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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, DC 20549


Form 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR

15(d) OF THE SECURITIES EXCHANGE ACT OF 1934




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

SECURITIES EXCHANGE ACT OF 1934


FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

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)


(Formerly Security Dynamics Technologies, Inc.)


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|--------------------------------------------------------------- |  | -------------------------------------
|                                                               
|                                                               
|                                                               
|                                                               
|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



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

Securities Registered Pursuant to Section 12(g) of the
Act:

Common Stock, $.01 Par Value


(Title of class)




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

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

The approximate aggregate market value of the Common Stock held
by non-affiliates of the registrant was $2,798,499,044 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 March 3, 2000. There were 39,772,538 shares of Common
Stock outstanding as of March 3, 2000.

DOCUMENTS INCORPORATED BY REFERENCE

|                                                                                          |  |                                  
|----------------------------------------------------------------------------------------- |  | ---------------------------------
|                                                                                          |  | PART OF FORM 10-K                
|DOCUMENT                                                                                  |  | INTO WHICH INCORPORATED          
|                                                                                          |  |                                  
|Portions of the Registrants Proxy Statement for the 2000
	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.

SecurID, BSAFE, ACE/ Server, ACE/ Sentry, SoftID, WebID, RSA
SecurPC, RC2 and RC4 are registered trademarks, and RSA, Keon,
RSA Security, RSA Secured, RC5, RC6, The Most Trusted Name in
e-Security and BoKs 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



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TABLE OF CONTENTS



|                                  |                                                                                               |  |  |  |  |  |  | 
|--------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                           
|                                  | ITEM 1. BUSINESS                                                                             
|                                  | ITEM 2. PROPERTIES                                                                           
|                                  | ITEM 3. LEGAL PROCEEDINGS                                                                    
|                                  | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS                                  
|EXECUTIVE OFFICERS OF THE COMPANY
|PART II                          
|                                  | ITEM 5. MARKET FOR THE COMPANYS 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 THE COMPANY                                     
|                                  | 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                    



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PART I




ITEM 1.  BUSINESS

The Company is a leading provider of electronic security
(e-security) solutions. The Company helps
organizations build secure, trusted foundations for electronic
business (e-business) through use of the
Companys two-factor user authentication, encryption and
public key management products and solutions. The Company sells
to enterprise customers seeking turnkey security solutions, and
to original equipment manufacturers (OEMs) and
developers seeking software development components for embedding
security in a range of applications. As used in this Annual
Report on Form 10-K, the term the Company refers
 to RSA Security Inc. (formerly Security Dynamics Technologies,
Inc.) and its subsidiaries.

INDUSTRY BACKGROUND

Historically, e-security solutions were deployed primarily to
protect corporate networks from erroneous and possibly malicious
intrusion, and to preserve the integrity of data as it passed
over insecure networks. It was typically the focus of businesses
in security-conscious or -dependent industries such as banking,
telecommunications, aerospace and defense. However, today
e-security has become a fundamental requirement for conducting
all forms of e-business, including but not limited to 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 as a means of reducing costs, competing more
aggressively, and more efficiently meeting increased business
demands for speed, accuracy and delivery of information.

E-business requires e-security to create and ensure 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 generally accepted methods of
	user identification, including: (i)  something secret the
	user knows, such as a word, phrase, PIN, code or fact;
	(ii) 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 (iii)  something unique to the user, such as a
	fingerprint, signature, retinal pattern, voice print or other
	measurable personal characteristic or biometric. The
	Company believes that 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. The Company believes that through
	the use of public key infrastructure management systems, these
	criteria can be met.                                                                                                                                                                                                                                                                        
|
| |  | 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). Data
	authentication devices, such as digital signatures, also allow
	for non-repudiation of transactions, and thereby create an
	electronic trust environment that enables legally binding
	transactions online. Such data privacy, integrity and
	authentication solutions are provided by encryption technologies.                                                                                                                                                                                                                           

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Security Administration and Audit.Finally,
	organizations must be able to administer, monitor and audit the
	flow of the entire e-business transaction. With the growth of
	distributed, Internet-based computing, organizations are
	increasingly concerned about various administrative issues
	relating to e-security, including the scalability of their
	e-security solutions and the ability of the solutions to cover
	multiple geographic regions. Security administration and audit
	solutions must also monitor user activity for purposes of
	detection and deterrence in order to ensure that the network or
	data have not been compromised.

COMPANY HISTORY

The Company is a leading provider of e-security solutions. The
Companys products are designed to help organizations
conduct e-business securely and protect corporate information
assets. The Companys core competencies are in strong,
two-factor user authentication solutions, encryption technologies
 and public key management systems. The Company believes that
through its RSA SecurID®, RSA BSAFE® and RSA Keon
 product lines it directly addresses the e-security requirements
for e-business.

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

In July 1997, the Company 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, the Company introduced RSA
Keon, a family of public key infrastructure-based
(PKI) 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, the Company renamed the DynaSoft BoKS product
family RSA Keon. In September 1999, the Company
introduced the next-generation, standards-based implementation of
 RSA Keon.

Also in September 1999, the Company changed its name from
Security Dynamics Technologies, Inc. to RSA Security Inc. The
Company took this step because it had combined the management
structure of Security Dynamics and RSA Data Security into a
tightly integrated team, with sales executives dedicated to
meeting the individual needs of both corporate and OEM/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. As
part of the corporate renaming, all of the Companys
strategic partnership programs, including RSA Keon Ready, RSA
SecurID Ready and RSA Secure, were united under the new RSA
Secured partner program.

In connection with the legal restructuring and promotional
activity surrounding the corporate name change, the Company
incurred charges in the third and fourth quarters of 1999 in the
approximate aggregate amount of $12.5 million.

COMPANY STRATEGY

The Companys objective is to continue to be a leading
provider of e-security solutions. Key elements of the
Companys strategy to achieve this objective include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Deliver e-Security Solutions.The Company
	believes e-security is driven by the proliferation of Web-based
	applications, whether for internal network security in the
	enterprise, for e-business applications deployed to customers,
	suppliers or employees, or for e-commerce Internet sites.
	Further, the Company believes that traditional, fear-based
	security is being augmented and in many cases replaced by
	e-security as an enabling technology that opens up new markets
	and channels for communications and commerce. The Company intends
	 to defend and grow its leading position in providing strong,
	two-factor user authentication and encryption, and to create a
	comparable position in PKI management systems as fundamental
	building blocks of e-security. The Company also intends to
	leverage its installed customer base in order to achieve this
	growth.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Maintain Technological Leadership.The Company
	plans to continue to add new capabilities and features to its
	e-security products to meet its customers evolving needs.
	The Company maintains a leading role in basic cryptographic
	research, develops new encryption technologies and maintains
	close working relationships with leading academic centers and
	custom development teams. The Company intends 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. Launched in December 1999 by the Company and
	a number of other leading security vendors, the PKI Forum is 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.The Company
	intends to expand its market opportunities through strategic
	partnerships, industry initiatives and marketing designed to
	heighten awareness of e-security issues. Through its RSA Secured
	partner program, the Company has established strategic
	partnerships with more than 500 industry-leading vendors and
	plans to continue to foster and leverage these partnerships and
	enter into additional relationships with companies that can
	provide complementary technologies for its solutions. The Company
	 also seeks to heighten awareness regarding e-security issues
	through marketing programs such as its annual RSA Security
	Conference.                                                                                                                                                                                                                                                                                                                
|
| |  | Expand Indirect Sales and Support Channel.The
	Company currently sells its products through a direct sales force
	 and through relationships with a significant number of OEMs,
	value-added resellers (VARs) and distributors. The
	Company believes that an expanded indirect sales and support
	channel enables it to enter new markets and gain access to a
	larger installed base of potential customers in a cost-effective
	manner.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Expand International Presence.The Company
	believes that international markets present a large, relatively
	new market for e-security products. Sales outside the United
	States as a percentage of total revenue were approximately 30.9%
	in 1997, 34.6% in 1998 and 30.3% in 1999. The Company has offices
	 located throughout the United States, Canada, Europe, Asia,
	Japan and Australia and plans to continue to expand its
	international business through the establishment of new offices,
	hiring of additional sales personnel, establishment of additional
	 distribution arrangements, primarily in Europe and Asia, and
	development of local presences in key markets. In addition, the
	U.S. Department of Commerce recently relaxed some of the
	restrictions on exports of commercial encryption products, and
	the Company expects that this relaxation may make it easier for
	the Company to sell its products into international markets. See
	Government Regulation and Export Controls.

PRODUCTS

The Company delivers a range of products and technologies that
are designed to help organizations and developers secure their
computing environments and build secure, trusted platforms for
electronic commerce. The Companys core competencies are in
its three major product lines  RSA SecurID, RSA BSAFE
and RSA Keon  which deliver two-factor user
authentication, encryption and public key management systems and
solutions, respectively.

RSA SecurID Authenticators

The Companys RSA SecurID solutions provide centrally
managed, strong, two-factor user authentication services for
enterprise networks, operating systems, e-business Web sites and
other IT 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 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.

The Companys RSA SecurID user identification and
authentication products combine two methods of user
identification  something secret the user knows (a personal
 information number or PIN) and

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Each RSA SecurID authenticator contains the Companys
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.

RSA BSAFE Cryptographic Tools

RSA BSAFE tools are a family of platform-independent
crypto-security developer tools that are designed to enable
enterprise and OEM software developers to reliably incorporate
e-security into a wide range of applications. The Companys
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. The
Company believes that the RSA BSAFE product line is the most
widely deployed cryptographic software in the world, with more
than 450 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, X.509, standards based certificate
	processing tools for C and Java;                                                  
|
| |  | RSA BSAFE S/ MIME-C tool for adding e-security to messaging
	applications; and                                                                     
|
| |  | 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.

The Company believes that its RSA RC series of symmetric, or
secret key, encryption technologies, which are available as part
of the RSA BSAFE product family, are among the highest performing
 and most secure techniques of their class available to encrypt
electronic data. RC2 and RC4 are designed to handle block and
streaming data types, respectively, and are designed to provide
for easy adjustment of key size for exportability as well as high
 performance without specialized hardware.

RSA Keon PKI Software

RSA Keon technology is a family of interoperable, standards-based
 PKI software modules for managing digital certificates and
providing 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 integration 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.
|
| |  | 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
	 or                                                                                                                                  

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| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Netscape Certificate Management Software. 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.

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STRATEGIC PARTNERS

Historically, the Company has placed a premium on establishing
interoperability between its products and those from other
vendors. To that end, the Company invests in and supports several
 strategic partnering programs under the umbrella name of
RSA Secured. The RSA Secured partner program is
designed to help vendors integrate or establish interoperability
between partner products and the Companys products,
including the RSA SecurID, RSA BSAFE and RSA Keon product
families.

The RSA Secured partner program includes specific programs for
certifying interoperability between RSA SecurID and RSA ACE/
Server and the products from vendors of remote access devices,
Internet firewalls, network and applications software and virtual
 private network products. The RSA Secured partner program also
includes specific programs for licensees of its RSA BSAFE
technology, who incorporate RSA BSAFE into their products.
Finally, the RSA Secured partner program incorporates specific
programs for vendors seeking to ensure interoperability between
their products and RSA Keon. Collectively, through the RSA
Secured partner programs, the Company has strategic relationships
 with more than 500 vendors  including AOL/ Netscape,
Apple Computer, Ascend, AT&T, Check Point, Cisco Systems,
Compaq, IBM, Intel, Microsoft, Nortel Networks, Novell, Oracle
and others  who have integrated the Companys
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 the Company. The Company believes that
these relationships help the Company and its customers to expand
their enterprise network coverage and assist the Company in
increasing its installed customer base and RSA SecurID
authenticator usage.

The Company has created marketing programs to foster the use of
the RSA Secured logo on vendor products that incorporate the
Companys technologies or are interoperable with the
Companys 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. For example, in January 2000, the
Company announced a strategic alliance with the member companies
of American International Group, Inc. (AIG) under
which, among other elements, the Company intends to give
discounts on the Companys products to e-business insurers
of AIG member companies, and AIG intends to give discounts on
e-business insurance coverage underwritten by AIG member
companies to organizations that secure their e-business
initiatives with the Companys products or with third
parties RSA Secured products.

SALES AND MARKETING

The Company has established a multi-channel distribution and
sales network to serve the e-security market. The Company sells
and licenses its products directly to end users through its
direct sales force and indirectly through a network of OEMs, VARs
 and distributors. In addition, the Company supports its direct
and indirect sales efforts through strategic marketing
relationships and public relations programs, trade shows and
other marketing activities.

In support of its sales efforts, the Company conducts sales
training courses, comprehensive targeted marketing programs
including direct mail, public relations, advertising, seminars,
trade shows, interactive marketing, telemarketing and ongoing
customer and third-party communications programs. The Company
also seeks to stimulate interest in e-security through its public
 relations program, speaking engagements, white papers, technical
 notes and other publications.

The Companys direct sales staff focuses on major accounts,
provides technical advice and support with respect to the
Companys products and works closely with the Companys
 customers, OEMs, VARs and distributors.

The Company also markets, sells and licenses its products
indirectly through its RSA SecurWorld network of OEMs, VARs
 and distributors. As of December 31, 1999, the Company had
relationships with approximately 300 OEMs, VARs and distributors.

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Generally, the Company sells its RSA BSAFE products to OEMs and
enterprise customers through its direct sales force, rather than
through distributors. The Company has historically sold its RSA
BSAFE products primarily to OEMs, but the Companys sales
staff is currently focusing on increasing sales of these products
 to enterprise customers as well.

To enhance demand for its products, the Company has participated
in the development of various industry-specific protocols that
incorporate the Companys RSA BSAFE cryptographic data
security technologies. The Company also hosts its own annual
industry conference, the RSA Security Conference, and
participates in other conferences to increase demand for its
products. Through its RSA Laboratories division, the Company
maintains a leading role in basic cryptographic research,
develops new encryption technologies and maintains close working
relations with leading academic centers and customer development
teams.

CUSTOMERS

As of December 31, 1999, the Company had licensed more than
6,000,000 RSA SecurID authenticators to more than 5,000 customers
 worldwide. Historically, the Companys 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. The Company believes that as corporate networks
proliferate and become more complex, the number of industries
concerned with e-security will grow.

As of December 31, 1999, the Company had licensed its RSA
BSAFE encryption engine and patent technology to more than 500
OEMs and developers that typically incorporate the encryption
technology into their products. The Companys RSA BSAFE
encryption technology is embedded in current versions of
Microsoft Windows NT®, Netscape Navigator®,
Quicken® by Intuit®, Lotus Notes® and numerous
other products, including mobile phones, pagers and other
wireless products of Ericsson, Symbian and Phone.com. The Company
 also licenses its RSA BSAFE encryption technology directly to
enterprise customers for incorporation into customers
business, financial and electronic commerce networks. The
Companys 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 the Companys
total revenue in 1997, 1998 or 1999.

CUSTOMER SERVICE AND SUPPORT

The Company maintains a customer support help desk, technical
support organization and professional services group at its
headquarters in Bedford, Massachusetts and at other locations
throughout the world and offers telephone and Web support for
certain of its products 24 hours a day, seven days a week. The
Company continues to add advanced technical support and
professional service personnel to its staff to address
anticipated additional demands arising from the deployment of the
 Companys e-security solutions into larger and more complex
 user environments. The Company also has field technical support
personnel who work directly with the Companys direct sales
force, distributors and customers.

The Companys 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 negligence or alteration)
 free of charge. The Company generally sells each of its 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, the Company agrees to provide
(i) corrections for documented program errors;
(ii) version upgrades for both software and, if applicable,
firmware; (iii) telephone consultation; and
(iv) Web-based access to solutions, patches and
documentation.

9



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PRODUCT DEVELOPMENT

The Companys product development efforts are focused on
enhancing the functionality, reliability, performance and
flexibility of its existing products, including but not limited
to its RSA SecurID, RSA ACE/ Server, RSA BSAFE and RSA Keon
product lines. The Company is developing architectures and
technologies to continually enhance the administrative
capabilities and scalability of its RSA ACE/ Server and RSA Keon
products and to increase interoperability with additional network
 operating systems, applications and directory services. The
Company also is developing tools to assist customers, strategic
partners and other third-party integrators in integrating the
Companys products with custom and other third-party network
 or system applications.

The Company is working to increase its competitive position by
developing standards-based protocols and solutions that address
the needs of specific market segments and build on its
industry-leading RSA BSAFE technology. In the latter case, the
Company may choose to partner with other parties to develop
and/or market the products. In addition, the Company has
developed enhanced RSA BSAFE Cert-C and Cert-J tools to enable
both OEM and enterprise developers to make new applications PKI
aware.

In addition to enhancing its existing products, the Company
continues to identify and prioritize various technologies for
potential future product offerings. The Company 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 the Company will be successful in
enhancing or developing existing products or identifying and
successfully acquiring new technologies.

The Companys product development staff engages in software
and hardware engineering, testing and quality assurance and
technical documentation. The Company also engages outside
contractors where appropriate to supplement the Companys
in-house expertise or expedite projects based on customer or
market demand.

MANUFACTURING AND SUPPLIERS

Manufacturing

RSA SecurID Authenticators. The Company currently
contracts for the manufacture of its RSA SecurID authenticators
with two suppliers. In 1999, for the RSA SecurID card, one of
these suppliers had its manufacturing operations in the United
States, and the other supplier had its manufacturing operations
in China. In early 2000, the Company notified its U.S. supplier
of its intent to terminate its contract to manufacture the RSA
SecurID card. The Company intends to continue to use the supplier
 in China to manufacture the RSA SecurID cards. For the RSA
SecurID key fob, both of these suppliers will continue to
manufacture the product, which is expected to represent over 60%
of the authenticator sales, in China and Thailand.

The Company has generally been able to obtain adequate supplies
of RSA SecurID authenticators in a timely manner and believes
that alternate vendors can be identified if current vendors are
unable to fulfill its 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 the Companys
financial condition or results of operations and could impact
customer relations.

RSA Software. The Companys RSA ACE/ Server, RSA
BSAFE and RSA Keon software products are distributed on standard
magnetic diskettes, compact disks and tapes together with
documentation. The Company contracts with media duplication
subcontractors for the majority of its media duplication. The
Company has the capability to do all media duplication in-house,
but limits its use to small production runs such as beta
programs.

Suppliers

Although the Company generally uses standard parts and components
 for its products, some components are currently available only
from limited sources. For example, the Company purchases the
microprocessor

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COMPETITION

The market for e-security products is highly competitive and
subject to rapid technological change. The Company believes that
competition in this market is likely to intensify as a result of
increasing demand for e-security products. The Company currently
experiences direct and indirect competition from a number of
sources, including (i) software operating systems suppliers
and application software vendors that incorporate a single-factor
 static password security system into their products;
(ii) vendors of hardware tokens competitive with the
Companys RSA SecurID products; (iii) smart card
security device vendors; (iv) biometric security device
vendors; (v) PKI and cryptographic software firms; and
(vi) application access providers. In some cases, these
vendors also support the Companys products and those of its
 competitors. In the future the Company may also face competition
 from these and other parties that develop e-security products
based upon approaches similar to or different from those employed
 by the Company, 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
marketed by the Company.

The Company believes 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 the Company believes that its
products currently compete favorably with respect to such
factors, there can be no assurance that the Company can maintain
its competitive position against current and potential
competitors, especially those with significantly greater
financial, marketing, service, support, technical and other
competitive resources.

PROPRIETARY RIGHTS

The Company relies on a combination of patent, trade secret,
copyright and trademark laws, software licenses, nondisclosure
agreements and technical measures to protect its proprietary
technology. The Company also generally enters into nondisclosure
and assignment of inventions agreements with its employees and
confidentiality and/or license agreements with its distributors,
strategic partners and customers and potential customers seeking
proprietary information, and limits access to and distribution of
 its software, documentation and other proprietary information.

The Companys 17 issued U.S. patents expire at various dates
 ranging from 2000 to 2018. The Companys 32 foreign patents
 expire at various dates between 2006 to 2015. The Company has
also filed patent applications on inventions embodied in new
technologies developed by the Company and on inventions that may
be useful in the field of e-business. There can be no assurance
that any of these applications will result in an issued patent.
In addition, the patent describing the RSA public key encryption
methodology, which was developed at the Massachusetts Institute
of Technology (U.S. Patent No. 4,405,829) and licensed to
the Company, will expire on September 20, 2000. An
implementation of this cryptographic algorithm described in this
patent is embodied in the Companys RSA BSAFE cryptographic
toolkit products. To date, the Company has vigorously enforced
its exclusive rights to the patented technology against
infringers who have released, or threatened to release, competing
 products that use the invention embodied in the patent. The
Company does not know what effect the expiration of the patent
will have, but it believes that the expiration may encourage
competitors to market competing products that previously would
have infringed the patent.

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The Company has registered, or is seeking to register, its
trademarks and service marks in countries where the Company has
sold its products. There can be no assurance that any such
trademark application currently pending will not be opposed by a
third party, or that every national trademark office will permit
the Company to register the marks on terms acceptable to the
Company. The Company will seek to enforce its trademark and
service mark rights against third parties who are marketing goods
 or services under marks that the Company considers confusingly
similar to the Companys marks. However, there can be no
assurance that the Company will prevail in any enforcement
action.

GOVERNMENT REGULATION AND EXPORT CONTROLS

All of the Companys 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 encryption products are regulated by the
Export Administration Regulations of the U.S. Department of
Commerce, while exports of encryption products designed or
adapted for military use require export licenses under the
International Traffic in Arms Regulations of the U.S. State
Department. Until recently, the U.S. government only permitted
exports of commercial encryption products (other than general
purpose encryption toolkits) with key lengths of up to 56
 bits after a one-time technical review by the U.S.
Department of Commerce. Under new regulations issued by the U.S.
Department of Commerce in January 2000, encryption products
of any key length, including general purpose encryption toolkits
such as the Companys RSA BSAFE products, may be exported,
after a one-time technical review, to all end-users other than
governmental end-users. The Company believes that it has
completed the necessary technical reviews of the products and
services it currently exports. Following export of certain of its
 products, the Company will be subject to various post-shipment
reporting requirements. Encryption products may be exported to
governmental end-users under special Encryption Licensing
Arrangements or individual export licenses which may be issued at
 the discretion of the U.S. Department of Commerce. These
regulations may be modified at any time, and there can be no
assurance that, in the event of any such modification, the
Company will be authorized to export encryption products from the
 United States without a license in the future. In the event of
such a modification, the Company 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.

EMPLOYEES

At December 31, 1999, the Company employed
834 employees. No employees are covered by any collective
bargaining agreements. The Company believes that its
relationships with its employees are good.

REBRANDING

In the third quarter of 1999, the Company changed its name to RSA
 Security Inc. from Security Dynamics Technologies, Inc., and
spent approximately $12.5 million for legal restructuring and
promotional activity surrounding the name change.




ITEM 2.  PROPERTIES

The Companys principal administrative, sales and marketing,
 research and development and support facilities are located in
Bedford, Massachusetts under non-cancelable ten year leases
expiring in August 2008. The facilities aggregate
approximately 183,000 square feet of office space, and the annual
 base rents aggregate approximately $3.1 million including
certain operating expenses. The Company also leases facilities
for research and development and sales and marketing in San
Mateo, California under non-cancelable ten-year leases expiring
in 2008. The facilities aggregate approximately 58,000 square
feet of office space, and the annual base rents aggregate
approximately $2.3 million including certain operating expenses.
Annual rent escalation provisions for all of theses leases are
based on the Consumer Price Index. The Company also leases
facilities for administration, field sales and customer support
throughout the United States, Canada, Asia, and Europe at annual
base rents aggregating approximately $2.8 million.

12



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##### Table of Contents



In connection with the consolidation of certain operations
commenced in January 1999, the Company sublet to third parties a
total of approximately 50,000 square feet of its facilities at
various locations, expiring through June 2001. The income
from these sublets aggregates approximately $0.3 million for the
year ended December 31, 1999.




ITEM 3.  LEGAL PROCEEDINGS

On or about December 11, 1998, a 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 filed an amended complaint
 on May 4, 1999, which asserts 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. Plaintiffs seek unspecified
damages, interest, costs and fees of their attorneys, accountants
 and experts. The Company is seeking to dismiss the
plaintiffs complaint and intends to defend the lawsuit
vigorously. Although the amounts claimed may be substantial, the
Company cannot predict the ultimate outcome or estimate the
potential loss, if any, related to the lawsuit. The Company
believes that the disposition of this matter will not have a
material adverse effect on the Companys consolidated
financial position. However, the adverse resolution of the
lawsuit could materially affect the Companys results of
operations or liquidity in any one annual or quarterly reporting
period.

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 seeks 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. The
 parties are currently conducting discovery. The Company believes
 that Mr. Weiss claims are without merit, and intends
to defend the matter vigorously. The Company believes that the
disposition of this matter will not have a material adverse
effect on the Companys consolidated financial position.




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

None.

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##### Table of Contents






EXECUTIVE OFFICERS OF THE COMPANY

The Companys executive officers are:

|                        |  |     |    |          |  |                                                                               
|----------------------- |  | --- | -- | -------- |  | ------------------------------------------------------------------------------
|Name                    |  | Age |    | Position
|                        |  |     |    |         
|Charles R. Stuckey, Jr. |  |     | 57 |          |  | Chairman of the Board and President of RSA Capital Inc.                       
|                       
|                       
|                       
|                       
|Arthur W. Coviello, Jr. |  |     | 46 |          |  | President, Chief Executive Officer and Director                               
|                       
|                       
|                       
|                       
|John Adams, Ph.D.       |  |     | 58 |          |  | Senior Vice President and Chief Technology Officer                            
|                       
|                       
|                       
|                       
|John F. Kennedy         |  |     | 51 |          |  | Senior Vice President, Finance, Chief Financial Officer and
	Treasurer        
|                       
|                       
|                       
|                       
|Linda E. Saris          |  |     | 47 |          |  | Senior Vice President, Customer Support, Information Services and
	 Operations
|                       
|                       
|                       
|                       
|Scott T. Schnell        |  |     | 41 |          |  | Senior Vice President, Marketing                                              
|                       
|                       
|                       
|                       
|Margaret K. Seif        |  |     | 38 |          |  | Vice President, General Counsel and Secretary                                 
|                       
|                       
|                       
|                       
|Joseph Uniejewski       |  |     | 46 |          |  | Senior Vice President, Engineering                                            

Mr. Stuckey has served as Chairman of the Board of Directors
 of the Company since July 1996, President from
January 1987 to March 1999, Chief Executive Officer
from March 1987 to January 2000, and President of RSA
Capital Inc., a subsidiary of the Company focussing on strategic
investments, since January 2000.

Mr. Coviello has served as Chief Executive Officer of the
Company since January 2000, President since March 1999,
 Executive Vice President from September 1995 to
March 1999, Chief Financial Officer and Treasurer from
October 1995 to August 1997 and Chief Operating Officer
 from January 1997 to March 1999. Prior to joining the
Company, 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.

Dr. Adams joined the Company as Senior Vice President,
Engineering in March 1996 and was appointed its Chief
Technology Officer in October 1999. Prior to joining the
Company, 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 the Company as Senior Vice President,
Finance, Chief Financial Officer and Treasurer in
August 1999. Prior to joining the Company, 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 the Company as Vice President, Finance and
Operations, Treasurer and Chief Financial Officer in
June 1989, and was appointed Senior Vice President, Customer
 Support, Information Services and Operations in July 1998.
From January 1997 to July 1998, Ms. Saris served
as Vice President, Customer Support and Operations of the Company
 and from October 1995 to January 1997, as its Vice
President, Operations.

Mr. Schnell joined RSA Data Security, Inc., a former
subsidiary of the Company that merged with the Company in
September 1999, as Vice President of Marketing in
March 1996, and was appointed Senior Vice President,
Marketing in July 1998. Prior to 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.

Ms. Seif joined the Company as General Counsel in
March 1998, and was appointed Vice President and Secretary
in June 1998. Prior to joining the Company, Ms. Seif
was Vice President and General Counsel of Firefly Network, Inc.,
a personal information software company, from 1996 to 1998. In
November 1993,

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##### Table of Contents





Mr. Uniejewski joined the Company as Vice President of
Product Marketing in October 1998 and was appointed Senior
Vice President, Engineering in October 1999. Prior to
joining the Company, 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.

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##### Table of Contents






PART II






|        |                                                                        
|------- | -----------------------------------------------------------------------
|ITEM 5. | MARKET FOR THE COMPANYS COMMON EQUITY AND RELATED
	STOCKHOLDER MATTERS

The Companys Common Stock has been trading on the Nasdaq
National Market under the symbol RSAS (formerly
SDTI) since the Companys 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 Common Stock as reported on the Nasdaq
National Market.

|               |  |      |    |     |  |   |    |     
|-------------- |  | ---- | -- | --- |  | - | -- | ----
|               |  | High |    | Low
|               |  |      |    |    
|1998           |  |      |    |     |  |   |    |     
|              
|              
|              
|              
|First Quarter  |  | $    | 42 | 1/8 |  | $ | 29 | 1/2 
|              
|              
|              
|              
|Second Quarter |  | $    | 42 | 3/4 |  | $ | 15 | 1/8 
|              
|              
|              
|              
|Third Quarter  |  | $    | 20 | 3/4 |  | $ | 9  | 3/8 
|              
|              
|              
|              
|Fourth Quarter |  | $    | 23 | 1/2 |  | $ | 5  | 7/16

|               |  |      |    |     |  |   |    |     
|-------------- |  | ---- | -- | --- |  | - | -- | ----
|               |  | High |    | Low
|               |  |      |    |    
|1999           |  |      |    |     |  |   |    |     
|              
|              
|              
|              
|First Quarter  |  | $    | 28 | 7/8 |  | $ | 14 | 1/2 
|              
|              
|              
|              
|Second Quarter |  | $    | 22 | 1/8 |  | $ | 15 | 1/16
|              
|              
|              
|              
|Third Quarter  |  | $    | 29 | 5/8 |  | $ | 16 | 1/16
|              
|              
|              
|              
|Fourth Quarter |  | $    | 77 | 1/2 |  | $ | 29 | 5/8 

There were 338 stockholders of record of the Companys
Common Stock as of February 4, 2000.

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

16



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##### Table of Contents






ITEM 6.  SELECTED FINANCIAL DATA

|                                         |                            |                          |        |        |        |      |        |        |        |      |         |        |        |   |         |        |         |   |         |        |         | 
|---------------------------------------- | -------------------------- | ------------------------ | ------ | ------ | ------ | ---- | ------ | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------- | - | ------- | ------ | ------- | 
|                                         |                            |                         
|                                         |                            | Years Ended December 31,
|                                         |                            |                         
|                                         |                            | 1995                     |        | 1996   |        | 1997 |        | 1998   |        | 1999
|                                         |                            |                          |        |        |        |      |        |        |        |     
|Statement of Operations Data             |                            |                          |        |        |        |      |        |        |        |      |         |        |        |   |         |        |         |   |         |       
|                                        
|                                        
|                                        
|                                        
|Revenue                                  |                            | $                        | 50,812 |        |        | $    | 86,417 |        |        | $    | 140,630 |        |        | $ | 171,334 |        |         | $ | 218,124 |       
|                                        
|                                        
|                                        
|                                        
|Cost of revenue                          |                            |                          | 8,999  |        |        |      | 18,431 |        |        |      | 28,704  |        |        |   | 40,781  |        |         |   | 45,161  |       
|                                         |                            |                          |        |        |        |      |        |        |        |      |         |        |        |   |         |        |         |   |         |       
|Gross profit                             |                            |                          | 41,813 |        |        |      | 67,986 |        |        |      | 111,926 |        |        |   | 130,553 |        |         |   | 172,963 |       
|                                        
|                                        
|                                        
|                                        
|Costs and expenses                       |                            |                          |        |        |        |      |        |        |        |      |         |        |        |   |         |        |         |   |         |       
|                                        
|                                        
|                                        
|                                        
|                                         | Research and development   |                          |        | 7,260  |        |      |        | 13,682 |        |      |         | 27,180 |        |   |         | 31,981 |         |   |         | 37,640 |        
|                                        
|                                        
|                                        
|                                        
|                                         | Marketing and selling      |                          |        | 14,478 |        |      |        | 24,829 |        |      |         | 41,926 |        |   |         | 66,788 |         |   |         | 89,943 |        
|                                        
|                                        
|                                        
|                                        
|                                         | General and administrative |                          |        | 10,775 |        |      |        | 14,603 |        |      |         | 17,171 |        |   |         | 19,007 |         |   |         | 27,261 |        
|                                        
|                                        
|                                        
|                                        
|                                         | Merger and integration     |                          |        |       |        |      |        | 6,100  |        |      |         | 5,700  |        |   |         | 2,600  |         |   |         |       |        
|                                        
|                                        
|                                        
|                                        
|                                         | Restructuring              |                          |        |       |        |      |        |       |        |      |         |       |        |   |         |       |         |   |         | 11,350 |        
|                                        
|                                        
|                                        
|                                        
|                                         | Legal settlement           |                          |        |       |        |      |        |       |        |      |         |       |        |   |         | 1,872  |         |   |         |       |        
|                                         |                            |                          |        |        |        |      |        |        |        |      |         |        |        |   |         |        |         |   |         |       
|                                         |                            | Total                    |        |        | 32,513 |      |        |        | 59,214 |      |         |        | 91,977 |   |         |        | 122,248 |   |         |        | 166,194 | 
|                                         |                            |                          |        |        |        |      |        |        |        |      |         |        |        |   |         |        |         |   |         |       
|Income from operations                   |                            |                          | 9,300  |        |        |      | 8,772  |        |        |      | 19,949  |        |        |   | 8,305   |        |         |   | 6,769   |       
|                                        
|                                        
|                                        
|                                        
|Interest income                          |                            |                          | 1,917  |        |        |      | 4,889  |        |        |      | 6,273   |        |        |   | 8,676   |        |         |   | 10,007  |       
|                                        
|                                        
|                                        
|                                        
|Net gain from investments                |                            |                          |       |        |        |      | 11,027 |        |        |      | 4,264   |        |        |   | 35,427  |        |         |   | 285,952 |       
|                                         |                            |                          |        |        |        |      |        |        |        |      |         |        |        |   |         |        |         |   |         |       
|Income before provision for income taxes |                            |                          | 11,217 |        |        |      | 24,688 |        |        |      | 30,486  |        |        |   | 52,408  |        |         |   | 302,728 |       
|                                        
|                                        
|                                        
|                                        
|Provision for income taxes               |                            |                          | 3,487  |        |        |      | 11,003 |        |        |      | 13,324  |        |        |   | 23,571  |        |         |   | 118,982 |       
|                                        
|                                        
|                                        
|                                        
|Minority interests                       |                            |                          |       |        |        |      |       |        |        |      | (114    | )      |        |   | 578     |        |         |   | 16      |       
|                                         |                            |                          |        |        |        |      |        |        |        |      |         |        |        |   |         |        |         |   |         |       
|Net income                               |                            | $                        | 7,730  |        |        | $    | 13,685 |        |        | $    | 17,048  |        |        | $ | 29,415  |        |         | $ | 183,762 |       
|                                         |                            |                          |        |        |        |      |        |        |        |      |         |        |        |   |         |        |         |   |         |       
|Basic earnings per share                 |                            |                          |        |        |        |      |        |        |        |      |         |        |        |   |         |        |         |   |         |       
|                                        
|                                        
|                                        
|                                        
|Per share amount                         |                            | $                        | 0.24   |        |        | $    | 0.37   |        |        | $    | 0.44    |        |        | $ | 0.72    |        |         | $ | 4.69    |       
|                                         |                            |                          |        |        |        |      |        |        |        |      |         |        |        |   |         |        |         |   |         |       
|Weighted average shares                  |                            |                          | 32,577 |        |        |      | 37,165 |        |        |      | 38,956  |        |        |   | 40,909  |        |         |   | 39,171  |       
|                                         |                            |                          |        |        |        |      |        |        |        |      |         |        |        |   |         |        |         |   |         |       
|Diluted earnings per share               |                            |                          |        |        |        |      |        |        |        |      |         |        |        |   |         |        |         |   |         |       
|                                        
|                                        
|                                        
|                                        
|Per share amount                         |                            | $                        | 0.22   |        |        | $    | 0.35   |        |        | $    | 0.42    |        |        | $ | 0.69    |        |         | $ | 4.38    |       
|                                         |                            |                          |        |        |        |      |        |        |        |      |         |        |        |   |         |        |         |   |         |       
|                                         | Weighted average shares    |                          |        | 32,577 |        |      |        | 37,165 |        |      |         | 38,956 |        |   |         | 40,909 |         |   |         | 39,171 |        
|                                        
|                                        
|                                        
|                                        
|                                         | Effect of dilutive options |                          |        | 2,209  |        |      |        | 2,533  |        |      |         | 1,692  |        |   |         | 1,588  |         |   |         | 2,809  |        
|                                         |                            |                          |        |        |        |      |        |        |        |      |         |        |        |   |         |        |         |   |         |       
|Adjusted weighted average shares         |                            |                          | 34,786 |        |        |      | 39,698 |        |        |      | 40,648  |        |        |   | 42,497  |        |         |   | 41,980  |       
|                                         |                            |                          |        |        |        |      |        |        |        |      |         |        |        |   |         |        |         |   |         |       

|                                                 |  |              |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |           | 
|------------------------------------------------ |  | ------------ | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | --------- | 
|                                                 |  |             
|                                                 |  | December 31,
|                                                 |  |             
|                                                 |  | 1995         |         | 1996 |  | 1997 |         | 1998 |  | 1999
|                                                 |  |              |         |      |  |      |         |      |  |     
|Balance Sheet Data                               |  |              |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |           | 
|                                                
|                                                
|                                                
|                                                
|Cash, cash equivalents and marketable securities |  | $            | 112,643 |      |  | $    | 107,008 |      |  | $    | 164,659 |  |  | $ | 158,236 |  |  | $ | 1,383,281 | 
|                                                
|                                                
|                                                
|                                                
|Working capital                                  |  |              | 104,753 |      |  |      | 110,103 |      |  |      | 178,348 |  |  |   | 180,885 |  |  |   | 553,307   | 
|                                                
|                                                
|                                                
|                                                
|Total assets                                     |  |              | 129,279 |      |  |      | 147,355 |      |  |      | 233,975 |  |  |   | 280,855 |  |  |   | 1,512,124 | 
|                                                
|                                                
|                                                
|                                                
|Stockholders equity                             |  |              | 109,442 |      |  |      | 125,104 |      |  |      | 200,653 |  |  |   | 242,720 |  |  |   | 611,024   | 

17



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##### Table of Contents








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

Overview

As used in this Report, the term the Company refers
to RSA Security Inc. (formerly known as Security Dynamics
Technologies, Inc.) and its subsidiaries.

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 contained
herein that is not a statement of historical fact may be deemed a
 forward-looking statement. Without limiting the foregoing, the
words believes, anticipates,
plans, expects, and similar expressions
are intended to identify forward-looking statements. There are a
number of factors that could cause the Companys actual
results to differ materially from those indicated by such
forward-looking statements. These factors include, without
limitation, those set forth below under the caption Certain
 Factors That May Affect Future Results.

The Company is a leading provider of electronic security
(e-security) solutions. The Company helps
organizations build secure, trusted foundations for electronic
business (e-business) through use of the
Companys two-factor user authentication, encryption and
public key management products and solutions. The Company sells
to corporate (Enterprise) end users seeking turnkey
e-security solutions, and to original equipment manufacturers and
 developers (OEMs) seeking software development
components for embedding security in a range of applications.

The Company was founded in 1984 and began shipping its RSA
SecurID® authenticators in 1986. Prior thereto, the Company
was primarily engaged in research and development activities. In
December 1991, the Company introduced its RSA ACE/
Server® software products for Enterprise network protection
using a client/server architecture. The Company believes that its
 growth has historically been driven by the emergence of networks
 and a corresponding increase in users with direct access to core
 enterprise systems and confidential data. Further, the Company
believes the number of users with such direct access is
increasing because of the growth of the Internet and corporate
intranets and extranets.

The Company has established a multi-channel distribution and
sales network to serve the Enterprise e-security market. The
Company sells and licenses its products directly to Enterprise
end users through its direct sales force and indirectly through a
 network of OEMs, value added resellers and distributors. In
addition, the Company supports its direct and indirect sales
efforts through strategic marketing relationships and public
relations programs, trade shows and other marketing activities.

The Companys direct sales to its customers in countries
outside of the United States are denominated in the local
currency. As a result, fluctuations in currency exchange rates
could affect the profitability in U.S. dollars of the
Companys products sold in those markets. The Companys
 sales through indirect distribution channels are generally
denominated in U.S. dollars.

The Companys revenue is derived primarily from two distinct
 product lines: Enterprise solutions (including RSA SecurID
authenticators, RSA ACE/ Server software, RSA Keon
software, and maintenance and professional services) and OEM
solutions (including RSA BSAFE® cryptographic development
tools and protocol products, RSA Keon components, and maintenance
 and professional services). Customers purchases typically
include an initial sale of RSA SecurID authenticators and RSA
ACE/ Server software, with later add on sales of additional or
replacement authenticators and software as the customers
use of the products expands to include more users, such as the
customers vendors, suppliers, customers and clients. RSA
SecurID authenticators are programmed at the customers
request to operate for a fixed period of up to four years, and
RSA ACE/ Server and RSA Keon software license fees are typically
based on the number of users authorized under the customers
 license. RSA BSAFE software licensing terms vary by product, but
 are typically composed of both initial fees and ongoing
royalties paid as a percentage of the OEMs product or
service revenues. Sales to existing customers also include
revenue associated with amendments to licensing agreements,
usually in order to accommodate licensing of new software or
technology to the customer, to increase the field of use rights,
or both.

18



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##### Table of Contents



The Companys RSA SecurID authenticators are produced by two
 outside contract manufacturing organizations (see Certain
Factors That May Affect Future Results), and the Company
licenses some of the technology included in some of its products
from third parties. The Companys cost of revenue consists
primarily of costs associated with (1) the manufacture and
delivery of RSA SecurID authenticators and (2) royalty fees
payable by the Company under licenses for third parties
technology included in its products. Cost of revenue also
includes professional service costs, customer support costs and
production costs. These production costs include shipping and
labor costs associated with programming, inspection and quality
control functions associated with the RSA SecurID authenticators.
 In the future, gross margin may be affected by several factors,
including changes in product mix and distribution channels, price
 reductions (resulting from volume discounts or otherwise),
competition, changes in the cost of revenue (including any
software license fees or royalties payable by the Company) and
other factors.

Information on the Companys industry segments may be found
in Note 10 of 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,
|                                         |                            |                         
|                                         |                            | 1997                     |       | 1998 |  | 1999
|                                         |                            |                          |       |      |  |     
|Revenue                                  |                            |                          | 100.0 | %    |  |      | 100.0 | %    |  |  | 100.0 | %   
|                                        
|                                        
|                                        
|                                        
|Cost of revenue                          |                            |                          | 20.4  |      |  |      | 23.8  |      |  |  | 20.7  |     
|                                         |                            |                          |       |      |  |      |       |      |  |  |       |     
|                                         | Gross profit               |                          |       | 79.6 |  |      |       | 76.2 |  |  |       | 79.3 | 
|                                        
|                                        
|                                        
|                                        
|Costs and expenses                       |                            |                          |       |      |  |      |       |      |  |  |       |     
|                                        
|                                        
|                                        
|                                        
|                                         | Research and development   |                          |       | 19.3 |  |      |       | 18.6 |  |  |       | 17.3 | 
|                                        
|                                        
|                                        
|                                        
|                                         | Marketing and selling      |                          |       | 29.8 |  |      |       | 39.0 |  |  |       | 41.2 | 
|                                        
|                                        
|                                        
|                                        
|                                         | General and administrative |                          |       | 12.2 |  |      |       | 11.1 |  |  |       | 12.5 | 
|                                        
|                                        
|                                        
|                                        
|                                         | Merger and integration     |                          |       | 4.1  |  |      |       | 1.5  |  |  |       |     | 
|                                        
|                                        
|                                        
|                                        
|                                         | Restructuring              |                          |       |     |  |      |       |     |  |  |       | 5.2  | 
|                                        
|                                        
|                                        
|                                        
|                                         | Legal settlement           |                          |       |     |  |      |       | 1.1  |  |  |       |     | 
|                                         |                            |                          |       |      |  |      |       |      |  |  |       |     
|Total                                    |                            |                          | 65.4  |      |  |      | 71.3  |      |  |  | 76.2  |     
|                                        
|                                        
|                                        
|                                        
|Income from operations                   |                            |                          | 14.2  |      |  |      | 4.9   |      |  |  | 3.1   |     
|                                        
|                                        
|                                        
|                                        
|Interest income and other                |                            |                          | 4.5   |      |  |      | 5.1   |      |  |  | 4.6   |     
|                                        
|                                        
|                                        
|                                        
|Net gain from investments                |                            |                          | 3.0   |      |  |      | 20.7  |      |  |  | 131.0 |     
|                                         |                            |                          |       |      |  |      |       |      |  |  |       |     
|Income before provision for income taxes |                            |                          | 21.7  |      |  |      | 30.7  |      |  |  | 138.7 |     
|                                        
|                                        
|                                        
|                                        
|Provision for income taxes               |                            |                          | 9.5   |      |  |      | 13.8  |      |  |  | 54.5  |     
|                                        
|                                        
|                                        
|                                        
|Minority interests                       |                            |                          |      |      |  |      | 0.3   |      |  |  |      |     
|                                         |                            |                          |       |      |  |      |       |      |  |  |       |     
|Net income                               |                            |                          | 12.2  | %    |  |      | 17.2  | %    |  |  | 84.2  | %   
|                                         |                            |                          |       |      |  |      |       |      |  |  |       |     

1999 Compared with 1998

Revenue

Total revenue increased 27.3% in 1999 to $218.1 million from
$171.3 million in 1998. Sales to Enterprise solution customers
increased 24% in 1999 to $165.1 million from $133.1 million in
1998, and sales to OEM customers increased 39% in 1999 to $53.0
million from $38.2 million in 1998. Approximately 57.8% of the
increase in revenue in 1999 was attributable to increased sales
of RSA SecurID authenticators and RSA ACE/ Server software,
approximately 31.5% of the increase was attributable to increased
 sales of RSA BSAFE, and approximately 10.7% of the increase was
attributable to increased maintenance and professional services
revenues. The Company believes that the overall increase in sales
 was attributable to the growth in the e-security market due to
increased use of the Internet and corporate intranets and
extranets.

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International revenue increased 11% in 1999 to $66.0 million from
 $59.3 million in 1998. The increase in international revenue was
 primarily from the continuing expansion of the Companys
international sales force and increased market penetration.

Gross Profit

The Companys gross profit increased 32.5% in 1999 to $173.0
 million from $130.6 million in 1998. Approximately 20% of this
increase was due to increased unit sales of RSA SecurID
authenticators, approximately 21% was due to increased sales of
RSA ACE/ Server and approximately 29% was due to increased sales
of RSA BSAFE.

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.

Rebranding

In September 1999 the Company changed its name to RSA
Security Inc. Legal and promotional costs incurred in connection
with this rebranding were approximately $12.5 million, of which
approximately $11.8 million has been included in marketing and
selling and approximately $0.7 million has been included in
general and administrative.

Marketing and Selling

Marketing and selling expenses increased 34.7% in 1999 to $89.9
million from $66.8 million in 1998. Approximately 38% of the
increase in 1999 was from increased payroll costs associated with
 the employment of additional staff, and approximately 11% of the
 increase was from increased sales commissions on increased
revenues.

General and Administrative

General and administrative expenses increased 43.4% in 1999 to
$27.3 million, from $19.0 million in 1998. Approximately 62% of
the increase in general and administrative expenses was from
increased payroll expenses associated with the employment of
additional staff and approximately 23% of the increase was from
increased professional fees, the majority of which related to
protection of intellectual property.

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 $11.4
million consisting of severance 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 Intrusion Detection, Inc.
(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,
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 from interest earned on higher cash and
marketable securities balances.

20



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##### Table of Contents



Net Gains From Investments

For 1999, net gains from investments were $286.0 million from
sales of marketable securities, which includes gains from the
sale of VeriSign, Inc. (VeriSign) common stock and
Trintech Group PLC (Trintech) ordinary shares of
$276.4 million, and an increase in value of VeriSign common stock
 of $12.6 million from the write-up under the equity method.
These gains are net of the Companys equity in
VeriSigns loss of $0.5 million and an investment allowance
of $2.5 million on other investments. Until June 30, 1999,
the Company had accounted for its investment in VeriSign under
the equity method. After June 1999, investments in VeriSign
common stock were accounted for as marketable securities
available for sale. For 1998, net gains from investments were
$35.4 million from sales of marketable securities, which includes
 gains from the sale of VeriSign common stock of $31.3 million,
and an increase in value of VeriSign common stock of $12.0
million from the write-up under the equity method upon
VeriSigns initial public offering. These gains are net of
the Companys equity in VeriSigns loss of $4.3 million
 and an investment allowance of $3.6 million on other
investments. The Company routinely evaluates the realizable value
 of its investments using qualitative and quantitative factors
including discounted cash flow analysis and liquidation value
assessments.

Minority Interests

Minority stockholders owned an aggregate 26% of the
Companys Japanese subsidiary until November 1999, when
 the Company 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 the subsidiarys net loss were $16,000
 in 1999 and $600,000 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. The Companys 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.

1998 Compared with 1997

Revenue

Total revenue increased 21.8% in 1998 to $171.3 million from
$140.6 million in 1997. Sales to Enterprise solution customers
increased 21% in 1998 to $133.1 million from $109.8 million in
1997, and sales to OEM customers increased 24% in 1998 to $38.2
million from $30.8 million in 1998. Approximately 43% of the
increase in revenue in 1998 was attributable to increased sales
of RSA SecurID authenticators, approximately 19% of the increase
was attributable to increased sales of RSA BSAFE toolkits,
approximately 22% of the increase was attributable to increased
sales of RSA ACE/ Server software and approximately 11% of the
increase was attributable to increased maintenance and
professional services revenues. These increases in revenue were
offset in part by decreased revenues from sales of RSA SecurPC
software and from decreased revenue from sales of hardware.
Revenue from sales of RSA Keon software and from sales of Kane
Security Analyst and Kane Security Monitor software decreased
slightly in 1998 compared to 1997. The Company believes that the
overall increase in sales was attributable to growth in the
information security market due to increased use of the Internet
and corporate intranets and extranets.

International revenue increased 36.4% in 1998 to $59.3 million
from $43.5 million in 1997. The increase in international revenue
 was primarily from the continuing expansion of the
Companys international sales force and increased market
penetration.

Gross Profit

The Companys gross profit increased 16.6% in 1998 to $130.6
 million, from $111.9 million in revenue in 1997. Gross profit as
 a percentage of revenue was lower in 1998, primarily due to
write-offs to cost of revenue of prepaid license fees of $4.1
million under secure VPN and secure e-mail license agreements
determined to have no future value and costs of $1.2 million
associated with exiting certain hardware product lines.

21



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##### Table of Contents





Research and Development

Research and development expenses increased 17.7% in 1998 to
$32.0 million from $27.2 million in 1997. Excluding purchased
research and development, the majority of the increase in
research and development expenses resulted from increased payroll
 expenses from the employment of additional staff. During 1998
the Company purchased and recorded as purchased research and
development expense certain technology from VeriSign for $500,000
 and from other parties for $1.3 million. The Company
incorporated these technologies into its RSA Keon product line.

During 1997, the Company purchased, and recorded as purchased
research and development expense, certain technology from
VeriSign for $2.7 million and from other third parties for $3.5
million. The Company incorporated the technologies into its RSA
Keon and RSA BSAFE products.

Marketing and Selling

Marketing and selling expenses increased 59.3% in 1998 to $66.8
million from $41.9 million in 1997. Approximately 52% of the
increase in marketing and selling expenses in 1998 resulted from
an increase in payroll costs from the employment of additional
staff and approximately 31% of the increase was attributable to
increased sales commissions. Sales commissions increased due to
increased revenues and due to compensation programs designed to
incent sales personnel to increase sales through the indirect
channel and, in particular, the Internet and telecommunication
service provider channels. The remainder of the increase in
marketing and selling expenses resulted primarily from increased
marketing program costs.

General and Administrative

General and administrative expenses increased 10.7% in 1998 to
$19.0 million, from $17.2 million in 1997. Approximately 68% of
the increase in general and administrative expenses was due to
increased payroll expenses from the employment of additional
staff and approximately 31% of the increase in general and
administrative expenses was due to increased professional fees
offset by expense reduction synergies achieved in connection with
 the acquisitions of DynaSoft AB (DynaSoft) and IDI.
The increase in professional fees was primarily due to the
Companys commencement of a program in 1998 to aggressively
protect its intellectual property rights through worldwide
trademark and patent registrations.

Merger and Integration

Merger and integration expenses from the acquisition of IDI were
approximately $2.6 million in 1998 and were $5.7 million from the
 acquisition of DynaSoft in 1997.

Legal Settlement

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 IDI. The value of the options was determined to be
 $1.9 million, using the Black-Scholes option-pricing model.

22



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##### Table of Contents



Interest Income

Interest income increased 38.3% in 1998 to $8.7 million from $6.3
 million in 1997 from interest earned on higher cash and
marketable securities balances.

Net Gains From Investments

For 1998, net gains from investments were $35.4 million from
sales of marketable securities, which includes gains from the
sale of VeriSign, Inc. common stock of $31.3 million, an increase
 in value of VeriSign common stock of $12.0 million from the
write-up under the equity method upon VeriSigns initial
public offering. These gains are net of the Companys equity
 in VeriSigns loss of $4.3 million and an investment
valuation allowance of $3.6 million on other investments. For
1997, net gains from investments were $4.3 million from sales of
marketable securities. The Company routinely evaluates the
realizable value of its investments using qualitative and
quantitative factors including discounted cash flow analysis and
liquidation value assessments.

Minority Interests

Minority stockholders owned an aggregate 26% of RSAs
Japanese subsidiary. Minority interests in the subsidiarys
net loss was $0.6 million in 1998, and minority interests in the
subsidiarys net income was $0.1 million in 1997.

Provision for Income Taxes

The provision for income taxes increased to $23.6 million during
1998 from $13.3 million in 1997, primarily due to higher pre-tax
income. The Companys effective tax rate increased to 45.0%
in 1998 from 43.7% in 1997 primarily due to the effect of state
income taxes on investment gains and differences in amounts of
nondeductible merger expenses in 1998 compared to 1997.

Liquidity and Capital Resources

Liquidity

The Company used $81.1 million of cash for operations in 1999
compared to $8.9 million for 1998. Operating cash used in 1999
was primarily for taxes paid on investment gains. Cash used in
operations for 1998 was primarily for working capital.

Investing activities provided cash in 1999 of $231.2 million and
used cash of $49.5 million in 1998. Investing activities were
primarily sales and purchases of marketable securities and
investments. Purchases of property and equipment used cash of
$13.7 million and $18.9 million in 1999 and 1998, respectively.

Cash used for financing activities in 1999 was $61.3 million
compared to $4.7 million in 1998. In 1999 and 1998, the Company
realized $45.3 million and $7.9 million, respectively, from the
exercise of employee stock options and purchases under the
employee stock purchase plan, including tax benefits thereon. The
 Company used cash of $103.0 million and $12.1 million to
repurchase its common stock in 1999 and 1998, respectively.

At December 31, 1999, the Company had cash, cash equivalents
 and marketable securities of $1,383.2 million and working
capital of $553.3 million, compared to $158.2 million and $180.9
million, respectively, at December 31, 1998. The Company
believes that working capital will be sufficient to meet its
anticipated cash requirements through at least 2001.

To protect a portion of its marketable securities position, the
Company sold put and call options on its VeriSign shares to
independent third parties. The put options entitle the holders to
 buy shares of VeriSign common stock, and the call options allow
the Company to sell shares of VeriSign common stock on certain
dates at specified prices, or permit a net-share settlement at
the Companys option. On December 31, 1999, 5,500,000
shares were covered by these put and call options. The
outstanding put and call options expire quarterly in 500,000
share increments between March 31, 2000 and
September 30, 2002 and have exercise

23



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##### Table of Contents





Other

Mergers and Acquisitions

On March 26, 1998 the Company issued approximately 784,000
shares of Common Stock in exchange for all of the outstanding
common stock of IDI in a transaction accounted for as a pooling
of interests. Acquisition costs were approximately $2.6 million.

Share Repurchase Program

The Company was authorized to repurchase up to 4,000,000 shares
of its common stock during the 12-month period ended
October 11, 1999, and is authorized to purchase up to an
additional 4,000,000 shares of its common stock during the
12-month period ending October 12, 2000. Repurchased shares
may be used for the Companys stock option and employee
stock purchase plans, and for general corporate purposes. Through
 December 31, 1999, the Company had repurchased 5,134,500
shares of its common stock, for an aggregate amount of $115.1
million, at an average cost of $22.42 per share.

Stock Purchase Warrants

The Company issued warrants to purchase 80,000 shares of common
stock in September 1999 in connection with a software sale.
The value of the warrants of $1.0 million was determined using
the Black-Scholes option-pricing model and allocated to
additional paid in capital.

Stock Option Repricing

In August 1998, the Company repriced options to purchase
approximately 5,500,000 shares of common stock to the then fair
market value of $12.0625 per share.

Conversion to Euro

The Companys systems are configured to process Euro
denominated transactions. The Company does not believe the Euro
will have a significant effect on its business, financial
position, cash flows or the results of its operations.

New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. In June 1999, the
FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities  Deferral of the
Effective Date of FASB Statement 133. The Statement defers
the effective date of SFAS No. 133 to January 1, 2001.
The effect of adopting the standard is being evaluated. The
Company estimates that, based on the valuation of the put and
call options as of December 31, 1999, the effect of adopting
 this standard would be to decrease net gains from investments by
 $29.8 million. SFAS No. 133 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 the derivative is a hedge, depending on the
nature of the hedge, changes in the fair value of derivatives
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.

24



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##### Table of Contents



Quarterly Financial Data

|                                         |  |                                       |        |                |  |               |        |                |  |   |        |  |  |   |        | 
|---------------------------------------- |  | ------------------------------------- | ------ | -------------- |  | ------------- | ------ | -------------- |  | - | ------ |  |  | - | ------ | 
|                                         |  | First Quarter                         |        | Second Quarter |  | Third Quarter |        | Fourth Quarter
|                                         |  |                                       |        |                |  |               |        |               
|                                         |  |                                      
|                                         |  | (in thousands, except per share data)
|                                        
|                                        
|                                        
|                                        
|1999                                     |  |                                       |        |                |  |               |        |                |  |   |        |  |  |   |        | 
|                                        
|                                        
|                                        
|                                        
|Net sales                                |  | $                                     | 48,672 |                |  | $             | 51,809 |                |  | $ | 55,658 |  |  | $ | 61,985 | 
|                                        
|                                        
|                                        
|                                        
|Gross profit                             |  |                                       | 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                 |  | $                                     | 1.03   |                |  | $             | 1.11   |                |  | $ | 1.50   |  |  | $ | 1.05   | 
|                                        
|                                        
|                                        
|                                        
|Diluted earnings per share               |  | $                                     | 0.97   |                |  | $             | 1.05   |                |  | $ | 1.42   |  |  | $ | 0.96   | 
|                                        
|                                        
|                                        
|                                        
|Results excluding non-core activity:     |  |                                       |        |                |  |               |        |                |  |   |        |  |  |   |        | 
|                                        
|                                        
|                                        
|                                        
|Net income                               |  | $                                     | 5,052  |                |  | $             | 5,957  |                |  | $ | 7,422  |  |  | $ | 9,922  | 
|                                        
|                                        
|                                        
|                                        
|Basic earnings per share                 |  | $                                     | 0.13   |                |  | $             | 0.15   |                |  | $ | 0.19   |  |  | $ | 0.25   | 
|                                        
|                                        
|                                        
|                                        
|Diluted earnings per share               |  | $                                     | 0.12   |                |  | $             | 0.15   |                |  | $ | 0.18   |  |  | $ | 0.23   | 
|                                        
|                                        
|                                        
|                                        
|1998                                     |  |                                       |        |                |  |               |        |                |  |   |        |  |  |   |        | 
|                                        
|                                        
|                                        
|                                        
|Net sales                                |  | $                                     | 40,246 |                |  | $             | 43,372 |                |  | $ | 40,801 |  |  | $ | 46,915 | 
|                                        
|                                        
|                                        
|                                        
|Gross profit                             |  |                                       | 31,630 |                |  |               | 31,479 |                |  |   | 32,435 |  |  |   | 35,009 | 
|                                        
|                                        
|                                        
|                                        
|Income before provision for income taxes |  |                                       | 5,918  |                |  |               | 17,124 |                |  |   | 4,937  |  |  |   | 24,429 | 
|                                        
|                                        
|                                        
|                                        
|Net income                               |  | $                                     | 2,964  |                |  | $             | 10,673 |                |  | $ | 3,188  |  |  | $ | 12,590 | 
|                                        
|                                        
|                                        
|                                        
|Basic earnings per share                 |  | $                                     | 0.07   |                |  | $             | 0.26   |                |  | $ | 0.08   |  |  | $ | 0.31   | 
|                                        
|                                        
|                                        
|                                        
|Diluted earnings per share               |  | $                                     | 0.07   |                |  | $             | 0.25   |                |  | $ | 0.08   |  |  | $ | 0.30   | 
|                                        
|                                        
|                                        
|                                        
|Results excluding non-core activity:     |  |                                       |        |                |  |               |        |                |  |   |        |  |  |   |        | 
|                                        
|                                        
|                                        
|                                        
|Net income                               |  | $                                     | 5,696  |                |  | $             | 6,084  |                |  | $ | 3,975  |  |  | $ | 3,283  | 
|                                        
|                                        
|                                        
|                                        
|Basic earnings per share                 |  | $                                     | 0.14   |                |  | $             | 0.15   |                |  | $ | 0.10   |  |  | $ | 0.08   | 
|                                        
|                                        
|                                        
|                                        
|Diluted earnings per share               |  | $                                     | 0.14   |                |  | $             | 0.15   |                |  | $ | 0.10   |  |  | $ | 0.08   | 

Net income includes the following non-core activity:

Gains from sales of VeriSign common stock of $74,489, $54,802,
$86,837 and $60,310 in the first, second, third and fourth
quarters of 1999, respectively, and $1,836 and $29,449 in the
third and fourth quarters of 1998, respectively. The
Companys proportionate share of VeriSigns quarterly
losses of $358 and $167 for the first and second quarters of
1999, respectively and $1,173, $1,214 and $1,800 for the second,
third and fourth quarters of 1998, 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 and $11,976
 in the second quarter of 1998. Losses relating to the investment
 valuation allowance on the Companys investments of $2,537
in the third quarter of 1999, and $3,647 in the fourth quarter of
 1998.

Costs associated with the Companys corporate rebranding of
$5,363 and $7,137 in the third and fourth quarters of 1999. Costs
 associated with the formation of RSA Capital Inc. were $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. Merger costs incurred during the acquisition
of IDI of $2,600 in the first quarter of 1998.

Costs associated with purchased technology of $210 and $1,550 in
the first and fourth quarters of 1998, respectively. The
write-off of a secure messaging license to cost of sales of
$3,000 in the second quarter of 1998. The costs associated with
terminating select hardware and VPN product lines of $2,346 in
the fourth quarter of 1998. Costs associated with accelerated
stock option compensation from terminations and headcount
reductions of $821 in the fourth quarter of 1998.

A one-time, non cash charge relating to settlement of threatened
litigation in connection with the Companys acquisition of
IDI of $1,872 in the third quarter of 1998.

25



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##### Table of Contents



Income tax provisions (benefits for non-recurring items were
$31,644, $30,173, $23,972 and $20,757 in the first, second, third
 and fourth quarters of 1999, respectively, and $80, $3,211,
($464), and $9,979 in the first, second, third and fourth
quarters of 1998, respectively.

Year 2000 Issues

Overview

Historically, computer systems and software products were coded
to accept only two digit entries in the date code field. These
date code fields had to be modified to accept four digit entries
to distinguish 21st century dates from 20th century dates. As a
result, such software and computer systems needed to be upgraded
or replaced in order to comply with such Year 2000
requirements.

Company Products

Prior to December 31, 1999, the Company tested substantially
 all of its products for Year 2000 readiness. In measuring Year
2000 readiness, the Company applied the following specifications:
 Year 2000 Ready means that: (1) no value for
current date will cause any interruption in operation;
(2) date-based functionality must be consistent for dates
prior to, during and after Year 2000; (3) in all interfaces
and data storage, the century in any date must be specified
either explicitly or by unambiguous algorithms or inferencing
rules; and (4) Year 2000 must be recognized as a leap year.

The Companys RSA SecuriID authenticators are Year 2000
Ready. Assuming that a customer is utilizing the Companys
software products in conjunction with a Year 2000 Ready operating
 system, then the Companys most recent software releases,
RSA ACE/ Server v3.3, RSA Keon Security Server v4, RSA Keon
Desktop v4, RSA Keon Agents v4 and above, RSA Keon Agent SDK, RSA
 Keon UNIX Platform Security v4, (Keon software products were
formerly known as BoKS), RSA Keon Certificate Server v5.0, RSA
SoftID, RSA SecurPC, RSA BSAFE Crypto-C, RSA BSAFE Crypto-J, RSA
BSAFE Cert-C, RSA BSAFE SSL-C and RSA BSAFE SSL-J are Year 2000
Ready. The Companys ACE/ Sentry hardware products are also
Year 2000 Ready. Certain prior versions of the Companys
software products, as well as the Companys ACM 100, 400,
1600 and 5100 hardware products, are not fully Year 2000 Ready,
and customers were informed of the status of the Companys
products in the ordinary course of business. In certain
circumstances, the Company has made available to customers who
have implemented prior releases of the Companys software
products software updates to make the products Year 2000 Ready.

While the Company has completed what it believes to be an
effective Year 2000 Readiness testing program for its products,
and although the Company has not yet received any complaints from
 its customers about the Year 2000 Readiness of its products, the
 Companys products may contain undetected errors or defects
 associated with Year 2000 date functions. Such errors or defects
 in the Companys products could result in delay or loss of
revenue and diversion of development resources, which might
materially adversely affect the Companys business,
financial condition or results of operations.

Company Systems

The Company established a Year 2000 task force to determine the
state of readiness of all Company information technology
(IT) and non-IT systems, including the
microprocessors contained in infrastructure products, such as
card-swipe entry devices, which are used at the Companys
facilities. Before December 31, 1999, the task force
identified the third-party equipment, software, vendors, systems
and suppliers used by the Company that were not Year 2000 Ready
and replaced non-Year 2000 Ready third-party equipment and
software with Year 2000 Ready equipment and software. With
respect to certain other business applications and systems
licensed by the Company from third parties (including but not
limited to the Companys telephone systems and management
information system installed in 1998), the Company relied on
those licensors written representations that the
applications were Year 2000 Ready. To date, the Company has not
experienced any significant problems due to non-Year 2000 Ready
equipment or software.

26



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##### Table of Contents



Costs to Address Year 2000 Issues

The Company incurred direct costs to modify or replace existing
systems used by the Company in the operation of its business to
ensure that all systems would be Year 2000 Ready before
December 31, 1999. The total amounts spent by the Company
addressing this issue were not material.

In addition, the Company spent substantial time and effort
testing and evaluating its own products to determine Year 2000
Readiness of those products. In the case of prior product
releases that are not Year 2000 Ready, the Company expects to
devote internal engineering and customer support resources to
resolving any issues for existing customers of those products.

Risks to the Company

The Company has made representations and warranties, both in
contracts and in written communications, to certain of its
customers regarding the Year 2000 Readiness of its products. The
Company has reviewed all of those representations to determine
the accuracy of those statements. The Company has determined that
 it made Year 2000 Readiness representations in fewer than 10% of
 its customer contracts, and many of those customers have
requested, and received, Year 2000 Ready versions of the
Companys products.

With respect to any contractual representation made by the
Company regarding Year 2000 Readiness that were not accurate, the
 Company will seek to upgrade the affected customer to the
Companys current Year 2000 Ready version of the product(s)
being used by that customer. If the Company has made a materially
 inaccurate statement regarding the Year 2000 Readiness of its
products and the customer chooses not to upgrade to a Year 2000
Ready version of the product, the Company may face the risk of
one or more lawsuits from its customers alleging breach of
representation.

The foregoing shall be considered a Year 2000 readiness
disclosure to the maximum extent allowed under the Year 2000
Information and Readiness Disclosure Act.

CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

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



| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| |  | the timing of introduction or enhancement of products by the
	Company or its competitors;
|
| |  | the size, timing and shipment of individual orders for the
	Companys products;          
|
| |  | customers deferring their orders in anticipation of new products;                        
|
| |  | market acceptance of new products;                                                       
|
| |  | changes in the Companys operating expenses;                                             
|
| |  | personnel changes;                                                                       
|
| |  | foreign currency exchange rates;                                                         
|
| |  | changes in the mix of products sold;                                                     
|
| |  | changes in product pricing;                                                              
|
| |  | development of the Companys direct and indirect
	distribution channels; and             
|
| |  | general economic conditions.                                                             

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

27



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##### Table of Contents



The Companys business has historically tended to be
seasonal, with revenue increasing at a higher rate in the last
quarter of the year and at a lower rate in the following quarter.
 The Company believes that the higher rate of increase during the
 last quarter is due to the Companys quota-based
compensation plans, year-end budgetary pressures on the
Companys customers and the tendency of some of the
Companys customers to implement changes in enterprise
network or data security just before the end of the calendar
year. In addition, revenue tends to increase at lower rates in
the summer months, particularly in Europe, when businesses defer
purchase decisions.

The Companys stock price has been volatile and is likely
 to remain volatile. During 1999, the Companys stock
price ranged from a per share high of $77.50 to a low of $14.88.
At the close of the market on February 9, 2000, the
Companys stock price was $63.73. Announcements, litigation
developments and the Companys ability to meet the
expectations of brokerage firms, industry analysts and investors
with respect to its operating and financial results may
contribute to this volatility. The Company 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 the
Companys 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 the Companys
stockholders filed a class action against the Company and some of
 its officers and directors. This litigation, and other
litigation if instituted, could result in substantial costs and a
 diversion of managements attention and resources.

The market for the Companys products is new and still
developing. An increasing number of businesses, government
agencies and individuals are using computer networks, including
enterprise-wide and remote computing, as well as the Internet,
intranets and extranets. Because these computer networks enhance
the ability of users, both authorized and unauthorized, to access
 sensitive and proprietary information and resources, demand for
the Companys enterprise network and data security products
has increased as well. With this growth of computer networks has
also come a growing use of public and private keys, digital
signatures and digital certificates for verifying user identities
 and establishing information access privileges for users in an
enterprise.

This growth may not continue. The use of computer networks to
conduct business and enhance authorized access to information and
 resources is relatively new, and many business and government
agencies will need to invest substantial resources and make major
 changes in their ways of doing business in order to benefit from
 computer networks. Many businesses and government agencies may
be reluctant to make these investments and changes and may be
deterred from using computer networks for a number of reasons,
including:



| |   |                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------
| |  | actual or perceived inadequacies in the development of network
	and Internet infrastructure and the lack of cost-effective,
	high-speed service;   
|
| |  | concerns about the security of communications and commerce over
	computer networks;                                                                
|
| |  | the complexity of developing and administrating computer
	networks; and                                                                            
|
| |  | the difficulty of integrating business applications on computer
	networks and the incompatibility of different business and
	security applications.

In addition, the distribution channels for the Companys
products are changing. For example, the Company believes that an
increasing number of 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. As new distribution channels evolve, the Company may
need to adjust its sales strategy to address these channels.

28



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Demand for the Companys products depends highly on the
continued growth in the use of computer networks to allow users
access to confidential and proprietary information and resources. This demand depends on, among other things:



| |   |                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the continued evolution of electronic commerce as a viable means
	of conducting business;                                                                                                                                                               
|
| |  | 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;                                                                                                        
|
| |  | the perceived quality, price, availability and interoperability
	of the Companys products over its 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 the Companys products operate, and
	the Companys 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 offered by the Company. On the other hand, an actual or
perceived breach of network or data security at the Company or
one of the Companys customers, whether or not the breach
was caused by the failure of one of the Companys products,
could hurt the Companys reputation and cause potential
customers to turn to competitors products. For example, in
February 2000, a third party attacker briefly redirected the
Companys www.rsa.com URL (which is one of the
Companys inactive web sites that points users to the
Companys main web site) to a false rsa.com site. Although
the companys security was not compromised in any way, the
Company believes that the public may have perceived that the
Company or its products were less secure because of this
incident. In addition, although the effectiveness of the
Companys identification and authentication products does
not depend on the secrecy of its proprietary algorithm, the
public disclosure or breaking of this algorithm could
 lead the public to believe that the Companys products have
 been compromised, which could reduce demand for the
Companys products.

Changes in e-security technology and standards could render
the Companys products obsolete. The market for
e-security products is fast-moving and evolving. E-security
technology is constantly changing as the Company and its
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
are continuing to evolve. If any segments of the Companys
market adopt technologies or standards that are inconsistent with
 the Companys products and technology, sales of the
Companys products in those market segments could decline.

The Companys future success will depend in part upon its
ability to enhance its 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, the Company may not be successful in introducing new or
 enhanced products. A number of factors, including the following,
 could have an adverse impact on the success of a product:



| |   |                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | delays or difficulties in product development;                                                                                                                                                                                                     
|
| |  | 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 the Companys competitive position;        
|
| |  | undetected software errors or bugs in the final products shipped
	to the Companys customers, which could cause market
	acceptance of the products to be lost or delayed, recalls of
	hardware products incorporating the software or loss of data;

29



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| |   |                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |  | the Companys competitors introducing their new products
	ahead of the Companys new products or introducing superior
	or cheaper products;
|
| |  | the markets failure to accept new technologies;                                                                                           
|
| |  | the Companys failure to anticipate changes in
	customers requirements; and                                                               
|
| |  | implementation of standards that are inconsistent with the
	technology embodied in the Companys products.                                 

The Companys success depends on the success of the RSA
Keon product line. During 1999, the Company launched its RSA
Keon product line, a family of enterprise security solutions
designed to enable organizations to support and manage the
growing use of public and private keys, digital signatures and
digital certificates for verifying user identities and
establishing information access privileges for these users in an
enterprise. This new product line is critical to the
Companys strategy and the evolution of its business into
new markets. If the RSA Keon product line is not successful, the
Companys financial condition or results of operations could
 be adversely affected. All of the factors listed above as
affecting the success of new products generally also affect the
RSA Keon product line. In addition, RSA Keons success
especially depends on market acceptance of digital certificate
and public and private key management technologies.

Transactions for the RSA Keon products often involve large
expenditures by the Companys customers, and the sales
cycles for these transactions are often lengthy and
unpredictable. The long nature of the sales cycles may impact the
 Companys quarterly results of operations. The sales cycles
 for these transactions are subject to a number of uncertainties
such as:



| |   |                                            
| | - | -------------------------------------------
| |  | customers budgetary constraints;          
|
| |  | the timing of customers budget cycles; and
|
| |  | customers internal review process.        

The Company must manage its growth. The Companys
business has grown significantly in size and complexity over the
last few years. This growth has placed, and is expected to
continue to place, a significant strain on the Companys
management and operations. In addition, the Companys
personnel, systems, procedures and controls may not be adequate
to support its growth. The geographic dispersal of the
Companys operations may also make it more difficult to
manage its growth.

The Companys market is highly competitive. The
Company competes with: (1) established e-security companies
that currently offer network security products or services;
(2) newly organized e-security companies that are developing
 new, competitive products and technologies; and
(3) established computer hardware or software companies that
 introduce their own network security products, either separately
 or bundled with their existing hardware or software products.
Some of the Companys current and potential competitors have
 significantly greater financial, marketing and technical
resources than the Company. 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 the Company can. The Company believes that maintaining its
competitive position will require it to continue investing in
research and development and sales and marketing. The Company may
 not have sufficient resources to make these investments and may
not be able to make the technological advances necessary to
maintain its competitive position. In addition, current and
potential competitors may establish collaborative relationships
to increase their ability to address the security needs of the
Companys prospective customers. Accordingly, new
competitors or alliances that emerge could pose unforeseen
competitive threats.

The Company must establish and maintain strategic
relationships. One of the Companys business strategies
is to enter into strategic marketing alliances or other similar
collaborative relationships in order to reach a larger customer
base than the Company could reach alone through its direct sales
and marketing efforts. If the Company is unable to create
relationships with strategic partners, then it will need to
devote more resources to sales and marketing. The Company 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

30



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The Companys products are subject to export regulations. Under new regulations issued by the U.S. Department of
Commerce in January 2000, encryption products of any key length,
including general purpose encryption tools such as the
Companys RSA BSAFE products, may be exported, after a
one-time technical review, to all end-users other than
governmental end-users. The Company believes that it has
completed the necessary technical reviews of the products and
services it currently exports. Following export of certain of its
 products, the Company will be subject to various post-shipment
reporting requirements. Encryption products may be exported to
governmental end-users under special encryption licensing
arrangements or individual export licenses which may be issued at
 the discretion of the U.S. Department of Commerce.

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

International sales make up a significant portion of the
Companys business. International sales accounted for
more than 30% of the Companys revenue in each of the years
ended December 31, 1997, 1998 and 1999. 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;                                                               
|
| |  | tariffs and other trade barriers;                                                                      
|
| |  | difficulties in enforcement of intellectual property rights; and                                       
|
| |  | political instability.                                                                                 

The Company depends on U.S. and foreign intellectual property
laws and agreements to protect its rights in its technology.
The Company relies on a combination of patent, trade secret,
copyright and trademark laws, software licenses, nondisclosure
agreements and technical measures to protect its proprietary
technology. The Company also generally enters into
confidentiality and/or license agreements with its employees,
distributors and strategic partners as well as with its customers
 and potential customers seeking proprietary information, and
limits access to and distribution of its software, documentation
and other proprietary information. However, these steps may prove
 inadequate to keep other parties from misappropriating the
Companys technology or from developing their own
competitive versions of the Companys technology. The
Companys 17 issued U.S. patents expire at various
dates ranging from 2000 to 2018. When each of the Companys
patents expires, competitors may develop and sell products based
on the same or similar technologies as those covered by the
expired patent.

The Company relies heavily on patents to protect its proprietary
rights in its technology, but it is possible that any patent
owned or held by the Company or its licensors might be
invalidated, circumvented, challenged or terminated. It is also
possible that the Companys pending or future patent
applications may not be within the scope of claims sought by the
Company. In addition, the laws of certain countries in which the
Companys products are now, or may in the future be,
developed or sold may not protect the Companys products and
 intellectual property rights to the same extent as the laws of
the United States. The inability of the Company

31



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One of the Companys important patents will expire during
 2000. A patent developed at the Massachusetts Institute of
Technology (U.S. Patent No. 4,405,829) and licensed to
the Company will expire on September 20, 2000. An
implementation of the cryptographic algorithm described in this
patent is embodied in the Companys RSA BSAFE cryptographic
tool products. To date, the Company has vigorously enforced its
exclusive rights to the patented technology against infringers
who have released, or threatened to release, competing products
that use the invention embodied in the patent. The Company does
not know what effect the expiration of the patent will have, but
it believes that the expiration may encourage competitors to
market competing products that previously would have infringed
the patent.

The encryption industry is highly litigious. From time to
time, the Company has received correspondence alleging that its
products may infringe patents held by third parties. In addition,
 foreign parties have recently claimed that the Companys
use of its trademarks abroad infringe their trademarks, and third
 parties located in the U.S. and abroad may assert infringement
claims against the Company in the future. The Company is and has
been involved in litigation relating to its intellectual property
 rights in its products. Any litigation carries a number of
significant risks including:



| |   |                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------
| |  | litigation is often very expensive, even if it is resolved in the
	 Companys favor;                                               
|
| |  | litigation diverts the attention of management and other
	resources; and                                                           
|
| |  | if a court or other government agency rules against it in any
	intellectual property litigation, the Company 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, which could include treble
	damages.

Cryptographic technologies are under constant attack. The
strength of the Companys cryptographic 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 the
 Companys products obsolete or unmarketable. The
Companys cryptographic systems depend in part on the
application of certain mathematical principles. The security
afforded by the Companys 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 the
Companys 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, the Companys
business or results of operations could be adversely impacted.

The Company depends heavily on key, talented employees in a
competitive labor market. The Companys success depends
on its 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 of unemployed
workers, and many firms are competing for the few employees with
the skills the Company needs. The Company believes that its
compensation plans are competitive, but it may not be able to
hire and retain the employees it needs.

Acquisitions may hurt the Companys business. A
component of the Companys business strategy is to seek to
buy businesses, products and technologies that complement or
augment the Companys existing businesses, products and
technologies. Acquisitions are difficult to identify and complete
 for a number of reasons, including competition among prospective
 buyers and the need for regulatory approvals. The Company

32



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##### Table of Contents





Even if the Company does complete any given acquisition, the
integration of the business and operations of the acquiree into
the Companys 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, the Company 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, the Company 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 the Companys suite
	of product offerings;
|
| |  | coordinate research and development efforts;                                                                                                     
|
| |  | integrate sales forces; and                                                                                                                      
|
| |  | consolidate duplicate facilities.                                                                                                                

An acquisition may disrupt ongoing operations, divert management
from day-to-day business and adversely impact the Companys
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.

The Company depends on a limited number of suppliers for some
of its product components. Although the Company generally
uses standard parts and components for its products, some
components are currently available only from limited sources. For
 example, the Company purchases the microprocessor chips
contained in its SecurID smart cards and PINPADs only from Sanyo
Electric Co., Ltd., and Epson Electronics, a Japanese computer
chip manufacturer, is the Companys only supplier of
microprocessor chips for the SecurID Key Fobs. In addition,
Flextronics International, a Singapore corporation, is the sole
manufacturer of the Companys SecurID smart cards and
PINPADs. If the Company were unable to obtain a sufficient supply
 of these or any other components, then the Company may be unable
 to fill customer orders and would have to expend significant
resources to find new suppliers. Even if the Company were able to
 find new suppliers, these suppliers may not be able to produce
the components in sufficient quantities or at competitive prices.

The Company licenses from Progress Software Corporation the
relational database management software contained in the
Companys ACE/ Server and Keon software, and the Company
relies on Progress Software for ongoing maintenance and support
for the licensed software. The Company also licenses certain
technology such as its LDAP Directory from Netscape Corporation
and relies on Netscape for ongoing maintenance and support for
this licensed technology. If any of the licensed technology were
to fail or experience significant problems in functioning, then
the Company would not be able to fix the problem without the
support of Progress or Netscape.

The value of the Companys business may fluctuate because
 the value of some of its assets fluctuates. A portion of the
 Companys assets includes the equity securities of both
publicly traded and non-publicly traded companies. In particular,
 the Company owns a significant number of shares of common stock
of VeriSign and Trintech, both of which are publicly traded
companies. The market price and valuations of the securities that
 the Company holds in these and other companies may fluctuate due
 to market conditions and other conditions over which the Company
 has no control. Fluctuations in the market price and valuations
of the securities that the Company holds in other companies may
result in fluctuations of the market price of the Companys
common stock and may reduce the amount of working capital
available to the Company.

33



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##### Table of Contents



In June 1998, the FASB issued SFAS No. 133, Accounting
 for Derivative Instruments and Hedging Activities, which
will affect the accounting of some of the Companys
investments. In June 1999, the FASB issued SFAS No. 137,
Accounting for Derivative Instruments and Hedging
Activities  Deferral of the Effective Date of FASB
Statement 133. The Statement defers the effective date of
SFAS No. 133 to fiscal 2001. The effect of adopting the
standard is being evaluated. The Company estimates, based on the
valuation of the Companys put and call options as of
December 31, 1999, the effect of adopting this standard
would be to decrease net gains from investments by
$29.8 million. SFAS No. 133 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 the derivative is a hedge, depending on the
nature of the hedge, changes in the fair value of derivatives
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.

Some provisions of the Companys charter and the
Companys adoption of a rights plan may inhibit potential
acquisition bids. The Company has a classified Board of
Directors and has 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 the
Company. 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 the Common Stock.




ITEM
7A.                   
 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Except as set forth below, the Company does not generally use
derivative financial instruments and generally purchases its
marketable securities in high credit quality instruments,
primarily U.S. Government and Federal Agency obligations,
tax-exempt municipal obligations and corporate obligations with
contractual maturities of ten years or less. The Company does not
 expect any material loss from its marketable security
investments and therefore believes that its potential interest
rate exposure is not material. The Company also makes equity
investments determined by the Board of Directors to be strategic
to the Company and routinely evaluates the realizable value of
these investments using qualitative and quantitative factors
including discounted cash flow analysis and liquidation value
assessments.

During September 1999, one of the Companys investments,
Trintech, concluded an initial public offering of its ordinary
shares. The Company is restricted in its right to sell the
Trintech shares until March 21, 2000 by certain provisions
of an agreement between the Company and the underwriters of the
Trintech offering. At December 31, 1999 the Company held
958,627 shares of Trintech.

To protect a portion of its marketable securities position, the
Company sold put and call options on its VeriSign shares to
independent third parties. The put options entitle the holders to
 buy shares of VeriSign common stock and the call options allow
the company to sell shares of VeriSign common stock on certain
dates at specified prices, or permit a net-share settlement at
the Companys option. This provides the Company with
protection against a portion of the market risk associated with
the securities in exchange for the Company foregoing a portion of
 the potential price appreciation of the securities. On
December 31, 1999, 5,500,000 shares were covered by these
put and call options. The outstanding put and call options expire
 between March 31, 2000 and September 30, 2002 and have
 strike prices ranging from $47.46 to $77.00 per share.

The Company invoices customers primarily in U.S. Dollars and in
local currency in those countries in which the Company has branch
 and subsidiary operations. The Company is exposed to foreign
exchange rate fluctuations from when customers are invoiced in
local currency until collection occurs. This exposure is offset
by the Companys use of local currency for operating
expenses incurred in those countries. Historically, the Company
has not entered into foreign currency hedge transactions. Through
 December 31, 1999, foreign currency fluctuations have not
had a material impact on the Companys financial position or
 results of

34



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##### Table of Contents





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
used by the Company 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



Management is responsible for preparing the RSA Security Inc.
(formerly Security Dynamics Technologies, 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 generally accepted auditing
standards and 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.
|
| | /s/ JOHN F. KENNEDY        

36



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##### Table of Contents



INDEPENDENT AUDITORS REPORT

To the Board of Directors and Stockholders of



We have audited the accompanying consolidated balance sheets of
RSA Security Inc. and subsidiaries as of December 31, 1999
and 1998, and the related consolidated statements of income,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 1999. Our audits also
 included the financial statement schedule listed at Item
14(a)(2). These financial statements and financial statement
schedule are the responsibility of the corporation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 generally accepted
auditing standards. 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, 1999 and
1998, and the results of their operations and their cash flows
for each of the three years in the period ended December 31,
 1999 in conformity with generally accepted accounting
principles. 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 20, 2000

37



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##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)


|                                                                                                                                                                                                        |                            |              |         |         |  |   |           |           | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------ | ------- | ------- |  | - | --------- | --------- | 
|                                                                                                                                                                                                        |                            |             
|                                                                                                                                                                                                        |                            | December 31,
|                                                                                                                                                                                                        |                            |             
|                                                                                                                                                                                                        |                            | 1998         |         | 1999   
|                                                                                                                                                                                                        |                            |              |         |        
|ASSETS:                                                                                                                                                                                                 |                            |              |         |         |  |   |           |          
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|Current Assets                                                                                                                                                                                          |                            |              |         |         |  |   |           |          
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|Cash and cash equivalents                                                                                                                                                                               |                            | $            | 33,178  |         |  | $ | 122,170   |          
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|Marketable securities                                                                                                                                                                                   |                            |              | 125,058 |         |  |   | 1,261,111 |          
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|Accounts receivable (less allowance for doubtful accounts of $710
	 in 1998 and $1,032 in 1999)                                                                                                         |                            |              | 36,712  |         |  |   | 42,735    |          
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|Inventory                                                                                                                                                                                               |                            |              | 7,025   |         |  |   | 7,857     |          
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|Prepaid expenses and other                                                                                                                                                                              |                            |              | 10,596  |         |  |   | 12,480    |          
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|Prepaid income taxes                                                                                                                                                                                    |                            |              | 3,930   |         |  |   | 8,054     |          
|                                                                                                                                                                                                        |                            |              |         |         |  |   |           |          
|                                                                                                                                                                                                        | Total current assets       |              |         | 216,499 |  |   |           | 1,454,407 | 
|                                                                                                                                                                                                        |                            |              |         |         |  |   |           |          
|Property and equipment, net                                                                                                                                                                             |                            |              | 29,568  |         |  |   | 34,096    |          
|                                                                                                                                                                                                        |                            |              |         |         |  |   |           |          
|Investments                                                                                                                                                                                             |                            |              | 14,248  |         |  |   |          |          
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|Deferred taxes                                                                                                                                                                                          |                            |              | 19,285  |         |  |   | 21,221    |          
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|Other                                                                                                                                                                                                   |                            |              | 1,255   |         |  |   | 2,400     |          
|                                                                                                                                                                                                        |                            |              |         |         |  |   |           |          
|                                                                                                                                                                                                        | Total                      |              | $       | 280,855 |  |   | $         | 1,512,124 | 
|                                                                                                                                                                                                        |                            |              |         |         |  |   |           |          
|LIABILITIES AND STOCKHOLDERS EQUITY:                                                                                                                                                                   |                            |              |         |         |  |   |           |          
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|Current Liabilities                                                                                                                                                                                     |                            |              |         |         |  |   |           |          
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|Accounts payable                                                                                                                                                                                        |                            | $            | 8,169   |         |  | $ | 7,626     |          
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|Accrued payroll and related benefits                                                                                                                                                                    |                            |              | 9,695   |         |  |   | 13,094    |          
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|Accrued expenses and other                                                                                                                                                                              |                            |              | 4,659   |         |  |   | 15,557    |          
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|Deferred revenue                                                                                                                                                                                        |                            |              | 10,971  |         |  |   | 17,058    |          
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|Deferred taxes                                                                                                                                                                                          |                            |              | 2,120   |         |  |   | 161,731   |          
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|Unrealized hedge liability                                                                                                                                                                              |                            |              |        |         |  |   | 686,034   |          
|                                                                                                                                                                                                        |                            |              |         |         |  |   |           |          
|                                                                                                                                                                                                        | Total current liabilities  |              |         | 35,614  |  |   |           | 901,100   | 
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|Minority interests                                                                                                                                                                                      |                            |              | 2,521   |         |  |   |          |          
|                                                                                                                                                                                                        |                            |              |         |         |  |   |           |          
|Stockholders Equity                                                                                                                                                                                    |                            |              |         |         |  |   |           |          
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|Common stock, $.01 par value; authorized, 80,000,000 and
	150,000,000 shares; issued, 41,534,359 and 44,041,236 shares;
	outstanding, 40,475,850 and 38,906,227 shares, in 1998 and 1999,
	respectively |                            |              | 415     |         |  |   | 440       |          
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|Additional paid-in capital                                                                                                                                                                              |                            |              | 191,185 |         |  |   | 242,024   |          
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|Retained earnings                                                                                                                                                                                       |                            |              | 64,302  |         |  |   | 248,064   |          
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|Deferred stock compensation                                                                                                                                                                             |                            |              | (74     | )       |  |   | (62       | )        
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|Treasury stock, common, at cost, 1,058,509 and 5,135,009 shares
	In 1998 and 1999, respectively                                                                                                         |                            |              | (12,135 | )       |  |   | (115,108  | )        
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|                                                                                                                                                                                                       
|Accumulated other comprehensive income                                                                                                                                                                  |                            |              | (973    | )       |  |   | 235,666   |          
|                                                                                                                                                                                                        |                            |              |         |         |  |   |           |          
|                                                                                                                                                                                                        | Total stockholders equity |              |         | 242,720 |  |   |           | 611,024   | 
|                                                                                                                                                                                                        |                            |              |         |         |  |   |           |          
|                                                                                                                                                                                                        | Total                      |              | $       | 280,855 |  |   | $         | 1,512,124 | 
|                                                                                                                                                                                                        |                            |              |         |         |  |   |           |          

See accompanying notes to consolidated financial statements.

38



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##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)


|                                         |       |                          |         |        |  |      |         |         |  |   |         |         | 
|---------------------------------------- | ----- | ------------------------ | ------- | ------ |  | ---- | ------- | ------- |  | - | ------- | ------- | 
|                                         |       |                         
|                                         |       | Years Ended December 31,
|                                         |       |                         
|                                         |       | 1997                     |         | 1998   |  | 1999
|                                         |       |                          |         |        |  |     
|Revenue                                  |       | $                        | 140,630 |        |  | $    | 171,334 |         |  | $ | 218,124 |        
|                                        
|                                        
|                                        
|                                        
|Cost of revenue                          |       |                          | 28,704  |        |  |      | 40,781  |         |  |   | 45,161  |        
|                                         |       |                          |         |        |  |      |         |         |  |   |         |        
|Gross margin                             |       |                          | 111,926 |        |  |      | 130,553 |         |  |   | 172,963 |        
|                                        
|                                        
|                                        
|                                        
|Costs and expenses                       |       |                          |         |        |  |      |         |         |  |   |         |        
|                                        
|                                        
|                                        
|                                        
|Research and development                 |       |                          | 27,180  |        |  |      | 31,981  |         |  |   | 37,640  |        
|                                        
|                                        
|                                        
|                                        
|Marketing and selling                    |       |                          | 41,926  |        |  |      | 66,788  |         |  |   | 89,943  |        
|                                        
|                                        
|                                        
|                                        
|General and administrative               |       |                          | 17,171  |        |  |      | 19,007  |         |  |   | 27,261  |        
|                                        
|                                        
|                                        
|                                        
|Merger and integration                   |       |                          | 5,700   |        |  |      | 2,600   |         |  |   |        |        
|                                        
|                                        
|                                        
|                                        
|Restructuring                            |       |                          |        |        |  |      |        |         |  |   | 11,350  |        
|                                        
|                                        
|                                        
|                                        
|Legal settlement                         |       |                          |        |        |  |      | 1,872   |         |  |   |        |        
|                                         |       |                          |         |        |  |      |         |         |  |   |         |        
|                                         | Total |                          |         | 91,977 |  |      |         | 122,248 |  |   |         | 166,194 | 
|                                         |       |                          |         |        |  |      |         |         |  |   |         |        
|Income from operations                   |       |                          | 19,949  |        |  |      | 8,305   |         |  |   | 6,769   |        
|                                        
|                                        
|                                        
|                                        
|Interest income                          |       |                          | 6,273   |        |  |      | 8,676   |         |  |   | 10,007  |        
|                                        
|                                        
|                                        
|                                        
|Net gain from investments                |       |                          | 4,264   |        |  |      | 35,427  |         |  |   | 285,952 |        
|                                         |       |                          |         |        |  |      |         |         |  |   |         |        
|Income before provision for income taxes |       |                          | 30,486  |        |  |      | 52,408  |         |  |   | 302,728 |        
|                                        
|                                        
|                                        
|                                        
|Provision for income taxes               |       |                          | 13,324  |        |  |      | 23,571  |         |  |   | 118,982 |        
|                                        
|                                        
|                                        
|                                        
|Minority interests                       |       |                          | (114    | )      |  |      | 578     |         |  |   | 16      |        
|                                         |       |                          |         |        |  |      |         |         |  |   |         |        
|Net income                               |       | $                        | 17,048  |        |  | $    | 29,415  |         |  | $ | 183,762 |        
|                                         |       |                          |         |        |  |      |         |         |  |   |         |        
|Basic earnings per share                 |       |                          |         |        |  |      |         |         |  |   |         |        
|                                        
|                                        
|                                        
|                                        
|Per share amount                         |       | $                        | 0.44    |        |  | $    | 0.72    |         |  | $ | 4.69    |        
|                                         |       |                          |         |        |  |      |         |         |  |   |         |        
|Weighted average shares                  |       |                          | 38,956  |        |  |      | 40,909  |         |  |   | 39,171  |        
|                                         |       |                          |         |        |  |      |         |         |  |   |         |        
|Diluted earnings per share               |       |                          |         |        |  |      |         |         |  |   |         |        
|                                        
|                                        
|                                        
|                                        
|Per share amount                         |       | $                        | 0.42    |        |  | $    | 0.69    |         |  | $ | 4.38    |        
|                                         |       |                          |         |        |  |      |         |         |  |   |         |        
|Weighted average shares                  |       |                          | 38,956  |        |  |      | 40,909  |         |  |   | 39,171  |        
|                                        
|                                        
|                                        
|                                        
|Effect of dilutive options and warrants  |       |                          | 1,692   |        |  |      | 1,588   |         |  |   | 2,809   |        
|                                         |       |                          |         |        |  |      |         |         |  |   |         |        
|Adjusted weighted average shares         |       |                          | 40,648  |        |  |      | 42,497  |         |  |   | 41,980  |        
|                                         |       |                          |         |        |  |      |         |         |  |   |         |        

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)


|                                              |  |              |            |            |  |          |     |          |  |                |         |        |  |        |         |   |  |   |      |   |  |  |           |  |  |   |          |  
|--------------------------------------------- |  | ------------ | ---------- | ---------- |  | -------- | --- | -------- |  | -------------- | ------- | ------ |  | ------ | ------- | - |  | - | ---- | - |  |  | --------- |  |  | - | -------- | -
|                                              |  |              |            |            |  |          |     |          |  |               
|                                              |  | Common Stock |            | Additional |  |          |     | Deferred |  | Treasury Stock
|                                              |  |              |            | Paid-in-   |  | Retained |     | Stock    |  |               
|                                              |  | Shares       |            | Amount     |  | Capital  |     | Earnings |  | Compensation   |         | Shares |  | Amount
|                                              |  |              |            |            |  |          |     |          |  |                |         |        |  |       
|Balance January 1, 1997                       |  |              | 38,005,235 |            |  | $        | 380 |          |  | $              | 102,463 |        |  | $      | 18,462  |   |  | $ | (174 | ) |  |  | 296       |  |  |   |         |  
|                                             
|                                             
|                                             
|                                             
|Issuance of common stock                      |  |              | 2,461,883  |            |  |          | 25  |          |  |                | 62,552  |        |  |        | (226    | ) |  |   |      |   |  |  | 213       |  |  |   |          |  
|                                             
|                                             
|                                             
|                                             
|Stock compensation                            |  |              |            |            |  |          |     |          |  |                | 736     |        |  |        |         |   |  |   | 58   |   |  |  |           |  |  |   |          |  
|                                             
|                                             
|                                             
|                                             
|Comprehensive income                          |  |              |            |            |  |          |     |          |  |                |         |        |  |        |         |   |  |   |      |   |  |  |           |  |  |   |          |  
|                                             
|                                             
|                                             
|                                             
|Translation adjustment                        |  |              |            |            |  |          |     |          |  |                |         |        |  |        |         |   |  |   |      |   |  |  |           |  |  |   |          |  
|                                             
|                                             
|                                             
|                                             
|Unrealized loss on marketable securities, net |  |              |            |            |  |          |     |          |  |                |         |        |  |        |         |   |  |   |      |   |  |  |           |  |  |   |          |  
|                                             
|                                             
|                                             
|                                             
|Net income                                    |  |              |            |            |  |          |     |          |  |                |         |        |  |        | 17,048  |   |  |   |      |   |  |  |           |  |  |   |          |  
|                                              |  |              |            |            |  |          |     |          |  |                |         |        |  |        |         |   |  |   |      |   |  |  |           |  |  |   |          |  
|Total comprehensive income                    |  |              |            |            |  |          |     |          |  |                |         |        |  |        |         |   |  |   |      |   |  |  |           |  |  |   |          |  
|                                              |  |              |            |            |  |          |     |          |  |                |         |        |  |        |         |   |  |   |      |   |  |  |           |  |  |   |          |  
|Balance,
	December 31, 1997                   |  |              | 40,467,118 |            |  |          | 405 |          |  |                | 165,751 |        |  |        | 35,284  |   |  |   | (116 | ) |  |  | 509       |  |  |   |         |  
|                                             
|                                             
|                                             
|                                             
|Issuance of common stock                      |  |              | 1,067,241  |            |  |          | 10  |          |  |                | 9,658   |        |  |        | (397    | ) |  |   |      |   |  |  |           |  |  |   |          |  
|                                             
|                                             
|                                             
|                                             
|Foreign acquisition tax benefit               |  |              |            |            |  |          |     |          |  |                | 13,835  |        |  |        |         |   |  |   |      |   |  |  |           |  |  |   |          |  
|                                             
|                                             
|                                             
|                                             
|Stock compensation                            |  |              |            |            |  |          |     |          |  |                | 1,941   |        |  |        |         |   |  |   | 42   |   |  |  |           |  |  |   |          |  
|                                             
|                                             
|                                             
|                                             
|Share repurchase program                      |  |              |            |            |  |          |     |          |  |                |         |        |  |        |         |   |  |   |      |   |  |  | 1,058,000 |  |  | $ | (12,135  | )
|                                             
|                                             
|                                             
|                                             
|Comprehensive income                          |  |              |            |            |  |          |     |          |  |                |         |        |  |        |         |   |  |   |      |   |  |  |           |  |  |   |          |  
|                                             
|                                             
|                                             
|                                             
|Translation adjustment                        |  |              |            |            |  |          |     |          |  |                |         |        |  |        |         |   |  |   |      |   |  |  |           |  |  |   |          |  
|                                             
|                                             
|                                             
|                                             
|Unrealized gain on marketable securities, net |  |              |            |            |  |          |     |          |  |                |         |        |  |        |         |   |  |   |      |   |  |  |           |  |  |   |          |  
|                                             
|                                             
|                                             
|                                             
|Net income                                    |  |              |            |            |  |          |     |          |  |                |         |        |  |        | 29,415  |   |  |   |      |   |  |  |           |  |  |   |          |  
|                                              |  |              |            |            |  |          |     |          |  |                |         |        |  |        |         |   |  |   |      |   |  |  |           |  |  |   |          |  
|Total comprehensive income                    |  |              |            |            |  |          |     |          |  |                |         |        |  |        |         |   |  |   |      |   |  |  |           |  |  |   |          |  
|                                              |  |              |            |            |  |          |     |          |  |                |         |        |  |        |         |   |  |   |      |   |  |  |           |  |  |   |          |  
|Balance,
	December 31, 1998                   |  |              | 41,534,359 |            |  |          | 415 |          |  |                | 191,185 |        |  |        | 64,302  |   |  |   | (74  | ) |  |  | 1,058,509 |  |  |   | (12,135  | )
|                                             
|                                             
|                                             
|                                             
|Issuance of common stock and warrants         |  |              | 2,506,877  |            |  |          | 25  |          |  |                | 49,723  |        |  |        |         |   |  |   |      |   |  |  |           |  |  |   |          |  
|                                             
|                                             
|                                             
|                                             
|Stock compensation                            |  |              |            |            |  |          |     |          |  |                | 1,116   |        |  |        |         |   |  |   | 12   |   |  |  |           |  |  |   |          |  
|                                             
|                                             
|                                             
|                                             
|Share repurchase program                      |  |              |            |            |  |          |     |          |  |                |         |        |  |        |         |   |  |   |      |   |  |  | 4,076,500 |  |  |   | (102,973 | )
|                                             
|                                             
|                                             
|                                             
|Comprehensive income                          |  |              |            |            |  |          |     |          |  |                |         |        |  |        |         |   |  |   |      |   |  |  |           |  |  |   |          |  
|                                             
|                                             
|                                             
|                                             
|Translation adjustment                        |  |              |            |            |  |          |     |          |  |                |         |        |  |        |         |   |  |   |      |   |  |  |           |  |  |   |          |  
|                                             
|                                             
|                                             
|                                             
|Unrealized gain on marketable securities, net |  |              |            |            |  |          |     |          |  |                |         |        |  |        |         |   |  |   |      |   |  |  |           |  |  |   |          |  
|                                             
|                                             
|                                             
|                                             
|Net income                                    |  |              |            |            |  |          |     |          |  |                |         |        |  |        | 183,762 |   |  |   |      |   |  |  |           |  |  |   |          |  
|                                              |  |              |            |            |  |          |     |          |  |                |         |        |  |        |         |   |  |   |      |   |  |  |           |  |  |   |          |  
|Total comprehensive income                    |  |              |            |            |  |          |     |          |  |                |         |        |  |        |         |   |  |   |      |   |  |  |           |  |  |   |          |  
|                                              |  |              |            |            |  |          |     |          |  |                |         |        |  |        |         |   |  |   |      |   |  |  |           |  |  |   |          |  
|Balance,
	December 31, 1999                   |  |              | 44,041,236 |            |  | $        | 440 |          |  | $              | 242,024 |        |  | $      | 248,064 |   |  | $ | (62  | ) |  |  | 5,135,009 |  |  | $ | (115,108 | )
|                                              |  |              |            |            |  |          |     |          |  |                |         |        |  |        |         |   |  |   |      |   |  |  |           |  |  |   |          |  

[Additional columns below]

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

|                                              |  |               |         |               |  |   |          |  
|--------------------------------------------- |  | ------------- | ------- | ------------- |  | - | -------- | -
|                                              |  | Accumulated   |         |              
|                                              |  | Other         |         | Total        
|                                              |  | Comprehensive |         | Stockholders
|                                              |  | Income        |         | Equity       
|                                              |  |               |         |              
|Balance January 1, 1997                       |  | $             | 3,973   |               |  | $ | 125,104  |  
|                                             
|                                             
|                                             
|                                             
|Issuance of common stock                      |  |               |         |               |  |   | 62,351   |  
|                                             
|                                             
|                                             
|                                             
|Stock compensation                            |  |               |         |               |  |   | 794      |  
|                                             
|                                             
|                                             
|                                             
|Comprehensive income                          |  |               |         |               |  |   |          |  
|                                             
|                                             
|                                             
|                                             
|Translation adjustment                        |  |               | (1,243  | )             |  |   | (1,243   | )
|                                             
|                                             
|                                             
|                                             
|Unrealized loss on marketable securities, net |  |               | (3,401  | )             |  |   | (3,401   | )
|                                             
|                                             
|                                             
|                                             
|Net income                                    |  |               |         |               |  |   | 17,048   |  
|                                              |  |               |         |               |  |   |          |  
|Total comprehensive income                    |  |               |         |               |  |   | 12,404   |  
|                                              |  |               |         |               |  |   |          |  
|Balance,
	December 31, 1997                   |  |               | (671    | )             |  |   | 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    | )             |  |   | (425     | )
|                                             
|                                             
|                                             
|                                             
|Unrealized gain on marketable securities, net |  |               | 123     |               |  |   | 123      |  
|                                             
|                                             
|                                             
|                                             
|Net income                                    |  |               |         |               |  |   | 29,415   |  
|                                              |  |               |         |               |  |   |          |  
|Total comprehensive income                    |  |               |         |               |  |   | 29,113   |  
|                                              |  |               |         |               |  |   |          |  
|Balance,
	December 31, 1998                   |  |               | (973    | )             |  |   | 242,720  |  
|                                             
|                                             
|                                             
|                                             
|Issuance of common stock and warrants         |  |               |         |               |  |   | 49,748   |  
|                                             
|                                             
|                                             
|                                             
|Stock compensation                            |  |               |         |               |  |   | 1,128    |  
|                                             
|                                             
|                                             
|                                             
|Share repurchase program                      |  |               |         |               |  |   | (102,973 | )
|                                             
|                                             
|                                             
|                                             
|Comprehensive income                          |  |               |         |               |  |   |          |  
|                                             
|                                             
|                                             
|                                             
|Translation adjustment                        |  |               | (147    | )             |  |   | (147     | )
|                                             
|                                             
|                                             
|                                             
|Unrealized gain on marketable securities, net |  |               | 236,786 |               |  |   | 236,786  |  
|                                             
|                                             
|                                             
|                                             
|Net income                                    |  |               |         |               |  |   | 183,762  |  
|                                              |  |               |         |               |  |   |          |  
|Total comprehensive income                    |  |               |         |               |  |   | 420,401  |  
|                                              |  |               |         |               |  |   |          |  
|Balance,
	December 31, 1999                   |  | $             | 235,666 |               |  | $ | 611,024  |  
|                                              |  |               |         |               |  |   |          |  

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,            
|                                                                                               |                                                               |                                     
|                                                                                               |                                                               | 1997                                 |                                                      | 1998     |         | 1999  
|                                                                                               |                                                               |                                      |                                                      |          |         |       
|Cash flows from operating activities:                                                          |                                                               |                                      |                                                      |          |         |        |         |          |        |         |         |         
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Net income                                                                                     |                                                               | $                                    | 17,048                                               |          |         | $      | 29,415  |          |        | $       | 183,762 |         
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Adjustments to reconcile net income to net cash provided by (used
	 for) operating activities: |                                                               |                                      |                                                      |          |         |        |         |          |        |         |         |         
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Legal settlement                                              |                                      |                                                      |         |         |        |         | 1,872    |        |         |         |         |       
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Non cash restructuring                                        |                                      |                                                      |         |         |        |         |         |        |         |         | 4,462    |       
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Non cash investment                                           |                                      |                                                      |         |         |        |         | (2,000   | )      |         |         |         |       
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Net gain from investments                                     |                                      |                                                      | (4,264   | )       |        |         | (35,427  | )      |         |         | (285,952 | )     
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Deferred taxes                                                |                                      |                                                      | (2,337   | )       |        |         | 1,366    |        |         |         | (5,733   | )     
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Depreciation and amortization                                 |                                      |                                                      | 4,353    |         |        |         | 6,845    |        |         |         | 9,182    |       
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Stock compensation                                            |                                      |                                                      | 794      |         |        |         | 1,983    |        |         |         | 1,128    |       
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Minority interests                                            |                                      |                                                      | (114     | )       |        |         | (578     | )      |         |         | (16      | )     
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Increase (decrease) in cash from changes in:                  |                                      |                                                      |          |         |        |         |          |        |         |         |          |       
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               |                                                               | Accounts receivable                  |                                                      |          | (10,946 | )      |         |          | (9,074 | )       |         |          | (6,330 | )      
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               |                                                               | Inventory                            |                                                      |          | (429    | )      |         |          | (3,993 | )       |         |          | (833   | )      
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               |                                                               | Prepaid expenses and other           |                                                      |          | (5,167  | )      |         |          | (7,529 | )       |         |          | (1,910 | )      
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               |                                                               | Accounts payable                     |                                                      |          | 1,627   |        |         |          | (5,874 | )       |         |          | (666   | )      
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               |                                                               | Accrued payroll and related benefits |                                                      |          | 471     |        |         |          | 4,370  |         |         |          | 3,605  |        
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               |                                                               | Accrued expenses and other           |                                                      |          | 6,225   |        |         |          | 3,593  |         |         |          | 7,387  |        
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               |                                                               | Prepaid and income taxes payable     |                                                      |          | (4,685  | )      |         |          | 4,817  |         |         |          | 4,787  |        
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               |                                                               | Deferred revenue                     |                                                      |          | 3,983   |        |         |          | 1,356  |         |         |          | 6,046  |        
|                                                                                               |                                                               |                                      |                                                      |          |         |        |         |          |        |         |         |         
|                                                                                               |                                                               |                                      | Net cash provided by (used for) operating activities |          |         | 6,559  |         |          |        | (8,858  | )       |          |        | (81,081 | )
|                                                                                               |                                                               |                                      |                                                      |          |         |        |         |          |        |         |         |         
|Cash flows from investing activities:                                                          |                                                               |                                      |                                                      |          |         |        |         |          |        |         |         |         
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Purchase of marketable securities                             |                                      |                                                      | (104,172 | )       |        |         | (211,393 | )      |         |         | (37,550  | )     
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Sales and maturities of marketable securities and investments |                                      |                                                      | 133,804  |         |        |         | 154,399  |        |         |         | 282,583  |       
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Purchases of property and equipment                           |                                      |                                                      | (10,896  | )       |        |         | (18,850  | )      |         |         | (13,688  | )     
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Capitalized software costs and purchased technology           |                                      |                                                      | (1,410   | )       |        |         |         |        |         |         |         |       
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Investments and other                                         |                                      |                                                      | (1,616   | )       |        |         | 26,328   |        |         |         | (114     | )     
|                                                                                               |                                                               |                                      |                                                      |          |         |        |         |          |        |         |         |         
|                                                                                               |                                                               |                                      | Net cash provided by (used for) investing activities |          |         | 15,710 |         |          |        | (49,516 | )       |          |        | 231,231 |  
|                                                                                               |                                                               |                                      |                                                      |          |         |        |         |          |        |         |         |         
|Cash flows from financing activities:                                                          |                                                               |                                      |                                                      |          |         |        |         |          |        |         |         |         
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Proceeds from sale of common stock, net of issuance costs     |                                      |                                                      | 61,108   |         |        |         |         |        |         |         |         |       
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Payments to acquisition shareholders                          |                                      |                                                      | (6,038   | )       |        |         |         |        |         |         |         |       
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Proceeds from exercise of stock options and purchase plans    |                                      |                                                      | 5,269    |         |        |         | 3,364    |        |         |         | 28,496   |       
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Tax benefit from exercise of stock options                    |                                      |                                                      | 2,012    |         |        |         | 4,482    |        |         |         | 16,790   |       
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Minority interests                                            |                                      |                                                      | 1,905    |         |        |         |         |        |         |         | (3,600   | )     
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Share repurchase program                                      |                                      |                                                      |         |         |        |         | (12,135  | )      |         |         | (102,973 | )     
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                               | Other                                                         |                                      |                                                      |         |         |        |         | (447     | )      |         |         |         |       
|                                                                                               |                                                               |                                      |                                                      |          |         |        |         |          |        |         |         |         
|                                                                                               |                                                               |                                      | Net cash provided by (used for) financing activities |          |         | 64,256 |         |          |        | (4,736  | )       |          |        | (61,287 | )
|                                                                                               |                                                               |                                      |                                                      |          |         |        |         |          |        |         |         |         
|Effect of exchange rate changes on cash and equivalents                                        |                                                               |                                      | (1,618                                               | )        |         |        | (307    | )        |        |         | 129     |         
|                                                                                               |                                                               |                                      |                                                      |          |         |        |         |          |        |         |         |         
|Net increase (decrease) in cash and equivalents                                                |                                                               |                                      | 84,907                                               |          |         |        | (63,417 | )        |        |         | 88,992  |         
|                                                                                              
|                                                                                              
|                                                                                              
|                                                                                              
|Cash and equivalents, beginning of year                                                        |                                                               |                                      | 11,688                                               |          |         |        | 96,595  |          |        |         | 33,178  |         
|                                                                                               |                                                               |                                      |                                                      |          |         |        |         |          |        |         |         |         
|Cash and equivalents, end of year                                                              |                                                               | $                                    | 96,595                                               |          |         | $      | 33,178  |          |        | $       | 122,170 |         
|                                                                                               |                                                               |                                      |                                                      |          |         |        |         |          |        |         |         |         

See accompanying notes to consolidated financial statements.

41



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##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)


1.  Nature of Business and Summary of Significant
Accounting Policies

Nature of Business  RSA Security Inc. and its
subsidiaries (formerly Security Dynamics Technologies, Inc.) (the
 Company) is a leading provider of electronic
security (e-security) solutions. The Company helps
organizations build secure, trusted foundations for electronic
business (e-business) through use of its two-factor
user authentication, encryption and public key management
products and solutions. The Company sells to corporate end users
(Enterprise) seeking turnkey security solutions, and
to original equipment manufacturers and developers
(OEM) seeking software development components for
embedding security in a range of applications. In
September 1999, the Company changed its name to RSA Security
 Inc. Costs incurred in connection with the rebranding were
approximately $12,500.

Reclassification  Certain prior year amounts
have been reclassified to conform with the 1999 presentation.

Principles of Consolidation  The consolidated
financial statements include the accounts of the Company and its
subsidiaries. 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
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 shipped, no further material
obligations exist, and collection is considered probable. Revenue
 from shipments to distributors is recognized upon receipt of
evidence of sale to end-users. Revenues from licensing other
intellectual property are 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 revenues, whether sold
separately or as part of a multiple element arrangement, are
deferred and recognized ratably over the term of the maintenance
contract, generally twelve months. Professional service revenues
are 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.

Marketable Securities  Marketable securities
are classified as available for sale and carried at
aggregate fair value. 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.

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. Depreciation and amortization are computed
using the straight-line method over the shorter of the lease term
 or estimated useful lives of the related assets (two to ten
years).

42



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##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

Investments  Investments are accounted for
using the equity method in situations where the Company has the
ability to exercise significant influence over the
investees business. All other investments are accounted for
 using the cost method. Until June 30, 1999, the Company
accounted for its investment in VeriSign, Inc.
(VeriSign) under the equity method. After June 1999
investments in VeriSign common stock were considered marketable
securities.

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 $850, $837 and $2,484 in 1997,
1998 and 1999, 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, uncertainties surrounding the
recoverability of deferred tax assets, scheduled reversals of
deferred tax liabilities, projected future taxable income, and
other matters in making this assessment.

Foreign Currency  Local currencies of the
countries in which the Companys branches and subsidiaries
are domiciled are the functional currencies. Translation
adjustments are accumulated in other comprehensive income.

Earnings Per Share  Basic earnings per share is
 computed on the basis of the weighted average number of common
shares outstanding. Diluted earnings per share is computed on the
 basis of the weighted average number of common shares
outstanding plus the effect of potential outstanding common
shares, such as options and warrants using the treasury
stock method.

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 and investments are comprised of publicly
traded and private debt and equity securities. Publicly traded
securities are classified as available for sale and are recorded
at market using the specific identification method. Unrealized
gains and losses are reflected in other comprehensive income.

Derivative financial instruments are used to hedge the
Companys investment in VeriSign and are, therefore, held
primarily for purposes other than trading. These instruments may
involve elements of credit and market risk in excess of the
amounts recognized in the financial statements. The Company
monitors its positions and the credit quality of counter parties,
 consisting primarily of major financial institutions, and does
not anticipate nonperformance by any counter party. The Company
can settle its hedging obligations by delivering its shares of
VeriSign common stock.

43



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##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

Use of Estimates  The preparation of the
Companys consolidated financial statements in conformity
with generally accepted accounting principles necessarily
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.

Stock-Based Compensation Plans  Stock-based
compensation cost is accounted for in accordance with the
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 tax benefit realized, are credited to equity. The pro
forma impact on earnings per share has been disclosed in the
Notes as required by SFAS No. 123.

New Accounting Pronouncements  In June 1998,
the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging
Activities. In June 1999, the FASB issued SFAS
No. 137, Accounting for Derivative Instruments and
Hedging Activities  Deferral of the Effective Date of
FASB Statement 133. The Statement defers the effective
 date of SFAS No. 133 to January 1, 2001. The effect of
 adopting the standard is being evaluated. The Company estimates
that, based on the valuation of certain put and call options on
its holdings of VeriSigns common stock as of
December 31, 1999, the effect of adopting this standard
would be to decrease net gains from investments by $29,800. SFAS
No. 133 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
the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives 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.

44



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##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

2.  Financial Instruments

The Companys marketable securities were as follows at:

|                                                            |                                               |                                      |        |                   |         |          |   |       |     |            |        |          |         |  |        |         |         |  |   |           |           |   |        |           |           | 
|----------------------------------------------------------- | --------------------------------------------- | ------------------------------------ | ------ | ----------------- | ------- | -------- | - | ----- | --- | ---------- | ------ | -------- | ------- |  | ------ | ------- | ------- |  | - | --------- | --------- | - | ------ | --------- | --------- | 
|                                                            |                                               |                                      |        |                  
|                                                            |                                               | December 31, 1998                    |        | December 31, 1999
|                                                            |                                               |                                      |        |                  
|                                                            |                                               |                                      |        | Net               |         |          |   |       |     | Net        |        |         
|                                                            |                                               | Cost                                 |        | Unrealized        |         | Recorded |   | Cost  |     | Unrealized |        | Recorded
|                                                            |                                               | Basis                                |        | Gains             |         | Basis    |   | Basis |     | Gains      |        | Basis   
|                                                            |                                               |                                      |        |                   |         |          |   |       |     |            |        |         
|Debt securities recorded at market, maturing:               |                                               |                                      |        |                   |         |          |   |       |     |            |        |          |         |  |        |         |         |  |   |           |           |   |        |          
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Within one year                               |                                      | $      | 12,168            |         |          | $ | 13    |     |            | $      | 12,181   |         |  | $      | 58,315  |         |  | $ | (126      | )         |   | $      | 58,189    |          
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Between 2 and 15 years                        |                                      |        | 112,553           |         |          |   | 324   |     |            |        | 112,877  |         |  |        | 107,900 |         |  |   | (2,586    | )         |   |        | 105,314   |          
|                                                            |                                               |                                      |        |                   |         |          |   |       |     |            |        |          |         |  |        |         |         |  |   |           |           |   |        |          
|                                                            |                                               | Debt securities recorded at market   |        |                   | 124,721 |          |   |       | 337 |            |        |          | 125,058 |  |        |         | 166,215 |  |   |           | (2,712    | ) |        |           | 163,503   | 
|                                                           
|                                                           
|                                                           
|                                                           
|Equity securities recorded at market:                       |                                               |                                      |        |                   |         |          |   |       |     |            |        |          |         |  |        |         |         |  |   |           |           |   |        |          
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | VeriSign, Inc. common stock, 5,500,000 shares |                                      |        |                  |         |          |   |      |     |            |        |         |         |  |        | 9,005   |         |  |   | 1,041,151 |           |   |        | 1,050,156 |          
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            | Trintech Group Plc.                           |                                      |        |                  |         |          |   |      |     |            |        |         |         |  |        | 4,877   |         |  |   | 42,575    |           |   |        | 47,452    |          
|                                                            |                                               |                                      |        |                   |         |          |   |       |     |            |        |          |         |  |        |         |         |  |   |           |           |   |        |          
|                                                            |                                               | Equity securities recorded at market |        |                   |        |          |   |       |    |            |        |          |        |  |        |         | 13,882  |  |   |           | 1,083,726 |   |        |           | 1,097,608 | 
|                                                           
|                                                           
|                                                           
|                                                           
|Equity securities recorded at cost                          |                                               |                                      | 17,895 |                   |         |          |  |       |     |            | 17,895 |          |         |  | 6,183  |         |         |  |  |           |           |   | 6,183  |          
|                                                           
|                                                           
|                                                           
|                                                           
|Valuation adjustment for equity securities recorded at cost |                                               |                                      | (3,647 | )                 |         |          |  |       |     |            | (3,647 | )        |         |  | (6,183 | )       |         |  |  |           |           |   | (6,183 | )        
|                                                            |                                               |                                      |        |                   |         |          |   |       |     |            |        |          |         |  |        |         |         |  |   |           |           |   |        |          
|Total equity securities recorded at cost                    |                                               |                                      | 14,248 |                   |         |          |  |       |     |            | 14,248 |          |         |  |       |         |         |  |  |           |           |   |       |          
|                                                            |                                               |                                      |        |                   |         |          |   |       |     |            |        |          |         |  |        |         |         |  |   |           |           |   |        |          
|                                                            |                                               | Marketable securities                |        | $                 | 138,969 |          |   | $     | 337 |            |        | $        | 139,306 |  |        | $       | 180,097 |  |   | $         | 1,081,014 |   |        | $         | 1,261,111 | 
|                                                            |                                               |                                      |        |                   |         |          |   |       |     |            |        |          |         |  |        |         |         |  |   |           |           |   |        |          

Debt securities include corporate and government notes and bonds.
 Equity securities recorded at cost primarily include preferred
stock and common stock that are restricted or not publicly
traded. To protect a portion of its marketable securities
position, the Company sold put and call options on its VeriSign
shares to independent third parties. The put options entitle the
holders to buy shares of VeriSign common stock and the call
options allow the Company to sell shares of VeriSign common stock
 on certain dates at specified prices, or permit a net-share
settlement at the Companys option. On December 31, 1999,
5,500,000 shares were covered by these put and call options. The
outstanding put and call options expire quarterly in 500,000
share increments between March 31, 2000 and
September 30, 2002 and have exercise prices ranging from
$47.46 to $77.00 per share. The options are 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.

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

For 1999, net gains from investments were $285,952 from sales of
marketable securities, which includes gains from the sale of
VeriSign common stock and Trintech Group PLC
(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. For 1998,
net gains from investments were $35,427 from sales of marketable
securities, which includes gains from the sale of VeriSign common
 stock of $31,285, and an increase in value of VeriSign common
stock of $11,976 from the write-up under the equity method upon
VeriSigns initial public offering. These gains are net of
the Companys equity in VeriSigns loss of $4,187 and
an investment allowance of $3,647 on other investments.

45



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##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

3.  Property and Equipment

Property and equipment were as follows at:

|                                                |       |              |         |        |  |   |         |        | 
|----------------------------------------------- | ----- | ------------ | ------- | ------ |  | - | ------- | ------ | 
|                                                |       |             
|                                                |       | December 31,
|                                                |       |             
|                                                |       | 1998         |         | 1999  
|                                                |       |              |         |       
|Furniture and equipment                         |       | $            | 37,269  |        |  | $ | 45,244  |       
|                                               
|                                               
|                                               
|                                               
|Leasehold improvements                          |       |              | 6,486   |        |  |   | 11,915  |       
|                                                |       |              |         |        |  |   |         |       
|                                                | Total |              |         | 43,755 |  |   |         | 57,159 | 
|                                               
|                                               
|                                               
|                                               
|Less: Accumulated depreciation and amortization |       |              | (14,187 | )      |  |   | (23,063 | )     
|                                                |       |              |         |        |  |   |         |       
|Property and equipment, net                     |       | $            | 29,568  |        |  | $ | 34,096  |       
|                                                |       |              |         |        |  |   |         |       

4.  Acquisitions

In 1997, the Company acquired DynaSoft AB (DynaSoft),
 and in 1998, the Company acquired Intrusion Detection, Inc.
(IDI), in transactions accounted for as poolings of
interests. To acquire DynaSoft, the Company issued approximately
2,700,000 shares of its common stock in exchange for
approximately 95% of the outstanding common stock of DynaSoft and
 certain outstanding stock options. The Company paid $6,038 to
certain other stockholders of DynaSoft in exchange for the
remaining outstanding common stock and stock options. To acquire
IDI, the Company issued approximately 784,000 shares of its
common stock in exchange for all of IDIs outstanding common
 stock. Investment banking, professional fees and other direct
expenses incurred in connection with the DynaSoft and the IDI
acquisitions were charged to operations and were approximately
$5,700 and $2,600 in 1997 and 1998, respectively.

Revenues and net income (loss) for DynaSoft and IDI as
independent companies for the periods before their acquisition
were for DynaSoft, revenues of $5,277 and net loss of $(155), for
 the period January 1, 1997 to July 15, 1997, the date
DynaSoft was acquired. For IDI, revenues and net income (loss) of
 $4,700 and $680, respectively, in 1997 and $900 and $(137),
respectively for the period January 1, 1998 to
March 26, 1998, the date IDI was acquired.

5.  Stock Option and Purchase Plans

The 1994 Stock Option Plan, as amended  1998
Restatement (1994 Plan), allows (i) the grant of
 options to purchase common stock intended to qualify as
incentive stock options and (ii) the grant of options that
do not so qualify (non-statutory options) to employees, officers,
 directors and consultants of the Company. Option exercise prices
 for incentive stock options granted under the 1994 Plan may not
be less than 100% of the fair market value of the shares. In
general, 1994 Plan option grants become exercisable as to 25% on
the first anniversary of the grant date, and in equal quarterly
amounts thereafter for three years. Options generally expire
eight years from the grant date.

The 1994 Director Stock Option Plan, as amended (Director
Plan), allows the granting of 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 up to ten years from the date of grant.

The Amended and Restated 1998 Non-Officer Employee Stock
Incentive Plan (1998 Plan) allows the grant of
non-statutory stock options, restricted stock awards, and other
stock-based awards to employees, consultants and advisors of the
Company, 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.

46



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##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

Authorized shares at December 31, 1999 were 11,570,000
shares under the 1994 Plan, 500,000 shares under the Director
Plan and 3,910,509 shares under the 1998 Plan. Shares available
for grant were 2,164,801 under the 1994 Plan, 482,000 under the
Director Plan and 184,753 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, 1999 1,000,000 shares
were authorized under the Purchase Plan and 448,161 shares were
available for purchase. The cumulative total shares purchased
under the plan through 1997, 1998 and 1999 were 145,203, 366,955
and 551,839, respectively.

A summary of stock option activity under all plans follows:

|                                 |                                  |        |            |                  |   |   |       |       | 
|-------------------------------- | -------------------------------- | ------ | ---------- | ---------------- | - | - | ----- | ----- | 
|                                 |                                  |        |            | Weighted Average
|                                 |                                  |        |            | Exercise        
|                                 |                                  | Shares |            | Price Per Share 
|                                 |                                  |        |            |                 
|Outstanding at January 1, 1997   |                                  |        | 4,722,457  |                  |   | $ | 15.71 |      
|                                
|                                
|                                
|                                
|                                 | Granted                          |        |            | 2,437,383        |   |   |       | 34.29 | 
|                                
|                                
|                                
|                                
|                                 | Exercised                        |        |            | (959,143         | ) |   |       | 3.58  | 
|                                
|                                
|                                
|                                
|                                 | Canceled                         |        |            | (147,056         | ) |   |       | 26.43 | 
|                                 |                                  |        |            |                  |   |   |       |      
|Outstanding at December 31, 1997 |                                  |        | 6,053,641  |                  |   |   | 24.87 |      
|                                
|                                
|                                
|                                
|                                 | Granted                          |        |            | 9,125,937        |   |   |       | 15.09 | 
|                                
|                                
|                                
|                                
|                                 | Exercised                        |        |            | (972,740         | ) |   |       | 1.85  | 
|                                
|                                
|                                
|                                
|                                 | Canceled                         |        |            | (6,178,366       | ) |   |       | 32.59 | 
|                                 |                                  |        |            |                  |   |   |       |      
|Outstanding at December 31, 1998 |                                  |        | 8,028,472  |                  |   |   | 13.35 |      
|                                
|                                
|                                
|                                
|                                 | Granted                          |        |            | 6,628,515        |   |   |       | 26.86 | 
|                                
|                                
|                                
|                                
|                                 | Exercised                        |        |            | (2,438,834       | ) |   |       | 11.33 | 
|                                
|                                
|                                
|                                
|                                 | Canceled                         |        |            | (1,782,758       | ) |   |       | 18.50 | 
|                                 |                                  |        |            |                  |   |   |       |      
|Outstanding at December 31, 1999 |                                  |        | 10,435,395 |                  |   | $ | 21.83 |      
|                                 |                                  |        |            |                  |   |   |       |      
|                                 | Exercisable at December 31, 1997 |        |            | 2,120,841        |   |   | $     | 11.45 | 
|                                 |                                  |        |            |                  |   |   |       |      
|                                 | Exercisable at December 31, 1998 |        |            | 2,629,914        |   |   | $     | 13.63 | 
|                                 |                                  |        |            |                  |   |   |       |      
|                                 | Exercisable at December 31, 1999 |        |            | 1,880,917        |   |   | $     | 15.48 | 
|                                 |                                  |        |            |                  |   |   |       |      

The following table sets forth information regarding stock
options outstanding at December 31, 1999 under all plans:

|               |               |           |  |                |            |                  |  |             |       |                    |  |  |     |  |  |  |           |  |  |   |       | 
|-------------- | ------------- | --------- |  | -------------- | ---------- | ---------------- |  | ----------- | ----- | ------------------ |  |  | --- |  |  |  | --------- |  |  | - | ----- | 
|               |               |           |  |                |            | Weighted Average |  |             |       | Weighted Average  
|               |               |           |  | Weighted       |            | Remaining        |  | Number      |       | Exercise Price for
|Range          |               | Number of |  | Average        |            | Contractual Life |  | Currently   |       | Currently         
|Exercise Price |               | Shares    |  | Exercise Price |            | (Years)          |  | Exercisable |       | Exercisable       
|               |               |           |  |                |            |                  |  |             |       |                   
|               | $.45          |           |  |                | 10,712     |                  |  | $           | .45   |                    |  |  | 4.0 |  |  |  | 10,712    |  |  | $ | .45   | 
|               | .90           |           |  |                | 11,221     |                  |  |             | .90   |                    |  |  | 0.8 |  |  |  | 11,221    |  |  |   | .90   | 
|               | 2.95  3.31   |           |  |                | 37,527     |                  |  |             | 3.18  |                    |  |  | 2.6 |  |  |  | 37,058    |  |  |   | 3.18  | 
|               | 6.62          |           |  |                | 3,959      |                  |  |             | 6.62  |                    |  |  | 1.3 |  |  |  | 3,959     |  |  |   | 6.62  | 
|               | 9.97  14.31  |           |  |                | 3,577,461  |                  |  |             | 11.80 |                    |  |  | 6.8 |  |  |  | 1,293,432 |  |  |   | 11.62 | 
|               | 16.00  22.50 |           |  |                | 2,478,915  |                  |  |             | 18.74 |                    |  |  | 7.3 |  |  |  | 123,505   |  |  |   | 18.71 | 
|               | 24.13  35.63 |           |  |                | 2,687,600  |                  |  |             | 26.93 |                    |  |  | 7.4 |  |  |  | 323,749   |  |  |   | 26.04 | 
|               | 37.15  44.21 |           |  |                | 1,628,000  |                  |  |             | 40.87 |                    |  |  | 7.8 |  |  |  | 77,281    |  |  |   | 41.10 | 
|               |               |           |  |                |            |                  |  |             |       |                    |  |  |     |  |  |  |           |  |  |   |       | 
|               | $.45  $44.21 |           |  |                | 10,435,395 |                  |  | $           | 21.83 |                    |  |  | 7.2 |  |  |  | 1,880,917 |  |  | $ | 15.48 | 
|               |               |           |  |                |            |                  |  |             |       |                    |  |  |     |  |  |  |           |  |  |   |       | 

47



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##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

Accounting for Stock Options  For certain
options and stock awards granted in 1997, 1998 and 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 $1,205, $1,982 and $1,128 in
1997, 1998 and 1999, respectively.

Stock Option Repricing  In August 1998,
the Company repriced options to purchase approximately 5,500,000
shares of common stock to the then fair market value of $12.0625
per share.

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,
|                               |         |                         
|                               |         | 1997                     |        | 1998 |  | 1999
|                               |         |                          |        |      |  |     
|Net income as reported         |         | $                        | 17,048 |      |  | $    | 29,415 |      |  | $ | 183,762 |     
|                              
|                              
|                              
|                              
|Pro forma net income           |         | $                        | 5,697  |      |  | $    | 4,598  |      |  | $ | 173,090 |     
|Pro forma net income per share |         |                          |        |      |  |      |        |      |  |   |         |     
|                              
|                              
|                              
|                              
|                               | Basic   |                          | $      | 0.15 |  |      | $      | 0.11 |  |   | $       | 4.42 | 
|                              
|                              
|                              
|                              
|                               | Diluted |                          | $      | 0.14 |  |      | $      | 0.11 |  |   | $       | 4.12 | 

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,
|                                                     |  |                         
|                                                     |  | 1997                     |       | 1998 |  | 1999
|                                                     |  |                          |       |      |  |     
|Stock Option Plans:                                  |  |                          |       |      |  |      |      |   |  |   |       |  
|                                                    
|                                                    
|                                                    
|                                                    
|Risk-free interest rate                              |  |                          | 6.1   | %    |  |      | 5.2  | % |  |   | 5.4   | %
|                                                    
|                                                    
|                                                    
|                                                    
|Expected life of option grants (years)               |  |                          | 4.3   |      |  |      | 4.1  |   |  |   | 4.1   |  
|                                                    
|                                                    
|                                                    
|                                                    
|Expected volatility of underlying stock              |  |                          | 57.5  | %    |  |      | 70.0 | % |  |   | 82.0  | %
|                                                    
|                                                    
|                                                    
|                                                    
|Expected dividend payment rate                       |  |                          | 0.0   | %    |  |      | 0.0  | % |  |   | 0.0   | %
|                                                    
|                                                    
|                                                    
|                                                    
|Expected forfeiture rate                             |  |                          | 4.1   | %    |  |      | 7.5  | % |  |   | 7.5   | %
|                                                    
|                                                    
|                                                    
|                                                    
|Weighted average fair value of stock options Granted |  | $                        | 19.64 |      |  | $    | 6.50 |   |  | $ | 17.04 |  
|                                                    
|                                                    
|                                                    
|                                                    
|Employee Stock Purchase Plan:                        |  |                          |       |      |  |      |      |   |  |   |       |  
|                                                    
|                                                    
|                                                    
|                                                    
|Risk-free interest rate                              |  |                          | 5.2   | %    |  |      | 5.2  | % |  |   | 4.8   | %
|                                                    
|                                                    
|                                                    
|                                                    
|Expected life of option grants (years)               |  |                          | 0.5   |      |  |      | 0.5  |   |  |   | 0.5   |  
|                                                    
|                                                    
|                                                    
|                                                    
|Expected volatility of underlying stock              |  |                          | 57.5  | %    |  |      | 70.0 | % |  |   | 82.0  | %
|                                                    
|                                                    
|                                                    
|                                                    
|Expected dividend payment rate                       |  |                          | 0.0   | %    |  |      | 0.0  | % |  |   | 0.0   | %
|                                                    
|                                                    
|                                                    
|                                                    
|Weighted average fair value of stock options Granted |  | $                        | 10.82 |      |  | $    | 5.58 |   |  | $ | 6.96  |  

6.  Stockholders Equity

Stockholder Rights Plan  On July 20, 1999
the Company announced that its Board of Directors had 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 $125.00, 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

48



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##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

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 was
authorized to repurchase up to 4,000,000 shares of its common
stock during the 12-month period ended October 11, 1999, and
 is authorized to purchase up to an additional 4,000,000 shares
of its common stock during the 12-month period ending
October 12, 2000. Repurchased shares may be used for the
Companys stock option and employee stock purchase plans,
and for general corporate purposes. Through December 31,
1999, the Company had repurchased 5,134,500 shares of its common
stock, for an aggregate amount of $115,108, at an average cost of
 $22.42 per share.

Stock Purchase Warrants  The Company issued
warrants to purchase 80,000 shares of common stock in September
1999 in connection with a software sale. The value of the
warrants of $1,040 was determined using the Black-Scholes
option-pricing model and was allocated to additional paid-in
capital.

7.  Income Taxes

The provision for income taxes consisted of the following:

|          |         |                          |        |        |        |      |        |        |        |   |         |         |         |  
|--------- | ------- | ------------------------ | ------ | ------ | ------ | ---- | ------ | ------ | ------ | - | ------- | ------- | ------- | -
|          |         |                         
|          |         | Years Ended December 31,
|          |         |                         
|          |         | 1997                     |        | 1998   |        | 1999
|          |         |                          |        |        |        |     
|Current:  |         |                          |        |        |        |      |        |        |        |   |         |        
|         
|         
|         
|         
|          | Federal |                          | $      | 13,337 |        |      | $      | 18,720 |        |   | $       | 119,387 |        
|         
|         
|         
|         
|          | State   |                          |        | 1,893  |        |      |        | 2,687  |        |   |         | 4,052   |        
|         
|         
|         
|         
|          | Foreign |                          |        | 431    |        |      |        | 798    |        |   |         | 1,276   |        
|          |         |                          |        |        |        |      |        |        |        |   |         |        
|          |         | Total                    |        |        | 15,661 |      |        |        | 22,205 |   |         |         | 124,715 |  
|          |         |                          |        |        |        |      |        |        |        |   |         |        
|Deferred: |         |                          |        |        |        |      |        |        |        |   |         |        
|         
|         
|         
|         
|          | Federal |                          |        | (2,179 | )      |      |        | (387   | )      |   |         | (11,827 | )      
|         
|         
|         
|         
|          | State   |                          |        | (158   | )      |      |        | 2,050  |        |   |         | 6,094   |        
|         
|         
|         
|         
|          | Foreign |                          |        |       |        |      |        | (297   | )      |   |         |        |        
|          |         |                          |        |        |        |      |        |        |        |   |         |        
|          |         | Total                    |        |        | (2,337 | )    |        |        | 1,366  |   |         |         | (5,733  | )
|          |         |                          |        |        |        |      |        |        |        |   |         |        
|Total     |         | $                        | 13,324 |        |        | $    | 23,571 |        |        | $ | 118,982 |        
|          |         |                          |        |        |        |      |        |        |        |   |         |        

49



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##### 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 at December 31 were as follows:

|                                                 |                                                  |      |        |         |   |   |          |          |  
|------------------------------------------------ | ------------------------------------------------ | ---- | ------ | ------- | - | - | -------- | -------- | -
|                                                 |                                                  | 1998 |        | 1999   
|                                                 |                                                  |      |        |        
|Deferred tax assets (liabilities)  current:     |                                                  |      |        |         |   |   |          |         
|                                                
|                                                
|                                                
|                                                
|                                                 | Unrealized hedge liability                       |      |        |         |   |   | $        | 274,414  |  
|                                                
|                                                
|                                                
|                                                
|                                                 | Marketable securities                            |      | $      | (5,760  | ) |   |          | (442,032 | )
|                                                
|                                                
|                                                
|                                                
|                                                 | Deferred revenue                                 |      |        | 1,107   |   |   |          | 1,107    |  
|                                                
|                                                
|                                                
|                                                
|                                                 | Royalty valuation                                |      |        | 920     |   |   |          | 779      |  
|                                                
|                                                
|                                                
|                                                
|                                                 | Sales returns                                    |      |        | 605     |   |   |          | 2,602    |  
|                                                
|                                                
|                                                
|                                                
|                                                 | Allowance for doubtful accounts                  |      |        | 284     |   |   |          | 413      |  
|                                                
|                                                
|                                                
|                                                
|                                                 | Compensation                                     |      |        | 237     |   |   |          | 247      |  
|                                                
|                                                
|                                                
|                                                
|                                                 | Inventory reserves                               |      |        | 225     |   |   |          | 225      |  
|                                                
|                                                
|                                                
|                                                
|                                                 | Warranty obligation                              |      |        | 42      |   |   |          | 42       |  
|                                                
|                                                
|                                                
|                                                
|                                                 | Commissions                                      |      |        | 95      |   |   |          |         |  
|                                                
|                                                
|                                                
|                                                
|                                                 | Other                                            |      |        | 125     |   |   |          | 472      |  
|                                                 |                                                  |      |        |         |   |   |          |         
|Net deferred tax asset (liability)  current     |                                                  | $    | (2,120 | )       |   | $ | (161,731 | )       
|                                                 |                                                  |      |        |         |   |   |          |         
|Deferred tax assets (liabilities)  non current: |                                                  |      |        |         |   |   |          |         
|                                                
|                                                
|                                                
|                                                
|                                                 | Foreign acquisition asset                        |      | $      | 39,333  |   |   | $        | 36,302   |  
|                                                
|                                                
|                                                
|                                                
|                                                 | Purchased research and development               |      |        | 2,642   |   |   |          | 2,568    |  
|                                                
|                                                
|                                                
|                                                
|                                                 | Compensation                                     |      |        | 2,269   |   |   |          | 4,169    |  
|                                                
|                                                
|                                                
|                                                
|                                                 | Investment valuation                             |      |        | 1,459   |   |   |          | 2,474    |  
|                                                
|                                                
|                                                
|                                                
|                                                 | Capitalized software development costs and other |      |        | (920    | ) |   |          | 1,206    |  
|                                                
|                                                
|                                                
|                                                
|                                                 | Valuation allowance                              |      |        | (25,498 | ) |   |          | (25,498  | )
|                                                 |                                                  |      |        |         |   |   |          |         
|Net deferred tax assets  non current            |                                                  | $    | 19,285 |         |   | $ | 21,221   |         
|                                                 |                                                  |      |        |         |   |   |          |         

Reconciliation between the statutory and effective income tax
rates follows:

|                                          |  |                          |      |      |  |      |      |   |  |  |      |  
|----------------------------------------- |  | ------------------------ | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                          |  |                         
|                                          |  | Years Ended December 31,
|                                          |  |                         
|                                          |  | 1997                     |      | 1998 |  | 1999
|                                          |  |                          |      |      |  |     
|Statutory tax rate                        |  |                          | 35.0 | %    |  |      | 35.0 | % |  |  | 35.0 | %
|                                         
|                                         
|                                         
|                                         
|State income taxes net of federal benefit |  |                          | 3.7  |      |  |      | 7.0  |   |  |  | 2.9  |  
|                                         
|                                         
|                                         
|                                         
|Merger expenses                           |  |                          | 6.7  |      |  |      | 0.1  |   |  |  |     |  
|                                         
|                                         
|                                         
|                                         
|Other                                     |  |                          | (1.7 | )    |  |      | 2.9  |   |  |  | 1.4  |  
|                                          |  |                          |      |      |  |      |      |   |  |  |      |  
|Effective income tax rate                 |  |                          | 43.7 | %    |  |      | 45.0 | % |  |  | 39.3 | %
|                                          |  |                          |      |      |  |      |      |   |  |  |      |  

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 believes 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.

Tax benefits arising from exercise of stock options were $2,012,
$4,482, and $16,790 in 1997, 1998 and 1999, respectively.

Cash payments for income taxes were approximately $15,542,
$18,249 and $101,929 in 1997, 1998 and 1999, respectively.

50



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##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

8.  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. Matching contributions were $367, $582 and $657 in
 1997, 1998 and 1999, respectively, and profit sharing
contributions were $400, $336 and $786 in 1997, 1998 and 1999,
respectively.

9.  Commitments

The Company leases office facilities under non-cancelable
operating leases expiring through 2009. Future minimum rental
payments are as follows:

|                         |  |   |        | 
|------------------------ |  | - | ------ | 
|                         |  |  
|                        
|Years Ended December 31,
|                        
|2000                     |  | $ | 7,010  | 
|                        
|                        
|                        
|                        
|2001                     |  |   | 6,816  | 
|                        
|                        
|                        
|                        
|2002                     |  |   | 6,245  | 
|                        
|                        
|                        
|                        
|2003                     |  |   | 6,057  | 
|                        
|                        
|                        
|                        
|2004 and thereafter      |  |   | 30,634 | 

Net rent expense was approximately $3,437, $4,884 and $7,952 in
1997, 1998 and 1999, respectively. Rent collected from subleases
of the Companys former headquarters was $527 in 1997, $81
in 1998, and $271 in 1999.

The Company has an agreement with another company for the right
to use certain software. In order to obtain favorable pricing,
the Company has, from time to time, prepaid royalties due under
the agreement. Royalties are recorded as a component of cost of
revenue as the related products are sold. Unamortized prepaid
royalties were $4,800 and $6,900 at December 31, 1998 and
1999 respectively.

The Company also has a license, granted through
September 2000, for cryptographic communication technology
and devices from the Massachusetts Institute of Technology, which
 allows an exclusive right to use, lease or sell technology,
subject to payment of royalties. Total royalty expense under all
agreements was $6,061, $6,235 and $6,890 in 1997, 1998 and 1999,
respectively.

10.  Segment Information

The Company has one reportable segment, Enterprise network and
data security solutions, which generates revenue from two product
 lines, enterprise solutions and OEM solutions. Products sold
include software, licensing, hardware, maintenance and
professional services. The segment was determined primarily on
how management views and evaluates the business.

The Companys operations are conducted throughout the world.
 Operations in the United States represent more than 10% of
revenues or income from operations. The Companys operations
 in other countries are individually insignificant and have been
included in Rest of world below. The following table
presents information about revenues:

|                     |  |                          |         |      |  |      |         |  |  |   |         | 
|-------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                     |  |                         
|                     |  | Years Ended December 31,
|                     |  |                         
|Product and services |  | 1997                     |         | 1998 |  | 1999
|                     |  |                          |         |      |  |     
|Enterprise solutions |  | $                        | 109,865 |      |  | $    | 133,129 |  |  | $ | 165,168 | 
|                    
|                    
|                    
|                    
|OEM solutions        |  |                          | 30,765  |      |  |      | 38,205  |  |  |   | 52,956  | 
|                     |  |                          |         |      |  |      |         |  |  |   |         | 
|                     |  | $                        | 140,630 |      |  | $    | 171,334 |  |  | $ | 218,124 | 
|                     |  |                          |         |      |  |      |         |  |  |   |         | 

51



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##### Table of Contents



RSA SECURITY INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
(Continued)

|                 |  |                          |         |      |  |      |         |  |  |   |         | 
|---------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                 |  |                         
|                 |  | Years Ended December 31,
|                 |  |                         
|Geographic areas |  | 1997                     |         | 1998 |  | 1999
|                 |  |                          |         |      |  |     
|United States    |  | $                        | 97,162  |      |  | $    | 112,042 |  |  | $ | 152,103 | 
|                
|                
|                
|                
|Rest of world    |  |                          | 43,468  |      |  |      | 59,292  |  |  |   | 66,021  | 
|                 |  |                          |         |      |  |      |         |  |  |   |         | 
|                 |  | $                        | 140,630 |      |  | $    | 171,334 |  |  | $ | 218,124 | 
|                 |  |                          |         |      |  |      |         |  |  |   |         | 

11.  Litigation

On or about December 11, 1998, a 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 filed an amended complaint on
May 4, 1999, which asserts 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. Plaintiffs seek unspecified
damages, interest, costs and fees of their attorneys, accountants
 and experts. The Company is seeking to dismiss the
plaintiffs complaint and intends to defend the lawsuit
vigorously. Although the amounts claimed may be substantial, the
Company cannot predict the ultimate outcome or estimate the
potential loss, if any, related to the lawsuit. The Company
believes that the disposition of this matter will not have a
material adverse effect on the Companys consolidated
financial position. However, the adverse resolution of the
lawsuit could materially affect the Companys results of
operations or liquidity in any one annual or quarterly reporting
period.

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 seeks 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. The
 parties are currently conducting discovery. The Company believes
 that Mr. Weiss claims are without merit, and intends
to defend the matter vigorously. The Company believes that the
disposition of this matter will not have a material adverse
effect on the Companys consolidated financial position.

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 IDI. The value of the options was determined to be
 $1,872, using the Black-Scholes option-pricing model.

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

12.  Related Party Transactions

VeriSign developed certain technology for the Company in exchange
 for an initial license fee of $2,700. The Company is the
exclusive distributor of VeriSigns certificate authority
software for a five year term subject to annual cancellation at
the Companys election. The Company paid VeriSign $500 at
the execution of the distributor agreement, $1,100 in 1999 and
additional prepaid license fees are due in minimum quarterly
installments of $2,300 in 2000, $3,000 in 2001, $4,000 in 2002,
and $4,000 in 2003. The Company sublet facilities to VeriSign in
exchange for lease payments of $105 in 1997 and $81 in 1998. A
Company director serves as VeriSigns Chairman of the Board
of Directors.

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##### 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
$104, $82 and $48 in 1997, 1998 and 1999, respectively. The
Company also had approximately $25 payable on demand to a less
than 5% stockholder as of December 31, 1998.

13.  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 of severance costs of $9,370 for 41 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 $1,980. 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 $2,884 were accrued and unpaid
at December 31, 1999 and consisted of facility exit costs of
 $1,749 and termination benefits, payable through the third
quarter of 2000, of $1,135.

14.  Comprehensive Income

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, 1997               |  | $           | 493    |            |  | $             | 3,480   |   |  | $ | 3,973   |  
|                                      
|                                      
|                                      
|                                      
|Period change                          |  |             | (1,243 | )          |  |               | (3,401  | ) |  |   | (4,644  | )
|                                       |  |             |        |            |  |               |         |   |  |   |         |  
|Balance, December 31, 1997             |  |             | (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 |  
|                                       |  |             |        |            |  |               |         |   |  |   |         |  

The tax effects of unrealized holding gains (losses) were $(291),
 $82 and $157,857 for 1997, 1998 and 1999, respectively.



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

Not applicable.

53



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##### Table of Contents






PART III




ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE
COMPANY

The information required by this item is contained in part under
the caption Executive Officers of the Company in
Part I hereof, and the remainder is contained in the
Companys Proxy Statement for the Companys Annual
Meeting of Stockholders to be held on April 19, 2000 (the
2000 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 the Board of Directors.




ITEM 11.  EXECUTIVE COMPENSATION

The information required by this item is contained under the
captions Director Compensation and Compensation
 of Executive Officers in the 2000 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 2000 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 2000 Proxy Statement and is
incorporated herein by reference.

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##### 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 Flow 
	 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:

The Company did not file any Current Reports on Form 8-K
during the quarter ended December 31, 1999.

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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company 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 the Company 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 13, 2000
|/s/ JOHN F. KENNEDY
	---------------------------------------------------John F. Kennedy                 |  | Senior Vice President, Finance and Chief Financial Officer
	(Principal Financial and Accounting Officer) |  | March 13, 2000
|/s/ CHARLES R. STUCKEY, JR.
	---------------------------------------------------Charles R. Stuckey, Jr. |  | Chairman of the Board of Directors                                                                       |  | March 13, 2000
|/s/ ROBERT P. BADAVAS
	---------------------------------------------------Robert P. Badavas             |  | Director                                                                                                 |  | March 13, 2000
|/s/ D. JAMES BIDZOS
	---------------------------------------------------D. James Bidzos                 |  | Director                                                                                                 |  | March 13, 2000
|/s/ RICHARD L. EARNEST
	---------------------------------------------------Richard L. Earnest           |  | Director                                                                                                 |  | March 13, 2000
|/s/ TAHER ELGAMAL
	---------------------------------------------------Taher Elgamal                     |  | Director                                                                                                 |  | March 13, 2000
|/s/ JOSEPH B. LASSITER, III
	---------------------------------------------------Joseph B. Lassiter, III |  | Director                                                                                                 |  | March 13, 2000
|/s/ JAMES K. SIMS
	---------------------------------------------------James K. Sims                     |  | Director                                                                                                 |  | March 13, 2000

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EXHIBIT INDEX

| |        |  |  |                                                                                                                                                                                                                                                                                                                                                                      
| | ------ |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3.1    |  |  | Third Restated Certificate of Incorporation, as amended, of the
	Company is incorporated herein by reference to Exhibit  3.1
	to the Companys Quarterly Report on Form 10-Q for the
	quarter ended June 30, 1999                                                                                                                                                    
|
| | 3.2    |  |  | Certificate of Ownership and Merger merging RSA Data Security,
	Inc. into Security Dynamics Technologies, Inc., as filed with the
	 office of the Secretary of State of the State of Delaware on
	September 10, 1999 is incorporated herein by reference to
	Exhibit 2.1 to the Companys Current Report on
	Form 8-K dated September 10, 1999                       
| | 3.3    |  |  | Amended and Restated By-Laws, as amended, of the Company is
	incorporated herein by reference to Exhibit 3.3 to the
	Companys Registration Statement on Form S-1
	(File No.  33-85606) (the Form S-1)                                                                                                                                                             
| | 4.1    |  |  | Specimen Certificate for shares of Common Stock, $.01 par value
	per share, of the Company is incorporated herein by reference to
	Exhibit 4.1 to the Companys Current Report on
	Form 8-K dated September 10, 1999                                                                                                                                                 
| | 4.2    |  |  | Rights Agreement dated as of July 20, 1999 between the
	Company 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 the
	Companys Registration Statement on Form 8-A (File
	No.  000-25120)
| | 4.3    |  |  | Common Stock Purchase Warrant of the Company dated
	September 24, 1999 in favor of General Electric Company is
	incorporated herein by reference to Exhibit 4.2 to the
	Companys Quarterly Report on Form 10-Q for the quarter
	 ended September 30, 1999                                                                                                           
| | *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 the Companys 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 the Companys 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 the Companys
	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                                                                                                                                                                                                                                                                                                 
| | *10.6  |  |  | 1994 Employee Stock Purchase Plan, as amended, is incorporated
	herein by reference to Exhibit 10.2 to the Companys
	Quarterly Report on Form 10-Q for the quarter ended
	September 30, 1999                                                                                                                                                                        
| | *10.7  |  |  | 1998 Deferred Compensation Plan is incorporated herein by
	reference to Exhibit 10.4 to the Companys Quarterly
	Report on Form 10-Q for the quarter ended March 31,
	1998                                                                                                                                                                                           
| | *10.8  |  |  | Amended and Restated Employment Agreement between the Company and
	 Charles R. Stuckey, Jr., dated as of November  1,
	 1997, is incorporated herein by reference to Exhibit  10.5
	to the Companys Annual Report on Form 10-K for the
	year ended December 31, 1997                                                                                                
| | *10.9  |  |  | Amendment No. 1 to Amended and Restated Employment
	Agreement, dated as of March 4, 1999,between the Company and
	 Charles R. Stuckey, Jr. is incorporated herein by
	reference to Exhibit 10.1 to the Companys Quarterly
	Report on Form 10-Q for the quarter ended March 31,
	1999                                                                                
| | *10.10 |  |  | Letter Agreement between the Company and Arthur W.
	Coviello, Jr., dated as of August 21, 1995, is
	incorporated herein by reference to Exhibit 10 to the
	Companys Quarterly Report on Form 10-Q for the quarter
	 ended September 30, 1995                                                                                                                        
| | *10.11 |  |  | Letter Agreement between the Company and Linda E. Saris,
	dated as of May 1, 1989, is incorporated herein by reference
	 to Exhibit 10.7 to the Form S-1                                                                                                                                                                                                             
| | *10.12 |  |  | Form of Management Employment Agreement is incorporated herein by
	 reference to Exhibit 10.1 to the Companys Quarterly
	Report on Form 10-Q for the quarter ended September 30,
	 1998                                                                                                                                                                             

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| |        |  |  |                                                                                                                                                                                                                                                                                                        
| | ------ |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | *10.13 |  |  | Agreement and Release, dated as of February 18, 1999, between the
	 Company and D. James Bidzos is incorporated by reference to
	 Exhibit 10.2 to the Companys Quarterly Report on
	Form 10-Q for the quarter ended March 31, 1999                                                                    
| | *10.14 |  |  | Amendment Number One to Agreement and Release dated July 
	20, 1999 between the Company and D. James Bidzos is
	incorporated herein by reference to Exhibit 10.1 to the
	Companys Quarterly Report on Form 10-Q for the quarter
	 ended September 30, 1999                                            
| | *10.15 |  |  | Consulting Agreement, dated as of February 18, 1999, between
	 the Company and D. James Bidzos is incorporated by
	reference to Exhibit 10.3 to the Companys Quarterly
	Report on Form 10-Q for the quarter ended March 31,
	1999                                                                     
| | 10.16 |  |  | Terms and Conditions of Purchase, dated January 1, 1994,
	between the Company and Gould Electronics is incorporated herein
	by reference to Exhibit 10.15 to the Form S-1                                                                                                                              
| | 10.17 |  |  | Letter, dated October 12, 1994, from Sanyo Electric Co.,
	LTD. to the Company is incorporated herein by reference to
	Exhibit 10.16 to the Form S-1                                                                                                                                                    
| | 10.18 |  |  | Progress Software Application Partner Agreement between the
	Company and Progress Software Corporation, dated December 
	5, 1994, as amended, is incorporated herein by reference to
	Exhibit 10.17 to the Form S-1                                                                                    
| | 10.19 |  |  | Second Amendment to Progress Software Application Partner
	Agreement, dated as of November 29, 1995, between the
	Company and Progress Software Corporation is incorporated herein
	by reference to Exhibit 10.13 to the Companys
	Quarterly Report on Form 10-Q for the quarter ended
	June  30, 1997
| | 10.20 |  |  | Third Amendment to Progress Software Application Partner
	Agreement, dated as of November 15, 1996, between the
	Company and Progress Software Corporation is incorporated herein
	by reference to Exhibit 10.14 to the Companys
	Quarterly Report on Form 10-Q for the quarter ended
	June  30, 1997 
| | 10.21 |  |  | Fourth Amendment to Progress Software Application Partner
	Agreement, dated as of April 1, 1998, between the Company
	and Progress Software Corporation, is incorporated herein by
	reference to Exhibit 10.18 to the Companys Quarterly
	Report on Form 10-Q for the quarter ended June 30, 1998     
| | #10.22 |  |  | Fifth Amendment to Progress Software Application Partner
	Agreement, dated as of February 18, 1999, between the
	Company and Progress Software Corporation                                                                                                                                             
| | #10.23 |  |  | Sixth Amendment to Progress Software Application Partner
	Agreement, dated as of October 26, 1999, between the Company
	 and Progress Software Corporation                                                                                                                                             
| | 10.24  |  |  | Indenture of Lease, dated as of March 11, 1996, between the
	Company and Beacon Properties, L.P. is incorporated herein by
	reference to Exhibit 10.17 to the Companys
	Registration Statement on Form S-4 (File No. 333-7265)                                                                        
| | 10.25  |  |  | Rider to Indenture of Lease, dated as of March 11, 1996
	between the Company and Beacon Properties, L.P., is incorporated
	herein by reference to Exhibit 10.6 to the Companys
	Quarterly Report on Form 10-Q for the quarter ended
	March 31, 1998                                                   
| | 10.26  |  |  | First Amendment to Lease, dated as of May 10, 1997, between
	the Company and Beacon Properties, L.P. is incorporated herein by
	 reference to Exhibit 10.2 to the Companys Quarterly
	Report on Form 10-Q for the quarter ended June  30,
	1997                                                       
| | 10.27  |  |  | Second Amendment to Lease, dated as of April 8, 1998, by and
	 between the Company and EOP  Crosby Corporate Center,
	 L.L.C., is incorporated herein by reference to Exhibit 10.5
	 to the Companys Quarterly Report on Form 10-Q for the
	 quarter ended March 31, 1998                            
| | 10.28  |  |  | Lease Agreement, dated as of August 15, 1997, by and between
	 the Company and Peninsula Office Park Associates, L.P., is
	incorporated herein by reference to Exhibit 10.7 to the
	Companys Quarterly Report on Form 10-Q for the quarter
	 ended March 31, 1998                                     
| | 10.29  |  |  | Lease Agreement, dated as of December 19, 1997, by and
	between the Company and Peninsula Office Park Associates, L.P.,
	is incorporated herein by reference to Exhibit 10.8 to the
	Companys Quarterly Report on Form 10-Q for the quarter
	 ended March 31, 1998                                    
| | 10.30  |  |  | Sublease Agreement, dated as of April 12, 1999, between the
	Company and netDialog Incorporated is incorporated herein by
	reference to Exhibit 10.1 to the Companys Quarterly
	Report on Form 10-Q for the quarter ended June 30, 1999                                                               

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##### Table of Contents



| |       |  |  |                                                                                                                                                                                                                                                                
| | ----- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.31 |  |  | Master Development and License Agreement, dated September 
	30, 1997, between the Company and VeriSign, Inc.
	(VeriSign) is incorporated herein by reference to
	Exhibit 10.19 to VeriSigns Registration Statement on
	Form  S-1 (File No. 333-40789)       
| | 10.32 |  |  | Amendment Number One to Master Development and License Agreement
	dated as of December 31, 1998 between the Company 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 the Company                                                                                                                                                                                                                                    
| | 23.1  |  |  | Consent of Deloitte & Touche LLP, Independent Auditors                                                                                                                                                                                                         
| | 27.1  |  |  | Financial Data Schedule                                                                                                                                                                                                                                        






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

59