incorporate a single-factor static password
security system into their products; vendors of hardware tokens
competitive with RSA SecurID products; smart card security
device vendors; biometric security device vendors; PKI and
cryptographic software firms; and application access providers.
In some cases, these vendors also support our products and those
of our competitors. In the future, we may also face competition
from these and other parties that develop e-security products
based upon approaches similar to or different from those we
employ, including operating system or network suppliers not
currently offering competitive e-security products. There can be
no assurance that the market for e-security products will not
ultimately be dominated by approaches other than the approaches
we offer.

We believe that the principal competitive factors affecting the
market for e-security products include technical features, ease
of use, interoperability, quality/reliability, level of
security, customer service and support, distribution channels
and price. Although we believe that our products currently
compete favorably with respect to such factors, there can be no
assurance that we can maintain our competitive position against
current and potential competitors, especially those with
significantly greater financial, marketing, service, support,
technical and other competitive resources.

PROPRIETARY RIGHTS

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

Our 23 issued U.S. patents expire at various dates ranging from
2005 to 2018. Our 31 foreign patents expire at various dates
between 2005 and 2013. We have also filed patent applications on
inventions embodied in new technologies that we developed and on
inventions that may be useful in the field of e-security. There
can be no assurance that any of these applications will result
in an issued patent.

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

11



---



##### Table of Contents



GOVERNMENT REGULATION AND EXPORT CONTROLS

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

Exports of commercial products using encryption are regulated by
the Export Administration Regulations of the U.S. Department of
Commerce. Under regulations issued by the Department of Commerce
in January 2000, encryption products of any key length,
including general purpose encryption toolkits such as our RSA
BSAFE products, may be exported, after a one-time technical
review, to all end-users other than governmental end-users.
Encryption products may be exported to governmental end-users
under special Encryption Licensing Arrangements or individual
export licenses that may be issued at the discretion of the
Department of Commerce. In October 2000, the Department of
Commerce further revised the Export Administration Regulations
to remove the export licensing requirement for shipments to
governmental end-users in 23 countries, including most of the
United States major trading partners. We believe that we
have completed the necessary technical reviews of the products
and services we currently export, but products we acquire such
as the Xcert products, may require technical review before we
can export them. Following export of certain of our products, we
will be subject to various post-shipment reporting requirements.

The export regulations may be modified at any time, and in the
event of any such modification, there can be no assurance that
we will be authorized to export encryption products from the
United States without a license in the future. In the event of
such a modification, we might be at a disadvantage in competing
for international sales compared to companies located outside of
the United States that would not be subject to such restrictions.

RSA CAPITAL

In January 2000, we formed our RSA Capital segment, whose
activities relate to our existing and future investments in
e-businesses and other technology companies. Through the RSA
Capital segment, RSA Security directly or through its
subsidiaries makes investments that we believe may provide a
strategic advantage to our operating business. In addition, our
Board of Directors has authorized us to form and invest at least
$100 million in a venture capital fund. The venture capital
fund will focus primarily on maximizing its returns on its
investments rather than the investments strategic value to
our operating business, and will invest in entities where we
believe that our expertise and reputation may contribute to the
success of the entity.

The RSA Capital segment competes for investment opportunities
with investment companies, venture capital firms, incubators and
other investors who may have the ability to devote greater
financial resources to investments than we do or who may be able
to offer greater strategic support to companies in which they
invest than we can.

Information on our industry segments may be found in Note 13 of
the Notes to Consolidated Financial Statements.

EMPLOYEES

At December 31, 2000, we employed 1,093 employees. Of these
employees, approximately 293 were involved in research and
development, 420 in sales and marketing, 145 in customer service
and support, 35 in production, 58 in information technology and
142 in administrative, human resources and finance. Of the
administrative and finance employees, 12 employees are devoted
to our RSA Capital segment. No employees are covered by any
collective bargaining agreements. We believe that our
relationships with our employees are good.




ITEM 2.  PROPERTIES

Our principal administrative, sales and marketing, research and
development and support facilities aggregate approximately
210,000 square feet of office space and are located in Bedford,
Massachusetts under non-cancelable ten year leases expiring in
August 2008. We entered into an operating lease agreement in

12



---



##### Table of Contents





During 2000, we purchased an approximately 31,000 square foot
office building in Bracknell, United Kingdom. This building is
used as our administration, sales and marketing headquarters for
our European operations.

In connection with the consolidation of certain operations
commenced in January 1999, we sublet to third parties a total of
approximately 50,000 square feet of our facilities at various
locations, expiring through June 2002.




ITEM 3.  LEGAL PROCEEDINGS

On or about December 11, 1998, a purported class action was
filed in the United States District Court for the District of
Massachusetts on behalf of all purchasers of our common stock
during the period from and including September 30, 1997 through
July 15, 1998: Fitzer v. Security Dynamics Technologies,
Inc., Charles R. Stuckey, Jr., D. James Bidzos, Arthur W.
Coviello, Jr., John Adams, Marian G. OLeary and Linda B.
Saris, Civil Action No. 98-CV-12496-WGY. The plaintiffs
subsequently dismissed without prejudice the claims against Ms.
Saris. The plaintiffs asserted that the defendants misled the
investing public concerning demand for our products, the
strengths of our technologies, and certain trends in our
business and sought unspecified damages, interest, costs and
fees of their attorneys, accountants and experts. On
September 28, 2000, the United States District Court
granted the defendants motion to dismiss, and entered a
judgment dismissing the plaintiffs claims with prejudice.
On October 18, 2000, the plaintiffs filed in the District
Court a notice of appeal from the judgment. After the notice of
appeal was filed, the defendants made a motion to the District
Court to modify the judgment of dismissal, and to add certain
material to the record on appeal. The District Court denied the
defendants motion, and defendants appeal from the
denial of the motion has been consolidated with the
plaintiffs appeal. Even if the plaintiffs request
for appeal is granted and the District Courts decision is
reversed, we believe that this suit will not have a material
adverse effect on our continuing operations and consolidated
financial position.

On or about May 20, 1999, Kenneth P. Weiss, the founder and
a former director, officer and employee of RSA Security, filed a
demand for arbitration alleging that (a) we constructively
terminated Mr. Weiss in May 1996 in violation of his
Employment Agreement with RSA Security, and (b) we breached
our obligations under Mr. Weiss Employment Agreement
by refusing to release certain assignments of patents.
Mr. Weiss subsequently amended his complaint to remove the
constructive termination claim. Mr. Weiss sought
unspecified damages, interest, costs and fees of his attorneys
and experts, as well as the return of his rights in certain
patents he created and assigned to RSA Security in the course of
his employment. Hearings in the proceeding took place over ten
days in the fall and winter of 2000. On February 26, 2001,
the arbitration panel entered an order denying all of
Mr. Weisss remaining claims.

On or about June 15, 2000, David Moran, a stockholder of
RSA Security, filed a shareholder derivative action in the Court
of Chancery of New Castle County in the State of Delaware on
behalf of himself and all others similarly situated v. Charles
R. Stuckey, Jr., D. James Bidzos, Richard L. Earnest,
Dr. Taher Elgamal, James K. Sims, Joseph B. Lassiter, III,
Arthur Coviello, Jr., Robert P. Badavas, VeriSign, Inc. and RSA
Security Inc, f/k/a Security Dynamics Technologies, Inc., Civil
Action No. 18107NC. Mr. Moran asserts that our Board
of Directors breached its fiduciary duty to RSA Security by
failing to obtain certain international patents, by failing to
enforce the terms of certain agreements with VeriSign, Inc., and
by appointing Mr. Stuckey as President of RSA Investments.
Mr. Moran seeks unspecified damages, interest,

13



---



##### Table of Contents





On or about August 16, 2000, James V. Biglan, a stockholder
of RSA Security, filed a shareholder derivative action in the
Court of Chancery of New Castle County in the State of Delaware
derivatively on behalf of RSA Security v. Charles R. Stuckey,
Jr., D. James Bidzos, Richard L. Earnest, Dr. Taher
Elgamal, James K. Sims, Robert P. Badavas, Joseph B. Lassiter,
III, Arthur Coviello, Jr., VeriSign, Inc. and RSA Security Inc.,
f/k/a Security Dynamics Technologies, Inc., Civil Action
No. 18190NC. Mr. Biglan asserts that our Board of
Directors breached its fiduciary duty to RSA Security by failing
to obtain certain international patents, by failing to enforce
the terms of certain agreements with VeriSign, Inc., by
permitting the violation of federal securities laws by RSA
Security and certain insiders, and by appointing Mr. Stuckey as
President of RSA Investments. Mr. Biglan seeks unspecified
damages, interest, costs and fees of his attorneys, accountants
and experts, as well as injunctive relief. We believe that
Mr. Biglans claims are without merit, and intend to
defend the lawsuit vigorously. We believe that the disposition
of this matter will not have a material adverse effect on our
continuing operations and consolidated financial position.

On or about September 29, 2000, the Court of Chancery of
New Castle County in the State of Delaware consolidated
Mr. Morans and Mr. Biglans cases.

On or about February 2, 2001, Leon Stambler filed a
complaint for patent infringement in U.S. District Court for the
District of Delaware against RSA Security, VeriSign, Inc., First
Data Corporation, Openwave Systems Inc., and Omnisky
Corporation, Case Number 01-0065. In his complaint,
Mr. Stambler alleges that certain products marketed by each
of the defendants infringe various patents that he owns, and he
seeks unspecified damages as well as a preliminary and permanent
injunction enjoining the defendants from infringing the claims
asserted. It is possible those other defendants who are our
licensees will seek indemnification from us for these claims
pursuant to the licenses in effect between those defendants and
us. Although we believe that Mr. Stamblers claims are
without merit and we intend to defend the lawsuit vigorously, we
cannot predict the ultimate outcome of this matter; however, we
believe that the disposition of this matter will not have a
material adverse effect on our continuing operations and
consolidated financial position.

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




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

None.

14



---



##### Table of Contents






EXECUTIVE OFFICERS OF RSA SECURITY

Our executive officers are:

|                        |  |     |    |          |  |                                                                                      
|----------------------- |  | --- | -- | -------- |  | -------------------------------------------------------------------------------------
|Name                    |  | Age |    | Position
|                        |  |     |    |         
|Arthur W. Coviello, Jr. |  |     | 47 |          |  | Chief Executive Officer, President and Director                                      
|                       
|                       
|                       
|                       
|Charles R. Stuckey, Jr. |  |     | 58 |          |  | Chairman of the Board of Directors and President of RSA
	Investments Inc.            
|                       
|                       
|                       
|                       
|John Adams, Ph.D.       |  |     | 59 |          |  | Chief Technology Officer and Senior Vice President                                   
|                       
|                       
|                       
|                       
|John F. Kennedy         |  |     | 52 |          |  | Chief Financial Officer, Senior Vice President, Finance and
	Operations and Treasurer
|                       
|                       
|                       
|                       
|Linda E. Saris          |  |     | 48 |          |  | Senior Vice President, New Ventures                                                  
|                       
|                       
|                       
|                       
|Scott T. Schnell        |  |     | 42 |          |  | Senior Vice President, Marketing and Corporate Development                           
|                       
|                       
|                       
|                       
|Thomas L. Schuster      |  |     | 47 |          |  | Senior Vice President, Worldwide Sales and Professional Services                     
|                       
|                       
|                       
|                       
|Margaret K. Seif        |  |     | 39 |          |  | Senior Vice President, General Counsel and Secretary                                 
|                       
|                       
|                       
|                       
|Joseph Uniejewski       |  |     | 47 |          |  | Senior Vice President, Engineering and Customer Support                              
|                       
|                       
|                       
|                       
|Vivian M. Vitale        |  |     | 47 |          |  | Senior Vice President, Human Resources                                               

Mr. Coviello has served as Chief Executive Officer of RSA
Security since January 2000, President since
March 1999, Executive Vice President from
September 1995 to March 1999, Chief Operating Officer
from January 1997 to March 1999 and Chief Financial
Officer and Treasurer from October 1995 to
August 1997. Before joining RSA Security, Mr. Coviello
served in various capacities with CrossComm Corporation, a
developer of internetworking products, and as its Chief
Operating Officer and Chief Financial Officer from
March 1992 to January 1994.

Mr. Stuckey has served as Chairman of the Board of
Directors of RSA Security since July 1996, President from
January 1987 to March 1999, Chief Executive Officer
from March 1987 to January 2000, and President of RSA
Investments Inc., a wholly owned subsidiary of RSA Security,
since January 2000.

Dr. Adams joined RSA Security as Senior Vice President,
Engineering in March 1996 and was appointed Chief Technology
Officer in October 1999. Before joining RSA Security,
Dr. Adams served in various capacities with Digital
Equipment Corporation, including Vice President and Technical
Director of its Network Operating Systems Division, from 1991 to
1996.

Mr. Kennedy joined RSA Security as Chief Financial Officer,
Senior Vice President, Finance and Treasurer in August 1999
and was appointed Senior Vice President, Finance and Operations
in October 2000. Before joining RSA Security,
Mr. Kennedy was Chief Financial Officer of décalog,
NV, a developer of enterprise investment management software,
from 1998 to 1999. From 1993 to 1998, he served as Vice
President of Finance, Chief Financial Officer and Treasurer of
Natural MicroSystems Corporation, a telecommunications company.

Ms. Saris joined RSA Security as Vice President, Finance
and Operations, Treasurer and Chief Financial Officer in
June 1989. She was appointed Senior Vice President,
Customer Support, Information Services and Operations in July
1998 and Senior Vice President, New Ventures in
October 2000. From January 1997 to July 1998,
Ms. Saris served as Vice President, Customer Support and
Operations of RSA Security and from October 1995 to
January 1997, as its Vice President, Operations.

Mr. Schnell joined RSA Data Security, Inc., a former
subsidiary of RSA Security that merged with RSA Security in
September 1999, as Vice President of Marketing in
March 1996. He was appointed Senior Vice President,
Marketing of RSA Security in July 1998 and Senior Vice
President, Marketing and Corporate Development in
October 2000. Before joining RSA Data Security,
Mr. Schnell was Vice President, Marketing of Photonics
Corporation from June 1994 to July 1995 and held a
number of positions, including Director of Sales, AppleSoft
Software, and Director and General Manager of the electronic
software retail unit at Apple Computer, Inc.

15



---



##### Table of Contents



Mr. Schuster joined RSA Security as Vice President, EMEA in
January 1998. He was appointed Senior Vice President,
Enterprise Sales in March 1999 and Senior Vice President,
Worldwide Sales and Professional Services in October 2000.
Before joining RSA Security, Mr. Schuster served as Vice
President, Sales and Marketing for North Europe, Mideast and
Africa of Novell, Inc. from January 1996 to December 1997.

Ms. Seif joined RSA Security as General Counsel in
March 1998. She was appointed Vice President and Secretary
in June 1998 and Senior Vice President in
January 2000. Before joining RSA Security, Ms. Seif
was Vice President and General Counsel of Firefly Network, Inc.,
a personal information software company, from 1996 to 1998. In
November 1993, Ms. Seif joined Ziff-Davis Publishing
Company as Senior Corporate Counsel. Through several
combinations, Ziff-Davis Publishing Company became
AT&Ts New Media Services division, where Ms. Seif
served as Vice President  Legal Affairs until 1996.

Mr. Uniejewski joined RSA Security as Vice President of
Product Marketing in October 1998. He was appointed Senior
Vice President, Engineering in October 1999 and Senior Vice
President, Engineering and Customer Support in October 2000.
Before joining RSA Security, Mr. Uniejewski served in
various positions at Gradient Technologies, including Vice
President of Engineering from 1996 to 1998. From 1994 to 1996 he
served as Director of Marketing of Cisco Systems ATM
business unit.

Ms. Vitale joined RSA Security as Director of Human
Resources in June 1996. She was appointed Vice President,
Human Resources in April 1997 and Senior Vice President,
Human Resources in January 2000. Before joining RSA
Security, Ms. Vitale served as Director of Employment and
Employee Relations at New England Business Services from
July 1994 to June 1996.

16



---



##### Table of Contents






PART II




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

The following sales prices have been adjusted to reflect the
three-for-two stock split, declared in February 2001,
payable in the form of a common stock dividend to holders of
record on March 9, 2001, which will be effected on or about
March 23, 2001. Our common stock has been trading on The
Nasdaq National Market under the symbol RSAS
(formerly SDTI) since our initial public offering on
December 14, 1994. The following table sets forth for the
fiscal periods indicated the high and low sales prices per share
of our common stock as reported on The Nasdaq National Market.

|               |  |      |       |     |  |   |       | 
|-------------- |  | ---- | ----- | --- |  | - | ----- | 
|               |  | High |       | Low
|               |  |      |       |    
|1999           |  |      |       |     |  |   |       | 
|              
|              
|              
|              
|First Quarter  |  | $    | 19.25 |     |  | $ | 9.92  | 
|              
|              
|              
|              
|Second Quarter |  | $    | 14.75 |     |  | $ | 10.04 | 
|              
|              
|              
|              
|Third Quarter  |  | $    | 19.75 |     |  | $ | 10.71 | 
|              
|              
|              
|              
|Fourth Quarter |  | $    | 51.66 |     |  | $ | 19.75 | 

|               |  |      |       |     |  |   |       | 
|-------------- |  | ---- | ----- | --- |  | - | ----- | 
|               |  | High |       | Low
|               |  |      |       |    
|2000           |  |      |       |     |  |   |       | 
|              
|              
|              
|              
|First Quarter  |  | $    | 62.04 |     |  | $ | 33.42 | 
|              
|              
|              
|              
|Second Quarter |  | $    | 48.33 |     |  | $ | 25.92 | 
|              
|              
|              
|              
|Third Quarter  |  | $    | 53.33 |     |  | $ | 27.25 | 
|              
|              
|              
|              
|Fourth Quarter |  | $    | 40.33 |     |  | $ | 23.50 | 

There were 292 stockholders of record of our common stock as of
February 8, 2001. We estimate that we have a total of
approximately 24,500 stockholders, including stockholders who
hold their shares in street name.

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

17



---



##### Table of Contents






ITEM 6.  SELECTED FINANCIAL DATA

|                                         |                                       |                          |        |        |        |      |         |         |         |      |         |         |         |   |         |         |         |   |         |         |         | 
|---------------------------------------- | ------------------------------------- | ------------------------ | ------ | ------ | ------ | ---- | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                         |                                       |                         
|                                         |                                       | Years ended December 31,
|                                         |                                       |                         
|                                         |                                       | 1996                     |        | 1997   |        | 1998 |         | 1999    |         | 2000
|                                         |                                       |                          |        |        |        |      |         |         |         |     
|Statement of Operations Data             |                                       |                          |        |        |        |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|                                        
|                                        
|                                        
|                                        
|Revenue                                  |                                       |                          |        |        |        |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|                                        
|                                        
|                                        
|                                        
|                                         | Products                              |                          | $      | 79,865 |        |      | $       | 127,683 |         |      | $       | 154,092 |         |   | $       | 190,736 |         |   | $       | 238,027 |        
|                                        
|                                        
|                                        
|                                        
|                                         | Services                              |                          |        | 6,552  |        |      |         | 12,947  |         |      |         | 17,242  |         |   |         | 27,388  |         |   |         | 42,164  |        
|                                         |                                       |                          |        |        |        |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|                                         |                                       | Total revenue            |        |        | 86,417 |      |         |         | 140,630 |      |         |         | 171,334 |   |         |         | 218,124 |   |         |         | 280,191 | 
|                                         |                                       |                          |        |        |        |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Cost of revenue                          |                                       |                          |        |        |        |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|                                        
|                                        
|                                        
|                                        
|                                         | Products                              |                          |        | 14,450 |        |      |         | 22,512  |         |      |         | 30,890  |         |   |         | 30,813  |         |   |         | 33,158  |        
|                                        
|                                        
|                                        
|                                        
|                                         | Services                              |                          |        | 3,981  |        |      |         | 6,192   |         |      |         | 9,891   |         |   |         | 14,348  |         |   |         | 21,825  |        
|                                         |                                       |                          |        |        |        |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|                                         |                                       | Total cost of revenue    |        |        | 18,431 |      |         |         | 28,704  |      |         |         | 40,781  |   |         |         | 45,161  |   |         |         | 54,983  | 
|                                         |                                       |                          |        |        |        |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Gross margin                             |                                       |                          | 67,986 |        |        |      | 111,926 |         |         |      | 130,553 |         |         |   | 172,963 |         |         |   | 225,208 |        
|                                        
|                                        
|                                        
|                                        
|Costs and expenses                       |                                       |                          |        |        |        |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|                                        
|                                        
|                                        
|                                        
|                                         | Research and development              |                          |        | 13,682 |        |      |         | 27,180  |         |      |         | 31,981  |         |   |         | 37,640  |         |   |         | 45,032  |        
|                                        
|                                        
|                                        
|                                        
|                                         | Marketing and selling                 |                          |        | 24,829 |        |      |         | 41,926  |         |      |         | 66,788  |         |   |         | 89,943  |         |   |         | 102,788 |        
|                                        
|                                        
|                                        
|                                        
|                                         | General and administrative            |                          |        | 14,603 |        |      |         | 17,171  |         |      |         | 19,007  |         |   |         | 27,261  |         |   |         | 35,409  |        
|                                        
|                                        
|                                        
|                                        
|                                         | Merger and integration                |                          |        | 6,100  |        |      |         | 5,700   |         |      |         | 2,600   |         |   |         |        |         |   |         |        |        
|                                        
|                                        
|                                        
|                                        
|                                         | Restructuring                         |                          |        |       |        |      |         |        |         |      |         |        |         |   |         | 11,350  |         |   |         | (2,079  | )      
|                                        
|                                        
|                                        
|                                        
|                                         | Legal settlement                      |                          |        |       |        |      |         |        |         |      |         | 1,872   |         |   |         |        |         |   |         |        |        
|                                         |                                       |                          |        |        |        |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|                                         |                                       | Total                    |        |        | 59,214 |      |         |         | 91,977  |      |         |         | 122,248 |   |         |         | 166,194 |   |         |         | 181,150 | 
|                                         |                                       |                          |        |        |        |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Income from operations                   |                                       |                          | 8,772  |        |        |      | 19,949  |         |         |      | 8,305   |         |         |   | 6,769   |         |         |   | 44,058  |        
|                                        
|                                        
|                                        
|                                        
|Interest income                          |                                       |                          | 4,889  |        |        |      | 6,273   |         |         |      | 8,676   |         |         |   | 10,007  |         |         |   | 12,864  |        
|                                        
|                                        
|                                        
|                                        
|Income from investing activities         |                                       |                          | 11,027 |        |        |      | 4,264   |         |         |      | 35,427  |         |         |   | 285,952 |         |         |   | 272,853 |        
|                                         |                                       |                          |        |        |        |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Income before provision for income taxes |                                       |                          | 24,688 |        |        |      | 30,486  |         |         |      | 52,408  |         |         |   | 302,728 |         |         |   | 329,775 |        
|                                        
|                                        
|                                        
|                                        
|Provision for income taxes               |                                       |                          | 11,003 |        |        |      | 13,324  |         |         |      | 23,571  |         |         |   | 118,982 |         |         |   | 124,012 |        
|                                        
|                                        
|                                        
|                                        
|Minority interests                       |                                       |                          |       |        |        |      | (114    | )       |         |      | 578     |         |         |   | 16      |         |         |   |        |        
|                                         |                                       |                          |        |        |        |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Net income                               |                                       | $                        | 13,685 |        |        | $    | 17,048  |         |         | $    | 29,415  |         |         | $ | 183,762 |         |         | $ | 205,763 |        
|                                         |                                       |                          |        |        |        |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Basic earnings per share (1)             |                                       |                          |        |        |        |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|                                        
|                                        
|                                        
|                                        
|Per share amount                         |                                       | $                        | 0.25   |        |        | $    | 0.29    |         |         | $    | 0.48    |         |         | $ | 3.13    |         |         | $ | 3.50    |        
|                                         |                                       |                          |        |        |        |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Weighted average shares                  |                                       |                          | 55,748 |        |        |      | 58,434  |         |         |      | 61,363  |         |         |   | 58,757  |         |         |   | 58,051  |        
|                                         |                                       |                          |        |        |        |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Diluted earnings per share (1)           |                                       |                          |        |        |        |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|                                        
|                                        
|                                        
|                                        
|Per share amount                         |                                       | $                        | 0.23   |        |        | $    | 0.28    |         |         | $    | 0.46    |         |         | $ | 2.92    |         |         | $ | 3.21    |        
|                                         |                                       |                          |        |        |        |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|                                         | Weighted average shares               |                          |        | 55,748 |        |      |         | 58,434  |         |      |         | 61,363  |         |   |         | 58,757  |         |   |         | 58,051  |        
|                                        
|                                        
|                                        
|                                        
|                                         | Effect of dilutive equity instruments |                          |        | 3,799  |        |      |         | 2,538   |         |      |         | 2,382   |         |   |         | 4,213   |         |   |         | 5,976   |        
|                                         |                                       |                          |        |        |        |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Adjusted weighted average shares         |                                       |                          | 59,547 |        |        |      | 60,972  |         |         |      | 63,745  |         |         |   | 62,970  |         |         |   | 64,027  |        
|                                         |                                       |                          |        |        |        |      |         |         |         |      |         |         |         |   |         |         |         |   |         |        

|                                                 |  |              |         |      |  |      |         |      |  |      |         |  |  |   |           |  |  |   |         | 
|------------------------------------------------ |  | ------------ | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | --------- |  |  | - | ------- | 
|                                                 |  |             
|                                                 |  | December 31,
|                                                 |  |             
|                                                 |  | 1996         |         | 1997 |  | 1998 |         | 1999 |  | 2000
|                                                 |  |              |         |      |  |      |         |      |  |     
|Balance Sheet Data                               |  |              |         |      |  |      |         |      |  |      |         |  |  |   |           |  |  |   |         | 
|                                                
|                                                
|                                                
|                                                
|Cash, cash equivalents and marketable securities |  | $            | 107,008 |      |  | $    | 164,659 |      |  | $    | 158,236 |  |  | $ | 1,383,281 |  |  | $ | 335,102 | 
|                                                
|                                                
|                                                
|                                                
|Working capital                                  |  |              | 110,103 |      |  |      | 178,348 |      |  |      | 180,885 |  |  |   | 553,307   |  |  |   | 305,667 | 
|                                                
|                                                
|                                                
|                                                
|Total assets                                     |  |              | 147,355 |      |  |      | 233,975 |      |  |      | 280,855 |  |  |   | 1,512,124 |  |  |   | 589,514 | 
|                                                
|                                                
|                                                
|                                                
|Stockholders equity                             |  |              | 125,104 |      |  |      | 200,653 |      |  |      | 242,720 |  |  |   | 611,024   |  |  |   | 481,004 | 




|    |                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Per share and share amounts have been adjusted to reflect the
	three-for-two stock split, declared in February 2001,
	payable in the form of a common stock dividend to holders of
	record on March 9, 2001, which will be effected on or about
	March 23, 2001.

18



---



##### Table of Contents








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

Overview

This Report contains forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934,
as amended, and Section 27A of the Securities Act of 1933,
as amended. For purposes of these Acts, any statement that is
not a statement of historical fact may be deemed a
forward-looking statement. For example, statements containing
the words believes, anticipates,
plans, expects, and similar expressions
may be forward-looking statements. There are a number of factors
that could cause our actual results to differ materially from
those indicated by these forward-looking statements, including
without limitation, the factors set forth below under the
caption Certain Factors That May Affect Future
Results. All references to common stock and per share
amounts have been adjusted on a retroactive basis to reflect the
three-for-two common stock split, declared in February 2001,
payable in the form of a common stock dividend to holders of
record on March 9, 2001, which will be effected on or about
March 23, 2001.

We sell our two-factor user authentication, encryption and
public key management products and solutions to corporate
(Enterprise) users seeking turnkey security
solutions, and to original equipment manufacturers and
developers (Developer) seeking software development
components for embedding security in a range of software
applications or hardware devices. In addition to providing
e-security solutions, in January 2000 we formed our RSA
Capital segment, whose activities relate to our existing and
future investments in e-businesses and other technology
companies.

Through our e-Security Solutions segment, we derive our
operating revenue primarily from two distinct product groups:
Enterprise solutions, which includes RSA SecurID®
authenticators, RSA ACE/ Server® software, RSA Keon®
software, and maintenance and professional services, and
Developer solutions, which includes RSA BSAFE®
cryptographic software and protocol products, RSA Keon
components, and maintenance and professional services.

Typically, our Enterprise solutions customers complete an
initial purchase of a product, then come back to purchase
additional or replacement authenticators and software as their
use of the product expands to include more users, such as their
vendors, suppliers, customers and clients. At each
customers request, we program our RSA SecurID
authenticators to operate for a fixed period of up to four
years. We typically base our RSA ACE/ Server and RSA Keon
software license fees on the number of users authorized under
each customers license.

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

With respect to our RSA Capital segment our investments have
historically consisted of equity instruments, and we expect that
most of our future investments will consist of equity
instruments as well. RSA Capital holds investments in several
public companies, which if their sale is not prohibited by
contractual or statutory restrictions, are accounted for as
available for sale marketable securities, as well as investments
in a number of private companies and restricted public
companies, which are accounted for using the cost method. RSA
Capital also holds an interest in Crosby Finance, LLC, a
qualified special purpose entity, which is accounted for as a
held to maturity security. Expenses incurred in connection with
these investments are primarily for general and administration,
management, and legal matters.

Our direct sales to our customers in countries outside of the
United States are primarily denominated in the local currency.
As a result, fluctuations in currency exchange rates could
affect the profitability and cash flows in U.S. dollars of our
products sold in markets outside of the United States.
Historically, foreign currency exchange rate fluctuations have
had minimal impact on our profitability and cash flows. Our
sales through indirect distribution channels are generally
denominated in U.S. dollars, and therefore are not subject to
foreign currency fluctuations.

19



---



##### Table of Contents



We have contracted with outside manufacturing organizations to
produce our RSA SecurID authenticators, and some of our products
contain technology that is licensed from third parties.
Therefore, our cost of revenue consists primarily of costs
associated with the manufacture and delivery of RSA SecurID
authenticators and royalty fees that we pay for the licensed
technology. Cost of revenue also includes professional service,
customer support, and production costs. Production costs include
the programming labor, shipping, inspection and quality control
functions associated with the RSA SecurID authenticators.

Information on our industry segments may be found in Note 13 of
the Notes to Consolidated Financial Statements.

Results of Operations

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

|                                         |                            |                          |       |      |   |      |       |      |   |  |       |      |  
|---------------------------------------- | -------------------------- | ------------------------ | ----- | ---- | - | ---- | ----- | ---- | - |  | ----- | ---- | -
|                                         |                            |                         
|                                         |                            | Years Ended December 31,
|                                         |                            |                         
|                                         |                            | 1998                     |       | 1999 |   | 2000
|                                         |                            |                          |       |      |   |     
|Revenue                                  |                            |                          |       |      |   |      |       |      |   |  |       |     
|                                        
|                                        
|                                        
|                                        
|                                         | Products                   |                          |       | 89.9 | % |      |       | 87.4 | % |  |       | 85.0 | %
|                                        
|                                        
|                                        
|                                        
|                                         | Services                   |                          |       | 10.1 |   |      |       | 12.6 |   |  |       | 15.0 |  
|                                         |                            |                          |       |      |   |      |       |      |   |  |       |     
|Total revenue                            |                            |                          | 100.0 |      |   |      | 100.0 |      |   |  | 100.0 |     
|                                         |                            |                          |       |      |   |      |       |      |   |  |       |     
|Cost of revenue                          |                            |                          |       |      |   |      |       |      |   |  |       |     
|                                        
|                                        
|                                        
|                                        
|                                         | Products                   |                          |       | 18.0 |   |      |       | 14.1 |   |  |       | 11.8 |  
|                                        
|                                        
|                                        
|                                        
|                                         | Services                   |                          |       | 5.8  |   |      |       | 6.6  |   |  |       | 7.8  |  
|                                         |                            |                          |       |      |   |      |       |      |   |  |       |     
|Total cost of revenue                    |                            |                          | 23.8  |      |   |      | 20.7  |      |   |  | 19.6  |     
|                                         |                            |                          |       |      |   |      |       |      |   |  |       |     
|                                         | Gross margin               |                          |       | 76.2 |   |      |       | 79.3 |   |  |       | 80.4 |  
|                                        
|                                        
|                                        
|                                        
|Costs and expenses                       |                            |                          |       |      |   |      |       |      |   |  |       |     
|                                        
|                                        
|                                        
|                                        
|                                         | Research and development   |                          |       | 18.6 |   |      |       | 17.3 |   |  |       | 16.1 |  
|                                        
|                                        
|                                        
|                                        
|                                         | Marketing and selling      |                          |       | 39.0 |   |      |       | 41.2 |   |  |       | 36.7 |  
|                                        
|                                        
|                                        
|                                        
|                                         | General and administrative |                          |       | 11.1 |   |      |       | 12.5 |   |  |       | 12.6 |  
|                                        
|                                        
|                                        
|                                        
|                                         | Merger and integration     |                          |       | 1.5  |   |      |       |     |   |  |       |     |  
|                                        
|                                        
|                                        
|                                        
|                                         | Restructuring              |                          |       |     |   |      |       | 5.2  |   |  |       | (0.7 | )
|                                        
|                                        
|                                        
|                                        
|                                         | Legal settlement           |                          |       | 1.1  |   |      |       |     |   |  |       |     |  
|                                         |                            |                          |       |      |   |      |       |      |   |  |       |     
|Total                                    |                            |                          | 71.3  |      |   |      | 76.2  |      |   |  | 64.7  |     
|                                        
|                                        
|                                        
|                                        
|Income from operations                   |                            |                          | 4.9   |      |   |      | 3.1   |      |   |  | 15.7  |     
|                                        
|                                        
|                                        
|                                        
|Interest income                          |                            |                          | 5.1   |      |   |      | 4.6   |      |   |  | 4.6   |     
|                                        
|                                        
|                                        
|                                        
|Income from investing activities         |                            |                          | 20.7  |      |   |      | 131.0 |      |   |  | 97.4  |     
|                                         |                            |                          |       |      |   |      |       |      |   |  |       |     
|Income before provision for income taxes |                            |                          | 30.7  |      |   |      | 138.7 |      |   |  | 117.7 |     
|                                        
|                                        
|                                        
|                                        
|Provision for income taxes               |                            |                          | 13.8  |      |   |      | 54.5  |      |   |  | 44.3  |     
|                                        
|                                        
|                                        
|                                        
|Minority interests                       |                            |                          | 0.3   |      |   |      |      |      |   |  |      |     
|                                         |                            |                          |       |      |   |      |       |      |   |  |       |     
|Net income                               |                            |                          | 17.2  | %    |   |      | 84.2  | %    |   |  | 73.4  | %   
|                                         |                            |                          |       |      |   |      |       |      |   |  |       |     

2000 Compared with 1999

Revenue

Total revenue increased 28.5% in 2000 to $280.2 million
from $218.1 million in 1999. The growth in product revenue
in 2000 versus 1999 occurred in both Enterprise solution and
Developer solution product groups, with the most significant
growth in total product revenue arising from the sale of
authentication products, whose revenue increased approximately
26% in 2000 over 1999, and accounted for 41% of total revenue
for the year ended December 31, 2000. Services revenue
increased 54% in 2000 over 1999, primarily due to increased
maintenance revenue from increased sales of products. We believe
that the revenue increases

20



---



##### Table of Contents





Sales to Enterprise solution customers increased 28.3% in 2000
over 1999 and accounted for approximately 75% of the increase in
total revenue in 2000 over 1999. For 2000, RSA SecurID
authentication products accounted for 77%, RSA Keon products
accounted for 7% and services associated with products in the
Enterprise solutions product group accounted for 16% of total
Enterprise solution revenue. We sold approximately
2.6 million RSA SecurID authenticator units in 2000, which
represents a 36% increase over 1999. The increase in number of
units sold, combined with a 6% decrease in the average selling
price per unit in 2000 versus 1999, contributed to the increased
revenue from our RSA SecurID authentication product line.
Enterprise solution RSA Keon software revenue increased
approximately 168% in 2000 over 1999. We believe that the
revenue generated from our authenticator product line continues
to provide overall growth for us, and newer product lines, such
as the RSA Keon product line, have had significant growth in
emerging PKI markets.

Sales to Developer customers increased 29.1% in 2000 over 1999
and accounted for approximately 25% of the increase in total
revenue in 2000 over 1999. For 2000, RSA BSAFE cryptography
products accounted for 80%, RSA Keon components accounted for 8%
and services associated with products in the Developer solutions
product group accounted for 12% of total Developer solution
revenue. We believe that the increase in Developer revenue can
be attributed to the continuing demand for products that ensure
the authenticity of transactions conducted online.

International revenue increased 41% in 2000 to
$93.1 million from $66.0 million in 1999, accounting
for 33.2% of total 2000 revenue. Revenue increased in all
international markets, with the most substantial growth in
Europe and Asia Pacific. We believe international revenue will
continue to increase as our presence in international markets
gets stronger and the international demand for our products
matures.

Gross Profit

Our total gross profit increased 30.2% in 2000 to
$225.2 million from $173.0 million in 1999. The gross
profit from sales of products was 86.1% in 2000 versus 83.8% in
1999. The gross profit from products, as a percentage of total
revenue, was 73.2% in 2000 versus 73.3% in 1999. The increase in
gross profit from products can be primarily attributed to the
increased sales volume on software products, which have higher
profit margins. The gross profit on services was 48.2% in 2000
versus 47.6% in 1999. The gross profit from services, as a
percentage of total revenue, was 7.2% in 2000 versus 6.0% in
1999. The increase in gross profit from services in 2000 can
primarily be attributed to increased maintenance revenue due to
increased sales of products.

Research and Development

Research and development expenses increased 19.6% in 2000 to
$45.0 million from $37.6 million in 1999. The majority
of the increase in research and development expenses resulted
from increased payroll expenses associated with the employment
of additional staff.

Marketing and Selling

Marketing and selling expenses increased 14.3% in 2000 to
$102.8 million from $89.9 million in 1999.
Approximately $16.2 million of the increase in marketing
and selling expenses in 2000 as compared to 1999 was from
increased payroll, commission and overhead costs associated with
the employment of additional staff and increased revenue. The
increase in payroll and overhead costs was offset by a decrease
of approximately $3.3 million in spending on marketing
programs. The decrease in spending on marketing programs during
2000 compared to 1999 can be attributed to the costs incurred in
connection with the corporate rebranding in 1999, which cost
$12.5 million, of which approximately $11.8 million was for
marketing programs and was included in marketing and selling
expenses, and the remainder was included in general and
administrative expenses.

21



---



##### Table of Contents



General and Administrative

General and administrative expenses increased 29.9% in 2000 to
$35.4 million from $27.3 million in 1999. Of the
increase in general and administrative expenses, approximately
$5.7 million was from increased payroll and overhead costs
associated with the employment of additional staff, and
approximately $2.4 million was from increased professional
fees related to the protection of intellectual property and
other legal and accounting matters.

Restructuring

In 1999, we commenced and substantially completed consolidation
of certain operations in an attempt to achieve operational
efficiency. We recorded costs of $11.4 million associated
with this restructuring during the year ended December 31,
1999. These costs consisted primarily of severance costs for
employees who were employed primarily in research and
development and general and administrative activities for the
formerly separate operations of Intrusion Detection, Inc.
(IDI), facility exit costs and other direct costs.
Facility exit costs consist primarily of estimated shortfalls of
sublease rental income compared to minimum lease payments due
under a lease agreement. During 2000, we reversed
$2.1 million of previously recorded restructuring costs due
to revised estimates of the facility exit costs, including
associated legal costs and other direct costs. Remaining costs
of approximately $347,000 were accrued and unpaid at
December 31, 2000 and consisted of facility exit costs.

Interest Income

Interest income increased 28.6% in 2000 to $12.9 million
from $10.0 million in 1999. The increase is primarily due
to interest earned on higher average cash and marketable debt
securities balances.

Income from Investing Activities

Income from investing activities was $272.9 million for
2000 which includes gains from the sale of VeriSign, Inc.
(VeriSign) common stock under the put and call
program of $86.1 million, net gain from termination and
settlement of the put and call option program of
$46.0 million, gain from sale of assets to Crosby Finance,
LLC (the LLC), a qualifying special purpose entity,
of $101.4 million, and gain from sale of Trintech Group Plc.
(Trintech) ordinary shares of $39.4 million.
During 2001 we expect to recognize income from investing
activities of approximately $41.0 million from the
settlement of forward contracts held by the LLC. We routinely
evaluate the realizable value of our investments using
qualitative and quantitative factors including discounted cash
flow analysis and liquidation value assessments.

In the third and fourth quarters of 1999, we sold put and call
options on our shares of VeriSign common stock to independent
third parties in order to protect a portion of our marketable
securities position. On December 31, 1999, our entire
position in VeriSign common stock, which totaled 5,500,000
shares, was covered by these put and call options. On
November 27, 2000, we exercised our right to terminate the
put and call options on our then remaining 4,000,000 shares of
VeriSign common stock. The settlement of the put and call
options resulted in the sale and delivery of 1,363,084 shares of
VeriSign common stock to one of the independent third parties,
resulting in net cash proceeds of zero.

Also on November 27, 2000 we entered into three forward
contracts and one variable delivery forward contract (the
Derivative Instruments) with respect to our
remaining 2,636,916 shares of VeriSign common stock. Upon
execution of the variable delivery forward contract, we received
cash proceeds of $137.8 million. Upon maturity of each of the
forward contracts we expect to receive net proceeds of
$17.8 million in each of the first three quarters of 2001.

Immediately following the execution of the Derivative
Instruments, we contributed our 2,636,916 shares of VeriSign
common stock to the LLC, of which we are a 99% member. At the
same time, we entered into an agreement with the LLC and the
counterparty to the Derivative Instruments, pursuant to which
all of our rights and obligations in the Derivative Instruments
were assumed by the LLC. The LLC is a bankruptcy-remote
qualifying special purpose entity, established to securitize the
shares of VeriSign common stock, and

22



---



##### Table of Contents





Minority Interests

Minority stockholders owned an aggregate 26% of our Japanese
subsidiary until November 1999, when we purchased the
interests for $3.6 million. The excess purchase price over
fair value of assets of $1.1 million was recorded as
goodwill and is being amortized over ten years. Minority
interests in our subsidiarys net loss were $16,000 in 1999.

Provision for Income Taxes

The provision for income taxes increased to $124.0 million
in 2000 from $119.0 million in 1999, primarily due to higher
pre-tax income. Our effective tax rate decreased to 37.6% in
2000 from 39.3% in 1999 primarily due to the effect of state
taxes on investment income. Due to the transfer of licensing
rights to a foreign subsidiary and other tax structure changes,
we believe our effective tax rate will decrease during 2001.

1999 Compared with 1998

Revenue

Total revenue increased 27.3% in 1999 to $218.1 million
from $171.3 million in 1998. The growth in product revenue
in 1999 versus 1998 occurred in both Enterprise solution and
Developer solution product groups, with the most significant
growth in total product revenue arising from sales of
authentication products, whose revenue increased approximately
24% in 1999 from 1998, and accounted for 42% of total revenue
for the year ended December 31, 1999. Services revenue
increased 59% in 1999 over 1998 primarily due to increased
maintenance revenue from increased sales of products. We believe
that the revenue increases are an indication of the increasing
importance of security solutions to the online economy, and are
also in part due to our product line synergies which enable us
to sell additional products to existing customers.

Sales to Enterprise solution customers increased 24.1% in 1999
over 1998 and accounted for approximately 69% of the increase in
total revenue in 1999 over 1998. For 1999, RSA SecurID
authentication products accounted for 84%, RSA Keon products,
which were introduced during 1999, accounted for 3% and services
associated with products in the Enterprise solutions product
group accounted for 13% of total Enterprise solution revenue. We
sold approximately 1.9 million RSA SecurID authenticator
units in 1999, which represents a 38% increase over 1998. The
increase in number of units sold, combined with a 9% decrease in
the average selling price per unit in 1999 versus 1998,
contributed to the increased revenue from our RSA SecurID
authentication product line. We believe that the revenue
generated from our authenticator product line provides overall
growth for us.

Sales to Developer customers increased 38.6% in 1999 over 1998
and accounted for approximately 31% of the increase in total
revenue in 1999 over 1998. For 1999, RSA BSAFE cryptography
products accounted for 90% and services associated with products
in the Developer solutions product group accounted for 10% of
total Developer solution revenue. We believe that the increase
in Developer revenue can be attributed to the continuing demand
for products that ensure the authenticity of transactions
conducted online.

International revenue increased 11.4% in 1999 to
$66.0 million from $59.3 million in 1998, accounting for
30.3% of the total 1999 revenue. Revenue increased in all
international markets, with the most substantial growth in
Europe and Asia Pacific.

23



---



##### Table of Contents



Gross Profit

Our gross profit increased 32.5% in 1999 to $173.0 million
from $130.6 million in 1998. The gross profit from sales of
products was 83.8% in 1999 versus 80.0% in 1998. The gross
profit from products, as a percentage of total revenue, was
73.3% in 1999 versus 71.9% in 1998. The increase in gross profit
from products in 1999 can be primarily attributed to the
increased sales volume on software products, which have higher
profit margins. The gross profit on services was 47.6% in 1999
versus 42.6% in 1998. The gross profit from services, as a
percentage of total revenue, was 6.0% in 1999 versus 4.3% in
1998. The increase in gross profit from services in 1999 can
primarily be attributed to increased maintenance revenue due to
increased sales of products.

Research and Development

Research and development expenses increased 17.7% in 1999 to
$37.6 million from $32.0 million in 1998. The majority
of the increase in research and development expenses resulted
from increased payroll expenses associated with the employment
of additional staff.

Marketing and Selling

Marketing and selling expenses increased 34.7% in 1999 to
$89.9 million from $66.8 million in 1998.
Approximately $8.8 million of the increase in marketing and
selling expenses in 1999 as compared to 1998 was from increased
payroll costs associated with the employment of additional
staff, approximately $2.5 million of the increase was from
increased sales commissions on increased revenue, and
approximately $11.8 million of the increase was from costs
associated with our corporate rebranding.

General and Administrative

General and administrative expenses increased 43.4% in 1999 to
$27.3 million from $19.0 million in 1998.
Approximately $6.4 million of the increase in general and
administrative expenses was from increased payroll and overhead
costs associated with the employment of additional staff, and
approximately $1.9 million of the increase was from
increased professional fees related to the protection of
intellectual property and other legal and accounting matters.

Restructuring

In 1999, we commenced and substantially completed consolidation
of certain operations in an attempt to achieve operational
efficiency. We recorded costs of $11.4 million associated
with this restructuring during 1999. These costs consisted
primarily of severance costs and other direct costs of
$9.4 million for employees who were employed primarily in
research and development and general and administrative
activities for the formerly separate operations of IDI, and
facility exit costs of $2.0 million. Facility exit costs
consist primarily of estimated shortfalls of sublease rental
income compared to minimum lease payments due under a lease
agreement. Costs of approximately $2.9 million were accrued and
unpaid at December 31, 1999 and consisted of facility exit
costs of $1.7 million and termination benefits and other
direct costs, payable through the third quarter of 2000, of
$1.2 million.

Interest Income

Interest income increased 15.3% in 1999 to $10.0 million
from $8.7 million in 1998. The increase is primarily due to
interest earned on higher cash and marketable securities
balances.

Income from Investing Activities

Income from investing activities increased approximately 700% in
1999 to $286.0 million from $35.4 million in 1998. Income
from investing activities in 1999 arose primarily from the sale
of VeriSign common stock and the sale of Trintech ordinary
shares and an increase in value of VeriSign common stock from
the write-up under the equity method basis. These gains are net
of our equity in VeriSigns loss and an

24



---



##### Table of Contents





Minority Interests

Minority stockholders owned an aggregate 26% of our Japanese
subsidiary until November 1999, when we purchased the
interests for $3.6 million. The excess purchase price over
fair value of assets of $1.1 million was recorded as
goodwill and is being amortized over ten years. Minority
interests in our subsidiarys net loss were $16,000 in 1999
and $578,000 in 1998.

Provision for Income Taxes

The provision for income taxes increased to $119.0 million
in 1999 from $23.6 million in 1998, primarily due to higher
pre-tax income. Our effective tax rate decreased to 39.3% in
1999 from 45.0% in 1998 primarily due to the effect of state
taxes on investment income.

Liquidity and Capital Resources

Liquidity

We had $301.9 million in cash and cash equivalents at
December 31, 2000, consisting primarily of investments in
U.S. Government treasuries and agencies with maturities of less
than 90 days. This represents an increase of $179.7 million
in cash and cash equivalents during the year ended
December 31, 2000 as compared to our cash and cash
equivalents balance at December 31, 1999. The elements of
the increase in cash and cash equivalents during 2000 include
cash provided from operating activities of $3.4 million,
cash from sales of marketable securities, net of purchases of
marketable securities of $391.8 million, primarily from the
sales of VeriSign common stock and Trintech ordinary shares, net
cash proceeds from the sale of put options and settlement of
forward equity contracts of $16.2 million and cash provided
from the proceeds of employee exercises and purchases under our
stock option and employee stock purchase plans of
$38.3 million. These cash increases were offset by cash
used to repurchase our common stock of $217.1 million, cash
used to purchase investments of $11.7 million and cash used
to purchase property and equipment of $39.5 million,
including the purchase of a new facility for our European
headquarters.

We expect to receive net cash proceeds of $17.8 million in
each of the first three quarters of 2001 upon maturity of each
of the forward contracts that are held in Crosby Finance, LLC.

At December 31, 2000, we had an available unused line of
credit agreement with a major financial institution. The line of
credit provides for up to $10.0 million in borrowing at either
fixed or variable rates linked to either the London Interbank
Offered Rate or the Prime Rate, until June 30, 2001,
subject to annual extension provisions.

We anticipate that we will continue to make significant
expenditures to repurchase our common stock. We have maintained
common stock repurchase programs since October 1998. Under
the current program, we are authorized to repurchase up to
9.75 million shares of our common stock through
October 3, 2001. Repurchased shares are used for stock
option and employee stock purchase plans, and for general
corporate purposes. We purchased 5.9 million shares of our
common stock during the year ended December 31, 2000, for
an aggregate amount of $217.1 million, or an average cost
of $36.78 per share.

During the year ended December 31, 2000, we received
$17.6 million from the sale of put options on our common
stock and those proceeds were used to facilitate our share
repurchase program. The proceeds were recorded as additional
paid-in capital. At December 31, 2000, we had outstanding
put options covering 2.25 million shares of common stock,
at strike prices ranging from $34.23 to $40.85 per share. These
options can only be exercised on certain dates, and expire
through the second quarter of 2002. We have the option to

25



---



##### Table of Contents





We have also entered into forward purchase contracts for
1.5 million shares of our common stock in order to set
purchase prices for our future repurchase of shares under our
share repurchase program. The contracts have forward purchase
prices ranging from $38.40 to $43.30 and provide for quarterly
resets of the forward purchase price through the first quarter
of 2001. The settlement on a reset date or at the end of the
contract is recorded as a component of equity. During 2000, the
forward purchase price for 858,750 shares was reset to $38.40
and we paid the net differential of $1.4 million, which has
been recorded as a decrease to additional paid-in capital.

In February 2001, we acquired Xcert International, Inc. a
company that develops and delivers digital certificate-based
products for securing e-business transactions. We acquired all
of the outstanding capital stock of Xcert for approximately
$67.5 million in cash. The transaction will be accounted
for as a purchase.

Our plans for future uses of cash also include additional
investments in preferred and common stock of other companies,
additional acquisitions of other entities or technologies, and
additional purchases of property and equipment.

We believe that cash generated from operating activities will be
sufficient to fund our working capital requirements through at
least the next twelve months. We anticipate that current cash on
hand, cash from sale of marketable securities and the cash
generated from the exercise of employee options and employee
stock purchase plans, will be adequate to fund our planned
capital and financing expenditures for at least the next twelve
months.

Other

New Accounting Pronouncements

The effective date of Statement of Financial Accounting
Standards (SFAS) No. 133, Accounting for
Derivative Instruments and Hedging Activities and SFAS
No. 138 An Amendment of FASB Statement
No. 133 is January 1, 2001. SFAS No. 133 and
No. 138 will require us to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If a derivative
is a hedge, depending on the nature of the hedge, changes in the
fair value of the derivative will either be offset against the
change in fair value of hedged assets, liabilities, or firm
commitments through earnings or recognized in accumulated other
comprehensive income until the hedged item is recognized in
earnings. The ineffective portion, if any, of a
derivatives change in fair value will be immediately
recognized in earnings. As of the effective date, SFAS
No. 133 and amendments will not have a material effect on
our consolidated financial position, results of operations or
cash flows.

During 2000, the Emerging Issues Task Force (EITF)
issued Issue No. 00-7, Application of EITF Issue
No. 96-13, Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Companys Own
Stock, to Equity Derivative Transactions that Contain Certain
Provisions that Require Cash Settlement if Certain Events
Occur and EITF Issue No. 00-19, Determination
of Whether Share Settlement is Within the Control of the Issuer
for Purposes of Applying Issue No. 96-13. EITF
No. 00-7 addresses embedded settlement features and stated
that contracts which could require cash payment cannot be
accounted for as equity of the issuer. EITF No. 00-19
stated that equity contracts could be recorded as equity of the
issuer provided the contract meets EITF No. 00-7
requirements and the issuer has enough available shares to
satisfy the settlement terms of the contract. If the issuer does
not have enough available shares to satisfy the contract, the
issuer would be required to reclassify the contract, or portion
of the contract, as a liability. The adoption of EITF
No. 00-7 and EITF No. 00-19 did not have a material
impact on our consolidated financial position, results of
operations or cash flows.

26



---



##### Table of Contents



Quarterly Financial Data

|                                         |  |                                       |        |         |  |         |        |         |  |   |        |  |  |   |         | 
|---------------------------------------- |  | ------------------------------------- | ------ | ------- |  | ------- | ------ | ------- |  | - | ------ |  |  | - | ------- | 
|                                         |  | First                                 |        | Second  |  | Third   |        | Fourth 
|                                         |  | Quarter                               |        | Quarter |  | Quarter |        | Quarter
|                                         |  |                                       |        |         |  |         |        |        
|                                         |  |                                      
|                                         |  | (in thousands, except per share data)
|                                        
|                                        
|                                        
|                                        
|2000                                     |  |                                       |        |         |  |         |        |         |  |   |        |  |  |   |         | 
|                                        
|                                        
|                                        
|                                        
|Revenue                                  |  | $                                     | 63,340 |         |  | $       | 66,700 |         |  | $ | 72,029 |  |  | $ | 78,122  | 
|                                        
|                                        
|                                        
|                                        
|Gross margin                             |  |                                       | 50,450 |         |  |         | 53,442 |         |  |   | 57,902 |  |  |   | 63,414  | 
|                                        
|                                        
|                                        
|                                        
|Income before provision for income taxes |  |                                       | 39,717 |         |  |         | 60,468 |         |  |   | 65,215 |  |  |   | 164,375 | 
|                                        
|                                        
|                                        
|                                        
|Net income                               |  |                                       | 24,600 |         |  |         | 37,232 |         |  |   | 40,016 |  |  |   | 103,915 | 
|                                        
|                                        
|                                        
|                                        
|Basic earnings per share                 |  | $                                     | 0.42   |         |  | $       | 0.63   |         |  | $ | 0.65   |  |  | $ | 1.83    | 
|                                        
|                                        
|                                        
|                                        
|Diluted earnings per share               |  | $                                     | 0.37   |         |  | $       | 0.58   |         |  | $ | 0.63   |  |  | $ | 1.69    | 
|                                        
|                                        
|                                        
|                                        
|Results excluding non-core activity:     |  |                                       |        |         |  |         |        |         |  |   |        |  |  |   |         | 
|                                        
|                                        
|                                        
|                                        
|Net income                               |  |                                       | 8,601  |         |  |         | 9,349  |         |  |   | 10,182 |  |  |   | 10,953  | 
|                                        
|                                        
|                                        
|                                        
|Basic earnings per share                 |  | $                                     | 0.15   |         |  | $       | 0.16   |         |  | $ | 0.17   |  |  | $ | 0.19    | 
|                                        
|                                        
|                                        
|                                        
|Diluted earnings per share               |  | $                                     | 0.13   |         |  | $       | 0.15   |         |  | $ | 0.16   |  |  | $ | 0.18    | 
|                                        
|                                        
|                                        
|                                        
|                                        
|1999                                     |  |                                       |        |         |  |         |        |         |  |   |        |  |  |   |         | 
|                                        
|                                        
|                                        
|                                        
|Revenue                                  |  | $                                     | 48,672 |         |  | $       | 51,809 |         |  | $ | 55,658 |  |  | $ | 61,985  | 
|                                        
|                                        
|                                        
|                                        
|Gross margin                             |  |                                       | 37,235 |         |  |         | 41,427 |         |  |   | 44,412 |  |  |   | 49,889  | 
|                                        
|                                        
|                                        
|                                        
|Income before provision for income taxes |  |                                       | 74,754 |         |  |         | 75,969 |         |  |   | 85,687 |  |  |   | 66,318  | 
|                                        
|                                        
|                                        
|                                        
|Net income                               |  |                                       | 40,989 |         |  |         | 42,995 |         |  |   | 58,585 |  |  |   | 41,193  | 
|                                        
|                                        
|                                        
|                                        
|Basic earnings per share                 |  | $                                     | 0.69   |         |  | $       | 0.74   |         |  | $ | 1.00   |  |  | $ | 0.70    | 
|                                        
|                                        
|                                        
|                                        
|Diluted earnings per share               |  | $                                     | 0.65   |         |  | $       | 0.70   |         |  | $ | 0.95   |  |  | $ | 0.64    | 
|                                        
|                                        
|                                        
|                                        
|Results excluding non-core activity:     |  |                                       |        |         |  |         |        |         |  |   |        |  |  |   |         | 
|                                        
|                                        
|                                        
|                                        
|Net income                               |  |                                       | 5,052  |         |  |         | 5,957  |         |  |   | 7,421  |  |  |   | 9,921   | 
|                                        
|                                        
|                                        
|                                        
|Basic earnings per share                 |  | $                                     | 0.09   |         |  | $       | 0.10   |         |  | $ | 0.13   |  |  | $ | 0.17    | 
|                                        
|                                        
|                                        
|                                        
|Diluted earnings per share               |  | $                                     | 0.08   |         |  | $       | 0.10   |         |  | $ | 0.12   |  |  | $ | 0.15    | 

Net income includes the following non-core activity:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Gains from sales of VeriSign common stock of $27,038, $31,072,
	$27,965 and $46,000 in the first, second, third and fourth
	quarters of 2000, respectively. Gain from the contribution of
	VeriSign shares to Crosby Finance, LLC of $101,427 in the fourth
	quarter of 2000. Gains from sales of VeriSign common stock of
	$74,489, $54,802, $86,837 and $60,177 in the first, second,
	third and fourth quarters of 1999, respectively. The
	Companys proportionate share of VeriSigns quarterly
	losses of $358 and $167 for the first and second quarters of
	1999, respectively. Gains from the write-up under the equity
	method of the Companys investment in VeriSign of $12,576
	in the second quarter of 1999. Losses relating to the investment
	valuation allowance on the Companys investments of $2,537
	in the third quarter of 1999.
|
| | Gains from sales of Trintech ordinary shares of $13,941, $23,013
	and $2,397 in the second, third and fourth quarters of 2000,
	respectively, and $133 in the fourth quarter of 1999.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | Loss from sale of other investments of $474 in the fourth
	quarter of 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | Costs associated with the Companys corporate rebranding of
	$5,363 and $7,137 in the third and fourth quarters of 1999,
	respectively. Costs associated with RSA Capital were $354, $789,
	$1,193 and $1,570 in the first, second, third and fourth
	quarters of 2000, respectively, and $147 in the fourth quarter
	of 1999.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | Costs associated with the Companys restructuring of
	$6,550, $3,800 and $1,000 for the first, third and fourth
	quarters of 1999, respectively. Revised estimates associated
	with the Companys restructuring resulted in a reversal of
	accrued restructuring costs of $2,079 during the second quarter
	of 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | Income tax provisions for non-recurring items were $10,684,
	$18,420, $19,950 and $54,818 in the first, second, third and
	fourth quarters of 2000, respectively, and $31,644, $30,173,
	$23,972, and $20,757 in the first, second, third and fourth
	quarters of 1999, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

27



---



##### Table of Contents



CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

Our operating results tend to fluctuate from quarter to
quarter.Our quarterly operating results may vary
significantly from quarter to quarter depending on a number of
factors, including, among other factors:



| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| |  | the size, timing and shipment of individual orders for our
	products;                                       
|
| |  | customers deferring their orders in anticipation of new products;                                           
|
| |  | changes in our operating expenses;                                                                          
|
| |  | the timing of the introduction or enhancement of our products
	and our competitors products;               
|
| |  | market acceptance of new products;                                                                          
|
| |  | changes in the mix of products sold;                                                                        
|
| |  | foreign currency exchange rates;                                                                            
|
| |  | changes in product pricing, including changes in
	competitors pricing policies;                            
|
| |  | development of our direct and indirect distribution channels;                                               
|
| |  | integration of any future acquisitions;                                                                     
|
| |  | the timing of personnel departures and new hires and the rate at
	which new personnel become productive; and
|
| |  | general economic conditions.                                                                                

We may not be able to grow or sustain our profitability from
quarter to quarter. Because our operating expenses are based on
anticipated revenue levels and a high percentage of our expenses
are fixed, a small variation in when revenue is recognized or
recognizable can cause significant variations in operating
results from quarter to quarter.

In addition, some market analysts and economists have recently
predicted that the U.S. economy may be weakening. A general
economic slowdown could have serious consequences for our
business and operating results. Among other things, a general
economic slowdown could reduce our working capital by causing
our customers and potential customers to stop buying our
products and services, causing a reduction in the value of our
investments and making it more difficult for us to raise capital
by selling our stock to investors.

Our stock price has been volatile and is likely to remain
volatile.During 2000, our stock price ranged
from a per share high of $62.04 to a low of $23.50, as adjusted
to reflect the three-for-two stock split declared in
February 2001. At the close of the market on
February 7, 2001, our stock price was $38.67, adjusted to
reflect the three-for-two stock split declared in
February 2001. Announcements, litigation developments and
our ability to meet the expectations of brokerage firms,
industry analysts and investors with respect to our operating
and financial results may contribute to this volatility. We may
not discover, or be able to confirm, revenue or earnings
shortfalls until the end of a quarter, which may result in an
immediate drop in our stock price. Securities class action
litigation is often instituted against publicly traded companies
after a period of volatility in the market price of the
companies securities. In December 1998, some of our
stockholders filed a class action against us and some of our
officers and directors. This litigation, and other litigation if
instituted, could result in substantial costs and a diversion of
our managements attention and resources.

Demand for our products depends highly on the continued
growth of the market for e-security
solutions.The market for e-security solutions is
at an early stage of development. Demand for our products
depends on, among other things:



| |   |                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------
| |  | the continued evolution of electronic commerce as a viable means
	of conducting business;                                                     
|
| |  | 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 computer networks;                                
|
| |  | market acceptance and use of public and private key
	cryptography, digital signatures and digital certificates in
	communication and commerce;

28



---



##### Table of Contents





| |   |                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the perceived quality, price, availability and interoperability
	of our products over our competitors products;                                                                                                                   
|
| |  | the pace of technological change, both in the development and
	use of computer networks generally and in the hardware and
	software environments in which our products operate, and our
	ability to keep up with these changes; and
|
| |  | general economic conditions.                                                                                                                                                                                                       

A well-publicized actual or perceived breach of network or data
security could trigger a heightened awareness of computer abuse,
resulting in an increased demand for security products such as
those we offer. On the other hand, an actual or perceived breach
of network or data security at our facilities or at a
customers facilities, whether or not caused by the failure
of one of our products, could hurt our reputation and cause
potential customers to turn to our competitors products.

Electronic security technologies are under constant
attack.The strength of our cryptographic and
other e-security technologies is constantly being tested by
computer professionals, academics and hackers. Any
significant advance in the techniques for attacking
cryptographic systems could make some or all of our products
obsolete or unmarketable. Our cryptographic systems depend in
part on the application of certain mathematical principles. The
security afforded by our encryption products is based on the
assumption that the factoring of the composite of
large prime numbers is difficult. If an easy factoring
method were developed, then the security of our encryption
products would be reduced or eliminated. Even if no
breakthroughs in factoring are discovered, factoring problems
can theoretically be solved by a computer system significantly
faster and more powerful than those currently available. If
these improved techniques for attacking cryptographic systems
are ever developed, our business or results of operations could
be adversely impacted.

In addition, our RSA ACE/ Server software and RSA SecurID
authenticators contain a proprietary algorithm. From time to
time, we have learned of attempts by third parties to reverse
engineer this algorithm to find vulnerabilities. If a third
party successfully hacks the algorithm and makes its
findings public, then we may need to dedicate engineering and
other resources to eliminate the published vulnerabilities. In
addition, some of our customers could require that we replace
some or all of their RSA SecurID authenticators with
authenticators containing a more secure algorithm. If we are
required to make these replacements or if we cannot address the
vulnerabilities in our algorithm in a timely fashion, then our
business and results of operations could be adversely impacted.

Changes in e-security technology and standards could render
our products obsolete.The market for e-security
products is rapidly evolving. E-security technology is
constantly changing as we and our competitors introduce new
products and retire old ones and as customer requirements
quickly develop and change.

In addition, the standards for e-commerce and network security
continue to evolve. If any segments of our market adopt
technologies or standards that are inconsistent with our
products and technology, sales of our products in those market
segments could decline.

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



| |   |                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | quality, reliability or security failure problems, which could
	result in returns, delays in collecting accounts receivable,
	unexpected service or warranty expenses, reduced orders and a
	decline in our competitive position;        
|
| |  | delays or difficulties in product development;                                                                                                                                                                                           
|
| |  | undetected software errors or bugs in the final products shipped
	to our customers, which could cause market acceptance of our
	products to be lost or delayed, recalls of hardware products
	incorporating the software or loss of data;

29



---



##### Table of Contents





| |   |                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------
| |  | our competitors introduction of their new products ahead
	of our new products, or their introduction of superior or
	cheaper products;
|
| |  | the markets failure to accept new technologies, including
	digital certificate and public and private key management
	technologies;   
|
| |  | our failure to include features in our products that our
	customers or U.S. or foreign government regulators may require;              
|
| |  | our failure to anticipate changes in customers
	requirements; and                                                                     
|
| |  | the implementation of standards that are inconsistent with the
	technology embodied in our products.                                   

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

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



| |   |                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------
| |  | customers budgetary constraints;                                                                         
|
| |  | the education of our customers regarding our products
	capabilities;                                     
|
| |  | customers willingness to make changes in their network
	infrastructure to take advantage of our products;
|
| |  | the timing of customers budget cycles; and                                                               
|
| |  | customers internal review process.                                                                       

The market and distribution channels for our products are
evolving.As new distribution channels evolve, we
may need to adjust our sales strategy to address these channels.
For example, many businesses are choosing to rent
access to enterprise applications from application service
providers and other vendors, rather than buying the applications
and investing the resources required to set up their own
computer networks. Our failure to anticipate new markets or
changes in the existing markets for our products could hurt our
market share and revenue if our competitors begin selling into
the new or expanded market before we do.

We must manage our growth.Our business has
grown significantly in size and complexity over the last few
years. For example, since 1998 we have nearly doubled the number
of people we employ and have added new facilities and
significantly expanded our existing facilities in a number of
U.S. and non-U.S. geographic regions. This growth has placed,
and may continue to place, a significant strain on our
management and operations. In addition, our personnel, systems,
procedures and controls may not be adequate to support our
growth. The geographic dispersal of our operations may also make
it more difficult to manage our growth.

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

30



---



##### Table of Contents



Even if we do complete any given acquisition, the integration of
the business and operations of the acquiree into our business
and operations is a complex, time consuming and expensive
process. Before any acquisition, each company has its own
business, culture, customers, employees and systems. Following
an acquisition, we and the acquiree must operate as a combined
organization using common communication systems, operating
procedures, financial controls and human resource practices. In
order to successfully integrate acquired companies, we must,
among other things, successfully:



| |   |                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------
| |  | attract and retain key management and other personnel;                                                                                 
|
| |  | integrate, both from an engineering and a sales and marketing
	perspective, the acquired products into our suite of product
	offerings;
|
| |  | coordinate research and development efforts;                                                                                           
|
| |  | integrate sales forces; and                                                                                                            
|
| |  | consolidate duplicate facilities.                                                                                                      

An acquisition may disrupt ongoing operations, divert our
management from day-to-day business, impair our relationships
with our employees, customers and strategic partners and
adversely impact our results of operations. In addition, these
types of transactions often result in charges to earnings for
such things as transaction expenses, amortization of goodwill,
or expensing of in-process research and development expenses.

Our market is highly competitive.We compete
with:



| |   |                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | established e-security companies that currently offer network
	security products or services;                                                                                             
|
| |  | newly organized e-security companies that are developing new,
	competitive products and technologies; and                                                                                 
|
| |  | established computer hardware and software companies that
	introduce their own network security products, either separately
	or bundled with their existing hardware or software products.

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

In addition, current and potential competitors may establish
collaborative relationships to address the security needs of our
prospective customers. Accordingly, new competitors or alliances
that emerge could pose unforeseen competitive threats. Increased
competition could result in lower prices, reduced margins or the
failure of our products to achieve or maintain market acceptance.

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

We also license some of the technology contained in our products
from third parties. For example, we license from Progress
Software Corporation the relational database management software
contained in our RSA ACE/ Server and RSA Keon software, and we
rely on Progress Software for ongoing maintenance and support
for the licensed software. If any of the technology that we
license were to fail or experience significant problems, then we
would not be able to fix the problem without the support of the
third party licensor.

31



---



##### Table of Contents



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

International sales make up a significant portion of our
business.International sales accounted for more
than 30% of our revenue in each of the years ended
December 31, 1998, 1999 and 2000. We intend to expand our
international operations and international sales and marketing
activities, and this expansion requires significant management
attention and resources. We may also need to tailor or
localize our products in order to compete in
particular international markets and to comply with foreign
laws. We may not be able to develop, market and distribute
localized versions of our products in a timely manner or at all.

In addition, there are certain risks inherent in doing business
internationally, including:



| |   |                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------
| |  | foreign regulatory requirements;                                                                       
|
| |  | legal uncertainty regarding liability;                                                                 
|
| |  | export and import restrictions on cryptographic technology and
	products incorporating that technology;
|
| |  | difficulties and delays in establishing international
	distribution channels;                          
|
| |  | difficulties in collecting international accounts receivable;                                          
|
| |  | fluctuations in currency exchange rates;                                                               
|
| |  | potentially adverse tax consequences, including restrictions on
	the repatriation of earnings;         
|
| |  | the burdens of complying with a wide variety of foreign laws;                                          
|
| |  | tariffs and other trade barriers;                                                                      
|
| |  | difficulties in enforcement of intellectual property rights; 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.We rely on a combination of patent,
trade secret, copyright and trademark laws, software licenses,
nondisclosure agreements and technical measures to protect our
proprietary technology. We also generally enter into
confidentiality or license agreements with our employees,
distributors and strategic partners as well as with our
customers and potential customers seeking proprietary
information, and limit access to and distribution of our
software, documentation and other proprietary information.
However, despite our efforts to protect our proprietary rights,
unauthorized third parties may nonetheless succeed at:



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

We rely on patents to protect our proprietary rights in our
technology, but it is possible that any patent that we or our
licensors hold might be invalidated, circumvented, challenged or
terminated. It is also possible that patent examiners might
reject the claims described in our pending or future patent
applications. In addition, 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. Our inability
to adequately protect our intellectual property could have a
significant negative effect on our financial condition and
results of operations.

Our issued U.S. patents expire at various dates ranging from
2005 to 2018. 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. For
example, an important patent covering the RSA public key
cryptosystem, which was developed at the Massachusetts Institute
of Technology (U.S. Patent No. 4,405,829) and licensed
exclusively to RSA Security, expired on September 20, 2000.
An implementation of the cryptographic algorithm described in
this patent is embodied in our RSA BSAFE cryptographic products.
We believe that

32



---



##### Table of Contents





The e-security industry is highly
litigious.From time to time, we have been
involved in disputes with third parties who allege that our
products may infringe the intellectual property rights held by
the third parties. Any litigation carries a number of
significant risks, including:



| |   |                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------
| |  | litigation is often very expensive, even if it is resolved in
	our favor;                                                
|
| |  | litigation diverts the attention of management and other
	resources; and                                                 
|
| |  | if a court or other government agency rules against us in any
	intellectual property litigation, we might be required to:



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

We depend heavily on key, talented employees in a competitive
labor market.Our success depends on our ability
to attract, motivate and retain highly skilled technical,
managerial and marketing personnel. In some areas of the United
States and in some foreign countries, the demand for these kinds
of employees exceeds the supply, and many firms are competing
for the few employees with the skills we need. We believe that
our compensation plans are competitive, but we may not be able
to hire and retain the employees we need. In addition, we do not
have employment agreements with most of our key employees and do
not maintain keyperson life insurance for any of our key
employees.

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

We may incur significant costs to avoid investment company
status and may suffer serious harm if deemed to be an investment
company.Some of our equity investments in other
businesses and in RSA Ventures, our venture capital fund, may
constitute investment securities under the Investment Company
Act of 1940. A company may be deemed to be an investment company
if it owns investment securities with a value exceeding 40% of
its total assets. Investment companies must register under and
comply with the Investment Company Act unless a particular
exclusion or safe harbor provision applies or the company
obtains exemptive relief from the Securities and Exchange
Commission. If we were deemed to be an investment company, we
would become subject to the requirements of the Investment
Company Act, which could have a number of serious consequences,
including:



| |   |                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------
| |  | we would be prohibited from engaging in business or issuing our
	securities as we have in the past;        
|
| |  | we might be subject to civil and criminal penalties for failure
	to comply with the Investment Company Act;
|
| |  | some of our contracts might be voidable; and                                                               
|
| |  | a court-appointed receiver could take control of RSA Security
	and liquidate our business.                 

Although our investment securities currently comprise less than
40% of our total assets, fluctuations in the value of these
securities or of our other assets could cause us to exceed this
limit. Unless an exclusion from or safe harbor under the
Investment Company Act were available to us or we obtained
exemptive relief from the SEC, we would have to attempt to
reduce our investment securities as a percentage of our total
assets,

33



---



##### Table of Contents





The value of our business may fluctuate because the value of
some of our assets fluctuates.A portion of our
assets includes the equity securities of both publicly traded
and non-publicly traded companies. The market price and
valuations of the securities we hold may fluctuate due to market
conditions and other conditions over which we have no control,
and these fluctuations may result in fluctuations of the market
price of our common stock and may reduce the amount of working
capital available to us. In addition, the securities of the
private companies in which we invest are generally illiquid, and
if these private companies never achieve a liquidity event, such
as a public offering or an acquisition, then we may never
realize a gain on our investment or even recoup the cost of our
investment.

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




ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

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

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

Marketable securities are recorded on the balance sheet at fair
value with unrealized gains and losses recorded in the other
comprehensive income section of stockholders equity. The
values recorded for the publicly traded companies are subject to
market price volatility. A 20% decrease in the fair value of our
marketable securities at December 31, 2000 would not have a
material effect on our financial position, results of operations
or cash flows.

We also make equity investments determined by our Board of
Directors. These investments are either not publicly traded or
are publicly traded but we are currently restricted from selling
our shares. These investments are recorded as long term
investments on the balance sheet and are carried at cost, as
long as our ownership interest is below 20%. We monitor these
investments for impairment and make appropriate reductions in
carrying values when necessary or mark the investment to fair
value and reclass them to marketable securities when appropriate.

Crosby Finance, LLC, of which we are a 99% member, holds shares
of VeriSign common stock, three forward contracts and a variable
delivery forward contract (Derivative Instruments).
We expect to receive cash proceeds of $17.8 million and net
gains of approximately $13.8 million in each of the first
three quarters of 2001 from the settlement of the forward
contracts held by the LLC. The variable delivery forward
contract held by the LLC will settle in January 2006, and during
the period outstanding, could cause us to recognize a loss, if
the underlying value of the equity securities becomes impaired.
The Derivative Instruments provide

34



---



##### Table of Contents





During 2000, we entered into equity instrument contracts indexed
to our common stock including put options and forward purchase
contracts. These equity instruments are designed to facilitate
the repurchase of our common stock and to minimize the effects
of employee stock options and employee stock purchase plan
exercises on the dilution of earnings per share. If there is a
significant decrease in the market value of our common stock, we
could be required to settle the contracts and this could have a
dilutive effect on our earnings per share. These contracts will
not have an impact on our results of operations. See Note 7 of
the Notes to Consolidated Financial Statements.

Through December 31, 2000, foreign currency fluctuations
have not had a material impact on our financial position or
results of operations and historically, we have not entered into
foreign currency hedge transactions. Our direct sales to our
customers in countries outside of the United States are
primarily denominated in the local currency. Our sales through
indirect distribution channels are generally denominated in U.S.
dollars. Between the time customers are invoiced in local
currency until collection occurs we are exposed to foreign
exchange rate fluctuations. This exposure is offset by our use
of local currency for operating expenses incurred in those
countries. Fluctuations in currency exchange rates could affect
the profitability and cash flows in U.S. dollars of our products
sold in international markets, however, we believe that our
potential foreign currency exchange rate exposure is not
material.

The foregoing risk management discussion and the effects thereof
are forward-looking statements. Actual results in the future may
differ materially from these projected results due to actual
developments in global financial markets. The analytical methods
we use to assess and mitigate risk discussed above should not be
considered projections of future events or losses.

35



---



##### Table of Contents






ITEM 8.     FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA

REPORT OF MANAGEMENT

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

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

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

Deloitte & Touche LLP audits the Companys financial
statements in accordance with auditing standards generally
accepted in the United States of America and as part of that
audit provides an objective, independent review of the
Companys internal controls and the fairness of its
reported financial condition and results of operations.

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



| |                                                                                                           
| | ----------------------------------------------------------------------------------------------------------
| | /s/ ARTHUR W. COVIELLO, JR.                                                                               
| |                                                                                                           
| | Arthur W. Coviello, Jr. 
	 Chief Executive Officer and President                                          
|
| | /s/ JOHN F. KENNEDY                                                                                       
| |                                                                                                           
| | John F. Kennedy 
	 Senior Vice President, Finance and Operations, 
	 Chief Financial Officer and Treasurer

January 16, 2001

36



---



##### Table of Contents



INDEPENDENT AUDITORS REPORT

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

We have audited the accompanying consolidated balance sheets of
RSA Security Inc. and subsidiaries as of December 31, 2000
and 1999, and the related consolidated statements of income,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2000. Our audits
also included the financial statement schedule listed in
Item 14 (a) (2). These financial statements and financial
statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on
our audits.

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

In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of RSA
Security Inc. and subsidiaries as of December 31, 2000 and
1999, and the results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as
a whole, presents fairly in all material respects the
information set forth therein.

/s/ DELOITTE & TOUCHE LLP

Boston, Massachusetts 
 January 16, 2001 
 (March 23, 2001 as to Note 2)

37



---



##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)


|                                                                                                                                                                       |                            |              |           |           |  |   |          |         | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------ | --------- | --------- |  | - | -------- | ------- | 
|                                                                                                                                                                       |                            |             
|                                                                                                                                                                       |                            | December 31,
|                                                                                                                                                                       |                            |             
|                                                                                                                                                                       |                            | 1999         |           | 2000     
|                                                                                                                                                                       |                            |              |           |          
|ASSETS                                                                                                                                                                
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|Current Assets                                                                                                                                                         |                            |              |           |           |  |   |          |        
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|Cash and cash equivalents                                                                                                                                              |                            | $            | 122,170   |           |  | $ | 301,897  |        
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|Marketable securities                                                                                                                                                  |                            |              | 1,261,111 |           |  |   | 33,205   |        
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|Accounts receivable (less allowance for doubtful accounts of
	$1,032 in 1999 and $2,006 in 2000)                                                                       |                            |              | 42,735    |           |  |   | 54,979   |        
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|Inventory                                                                                                                                                              |                            |              | 7,857     |           |  |   | 3,707    |        
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|Prepaid expenses and other                                                                                                                                             |                            |              | 12,480    |           |  |   | 20,389   |        
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|Prepaid income taxes                                                                                                                                                   |                            |              | 8,054     |           |  |   |         |        
|                                                                                                                                                                       |                            |              |           |           |  |   |          |        
|                                                                                                                                                                       | Total current assets       |              |           | 1,454,407 |  |   |          | 414,177 | 
|                                                                                                                                                                       |                            |              |           |           |  |   |          |        
|Property and equipment, net                                                                                                                                            |                            |              | 34,096    |           |  |   | 64,207   |        
|                                                                                                                                                                       |                            |              |           |           |  |   |          |        
|Investments                                                                                                                                                            |                            |              |          |           |  |   | 87,688   |        
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|Deferred taxes                                                                                                                                                         |                            |              | 21,221    |           |  |   | 20,723   |        
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|Other                                                                                                                                                                  |                            |              | 2,400     |           |  |   | 2,719    |        
|                                                                                                                                                                       |                            |              |           |           |  |   |          |        
|                                                                                                                                                                       | Total                      |              | $         | 1,512,124 |  |   | $        | 589,514 | 
|                                                                                                                                                                       |                            |              |           |           |  |   |          |        
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                  
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|Current Liabilities                                                                                                                                                    |                            |              |           |           |  |   |          |        
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|Accounts payable                                                                                                                                                       |                            | $            | 7,626     |           |  | $ | 7,663    |        
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|Accrued payroll and related benefits                                                                                                                                   |                            |              | 13,094    |           |  |   | 16,023   |        
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|Accrued expenses and other                                                                                                                                             |                            |              | 15,557    |           |  |   | 12,649   |        
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|Income taxes payable                                                                                                                                                   |                            |              |          |           |  |   | 26,249   |        
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|Deferred revenue                                                                                                                                                       |                            |              | 17,058    |           |  |   | 25,444   |        
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|Deferred taxes                                                                                                                                                         |                            |              | 161,731   |           |  |   | 20,482   |        
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|Unrealized hedge liability                                                                                                                                             |                            |              | 686,034   |           |  |   |         |        
|                                                                                                                                                                       |                            |              |           |           |  |   |          |        
|                                                                                                                                                                       | Total current liabilities  |              |           | 901,100   |  |   |          | 108,510 | 
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|Stockholders Equity                                                                                                                                                   |                            |              |           |           |  |   |          |        
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|Common stock, $.01 par value; authorized 300,000,000 shares;
	issued, 62,144,158 shares; outstanding, 58,368,340 and
	56,166,352 shares in 1999 and 2000, respectively |                            |              | 621       |           |  |   | 621      |        
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|Additional paid-in capital                                                                                                                                             |                            |              | 200,879   |           |  |   | 213,884  |        
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|Retained earnings                                                                                                                                                      |                            |              | 248,064   |           |  |   | 453,827  |        
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|Deferred stock compensation                                                                                                                                            |                            |              | (62       | )         |  |   | (58      | )      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|Treasury stock, at cost, 3,775,818 and 5,977,806 shares in 1999
	and 2000, respectively                                                                                |                            |              | (74,144   | )         |  |   | (218,962 | )      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|                                                                                                                                                                      
|Accumulated other comprehensive income                                                                                                                                 |                            |              | 235,666   |           |  |   | 31,692   |        
|                                                                                                                                                                       |                            |              |           |           |  |   |          |        
|                                                                                                                                                                       | Total stockholders equity |              |           | 611,024   |  |   |          | 481,004 | 
|                                                                                                                                                                       |                            |              |           |           |  |   |          |        
|                                                                                                                                                                       | Total                      |              | $         | 1,512,124 |  |   | $        | 589,514 | 
|                                                                                                                                                                       |                            |              |           |           |  |   |          |        

See accompanying notes to consolidated financial
statements.

38



---



##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)


|                                         |                       |                          |         |         |  |      |         |         |  |   |         |         | 
|---------------------------------------- | --------------------- | ------------------------ | ------- | ------- |  | ---- | ------- | ------- |  | - | ------- | ------- | 
|                                         |                       |                         
|                                         |                       | Years Ended December 31,
|                                         |                       |                         
|                                         |                       | 1998                     |         | 1999    |  | 2000
|                                         |                       |                          |         |         |  |     
|Revenue                                  |                       |                          |         |         |  |      |         |         |  |   |         |        
|                                        
|                                        
|                                        
|                                        
|Products                                 |                       | $                        | 154,092 |         |  | $    | 190,736 |         |  | $ | 238,027 |        
|                                        
|                                        
|                                        
|                                        
|Services                                 |                       |                          | 17,242  |         |  |      | 27,388  |         |  |   | 42,164  |        
|                                         |                       |                          |         |         |  |      |         |         |  |   |         |        
|                                         | Total revenue         |                          |         | 171,334 |  |      |         | 218,124 |  |   |         | 280,191 | 
|                                         |                       |                          |         |         |  |      |         |         |  |   |         |        
|                                        
|Cost of Revenue                          |                       |                          |         |         |  |      |         |         |  |   |         |        
|                                        
|                                        
|                                        
|                                        
|Products                                 |                       |                          | 30,890  |         |  |      | 30,813  |         |  |   | 33,158  |        
|                                        
|                                        
|                                        
|                                        
|Services                                 |                       |                          | 9,891   |         |  |      | 14,348  |         |  |   | 21,825  |        
|                                         |                       |                          |         |         |  |      |         |         |  |   |         |        
|                                         | Total cost of revenue |                          |         | 40,781  |  |      |         | 45,161  |  |   |         | 54,983  | 
|                                         |                       |                          |         |         |  |      |         |         |  |   |         |        
|Gross margin                             |                       |                          | 130,553 |         |  |      | 172,963 |         |  |   | 225,208 |        
|                                        
|                                        
|                                        
|                                        
|                                        
|Costs and expenses                       |                       |                          |         |         |  |      |         |         |  |   |         |        
|                                        
|                                        
|                                        
|                                        
|Research and development                 |                       |                          | 31,981  |         |  |      | 37,640  |         |  |   | 45,032  |        
|                                        
|                                        
|                                        
|                                        
|Marketing and selling                    |                       |                          | 66,788  |         |  |      | 89,943  |         |  |   | 102,788 |        
|                                        
|                                        
|                                        
|                                        
|General and administrative               |                       |                          | 19,007  |         |  |      | 27,261  |         |  |   | 35,409  |        
|                                        
|                                        
|                                        
|                                        
|Merger and integration                   |                       |                          | 2,600   |         |  |      |        |         |  |   |        |        
|                                        
|                                        
|                                        
|                                        
|Restructuring                            |                       |                          |        |         |  |      | 11,350  |         |  |   | (2,079  | )      
|                                        
|                                        
|                                        
|                                        
|Legal settlement                         |                       |                          | 1,872   |         |  |      |        |         |  |   |        |        
|                                         |                       |                          |         |         |  |      |         |         |  |   |         |        
|                                         | Total                 |                          |         | 122,248 |  |      |         | 166,194 |  |   |         | 181,150 | 
|                                         |                       |                          |         |         |  |      |         |         |  |   |         |        
|Income from operations                   |                       |                          | 8,305   |         |  |      | 6,769   |         |  |   | 44,058  |        
|                                        
|                                        
|                                        
|                                        
|Interest income                          |                       |                          | 8,676   |         |  |      | 10,007  |         |  |   | 12,864  |        
|                                        
|                                        
|                                        
|                                        
|Income from investing activities         |                       |                          | 35,427  |         |  |      | 285,952 |         |  |   | 272,853 |        
|                                         |                       |                          |         |         |  |      |         |         |  |   |         |        
|Income before provision for income taxes |                       |                          | 52,408  |         |  |      | 302,728 |         |  |   | 329,775 |        
|                                        
|                                        
|                                        
|                                        
|Provision for income taxes               |                       |                          | 23,571  |         |  |      | 118,982 |         |  |   | 124,012 |        
|                                        
|                                        
|                                        
|                                        
|Minority interests                       |                       |                          | 578     |         |  |      | 16      |         |  |   |        |        
|                                         |                       |                          |         |         |  |      |         |         |  |   |         |        
|Net income                               |                       | $                        | 29,415  |         |  | $    | 183,762 |         |  | $ | 205,763 |        
|                                         |                       |                          |         |         |  |      |         |         |  |   |         |        
|                                        
|Basic earnings per share                 |                       |                          |         |         |  |      |         |         |  |   |         |        
|                                        
|                                        
|                                        
|                                        
|Per share amount                         |                       | $                        | 0.48    |         |  | $    | 3.13    |         |  | $ | 3.50    |        
|                                         |                       |                          |         |         |  |      |         |         |  |   |         |        
|Weighted average shares                  |                       |                          | 61,363  |         |  |      | 58,757  |         |  |   | 58,051  |        
|                                         |                       |                          |         |         |  |      |         |         |  |   |         |        
|                                        
|Diluted earnings per share               |                       |                          |         |         |  |      |         |         |  |   |         |        
|                                        
|                                        
|                                        
|                                        
|Per share amount                         |                       | $                        | 0.46    |         |  | $    | 2.92    |         |  | $ | 3.21    |        
|                                         |                       |                          |         |         |  |      |         |         |  |   |         |        
|Weighted average shares                  |                       |                          | 61,363  |         |  |      | 58,757  |         |  |   | 58,051  |        
|                                        
|                                        
|                                        
|                                        
|Effect of dilutive equity instruments    |                       |                          | 2,382   |         |  |      | 4,213   |         |  |   | 5,976   |        
|                                         |                       |                          |         |         |  |      |         |         |  |   |         |        
|Adjusted weighted average shares         |                       |                          | 63,745  |         |  |      | 62,970  |         |  |   | 64,027  |        
|                                         |                       |                          |         |         |  |      |         |         |  |   |         |        

See accompanying notes to consolidated financial
statements.

39



---



##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(In thousands, except share data)


|                                              |  |              |            |            |  |          |     |          |  |                |         |               |  |        |         |        |  |   |      |   |  |  |            |   |  |   |          |   |  |   |          |  
|--------------------------------------------- |  | ------------ | ---------- | ---------- |  | -------- | --- | -------- |  | -------------- | ------- | ------------- |  | ------ | ------- | ------ |  | - | ---- | - |  |  | ---------- | - |  | - | -------- | - |  | - | -------- | -
|                                              |  |              |            |            |  |          |     |          |  |                |         | Accumulated  
|                                              |  | Common Stock |            | Additional |  |          |     | Deferred |  | Treasury Stock |         | Other        
|                                              |  |              |            | Paid-in    |  | Retained |     | Stock    |  |                |         | Comprehensive
|                                              |  | Shares       |            | Amount     |  | Capital  |     | Earnings |  | Compensation   |         | Shares        |  | Amount |         | Income
|                                              |  |              |            |            |  |          |     |          |  |                |         |               |  |        |         |       
|Balance January 1, 1998                       |  |              | 60,700,677 |            |  | $        | 607 |          |  | $              | 165,549 |               |  | $      | 35,284  |        |  | $ | (116 | ) |  |  | 763        |   |  |   |         |   |  | $ | (671     | )
|                                             
|                                             
|                                             
|                                             
|Issuance of common stock                      |  |              | 1,434,361  |            |  |          | 14  |          |  |                | 8,431   |               |  |        | (397    | )      |  |   |      |   |  |  | (166,380   | ) |  | $ | 1,223    |   |  |   |          |  
|                                             
|                                             
|                                             
|                                             
|Foreign acquisition tax
	benefit              |  |              |            |            |  |          |     |          |  |                | 13,835  |               |  |        |         |        |  |   |      |   |  |  |            |   |  |   |          |   |  |   |          |  
|                                             
|                                             
|                                             
|                                             
|Stock compensation                            |  |              |            |            |  |          |     |          |  |                | 1,941   |               |  |        |         |        |  |   | 42   |   |  |  |            |   |  |   |          |   |  |   |          |  
|                                             
|                                             
|                                             
|                                             
|Share repurchase program                      |  |              |            |            |  |          |     |          |  |                |         |               |  |        |         |        |  |   |      |   |  |  | 1,587,000  |   |  |   | (12,135  | ) |  |   |          |  
|                                             
|                                             
|                                             
|                                             
|Comprehensive income                          |  |              |            |            |  |          |     |          |  |                |         |               |  |        |         |        |  |   |      |   |  |  |            |   |  |   |          |   |  |   |          |  
|                                             
|                                             
|                                             
|                                             
|Translation adjustment                        |  |              |            |            |  |          |     |          |  |                |         |               |  |        |         |        |  |   |      |   |  |  |            |   |  |   |          |   |  |   | (425     | )
|                                             
|                                             
|                                             
|                                             
|Unrealized gain on marketable securities, net |  |              |            |            |  |          |     |          |  |                |         |               |  |        |         |        |  |   |      |   |  |  |            |   |  |   |          |   |  |   | 123      |  
|                                             
|                                             
|                                             
|                                             
|Net income                                    |  |              |            |            |  |          |     |          |  |                |         |               |  |        | 29,415  |        |  |   |      |   |  |  |            |   |  |   |          |   |  |   |          |  
|                                              |  |              |            |            |  |          |     |          |  |                |         |               |  |        |         |        |  |   |      |   |  |  |            |   |  |   |          |   |  |   |          |  
|Total comprehensive income                    |  |              |            |            |  |          |     |          |  |                |         |               |  |        |         |        |  |   |      |   |  |  |            |   |  |   |          |   |  |   |          |  
|                                              |  |              |            |            |  |          |     |          |  |                |         |               |  |        |         |        |  |   |      |   |  |  |            |   |  |   |          |   |  |   |          |  
|Balance, December  31, 1998                   |  |              | 62,135,038 |            |  |          | 621 |          |  |                | 189,756 |               |  |        | 64,302  |        |  |   | (74  | ) |  |  | 1,421,383  |   |  |   | (10,912  | ) |  |   | (973     | )
|                                             
|                                             
|                                             
|                                             
|Issuance of common stock and warrants         |  |              | 9,120      |            |  |          |     |          |  |                | 10,007  |               |  |        |         |        |  |   |      |   |  |  | (3,760,315 | ) |  |   | 39,741   |   |  |   |          |  
|                                             
|                                             
|                                             
|                                             
|Stock compensation                            |  |              |            |            |  |          |     |          |  |                | 1,116   |               |  |        |         |        |  |   | 12   |   |  |  |            |   |  |   |          |   |  |   |          |  
|                                             
|                                             
|                                             
|                                             
|Share repurchase program                      |  |              |            |            |  |          |     |          |  |                |         |               |  |        |         |        |  |   |      |   |  |  | 6,114,750  |   |  |   | (102,973 | ) |  |   |          |  
|                                             
|                                             
|                                             
|                                             
|Comprehensive income                          |  |              |            |            |  |          |     |          |  |                |         |               |  |        |         |        |  |   |      |   |  |  |            |   |  |   |          |   |  |   |          |  
|                                             
|                                             
|                                             
|                                             
|Translation adjustment                        |  |              |            |            |  |          |     |          |  |                |         |               |  |        |         |        |  |   |      |   |  |  |            |   |  |   |          |   |  |   | (147     | )
|                                             
|                                             
|                                             
|                                             
|Unrealized gain on marketable securities, net |  |              |            |            |  |          |     |          |  |                |         |               |  |        |         |        |  |   |      |   |  |  |            |   |  |   |          |   |  |   | 236,786  |  
|                                             
|                                             
|                                             
|                                             
|Net income                                    |  |              |            |            |  |          |     |          |  |                |         |               |  |        | 183,762 |        |  |   |      |   |  |  |            |   |  |   |          |   |  |   |          |  
|                                              |  |              |            |            |  |          |     |          |  |                |         |               |  |        |         |        |  |   |      |   |  |  |            |   |  |   |          |   |  |   |          |  
|Total comprehensive income                    |  |              |            |            |  |          |     |          |  |                |         |               |  |        |         |        |  |   |      |   |  |  |            |   |  |   |          |   |  |   |          |  
|                                              |  |              |            |            |  |          |     |          |  |                |         |               |  |        |         |        |  |   |      |   |  |  |            |   |  |   |          |   |  |   |          |  
|Balance, December  31, 1999                   |  |              | 62,144,158 |            |  |          | 621 |          |  |                | 200,879 |               |  |        | 248,064 |        |  |   | (62  | ) |  |  | 3,775,818  |   |  |   | (74,144  | ) |  |   | 235,666  |  
|                                             
|                                             
|                                             
|                                             
|Issuance of common stock and warrants         |  |              |            |            |  |          |     |          |  |                | (3,737  | )             |  |        |         |        |  |   |      |   |  |  | (3,699,762 | ) |  |   | 72,256   |   |  |   |          |  
|                                             
|                                             
|                                             
|                                             
|Stock compensation                            |  |              |            |            |  |          |     |          |  |                | 559     |               |  |        |         |        |  |   | 4    |   |  |  |            |   |  |   |          |   |  |   |          |  
|                                             
|                                             
|                                             
|                                             
|Share repurchase program                      |  |              |            |            |  |          |     |          |  |                |         |               |  |        |         |        |  |   |      |   |  |  | 5,901,750  |   |  |   | (217,074 | ) |  |   |          |  
|                                             
|                                             
|                                             
|                                             
|Put option premiums                           |  |              |            |            |  |          |     |          |  |                | 17,630  |               |  |        |         |        |  |   |      |   |  |  |            |   |  |   |          |   |  |   |          |  
|                                             
|                                             
|                                             
|                                             
|Equity of forward equity contracts            |  |              |            |            |  |          |     |          |  |                | (1,447  | )             |  |        |         |        |  |   |      |   |  |  |            |   |  |   |          |   |  |   |          |  
|                                             
|                                             
|                                             
|                                             
|Comprehensive income                          |  |              |            |            |  |          |     |          |  |                |         |               |  |        |         |        |  |   |      |   |  |  |            |   |  |   |          |   |  |   |          |  
|                                             
|                                             
|                                             
|                                             
|Translation adjustment                        |  |              |            |            |  |          |     |          |  |                |         |               |  |        |         |        |  |   |      |   |  |  |            |   |  |   |          |   |  |   | (1,381   | )
|                                             
|                                             
|                                             
|                                             
|Unrealized loss on marketable securities, net |  |              |            |            |  |          |     |          |  |                |         |               |  |        |         |        |  |   |      |   |  |  |            |   |  |   |          |   |  |   | (202,593 | )
|                                             
|                                             
|                                             
|                                             
|Net income                                    |  |              |            |            |  |          |     |          |  |                |         |               |  |        | 205,763 |        |  |   |      |   |  |  |            |   |  |   |          |   |  |   |          |  
|                                              |  |              |            |            |  |          |     |          |  |                |         |               |  |        |         |        |  |   |      |   |  |  |            |   |  |   |          |   |  |   |          |  
|Total comprehensive income                    |  |              |            |            |  |          |     |          |  |                |         |               |  |        |         |        |  |   |      |   |  |  |            |   |  |   |          |   |  |   |          |  
|                                              |  |              |            |            |  |          |     |          |  |                |         |               |  |        |         |        |  |   |      |   |  |  |            |   |  |   |          |   |  |   |          |  
|Balance, December  31, 2000                   |  |              | 62,144,158 |            |  | $        | 621 |          |  | $              | 213,884 |               |  | $      | 453,827 |        |  | $ | (58  | ) |  |  | 5,977,806  |   |  | $ | (218,962 | ) |  | $ | 31,692   |  
|                                              |  |              |            |            |  |          |     |          |  |                |         |               |  |        |         |        |  |   |      |   |  |  |            |   |  |   |          |   |  |   |          |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                              |  |               |          |  
|--------------------------------------------- |  | ------------- | -------- | -
|                                              |  | Total        
|                                              |  | Stockholders
|                                              |  | Equity       
|                                              |  |              
|Balance January 1, 1998                       |  | $             | 200,653  |  
|                                             
|                                             
|                                             
|                                             
|Issuance of common stock                      |  |               | 9,271    |  
|                                             
|                                             
|                                             
|                                             
|Foreign acquisition tax
	benefit              |  |               | 13,835   |  
|                                             
|                                             
|                                             
|                                             
|Stock compensation                            |  |               | 1,983    |  
|                                             
|                                             
|                                             
|                                             
|Share repurchase program                      |  |               | (12,135  | )
|                                             
|                                             
|                                             
|                                             
|Comprehensive income                          |  |               |          |  
|                                             
|                                             
|                                             
|                                             
|Translation adjustment                        |  |               | (425     | )
|                                             
|                                             
|                                             
|                                             
|Unrealized gain on marketable securities, net |  |               | 123      |  
|                                             
|                                             
|                                             
|                                             
|Net income                                    |  |               | 29,415   |  
|                                              |  |               |          |  
|Total comprehensive income                    |  |               | 29,113   |  
|                                              |  |               |          |  
|Balance, December  31, 1998                   |  |               | 242,720  |  
|                                             
|                                             
|                                             
|                                             
|Issuance of common stock and warrants         |  |               | 49,748   |  
|                                             
|                                             
|                                             
|                                             
|Stock compensation                            |  |               | 1,128    |  
|                                             
|                                             
|                                             
|                                             
|Share repurchase program                      |  |               | (102,973 | )
|                                             
|                                             
|                                             
|                                             
|Comprehensive income                          |  |               |          |  
|                                             
|                                             
|                                             
|                                             
|Translation adjustment                        |  |               | (147     | )
|                                             
|                                             
|                                             
|                                             
|Unrealized gain on marketable securities, net |  |               | 236,786  |  
|                                             
|                                             
|                                             
|                                             
|Net income                                    |  |               | 183,762  |  
|                                              |  |               |          |  
|Total comprehensive income                    |  |               | 420,401  |  
|                                              |  |               |          |  
|Balance, December  31, 1999                   |  |               | 611,024  |  
|                                             
|                                             
|                                             
|                                             
|Issuance of common stock and warrants         |  |               | 68,519   |  
|                                             
|                                             
|                                             
|                                             
|Stock compensation                            |  |               | 563      |  
|                                             
|                                             
|                                             
|                                             
|Share repurchase program                      |  |               | (217,074 | )
|                                             
|                                             
|                                             
|                                             
|Put option premiums                           |  |               | 17,630   |  
|                                             
|                                             
|                                             
|                                             
|Equity of forward equity contracts            |  |               | (1,447   | )
|                                             
|                                             
|                                             
|                                             
|Comprehensive income                          |  |               |          |  
|                                             
|                                             
|                                             
|                                             
|Translation adjustment                        |  |               | (1,381   | )
|                                             
|                                             
|                                             
|                                             
|Unrealized loss on marketable securities, net |  |               | (202,593 | )
|                                             
|                                             
|                                             
|                                             
|Net income                                    |  |               | 205,763  |  
|                                              |  |               |          |  
|Total comprehensive income                    |  |               | 1,789    |  
|                                              |  |               |          |  
|Balance, December  31, 2000                   |  | $             | 481,004  |  
|                                              |  |               |          |  

See accompanying notes to consolidated financial
statements.

40



---



##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)


|                                                                                              |                                                            |                                      |                                                      |          |        |         |         |          |        |         |         |          |         |          |  
|--------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ------------------------------------ | ---------------------------------------------------- | -------- | ------ | ------- | ------- | -------- | ------ | ------- | ------- | -------- | ------- | -------- | -
|                                                                                              |                                                            |                                     
|                                                                                              |                                                            | Years Ended December 31,            
|                                                                                              |                                                            |                                     
|                                                                                              |                                                            | 1998                                 |                                                      | 1999     |        | 2000   
|                                                                                              |                                                            |                                      |                                                      |          |        |        
|Cash flows from operating activities                                                          |                                                            |                                      |                                                      |          |        |         |         |          |        |         |         |         
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Net income                                                                                    |                                                            | $                                    | 29,415                                               |          |        | $       | 183,762 |          |        | $       | 205,763 |         
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Adjustments to reconcile net income to net cash provided by
	(used for) operating activities: |                                                            |                                      |                                                      |          |        |         |         |          |        |         |         |         
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Legal settlement                                           |                                      |                                                      | 1,872    |        |         |         |         |        |         |         |         |        
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Non cash restructuring                                     |                                      |                                                      |         |        |         |         | 4,462    |        |         |         | (2,079   | )      
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Non cash interest income                                   |                                      |                                                      |         |        |         |         |         |        |         |         | (157     | )      
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Non cash investment                                        |                                      |                                                      | (2,000   | )      |         |         |         |        |         |         |         |        
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Tax benefit from exercise of stock options                 |                                      |                                                      | 4,482    |        |         |         | 16,790   |        |         |         | 30,241   |        
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Income from investing activities                           |                                      |                                                      | (35,427  | )      |         |         | (285,952 | )      |         |         | (272,853 | )      
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Deferred taxes                                             |                                      |                                                      | 1,366    |        |         |         | (5,733   | )      |         |         | 3,704    |        
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Depreciation and amortization                              |                                      |                                                      | 6,845    |        |         |         | 9,182    |        |         |         | 9,971    |        
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Stock compensation                                         |                                      |                                                      | 1,983    |        |         |         | 1,128    |        |         |         | 563      |        
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Minority interests                                         |                                      |                                                      | (578     | )      |         |         | (16      | )      |         |         |         |        
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Increase (decrease) in cash from changes in:               |                                      |                                                      |          |        |         |         |          |        |         |         |          |        
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              |                                                            | Accounts receivable                  |                                                      |          | (9,074 | )       |         |          | (6,330 | )       |         |          | (13,141 | )       
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              |                                                            | Inventory                            |                                                      |          | (3,993 | )       |         |          | (833   | )       |         |          | 4,150   |         
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              |                                                            | Prepaid expenses and other           |                                                      |          | (7,529 | )       |         |          | (1,910 | )       |         |          | (8,054  | )       
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              |                                                            | Accounts payable                     |                                                      |          | (5,874 | )       |         |          | (666   | )       |         |          | 94      |         
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              |                                                            | Accrued payroll and related benefits |                                                      |          | 4,370  |         |         |          | 3,605  |         |         |          | 3,060   |         
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              |                                                            | Accrued expenses and other           |                                                      |          | 3,593  |         |         |          | 7,387  |         |         |          | (658    | )       
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              |                                                            | Prepaid and income taxes payable     |                                                      |          | 4,817  |         |         |          | 4,787  |         |         |          | 34,180  |         
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              |                                                            | Deferred revenue                     |                                                      |          | 1,356  |         |         |          | 6,046  |         |         |          | 8,580   |         
|                                                                                              |                                                            |                                      |                                                      |          |        |         |         |          |        |         |         |         
|                                                                                              |                                                            |                                      | Net cash provided by (used for) operating activities |          |        | (4,376  | )       |          |        | (64,291 | )       |          |         | 3,364    |  
|                                                                                              |                                                            |                                      |                                                      |          |        |         |         |          |        |         |         |         
|Cash flows from investing activities                                                          |                                                            |                                      |                                                      |          |        |         |         |          |        |         |         |         
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Purchases of marketable securities                         |                                      |                                                      | (211,393 | )      |         |         | (37,550  | )      |         |         | (79,648  | )      
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Sales and maturities of marketable securities              |                                      |                                                      | 154,399  |        |         |         | 282,583  |        |         |         | 471,490  |        
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Purchases of property and equipment                        |                                      |                                                      | (18,850  | )      |         |         | (13,688  | )      |         |         | (39,511  | )      
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Investments                                                |                                      |                                                      | 26,328   |        |         |         |         |        |         |         | (11,692  | )      
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Other                                                      |                                      |                                                      |         |        |         |         | (114     | )      |         |         | (527     | )      
|                                                                                              |                                                            |                                      |                                                      |          |        |         |         |          |        |         |         |         
|                                                                                              |                                                            |                                      | Net cash provided by (used for) investing activities |          |        | (49,516 | )       |          |        | 231,231 |         |          |         | 340,112  |  
|                                                                                              |                                                            |                                      |                                                      |          |        |         |         |          |        |         |         |         
|Cash flows from financing activities                                                          |                                                            |                                      |                                                      |          |        |         |         |          |        |         |         |         
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Proceeds from exercise of stock options and purchase plans |                                      |                                                      | 3,364    |        |         |         | 28,496   |        |         |         | 38,279   |        
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Minority interests                                         |                                      |                                                      |         |        |         |         | (3,600   | )      |         |         |         |        
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Share repurchase program                                   |                                      |                                                      | (12,135  | )      |         |         | (102,973 | )      |         |         | (217,074 | )      
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Sale of put options                                        |                                      |                                                      |         |        |         |         |         |        |         |         | 17,630   |        
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Equity of forward equity contracts                         |                                      |                                                      |         |        |         |         |         |        |         |         | (1,447   | )      
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                              | Other                                                      |                                      |                                                      | (447     | )      |         |         |         |        |         |         |         |        
|                                                                                              |                                                            |                                      |                                                      |          |        |         |         |          |        |         |         |         
|                                                                                              |                                                            |                                      | Net cash used for financing activities               |          |        | (9,218  | )       |          |        | (78,077 | )       |          |         | (162,612 | )
|                                                                                              |                                                            |                                      |                                                      |          |        |         |         |          |        |         |         |         
|Effect of exchange rate changes on cash and equivalents                                       |                                                            |                                      | (307                                                 | )        |        |         | 129     |          |        |         | (1,137  | )       
|                                                                                              |                                                            |                                      |                                                      |          |        |         |         |          |        |         |         |         
|Net increase (decrease) in cash and equivalents                                               |                                                            |                                      | (63,417                                              | )        |        |         | 88,992  |          |        |         | 179,727 |         
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Cash and cash equivalents, beginning of year                                                  |                                                            |                                      | 96,595                                               |          |        |         | 33,178  |          |        |         | 122,170 |         
|                                                                                              |                                                            |                                      |                                                      |          |        |         |         |          |        |         |         |         
|Cash and cash equivalents, end of year                                                        |                                                            | $                                    | 33,178                                               |          |        | $       | 122,170 |          |        | $       | 301,897 |         
|                                                                                              |                                                            |                                      |                                                      |          |        |         |         |          |        |         |         |         

See accompanying notes to consolidated financial
statements.

41



---



##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)


1.     Nature of Business and
Summary of Significant Accounting Policies

Nature of Business  RSA Security Inc. and its
subsidiaries (the Company) is a leading provider of
electronic security (e-security) solutions. The
Company helps organizations secure the authenticity of the
people, devices and transactions involved in electronic business
(e-business) through the use of its authentication,
encryption and public key infrastructure (PKI)
solutions. The Company sells to Enterprise customers seeking
turnkey security solutions, and to Developers seeking software
development components for embedding security in software
applications or hardware devices. In additional to providing
e-security solutions, in January 2000 the Company formed
its RSA Capital segment, whose activities relate to existing and
future investments in e-businesses and other technology
companies.

Principles of Consolidation  The consolidated
financial statements include the accounts of the Company and its
subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Minority stockholders owned
an aggregate 26% of the Companys Japanese subsidiary until
November 1999 when the Company purchased the interests for
$3,600. The excess purchase price over fair value of assets of
$1,096 was recorded as goodwill and is being amortized over ten
years.

Revenue Recognition  Revenue is recognized
when earned. The Companys revenue recognition policies are
in compliance with all applicable accounting regulations,
including the American Institute of Certified Public Accountants
(AICPA) Statement of Position (SOP)
97-2, Software Revenue Recognition and SOP 98-9,
Modification of SOP 97-2 With Respect to Certain
Transactions. Revenue from products is recognized when
persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed and determinable, and collectibility
is probable. Revenue from shipments to distributors is
recognized upon receipt of evidence of sale to end-users.
Revenue from licensing other intellectual property is recognized
when evidence of an arrangement exists, the fee is fixed or
determinable and collection is considered probable. When
arrangements contain multiple elements and vendor specific
objective evidence exists for all undelivered elements, the
Company recognizes revenue for the delivered elements using the
residual method. For arrangements containing multiple elements
wherein vendor specific objective evidence does not exist for
all undelivered elements, revenue for the delivered and
undelivered elements is deferred until vendor specific objective
evidence exists or all elements have been delivered. Maintenance
services revenue, whether sold separately or as part of a
multiple element arrangement, is deferred and recognized ratably
over the term of the maintenance contract, generally twelve
months. Professional service revenue is recognized as services
are provided. No customer accounted for 5% or more of the
Companys revenue in any period reported.

Warranty Policy  Reserves are provided for
warranties based upon historical experience.

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

Inventory  Inventory consists primarily of RSA
SecurID authenticators and is stated at the lower of cost
(first-in, first-out method) or market.

Property and Equipment  Property and equipment
are stated at cost. Furniture and equipment are depreciated by
the straight-line method over the estimated useful lives of the
assets, generally two to ten years. Leasehold improvements are
depreciated by the straight-line method over the lease term or
estimated useful life of the related asset, whichever is
shorter. Buildings are depreciated over fifty years, or the
estimated useful life of the asset. Property and equipment sold
or retired is eliminated from the accounts in the year of
disposition and the resulting gain or loss is reflected in
earnings. The carrying value of all property and equipment is
evaluated periodically to determine if adjustment to the useful
life or to the net book value is needed.

42



---



##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

Financial Instruments  The carrying amounts of
cash and cash equivalents, accounts receivable and accounts
payable approximate fair value due to the short-term nature of
these instruments.

Marketable securities, including publicly traded securities
whose sale is not prohibited by contractual or statutory
restrictions, are classified as available for sale
and recorded at market using the specific identification method.
Unrealized gains and losses are included in accumulated other
comprehensive income, net of tax effects. Realized gains are
determined based on the specific identified cost of the
securities. The Company accounts for its investment in Crosby
Finance, LLC under Emerging Issues Task Force (EITF)
Issue No. 96-12, Recognition of Interest Income and
Balance Sheet Classification of Structured Notes, and has
been classified as a held to maturity security and is recorded
in investments in the consolidated balance sheet at
December 31, 2000.

Investments where ownership is less than 20% and the Company
does not have significant influence on the operating or
financial decisions of the investee are accounted for using the
cost method. Investments where the Company does have significant
influence on the operating or financial decisions of the
investee, but which are not majority-owned or controlled, are
accounted for using the equity method. Certain events, such as
an initial public offering, could result in the reclassification
of an investment to an available for sale marketable security.

Through November 2000, derivative financial instruments
were used to hedge the Companys investment in VeriSign and
were, therefore, held primarily for purposes other than trading.
During November 2000 the Company exercised its right to
terminate the derivative financial instruments used to hedge its
position in VeriSign, and subsequently transferred its
investment in VeriSign into Crosby Finance, LLC, a
bankruptcy-remote, qualifying special purpose entity, of which
the Company holds a 99% interest. The Company monitors its
positions and the credit quality of counterparties, consisting
primarily of major financial institutions, and does not
anticipate nonperformance by any counterparty.

The Company routinely evaluates the realizable value of its
financial instruments using qualitative and quantitative factors
including discounted cash flow analysis and liquidation value
assessments.

Impairment of Long-lived Assets  The
recoverability of long-lived assets is periodically assessed by
comparing the undiscounted cash flows expected to be generated
to the carrying value. If the sum of the undiscounted cash flows
is less than the carrying value of the assets, an impairment
charge is recognized.

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

Advertising  Advertising costs are expensed as
incurred and were approximately $837, $2,484 and $5,548 in 1998,
1999 and 2000, respectively.

Income Taxes  The liability method is used for
income taxes. Deferred taxes are determined based on the
estimated future tax effects of differences between the
financial statement and tax bases of assets and liabilities
given the provisions of the enacted tax laws. Taxes are provided
on the undistributed earnings of foreign subsidiaries, which are
ultimately expected to be remitted to the parent company.
Unrecognized provisions for taxes on undistributed earnings of
foreign subsidiaries which are considered permanently invested
are not material to the Companys consolidated financial
position or results of operations. Valuation allowances are
provided against net deferred tax assets, if based upon the
available evidence, it is more likely than not that some or all
of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the
generation of future taxable income and when temporary
differences become deductible. Management considers, among other
available information, scheduled reversals of deferred tax
liabilities, projected future taxable income, and other matters
in making this assessment.

43



---



##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

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

Earnings Per Share  Basic earnings per share
is computed using net income less financing costs on forward
equity contracts divided by the weighted average number of
common shares outstanding. Diluted earnings per common share is
computed using the weighted average number of common shares
outstanding plus the effect of potential outstanding common
shares, including options, warrants and forward equity contracts
using the treasury stock method.

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

Use of Estimates  The preparation of the
Companys consolidated financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses
during the reporting periods. Actual results could differ from
those estimates.

Concentration of Credit Risk  The Company
provides enterprise network and data security solutions to
various customers in diverse industries. The Company performs
ongoing credit evaluations of its customers and maintains
allowances for potential credit losses. The Company has a
non-recourse arrangement with a major financial institution,
under which the Companys customers are able to obtain
financing directly from the financial institution.

Stock-Based Compensation Plans  Stock-based
compensation cost is accounted for in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. Accordingly, no accounting
recognition is given to stock options granted at fair market
value until they are exercised. Upon exercise, net proceeds,
including the tax benefits realized, are credited to equity. The
pro forma impact on earnings per share has been disclosed as
required by SFAS No. 123.

Reclassification  Certain prior year amounts
have been reclassified to conform with the 2000 presentation.

New Accounting Pronouncements  The effective
date of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities and SFAS No. 138,
An Amendment of FASB Statement No. 133, is
January 1, 2001. SFAS No. 133 and No. 138 will
require the Company to recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be
adjusted to fair value through income. If a derivative is a
hedge, depending on the nature of the hedge, changes in the fair
value of the derivative will either be offset against the change
in fair value of hedged assets, liabilities, or firm commitments
through earnings or recognized in accumulated other
comprehensive income until the hedged item is recognized in
earnings. The ineffective portion, if any, of a
derivatives change in fair value will be immediately
recognized in earnings. As of the effective date, SFAS
No. 133 and amendments will not have a material effect on
the Companys consolidated financial position, results of
operations or cash flows.

During 2000, the EITF issued Issue No. 00-7,
Application of EITF Issue No. 96-13, Accounting for
Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Companys Own Stock, to Equity

44



---



##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

Derivative Transactions that Contain Certain Provisions that
Require Cash Settlement if Certain Events Occur and EITF
Issue No. 00-19, Determination of Whether Share
Settlement is Within the Control of the Issuer for Purposes of
Applying Issue No. 96-13. EITF No. 00-7
addresses embedded settlement features and stated that contracts
which could require cash payment cannot be accounted for as
equity of the issuer. EITF No. 00-19 stated that equity
contracts could be recorded as equity of the issuer provided the
contract meets EITF No. 00-7 requirements and the issuer
has enough available shares to satisfy the settlement terms of
the contract. If the issuer does not have enough available
shares to satisfy the contract, the issuer would be required to
reclassify the contract, or portion of the contract, as a
liability. The adoption of EITF No. 00-7 and EITF No. 00-19
did not have a material impact on the Companys
consolidated financial position, results of operations or cash
flows.

2.     Common Stock Split

On February 1, 2001, the Companys Board of Directors
declared a three-for-two stock split, to be effected in the form
of a common stock dividend. Shares are to be distributed on or
about March 23, 2001 to stockholders of record on
March 9, 2001. All references to common stock and per share
amounts in this Annual Report on Form 10-K have been adjusted to
reflect the three-for-two common stock split on a retroactive
basis.

3.     Investments and Financial
Instruments

The Companys marketable securities were as follows at:

|                                              |                        |                                    |                             |                   |         |          |           |        |        |            |           |          |         |           |       |        |        |        |      |     |     |      |       |        |        |        | 
|--------------------------------------------- | ---------------------- | ---------------------------------- | --------------------------- | ----------------- | ------- | -------- | --------- | ------ | ------ | ---------- | --------- | -------- | ------- | --------- | ----- | ------ | ------ | ------ | ---- | --- | --- | ---- | ----- | ------ | ------ | ------ | 
|                                              |                        |                                    |                             |                  
|                                              |                        | December 31, 1999                  |                             | December 31, 2000
|                                              |                        |                                    |                             |                  
|                                              |                        |                                    |                             | Net               |         |          |           |        |        | Net        |           |         
|                                              |                        | Cost                               |                             | Unrealized        |         | Recorded |           | Cost   |        | Unrealized |           | Recorded
|                                              |                        | Basis                              |                             | Gains             |         | Basis    |           | Basis  |        | Gains      |           | Basis   
|                                              |                        |                                    |                             |                   |         |          |           |        |        |            |           |         
|Debt securities recorded at market, maturing: |                        |                                    |                             |                   |         |          |           |        |        |            |           |          |         |           |       |        |        |        |      |     |     |      |       |       
|                                             
|                                             
|                                             
|                                             
|                                              | Within one year        |                                    | $                           | 58,315            |         |          | $         | (126   | )      |            | $         | 58,189   |         |           | $     | 24,188 |        |        | $    | (25 | )   |      | $     | 24,163 |       
|                                             
|                                             
|                                             
|                                             
|                                              | Between 1 and 15 years |                                    |                             | 107,900           |         |          |           | (2,586 | )      |            |           | 105,314  |         |           |       | 5,500  |        |        |      | (8  | )   |      |       | 5,492  |       
|                                              |                        |                                    |                             |                   |         |          |           |        |        |            |           |          |         |           |       |        |        |        |      |     |     |      |       |       
|                                              |                        | Debt securities recorded at market |                             |                   | 166,215 |          |           |        | (2,712 | )          |           |          | 163,503 |           |       |        | 29,688 |        |      |     | (33 | )    |       |        | 29,655 |       
|                                              |                        |                                    |                             |                   |         |          |           |        |        |            |           |          |         |           |       |        |        |        |      |     |     |      |       |       
|Equity securities recorded at market          |                        |                                    | 13,882                      |                   |         |          | 1,083,726 |        |        |            | 1,097,608 |          |         |           | 4,094 |        |        |        | (544 | )   |     |      | 3,550 |       
|                                              |                        |                                    |                             |                   |         |          |           |        |        |            |           |          |         |           |       |        |        |        |      |     |     |      |       |       
|                                              |                        |                                    | Total marketable securities |                   | $       | 180,097  |           |        | $      | 1,081,014  |           |          | $       | 1,261,111 |       |        | $      | 33,782 |      |     | $   | (577 | )     |        | $      | 33,205 | 
|                                              |                        |                                    |                             |                   |         |          |           |        |        |            |           |          |         |           |       |        |        |        |      |     |     |      |       |       

The Companys investments were as follows at:

|                                                            |                   |                   |        |                   |  |          |   |       |  |            |        |          |  |   |        |        |  |   |        |        |  |   |        |        | 
|----------------------------------------------------------- | ----------------- | ----------------- | ------ | ----------------- |  | -------- | - | ----- |  | ---------- | ------ | -------- |  | - | ------ | ------ |  | - | ------ | ------ |  | - | ------ | ------ | 
|                                                            |                   |                   |        |                  
|                                                            |                   | December 31, 1999 |        | December 31, 2000
|                                                            |                   |                   |        |                  
|                                                            |                   |                   |        | Net               |  |          |   |       |  | Net        |        |         
|                                                            |                   | Cost              |        | Unrealized        |  | Recorded |   | Cost  |  | Unrealized |        | Recorded
|                                                            |                   | Basis             |        | Gains             |  | Basis    |   | Basis |  | Gains      |        | Basis   
|                                                            |                   |                   |        |                   |  |          |   |       |  |            |        |         
|Equity securities recorded at cost                          |                   | $                 | 6,183  |                   |  |          |  |       |  | $          | 6,183  |          |  | $ | 17,620 |        |  |   |       |        |  | $ | 17,620 |       
|                                                           
|                                                           
|                                                           
|                                                           
|Valuation adjustment for equity securities recorded at cost |                   | $                 | (6,183 | )                 |  |          |  |       |  | $          | (6,183 | )        |  |   | (5,928 | )      |  |   |       |        |  |   | (5,928 | )     
|                                                            |                   |                   |        |                   |  |          |   |       |  |            |        |          |  |   |        |        |  |   |        |        |  |   |        |       
|Total equity securities recorded at cost                    |                   |                   |       |                   |  |          |  |       |  |            |       |          |  |   | 11,692 |        |  |   |       |        |  |   | 11,692 |       
|                                                            |                   |                   |        |                   |  |          |   |       |  |            |        |          |  |   |        |        |  |   |        |        |  |   |        |       
|Investment in Crosby Finance, LLC                           |                   |                   |       |                   |  |          |  |       |  |            |       |          |  |   | 17,931 |        |  | $ | 58,065 |        |  |   | 75,996 |       
|                                                            |                   |                   |        |                   |  |          |   |       |  |            |        |          |  |   |        |        |  |   |        |        |  |   |        |       
|                                                            | Total investments |                   |        |                  |  |          |   |      |  |            |        |         |  |   | $      | 29,623 |  |   | $      | 58,065 |  |   | $      | 87,688 | 
|                                                            |                   |                   |        |                   |  |          |   |       |  |            |        |          |  |   |        |        |  |   |        |        |  |   |        |       

45



---



##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

Debt securities include government and corporate notes and
bonds. Equity securities recorded at cost primarily include
preferred stock and common stock whose sale is prohibited by
contractual or statutory restrictions or not publicly traded.
During October 2000, nCipher, Plc completed its initial
public offering and the Company reclassified its investment in
nCipher to marketable securities.

At December 31, 1999 the Company had 5,500,000 shares of
VeriSign, Inc. (VeriSign) common stock which were
covered by put and call options held by independent third
parties. These put options entitled the holders to buy shares of
VeriSign common stock and the call options allowed the Company
to sell shares of VeriSign common stock on certain dates at
specified prices, or permitted a net-share settlement at the
Companys option. The options were recorded at intrinsic
value, resulting in an unrealized hedge liability of $686,034 at
December 31, 1999. There were no premiums paid for the
options. On November 27, 2000, the Company exercised its
right to terminate the put and call options on its then
remaining 4,000,000 shares of VeriSign common stock. The
termination and settlement of the put and call options resulted
in the sale and delivery of 1,363,084 shares VeriSign common
stock to one of the option counterparties, net cash proceeds to
the Company of zero and a net gain of $46,000.

Also on November 27, 2000 the Company entered into three
forward contracts and one variable delivery forward contract
(the Derivative Instruments) with respect to the
remaining 2,636,916 shares of VeriSign common stock. The Company
then contributed the remaining shares of VeriSign common stock
to Crosby Finance, LLC (the LLC), of which the
Company is a 99% member. The Company, the LLC and the
counterparty to the Derivative Instruments concurrently entered
into an agreement, pursuant to which all of the Companys
rights and obligations in the Derivative Instruments were
assumed by the LLC. The LLC is a bankruptcy-remote qualifying
special purpose entity, established to securitize the VeriSign
shares, and the transfer has been accounted for as a sale under
SFAS No. 125, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities.
Accordingly, the Company does not consolidate the LLC for
accounting purposes. The Company realized a pretax gain of
$101,435 upon the transfer of the Derivative Instruments to the
LLC. The Company is accounting for its interest in the LLC in
accordance with EITF No. 96-12, Recognition of Interest
Income and Balance Sheet Classification of Structured
Notes and accordingly, has recognized $157 of interest
income in 2000. At December 31, 2000 the Companys 99%
interest in the LLC was $75,996, which has been recorded as a
held to maturity security and included in investments.

For 2000, income from investing activities was $272,853, which
includes gains from the sale of VeriSign common stock under its
put and call program of $86,075, net gain from termination and
settlement of its put and call option program of $46,000, gain
from sale of assets to the LLC, a qualifying special purpose
entity, of $101,427, and gain from sale of Trintech Group Plc.
(Trintech) ordinary shares of $39,351. For 1999,
income from investing activities was $285,952 from sales of
marketable securities, which includes gains from the sale of
VeriSign common stock and Trintech ordinary shares of $276,438,
and an increase in value of VeriSign common stock of $12,576
from the write-up under the equity method. These gains are net
of the Companys equity in VeriSigns loss of $525 and
an investment allowance of $2,537 on other investments.

46



---



##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

4.     Property and Equipment

Property and equipment were as follows at:

|                                                |       |              |         |        |  |   |         |        | 
|----------------------------------------------- | ----- | ------------ | ------- | ------ |  | - | ------- | ------ | 
|                                                |       |             
|                                                |       | December 31,
|                                                |       |             
|                                                |       | 1999         |         | 2000  
|                                                |       |              |         |       
|Land                                            |       |              |        |        |  | $ | 5,972   |       
|                                               
|                                               
|                                               
|                                               
|Building                                        |       |              |        |        |  |   | 17,125  |       
|                                               
|                                               
|                                               
|                                               
|Furniture and equipment                         |       | $            | 45,244  |        |  |   | 61,180  |       
|                                               
|                                               
|                                               
|                                               
|Leasehold improvements                          |       |              | 11,915  |        |  |   | 12,802  |       
|                                                |       |              |         |        |  |   |         |       
|                                                | Total |              |         | 57,159 |  |   |         | 97,079 | 
|                                               
|                                               
|                                               
|                                               
|Less: Accumulated depreciation and amortization |       |              | (23,063 | )      |  |   | (32,872 | )     
|                                                |       |              |         |        |  |   |         |       
|Property and equipment, net                     |       | $            | 34,096  |        |  | $ | 64,207  |       
|                                                |       |              |         |        |  |   |         |       

5.     Earnings Per Share

The following table sets forth the computation of basic and
diluted earnings per share for the years ended December 31,
1998, 1999 and 2000:

|                                        |                                                 |                                                          |      |        |        |      |      |         |        |   |      |         |        | 
|--------------------------------------- | ----------------------------------------------- | -------------------------------------------------------- | ---- | ------ | ------ | ---- | ---- | ------- | ------ | - | ---- | ------- | ------ | 
|                                        |                                                 |                                                         
|                                        |                                                 | Years Ended December 31,                                
|                                        |                                                 |                                                         
|                                        |                                                 | 1998                                                     |      | 1999   |        | 2000
|                                        |                                                 |                                                          |      |        |        |     
|                                        |                                                 |                                                         
|                                        |                                                 | (In thousands except per share data)                    
|                                       
|                                       
|                                       
|                                       
|Numerator:                              |                                                 |                                                          |      |        |        |      |      |         |        |   |      |        
|                                       
|                                       
|                                       
|                                       
|                                        | Net income                                      |                                                          | $    | 29,415 |        |      | $    | 183,762 |        |   | $    | 205,763 |       
|                                       
|                                       
|                                       
|                                       
|                                        | Financing costs on forward equity contracts (a) |                                                          |      |       |        |      |      |        |        |   |      | (2,353  | )     
|                                        |                                                 |                                                          |      |        |        |      |      |         |        |   |      |        
|Numerator for basic earnings per share: |                                                 |                                                          |      |        |        |      |      |         |        |   |      |        
|                                       
|                                       
|                                       
|                                       
|                                        | Net income available to common stockholders     |                                                          | $    | 29,415 |        |      | $    | 183,762 |        |   | $    | 203,410 |       
|                                        |                                                 |                                                          |      |        |        |      |      |         |        |   |      |        
|Denominator:                            |                                                 |                                                          |      |        |        |      |      |         |        |   |      |        
|                                       
|                                       
|                                       
|                                       
|                                        | Denominator for basic earnings per share:       |                                                          |      |        |        |      |      |         |        |   |      |         |       
|                                       
|                                       
|                                       
|                                       
|                                        |                                                 | Weighted average shares                                  |      |        | 61,363 |      |      |         | 58,757 |   |      |         | 58,051 | 
|                                       
|                                       
|                                       
|                                       
|                                        |                                                 | Effect of options, warrants and forward equity contracts |      |        | 2,382  |      |      |         | 4,213  |   |      |         | 5,976  | 
|                                        |                                                 |                                                          |      |        |        |      |      |         |        |   |      |        
|                                        | Denominator for diluted earnings per share:     |                                                          |      |        |        |      |      |         |        |   |      |         |       
|                                       
|                                       
|                                       
|                                       
|                                        |                                                 | Adjusted weighted average shares                         |      |        | 63,745 |      |      |         | 62,970 |   |      |         | 64,027 | 
|                                        |                                                 |                                                          |      |        |        |      |      |         |        |   |      |        
|Basic earnings per share                |                                                 | $                                                        | 0.48 |        |        | $    | 3.13 |         |        | $ | 3.50 |        
|                                        |                                                 |                                                          |      |        |        |      |      |         |        |   |      |        
|Diluted earnings per share              |                                                 | $                                                        | 0.46 |        |        | $    | 2.92 |         |        | $ | 3.21 |        
|                                        |                                                 |                                                          |      |        |        |      |      |         |        |   |      |        




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

6.     Stock Option and Purchase
Plans

The 1994 Stock Option Plan, as amended  1998
Restatement, as amended (1994 Plan), allows the
Company to grant to its employees, officers, directors and
consultants options to purchase common stock intended to qualify
as incentive stock options, options that do not qualify as
incentive stock options (non-statutory options), restricted
stock awards and other stock-based awards. Option exercise
prices for incentive stock options granted under the 1994 Plan
may not be less than 100% of the fair market value of the
shares. In

47



---



##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

general, 1994 Plan option grants become exercisable as to 25% on
the first anniversary of the grant date, and in equal quarterly
amounts thereafter for three years. In general, no installment
is exercisable after the fourth anniversary of the date on which
such installment first becomes exercisable, and options
generally expire eight years from the grant date.

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

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

Authorized shares at December 31, 2000 were 17,355,000
shares under the 1994 Plan, 750,000 shares under the Director
Plan and 12,857,371 shares under the 1998 Plan. At
December 31, 2000 shares available for grant were 2,250,882
under the 1994 Plan, 610,500 under the Director Plan and 167,110
under the 1998 Plan.

The 1994 Employee Stock Purchase Plan, as amended
(Purchase Plan), provides for sales of common stock
to participating employees at prices of not less than 85% of the
closing price on either the first day or the last day of the
offering period, whichever is lower. At December 31, 2000
1,500,000 shares were authorized under the Purchase Plan and
498,178 shares were available for purchase. The cumulative total
shares purchased under the plan through 1998, 1999 and 2000 were
550,432, 827,758 and 1,001,821, respectively.

A summary of stock option activity under all plans follows:

|                                 |                                  |        |            |                  |   |   |       |       | 
|-------------------------------- | -------------------------------- | ------ | ---------- | ---------------- | - | - | ----- | ----- | 
|                                 |                                  |        |            | Weighted Average
|                                 |                                  |        |            | Exercise        
|                                 |                                  | Shares |            | Price Per Share 
|                                 |                                  |        |            |                 
|Outstanding at January 1, 1998   |                                  |        | 9,080,461  |                  |   | $ | 16.58 |      
|                                
|                                
|                                
|                                
|                                 | Granted                          |        |            | 13,688,906       |   |   |       | 10.06 | 
|                                
|                                
|                                
|                                
|                                 | Exercised                        |        |            | (1,459,110       | ) |   |       | 1.23  | 
|                                
|                                
|                                
|                                
|                                 | Canceled                         |        |            | (9,267,549       | ) |   |       | 21.73 | 
|                                 |                                  |        |            |                  |   |   |       |      
|Outstanding at December 31, 1998 |                                  |        | 12,042,708 |                  |   |   | 8.90  |      
|                                
|                                
|                                
|                                
|                                 | Granted                          |        |            | 9,942,772        |   |   |       | 17.91 | 
|                                
|                                
|                                
|                                
|                                 | Exercised                        |        |            | (3,658,251       | ) |   |       | 7.55  | 
|                                
|                                
|                                
|                                
|                                 | Canceled                         |        |            | (2,674,137       | ) |   |       | 12.33 | 
|                                 |                                  |        |            |                  |   |   |       |      
|Outstanding at December 31, 1999 |                                  |        | 15,653,092 |                  |   |   | 14.55 |      
|                                
|                                
|                                
|                                
|                                 | Granted                          |        |            | 8,936,787        |   |   |       | 34.95 | 
|                                
|                                
|                                
|                                
|                                 | Exercised                        |        |            | (3,173,193       | ) |   |       | 10.31 | 
|                                
|                                
|                                
|                                
|                                 | Canceled                         |        |            | (1,443,675       | ) |   |       | 16.18 | 
|                                 |                                  |        |            |                  |   |   |       |      
|Outstanding at December 31, 2000 |                                  |        | 19,973,011 |                  |   | $ | 24.10 |      
|                                 |                                  |        |            |                  |   |   |       |      
|                                 | Exercisable at December 31, 1998 |        |            | 3,944,871        |   |   | $     | 9.09  | 
|                                 |                                  |        |            |                  |   |   |       |      
|                                 | Exercisable at December 31, 1999 |        |            | 2,821,375        |   |   | $     | 10.32 | 
|                                 |                                  |        |            |                  |   |   |       |      
|                                 | Exercisable at December 31, 2000 |        |            | 4,764,196        |   |   | $     | 15.44 | 
|                                 |                                  |        |            |                  |   |   |       |      

48



---



##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

The following table sets forth information regarding stock
options outstanding at December 31, 2000 under all plans:

|               |               |           |  |                |              |                  |  |             |       |                    |  |  |     |  |  |  |           |  |  |   |       | 
|-------------- | ------------- | --------- |  | -------------- | ------------ | ---------------- |  | ----------- | ----- | ------------------ |  |  | --- |  |  |  | --------- |  |  | - | ----- | 
|               |               |           |  |                |              |                  |  |             |       | Weighted          
|               |               |           |  |                |              | Weighted Average |  |             |       | Average           
|               |               |           |  | Weighted       |              | Remaining        |  | Number      |       | Exercise Price for
|Range          |               | Number of |  | Average        |              | Contractual Life |  | Currently   |       | Currently         
|Exercise Price |               | Shares    |  | Exercise Price |              | (Years)          |  | Exercisable |       | Exercisable       
|               |               |           |  |                |              |                  |  |             |       |                   
|               | $0.30         |           |  |                | 4,725        |                  |  | $           | 0.30  |                    |  |  | 3.0 |  |  |  | 4,725     |  |  | $ | 0.30  | 
|               | 1.97  2.15   |           |  |                | 17,117       |                  |  |             | 1.97  |                    |  |  | 3.9 |  |  |  | 16,939    |  |  |   | 1.97  | 
|               | 4.41          |           |  |                | 2,939        |                  |  |             | 4.41  |                    |  |  | 0.3 |  |  |  | 2,939     |  |  |   | 4.41  | 
|               | 6.65  9.54   |           |  |                | 3,220,948    |                  |  |             | 7.81  |                    |  |  | 5.2 |  |  |  | 1,879,073 |  |  |   | 7.76  | 
|               | 10.67  15.00 |           |  |                | 2,367,847    |                  |  |             | 12.55 |                    |  |  | 6.3 |  |  |  | 679,540   |  |  |   | 12.35 | 
|               | 16.09  23.75 |           |  |                | 3,358,198    |                  |  |             | 18.00 |                    |  |  | 6.4 |  |  |  | 1,152,580 |  |  |   | 17.60 | 
|               | 24.77  35.67 |           |  |                | 7,266,087    |                  |  |             | 29.77 |                    |  |  | 7.4 |  |  |  | 1,023,900 |  |  |   | 29.35 | 
|               | 38.25  49.37 |           |  |                | 3,735,150    |                  |  |             | 40.08 |                    |  |  | 7.3 |  |  |  | 4,500     |  |  |   | 46.17 | 
|               |               |           |  |                |              |                  |  |             |       |                    |  |  |     |  |  |  |           |  |  |   |       | 
|               | $0.30  $49.3 |           |  |                | 7 19,973,011 |                  |  | $           | 24.10 |                    |  |  | 6.7 |  |  |  | 4,764,196 |  |  | $ | 15.44 | 
|               |               |           |  |                |              |                  |  |             |       |                    |  |  |     |  |  |  |           |  |  |   |       | 

For certain options and stock awards granted prior to 1999, the
Company is recognizing compensation expense based on the excess
of fair market value over the option exercise or award prices at
dates of grant. Compensation is being recognized ratably over
the vesting periods and amounted to $1,983, $1,128 and $563 in
1998, 1999 and 2000, respectively.

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

|                               |         |                          |        |      |  |      |         |      |  |   |         |      | 
|------------------------------ | ------- | ------------------------ | ------ | ---- |  | ---- | ------- | ---- |  | - | ------- | ---- | 
|                               |         |                         
|                               |         | Years Ended December 31,
|                               |         |                         
|                               |         | 1998                     |        | 1999 |  | 2000
|                               |         |                          |        |      |  |     
|Net income as reported         |         | $                        | 29,415 |      |  | $    | 183,762 |      |  | $ | 205,763 |     
|                              
|                              
|                              
|                              
|Pro forma net income           |         | $                        | 4,598  |      |  | $    | 173,090 |      |  | $ | 147,618 |     
|Pro forma net income per share |         |                          |        |      |  |      |         |      |  |   |         |     
|                              
|                              
|                              
|                              
|                               | Basic   |                          | $      | 0.08 |  |      | $       | 2.94 |  |   | $       | 2.50 | 
|                              
|                              
|                              
|                              
|                               | Diluted |                          | $      | 0.07 |  |      | $       | 2.75 |  |   | $       | 2.31 | 

49



---



##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

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

|                                                     |  |                          |      |      |  |      |       |   |  |   |       |  
|---------------------------------------------------- |  | ------------------------ | ---- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                                                     |  |                         
|                                                     |  | Years Ended December 31,
|                                                     |  |                         
|                                                     |  | 1998                     |      | 1999 |  | 2000
|                                                     |  |                          |      |      |  |     
|Stock Option Plans:                                  |  |                          |      |      |  |      |       |   |  |   |       |  
|                                                    
|                                                    
|                                                    
|                                                    
|Risk-free interest rate                              |  |                          | 5.2  | %    |  |      | 5.4   | % |  |   | 6.1   | %
|                                                    
|                                                    
|                                                    
|                                                    
|Expected life of option grants (years)               |  |                          | 4.1  |      |  |      | 4.1   |   |  |   | 4.2   |  
|                                                    
|                                                    
|                                                    
|                                                    
|Expected volatility of underlying stock              |  |                          | 70.0 | %    |  |      | 82.0  | % |  |   | 82.0  | %
|                                                    
|                                                    
|                                                    
|                                                    
|Expected dividend payment rate                       |  |                          | 0.0  | %    |  |      | 0.0   | % |  |   | 0.0   | %
|                                                    
|                                                    
|                                                    
|                                                    
|Expected forfeiture rate                             |  |                          | 7.5  | %    |  |      | 7.5   | % |  |   | 7.5   | %
|                                                    
|                                                    
|                                                    
|                                                    
|Weighted average fair value of stock options granted |  | $                        | 4.34 |      |  | $    | 11.36 |   |  | $ | 22.62 |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|Employee Stock Purchase Plan:                        |  |                          |      |      |  |      |       |   |  |   |       |  
|                                                    
|                                                    
|                                                    
|                                                    
|Risk-free interest rate                              |  |                          | 5.2  | %    |  |      | 4.8   | % |  |   | 6.1   | %
|                                                    
|                                                    
|                                                    
|                                                    
|Expected life of option grants (years)               |  |                          | 0.5  |      |  |      | 0.5   |   |  |   | 0.5   |  
|                                                    
|                                                    
|                                                    
|                                                    
|Expected volatility of underlying stock              |  |                          | 70.0 | %    |  |      | 82.0  | % |  |   | 82.0  | %
|                                                    
|                                                    
|                                                    
|                                                    
|Expected dividend payment rate                       |  |                          | 0.0  | %    |  |      | 0.0   | % |  |   | 0.0   | %
|                                                    
|                                                    
|                                                    
|                                                    
|Weighted average fair value of stock options granted |  | $                        | 3.72 |      |  | $    | 4.64  |   |  | $ | 14.46 |  

7.     Stockholders Equity

Stockholder Rights Plan  On July 20, 1999
the Companys Board of Directors adopted a Stockholder
Rights Plan and a Rights Agreement to govern the Plan in which
common stock purchase rights (each, a Right) would
be distributed as a dividend at the rate of one Right for each
share of the Companys common stock outstanding as of the
close of business on July 30, 1999. Each Right entitles
rightsholders to purchase one share of common stock of the
Company at a purchase price of $83.33, subject to adjustment
(the Purchase Price). The Rights will be exercisable
if another party acquires, or obtains the right to acquire,
beneficial ownership of 15% or more of the Companys common
stock, or upon the commencement of a tender or exchange offer
that, if consummated, would result in another party acquiring
15% or more of the Companys common stock. In the event of
an acquisition or a similar event, each Right, except those
owned by the acquiring party, will enable the holder of the
Right to purchase that number of shares of the Companys
common stock which equals the Purchase Price divided by one-half
of the current market price (as defined in the Rights Agreement)
of such common stock.

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

Share Repurchase Program  The Company has
maintained a common stock repurchase program since
October 1998. Under the current program, the Company is
authorized to repurchase up to 9,750,000 shares of its common
stock through October 3, 2001. Repurchased shares are used
for stock option and employee stock purchase plans, and for
general corporate purposes. Since the repurchase program was
authorized, the Company has repurchased 13,603,500 shares of its
common stock for an aggregate amount of $332,181, or an

50



---



##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

average cost of $24.41 per share. The Company purchased
5,901,750 shares of its common stock during the year ended
December 31, 2000, for an aggregate amount of $217,074, or
an average cost of $36.78 per share.

During the year ended December 31, 2000, the Company
received $17,630 from the sale of put options on its common
stock and those proceeds were used to facilitate its share
repurchase program. The proceeds were recorded as additional
paid-in capital. At December 31, 2000, the Company had
outstanding put options covering 2,250,000 shares of its common
stock, at strike prices ranging from $34.23 to $40.85 per share.
These options can only be exercised on certain dates, and expire
through the second quarter of 2002. The Company has the option
to settle the put options in cash, net shares or through
physical delivery of the Companys shares for cash. In
certain remote circumstances, such as contract default, the
option agreements provide the counterparty with the option of
requiring cash settlement. The settlement of these put options
will be recorded as a component of equity. The put options with
strike prices in excess of the average closing market value of
the Companys common stock for the year ended
December 31, 2000, of $38.87, would be considered dilutive.
Accordingly, the put options had a dilutive effect on the
calculation of earnings per share for the year ended
December 31, 2000.

The Company has also entered into forward purchase contracts for
1,500,000 shares of its common stock in order to set purchase
prices for its future repurchase of shares under its share
repurchase program. The contracts have forward purchase prices
ranging from $38.40 to $43.30 and provide for quarterly resets
of the forward purchase price through the first quarter of 2001.
If the reset date market price of the Companys common
stock is higher than the forward purchase price, the forward
purchase price resets to the reset date market price and the
Company receives the net differential. If the reset date market
price of the Companys common stock is lower than the
forward purchase price, the Company is not obligated to settle
the net differential and the forward purchase price does not
reset. At the end of the contract if the market price of the
Companys common stock is lower than the forward purchase
price, the Company is required to settle the net differential.
The Company has the option to pay or receive net cash, net
shares or settle with a cash payment for the gross amount of
shares. The settlement on a reset date or at the end of the
contract is recorded as a component of equity. During 2000, the
forward purchase price for 572,500 shares was reset to $38.40
and the Company paid the net differential of $1,447, which has
been recorded as a decrease to additional paid-in capital.
Contracts with forward purchase prices above the closing fair
value of the Companys common stock at December 31,
2000 of $35.25 would be considered dilutive. Accordingly, the
forward purchase contracts did have a dilutive effect on the
earnings per share calculation at December 31, 2000.

8.     Comprehensive Income

For the years ended December 31, 1998, 1999 and 2000,
comprehensive income was as follows:

|                                  |                                                                       |                          |        |      |   |      |         |         |   |   |         |          |  
|--------------------------------- | --------------------------------------------------------------------- | ------------------------ | ------ | ---- | - | ---- | ------- | ------- | - | - | ------- | -------- | -
|                                  |                                                                       |                         
|                                  |                                                                       | Years Ended December 31,
|                                  |                                                                       |                         
|                                  |                                                                       | 1998                     |        | 1999 |   | 2000
|                                  |                                                                       |                          |        |      |   |     
|Net income                        |                                                                       | $                        | 29,415 |      |   | $    | 183,762 |         |   | $ | 205,763 |         
|                                 
|                                 
|                                 
|                                 
|Comprehensive income, net of tax: |                                                                       |                          |        |      |   |      |         |         |   |   |         |         
|                                 
|                                 
|                                 
|                                 
|                                  | Holding gains (losses) arising during period                          |                          |        | 123  |   |      |         | 272,972 |   |   |         | (657     | )
|                                 
|                                 
|                                 
|                                 
|                                  | Less: reclassification adjustment for gains included in net
	income   |                          |        |     |   |      |         | (36,186 | ) |   |         | (201,936 | )
|                                  |                                                                       |                          |        |      |   |      |         |         |   |   |         |         
|                                  | Increase (decrease) in net unrealized gains on marketable
	securities |                          |        | 123  |   |      |         | 236,786 |   |   |         | (202,593 | )
|                                  |                                                                       |                          |        |      |   |      |         |         |   |   |         |         
|                                  | Foreign currency translation adjustments                              |                          |        | (425 | ) |      |         | (147    | ) |   |         | (1,381   | )
|                                  |                                                                       |                          |        |      |   |      |         |         |   |   |         |         
|Comprehensive income              |                                                                       | $                        | 29,113 |      |   | $    | 420,401 |         |   | $ | 1,789   |         
|                                  |                                                                       |                          |        |      |   |      |         |         |   |   |         |         

51



---



##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

Accumulated other comprehensive income consists of the following:

|                                       |  |             |        |            |  |               |          |   |  |   |          |  
|-------------------------------------- |  | ----------- | ------ | ---------- |  | ------------- | -------- | - |  | - | -------- | -
|                                       |  |             |        | Unrealized |  |              
|                                       |  |             |        | Holding    |  |              
|                                       |  | Foreign     |        | (Loss)     |  | Accumulated  
|                                       |  | Currency    |        | Gain on    |  | Other        
|                                       |  | Translation |        | Marketable |  | Comprehensive
|Accumulated other comprehensive income |  | Adjustments |        | Securities |  | Income       
|                                       |  |             |        |            |  |              
|Balance, January 1, 1998               |  | $           | (750   | )          |  | $             | 79       |   |  | $ | (671     | )
|                                      
|                                      
|                                      
|                                      
|Period change                          |  |             | (425   | )          |  |               | 123      |   |  |   | (302     | )
|                                       |  |             |        |            |  |               |          |   |  |   |          |  
|Balance, December 31, 1998             |  |             | (1,175 | )          |  |               | 202      |   |  |   | (973     | )
|                                      
|                                      
|                                      
|                                      
|Period change                          |  |             | (147   | )          |  |               | 236,786  |   |  |   | 236,639  |  
|                                       |  |             |        |            |  |               |          |   |  |   |          |  
|Balance, December 31, 1999             |  |             | (1,322 | )          |  |               | 236,988  |   |  |   | 235,666  |  
|                                      
|                                      
|                                      
|                                      
|Period change                          |  |             | (1,381 | )          |  |               | (202,593 | ) |  |   | (203,974 | )
|                                       |  |             |        |            |  |               |          |   |  |   |          |  
|Balance, December 31, 2000             |  | $           | (2,703 | )          |  | $             | 34,395   |   |  | $ | 31,692   |  
|                                       |  |             |        |            |  |               |          |   |  |   |          |  

The tax effects of unrealized holding gains and (losses) on
marketable securities were $82, $157,857 and $(135,062) for
1998, 1999 and 2000, respectively.

9.  Income Taxes

The provision for income taxes consisted of the following:

|          |                                 |                          |        |        |        |      |         |         |         |   |         |         |         | 
|--------- | ------------------------------- | ------------------------ | ------ | ------ | ------ | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|          |                                 |                         
|          |                                 | Years Ended December 31,
|          |                                 |                         
|          |                                 | 1998                     |        | 1999   |        | 2000
|          |                                 |                          |        |        |        |     
|Current:  |                                 |                          |        |        |        |      |         |         |         |   |         |        
|         
|         
|         
|         
|          | Federal                         |                          | $      | 18,720 |        |      | $       | 119,387 |         |   | $       | 114,981 |        
|         
|         
|         
|         
|          | State                           |                          |        | 2,687  |        |      |         | 4,052   |         |   |         | 3,484   |        
|         
|         
|         
|         
|          | Foreign                         |                          |        | 798    |        |      |         | 1,276   |         |   |         | 1,843   |        
|          |                                 |                          |        |        |        |      |         |         |         |   |         |        
|          |                                 | Total                    |        |        | 22,205 |      |         |         | 124,715 |   |         |         | 120,308 | 
|          |                                 |                          |        |        |        |      |         |         |         |   |         |        
|Deferred: |                                 |                          |        |        |        |      |         |         |         |   |         |        
|         
|         
|         
|         
|          | Federal                         |                          |        | (387   | )      |      |         | (11,827 | )       |   |         | 29,017  |        
|         
|         
|         
|         
|          | State                           |                          |        | 2,050  |        |      |         | 6,094   |         |   |         | 185     |        
|         
|         
|         
|         
|          | Foreign                         |                          |        | (297   | )      |      |         |        |         |   |         |        |        
|         
|         
|         
|         
|          | Reversal of valuation allowance |                          |        |       |        |      |         |        |         |   |         | (25,498 | )      
|          |                                 |                          |        |        |        |      |         |         |         |   |         |        
|          |                                 | Total                    |        |        | 1,366  |      |         |         | (5,733  | ) |         |         | 3,704   | 
|          |                                 |                          |        |        |        |      |         |         |         |   |         |        
|Total     |                                 | $                        | 23,571 |        |        | $    | 118,982 |         |         | $ | 124,012 |        
|          |                                 |                          |        |        |        |      |         |         |         |   |         |        

52



---



##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

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

|                                                 |                                                   |      |          |          |   |   |         |         |  
|------------------------------------------------ | ------------------------------------------------- | ---- | -------- | -------- | - | - | ------- | ------- | -
|                                                 |                                                   | 1999 |          | 2000    
|                                                 |                                                   |      |          |         
|Deferred tax assets (liabilities)  current:     |                                                   |      |          |          |   |   |         |        
|                                                
|                                                
|                                                
|                                                
|                                                 | Unrealized hedge liability                        |      | $        | 274,414  |   |   |         |        |  
|                                                
|                                                
|                                                
|                                                
|                                                 | Unrealized gains on marketable securities         |      |          | (442,032 | ) |   |         |        |  
|                                                
|                                                
|                                                
|                                                
|                                                 | Investment in Crosby Finance, LLC                 |      |          |         |   |   | $       | (23,163 | )
|                                                
|                                                
|                                                
|                                                
|                                                 | Revenue related items and other                   |      |          | 5,887    |   |   |         | 2,681   |  
|                                                 |                                                   |      |          |          |   |   |         |        
|Net deferred tax liabilities  current           |                                                   | $    | (161,731 | )        |   | $ | (20,482 | )      
|                                                 |                                                   |      |          |          |   |   |         |        
|Deferred tax assets (liabilities)  non current: |                                                   |      |          |          |   |   |         |        
|                                                
|                                                
|                                                
|                                                
|                                                 | Foreign acquisition asset                         |      | $        | 36,302   |   |   | $       | 33,270  |  
|                                                
|                                                
|                                                
|                                                
|                                                 | Deferred gain  Investment in Crosby Finance, LLC |      |          |         |   |   |         | (23,007 | )
|                                                
|                                                
|                                                
|                                                
|                                                 | Purchased research and development                |      |          | 2,568    |   |   |         | 2,515   |  
|                                                
|                                                
|                                                
|                                                
|                                                 | Compensation                                      |      |          | 4,169    |   |   |         | 4,743   |  
|                                                
|                                                
|                                                
|                                                
|                                                 | Investment valuation                              |      |          | 2,474    |   |   |         | 2,474   |  
|                                                
|                                                
|                                                
|                                                
|                                                 | Other                                             |      |          | 1,206    |   |   |         | 728     |  
|                                                
|                                                
|                                                
|                                                
|                                                 | Valuation allowance                               |      |          | (25,498  | ) |   |         |        |  
|                                                 |                                                   |      |          |          |   |   |         |        
|Net deferred tax assets  non current            |                                                   | $    | 21,221   |          |   | $ | 20,723  |        
|                                                 |                                                   |      |          |          |   |   |         |        

The reconciliation between the statutory and effective income
tax rates is as follows:

|                                                     |  |                          |      |      |  |      |      |   |  |  |      |  
|---------------------------------------------------- |  | ------------------------ | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                                     |  |                         
|                                                     |  | Years Ended December 31,
|                                                     |  |                         
|                                                     |  | 1998                     |      | 1999 |  | 2000
|                                                     |  |                          |      |      |  |     
|Statutory tax rate                                   |  |                          | 35.0 | %    |  |      | 35.0 | % |  |  | 35.0 | %
|                                                    
|                                                    
|                                                    
|                                                    
|State income taxes net of federal benefit            |  |                          | 7.0  |      |  |      | 2.9  |   |  |  | 1.0  |  
|                                                    
|                                                    
|                                                    
|                                                    
|Merger expenses                                      |  |                          | 0.1  |      |  |      |     |   |  |  |     |  
|                                                    
|                                                    
|                                                    
|                                                    
|Reversal of valuation allowance                      |  |                          |     |      |  |      |     |   |  |  | (7.7 | )
|                                                    
|                                                    
|                                                    
|                                                    
|Transfer of licensing rights to a foreign subsidiary |  |                          |     |      |  |      |     |   |  |  | 6.4  |  
|                                                    
|                                                    
|                                                    
|                                                    
|Other                                                |  |                          | 2.9  |      |  |      | 1.4  |   |  |  | 2.9  |  
|                                                     |  |                          |      |      |  |      |      |   |  |  |      |  
|Effective income tax rate                            |  |                          | 45.0 | %    |  |      | 39.3 | % |  |  | 37.6 | %
|                                                     |  |                          |      |      |  |      |      |   |  |  |      |  

In the fourth quarter of 1998, the Company made certain
elections for U.S. tax reporting purposes that resulted in a
deferred tax asset of approximately $39,333 relating to the
DynaSoft acquisition, a taxable business combination in 1997
which was accounted for as a pooling of interests. In accordance
with provisions of SFAS No. 109, the Company simultaneously
recorded a $25,498 valuation allowance, reducing the deferred
tax asset to an amount that management believed is more likely
than not to be realized. The net deferred tax asset of $13,835
was recorded with a corresponding increase to additional paid-in
capital. During the fourth quarter of 2000, the Company reversed
the valuation allowance of $25,498, due to revised estimates of
what management believes will more likely than not be realized.

Tax benefits arising from exercise of stock options were $4,482,
$16,790 and $30,241 in 1998, 1999 and 2000, respectively.

Cash payments for income taxes were approximately $18,249,
$101,929 and $63,964 in 1998, 1999 and 2000, respectively.

53



---



##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

10.     Retirement and Savings
Plan

The Company has a 401(k) retirement and savings plan which
allows each participant to defer up to 20% of annual earnings up
to an amount not to exceed an annual statutory maximum. The
Company may make, at its discretion, matching and profit-sharing
contributions. Generally, matching and profit-sharing
contributions made by the Company vest annually over four years.
Matching contributions were $582, $657 and $857 in 1998, 1999
and 2000, respectively, and profit sharing contributions were
$336, $786 and $608 in 1998, 1999 and 2000, respectively.

The Company also has a non-qualified deferred compensation
program which permits key employees to annually elect to defer a
portion of their compensation for not less than three years or
until their retirement, termination, death or disability. To
assist in the financing of the funding of the deferred
compensation program, the Company has invested in corporate
owned life insurance policies. Deferred compensation expense was
$1,192 in 2000.

11.     Commitments

The Company leases office facilities under non-cancelable
operating leases expiring through 2017. Future minimum rental
payments are as follows:

|                         |  |   |         | 
|------------------------ |  | - | ------- | 
|Years Ended December 31, |  |  
|                         |  |  
|2001                     |  | $ | 10,192  | 
|                        
|                        
|                        
|                        
|2002                     |  |   | 14,412  | 
|                        
|                        
|                        
|                        
|2003                     |  |   | 14,151  | 
|                        
|                        
|                        
|                        
|2004                     |  |   | 13,788  | 
|                        
|                        
|                        
|                        
|2005 and thereafter      |  |   | 113,124 | 

Net rent expense was approximately $4,884, $7,952 and $8,319 in
1998, 1999 and 2000, respectively. Rent collected from subleases
of the Companys former headquarters was $81, $271 and $582
in 1998, 1999 and 2000, respectively.

Until its expiration in September 2000, the Company had a
license for cryptographic communication technology and devices
from the Massachusetts Institute of Technology, which allowed
for an exclusive right to use, lease or sell technology, subject
to payment of royalties. Since September 2000, the Company
has continued to use the technology but is no longer subject to
the payment of royalties. Total royalty expense under all
agreements was $6,235, $6,890 and $7,329 in 1998, 1999 and 2000,
respectively.

In November 2000 the Company entered into fifteen year
non-cancelable operating leases for a new corporate headquarters
facility that is presently under construction. The new
headquarters facility will be located in Bedford, Massachusetts
and construction is expected to be completed in April 2002.
The Company plans to sublease its existing occupied space in
Bedford, Massachusetts once it occupies its new facility. At
this time, the Company does not believe it will incur any
material losses from any sublease of its existing principal
facilities leases. In connection with the leases of the new
facility, the Company loaned the lessor $4,500, bearing interest
due monthly at 6% per annum, which matures 15 days after the
occupancy of the new facility. The note receivable has been
included in prepaid expenses at December 31, 2000.

12.     Line of Credit

During 2000, the Company entered into a $10,000 line of credit
agreement with a major financial institution maturing on
June 30, 2001, subject to annual extension provisions. This
agreement was unused at December 31, 2000. Borrowings under
this agreement will bear interest, at the Companys option,
at either

54



---



##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

fixed or variable rates linked to either the London Interbank
Offered Rate or the Prime Rate. Borrowings will be
collateralized by cash deposits of the Company.

13.     Segment Information

The Company has two reportable segments, e-Security Solutions
and RSA Capital (formed January 2000). The segments were
determined primarily on how management views and evaluates the
business. The operations of the e-Security Solutions segment
consist of the sale of software licenses, hardware, maintenance
and professional services through two product groups, Enterprise
solutions and Developer solutions. Enterprise solutions include
sales of RSA SecurID authenticators, RSA ACE/ Server software,
RSA Keon software, and maintenance and professional services and
Developer solutions include sales of RSA BSAFE cryptographic
software and protocol products, RSA Keon components, and
maintenance and professional services.

In January 2000 the Company redefined the reporting
segments of its business to include the RSA Capital segment.
This segment includes the activities relating to the
Companys existing and future investments in e-businesses
and other technology companies. The Board of Directors has
authorized the Company to invest in and solicit investments for
RSA Ventures I, a venture capital fund. The fund may raise up to
$200,000, with the Companys portion not to be less than
$100,000. Expenses incurred in connection with RSA Capital are
primarily for general and administration, management and
professional fees, and are included in general and
administrative expenses.

Non-recurring expense items that are not identifiable to the
Companys two segments have been included in other below
and include restructuring charges and costs associated with the
Companys 1999 rebranding. The tables below present
information about the Companys reportable segments for the
years ended December 31, 1999 and 2000:

|                                 |  |                              |         |         |  |       |         |              |  |   |       |  |  |   |         | 
|-------------------------------- |  | ---------------------------- | ------- | ------- |  | ----- | ------- | ------------ |  | - | ----- |  |  | - | ------- | 
|                                 |  |                             
|                                 |  | Year Ended December 31, 2000
|                                 |  |                             
|                                 |  | e-Security                   |         | RSA     |  |      
|                                 |  | Solutions                    |         | Capital |  | Other |         | Consolidated
|                                 |  |                              |         |         |  |       |         |             
|Revenue                          |  | $                            | 280,191 |         |  |       |        |              |  |   |      |  |  | $ | 280,191 | 
|                                 |  |                              |         |         |  |       |         |              |  |   |       |  |  |   |         | 
|Income from operations           |  | $                            | 45,075  |         |  | $     | (3,096  | )            |  | $ | 2,079 |  |  | $ | 44,058  | 
|                                 |  |                              |         |         |  |       |         |              |  |   |       |  |  |   |         | 
|Interest income and other        |  | $                            | 12,864  |         |  |       |        |              |  |   |      |  |  | $ | 12,864  | 
|                                 |  |                              |         |         |  |       |         |              |  |   |       |  |  |   |         | 
|Income from investing activities |  |                              |        |         |  | $     | 272,853 |              |  |   |      |  |  | $ | 272,853 | 
|                                 |  |                              |         |         |  |       |         |              |  |   |       |  |  |   |         | 
|Depreciation and amortization    |  | $                            | 9,971   |         |  |       |        |              |  |   |      |  |  | $ | 9,971   | 
|                                 |  |                              |         |         |  |       |         |              |  |   |       |  |  |   |         | 
|Identifiable assets              |  | $                            | 498,276 |         |  | $     | 91,238  |              |  |   |      |  |  | $ | 589,514 | 
|                                 |  |                              |         |         |  |       |         |              |  |   |       |  |  |   |         | 

|                                 |  |                              |         |         |  |       |           |              |  |   |         |   |  |   |           | 
|-------------------------------- |  | ---------------------------- | ------- | ------- |  | ----- | --------- | ------------ |  | - | ------- | - |  | - | --------- | 
|                                 |  |                             
|                                 |  | Year Ended December 31, 1999
|                                 |  |                             
|                                 |  | e-Security                   |         | RSA     |  |      
|                                 |  | Solutions                    |         | Capital |  | Other |           | Consolidated
|                                 |  |                              |         |         |  |       |           |             
|Revenue                          |  | $                            | 218,124 |         |  |       |          |              |  |   |        |   |  | $ | 218,124   | 
|                                 |  |                              |         |         |  |       |           |              |  |   |         |   |  |   |           | 
|Income from operations           |  | $                            | 30,766  |         |  | $     | (147      | )            |  | $ | (23,850 | ) |  | $ | 6,769     | 
|                                 |  |                              |         |         |  |       |           |              |  |   |         |   |  |   |           | 
|Interest income and other        |  | $                            | 10,007  |         |  |       |          |              |  |   |        |   |  | $ | 10,007    | 
|                                 |  |                              |         |         |  |       |           |              |  |   |         |   |  |   |           | 
|Income from investing activities |  |                              |        |         |  | $     | 285,952   |              |  |   |        |   |  | $ | 285,952   | 
|                                 |  |                              |         |         |  |       |           |              |  |   |         |   |  |   |           | 
|Depreciation and amortization    |  | $                            | 9,182   |         |  |       |          |              |  |   |        |   |  | $ | 9,182     | 
|                                 |  |                              |         |         |  |       |           |              |  |   |         |   |  |   |           | 
|Identifiable assets              |  | $                            | 414,516 |         |  | $     | 1,097,608 |              |  |   |        |   |  | $ | 1,512,124 | 
|                                 |  |                              |         |         |  |       |           |              |  |   |         |   |  |   |           | 

55



---



##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

The Companys operations are conducted throughout the
world. Operations in North America represent more than 10% of
revenue and income from operations. The Companys
operations in other countries are individually insignificant and
have been included in Rest of world below. The
following tables present information about e-Security Solutions
revenue for the years ended December 31, 1998, 1999 and
2000:

|                           |  |                          |         |      |  |      |         |  |  |   |         | 
|-------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                           |  |                         
|                           |  | Years Ended December 31,
|                           |  |                         
|Product and service groups |  | 1998                     |         | 1999 |  | 2000
|                           |  |                          |         |      |  |     
|Enterprise solutions       |  | $                        | 133,129 |      |  | $    | 165,168 |  |  | $ | 211,835 | 
|                          
|                          
|                          
|                          
|Developer solutions        |  |                          | 38,205  |      |  |      | 52,956  |  |  |   | 68,356  | 
|                           |  |                          |         |      |  |      |         |  |  |   |         | 
|                           |  | $                        | 171,334 |      |  | $    | 218,124 |  |  | $ | 280,191 | 
|                           |  |                          |         |      |  |      |         |  |  |   |         | 

|                 |  |                          |         |      |  |      |         |  |  |   |         | 
|---------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                 |  |                         
|                 |  | Years Ended December 31,
|                 |  |                         
|Geographic areas |  | 1998                     |         | 1999 |  | 2000
|                 |  |                          |         |      |  |     
|North America    |  | $                        | 112,042 |      |  | $    | 152,103 |  |  | $ | 187,124 | 
|                
|                
|                
|                
|Rest of world    |  |                          | 59,292  |      |  |      | 66,021  |  |  |   | 93,067  | 
|                 |  |                          |         |      |  |      |         |  |  |   |         | 
|                 |  | $                        | 171,334 |      |  | $    | 218,124 |  |  | $ | 280,191 | 
|                 |  |                          |         |      |  |      |         |  |  |   |         | 

During 2000, the Company purchased land and a building in the
United Kingdom for $23,097, which has been recorded as property
and equipment on the balance sheet at December 31, 2000.

14.     Litigation

On or about December 11, 1998, a purported class action was
filed in the United States District Court for the District of
Massachusetts on behalf of all purchasers of the Companys
common stock during the period from and including
September 30, 1997 through July 15, 1998: Fitzer v.
Security Dynamics Technologies, Inc., Charles R. Stuckey, Jr.,
D. James Bidzos, Arthur W. Coviello, Jr., John Adams, Marian G.
OLeary and Linda B. Saris, Civil Action
No. 98-CV-12496-WGY. The plaintiffs subsequently dismissed
without prejudice the claims against Ms. Saris. The
plaintiffs asserted that the defendants misled the investing
public concerning demand for the Companys products, the
strengths of its technologies, and certain trends in the
Companys business and sought unspecified damages,
interest, costs and fees of their attorneys, accountants and
experts. On September 28, 2000, the United States District
Court granted the defendants motion to dismiss, and
entered a judgment dismissing the plaintiffs claims with
prejudice. On October 18, 2000, the plaintiffs filed in the
District Court a notice of appeal from the judgment. After the
notice of appeal was filed, the defendants made a motion to the
District Court to modify the judgment of dismissal, and to add
certain material to the record on appeal. The District Court
denied the defendants motion, and defendants appeal
from the denial of the motion has been consolidated with the
plaintiffs appeal. Even if the plaintiffs request
for appeal is granted and the District Courts decision is
reversed, the Company believes that this suit will not have a
material adverse effect on the Companys continuing
operations or consolidated financial position.

On or about May 20, 1999, Kenneth P. Weiss, the founder and
a former director, officer and employee of the Company, filed a
demand for arbitration alleging that (a) the Company
constructively terminated Mr. Weiss in May 1996 in
violation of his Employment Agreement with the Company, and
(b) the Company breached its obligations under
Mr. Weiss Employment Agreement by refusing to release
certain assignments of patents. Mr. Weiss subsequently
amended his complaint to remove the constructive termination
claim. Mr. Weiss sought unspecified damages, interest,
costs and fees of his attorneys and experts, as well as the
return of his rights in certain patents he created and assigned
to the Company in the course of his employment. Hearings in the
proceeding took place over ten days in the fall and winter of
2000. On February 26, 2001, the arbitration panel entered
an order denying all of Mr. Weisss remaining claims.

56



---



##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

On or about June 15, 2000, David Moran, a stockholder of
RSA Security, filed a shareholder derivative action in the Court
of Chancery of New Castle County in the State of Delaware on
behalf of himself and all others similarly situated v. Charles
R. Stuckey, Jr., D. James Bidzos, Richard L. Earnest,
Dr. Taher Elgamal, James K. Sims, Joseph B. Lassiter, III,
Arthur Coviello, Jr., Robert P. Badavas, VeriSign, Inc. and RSA
Security Inc, f/k/a Security Dynamics Technologies, Inc., Civil
Action No. 18107NC. Mr. Moran asserts that the
Companys Board of Directors breached its fiduciary duty to
the Company by failing to obtain certain international patents,
by failing to enforce the terms of certain agreements with
VeriSign, and by appointing Mr. Stuckey as President of RSA
Investments. Mr. Moran seeks unspecified damages, interest,
costs and fees of his attorneys, accountants and experts, as
well as injunctive relief. The Company believes that
Mr. Morans claims are without merit, and intends to
defend the lawsuit vigorously. The Company believes that the
disposition of this matter will not have a material adverse
effect on the Companys continuing operations or
consolidated financial position.

On or about August 16, 2000, James V. Biglan, a stockholder
of the Company, filed a shareholder derivative action in the
Court of Chancery of New Castle County in the State of Delaware
derivatively on behalf of the Company v. Charles R. Stuckey,
Jr., D. James Bidzos, Richard L. Earnest, Dr. Taher
Elgamal, James K. Sims, Robert P. Badavas, Joseph B. Lassiter,
III, Arthur Coviello, Jr., VeriSign, Inc. and RSA Security Inc.
f/k/a Security Dynamics Technologies, Inc., Civil Action
No. 18190NC. Mr. Biglan asserts that the
Companys Board of Directors breached its fiduciary duty to
the Company by failing to obtain certain international patents,
by failing to enforce the terms of certain agreements with
VeriSign, by permitting the violation of federal securities laws
by RSA Security and certain insiders, and by appointing
Mr. Stuckey as President of RSA Investments.
Mr. Biglan seeks unspecified damages, interest, costs and
fees of his attorneys, accountants and experts, as well as
injunctive relief. The Company believes that
Mr. Biglans claims are without merit, and intends to
defend the lawsuit vigorously. The Company believes that the
disposition of this matter will not have a material adverse
effect on the Companys continuing operations or
consolidated financial position.

On or about September 29, 2000, the Court of Chancery of
New Castle County in the State of Delaware consolidated
Mr. Morans and Mr. Biglans cases.

In September 1998 the Company granted options to purchase
an aggregate of 325,000 shares of common stock in connection
with the settlement of threatened litigation arising out of the
acquisition of Intrusion Detection, Inc. (IDI). The
value of the options was determined to be $1,872, using the
Black-Scholes option-pricing model, which was recorded as legal
settlement expense in the consolidated statement of income for
the year ended December 31, 1998.

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

15.     Related Party
Transactions

VeriSign developed certain certificate authority software
technology of which the Company was the exclusive distributor
under a five year term subject to cancellation at the
Companys election. The Company paid VeriSign $2,700 as an
initial license fee, $500 at the execution of the distributor
agreement, and license fees of $1,100 in 1999 and $2,250 in
2000. In November 2000 the Company elected to cancel its
exclusive distribution agreement with VeriSign and paid
additional license fees of $1,380. The license fees are recorded
as a component of cost of revenue as the related products are
sold. Unamortized prepaid royalties were $1,891 and $5,221 at
December 31, 1999 and 2000, respectively. The Company
sublet facilities to VeriSign in exchange for lease payments of
$81 in 1998. A Company director serves as VeriSigns
Chairman of the Board of Directors.

57



---



##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

A stockholder, who owns less than 5% of the Companys
common stock, provides consulting services to the Company and
received $82, $48 and $132 in 1998, 1999 and 2000, respectively.

16.     Restructuring

In 1999, the Company commenced and substantially completed
consolidation of certain operations in an attempt to achieve
operational efficiency. The Company recorded costs of $11,350,
consisting primarily of severance costs for 41 employees who
were employed primarily in research and development and general
and administrative activities for the formerly separate
operations of IDI, facility exit costs and other direct costs.
Facility exit costs consist primarily of estimated shortfalls of
sublease rental income compared to minimum lease payments due
under a lease agreement. During 2000, the Company reversed
$2,079 of previously recorded restructuring costs due to revised
estimates of the facility exit costs, including associated legal
costs and other direct costs. Remaining costs of approximately
$347 were accrued and unpaid at December 31, 2000 and
consisted of facility exit costs.

|                                     |  |               |        |           |  |              |        |       |  |   |       |   |  |   |        |  
|------------------------------------ |  | ------------- | ------ | --------- |  | ------------ | ------ | ----- |  | - | ----- | - |  | - | ------ | -
|                                     |  | Facility Exit |        | Severance |  | Other Direct |        |      
|                                     |  | Costs         |        | Costs     |  | Costs        |        | Total
|                                     |  |               |        |           |  |              |        |      
|Recorded restructuring costs         |  | $             | 2,000  |           |  | $            | 8,000  |       |  | $ | 1,350 |   |  | $ | 11,350 |  
|                                    
|                                    
|                                    
|                                    
|Payments                             |  |               | (251   | )         |  |              | (7,609 | )     |  |   | (606  | ) |  |   | (8,466 | )
|                                     |  |               |        |           |  |              |        |       |  |   |       |   |  |   |        |  
|Balance at December 31, 1999         |  |               | 1,749  |           |  |              | 391    |       |  |   | 744   |   |  |   | 2,884  |  
|                                    
|                                    
|                                    
|                                    
|Payments                             |  |               | (40    | )         |  | $            | (391   | )     |  |   | (27   | ) |  |   | (458   | )
|                                    
|                                    
|                                    
|                                    
|Reversal of costs previously accrued |  |               | (1,362 | )         |  |              |       |       |  | $ | (717  | ) |  |   | (2,079 | )
|                                     |  |               |        |           |  |              |        |       |  |   |       |   |  |   |        |  
|Balance at December 31, 2000         |  | $             | 347    |           |  |              |       |       |  |   |      |   |  | $ | 347    |  
|                                     |  |               |        |           |  |              |        |       |  |   |       |   |  |   |        |  

17.     Subsequent Events
(Unaudited)

Acquisition  On February 12, 2001, the
Company completed its acquisition of Xcert International, Inc.,
a company that develops and delivers digital certificate-based
products for securing e-business transactions, for approximately
$67,500 in cash plus the assumption of all Xcert stock options.
The transaction will be accounted for as a purchase.

Put Option Contract Settlement  In
March 2001, as part of the ongoing share repurchase
program, the Company purchased 375,000 shares of its common
stock for $13,943 in cash through the settlement of one of its
put option contracts. This settlement was recorded as a
component of stockholders equity.

Litigation  On or about February 2, 2001,
Leon Stambler filed a complaint for patent infringement in U.S.
District Court for the District of Delaware against the Company,
VeriSign, Inc., First Data Corporation, Openwave Systems Inc.,
and Omnisky Corporation, Case Number 01-0065. In his complaint,
Mr. Stambler alleges that certain products marketed by each
of the defendants infringe various patents that he owns, and he
seeks unspecified damages as well as a preliminary and permanent
injunction enjoining the defendants from infringing the claims
asserted. It is possible that those other defendants who are the
Companys licensees may seek indemnification from the
Company for these claims pursuant to the licenses in effect
between those defendants and the Company. Although the Company
believes that Mr. Stamblers claims are without merit
and intends to defend the lawsuit vigorously, the Company cannot
predict the ultimate outcome of this matter; however, the
Company believes that the disposition of this matter will not
have a material adverse effect on the Companys continuing
operations or consolidated financial position.



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

Not applicable.

58



---



##### Table of Contents






PART III




ITEM 10.     DIRECTORS AND EXECUTIVE
OFFICERS OF RSA SECURITY

The information required by this item is contained in part under
the caption Executive Officers of RSA Security in
Part I hereof, and the remainder is contained in our Proxy
Statement for our Annual Meeting of Stockholders to be held on
April 27, 2001 (the 2001 Proxy Statement) under
the captions Proposal 1  Election of
Directors and Section 16(a) Beneficial
Ownership Reporting Compliance and is incorporated herein
by this reference.

Officers are elected on an annual basis and serve at the
discretion of our Board of Directors.




ITEM 11.     EXECUTIVE
COMPENSATION

The information required by this item is contained under the
captions Director Compensation, Compensation
of Executive Officers and Comparative Stock
Performance in the 2001 Proxy Statement and is
incorporated herein by this reference.




ITEM 12.     SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item is contained under the
caption Stock Ownership of Certain Beneficial Owners and
Management in the 2001 Proxy Statement and is incorporated
herein by this reference.




ITEM 13.     CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS

The information required by this item is contained under the
caption Certain Relationships and Related
Transactions in the 2001 Proxy Statement and is
incorporated herein by this reference.

59



---



##### Table of Contents






PART IV




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

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

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



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

2.     Financial Statement Schedule.
Financial Statement Schedule II Valuation and
Qualifying Accounts immediately following the Exhibit
Index is filed as part of this Report.

3.     Exhibits. The Exhibits listed in
the Exhibit Index following the signature page to this
Report are filed as part of this Report.

(b)     Current Reports on
Form 8-K:

On December 12, 2000, we filed a Current Report on
Form 8-K, dated November 27, 2000, reporting the
disposition of some of our assets.

60



---



##### Table of Contents






SIGNATURES

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



| |                  
| | -----------------
| | RSA SECURITY INC.



| |     |                            
| | --- | ---------------------------
| | By: | /s/ ARTHUR W. COVIELLO, JR.

| |                        
| | -----------------------
| |                        
| | Arthur W. Coviello, Jr.
| | Chief Executive Officer
| | and President          



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

|                                                   |  |                                                                                                                                         |  |               
|-------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------- |  | --------------
|Signature                                          |  | Title                                                                                                                                   |  | Date          
|                                                   |  |                                                                                                                                         |  |               
|/s/ ARTHUR W. COVIELLO, JR.Arthur W. Coviello, Jr. |  | Chief Executive Officer, President and Director (Principal
	Executive Officer)                                                          |  | March 27, 2001
|                                                  
|/s/ JOHN F. KENNEDYJohn F. Kennedy                 |  | Senior Vice President, Finance and Operations, and Chief
	Financial Officer and Treasurer (Principal Financial and
	Accounting Officer) |  | March 27, 2001
|/s/ CHARLES R. STUCKEY, JR.Charles R. Stuckey, Jr. |  | Chairman of the Board of Directors                                                                                                      |  | March 27, 2001
|/s/ ROBERT P. BADAVASRobert P. Badavas             |  | Director                                                                                                                                |  | March 27, 2001
|/s/ D. JAMES BIDZOSD. James Bidzos                 |  | Director                                                                                                                                |  | March 27, 2001
|/s/ RICHARD L. EARNESTRichard L. Earnest           |  | Director                                                                                                                                |  | March 27, 2001
|/s/ TAHER ELGAMALTaher Elgamal                     |  | Director                                                                                                                                |  | March 27, 2001
|/s/ JOSEPH B. LASSITER, IIIJoseph B. Lassiter, III |  | Director                                                                                                                                |  | March 27, 2001
|/s/ JAMES K. SIMSJames K. Sims                     |  | Director                                                                                                                                |  | March 27, 2001

61



---



##### Table of Contents






EXHIBIT INDEX

| |        |  |  |                                                                                                                                                                                                                                                                                                                                                    
| | ------ |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2.1    |  |  | Assets Contribution Agreement, dated as of November 27,
	2000, between RSA Security Business Trust and Crosby Finance,
	LLC is incorporated herein by reference to Exhibit  2.1 to
	our Current Report on Form 8-K dated November 27, 2000.                                                                                                        
|
| | 2.2    |  |  | Novation Agreement, dated November 27, 2000, among Deutsche
	Bank AG London, Deutsche Bank Securities Inc., RSA Security
	Business Trust and Crosby Finance, LLC is incorporated herein by
	reference to Exhibit 2.1 to our Current Report on
	Form 8-K dated November 27, 2000.                                                                   
| | 3.1    |  |  | RSAs Third Restated Certificate of Incorporation, as
	amended, is incorporated herein by reference to Exhibit 3.1
	to our Quarterly Report on Form 10-Q for the quarter ended
	June 30, 2000.                                                                                                                                                     
| | 3.2    |  |  | RSAs Amended and Restated By-Laws, as amended, is
	incorporated herein by reference to Exhibit 3.3 to our
	Registration Statement on Form S-1 (File No. 33-85606)
	(the Form S-1).                                                                                                                                                              
| | 4.1    |  |  | Specimen Certificate for shares of our common stock, $.01 par
	value per share, is incorporated herein by reference to
	Exhibit 4.1 to our Current Report on Form 8-K dated
	September 10, 1999.                                                                                                                                                   
| | 4.2    |  |  | Rights Agreement, dated as of July 20, 1999, between RSA
	and State Street Bank and Trust Company, which includes as
	Exhibit A the Form of Rights Certificate and as
	Exhibit B the Summary of Rights to Purchase Common Stock,
	is incorporated herein by reference to Exhibit 1 to our
	Registration Statement on Form 8-A (File No. 000-25120).
| | *10.1  |  |  | 1986 Stock Option Plan, as amended, is incorporated herein by
	reference to Exhibit 10.1 to the Form S-1.                                                                                                                                                                                                                                          
| | *10.2  |  |  | 1994 Stock Option Plan, as amended, is incorporated herein by
	reference to Exhibit 10.2 to our Annual Report on
	Form  10-K for the year ended December 31, 1996.                                                                                                                                                                                 
| | *10.3  |  |  | 1994 Stock Option Plan, as amended  1998 Restatement, as
	amended, is incorporated herein by reference to Appendix A
	to our Preliminary Schedule 14A filed March 5, 1999.                                                                                                                                                                        
| | *10.4  |  |  | 1994 Director Stock Option Plan, as amended, is incorporated
	herein by reference to Exhibit 10.3 to our Quarterly Report
	on Form 10-Q for the quarter ended June 30, 1999.                                                                                                                                                                       
| | *10.5  |  |  | Amended and Restated 1998 Non-Officer Employee Stock Incentive
	Plan, as amended.                                                                                                                                                                                                                                                                  
| | *10.6  |  |  | 1994 Employee Stock Purchase Plan, as amended, is incorporated
	herein by reference to Exhibit 10.2 to our Quarterly Report
	on Form 10-Q for the quarter ended September 30, 1999.                                                                                                                                                                
| | *10.7  |  |  | 2000 Deferred Compensation Plan is incorporated herein by
	reference to Exhibit 10.1 to our Quarterly Report on
	Form  10-Q for the quarter ended March 31, 2000.                                                                                                                                                                                  
| | *10.8  |  |  | RSA Security Inc. Grantor Trust Agreement, dated March 13,
	2000, between RSA and Wachovia Bank, N.A. is incorporated herein
	by reference to Exhibit 10.2 to our Quarterly Report on
	Form 10-Q for the quarter ended March 31, 2000.                                                                                                             
| | *10.9  |  |  | Consulting Agreement, dated as of February 18, 1999,
	between RSA and D. James Bidzos is incorporated by reference to
	Exhibit 10.3 to our Quarterly Report on Form 10-Q for
	the quarter ended March 31, 1999.                                                                                                                                    
| | *10.10 |  |  | Form of Amendment Number One to Consulting Agreement, dated
	March 1, 2000, between RSA and D. James Bidzos is
	incorporated herein by reference to Exhibit 10.3 to our
	Quarterly Report on Form 10-Q for the quarter ended
	March  31, 2000.                                                                                                     
| | *10.11 |  |  | Employment Agreement, dated as of April 1, 2000, between
	RSA and Arthur W. Coviello, Jr. is incorporated herein by
	reference to Exhibit 10.2 to our Quarterly Report on
	Form  10-Q for the quarter ended June 30, 2000.                                                                                                                         
| | *10.12 |  |  | Letter Agreement, dated as of May 1, 1989, between RSA and
	Linda E. Saris is incorporated herein by reference to
	Exhibit 10.7 to the Form S-1.                                                                                                                                                                                                   
| | *10.13 |  |  | Employment Agreement, dated as of April 1, 2000, between
	RSA and Thomas L. Schuster.                                                                                                                                                                                                                                                              

62



---



##### Table of Contents



| |        |  |  |                                                                                                                                                                                                                                                                                      
| | ------ |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | *10.14 |  |  | Second Amended and Restated Employment Agreement, dated as of
	April 1, 2000, between RSA and Charles R. Stuckey, Jr. is
	incorporated herein by reference to Exhibit 10.3 to our
	Quarterly Report on Form 10-Q for the quarter ended
	June  30, 2000.                              
| | 10.15 |  |  | Terms and Conditions of Purchase, dated January 1, 1994,
	between RSA and Gould Electronics is incorporated herein by
	reference to Exhibit 10.15 to the Form S-1.                                                                                                                   
| | 10.16 |  |  | Letter, dated October 12, 1994, from Sanyo Electric Co.,
	LTD. to RSA is incorporated herein by reference to Exhibit 
	10.16 to the Form S-1.                                                                                                                                        
| | 10.17 |  |  | Progress Software Application Partner Agreement, dated
	December 5, 1994, as amended, between RSA and Progress
	Software Corporation is incorporated herein by reference to
	Exhibit 10.17 to the Form S-1.                                                                          
| | 10.18 |  |  | Second Amendment to Progress Software Application Partner
	Agreement, dated as of November 29, 1995, between RSA and
	Progress Software Corporation is incorporated herein by
	reference to Exhibit 10.13 to our Quarterly Report on
	Form  10-Q for the quarter ended June 30, 1997.
| | 10.19 |  |  | Third Amendment to Progress Software Application Partner
	Agreement, dated as of November 15, 1996, between RSA and
	Progress Software Corporation is incorporated herein by
	reference to Exhibit 10.14 to our Quarterly Report on
	Form  10-Q for the quarter ended June 30, 1997. 
| | 10.20 |  |  | Fourth Amendment to Progress Software Application Partner
	Agreement, dated as of April 1, 1998, between RSA and
	Progress Software Corporation is incorporated herein by
	reference to Exhibit 10.18 to our Quarterly Report on
	Form  10-Q for the quarter ended June 30, 1998.    
| | 10.21 |  |  | Fifth Amendment to Progress Software Application Partner
	Agreement, dated as of February 18, 1999, between RSA and
	Progress Software Corporation is incorporated herein by
	reference to Exhibit 10.22 to our Annual Report on
	Form  10-K for the year ended December 31, 1999.   
| | 10.22 |  |  | Sixth Amendment to Progress Software Application Partner
	Agreement, dated as of October 26, 1999, between RSA and
	Progress Software Corporation is incorporated herein by
	reference to Exhibit 10.23 to our Annual Report on
	Form  10-K for the year ended December 31, 1999.    
| | 10.23  |  |  | Indenture of Lease, dated as of March 11, 1996, between RSA
	and Beacon Properties, L.P. is incorporated herein by reference
	to Exhibit 10.17 to our Registration Statement on
	Form S-4 (File No. 333-7265).                                                                       
| | 10.24  |  |  | Rider to Indenture of Lease, dated as of March 11, 1996
	between RSA and Beacon Properties, L.P. is incorporated herein
	by reference to Exhibit 10.6 to our Quarterly Report on
	Form 10-Q for the quarter ended March 31, 1998.                                                    
| | 10.25  |  |  | First Amendment to Lease, dated as of May 10, 1997, between
	RSA and Beacon Properties, L.P. is incorporated herein by
	reference to Exhibit 10.2 to our Quarterly Report on
	Form  10-Q for the quarter ended June 30, 1997.                                                        
| | 10.26  |  |  | Second Amendment to Lease, dated as of April 8, 1998,
	between RSA and EOP  Crosby Corporate Center, L.L.C.
	is incorporated herein by reference to Exhibit 10.5 to our
	Quarterly Report on Form 10-Q for the quarter ended
	March  31, 1998.                                      
| | 10.27  |  |  | Third Amendment to Lease, dated as of May 9, 2000, between
	RSA and EOP  Crosby Corporate Center, L.L.C. is
	incorporated herein by reference to Exhibit 10.4 to our
	Quarterly Report on Form 10-Q for the quarter ended
	June  30, 2000.                                          
| | 10.28  |  |  | Lease Agreement, dated as of August 15, 1997, between RSA
	and Peninsula Office Park Associates, L.P. is incorporated
	herein by reference to Exhibit 10.7 to our Quarterly Report
	on Form 10-Q for the quarter ended March 31, 1998.                                               
| | 10.29  |  |  | Lease Agreement, dated as of December 19, 1997, between RSA
	and Peninsula Office Park Associates, L.P. is incorporated
	herein by reference to Exhibit 10.8 to our Quarterly Report
	on Form 10-Q for the quarter ended March 31, 1998.                                             

63



---



##### Table of Contents



| |       |  |  |                                                                                                                                                                                                                                                         
| | ----- |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.30 |  |  | Sublease Agreement, dated as of April 12, 1999, between RSA
	and netDialog Incorporated is incorporated herein by reference
	to Exhibit 10.1 to our Quarterly Report on Form  10-Q
	for the quarter ended June 30, 1999.                                
| | 10.31 |  |  | Lease, dated as of November 16, 2000, between RSA and
	Bedford Woods Limited Partnership I.                                                                                                                                                             
| | 10.32 |  |  | Lease, dated as of November 17, 2000, between RSA and
	Bedford Woods Limited Partnership I.                                                                                                                                                             
| | 10.33 |  |  | Master Development and License Agreement, dated September 
	30, 1997, between RSA and VeriSign, Inc. is incorporated herein
	by reference to Exhibit 10.19 to VeriSigns
	Registration Statement on Form S-1 (File
	No. 333-40789).                     
| | 10.34 |  |  | Amendment Number One to Master Development and License Agreement
	dated as of December 31, 1998 between RSA and VeriSign is
	incorporated herein by reference to Exhibit  10.30 to
	VeriSigns Registration Statement on Form S-1 (File
	No. 333-70121).
| | 21.1  |  |  | Subsidiaries of RSA Security.                                                                                                                                                                                                                           
| | 23.1  |  |  | Consent of Deloitte & Touche LLP, Independent Auditors.                                                                                                                                                                                                 




|  |                                                                                                                               
|- | ------------------------------------------------------------------------------------------------------------------------------
|* | Management contract or compensatory plan or arrangement filed in
	response to Item 14(a)(3) of the instructions to
	Form 10-K.



|  |                                                                                                             
|- | ------------------------------------------------------------------------------------------------------------
| | Confidential treatment previously granted by the Securities and
	Exchange Commission as to certain portions.

64



---



##### Table of Contents






SCHEDULE II

RSA SECURITY INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

(In thousands)


|                                     |  |              |       |            |  |            |       |            |  |            |    |     |  |   |       |     |  |   |       | 
|------------------------------------ |  | ------------ | ----- | ---------- |  | ---------- | ----- | ---------- |  | ---------- | -- | --- |  | - | ----- | --- |  | - | ----- | 
|                                     |  | Balance at   |       | Charged to |  | Charged to |       |            |  | Balance at
|                                     |  | beginning of |       | costs and  |  | other      |       |            |  | end of    
|                                     |  | period       |       | expenses   |  | accounts   |       | Deductions |  | period    
|                                     |  |              |       |            |  |            |       |            |  |           
|Allowance for doubtful accounts      |  |              |       |            |  |            |       |            |  |            |    |     |  |   |       |     |  |   |       | 
|                                    
|                                    
|                                    
|                                    
|For the year ended December 31, 2000 |  | $            | 1,032 |            |  | $          | 2,933 |            |  | $          | 37 | (A) |  | $ | 1,922 | (B) |  | $ | 2,006 | 
|                                    
|                                    
|                                    
|                                    
|For the year ended December 31, 1999 |  |              | 710   |            |  |            | 630   |            |  |            |   |     |  |   | 308   | (B) |  |   | 1,032 | 
|                                    
|                                    
|                                    
|                                    
|For the year ended December 31, 1998 |  |              | 852   |            |  |            | 122   |            |  |            |   |     |  |   | 264   | (B) |  |   | 710   | 
|                                    
|                                    
|                                    
|                                    
|                                    
|Accrued warranty costs               |  |              |       |            |  |            |       |            |  |            |    |     |  |   |       |     |  |   |       | 
|                                    
|                                    
|                                    
|                                    
|For the year ended December 31, 2000 |  | $            | 105   |            |  | $          |      |            |  | $          |   |     |  | $ |      |     |  | $ | 105   | 
|                                    
|                                    
|                                    
|                                    
|For the year ended December 31, 1999 |  |              | 105   |            |  |            |      |            |  |            |   |     |  |   |      |     |  |   | 105   | 
|                                    
|                                    
|                                    
|                                    
|For the year ended December 31, 1998 |  |              | 105   |            |  |            |      |            |  |            |   |     |  |   |      |     |  |   | 105   | 




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



|    |                                                        
|--- | -------------------------------------------------------
|(B) | Reflects write-off of uncollectible accounts receivable

65



---



##### Table of Contents



SDMCM-AR-2001