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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, 2003

OR

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

Commission File No. 000-25120

RSA Security Inc.

(Exact name of registrant as specified in its charter)


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

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

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



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

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



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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. [  ]

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

As of February 23, 2004, the approximate aggregate market value of the common
stock held by non-affiliates of the registrant was $979,539,894 based on the
last reported sale price of the registrants common stock on The NASDAQ
National Market as of the close of business on that date. There were 61,405,366
shares of common stock outstanding as of February 23, 2004.

As of June 30, 2003, the approximate aggregate market value of the common stock
held by non-affiliates of the registrant was $623,321,300 based on the last
reported sale price of the registrants common stock on The NASDAQ National
Market as of the close of business on that date.

DOCUMENTS INCORPORATED BY REFERENCE

|                                      |  |                                      
|------------------------------------- |  | -------------------------------------
|                                      |  | PART OF FORM 10-K                    
|DOCUMENT                              |  | INTO WHICH INCORPORATED              
|                                      |  |                                      
|Portions of the Registrants Proxy    |  | Items 10, 11, 12, 13 & 14 of Part III
|Statement for the 2003 Annual Meeting |  |                                      
|of Stockholders                       |  |                                      

We make statements in this Report that are forward looking, that is, statements
that are not historical facts but convey projections about the future. For
example, statements containing the words believes, anticipates, plans,
expects, estimates, intends, may, projects, will, would, and
similar expressions may be forward-looking statements. However, we caution
investors not to place undue reliance on any forward-looking statements in this
Report because these statements speak only as of the date when made. We
undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise. There are a
number of factors that could cause our actual results to differ materially from
those indicated by these forward-looking statements, including without
limitation, the factors set forth in this report under the caption Certain
Factors That May Affect Future Results.

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

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TABLE OF CONTENTS



|                                                   |                                                                                                         |                                                 |  |  |  |  |  | 
|-------------------------------------------------- | ------------------------------------------------------------------------------------------------------- | ----------------------------------------------- |  |  |  |  |  | 
|PART I                                            
|                                                   | ITEM 1. BUSINESS                                                                                       
|                                                   | ITEM 2. PROPERTIES                                                                                     
|                                                   | ITEM 3. LEGAL PROCEEDINGS                                                                              
|                                                   | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                            
|PART II                                           
|                                                   | ITEM 5. MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                                   
|                                                   | ITEM 6. SELECTED FINANCIAL DATA                                                                        
|                                                   | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS          
|                                                   | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                    
|                                                   | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                    
|                                                   |                                                                                                         | Consolidated Balance Sheets                    
|                                                   |                                                                                                         | Consolidated Statements of Operations          
|                                                   |                                                                                                         | Consolidated Statements of Stockholders Equity
|                                                   |                                                                                                         | Consolidated Statements of Cash Flows          
|                                                   |                                                                                                         | Notes to Consolidated Financial Statements     
|                                                   | ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE            
|                                                   | ITEM 9A. CONTROLS AND PROCEDURES                                                                       
|PART III                                          
|                                                   | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF RSA SECURITY                                              
|                                                   | ITEM 11. EXECUTIVE COMPENSATION                                                                        
|                                                   | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|                                                   | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                
|                                                   | ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                        
|PART IV                                           
|                                                   | ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                               
|SIGNATURES                                        
|EXHIBIT INDEX                                     
|EX-10.19 9TH AMENDMENT TO PARTNER AGREEMENT       
|EX-10.29 SUBLEASE DATED 12/10/03 (170 SYSTEMS INC)
|EX-10.30 SUBLEASE DATED 1/2004 (INTERSENSE INC.)  
|EX-21.1 SUBSIDIARIES OF RSA SECURITY INC.         
|EX-23.1 CONSENT OF DELOITTE & TOUCHE LLP          
|EX-31.1 CERTIFICATION OF THE C.E.O.               
|EX-31.2 CERTIFICATION OF THE C.F.O.               
|EX-32.1 CERTIFICATIONS OF THE C.E.O. & C.F.O.     
|EX-99.2 STOCK TRADING PLAN (BADAVAS)              
|EX-99.5 STOCK TRADING PLAN (GLIDDEN)              
|EX-99.8 STOCK TRADING PLAN (SEIF)                 
|EX-99.9 STOCK TRADING PLAN (STUCKEY)              
|EX-99.10 STOCK TRADING PLAN (UNIEJEWSKI)          
|EX-99.11 STOCK TRADING PLAN (VITALE)              



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PART I




ITEM 1.  BUSINESS

COMPANY OVERVIEW

With more than 13,000 customers around the globe, RSA Security Inc. and its
consolidated subsidiaries help organizations protect their information and
manage the identities of the people and applications accessing and exchanging
that information. Built to work seamlessly in complex environments, our
portfolio of e-security solutions  including Identity and Access Management,
Secure Mobile and Remote Access, Secure Enterprise Access and Secure
Transactions  is designed to inspire customers to confidently realize new
technologies and exploit the full power of the Internet.

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

COMPANY HISTORY

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

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

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

Throughout our history, we have made a number of corporate acquisitions, in
addition to the RSA Data Security and Securant acquisitions described above.
Xcert Internationals Sentry CA line of products became part of our RSA Keon
digital certificate management product family following our February 2001
acquisition of Xcert International, Inc., a privately held company that
developed and delivered digital certificate-based products for securing
e-business transactions. We introduced a new smart card authentication
solution called RSA SecurID Passage, which is part of our authentication
product line, as a result of our May 2001 acquisition of 3-G International,
Inc., a privately held company that developed and delivered smart card and
biometric authentication products.

BACKGROUND

We believe that more and more businesses and government entities are finding
that they need to exchange electronic information both internally, among their
employees and departments, and externally, with their customers, vendors,
business partners, suppliers and others. We have observed an increase in
requirements for access to electronic information, characterized by a growing
number and type of users, applications, transactions and access methods.
Extending information access both inside and outside the organizations walls 
to customers, partners and remote and mobile workers  has become critical to
many organizations. This has, in turn, driven advances in technology,
resulting in improvements in the speed of exchange and ease of access to
information. Some of these technology advancements include faster networks as
well as intranets, extranets, portals, wireless access, and VPNs facilitating
productive anytime, anywhere access to critical resources.

Increased access to critical information can lead to greater risk of exposure
of that information to unauthorized users. Information can be intercepted by
hackers, cyber-terrorists, identity thieves, disgruntled employees and even
competitors. Losses that result from any serious breach can include large
direct and indirect costs, a loss of confidence in the enterprise and
regulatory fines. As a result, many organizations have traditionally viewed
security as a necessary expense. However, we believe that many organizations
are now beginning to see security as a strategic imperative.

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Many e-security technologies have emerged to address the information access
challenges that organizations face. Some organizations need authentication
solutions to help positively identify users (from within as well as outside the
enterprise) before granting access to critical applications and resources.
Others require comprehensive identity management solutions to help manage user
identities, user lifecycles and their access privileges. RSA Security believes
that as information access continues to expand in complexity, these distinct
e-security requirements will merge to address the larger need for integrated
identity and access management.

THE RSA SECURITY STRATEGY

Secure Information Access

Our portfolio of solutions, including Identity and Access Management, Secure
Mobile and Remote Access, Secure Enterprise Access and Secure Transactions, is
designed to help organizations realize the benefits of e-business, while
helping to protect critical resources and applications from unauthorized access
and other forms of electronic malice.

Lead e-Security

With over one billion RSA Security-enabled software units shipped, we are a
trusted, experienced partner to our customers. We participate actively in the
development of industry standards, such as the Liberty Alliance Project,
Security Assertion Markup Language (SAML), OASIS and Public Key Cryptography
Standards (PKCS). Our efforts are designed to ensure that our current and
prospective customers get the right solution for their heterogeneous computing
environments and growing business.

Provide Seamless Solutions

We have strategic partnerships with industry-leading companies, including
global integrators like Accenture and platform vendors such as Microsoft and
Cisco Systems. The RSA Secured® technology partner program, a key part of this
initiative, focuses on product integration and interoperability certification
activities, as well as joint support strategies for our mutual customers. Our
RSA BSAFE developer solutions are engineered to enable developers to quickly
and effectively integrate encryption, protocols and electronic signatures into
their applications. Our current products support a number of standards,
including PKCS, RADIUS and OASIS SAML 1.0 specification.

THE RSA SECURITY SOLUTION: SECURE INFORMATION EXCHANGE AND IDENTITY MANAGEMENT

Our authentication, identity management and encryption solutions, coupled
with professional services and third-party strategic partnerships, are
designed to help businesses and government entities securely put critical
information into the hands of the people who need it, while protecting it
against unauthorized access.

Secure Mobile and Remote Access

Organizations need to secure access to the network from outside the firewall,
including from a remote or branch office, partner or customer site, and mobile
workforce. To address this challenge, we offer a broad range of authentication
options:



| |  |  | RSA SecurID®hardware and software authenticators and RSA
ACE/Server softwareare more secure alternatives to passwords,
providing ease of use and the added protection of two-factor
authentication.                   
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | RSA®Mobile software, which can be used in both enterprise and
consumer applications, generates a one-time passcode that is
immediately sent to the users cell phone or PDA for
authentication to protected resources.

Identity and Access Management

We provide identity management capabilities through our RSA ClearTrust®
solution  including access management, authentication, provisioning and user
management.



| |  |  | RSA ClearTrust web access management solutionis designed to
facilitate secure single sign-on (SSO), while protecting access to
mission-critical web-based applications and resources through the
management of user identities and their access rights.                                                  
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We work with technology partners to address customer
requirements for provisioning across the enterprise. We recently
entered into a reseller agreement with Thor Technologies, which
permits us to bundle with our RSA ClearTrust product and resell
separately Thors Xcellerate provisioning software.

Secure Enterprise Access

In order to help organizations effectively manage and control secure access to
business-critical information resources within the enterprise, we offer the
following solutions:

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| |  |  | RSA SecurID® Smart Card and USB solutionsare designed to allow
an organization to store credentials and combine multiple security
functions  such as employee badging, building access and network
access  on one portable device.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | RSA Keon®Certificate Management solutionsenable an organization to
issue, validate and manage credentials that are based on x.509 digital
certificates.                                                                             

Secure Transactions

In order to ensure secure transactions, organizations need reliable, trusted,
cross-platform technology that verifies: who or where the business data and
logic are coming from; who or where it is going to; and that it is protected
along the way. We address the need for secure transactions through the
following offerings:



| |  |  | RSA BSAFE® encryption and digital signing softwareis engineered to
provide security, performance and support for industry standards. The
RSA BSAFE line of software development kits (SDKs) provides components
to secure e-business applications, enterprise software, mobile phones,
pocket PCs, PDAs, Web browsers, complex networking equipment, and
cable TV boxes.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | RSA Keon® Certificate Management solutionshelp enable an
organization to issue, validate and manage credentials that are based
on x.509 digital certificates.                                                                                                                                                                                                           

Path to the Future

We offer our customers a migration path to a system that will be designed to
address all of the core requirements outlined above with a single platform:



| |  |  | We are working on a new identity and access management architecture,
codenamed NEXUS, that will be designed to integrate our solutions into
a single common administrative and system services platform and to
deliver common administration and integration across our products.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

STRATEGIC PARTNERS

Through the RSA Secured® partner program, RSA Security works with leading
platform, network and application vendors to ensure that many widely used
infrastructure products and applications interoperate with our authentication
and identity management solutions. Partners in our RSA Secured SecurID-Ready,
Keon-Ready and ClearTrust-Ready programs participate in a rigorous testing and
certification process and are periodically required to re-certify their
offerings. RSA Secured products include directories and databases, provisioning
solutions, enterprise applications, platforms, portals, and web servers.
Collectively, through all of the RSA Secured partner programs, we have
relationships with leading vendors, representing more than 1,000 products that
incorporate our technologies or are interoperable with our products.

In addition, we collaborate with business integration partners in order to
assist customers in identifying opportunities where secure information access
and identity management can help to achieve strategic business goals. Our
partners bring experience to the task of developing, integrating and deploying
solutions for complex enterprise business and technology environments. In
providing complete lifecycle solutions, from planning and architecture design
to deployment, project management and ongoing support, we offer integration
expertise gained from thousands of customer implementations.

SALES AND MARKETING

We have established a multi-channel distribution and sales network to serve the
e-security market. We sell and license our products directly to end users
through our worldwide sales force and through our RSA SecurWorld network of
original equipment manufacturers, or OEMs, value-added resellers, or VARs, and
distributors. In addition, we support our sales efforts through strategic
marketing relationships with other vendors. We are currently in the process of
changing our sales force strategy to dedicate a portion of our direct sales
force to selling our emerging products, such as our RSA ClearTrust and RSA Keon
products. For our more mature
products, such as our RSA SecurID and RSA ACE/Server products, our strategy is
to sell these products primarily through our RSA SecurWorld network of OEMs,
VARs and distributors.

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

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To enhance demand for our products, we have participated in the development of
various industry-specific protocols that incorporate or complement our security
technologies. We also host the industrys largest annual security conference,
the RSA Conference, and participate in other conferences to increase awareness,
education and demand for our products.

CUSTOMERS

We have a broad customer base, and no one end user customer accounted for more
than 5% of our total revenue in 2003, 2002 or 2001. However, one of our
resellers, Tech Data Corporation, accounted for approximately 10% of our total
revenue in 2003. During 2003, we sold our products to an average of
approximately 4,300 customers per quarter, including both new customers and
existing customers to whom we had sold in previous periods. In addition, we
increased our customer base during 2003 by 30% to end the year with
approximately 13,800 customers.

We sell our products to customers in a number of different vertical markets.
We have analyzed approximately 85% of our revenue for the years ended December
31, 2003 and 2002 and determined that the percentage of the analyzed revenue
represented by sales to each of our major vertical markets is as follows:

|                                               |  |      |    |      |  |  |    |  
|---------------------------------------------- |  | ---- | -- | ---- |  |  | -- | -
|Vertical Markets                               |  | 2003 |    | 2002
|                                               |  |      |    |     
|Technology, hardware and software companies    |  |      | 25 | %    |  |  | 22 | %
|Banking and insurance                          |  |      | 21 | %    |  |  | 20 | %
|Professional services                          |  |      | 10 | %    |  |  | 13 | %
|Telecommunications                             |  |      | 11 | %    |  |  | 11 | %
|Healthcare and pharmaceuticals                 |  |      | 10 | %    |  |  | 10 | %
|Manufacturing, distribution and transportation |  |      | 10 | %    |  |  | 10 | %
|Government, federal, state and local           |  |      | 6  | %    |  |  | 7  | %
|Other                                          |  |      | 7  | %    |  |  | 7  | %

As of December 31, 2003, we have sold more than 16 million RSA SecurID
authenticators and licensed our software to thousands of customers worldwide,
including approximately 88% of the Fortune 100 and approximately 66% of the
Fortune 500. Historically, our customers have sought to secure highly
confidential information and have been sophisticated and knowledgeable
purchasers of e-security systems.

MAINTENANCE, SUPPORT AND PROFESSIONAL SERVICES

We maintain a customer support help desk, technical support organization and
professional services group at our headquarters in Bedford, Massachusetts, and
at other locations throughout the world. We offer telephone and Web support
for many of our products 24 hours a day, seven days a week. We also have field
technical support personnel who work directly with our sales force,
distributors and customers. We believe that the quality and the 24 hour, 7 days
a week availability of our maintenance and support organization give us a
competitive advantage over other companies in our industry.

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

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

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

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PRODUCT DEVELOPMENT

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

We continue to work on developing standards-based protocols and solutions that
address the needs of specific market segments and build on our RSA BSAFE
technology.

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

Our product development staff, which works in five development centers
worldwide, engages in software and hardware engineering, testing and quality
assurance, and technical documentation. We also engage outside contractors
where appropriate to supplement our in-house expertise or expedite projects
based on customer or market demand. Research and development expenses were
$53.6 million, $55.1 million and $66.2 million for 2003, 2002 and 2001,
respectively. Our research and development expenses for 2001 include in process
research and development expense of $7.9 million, which we wrote off in
connection with our acquisitions of Securant, Xcert, 3GI and Transindigo.

MANUFACTURING AND SUPPLIERS

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

We distribute our software products electronically or on standard magnetic
diskettes, compact disks and tapes together with documentation, which are
available from many suppliers. We conduct nearly all of our media duplication
in-house.

We contract for the manufacture of RSA SecurID®authenticators with
Flextronics, a global electronic manufacturing services supplier, utilizing the
suppliers plant in China. Flextronics contracts with other suppliers for the
manufacture of various components, such as the batteries and microcontrollers
in the authenticators.

Some components of our hardware authenticators are currently available only
from limited sources. For example, Sanyo Electric Co., Ltd. is our only
supplier for the microcontroller chips contained in our RSA SecurID products,
Flextronics is our only manufacturer for RSA SecurID authenticators, and
Schlumberger is our only manufacturer of smart cards. If we were unable to
obtain a sufficient supply of these or any other components or RSA SecurID
authenticators, then we might be unable to fill customer orders and might have
to expend significant resources to find new suppliers or manufacturers. As a
result, we attempt to maintain a three-month supply in inventory. We believe
that it could take approximately six months to identify and commence production
of suitable replacements for the microcontroller chip used in RSA SecurID
authenticators.

We monitor warranty claims and address defects through our quality and design
processes, which are managed by our product engineering, quality control and
technical support organizations. During 2002 and 2003 our quarterly analysis of
historical failure and defective return rates indicated that certain
authenticators produced between 2000 and 2002 were subject to higher defect and
failure rates. During the last several years, we have increased resources and
initiated new programs to build an expanded family of high performance
authentication solutions. These programs have resulted in the redesign and
re-engineering of authenticator products to improve performance and reliability
by incorporating new microprocessors, electronics, firmware and batteries with
longer life. We will continue to monitor warranty claims and reevaluate our
estimate of warranty and defective return obligations in future periods.

COMPETITION

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



| |  |  | software operating systems suppliers and application software vendors
that offer e-security products or features, either as stand-alone
products or incorporated into their operating systems or applications;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | vendors of hardware authenticators and smart cards competitive with RSA SecurID products;
| | - |  | -----------------------------------------------------------------------------------------
|
| |  |  | biometric security device vendors;                                                       
|
| |  |  | vendors of Web access management solutions;                                              
|
| |  |  | public key infrastructure (PKI) and cryptographic software firms;                        
|
| |  |  | application access providers; and                                                        
|
| |  |  | freeware, i.e., free or low-cost, unpatented e-security technology.                    

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

PROPRIETARY RIGHTS

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

Our 33 issued U.S. patents expire at various dates ranging from 2005 to 2018.
Our 46 foreign patents expire at various dates between 2005 and 2020. We have
also filed patent applications on inventions embodied in new technologies that
we developed and on inventions that may be useful in the field of e-security.
There can be no assurance that any of these applications will result in an
issued patent.

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

GOVERNMENT REGULATION AND EXPORT CONTROLS

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

The Export Administration Regulations of the U.S. Department of Commerce
regulate the export of most commercial products with encryption features.
Under these regulations, encryption products of any key length, including
general purpose encryption toolkits such as our RSA BSAFE products, may be
exported, after a one-time technical review, to non-governmental end-users and
many governmental end-users around the world, except for embargoed countries
and specific prohibited end-users. For some governmental end-users, we are
also required to obtain special Encryption Licensing Arrangements or individual
export licenses that may be issued at the discretion of the Department of
Commerce.

We believe that we have completed the necessary technical reviews of the
products and services we currently export, but new products that we acquire or
develop may require technical review before we can export them. For the export
of some of our products, we are subject to various post-shipment reporting
requirements. However, the export regulations may be modified at any time. In
light of the ongoing discussions regarding anti-terrorism legislation in the
United States Congress, there may be an increased risk that export regulations
may be modified in the future. Modifications to the export regulations could
reduce or eliminate our ability to export some or all of our products from the
United States without a license in the future, which could put us at a
disadvantage in competing for international sales compared to companies located
outside of the United States that would not be subject to these restrictions.

BACKLOG

We consider backlog to be orders for products or services evidenced by an
executed contract which have not been fulfilled as of the end of a fiscal
period. Backlog from sale of products and services was $15.7 million at
December 31, 2003 and $5.9 million at December 31, 2002. We believe that all
backlog orders at December 31, 2003 will be fulfilled during 2004.

EMPLOYEES

At January 31, 2004, we employed 1,049 employees. Of these employees,
approximately 392 were involved in sales and marketing, 327 were involved in
research and development, 122 in professional services, customer service and
support, 99 in administrative,

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human resources and finance, 57 in information
technology, and 52 in production. None of our employees are covered by
collective bargaining agreements. We believe that our relationships with our
employees are good.

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

Information on our e-Security Solutions segment and geographical areas may be
found in Note 13 of the Notes to Consolidated Financial Statements.




ITEM 2. PROPERTIES

Our principal administrative, sales and marketing, research and development and
support headquarter facilities aggregate approximately 328,000 square feet of
office space and are located in Bedford, Massachusetts, under non-cancelable
fifteen year leases expiring in December 2017. Our former headquarter
facilities aggregate approximately 203,000 square feet of office space and are
located in Bedford, Massachusetts, under non-cancelable ten year leases
expiring in 2009. We lease approximately 58,000 square feet of office space
for research and development and sales and marketing in San Mateo, California,
under non-cancelable ten-year leases expiring in 2008, and administration and
manufacturing facilities in Shannon, Ireland, aggregating approximately 18,750
square feet, which serves as our distribution center for international sales.
We also lease facilities for administration, field sales, research and
development and customer support throughout the United States, Canada, Asia,
Australia and Europe. In addition, we own an approximately 31,000 square foot
office building in Bracknell, United Kingdom, which is used for our United
Kingdom and European operations.

We are actively looking to sublease our former headquarters and other excess
facilities that aggregate approximately 190,000 square feet of office space.
During 2002 and 2001, we recorded restructuring charges including approximately
$53.7 million representing lease payments due under excess facilities lease
agreements, net of estimated sublease income, impaired leasehold improvements
and furniture and fixtures, and other associated facilities expense. Based upon
current economic and real estate market conditions, we expect to be able to
enter into sublease agreements for substantially all of our excess facilities
within the next two years. We have existing sublet agreements with third
parties for approximately 180,000 square feet of our excess facilities at
various locations, which expire at various times through June 2009.




ITEM 3. LEGAL PROCEEDINGS

On or about February 2, 2001, Leon Stambler filed a complaint for patent
infringement in U.S. District Court for the District of Delaware against RSA
Security, VeriSign, Inc., First Data Corporation, Openwave Systems Inc., and
Omnisky Corporation, Case Number 01-0065. In his complaint, Mr. Stambler
alleged that certain products marketed by each of the defendants infringed
various patents that he owns, and he sought unspecified damages as well as a
preliminary and permanent injunction enjoining the defendants from infringing
the claims asserted. The trial took place in March 2003, and the jury
determined that our products did not infringe Mr. Stamblers patents. On April
17, 2003, the court entered final judgment in our favor on all claims of
non-infringement. In May 2003, Mr. Stambler filed a motion asking the court to
set aside the jurys verdict, and in November 2003, the court denied Mr.
Stamblers motion. On or about December 8, 2003, Mr. Stambler filed a notice of
appeal to the United States Court of Appeals. We plan to vigorously defend the
appeal. We believe that the final disposition of this matter will not have a
material adverse effect on our continuing operations and consolidated financial
position.

On or about December 20, 2001, France Telecom and Telediffusion de France
(FT) filed a Request for Arbitration with the International Court of
Arbitration. FT claims that we breached a license agreement with FT and sought
unspecified damages, including a payment in excess of $110.0 million plus the
legal fees and other costs associated with the arbitration. The arbitration
took place in June 2003, and we expect the arbitrator to make a final, binding
decision in the first half of 2004. We believe that FTs
claims are without merit. In a related matter, FT has also filed a patent
infringement suit in Delaware against Novell, Inc., one of our licensees. In
August 2002, we signed a letter agreement with Novell agreeing that if a court
requires Novell to pay FT damages, we will reimburse Novell for 50% of the
damages, up to a maximum payment of $2.5 million by us. If the damages payable
by Novell exceed $5.0 million, then the indemnification provisions of our
license agreement with Novell will govern our indemnification obligations.
Although we believe that FTs claims against Novell are without merit, we
cannot predict the ultimate outcome of this matter. However, we believe that
neither the disposition of our arbitration with FT nor the disposition of the
litigation between Novell and FT will have a material adverse effect on our
continuing operations and consolidated financial position.

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

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

None.

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PART II




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

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

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

|               |  |      |       |     |  |   |       | 
|-------------- |  | ---- | ----- | --- |  | - | ----- | 
|2003           |  | High |       | Low
|               |  |      |       |    
|First Quarter  |  | $    | 8.25  |     |  | $ | 4.79  | 
|Second Quarter |  | $    | 11.86 |     |  | $ | 6.60  | 
|Third Quarter  |  | $    | 15.85 |     |  | $ | 10.43 | 
|Fourth Quarter |  | $    | 17.31 |     |  | $ | 11.65 | 

There were 454 stockholders of record of our common stock as of February 23,
2004. We estimate that we have a total of approximately 68,000 stockholders,
including stockholders who hold their shares in street name.

We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain earnings, if any, to support our growth strategy and
do not anticipate paying cash dividends in the foreseeable future. Payment of
future dividends, if any, will be at the discretion of our Board of Directors
after taking into account various factors, including our financial condition,
operating results, current and anticipated cash needs and plans for expansion.
In addition, until all of the 7% convertible subordinated debentures that we
issued in October and November 2001 have been converted or redeemed, we may not
declare or pay cash dividends on our capital stock unless we have the prior
consent of the holders of at least 60% of the outstanding principal amount of
the debentures.

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ITEM 6. SELECTED FINANCIAL DATA

(in thousands, except per share data)

|                                                          |                                                          |                                       |         |         |                          |         |          |         |        |         |         |         |        |         |         |         |        |         |         |         |        |         | 
|--------------------------------------------------------- | -------------------------------------------------------- | ------------------------------------- | ------- | ------- | ------------------------ | ------- | -------- | ------- | ------ | ------- | ------- | ------- | ------ | ------- | ------- | ------- | ------ | ------- | ------- | ------- | ------ | ------- | 
|                                                          |                                                          |                                       |         |         | Years Ended December 31,
|                                                          |                                                          |                                       |         |         |                         
|                                                          |                                                          |                                       |         |         | 2003                     |         | 2002     |         | 2001   |         | 2000    |         | 1999  
|                                                          |                                                          |                                       |         |         |                          |         |          |         |        |         |         |         |       
|Statement of Operations Data                              |                                                          |                                       |         |         |                          |         |          |         |        |         |         |         |        |         |         |         |        |         |         |        
|Revenue                                                   |                                                          |                                       |         |         |                          |         |          |         |        |         |         |         |        |         |         |         |        |         |         |        
|                                                          | Products                                                 |                                       | $       | 193,664 |                          |         | $        | 168,954 |        |         | $       | 222,382 |        |         | $       | 238,027 |        |         | $       | 190,736 |       
|                                                          | Maintenance and professional services                    |                                       |         | 66,202  |                          |         |          | 63,130  |        |         |         | 60,338  |        |         |         | 42,164  |        |         |         | 27,388  |       
|                                                          |                                                          |                                       |         |         |                          |         |          |         |        |         |         |         |        |         |         |         |        |         |         |         |       
|Total revenue                                             |                                                          |                                       | 259,866 |         |                          |         | 232,084  |         |        |         | 282,720 |         |        |         | 280,191 |         |        |         | 218,124 |        
|                                                          |                                                          |                                       |         |         |                          |         |          |         |        |         |         |         |        |         |         |         |        |         |         |         |       
|Cost of revenue                                           |                                                          |                                       |         |         |                          |         |          |         |        |         |         |         |        |         |         |         |        |         |         |        
|                                                          | Products                                                 |                                       |         | 32,336  |                          |         |          | 35,772  |        |         |         | 38,226  |        |         |         | 33,158  |        |         |         | 30,813  |       
|                                                          | Maintenance and professional services                    |                                       |         | 20,877  |                          |         |          | 22,207  |        |         |         | 28,456  |        |         |         | 21,825  |        |         |         | 14,348  |       
|                                                          | Impairment of technology related
intangible assets (1)   |                                       |         |        |                          |         |          | 14,333  |        |         |         |        |        |         |         |        |        |         |         |        |       
|                                                          | Amortization of technology related
intangible assets (1) |                                       |         |        |                          |         |          | 6,587   |        |         |         | 3,281   |        |         |         |        |        |         |         |        |       
|                                                          |                                                          |                                       |         |         |                          |         |          |         |        |         |         |         |        |         |         |         |        |         |         |         |       
|Total cost of revenue                                     |                                                          |                                       | 53,213  |         |                          |         | 78,899   |         |        |         | 69,963  |         |        |         | 54,983  |         |        |         | 45,161  |        
|                                                          |                                                          |                                       |         |         |                          |         |          |         |        |         |         |         |        |         |         |         |        |         |         |         |       
|Gross profit                                              |                                                          |                                       | 206,653 |         |                          |         | 153,185  |         |        |         | 212,757 |         |        |         | 225,208 |         |        |         | 172,963 |        
|Costs and expenses                                        |                                                          |                                       |         |         |                          |         |          |         |        |         |         |         |        |         |         |         |        |         |         |        
|                                                          | Research and development                                 |                                       |         | 53,629  |                          |         |          | 55,061  |        |         |         | 58,345  |        |         |         | 45,032  |        |         |         | 37,640  |       
|                                                          | Marketing and selling                                    |                                       |         | 94,298  |                          |         |          | 100,673 |        |         |         | 122,915 |        |         |         | 102,788 |        |         |         | 89,943  |       
|                                                          | General and administrative                               |                                       |         | 33,776  |                          |         |          | 30,256  |        |         |         | 39,127  |        |         |         | 35,409  |        |         |         | 27,261  |       
|                                                          | Restructurings                                           |                                       |         |        |                          |         |          | 56,036  |        |         |         | 19,956  |        |         |         | (2,079  | )      |         |         | 11,350  |       
|                                                          | Impairment of intangible assets (1)                      |                                       |         |        |                          |         |          | 4,807   |        |         |         |        |        |         |         |        |        |         |         |        |       
|                                                          | Amortization of intangible assets (1)                    |                                       |         |        |                          |         |          | 3,337   |        |         |         | 11,171  |        |         |         |        |        |         |         |        |       
|                                                          | In process research and development                      |                                       |         |        |                          |         |          |        |        |         |         | 7,891   |        |         |         |        |        |         |         |        |       
|                                                          |                                                          |                                       |         |         |                          |         |          |         |        |         |         |         |        |         |         |         |        |         |         |         |       
|                                                          |                                                          |                                       | Total   |         |                          | 181,703 |          |         |        | 250,170 |         |         |        | 259,405 |         |         |        | 181,150 |         |         |        | 166,194 | 
|                                                          |                                                          |                                       |         |         |                          |         |          |         |        |         |         |         |        |         |         |         |        |         |         |         |       
|Income (loss) from operations                             |                                                          |                                       | 24,950  |         |                          |         | (96,985  | )       |        |         | (46,648 | )       |        |         | 44,058  |         |        |         | 6,769   |        
|Interest (expense) income and other                       |                                                          |                                       | (7,962  | )       |                          |         | (8,778   | )       |        |         | 5,860   |         |        |         | 12,864  |         |        |         | 10,007  |        
|Income (loss) from investing activities                   |                                                          |                                       | 1,568   |         |                          |         | (30,937  | )       |        |         | 40,836  |         |        |         | 272,853 |         |        |         | 285,952 |        
|                                                          |                                                          |                                       |         |         |                          |         |          |         |        |         |         |         |        |         |         |         |        |         |         |         |       
|Income (loss) before provision (benefit)
for income taxes |                                                          |                                       | 18,556  |         |                          |         | (136,700 | )       |        |         | 48      |         |        |         | 329,775 |         |        |         | 302,728 |        
|Provision (benefit) for income taxes                      |                                                          |                                       | 3,720   |         |                          |         | (39,876  | )       |        |         | 2,555   |         |        |         | 124,012 |         |        |         | 118,982 |        
|Minority interests                                        |                                                          |                                       |        |         |                          |         |         |         |        |         |        |         |        |         |        |         |        |         | 16      |        
|                                                          |                                                          |                                       |         |         |                          |         |          |         |        |         |         |         |        |         |         |         |        |         |         |         |       
|Net income (loss)                                         |                                                          | $                                     | 14,836  |         |                          | $       | (96,824  | )       |        | $       | (2,507  | )       |        | $       | 205,763 |         |        | $       | 183,762 |        
|                                                          |                                                          |                                       |         |         |                          |         |          |         |        |         |         |         |        |         |         |         |        |         |         |         |       
|Basic earnings (loss) per share (2)                       |                                                          |                                       |         |         |                          |         |          |         |        |         |         |         |        |         |         |         |        |         |         |        
|                                                          |                                                          | Per share amount                      |         | $       | 0.25                     |         |          | $       | (1.71  | )       |         | $       | (0.04  | )       |         | $       | 3.50   |         |         | $       | 3.13   |        
|                                                          |                                                          |                                       |         |         |                          |         |          |         |        |         |         |         |        |         |         |         |        |         |         |         |       
|                                                          |                                                          | Weighted average shares               |         |         | 58,758                   |         |          |         | 56,621 |         |         |         | 56,259 |         |         |         | 58,051 |         |         |         | 58,757 |        
|                                                          |                                                          |                                       |         |         |                          |         |          |         |        |         |         |         |        |         |         |         |        |         |         |         |       
|Diluted earnings (loss) per share (2)                     |                                                          |                                       |         |         |                          |         |          |         |        |         |         |         |        |         |         |         |        |         |         |        
|                                                          |                                                          | Per share amount                      |         | $       | 0.24                     |         |          | $       | (1.71  | )       |         | $       | (0.04  | )       |         | $       | 3.21   |         |         | $       | 2.92   |        
|                                                          |                                                          |                                       |         |         |                          |         |          |         |        |         |         |         |        |         |         |         |        |         |         |         |       
|                                                          |                                                          | Weighted average shares               |         |         | 58,758                   |         |          |         | 56,621 |         |         |         | 56,259 |         |         |         | 58,051 |         |         |         | 58,757 |        
|                                                          |                                                          | Effect of dilutive equity instruments |         |         | 3,546                    |         |          |         |       |         |         |         |       |         |         |         | 5,976  |         |         |         | 4,213  |        
|                                                          |                                                          |                                       |         |         |                          |         |          |         |        |         |         |         |        |         |         |         |        |         |         |         |       
|                                                          |                                                          | Adjusted weighted average shares      |         |         | 62,304                   |         |          |         | 56,621 |         |         |         | 56,259 |         |         |         | 64,027 |         |         |         | 62,970 |        
|                                                          |                                                          |                                       |         |         |                          |         |          |         |        |         |         |         |        |         |         |         |        |         |         |         |       

|                                                 |  |              |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |           | 
|------------------------------------------------ |  | ------------ | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | --------- | 
|                                                 |  | December 31,
|                                                 |  |             
|                                                 |  | 2003         |         | 2002 |  | 2001 |         | 2000 |  | 1999
|                                                 |  |              |         |      |  |      |         |      |  |     
|Balance Sheet Data                               |  |              |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |           | 
|Cash, cash equivalents and
marketable securities |  | $            | 207,323 |      |  | $    | 103,030 |      |  | $    | 63,120  |  |  | $ | 335,102 |  |  | $ | 1,383,281 | 
|Working capital                                  |  |              | 70,394  |      |  |      | 94,049  |      |  |      | 69,657  |  |  |   | 304,780 |  |  |   | 552,420   | 
|Total assets                                     |  |              | 529,577 |      |  |      | 482,848 |      |  |      | 529,677 |  |  |   | 599,220 |  |  |   | 1,520,901 | 
|Long term obligations                            |  |              | 25,907  |      |  |      | 105,394 |      |  |      | 81,670  |  |  |   |        |  |  |   |          | 
|Stockholders equity                             |  |              | 308,775 |      |  |      | 263,434 |      |  |      | 353,413 |  |  |   | 481,004 |  |  |   | 611,024   | 

(1)  Total cost of revenue, gross profit and total operating expenses reflect
the reclassification of amortization of technology related intangible assets
from operating expense to cost of revenue of $6,587 and $3,281 for the years
ended December 31, 2002 and 2001,

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respectively, and also reflect the reclassification of impairment of technology
related intangible assets of $14,333 from operating to cost of revenue expense
for the year ended December 31, 2002.

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

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

We make statements in this Report that are forward looking, that is, statements
that are not historical facts but that convey projections about the future. For
example, statements containing the words believes, anticipates, plans,
expects, estimates, intends, may, projects, will, would, and
similar expressions may be forward-looking statements. However, we caution
investors not to place undue reliance on any forward-looking statements in this
Report because these statements speak only as of the date when made.
Furthermore, we are not obligated to publicly update any forward-looking
statements, whether as a result of new information, future events or otherwise.
There are a number of factors that could cause our actual results to differ
materially from those indicated by these forward-looking statements, including
without limitation the factors described below under the caption Certain
Factors That May Affect Future Results.

Overview

RSA Security Inc. helps organizations protect their information and manage
identities of the people and applications accessing and exchanging information.
With thousands of customers around the globe, we provide interoperable
solutions for establishing online identities, access rights and privileges for
people, applications and devices. We sell our two-factor user authentication,
certificate processing, Web access management and encryption products and
solutions to corporate enterprise users seeking turnkey security solutions, and
to original equipment manufacturers, developers and corporate enterprise users
seeking software development components for embedding security in a range of
software applications or hardware devices.

We derive our operating revenue primarily from two distinct product groups:
Enterprise solutions, which includes RSA SecurID® authenticators, RSA
ACE/Server® software, RSA ClearTrust® software, RSA Keon® software, and
maintenance and professional services associated with those products; and
Developer solutions, which includes RSA BSAFE® encryption software and protocol
products, RSA Keon components, and maintenance and professional services
associated with those products.

We believe sales of our products will be driven by the trend of enterprises
permitting remote access to internal resources and Web-enabling of existing
applications. Sales of our RSA SecurID authenticator products continue to
generate substantial revenue for us, while our less mature Enterprise software
products are building revenue and market share. We believe the decrease in the
number of technology companies funding development and the availability of
free, open source products that compete with our RSA BSAFE product line
continue to put pressure on our Developer solutions revenue. We believe our
product line synergies and strength of our customer base create opportunities
to sell additional products to existing customers. However, information
technology budgets remain constrained, which has had and could continue to have
a direct effect on the sale of our products.

Our Enterprise solutions customers typically place an initial order for a
limited number of users, for either our RSA SecurID authenticators or any of
our software products, and deploy additional authenticators or software
licenses as their need for our products within their enterprise increases.
Authenticators have a programmed life of two to five years, and as they expire,
our customers typically place additional orders for replacement authenticators.
We typically base our RSA ACE/Server, RSA Keon and RSA ClearTrust software
license fees on the number of users authorized under each customers license.
In most cases, customers will also enter into an annual customer support
agreement for their software license at the time of initial purchase and renew
this support agreement annually. Our support agreement entitles our customers
to license software upgrades and telephone support.

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

Our professional services group provides customers with project management,
architecture and design, physical deployment, custom development, education and
practitioner certification services. Customers typically pay for professional
services either at a fixed price or at hourly or daily rates for the time it
takes us to complete the project.

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

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RSA SecurID authenticators. We are currently working to establish new supplier
relationships in order to increase the number of vendors from which we buy our
authenticators and authenticator components, in order to reduce our
vulnerability to potential supply problems.

We distribute our products through direct sales to end user customers, and
through indirect sales, including sales to resellers and distributors that we
ship directly to the end user customer and sales to distributors for stocking
purposes. For the year ended December 31, 2003, approximately 51% of our
revenue was from sales to distributors shipped directly to the end user and
resellers, approximately 41% of our revenue was from direct sales to end user
customers, and approximately 8% of our revenue was from sales to stocking
distributors. Our stocking distributors provide us with inventory level and
point of sale reports on a monthly basis. Based upon these reports, we
estimate that our stocking distributors typically hold approximately four weeks
of inventory on hand in the distribution channel.

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

Prior to January 1, 2003, we reported two segments, e-Security Solutions and
RSA Capital. We have modified our segment disclosure to reflect the divestiture
of substantially all of our investments held in RSA Capital and the reduction
of resources allocated to RSA Capital. Accordingly, we began reporting one
segment, the e-Security Solutions segment, after January 1, 2003. We have
revised our segment disclosure to conform to the current period presentation.
Information on our segment may be found in Note 13 of the Notes to Consolidated
Financial Statements.

Application of Critical Accounting Policies and Estimates

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

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

Revenue Recognition We derive our revenue primarily from two sources: sales
of products, including hardware and software licenses, and services, including
maintenance, support and professional services. Our management must make and
use judgments and estimates in connection with the revenue recognized in any
reporting period. We recognize revenue from the sale of products when
persuasive evidence of an arrangement exists, delivery has occurred, the fee is
fixed or determinable, and collection is considered probable. We reduce
revenue by provisions for estimated sales returns. The amount and timing of our
revenue for any period may materially differ if our management made different
judgments or utilized different estimates in establishing our allowance for
sales returns. An increase in our allowance for sales returns would reduce our
revenue in the period for which the increase is recorded.

For all sales, we use a binding contract, purchase order or another form of
documented agreement as evidence of an arrangement with the customer. Sales to
our distributors are evidenced by a master agreement governing the
relationship, together with binding purchase orders on a
transaction-by-transaction basis. We consider delivery to occur when we ship
the product, so long as title and risk of loss have passed to the customer.

At the time of a transaction, we assess whether the sale amount is fixed or
determinable based upon the terms of the documented agreement. If we determine
the fee is not fixed or determinable, we recognize revenue when the fee is
fixed. We assess if collection is probable based on a number of factors,
including past transaction history with the customer and the creditworthiness
of the customer.

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If we determine that collection is not probable, we do not record revenue until
such time as collection becomes probable, which is generally upon the receipt
of cash.

We do not generally include acceptance provisions in arrangements with
customers; however, if an arrangement includes an acceptance provision, we
recognize revenue upon the customers acceptance of the product, which occurs
upon the earlier of receipt of a written customer acceptance or expiration of
the acceptance period.

In accordance with Statement of Financial Accounting Standards (SFAS) No. 48,
Revenue Recognition when Right of Return Exists, we recognize revenue upon
shipment of product to stocking distributors who have only limited return
rights, and record a sales return reserve to provide for estimated product
returns. We estimate product returns from distributors based upon historical
experience.

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

We defer maintenance service revenue, whether sold separately or as part of a
multiple element arrangement, and recognize it ratably over the term of the
maintenance contract, generally twelve months.

We recognize revenue allocated to professional service elements as the services
are performed. When the customization is essential to the functionality of the
licensed software, then both the software license and professional services
revenue are recognized under the percentage of completion method, which
requires revenue to be recognized as a percentage of the project completed. We
recognize revenue and gross profit using labor hours as an input measure of
progress to completion on these arrangements.

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

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

Allowance for Warranty Obligations Our standard practice is to provide a
warranty on all RSA SecurID hardware authenticators for the customer selected
programmed life of the authenticator (generally two to five years) and to
replace any defective authenticators (other than authenticators damaged by a
users abuse or alteration) free of charge. We sell our other products to
customers with a warranty for product defects for a specified period, generally
ninety days. We provide reserves for warranty obligations based on historical
failure and defective return rates, and include these costs as a component of
product cost of revenue. We reevaluate the estimate of warranty and defective
return obligations, including the assumptions about estimated failure and
return rates, each quarter.

During 2002 and 2003, our analysis of historical failure and defective return
rates indicated that certain authenticators produced between 2000 and 2002 were
subject to higher defect and failure rates than we had previously experienced.
Accordingly, we increased our provisions for warranty obligations by $4.6
million and $2.8 million for the years ended December 31, 2003 and 2002,
respectively. We will continue to monitor warranty claims and reevaluate our
estimate of warranty and defective return obligations in future periods, which
may result in our recording additional warranty expense. Actual warranty
returns could differ from the allowance for warranty obligations recorded.

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We monitor warranty claims and address defects through our quality and design
processes, which are managed by our product engineering, quality control and
technical support organizations. During the last several years, we have
increased programs and initiated new programs to build an expanded family of
high performance authentication solutions. These programs have resulted in the
redesign and re-engineering of authenticator products to improve performance
and reliability by incorporating new microprocessors, electronics, firmware and
batteries with longer life.

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

Management judgment is required in determining our provision for income taxes,
our deferred tax assets and liabilities and any valuation allowance recorded
against deferred tax assets. We have recorded a valuation allowance of $25.4
million as of December 31, 2003 due to uncertainties related to our ability to
utilize some of our deferred tax assets, primarily consisting of acquisition
related net operating losses carried forward. We base the valuation allowance
on our estimates of taxable income by jurisdiction in which we operate and the
period over which our deferred tax assets will be recoverable. If actual
results differ from these estimates or we adjust these estimates in future
periods, we may need to adjust our valuation allowance, which could materially
impact our consolidated financial position and results of operations.

Valuation of Goodwill and Other Intangible Assets In assessing the
recoverability of our intangible assets, we must make assumptions regarding
estimated future cash flows and earnings and other factors used to determine
the fair value of the respective assets. We will record an impairment charge in
the amount by which the carrying value of the assets exceeds their fair value.
We generally determine fair value based on estimated discounted future cash
flows. If these estimates or their related assumptions change in the future,
we may be required to record impairment charges against these assets in the
reporting period in which the impairment is determined. Any such impairment
charge could be significant and could have a material adverse effect on our
consolidated financial position and results of operations. We perform an annual
test for impairment of our goodwill as of November 30 of each year and, if
events or circumstances occur that would more likely than not reduce the fair
value of the goodwill below its carrying amount, will perform an interim
impairment test. We completed the required annual goodwill impairment test as
of November 30, 2003, by comparing the carrying amount of the enterprise to the
estimated fair value of the enterprise. Estimated fair value of the enterprise
was determined based upon the market multiple valuation method, which requires
that we utilize estimates of future cash flows, revenue and earnings. As of
November 30, 2003, the fair value of the enterprise was greater than the
carrying amount of the enterprise. Therefore, our annual goodwill impairment
test performed as of November 30, 2003 did not result in an impairment of our
goodwill. At December 31, 2003, we had approximately $189.3 million of
goodwill, which accounted for approximately 36% of our total assets. Any
goodwill impairment test could result in a decrease to the carrying value of
goodwill and could have a material effect on our results of operations and
consolidated financial position.

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

We continue to monitor and assess our facility obligations, real estate markets
and our operating expenses. As a result of these ongoing assessments, during
2003 we revised estimates used in previously recorded restructuring charges.
These revisions resulted in no net change to our restructuring liability at
December 31, 2003. We revised estimates included in facility exit charges
based upon the terms of finalized subleases obtained during 2003, due to lower
than anticipated operating costs and other direct costs associated with certain
exited facilities, and due to revisions in anticipated headcount growth. These
revised estimates of excess facility costs resulted in a net increase to
facility exit costs of $0.8 million at December 31, 2003. In addition, we
reduced our severance restructuring reserve by $0.6 million at December 31,
2003 when we determined our remaining severance and other outplacement costs
were lower than originally estimated. We also reduced our restructuring
reserve of costs associated with the liquidation of our Swedish development
operations and the sale of certain Swedish assets by $0.2 million at December
31, 2003 when we determined we had no legal and consulting costs remaining in
connection with this transaction.

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We will continue to monitor and asses our facility obligations, real estate
markets and our operating expenses. If the assumptions for the estimates used
in our restructuring reserve change due to changes in the real estate and
sublease markets, or due to the terms of sublease agreements that we have
obtained, the ultimate restructuring expenses for these facilities could vary
by material amounts, and could cause us to record additional or revise
previously recorded restructuring charges in future reporting periods which
could have a material effect on our results of operations and consolidated
position.

New Accounting Pronouncements-Interpretation No. 46  In January 2003, the
Financial Accounting Standards Board (FASB) issued Interpretation No. 46,
Consolidation of Variable Interest Entities, which was revised by FIN 46R
issued in December 2003 (FIN 46). This interpretation of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, addresses consolidation
by business enterprises of variable interest entities (VIE) that either: do
not have sufficient equity investment at risk to permit the entity to finance
its activities without additional subordinated financial support, or for which
the equity investors lack an essential characteristic of a controlling
financial interest. FIN 46 also sets forth certain disclosure requirements
regarding interests in VIE that are deemed significant, even if consolidation
is not required. FIN 46 applies to interim periods ending after March 15, 2004
We believe the adoption of FIN 46 will not require the consolidation of our
investment in Crosby and therefore will not have a significant impact on our
consolidated financial position or results of operations.

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Results of Operations

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

|                                                          |                                                    |                                                          |       |                          |      |      |       |      |      |   |       |      |      |  
|--------------------------------------------------------- | -------------------------------------------------- | -------------------------------------------------------- | ----- | ------------------------ | ---- | ---- | ----- | ---- | ---- | - | ----- | ---- | ---- | -
|                                                          |                                                    |                                                          |       | Years Ended December 31,
|                                                          |                                                    |                                                          |       |                         
|                                                          |                                                    |                                                          |       | 2003                     |      | 2002 |       | 2001
|                                                          |                                                    |                                                          |       |                          |      |      |       |     
|Revenue                                                   |                                                    |                                                          |       |                          |      |      |       |      |      |   |       |     
|                                                          |                                                    | Products                                                 |       |                          | 74.5 | %    |       |      | 72.8 | % |       |      | 78.7 | %
|                                                          |                                                    | Maintenance and professional services                    |       |                          | 25.5 |      |       |      | 27.2 |   |       |      | 21.3 |  
|                                                          |                                                    |                                                          |       |                          |      |      |       |      |      |   |       |      |      |  
|Total revenue                                             |                                                    |                                                          | 100.0 |                          |      |      | 100.0 |      |      |   | 100.0 |     
|                                                          |                                                    |                                                          |       |                          |      |      |       |      |      |   |       |      |      |  
|Cost of revenue                                           |                                                    |                                                          |       |                          |      |      |       |      |      |   |       |     
|                                                          |                                                    | Products                                                 |       |                          | 12.5 |      |       |      | 15.4 |   |       |      | 13.5 |  
|                                                          |                                                    | Maintenance and professional services                    |       |                          | 8.0  |      |       |      | 9.6  |   |       |      | 10.1 |  
|                                                          |                                                    | Impairment of technology related intangible assets (1)   |       |                          |     |      |       |      | 6.2  |   |       |      |     |  
|                                                          |                                                    | Amortization of technology related intangible assets (1) |       |                          |     |      |       |      | 2.8  |   |       |      | 1.1  |  
|                                                          |                                                    |                                                          |       |                          |      |      |       |      |      |   |       |      |      |  
|Total cost of revenue                                     |                                                    |                                                          | 20.5  |                          |      |      | 34.0  |      |      |   | 24.7  |     
|                                                          |                                                    |                                                          |       |                          |      |      |       |      |      |   |       |      |      |  
|Gross margin                                              |                                                    |                                                          | 79.5  |                          |      |      | 66.0  |      |      |   | 75.3  |     
|Costs and expenses                                        |                                                    |                                                          |       |                          |      |      |       |      |      |   |       |     
|                                                          | Research and development                           |                                                          |       | 20.6                     |      |      |       | 23.7 |      |   |       | 20.6 |     
|                                                          | Marketing and selling                              |                                                          |       | 36.3                     |      |      |       | 43.4 |      |   |       | 43.5 |     
|                                                          | General and administrative                         |                                                          |       | 13.0                     |      |      |       | 13.1 |      |   |       | 13.8 |     
|                                                          | Restructurings                                     |                                                          |       |                         |      |      |       | 24.1 |      |   |       | 7.1  |     
|                                                          | Impairment of intangible assets (1)                |                                                          |       |                         |      |      |       | 2.1  |      |   |       |     |     
|                                                          | Amortization of goodwill and intangible assets (1) |                                                          |       |                         |      |      |       | 1.4  |      |   |       | 4.0  |     
|                                                          | In process research and development                |                                                          |       |                         |      |      |       |     |      |   |       | 2.8  |     
|                                                          |                                                    |                                                          |       |                          |      |      |       |      |      |   |       |      |      |  
|Total                                                     |                                                    |                                                          | 69.9  |                          |      |      | 107.8 |      |      |   | 91.8  |     
|Income (loss) from operations                             |                                                    |                                                          | 9.6   |                          |      |      | (41.8 | )    |      |   | (16.5 | )   
|Interest (expense) income and other                       |                                                    |                                                          | (3.1  | )                        |      |      | (3.8  | )    |      |   | 2.1   |     
|Income (loss) from investing activities                   |                                                    |                                                          | 0.6   |                          |      |      | (13.3 | )    |      |   | 14.4  |     
|                                                          |                                                    |                                                          |       |                          |      |      |       |      |      |   |       |      |      |  
|Income (loss) before provision (benefit) for income taxes |                                                    |                                                          | 7.1   |                          |      |      | (58.9 | )    |      |   | 0.0   |     
|Provision (benefit) for income taxes                      |                                                    |                                                          | 1.4   |                          |      |      | (17.2 | )    |      |   | 0.9   |     
|                                                          |                                                    |                                                          |       |                          |      |      |       |      |      |   |       |      |      |  
|Net income (loss)                                         |                                                    |                                                          | 5.7   | %                        |      |      | (41.7 | )%   |      |   | (0.9  | )%  
|                                                          |                                                    |                                                          |       |                          |      |      |       |      |      |   |       |      |      |  

(1)  Total cost of revenue, gross margin and total operating expenses reflect
the reclassification of amortization of technology related intangible assets
from operating expense to cost of revenue of $6.6 million and $3.3 million for
the years ended December 31, 2002 and 2001, respectively, and also reflects the
reclassification of impairment of technology related intangible assets of $14.3
million from operating to cost of revenue expense for the year ended December
31, 2002.

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2003 Compared with 2002

Revenue

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

|                |                                       |         |                          |            |      |         |            |            |   |            |   |       |  |  |  |       |   |  |  |       |   
|--------------- | ------------------------------------- | ------- | ------------------------ | ---------- | ---- | ------- | ---------- | ---------- | - | ---------- | - | ----- |  |  |  | ----- | - |  |  | ----- | --
|                |                                       |         | Years Ended December 31, |            |      |         |           
|                |                                       |         |                          |            |      |         |           
|                |                                       |         | 2003                     |            | 2002 |         | Percentage
|                |                                       |         |                          |            |      |         | Increase  
|($ in millions) |                                       | Revenue |                          | Percentage |      | Revenue |            | Percentage |   | (Decrease)
|                |                                       |         |                          |            |      |         |            |            |   |           
|Product group:  |                                       |         |                          |            |      |         |            |            |   |            |   |       |  |  |  |       |   |  |  |      
|                | Enterprise solutions                  |         | $                        | 235.8      |      |         |            | 90.7       | % |            | $ | 204.7 |  |  |  | 88.2  | % |  |  | 15.2  | % 
|                | Developer solutions                   |         |                          | 24.1       |      |         |            | 9.3        | % |            |   | 27.4  |  |  |  | 11.8  | % |  |  | (12.0 | )%
|                |                                       |         |                          |            |      |         |            |            |   |            |   |       |  |  |  |       |   |  |  |      
|                | Total                                 |         | $                        | 259.9      |      |         |            | 100.0      | % |            | $ | 232.1 |  |  |  | 100.0 | % |  |  | 12.0  | % 
|                |                                       |         |                          |            |      |         |            |            |   |            |   |       |  |  |  |       |   |  |  |      
|Product type:   |                                       |         |                          |            |      |         |            |            |   |            |   |       |  |  |  |       |   |  |  |      
|                | Authenticators                        |         | $                        | 129.8      |      |         |            | 49.9       | % |            | $ | 107.8 |  |  |  | 46.5  | % |  |  | 20.4  | % 
|                | Software products                     |         |                          | 63.9       |      |         |            | 24.6       | % |            |   | 61.2  |  |  |  | 26.3  | % |  |  | 4.4   | % 
|                | Maintenance and professional
services |         |                          | 66.2       |      |         |            | 25.5       | % |            |   | 63.1  |  |  |  | 27.2  | % |  |  | 4.9   | % 
|                |                                       |         |                          |            |      |         |            |            |   |            |   |       |  |  |  |       |   |  |  |      
|                | Total                                 |         | $                        | 259.9      |      |         |            | 100.0      | % |            | $ | 232.1 |  |  |  | 100.0 | % |  |  | 12.0  | % 
|                |                                       |         |                          |            |      |         |            |            |   |            |   |       |  |  |  |       |   |  |  |      
|Product line:   |                                       |         |                          |            |      |         |            |            |   |            |   |       |  |  |  |       |   |  |  |      
|                | Authentication products               |         | $                        | 223.4      |      |         |            | 86.0       | % |            | $ | 197.7 |  |  |  | 85.2  | % |  |  | 13.0  | % 
|                | Encryption products                   |         |                          | 24.0       |      |         |            | 9.2        | % |            |   | 26.3  |  |  |  | 11.3  | % |  |  | (8.7  | )%
|                | Web access management products        |         |                          | 12.5       |      |         |            | 4.8        | % |            |   | 8.1   |  |  |  | 3.5   | % |  |  | 54.3  | % 
|                |                                       |         |                          |            |      |         |            |            |   |            |   |       |  |  |  |       |   |  |  |      
|                | Total                                 |         | $                        | 259.9      |      |         |            | 100.0      | % |            | $ | 232.1 |  |  |  | 100.0 | % |  |  | 12.0  | % 
|                |                                       |         |                          |            |      |         |            |            |   |            |   |       |  |  |  |       |   |  |  |      

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

|                 |  |                          |       |            |  |            |       |            |  |          |       |  |  |  |       |   |  |  |      |  
|---------------- |  | ------------------------ | ----- | ---------- |  | ---------- | ----- | ---------- |  | -------- | ----- |  |  |  | ----- | - |  |  | ---- | -
|                 |  | Years Ended December 31, |       |            |  |           
|                 |  |                          |       |            |  |           
|                 |  | 2003                     |       | 2002       |  |            |       |           
|                 |  |                          |       |            |  | Percentage
|($ in millions)  |  | Revenue                  |       | Percentage |  | Revenue    |       | Percentage |  | Increase
|                 |  |                          |       |            |  |            |       |            |  |         
|United States    |  | $                        | 155.0 |            |  |            | 59.6  | %          |  | $        | 138.6 |  |  |  | 59.7  | % |  |  | 11.8 | %
|Europe and other |  |                          | 80.2  |            |  |            | 30.9  | %          |  |          | 70.2  |  |  |  | 30.3  | % |  |  | 14.2 | %
|Asia Pacific     |  |                          | 24.7  |            |  |            | 9.5   | %          |  |          | 23.3  |  |  |  | 10.0  | % |  |  | 6.0  | %
|                 |  |                          |       |            |  |            |       |            |  |          |       |  |  |  |       |   |  |  |      |  
|Total            |  | $                        | 259.9 |            |  |            | 100.0 | %          |  | $        | 232.1 |  |  |  | 100.0 | % |  |  | 12.0 | %
|                 |  |                          |       |            |  |            |       |            |  |          |       |  |  |  |       |   |  |  |      |  

We believe the increase in total revenue in 2003 as compared to 2002 was
primarily attributable to businesses continuing the trend toward permitting
remote access to internal resources and Web-enabling existing applications. We
believe our identity and access management solutions promote our product
synergies and enable us to generate additional revenue by selling additional
products to existing customers. We also believe that as new, lower cost
remote access technologies become available and as employment rates increase,
we will benefit with increased total product revenue. However, information
technology budgets continue to be constrained, and the continued uncertainty in
the economy may affect revenue generated from the sales of our products in
future quarters.

Our RSA SecurID authentication product line generates a substantial portion of
our revenue. Authenticator units sold, in thousands of units, were as follows:

|                                   |  |      |       |      |  |            |       |  |  |            |      |   
|---------------------------------- |  | ---- | ----- | ---- |  | ---------- | ----- |  |  | ---------- | ---- | --
|                                   |  |      |       |      |  |            |       |  |  | Percentage
|                                   |  |      |       |      |  |            |       |  |  | Increase  
|                                   |  | 2003 |       | 2002 |  | (Decrease)
|                                   |  |      |       |      |  |           
|Number of authenticator units sold |  |      | 3,036 |      |  |            | 2,529 |  |  |            | 20.0 | % 
|Average selling price              |  | $    | 41.99 |      |  | $          | 42.65 |  |  |            | (1.5 | )%

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The increase in number of units sold, partially offset by a decrease in the
average selling price in 2003 as compared to 2002, contributed to the increased
revenue from our RSA SecurID authentication product line. The decrease in the
average selling price can be attributed to an increase in the number of larger
volume transactions during 2003 as compared to 2002, because we tend to give
larger discounts on larger volume transactions. We believe our RSA SecurID
authentication products generate and will continue to generate substantial
revenue for us.

Our sales to the financial services, technology and telecommunications vertical
markets continue to provide increased revenue for us. In addition, we believe
the increase in our total revenue can be attributed in part to the continued
adoption of our authentication products by an increasing number of small and
mid size businesses, combined with existing larger customers expanding their
deployments of our products.

We believe the increase in our Web access management revenue is due in part to
an increase in the number of companies opening up their information and
applications to internal and external users. We believe that our Web access
management revenue will continue to grow due to introductions of new
enhancements to our products, strong technology and strategic partnerships. In
addition, we have made a change to our sales strategy to dedicate a portion of
our sales force to focus on selling our emerging products, while selling our
more mature products through our resellers and distributors.

The decrease in Developer solutions and encryption revenue during 2003 as
compared to 2002 was primarily due to the decrease in the number of technology
companies funding development of new information technology products, and the
availability of free, open source products that compete with our RSA BSAFE
product line and which continue to put pressure on our Developer solutions
revenue. We believe that our Developer solutions revenue may benefit from
companies needs to secure their transactions due to regulatory requirements.
We currently believe our Developer solutions revenue will represent 8% to 10%
of total revenue over the next twelve months.

The increase in service revenue for 2003 as compared to 2002 can primarily be
attributed to purchases by new customers coupled with high renewals of annual
maintenance contracts from sale of products in prior periods.

We believe that as the United States government proceeds with its agenda of
increasing awareness and funding of cyber-security issues and its focus on
homeland security, we will benefit with increased revenue. We believe the
government sector of our business may increase in the future as government
agencies seek e-security partners in order to execute their cyber-security
agenda. However, revenue from the government sector of our business was
consistent during 2003 as compared to 2002 as the United States government
continued to defer its information technology spending. We believe our revenue
from the healthcare and financial services markets will continue to increase
due to required compliance with industry specific privacy and security laws
standards.

Gross Profit

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

|                                      |  |                          |       |              |  |              |      |              |  |   |       |  |  |  |      |  
|------------------------------------- |  | ------------------------ | ----- | ------------ |  | ------------ | ---- | ------------ |  | - | ----- |  |  |  | ---- | -
|                                      |  | Years Ended December 31,
|                                      |  |                         
|                                      |  | 2003                     |       | 2002        
|                                      |  |                          |       |             
|($ in millions)                       |  | Gross Profit             |       | Gross Margin |  | Gross Profit |      | Gross Margin
|                                      |  |                          |       |              |  |              |      |             
|Products (1)                          |  | $                        | 161.4 |              |  |              | 83.3 | %            |  | $ | 112.3 |  |  |  | 66.4 | %
|Maintenance and
professional
services |  |                          | 45.3  |              |  |              | 68.5 | %            |  |   | 40.9  |  |  |  | 64.8 | %
|                                      |  |                          |       |              |  |              |      |              |  |   |       |  |  |  |      |  
|Total                                 |  | $                        | 206.7 |              |  |              | 79.5 | %            |  | $ | 153.2 |  |  |  | 66.0 | %
|                                      |  |                          |       |              |  |              |      |              |  |   |       |  |  |  |      |  

(1)  Total gross profit and gross
margin and gross profit - products and gross
margin - products reflect the reclassification of amortization of technology
related intangible assets of $6.6 million from operating expense to cost of
revenue for the year ended December 31, 2002, and also reflects the
reclassification of impairment of technology related intangible assets of $14.3
million from operating expense to cost of revenue expense for the year ended
December 31, 2002.

Included in the gross profit for products for 2002 is a $2.9 million charge for
inventory write down related to discontinued product designs and for product
quality warranty obligation expenses. The increase in total gross margin for
2003 as compared to 2002, was primarily attributable to the decrease of $6.6
million in amortization of technology related intangible assets expense and the
decrease of $14.3 million in impairment of technology related intangible assets
for 2003 as compared to 2002. These decreases were partially offset by a $1.9
million increase in the provision of warranty expense in 2003 as compared to
2002.

We believe the increase in gross margin for products in 2003 as compared to
2002, after excluding the items mentioned above, can be attributed, in part, to
the increase in our software revenue. Our software products have higher gross
margins than our other product types, and an increase in software revenue would
cause our gross margin from products to increase. The increase in total gross
margin

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in 2003 was also attributable to our efforts to reduce costs and improve
operating efficiencies, combined with an increase in total revenue.

The increase in gross profit from maintenance and professional services in 2003
as compared to 2002, was primarily attributable to increased maintenance
revenue achieved on decreased customer support costs. Customer support costs
decreased due to cost reduction programs implemented over the past two years.

We expect to maintain total gross margins of between 79% and 81% for 2004.

Research and Development

Total research and development expenses decreased 2.6% in 2003 to $53.6 million
from $55.1 million in 2002, and represented 20.6% of total revenue for 2003.
For 2003 as compared to 2002, the decrease in research and development expenses
of $1.5 million was primarily due to the decrease in overhead expenses of
approximately $2.8 million offset by the increase in payroll and consulting
expenses of approximately $1.3 million associated with our continued allocation
of resources towards investing in our future product offerings. We expect total
research and development expenditures will be between 19% and 21% of total
revenue for 2004.

Marketing and Selling

Total marketing and selling expenses decreased 6.3% in 2003 to $94.3 million
from $100.7 million in 2002, and represented 36.3% of total revenue for 2003.
Marketing and selling expenses decreased $6.4 million in 2003 as compared to
2002 primarily due to cost reduction measures. For 2003 as compared to 2002,
approximately $4.8 million of the decrease in marketing and selling expenses
was from decreased overhead costs associated with cost reduction measures,
approximately $2.9 million of the decrease was from decreased spending on
marketing programs, and approximately $1.6 million of the decrease was from a
reduction in bad debt expense. These reductions were partially offset by
approximately $2.9 million of increased commission expense due to increased
revenue. We believe total marketing and selling expenditures will be between
32% and 35% of total revenue in 2004.

General and Administrative

Total general and administrative expenses increased 11.6% in 2003 to $33.8
million from $30.3 million in 2002, and represented 13.0% of total revenue for
2003. For 2003 as compared to 2002, approximately $2.8 million of the increase
was from increased payroll and overhead costs associated with an increased
workforce and increased bonus payouts, and approximately $0.7 million of the
increase for professional fees incurred in connection with on-going litigation.
We believe total general and administrative expenditures will be between 10%
and 12% of total revenue in 2004.

Acquisitions

During 2001, we completed four acquisitions, which were accounted for as
purchases. Accordingly, the results of operations of the acquired companies
have been included in our consolidated statements of operations since their
respective dates of acquisition.

In September 2001, we acquired all of the capital stock of Securant, a
privately held company that developed the ClearTrust Web access management
solution, for an aggregate of $139.1 million in cash including acquisition
costs. In May 2001, we acquired all of the capital stock of 3GI, a privately
held company that developed smart card and biometric authentication products,
and substantially all of the assets of Transindigo, a privately held company
that developed real time Web access management software products, for an
aggregate of $23.7 million in cash including acquisition costs and litigation
expenses. In February 2001, we acquired all of the capital stock of Xcert, a
privately held company that developed digital certificate-based products for
securing e-business transactions, for $69.7 million in cash, including
acquisition costs, plus the assumption of all Xcert stock options.

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

|                                       |  |                       |       |       |  |             |      |       |  |         |      |   |  |   |       |           |  |              |  | 
|-------------------------------------- |  | --------------------- | ----- | ----- |  | ----------- | ---- | ----- |  | ------- | ---- | - |  | - | ----- | --------- |  | ------------ |  | 
|                                       |  | Estimated Fair Values |       |       |  |            
|                                       |  |                       |       |       |  |            
|                                       |  |                       |       |       |  |             |      |       |  | 3GI and |      |   |  |   |       | Estimated
|($ in millions)                        |  | Securant              |       | Xcert |  | Transindigo |      | Total |  | Life   
|                                       |  |                       |       |       |  |             |      |       |  |        
|Assets and liabilities, including cash |  | $                     | (0.6  | )     |  | $           | 4.8  |       |  | $       | 6.8  |   |  | $ | 11.0  |           |  |              |  | 
|Goodwill                               |  |                       | 123.6 |       |  |             | 57.7 |       |  |         | 13.5 |   |  |   | 194.8 |           |  |              |  | 
|Intangible assets (1)                  |  |                       | 19.6  |       |  |             | 12.9 |       |  |         | 2.9  |   |  |   | 35.4  |           |  | 1 to 7 years
|Deferred tax liabilities, net (1)      |  |                       | (7.3  | )     |  |             | (5.1 | )     |  |         | (1.1 | ) |  |   | (13.5 | )         |  |              |  | 
|In process research and development    |  |                       | 3.8   |       |  |             | 2.5  |       |  |         | 1.6  |   |  |   | 7.9   |           |  |              |  | 
|                                       |  |                       |       |       |  |             |      |       |  |         |      |   |  |   |       |           |  |              |  | 
|Total purchase price                   |  |                       | 139.1 |       |  |             | 72.8 |       |  |         | 23.7 |   |  |   | 235.6 |           |  |              |  | 
|Less: assumption of stock options      |  |                       |      |       |  |             | (3.1 | )     |  |         |     |   |  |   | (3.1  | )         |  |              |  | 
|Less: cash acquired                    |  |                       | (2.1  | )     |  |             | (0.4 | )     |  |         | (6.9 | ) |  |   | (9.4  | )         |  |              |  | 
|                                       |  |                       |       |       |  |             |      |       |  |         |      |   |  |   |       |           |  |              |  | 
|Net cash paid                          |  | $                     | 137.0 |       |  | $           | 69.3 |       |  | $       | 16.8 |   |  | $ | 223.1 |           |  |              |  | 
|                                       |  |                       |       |       |  |             |      |       |  |         |      |   |  |   |       |           |  |              |  | 

|(1) |  | We recorded an impairment charge of $19.1 million during 2002 to
reduce the carrying value of these intangible assets to zero at December
31, 2002. Accordingly, we did not record any amortization expense
related to these intangible assets after December 31, 2002. As a result
of this impairment charge, we reduced the deferred tax liabilities
associated with the intangible assets to zero at December 31, 2002.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Pursuant to two separate escrow agreements entered into in connection with the
Securant acquisition, $21.0 million of the cash purchase price otherwise
payable to Securants shareholders was placed in escrow, pending settlement of
any claims for breach of representations, warranties or covenants in the merger
agreement. One escrow agreement put $20.0 million of the purchase price into an
escrow fund. We received $3.3 million from this Securant escrow fund during the
year ended December 31, 2003 in final settlement of outstanding escrow fund
claims, which resulted in a decrease to goodwill of $3.3 million. The remainder
of the escrow fund was released to the selling shareholders during March 2003.
The second escrow agreement put $1.0 million of the Securant purchase price
into an escrow fund. The remaining unclaimed balance of the $1.0 million
Securant escrow fund not subject to a pending claim is scheduled to be released
to the selling shareholders during 2005.

Pursuant to an escrow agreement, $3.0 million of the cash purchase price
otherwise payable to 3GIs stockholders was placed in escrow, pending
settlement of any claims for breaches of representations, warranties or
covenants in the merger agreement. We submitted claims against the 3GI escrow
totaling approximately $3.0 million and received an aggregate of $2.6 million
from the 3GI escrow fund in settlement of these claims, of which $0.1 million
was received during 2003, resulting in a decrease to goodwill of $0.1 million
during 2003. The remainder of the escrow fund was released to the selling
stockholders during March 2003.

Pursuant to an escrow agreement, $10.5 million of the cash purchase price
otherwise payable to Xcerts stockholders was placed in escrow, pending
settlement of any claims for breaches of representations, warranties or
covenants in the merger agreement. We released all but $0.5 of the Xcert escrow
fund to the selling stockholders in August 2002. We received approximately $0.1
million from the escrow fund in settlement of certain tax issues during 2002,
and the balance of the $0.5 million was released to the selling stockholders
during 2003.

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

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

We incurred litigation expenses in connection with a patent litigation relating
to the products acquired in the May 2001 acquisition of 3GI and recorded these
expenses as related costs of acquisition. The costs to defend the 3GI lawsuit
were covered by the escrow fund set aside from the 3GI purchase price. The
costs of litigation and disbursements from the 3GI escrow resulted in a net
increase to goodwill of $0.1 million during 2002.

The amounts allocated to in process research and development (IPR&D) projects
were expensed in the quarter that the related acquisition was consummated
because technological feasibility of the IPR&D projects had not been achieved
and there were no

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alternative future uses. IPR&D expense of $7.9 million for the year ended
December 31, 2001 represents the write off of IPR&D in connection with the
acquisition of Securant, Xcert, 3GI and Transindigo.

Restructurings
During 2002 and 2001, we evaluated and initiated restructuring actions in order
to consolidate some of our operations, enhance operational efficiency and
reduce expenses. These actions resulted in total restructuring charges of
$56.0 million and $20.0 million for the years ended December 31, 2002 and 2001,
respectively.

We continue to monitor and assess our facility obligations, real estate markets
and our operating expenses. As a result of these ongoing assessments, during
2003 we revised estimates used in previously recorded restructuring charges.
These revisions resulted in no net change to our restructuring liability at
December 31, 2003. We revised estimates of facility exit charges based upon
the terms of finalized subleases obtained during 2003, due to lower than
anticipated operating costs and other direct costs associated with certain
exited facilities, and due to revisions in anticipated headcount growth. These
revised estimates of excess facility costs resulted in a net increase to
facility exit costs of $0.8 million at December 31, 2003. In addition, we
reduced our severance restructuring reserve by $0.6 million at December 31,
2003 when we determined our remaining severance and other outplacement costs
were lower than originally estimated. We also reduced our restructuring
reserve of costs associated with the liquidation of our Swedish development
operations and the sale of certain Swedish assets by $0.2 million at December
31, 2003 when we determined we had no legal and consulting costs remaining in
connection with this transaction.

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

Included in the 2002 restructuring charges are costs of $44.0 million
consisting of facility exit costs and related impairment of leasehold
improvements and furniture and fixtures. Facility exit costs consist of
estimated shortfalls of sublease rental income compared to obligations due
under certain exited facilities leases which are payable through 2009. The
remaining unreserved lease obligations related to certain exited facilities
amount to $8.2 million, which represents our estimated sublease income from
these facilities from the end of the reserve period to the end of the lease
term. Impairment of leasehold improvements and furniture and fixtures included
in facility exit costs are for unamortized leasehold improvements and furniture
and fixtures that we believe will not be recoverable upon sublease of exited
facilities. Total facility exit costs for 2002 include costs of $35.7 million
we incurred when we revised estimates used in previously recorded restructuring
charges. We revised the estimates included in facility exit costs due to the
extension of the period of time estimated to obtain sublease tenants for
certain exited facilities, based on the terms of finalized subleases obtained
during 2002, due to higher than anticipated operating costs associated with
certain exited facilities, and due to the continued uncertainty and
deterioration in the commercial real estate and sublet markets in the Boston
metropolitan area.

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

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

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Restructuring charges accrued and unpaid at December 31, 2003 were as follows:

|                                                             |  |                 |       |           |  |             |      |             |  |       |      |   |  |   |      |   |  |   |       |  
|------------------------------------------------------------ |  | --------------- | ----- | --------- |  | ----------- | ---- | ----------- |  | ----- | ---- | - |  | - | ---- | - |  | - | ----- | -
|                                                             |  | Facility Exit   |       |           |  |             |      | Liquidation |  |       |      |   |  |   |      |  
|                                                             |  | Costs & Related |       |           |  |             |      | of Sweden   |  |       |      |   |  |   |      |  
|                                                             |  | Asset           |       | Severance |  | Development |      | Purchased   |  |       |      |  
|                                                             |  | Impairments     |       | Costs     |  | Operations  |      | Technology  |  | Total
|                                                             |  |                 |       |           |  |             |      |             |  |      
|Balance at January 1, 2001                                   |  | $               | 0.4   |           |  |             |     |             |  |       |     |   |  |   |     |   |  | $ | 0.4   |  
|Total restructuring charges  2001                           |  |                 | 9.7   |           |  | $           | 5.9  |             |  |       |     |   |  | $ | 4.4  |   |  |   | 20.0  |  
|                                                             |  |                 |       |           |  |             |      |             |  |       |      |   |  |   |      |   |  |   |       |  
|Payments  2001                                              |  |                 | (0.3  | )         |  |             | (4.6 | )           |  |       |      |   |  |   |     |   |  |   | (4.9  | )
|Write offs - 2001                                            |  |                 |      |           |  |             |     |             |  |       |     |   |  |   | (4.4 | ) |  |   | (4.4  | )
|                                                             |  |                 |       |           |  |             |      |             |  |       |      |   |  |   |      |   |  |   |       |  
|Total payments and write offs - 2001                         |  |                 | (0.3  | )         |  |             | (4.6 | )           |  |       |     |   |  |   | (4.4 | ) |  |   | (9.3  | )
|                                                             |  |                 |       |           |  |             |      |             |  |       |      |   |  |   |      |   |  |   |       |  
|Balance at December 31, 2001                                 |  |                 | 9.8   |           |  |             | 1.3  |             |  |       |     |   |  |   |     |   |  |   | 11.1  |  
|                                                             |  |                 |       |           |  |             |      |             |  |       |      |   |  |   |      |   |  |   |       |  
|Restructuring charges - 2002                                 |  |                 | 8.3   |           |  |             | 5.7  |             |  | $     | 4.4  |   |  |   |     |   |  |   | 18.4  |  
|Revision of previously recorded
restructuring charges - 2002 |  |                 | 35.7  |           |  |             |     |             |  |       | 1.9  |   |  |   |     |   |  |   | 37.6  |  
|                                                             |  |                 |       |           |  |             |      |             |  |       |      |   |  |   |      |   |  |   |       |  
|Total restructuring charges  2002                           |  |                 | 44.0  |           |  |             | 5.7  |             |  |       | 6.3  |   |  |   |     |   |  |   | 56.0  |  
|                                                             |  |                 |       |           |  |             |      |             |  |       |      |   |  |   |      |   |  |   |       |  
|Payments  2002                                              |  |                 | (5.8  | )         |  |             | (5.6 | )           |  |       | (5.7 | ) |  |   |     |   |  |   | (17.1 | )
|Write offs  2002                                            |  |                 | (12.1 | )         |  |             |     |             |  |       |     |   |  |   |     |   |  |   | (12.1 | )
|                                                             |  |                 |       |           |  |             |      |             |  |       |      |   |  |   |      |   |  |   |       |  
|Total payments and write offs  2002                         |  |                 | (17.9 | )         |  |             | (5.6 | )           |  |       | (5.7 | ) |  |   |     |   |  |   | (29.2 | )
|                                                             |  |                 |       |           |  |             |      |             |  |       |      |   |  |   |      |   |  |   |       |  
|Balance at December 31, 2002                                 |  |                 | 35.9  |           |  |             | 1.4  |             |  |       | 0.6  |   |  |   |     |   |  |   | 37.9  |  
|Revision of previously recorded
restructuring charges - 2003 |  |                 | 0.8   |           |  |             | (0.6 | )           |  |       | (0.2 | ) |  |   |     |   |  |   |      |  
|Payments  2003                                              |  |                 | (8.8  | )         |  |             | (0.6 | )           |  |       | (0.4 | ) |  |   |     |   |  |   | (9.8  | )
|Write offs  2003                                            |  |                 | (0.2  | )         |  |             |     |             |  |       |     |   |  |   |     |   |  |   | (0.2  | )
|                                                             |  |                 |       |           |  |             |      |             |  |       |      |   |  |   |      |   |  |   |       |  
|Total payments and write offs  2003                         |  |                 | (9.0  | )         |  |             | (0.6 | )           |  | $     | (0.4 | ) |  |   |     |   |  |   | (10.0 | )
|                                                             |  |                 |       |           |  |             |      |             |  |       |      |   |  |   |      |   |  |   |       |  
|Balance at December 31, 2003                                 |  | $               | 27.7  |           |  | $           | 0.2  |             |  |       |     |   |  |   |     |   |  | $ | 27.9  |  
|                                                             |  |                 |       |           |  |             |      |             |  |       |      |   |  |   |      |   |  |   |       |  

In 1999, we commenced and substantially completed consolidation of certain
operations in order to enhance operational efficiency. We recorded facility
exit costs consisting primarily of estimated shortfalls of sublease rental
income compared to minimum lease payments due under a lease agreement. During
2003, we revised our estimate of these facility exit costs and reduced the
reserve for these facility exit costs to zero.

We expect to pay the remaining restructuring costs accrued at December 31, 2003
as follows:

|                              |  |              |  | 
|----------------------------- |  | ------------ |  | 
|Year ending December 31, 2004 |  | $9.0 million
|Year ending December 31, 2005 |  | 7.4 million 
|Year ending December 31, 2006 |  | 6.6 million 
|Year ending December 31, 2007 |  | 2.9 million 
|Year ending December 31, 2008 |  | 1.3 million 
|Year ending December 31, 2009 |  | 0.7 million 

Interest Expense and Other
Interest expense and other includes the following:

|                                                  |  |                          |      |      |  |   |      |  
|------------------------------------------------- |  | ------------------------ | ---- | ---- |  | - | ---- | -
|                                                  |  | Years Ended December 31,
|                                                  |  |                         
|($ in millions)                                   |  | 2003                     |      | 2002
|                                                  |  |                          |      |     
|Interest expense on 7% convertible debentures     |  | $                        | (5.7 | )    |  | $ | (5.7 | )
|Non cash amortization of deferred financing costs |  |                          | (1.6 | )    |  |   | (1.6 | )
|Non cash accretion of warrant value               |  |                          | (1.4 | )    |  |   | (1.4 | )
|Interest income net of (expense) and other        |  |                          | 1.3  |      |  |   | 0.1  |  
|Unrealized loss from foreign currency translation |  |                          | (0.6 | )    |  |   | (0.2 | )
|                                                  |  |                          |      |      |  |   |      |  
|Total interest expense and other                  |  | $                        | (8.0 | )    |  | $ | (8.8 | )
|                                                  |  |                          |      |      |  |   |      |  

Interest expense, non cash amortization of deferred financing costs and non
cash accretion of warrant value included in interest expense and other were
incurred in connection with our 7% convertible debentures which were issued in
October and November 2001. The increase in interest income net of expense and
other in 2003 as compared to 2002 was primarily due to higher cash and cash
equivalent balances maintained in 2003 as well as a decrease in fixed asset
disposals of $0.8 million in 2003 as compared to 2002. The unrealized loss
from foreign currency translation was primarily due to the weakening of the US
dollar during 2003.

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Income (Loss) from Investing Activities
Income (loss) from investing activities includes the following gains (losses):

|                                              |  |                          |     |      |  |   |       |  
|--------------------------------------------- |  | ------------------------ | --- | ---- |  | - | ----- | -
|                                              |  | Years Ended December 31,
|                                              |  |                         
|($ in millions)                               |  | 2003                     |     | 2002
|                                              |  |                          |     |     
|Gain from sale of marketable securities, net  |  |                          |    |      |  | $ | 0.7   |  
|Income (loss) from sale of investments        |  | $                        | 1.6 |      |  |   | (2.9  | )
|Decline in fair value of Crosby Finance, LLC  |  |                          |    |      |  |   | (6.8  | )
|Investment impairment charges                 |  |                          |    |      |  |   | (21.9 | )
|                                              |  |                          |     |      |  |   |       |  
|Total income (loss) from investing activities |  | $                        | 1.6 |      |  | $ | (30.9 | )
|                                              |  |                          |     |      |  |   |       |  

During 2002, we recognized total investment impairment charges of $21.9 million
related to our long-term investments in privately held companies. Included in
total investment impairment charges in 2002 and as a result of our initiation
of a process to sell our equity investments we recorded an impairment charge of
$12.0 million to reflect the investments at their estimated realizable value,
less costs of disposal. Also during 2002, and included in total investment
impairment charges, we recorded an impairment charge of $9.9 million based upon
valuations and anticipated cash proceeds to reduce the carrying amount of three
investments to their estimated fair value for three companies in which we had
invested that were in the process of obtaining additional financing or being
sold. During 2003, we completed the sale of our equity investments and
recorded a gain from the sale of approximately $1.6 million.

The carrying amount of our 99% interest in Crosby was $0.2 million at December
31, 2003 and 2002, respectively. We account for our investment in Crosby under
the guidelines of EITF No. 96-12, Recognition of Interest Income and Balance
Sheet Classification of Structured Notes. Accordingly, we are carrying our
interest at fair value with all changes in fair value reported in income from
investing activities. We determine the fair value of our interest in Crosby
based on the fair value of Crosbys right to potentially receive additional
cash proceeds upon maturity of the variable delivery forward contract (VDF).
The decline in fair value of our interest in Crosby was $6.8 million for the
year ended December 31, 2002.

Provision (Benefit) for Income Taxes

We recorded an income tax provision of $3.7 million for 2003 compared to a
benefit of $(39.9) million for 2002. Our effective tax rate decreased to 20.0%
for 2003 from 29.2% for 2002. The decrease in our effective tax rate in 2003
was primarily attributable to the increased profitability of our international
operations, where the effective tax rates are generally lower than the United
States statutory rate. We currently expect our tax rate to be approximately
20.0% for 2004.

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2002 Compared with 2001

Revenue

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

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

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

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

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

We believe the decrease in total revenue in 2002 as compared to 2001 was
primarily due to the continued decline in information technology spending by
our existing and prospective customers due to the uncertainty of the economy.

Our RSA SecurID authentication product line generates a substantial portion of
our revenue. Authenticator units sold, in thousands of units, were as follows:

|                                   |  |      |       |      |  |          |       |  |  |            |      |   
|---------------------------------- |  | ---- | ----- | ---- |  | -------- | ----- |  |  | ---------- | ---- | --
|                                   |  |      |       |      |  |          |       |  |  | Percentage
|                                   |  | 2002 |       | 2001 |  | Decrease
|                                   |  |      |       |      |  |         
|Number of authenticator units sold |  |      | 2,529 |      |  |          | 2,716 |  |  |            | (6.9 | )%
|Average selling price              |  | $    | 42.65 |      |  | $        | 43.45 |  |  |            | (1.8 | )%

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We believe revenue from sales of RSA SecurID authenticators declined in 2002 as
compared to 2001 primarily due to the recent and continued downsizing of
businesses. The decrease in number of units sold, along with the decrease in
the average selling price in 2002 as compared to 2001, contributed to the
decreased revenue from our RSA SecurID authentication product line. The
decrease in the average selling price can be attributed to an increase in the
number of larger volume transactions during 2002 as compared to 2001, because
we tend to give larger discounts on larger volume transactions.

Our authentication products revenue includes revenue from our RSA Keon product
line for all periods presented. RSA Keon revenue decreased in 2002 as compared
to 2001, which we believe was due primarily to our customers delaying or
canceling the implementation of large infrastructure information technology
projects. In addition, during 2002 we eliminated several products included in
the RSA Keon product line, and this contributed to the decrease in revenue from
our RSA Keon product line.

As a result of our acquisition of Securant in September 2001, we established
the RSA ClearTrust Web access management solution product line, and generated
$3.8 million of Web access management revenue in the fourth quarter of 2001.
Web access management revenue was $8.1 million and accounted for 3.5% of total
revenue for 2002.

We believe that the decrease in Developer solutions and encryption revenue was
primarily attributable to a decrease in the number of technology companies
funding development and in the development of new information technology
products, as well as the availability of free, open source products that
compete with our RSA BSAFE product line.

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

Gross Profit

The following tables set forth the gross profit and gross margin for products
and maintenance and professional services for the years ended December 31, 2002
and 2001:

|                                      |  |                          |       |              |  |              |      |              |  |   |       |  |  |  |      |  
|------------------------------------- |  | ------------------------ | ----- | ------------ |  | ------------ | ---- | ------------ |  | - | ----- |  |  |  | ---- | -
|                                      |  | Years Ended December 31,
|                                      |  |                         
|                                      |  | 2002                     |       | 2001        
|                                      |  |                          |       |             
|($ in millions)                       |  | Gross Profit             |       | Gross Margin |  | Gross Profit |      | Gross Margin
|                                      |  |                          |       |              |  |              |      |             
|Products (1)                          |  | $                        | 112.3 |              |  |              | 66.4 | %            |  | $ | 180.9 |  |  |  | 81.3 | %
|Maintenance and
professional
services |  |                          | 40.9  |              |  |              | 64.8 | %            |  |   | 31.9  |  |  |  | 52.8 | %
|                                      |  |                          |       |              |  |              |      |              |  |   |       |  |  |  |      |  
|Total                                 |  | $                        | 153.2 |              |  |              | 66.0 | %            |  | $ | 212.8 |  |  |  | 75.3 | %
|                                      |  |                          |       |              |  |              |      |              |  |   |       |  |  |  |      |  

(1)  Total gross profit, total gross margin, gross profit-products and gross
margin-products reflect the reclassification of amortization of technology
related intangible assets from operating expense to cost of revenue of $6.6
million and $3.3 million for the years ended December 31, 2002 and 2001,
respectively, and also reflect the reclassification of impairment of technology
related intangible assets of $14.3 million from operating expense to cost of
revenue for the year ended December 31, 2002.

Included in the gross profit for products for 2002 is a $2.9 million charge for
inventory write down related to discontinued product designs and for product
quality warranty accruals. Included in the gross profit for products for 2001
is a write off of prepaid royalties of $5.2 million. These prepaid royalties
were expensed to cost of product revenue when it was determined that they may
not have future realizable value as a result of our acquisition of Xcert in
February 2001

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

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

Research and Development

Total research and development expenses decreased 5.6% in 2002 to $55.1 million
from $58.3 million in 2001, and represented 23.7% of total revenue for 2002.
For 2002 as compared to 2001, the decrease of approximately $3.2 million in
research and development expenses was from decreased payroll, overheard and
consulting expenses associated with our reduced workforce. RSA Capital expenses
included in total research and development expenses were $0.5 million and $2.5
million for 2002 and 2001, respectively, all of which were attributable to our
New Emerging Security Technologies (NEST) group, which merged into our
e-Security Solutions segment prior to the second quarter of 2002.

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Marketing and Selling

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

General and Administrative

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

Acquisitions

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

In September 2001, we acquired all of the capital stock of Securant, a
privately held company that developed the ClearTrust Web access management
solution. In May 2001, we acquired all of the capital stock of 3GI, a privately
held company that developed smart card and biometric authentication products,
and substantially all of the assets of Transindigo, a privately held company
that developed real time Web access management software products. In February
2001, we acquired all of the capital stock of Xcert, a privately held company
that developed digital certificate-based products for securing e-business
transactions.

As a result of our adoption of SFAS No. 142, Goodwill and Other Intangible
Assets, on January 1, 2002 we discontinued amortizing the goodwill arising
from business acquisitions. Instead, goodwill is evaluated at least annually
for impairment.

We recorded an impairment charge of $19.1 million during 2002 to reduce the
carrying value of the acquisition related intangible assets to zero at December
31, 2002. Accordingly, we did not record any amortization expense related to
these intangible assets after December 31, 2002. As a result of this
impairment charge, we reduced the deferred tax liabilities associated with the
intangible assets to zero at December 31, 2002.

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

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

Restructurings

During 2002 and 2001, we evaluated and initiated restructuring actions in order
to consolidate some of our operations, enhance operational efficiency and
reduce expenses. These actions resulted in total restructuring charges of
$56.0 million and $20.0 million for the years ended December 31, 2002 and 2001,
respectively.

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

Included in the 2002 restructuring charges are costs of $44.0 million
consisting of facility exit costs and related impairment of leasehold
improvements and furniture and fixtures. Facility exit costs consist of
estimated shortfalls of sublease rental income compared to obligations due
under certain exited facilities leases which are payable through 2009.
Impairment of leasehold improvements and furniture and fixtures included in
facility exit costs are for unamortized leasehold improvements and furniture
and fixtures that we believe will not be recoverable upon sublease of exited
facilities. Total facility exit costs for 2002 include costs of $35.7 million
we incurred when we revised estimates used in previously recorded restructuring
charges. We revised the estimates included in facility exit costs due to the
extension of the period of time estimated to obtain sublease tenants for
certain exited facilities, based on the terms of finalized subleases obtained
during 2002, due to higher than anticipated operating costs associated with
certain exited facilities, and due to the continued uncertainty and
deterioration in the commercial real estate and sublet markets in the Boston
metropolitan area.

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

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

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

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

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

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

Interest (Expense) Income and Other

|                                                  |  |                          |      |      |  |   |      |  
|------------------------------------------------- |  | ------------------------ | ---- | ---- |  | - | ---- | -
|                                                  |  | Years Ended December 31,
|                                                  |  |                         
|($ in millions)                                   |  | 2002                     |      | 2001
|                                                  |  |                          |      |     
|Interest expense on 7% convertible debentures     |  | $                        | (5.7 | )    |  | $ | (1.2 | )
|Non cash amortization of deferred financing costs |  |                          | (1.6 | )    |  |   | (0.3 | )
|Non cash accretion of warrant value               |  |                          | (1.4 | )    |  |   | (0.3 | )
|Interest income net of (expense) and other        |  |                          | 0.1  |      |  |   | 7.8  |  
|Unrealized loss from foreign currency translation |  |                          | (0.2 | )    |  |   | (0.1 | )
|                                                  |  |                          |      |      |  |   |      |  
|Total interest expense and other                  |  | $                        | (8.8 | )    |  | $ | 5.9  |  
|                                                  |  |                          |      |      |  |   |      |  

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

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(Loss) Income from Investing Activities

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

|                                                            |  |                          |       |      |  |   |      |  
|----------------------------------------------------------- |  | ------------------------ | ----- | ---- |  | - | ---- | -
|                                                            |  | Years ended December 31,
|                                                            |  |                         
|($ in millions)                                             |  | 2002                     |       | 2001
|                                                            |  |                          |       |     
|Marketable securities, net                                  |  | $                        | 0.7   |      |  | $ | 5.7  |  
|Settlement of forward contracts held by Crosby Finance, LLC |  |                          |      |      |  |   | 41.8 |  
|(Loss) income from sale of investments                      |  |                          | (2.9  | )    |  |   | 0.5  |  
|Decline in fair value of Crosby Finance, LLC                |  |                          | (6.8  | )    |  |   |     |  
|Investment impairment charges                               |  |                          | (21.9 | )    |  |   | (7.2 | )
|                                                            |  |                          |       |      |  |   |      |  
|Total (loss) income from investing activities               |  | $                        | (30.9 | )    |  | $ | 40.8 |  
|                                                            |  |                          |       |      |  |   |      |  

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

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

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

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

The carrying amount of our 99% interest in Crosby was $0.2 million and $7.0
million at December 31, 2002 and 2001, respectively. We account for our
investment in Crosby under the guidelines of EITF No. 96-12, Recognition of
Interest Income and Balance Sheet Classification of Structured Notes. Before
the settlement of the Forwards, we used the retrospective interest method to
account for our interest in Crosby as we believed we would recover a
substantial amount of our interest. Any increases in the cost basis of our
interest in Crosby, determined by applying the retrospective interest method,
were recorded in interest income. Any changes in the fair value of our
interest in Crosby were recorded in other comprehensive income in stockholders
equity. In the fourth quarter of 2001, after the settlement of the last
Forward, it became reasonably possible that we could lose all or substantially
all of the value of our remaining interest, and therefore could no longer apply
the retrospective interest method to our interest in Crosby. Accordingly, we
are carrying our interest at fair value with all changes in fair value reported
in income from investing activities. We determine the fair value of our
interest in Crosby based on the fair value of Crosbys right to potentially
receive additional cash proceeds upon maturity of the VDF. The decline in the
fair value of our interest in Crosby was $6.8 million for the year ended
December 31, 2002.

Provision for Income Taxes

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

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Liquidity and Capital Resources

Liquidity

We had $207.3 million in cash and cash equivalents at December 31, 2003,
consisting primarily of operating cash and short-term investments. This
represents an increase of $104.3 million in cash and cash equivalents during
the year ended December 31, 2003. The major changes in cash during 2003 were
cash provided by operations of $81.5 million, cash provided by financing
activities of $20.8 million and cash provided by investing activities of $0.8
million.

Cash provided by operations for the year ended December 31, 2003 included $51.8
million of cash received from income tax refunds. We currently expect to
receive additional tax refunds of approximately $10.0 million during the second
half of 2004. These tax refunds are attributable to the recovery of income
taxes paid in prior years and are available to us due to the carryback of
operating losses incurred in 2002 and 2001. The refunds are subject to any
Internal Revenue Service review.

Cash provided by financing activities of $20.8 million during 2003 consisted of
proceeds from employee exercises and purchases under our stock option and
employee stock purchase plans.

Cash provided by investing activities of $0.8 million during 2003 consisted
primarily of $3.0 million of cash provided by the sale of equity investments
and $3.4 million of cash provided by acquisition escrow payments. These
receipts of cash from investing activities were partially offset by $5.6
million of cash used to purchase property and equipment and other long term
assets.

We have commitments for various operating leases worldwide that expire at
various times through 2017 and that are shown below net of existing sublease
agreements, excluding facility exit costs included in restructuring charges.
The lease commitments of $131.2 million shown below include lease commitments
of $8.2 million related to certain exited facilities that have not been
reserved for in restructuring charges. In addition, lease commitments and
restructuring obligations shown below are net of estimated sublease income of
$10.8 million related to existing sublease agreements. Restructuring
commitments shown below are primarily for facility exit costs consisting of
minimum lease payments due under certain excess facilities lease agreements
payable through 2009, net of related sublease agreements. The following are
our contractual commitments associated with our lease obligations,
restructurings and convertible debentures:

|                  |                            |      |                           |      |  |      |      |      |  |      |      |            |  |       |      |      |  |   |      |      |  |   |      |      |  |   |       |       | 
|----------------- | -------------------------- | ---- | ------------------------- | ---- |  | ---- | ---- | ---- |  | ---- | ---- | ---------- |  | ----- | ---- | ---- |  | - | ---- | ---- |  | - | ---- | ---- |  | - | ----- | ----- | 
|                  |                            |      | Years Ending December 31, |      |  |      |      |      |  |      |     
|                  |                            |      |                           |      |  |      |      |      |  |      |     
|($ in millions)   |                            | 2004 |                           | 2005 |  | 2006 |      | 2007 |  | 2008 |      | Thereafter |  | Total
|                  |                            |      |                           |      |  |      |      |      |  |      |      |            |  |      
|                  | Leases                     |      | $                         | 12.6 |  |      | $    | 12.1 |  |      | $    | 9.8        |  |       | $    | 13.7 |  |   | $    | 13.2 |  |   | $    | 69.8 |  |   | $     | 131.2 | 
|                  | Convertible debt principal |      |                           | 80.0 |  |      |      |     |  |      |      |           |  |       |      |     |  |   |      |     |  |   |      |     |  |   |       | 80.0  | 
|                  | Convertible debt interest  |      |                           | 4.5  |  |      |      |     |  |      |      |           |  |       |      |     |  |   |      |     |  |   |      |     |  |   |       | 4.5   | 
|                  | Restructurings             |      |                           | 9.0  |  |      |      | 7.4  |  |      |      | 6.6        |  |       |      | 2.9  |  |   |      | 1.3  |  |   |      | 0.7  |  |   |       | 27.9  | 
|                  |                            |      |                           |      |  |      |      |      |  |      |      |            |  |       |      |      |  |   |      |      |  |   |      |      |  |   |       |       | 
|Total commitments |                            | $    | 106.1                     |      |  | $    | 19.5 |      |  | $    | 16.4 |            |  | $     | 16.6 |      |  | $ | 14.5 |      |  | $ | 70.5 |      |  | $ | 243.6 |      
|                  |                            |      |                           |      |  |      |      |      |  |      |      |            |  |       |      |      |  |   |      |      |  |   |      |      |  |   |       |       | 

During October and November 2001, we issued 7% convertible subordinated
debentures with an aggregate principal amount of $80.0 million, together with
warrants to purchase an aggregate of 873,045 shares of our common stock.
Interest is payable in cash semi-annually on January 1 and July 1, at a fixed
rate of 7% per annum. We made $5.7 million of interest payments during the
year ended December 31, 2003. We expect to make interest payments of
approximately $4.7 million during the year ending December 31, 2004. The
debentures mature on October 17, 2004, unless redeemed earlier by us or
converted into shares of our common stock at the holders option. At any time
and at their option, each holder may convert any outstanding debentures into
shares of our common stock at a conversion price of $13.745 per share.
Conversion of all of the outstanding debentures would result in the issuance of
approximately 5.8 million shares of our common stock. We can redeem all or a
portion of the 7% convertible debentures for cash at any time after October 17,
2002, as long as the arithmetic average of the weighted average price of our
common stock on each trading day during the fifteen trading day period
immediately prior to the election to redeem is 150% of the conversion price.
This redemption feature was not exercisable at December 31, 2003. The
debentures are unsecured and are subordinated to all existing and future senior
indebtedness. The agreements governing the convertible debentures contain
covenants restricting our ability to incur and guarantee additional debt. The
covenants limit the amount of additional debt we may incur to the lesser of 30%
of our consolidated stockholders equity, which was approximately $92.6 million
at December 31, 2003, or a total of $180.0 million including the balance of the
7% convertible debentures outstanding.

Any increase or decrease in our accounts receivable balance and accounts
receivable days outstanding (calculated as net accounts receivable divided by
revenue per day) will affect our cash flow from operations and liquidity. Our
accounts receivable and accounts receivable days outstanding may increase due
to changes in factors such as the amount of international sales and length of
customers payment cycle. We also record deferred maintenance billings as
accounts receivable, and the timing of these billings affects the

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accounts receivable days outstanding. Historically, international and indirect
customers pay at a slower rate than domestic and direct customers. An increase
in revenue generated from international and indirect customers may increase our
accounts receivable days outstanding and accounts receivable balance. Due to
the current economic climate, we may observe an increase in the length of our
customers payment cycle. To address increases in accounts receivable balance
and to improve cash flow, we may from time to time take actions to encourage
earlier payment of receivables. Discounts offered to customers to encourage
payment are deducted from revenue. To the extent that our accounts receivable
balance increases, we may incur increased bad debt expense and increased
estimates for reserves against revenue and will be subject to greater general
credit risks.

Crosby held approximately 2.0 million shares of VeriSign common stock and a
variable delivery forward contract, or VDF, at December 31, 2003. The gain
recorded for financial reporting purposes upon execution of the VDF contract in
2000 has not been recognized for tax purposes, and accordingly we recorded a
$26.6 million deferred tax liability in 2000. This deferred tax liability will
reverse upon maturity of the VDF contract in 2006 and the gain will be included
in the calculation of our taxable income for 2006. The recognition of that
gain would result in a tax liability to us and may require the payment of cash
to settle such tax liability.

Our plans for future uses of cash may include additional acquisitions of other
entities or technologies, retirement of outstanding debt and additional
purchases of property and equipment. We anticipate capital expenditures will be
primarily for purchases of property and equipment and will aggregate
approximately $8.0 million to $9.0 million for 2004. We expect to fund our
capital expenditures from cash on hand and cash generated from operations.

We believe that cash generated from our operating activities will be sufficient
to fund our working capital requirements, including our restructuring
liabilities, through at least the next twelve months. However, because of our
concern that the current economic conditions may persist during 2004, if not
longer, we have taken and continue to take steps to reduce our expenses and
align our cost structure to our revenue. We anticipate that current cash on
hand, cash generated from operations, and cash generated from the exercise of
employee options and employee stock purchase plans will be adequate to fund our
planned capital and financing expenditures, including repayment of the
debentures maturing on October 17, 2004, for at least the next twelve months.

Off Balance Sheet Arrangements

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

At December 31, 2003, Crosby held approximately 2.0 million shares of VeriSign
common stock and the VDF contract. The VDF contract entitles Crosby to receive
cash proceeds of up to $35.3 million depending on the market price of VeriSign
common stock on January 3, 2006. The closing price of VeriSigns common stock
on The NASDAQ National Market on December 31, 2003 was $16.30 per share. Unless
the value of VeriSign common stock appreciates to at least $87.16 per share in
January 2006, Crosby will not be entitled to any cash proceeds. Crosby has no
liability or obligation to its members or the counterparty to the VDF contract
other than to deliver the shares of VeriSign common stock to the counterparty
upon maturity of the VDF contract and to distribute the cash proceeds, if any,
to its members. After settlement of the VDF in January 2006, Crosby will
dissolve.

The gain recorded for financial reporting purposes upon execution of the VDF
contract in 2000 has not been recognized for tax purposes, and accordingly we
recorded a $26.6 million deferred tax liability in 2000. This deferred tax
liability will reverse upon maturity of the VDF contract in 2006 and the gain
will be included in the calculation of our taxable income for 2006. The
recognition of that gain would result in a tax liability to us and may require
the payment of cash to settle such tax liability.

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

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

|                                         |  |               |         |                |  |               |         |                |  |   |         |   |  |   |         |  
|---------------------------------------- |  | ------------- | ------- | -------------- |  | ------------- | ------- | -------------- |  | - | ------- | - |  | - | ------- | -
|                                         |  | First Quarter |         | Second Quarter |  | Third Quarter |         | Fourth Quarter
|                                         |  |               |         |                |  |               |         |               
|2003                                     |  |               |         |                |  |               |         |                |  |   |         |   |  |   |         |  
|Revenue                                  |  | $             | 61,264  |                |  | $             | 63,402  |                |  | $ | 64,462  |   |  | $ | 70,738  |  
|Gross profit                             |  |               | 48,082  |                |  |               | 50,380  |                |  |   | 51,524  |   |  |   | 56,667  |  
|Income before provision for income taxes |  |               | 2,671   |                |  |               | 3,750   |                |  |   | 4,707   |   |  |   | 7,428   |  
|Net income                               |  |               | 1,744   |                |  |               | 3,230   |                |  |   | 3,648   |   |  |   | 6,214   |  
|Basic earnings per share                 |  | $             | 0.03    |                |  | $             | 0.06    |                |  | $ | 0.06    |   |  | $ | 0.10    |  
|Diluted earnings per share               |  | $             | 0.03    |                |  | $             | 0.05    |                |  | $ | 0.06    |   |  | $ | 0.10    |  
|2002                                     |  |               |         |                |  |               |         |                |  |   |         |   |  |   |         |  
|Revenue                                  |  | $             | 55,505  |                |  | $             | 56,530  |                |  | $ | 59,028  |   |  | $ | 61,021  |  
|Gross profit (1)                         |  |               | 40,406  |                |  |               | 41,544  |                |  |   | 42,949  |   |  |   | 28,286  |  
|Loss before benefit for income taxes     |  |               | (19,058 | )              |  |               | (42,957 | )              |  |   | (12,247 | ) |  |   | (62,438 | )
|Net loss                                 |  |               | (13,722 | )              |  |               | (25,041 | )              |  |   | (8,220  | ) |  |   | (49,841 | )
|Basic loss per share                     |  | $             | (0.24   | )              |  | $             | (0.44   | )              |  | $ | (0.14   | ) |  | $ | (0.88   | )
|Diluted loss per share                   |  | $             | (0.24   | )              |  | $             | (0.44   | )              |  | $ | (0.14   | ) |  | $ | (0.88   | )

(1)  Gross profit reflects the reclassification of amortization of technology
related intangible assets of $6,587 from operating expense to cost of revenue
for the year ended December 31, 2002, and also reflects the reclassification of
impairment of technology related intangible assets of $14,333 from operating
expense to cost of revenue for the year ended December 31, 2002.

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CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS

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



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

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

If the global economy remains weak, then we may have difficulty selling our
products and services.The global economy, especially the technology sector,
is still weak and may recover slowly or not at all during the foreseeable
future. The general economic slowdown has had and may continue to have serious
negative consequences for our business and operating results. We believe that
the economic slowdown is causing some current or potential customers to defer
purchases, to go out of business or to have insufficient capital to buy or pay
for our products. In response to the current economic conditions, many
companies have reduced their budgets for information technology products and
services, which could reduce or eliminate some potential sales of our products
and services. In addition, some of our resellers and distributors are
experiencing financial difficulties due to the weak economy, which affects our
ability to sell to and collect money from those resellers and distributors.

If we cannot sublease our excess facilities, then we will have to continue to
make lease payments for these facilities until the leases expire.We currently
lease a number of excess, unused or under-used facilities that we are trying to
sublet, and some of our lease commitments for these facilities will not expire
for several years. The real estate market, especially the real estate market
in the Boston metropolitan area where our headquarters are located, is still
weak, and we do not know when or whether we will be able to find sublessees for
our excess facilities. Even if we do find sublessees, the monthly rent we
receive from the sublessees will likely be significantly less than the monthly
rent we owe to the landlord, which means that we will remain responsible for
paying the difference.

Our stock price has been volatile and is likely to remain volatile. From
January 1, 2003 through February 23, 2004 our stock price has ranged from a per
share high of $17.98 to a low of $4.79. A number of factors may contribute to
the volatility of our stock price, including:



| |  |  | our ability to meet the expectations of brokerage firms, industry
analysts and investors with respect to our operating and financial
results;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our public announcements and our competitors public announcements;                                                                          
|
| |  |  | the publics perception of the strength of the e-security solutions market and technology companies generally;                               
|
| |  |  | litigation developments;                                                                                                                     
|
| |  |  | the volatility of the stock market in general and of the technology sector in particular; and                                                
|
| |  |  | general economic conditions.                                                                                                                 

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



| |  |  | the perceived ability of our products to address real customer problems;                                                 
| | - |  | -------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the perceived quality, price, availability and interoperability of our products as compared to our competitors products;

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| |  |  | the markets perception of how easy or difficult it is to deploy our
products, especially in complex, heterogeneous network environments;                                              
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the continued evolution of electronic commerce as a viable means of conducting business;                                                                                               
|
| |  |  | market acceptance and use of digital signatures and digital certificates in business applications;                                                                                     
|
| |  |  | the ability of network infrastructures to support an increasing number of users and services;                                                                                          
|
| |  |  | the publics perception of the need for secure electronic commerce
and communications over both wired and wireless computer networks;                                                  
|
| |  |  | the U.S. governments continued focus on e-security as a means to counteract terrorism and other hostile acts;                                                                         
|
| |  |  | the pace of technological change and our ability to keep up with these changes;                                                                                                        
|
| |  |  | the markets perception of our products ability to address the e-security aspects of privacy and security legislation; and                                                            
|
| |  |  | general economic conditions, which, among other things, influence how
much money our customers and potential customers are willing to allocate
to their information technology budgets.

If we fail to keep up with changes in e-security technology and standards, then
our products could become obsolete.The market for e-security products is
rapidly evolving. E-security technology is constantly changing as we and our
competitors introduce new products and retire old ones and as customer
requirements develop and change. Our future success will depend in part upon
our ability to enhance our existing products and to introduce new,
competitively priced products and solutions with features that meet changing
customer requirements, all in a timely and cost-effective manner. We may not
be successful in introducing new or enhanced products. A number of factors,
including the following, could have a negative impact on the success of our
products:



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

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

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



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

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

If we fail to obtain a sufficient supply of high-quality RSA SecurID
authenticators or components, then we may be unable to fill customer orders or
may need to replace defective authenticators shipped to our customers.
Problems with the availability or quality of our products could cause our
revenue to decrease and our costs to increase, damage our reputation in the
marketplace and subject us to damage claims from our customers. Examples of
quality and possible availability problems include:

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| |  |  | In 2002 and 2003, our quarterly analysis of historical failure and
defective return rates indicated that certain authenticators produced
between 2000 and 2002 were subject to higher defect and failure rates.                                                                                                                                       
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Many of our suppliers are located outside of the United States. If
political, economic or health-related events, such as the U.S. actions
in Iraq or a major health crisis like the SARS epidemic in 2003, were to
affect international trade, then we could experience difficulties in
obtaining product components from our international suppliers.
|
| |  |  | We depend on a limited number of suppliers for some of our product
components. If our existing suppliers were unable to provide us with a
sufficient supply of quality components, then we would have to expend
significant resources to find new suppliers, and it is possible that we
would be unable to find new suppliers in a timely manner.     

If we fail to remain competitive, then we could lose market share for our
established products or fail to gain market share for our less mature products.
A number of competitive factors could cause us to lose potential sales or to
sell our products at lower prices or at reduced margins, including, among
others:



| |  |  | Some of our competitors offer e-security products with features and
functionality that our products do not currently offer.                                                                                                                                                                                                                
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Some computer and software companies that have not traditionally
offered e-security products are now offering free or low-cost e-security
products and functionality bundled with their own computer and software
products.                                                                                                                
|
| |  |  | Some of our current and potential competitors have greater financial,
marketing and technical resources than we do, allowing them to leverage
an installed customer base, adapt more quickly to new technologies and
changes in customer requirements, or devote greater resources to the
promotion and sale of their products than we can.
|
| |  |  | The expiration of some of our patents has permitted the use and
distribution of freeware, free versions of some of our technology, and
we believe that some potential customers may be choosing to use freeware
instead of buying our products.                                                                                          
|
| |  |  | Many companies have reduced their information technology budgets due
to the current economic conditions, which could make competition more
intense because we are competing for fewer customer dollars.                                                                                                                                    

International sales make up a significant portion of our business.
International sales accounted for more than 40% of our total revenue in each of
the years ended December 31, 2003, 2002 and 2001. We may need to tailor or
localize our products in order to compete in particular international markets
and to comply with foreign laws. We may not be able to develop, market and
distribute localized versions of our products in a timely manner or at all. In
addition, there are certain risks inherent in doing business internationally,
including:



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

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



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

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



| |  |  | It is possible that any patent that we or our licensors hold might be invalidated, circumvented, challenged or terminated.
| | - |  | --------------------------------------------------------------------------------------------------------------------------
|
| |  |  | It is possible that patent examiners might reject the claims described in our pending or future patent applications.      

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| |  |  | The laws of some countries in which our products are now, or may in
the future be, developed or sold may not protect our products and
intellectual property rights to the same extent as the laws of the
United States.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | During the life of a patent, third parties may design and sell
work-around solutions that accomplish the goals of our patented
inventions but do not infringe the patents themselves.                                

Our issued U.S. patents expire at various dates ranging from 2005 to 2018.
When each of our patents expires, competitors may develop and sell products
based on the same or similar technologies as those covered by the expired
patent, which could result in lower prices, reduced margins or the failure of
our products to achieve or maintain market acceptance. In addition, when each
of our patents expires, potential customers may choose to rely on freeware,
free versions of our previously patented technology, rather than buying our
products.

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

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



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

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



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

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

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

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

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

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

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

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




ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

At December 31, 2003 Crosby Finance, LLC, a qualified special purpose entity of
which we are a 99% member, held approximately 2.0 million shares of VeriSign
common stock and a variable delivery forward contract, or VDF. The VDF contract
held by Crosby will settle in January 2006. The VDF contract entitles us to
additional cash proceeds of up to $35.3 million depending on the market price
of VeriSign common stock on January 3, 2006, as follows:

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

We account for our investment in Crosby under EITF Issue No. 96-12,
Recognition of Interest Income and Balance Sheet Classification of Structured
Notes. We are carrying our interest at fair value with all changes in fair
value reported in income from investing activities in the statement of
operations. We determine the fair value based on the fair value of Crosbys
right to potentially receive additional cash proceeds under the VDF. The
closing price of VeriSigns common stock on The NASDAQ National Market on
December 31, 2003 was $16.30 per share. Unless the VeriSign stock appreciates
to at least $87.16 per share in January 2006, we will not be entitled to any
cash flows from our remaining interest in Crosby. Our remaining investment in
Crosby has a fair value of $0.2 million at December 31, 2003, and is recorded
in other assets. Should the value of our investment in Crosby decrease, we
would incur a pretax charge of up to $0.2 million, which would be included in
income from investing activities in the statement of operations.

During 2001, we issued 7% convertible subordinated debentures due October 17,
2004 with an aggregate principal amount of $80.0 million, together with
warrants to purchase an aggregate of approximately 0.9 million shares of our
common stock. At any time and at

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their option, each holder may convert any outstanding debentures into shares of
our common stock at a conversion price of $13.745 per share, which upon
conversion of all of the outstanding debentures would result in the issuance of
approximately 5.8 million shares of our common stock. The holders of the
warrants issued with the debentures may exercise the warrants at any time until
October 17, 2006 at an exercise price of $13.745 per share. The conversion
price of the debentures and the exercise price of the warrants may be adjusted
under certain circumstances, such as events that would cause dilution of the
holders interest. We may redeem all or a portion of the debentures for cash at
any time after October 17, 2002 as long as the arithmetic average of the
weighted average price of our common stock on each trading day during the
fifteen trading day period immediately prior to the election to redeem is at
least 150% of the conversion price. The redemption feature was not exercisable
at December 31, 2003. If the 7% convertible debentures are redeemed in part or
total prior to their maturity date we will record a non cash charge for
unamortized deferred financing costs and the unamortized value of the warrants.
At December 31, 2003, unamortized deferred financing costs were $1.2 million
and the unamortized value of the warrants was $1.1 million. Interest is payable
in cash semi-annually at a fixed rate of 7% per annum, and therefore we believe
we have no interest rate exposure with these debentures.

As a global concern, we face exposure to adverse movements in foreign currency
exchange rates. These exposures may change over time as business practices
evolve and could have a material adverse impact on our financial results.
Historically, our primary exposures to fluctuations in foreign currency
exchange rates related to sales and operating expenses denominated in local
currencies. Our direct sales to our customers in countries outside of the
United States are denominated in U.S. dollars and local currencies, with the
majority of our direct sales denominated in U.S. dollars. Our sales through
indirect distribution channels are generally denominated in U.S. dollars. For
countries outside the United States, we generally pay our operating expenses in
local currency. When we do invoice customers in local currency, we are exposed
to foreign exchange rate fluctuations from the time of invoice until collection
occurs. We are also exposed to foreign currency rate fluctuations between the
time we collect in U.S. dollars and the time we pay our operating expenses in
local currency. Fluctuations in foreign currency exchange rates could affect
the profitability and cash flows in U.S. dollars of our products sold in
international markets.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF MANAGEMENT

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

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

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

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

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

/s/ Arthur W. Coviello, Jr.

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

/s/ Jeffrey D. Glidden

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

March 4, 2004

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INDEPENDENT AUDITORS REPORT

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

We have audited the accompanying consolidated balance sheets of RSA Security
Inc. and subsidiaries as of December 31, 2003 and 2002, and the related
consolidated statements of operations, stockholders equity, and cash flows for
each of the three years in the period ended December 31, 2003. Our audits also
included the financial statement schedule listed in Item 15 (a) (2). These
financial statements and financial statement schedule are the responsibility of
the Companys management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of RSA Security Inc. and subsidiaries
as of December 31, 2003 and 2002, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2003 in
conformity with accounting principles generally accepted in the United States
of America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.

As discussed in Notes 1 and 2 of the Notes to Consolidated Financial
Statements, in 2002 the Company adopted the provisions of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.

/s/ DELOITTE & TOUCHE LLP

Boston, Massachusetts
March 4, 2004

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

|                                  |                                                                                                                                                                        |                            |                                      |         |              |   |         |          |         |  | 
|--------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------ | ------- | ------------ | - | ------- | -------- | ------- |  | 
|                                  |                                                                                                                                                                        |                            |                                      |         | December 31,
|                                  |                                                                                                                                                                        |                            |                                      |         |             
|                                  |                                                                                                                                                                        |                            |                                      |         | 2003         |   | 2002   
|                                  |                                                                                                                                                                        |                            |                                      |         |              |   |        
|ASSETS                            |                                                                                                                                                                        |                            |                                      |         |              |   |         |         
|Current assets                    |                                                                                                                                                                        |                            |                                      |         |              |   |         |         
|                                  | Cash and cash equivalents                                                                                                                                              |                            | $                                    | 207,323 |              |   | $       | 103,030  |        
|                                  | Accounts receivable (less allowance for doubtful accounts
of $1,849 in 2003 and $2,494 in 2002)                                                                        |                            |                                      | 33,310  |              |   |         | 35,666   |        
|                                  | Inventory                                                                                                                                                              |                            |                                      | 4,011   |              |   |         | 2,334    |        
|                                  | Prepaid expenses and other assets                                                                                                                                      |                            |                                      | 6,641   |              |   |         | 5,567    |        
|                                  | Refundable income taxes                                                                                                                                                |                            |                                      | 11,062  |              |   |         | 57,643   |        
|                                  | Deferred taxes                                                                                                                                                         |                            |                                      | 2,942   |              |   |         | 3,829    |        
|                                  |                                                                                                                                                                        |                            |                                      |         |              |   |         |         
|                                  |                                                                                                                                                                        | Total current assets       |                                      |         | 265,289      |   |         |          | 208,069 | 
|                                  |                                                                                                                                                                        |                            |                                      |         |              |   |         |         
|Property and equipment, net       |                                                                                                                                                                        |                            | 68,149                               |         |              |   | 73,376  |         
|Other assets                      |                                                                                                                                                                        |                            |                                      |         |              |   |         |         
|                                  | Goodwill, net                                                                                                                                                          |                            |                                      | 189,260 |              |   |         | 192,629  |        
|                                  | Investments                                                                                                                                                            |                            |                                      |        |              |   |         | 1,400    |        
|                                  | Other                                                                                                                                                                  |                            |                                      | 6,879   |              |   |         | 7,374    |        
|                                  |                                                                                                                                                                        |                            |                                      |         |              |   |         |         
|                                  |                                                                                                                                                                        | Total other assets         |                                      |         | 196,139      |   |         |          | 201,403 | 
|                                  |                                                                                                                                                                        |                            |                                      |         |              |   |         |         
|                                  |                                                                                                                                                                        | $                          | 529,577                              |         |              | $ | 482,848 |         
|                                  |                                                                                                                                                                        |                            |                                      |         |              |   |         |         
|                                  |                                                                                                                                                                        |                            | LIABILITIES AND STOCKHOLDERS EQUITY |         |              |   |         |          |         |  | 
|Current liabilities               |                                                                                                                                                                        |                            |                                      |         |              |   |         |         
|                                  | Convertible debentures                                                                                                                                                 |                            | $                                    | 78,877  |              |   |         |         |        
|                                  | Accounts payable                                                                                                                                                       |                            |                                      | 8,021   |              |   | $       | 6,966    |        
|                                  | Accrued payroll and related benefits                                                                                                                                   |                            |                                      | 16,246  |              |   |         | 11,256   |        
|                                  | Accrued expenses and other liabilities                                                                                                                                 |                            |                                      | 18,955  |              |   |         | 17,543   |        
|                                  | Current portion of accrued restructurings                                                                                                                              |                            |                                      | 9,043   |              |   |         | 11,601   |        
|                                  | Income taxes accrued and payable                                                                                                                                       |                            |                                      | 29,128  |              |   |         | 33,484   |        
|                                  | Deferred revenue                                                                                                                                                       |                            |                                      | 34,625  |              |   |         | 33,170   |        
|                                  |                                                                                                                                                                        |                            |                                      |         |              |   |         |         
|                                  |                                                                                                                                                                        | Total current liabilities  |                                      |         | 194,895      |   |         |          | 114,020 | 
|                                  |                                                                                                                                                                        |                            |                                      |         |              |   |         |         
|Deferred taxes, long-term         |                                                                                                                                                                        |                            | 7,046                                |         |              |   | 1,592   |         
|Accrued restructurings, long-term |                                                                                                                                                                        |                            | 18,861                               |         |              |   | 26,325  |         
|Convertible debentures            |                                                                                                                                                                        |                            |                                     |         |              |   | 77,477  |         
|                                  |                                                                                                                                                                        |                            |                                      |         |              |   |         |         
|                                  |                                                                                                                                                                        | Total liabilities          |                                      |         | 220,802      |   |         |          | 219,414 | 
|                                  |                                                                                                                                                                        |                            |                                      |         |              |   |         |         
|Commitments and Contingencies     |                                                                                                                                                                        |                            |                                      |         |              |   |         |         
|Stockholders equity              |                                                                                                                                                                        |                            |                                      |         |              |   |         |         
|                                  | Common stock, $0.01 par value; authorized, 300,000,000 shares; issued, 62,144,158
shares;
outstanding, 60,870,590 and 57,066,695 shares in 2003 and 2002, respectively |                            |                                      | 621     |              |   |         | 621      |        
|                                  | Additional paid-in capital                                                                                                                                             |                            |                                      |        |              |   |         | 100,824  |        
|                                  | Retained earnings                                                                                                                                                      |                            |                                      | 359,730 |              |   |         | 354,496  |        
|                                  | Treasury stock, at cost; 1,273,568 and 5,077,463 shares in 2003 and 2002, respectively                                                                                 |                            |                                      | (53,852 | )            |   |         | (190,554 | )      
|                                  | Accumulated other comprehensive income (loss)                                                                                                                          |                            |                                      | 2,276   |              |   |         | (1,953   | )      
|                                  |                                                                                                                                                                        |                            |                                      |         |              |   |         |         
|                                  |                                                                                                                                                                        | Total stockholders equity |                                      |         | 308,775      |   |         |          | 263,434 | 
|                                  |                                                                                                                                                                        |                            |                                      |         |              |   |         |         
|                                  |                                                                                                                                                                        | $                          | 529,577                              |         |              | $ | 482,848 |         
|                                  |                                                                                                                                                                        |                            |                                      |         |              |   |         |         

See accompanying notes to consolidated financial statements.

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

|                                                          |                                                      |       |         |                          |         |      |          |         |         |   |         |         |         | 
|--------------------------------------------------------- | ---------------------------------------------------- | ----- | ------- | ------------------------ | ------- | ---- | -------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                          |                                                      |       |         | Years Ended December 31,
|                                                          |                                                      |       |         |                         
|                                                          |                                                      |       |         | 2003                     |         | 2002 |          | 2001   
|                                                          |                                                      |       |         |                          |         |      |          |        
|Revenue                                                   |                                                      |       |         |                          |         |      |          |         |         |   |         |        
|                                                          | Products                                             |       | $       | 193,664                  |         |      | $        | 168,954 |         |   | $       | 222,382 |        
|                                                          | Maintenance and professional services                |       |         | 66,202                   |         |      |          | 63,130  |         |   |         | 60,338  |        
|                                                          |                                                      |       |         |                          |         |      |          |         |         |   |         |        
|Total revenue                                             |                                                      |       | 259,866 |                          |         |      | 232,084  |         |         |   | 282,720 |        
|                                                          |                                                      |       |         |                          |         |      |          |         |         |   |         |        
|Cost of revenue                                           |                                                      |       |         |                          |         |      |          |         |         |   |         |        
|                                                          | Products                                             |       |         | 32,336                   |         |      |          | 35,772  |         |   |         | 38,226  |        
|                                                          | Maintenance and professional services                |       |         | 20,877                   |         |      |          | 22,207  |         |   |         | 28,456  |        
|                                                          | Impairment of technology related intangible assets   |       |         |                         |         |      |          | 14,333  |         |   |         |        |        
|                                                          | Amortization of technology related intangible assets |       |         |                         |         |      |          | 6,587   |         |   |         | 3,281   |        
|                                                          |                                                      |       |         |                          |         |      |          |         |         |   |         |         |        
|Total cost of revenue                                     |                                                      |       | 53,213  |                          |         |      | 78,899   |         |         |   | 69,963  |        
|                                                          |                                                      |       |         |                          |         |      |          |         |         |   |         |         |        
|Gross profit                                              |                                                      |       | 206,653 |                          |         |      | 153,185  |         |         |   | 212,757 |        
|                                                          |                                                      |       |         |                          |         |      |          |         |         |   |         |        
|Costs and expenses                                        |                                                      |       |         |                          |         |      |          |         |         |   |         |        
|                                                          | Research and development                             |       |         | 53,629                   |         |      |          | 55,061  |         |   |         | 58,345  |        
|                                                          | Marketing and selling                                |       |         | 94,298                   |         |      |          | 100,673 |         |   |         | 122,915 |        
|                                                          | General and administrative                           |       |         | 33,776                   |         |      |          | 30,256  |         |   |         | 39,127  |        
|                                                          | Restructurings                                       |       |         |                         |         |      |          | 56,036  |         |   |         | 19,956  |        
|                                                          | Impairment of intangible assets                      |       |         |                         |         |      |          | 4,807   |         |   |         |        |        
|                                                          | Amortization of intangible assets                    |       |         |                         |         |      |          | 3,337   |         |   |         | 11,171  |        
|                                                          | In process research and development                  |       |         |                         |         |      |          |        |         |   |         | 7,891   |        
|                                                          |                                                      |       |         |                          |         |      |          |         |         |   |         |         |        
|                                                          |                                                      | Total |         |                          | 181,703 |      |          |         | 250,170 |   |         |         | 259,405 | 
|                                                          |                                                      |       |         |                          |         |      |          |         |         |   |         |        
|Income (loss) from operations                             |                                                      |       | 24,950  |                          |         |      | (96,985  | )       |         |   | (46,648 | )      
|Interest (expense) income and other                       |                                                      |       | (7,962  | )                        |         |      | (8,778   | )       |         |   | 5,860   |        
|Income (loss) from investing activities                   |                                                      |       | 1,568   |                          |         |      | (30,937  | )       |         |   | 40,836  |        
|                                                          |                                                      |       |         |                          |         |      |          |         |         |   |         |         |        
|Income (loss) before provision (benefit) for income taxes |                                                      |       | 18,556  |                          |         |      | (136,700 | )       |         |   | 48      |        
|Provision (benefit) for income taxes                      |                                                      |       | 3,720   |                          |         |      | (39,876  | )       |         |   | 2,555   |        
|                                                          |                                                      |       |         |                          |         |      |          |         |         |   |         |         |        
|Net income (loss)                                         |                                                      | $     | 14,836  |                          |         | $    | (96,824  | )       |         | $ | (2,507  | )      
|                                                          |                                                      |       |         |                          |         |      |          |         |         |   |         |         |        
|Basic earnings (loss) per share                           |                                                      |       |         |                          |         |      |          |         |         |   |         |        
|                                                          | Per share amount                                     |       | $       | 0.25                     |         |      | $        | (1.71   | )       |   | $       | (0.04   | )      
|                                                          |                                                      |       |         |                          |         |      |          |         |         |   |         |        
|                                                          | Weighted average shares                              |       |         | 58,758                   |         |      |          | 56,621  |         |   |         | 56,259  |        
|                                                          |                                                      |       |         |                          |         |      |          |         |         |   |         |        
|Diluted earnings (loss) per share                         |                                                      |       |         |                          |         |      |          |         |         |   |         |        
|                                                          | Per share amount                                     |       | $       | 0.24                     |         |      | $        | (1.71   | )       |   | $       | (0.04   | )      
|                                                          |                                                      |       |         |                          |         |      |          |         |         |   |         |        
|                                                          | Weighted average shares                              |       |         | 58,758                   |         |      |          | 56,621  |         |   |         | 56,259  |        
|                                                          | Effect of dilutive equity instruments                |       |         | 3,546                    |         |      |          |        |         |   |         |        |        
|                                                          |                                                      |       |         |                          |         |      |          |         |         |   |         |        
|                                                          | Adjusted weighted average shares                     |       |         | 62,304                   |         |      |          | 56,621  |         |   |         | 56,259  |        
|                                                          |                                                      |       |         |                          |         |      |          |         |         |   |         |        

See accompanying notes to consolidated financial statements.

44



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##### Table of Contents






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

|                                                                           |  |              |            |          |  |          |     |                |  |            |          |               |  |        |         |        |  |  |            |   |  |   |          |               |  |             |         |   |  |   |         |  
|-------------------------------------------------------------------------- |  | ------------ | ---------- | -------- |  | -------- | --- | -------------- |  | ---------- | -------- | ------------- |  | ------ | ------- | ------ |  |  | ---------- | - |  | - | -------- | ------------- |  | ----------- | ------- | - |  | - | ------- | -
|                                                                           |  |              |            |          |  |          |     |                |  |            |          |               |  |        |         |        |  |  |            |   |  |   |          |               |  | Accumulated |         |   |  |  
|                                                                           |  |              |            |          |  |          |     |                |  |            |          |               |  |        |         |        |  |  |            |   |  |   |          |               |  | Other       |         |   |  |  
|                                                                           |  |              |            |          |  |          |     |                |  | Additional |          |               |  |        |         |        |  |  |            |   |  |   |          | Comprehensive |  | Total      
|                                                                           |  | Common Stock |            | Paid-in- |  | Retained |     | Treasury Stock |  | Income     |          | Stockholders
|                                                                           |  | Shares       |            | Amount   |  | Capital  |     | Earnings       |  | Shares     |          | Amount        |  | (Loss) |         | Equity
|                                                                           |  |              |            |          |  |          |     |                |  |            |          |               |  |        |         |       
|Balance, January 1, 2001                                                   |  |              | 62,144,158 |          |  | $        | 621 |                |  | $          | 213,826  |               |  | $      | 453,827 |        |  |  | 5,977,806  |   |  | $ | (218,962 | )             |  | $           | 31,692  |   |  | $ | 481,004 |  
|                                                                           |  |              |            |          |  |          |     |                |  |            |          |               |  |        |         |        |  |  |            |   |  |   |          |               |  |             |         |   |  |   |         |  
|Issuance of common stock
from exercise of stock
options and purchase plans |  |              |            |          |  |          |     |                |  |            | (57,261  | )             |  |        |         |        |  |  | (2,457,030 | ) |  |   | 90,855   |               |  |             |         |   |  |   | 33,594  |  
|Tax benefit on the exercise
of stock options                               |  |              |            |          |  |          |     |                |  |            | 15,828   |               |  |        |         |        |  |  |            |   |  |   |          |               |  |             |         |   |  |   | 15,828  |  
|Assumption of Xcert
International Inc. stock
options                       |  |              |            |          |  |          |     |                |  |            | 3,730    |               |  |        |         |        |  |  |            |   |  |   |          |               |  |             |         |   |  |   | 3,730   |  
|Issuance of warrants in
connection with convertible
debt issuance          |  |              |            |          |  |          |     |                |  |            | 4,149    |               |  |        |         |        |  |  |            |   |  |   |          |               |  |             |         |   |  |   | 4,149   |  
|Share repurchase program                                                   |  |              |            |          |  |          |     |                |  |            |          |               |  |        |         |        |  |  | 2,213,500  |   |  |   | (89,974  | )             |  |             |         |   |  |   | (89,974 | )
|Put option premiums                                                        |  |              |            |          |  |          |     |                |  |            | 7,565    |               |  |        |         |        |  |  |            |   |  |   |          |               |  |             |         |   |  |   | 7,565   |  
|Put option settlements                                                     |  |              |            |          |  |          |     |                |  |            | (63,815  | )             |  |        |         |        |  |  |            |   |  |   |          |               |  |             |         |   |  |   | (63,815 | )
|Comprehensive loss:                                                        |  |              |            |          |  |          |     |                |  |            |          |               |  |        |         |        |  |  |            |   |  |   |          |               |  |             |         |   |  |   |         |  
|Translation adjustment                                                     |  |              |            |          |  |          |     |                |  |            |          |               |  |        |         |        |  |  |            |   |  |   |          |               |  |             | (2,188  | ) |  |   | (2,188  | )
|Unrealized loss on
marketable securities, net                              |  |              |            |          |  |          |     |                |  |            |          |               |  |        |         |        |  |  |            |   |  |   |          |               |  |             | (33,973 | ) |  |   | (33,973 | )
|Net loss                                                                   |  |              |            |          |  |          |     |                |  |            |          |               |  |        | (2,507  | )      |  |  |            |   |  |   |          |               |  |             |         |   |  |   | (2,507  | )
|                                                                           |  |              |            |          |  |          |     |                |  |            |          |               |  |        |         |        |  |  |            |   |  |   |          |               |  |             |         |   |  |   |         |  
|Total comprehensive loss                                                   |  |              |            |          |  |          |     |                |  |            |          |               |  |        |         |        |  |  |            |   |  |   |          |               |  |             |         |   |  |   | (38,668 | )
|                                                                           |  |              |            |          |  |          |     |                |  |            |          |               |  |        |         |        |  |  |            |   |  |   |          |               |  |             |         |   |  |   |         |  
|Balance, December 31, 2001                                                 |  |              | 62,144,158 |          |  |          | 621 |                |  |            | 124,022  |               |  |        | 451,320 |        |  |  | 5,734,276  |   |  |   | (218,081 | )             |  |             | (4,469  | ) |  |   | 353,413 |  
|                                                                           |  |              |            |          |  |          |     |                |  |            |          |               |  |        |         |        |  |  |            |   |  |   |          |               |  |             |         |   |  |   |         |  
|Issuance of common stock
from exercise of stock
options and purchase plans |  |              |            |          |  |          |     |                |  |            | (23,566  | )             |  |        |         |        |  |  | (656,813   | ) |  |   | 27,527   |               |  |             |         |   |  |   | 3,961   |  
|Tax benefit on the exercise
of stock options                               |  |              |            |          |  |          |     |                |  |            | 328      |               |  |        |         |        |  |  |            |   |  |   |          |               |  |             |         |   |  |   | 328     |  
|Stock compensation                                                         |  |              |            |          |  |          |     |                |  |            | 40       |               |  |        |         |        |  |  |            |   |  |   |          |               |  |             |         |   |  |   | 40      |  
|Comprehensive loss:                                                        |  |              |            |          |  |          |     |                |  |            |          |               |  |        |         |        |  |  |            |   |  |   |          |               |  |             |         |   |  |   |         |  
|Translation adjustment                                                     |  |              |            |          |  |          |     |                |  |            |          |               |  |        |         |        |  |  |            |   |  |   |          |               |  |             | 2,938   |   |  |   | 2,938   |  
|Unrealized loss on
marketable securities, net                              |  |              |            |          |  |          |     |                |  |            |          |               |  |        |         |        |  |  |            |   |  |   |          |               |  |             | (422    | ) |  |   | (422    | )
|Net loss                                                                   |  |              |            |          |  |          |     |                |  |            |          |               |  |        | (96,824 | )      |  |  |            |   |  |   |          |               |  |             |         |   |  |   | (96,824 | )
|                                                                           |  |              |            |          |  |          |     |                |  |            |          |               |  |        |         |        |  |  |            |   |  |   |          |               |  |             |         |   |  |   |         |  
|Total comprehensive loss                                                   |  |              |            |          |  |          |     |                |  |            |          |               |  |        |         |        |  |  |            |   |  |   |          |               |  |             |         |   |  |   | (94,308 | )
|                                                                           |  |              |            |          |  |          |     |                |  |            |          |               |  |        |         |        |  |  |            |   |  |   |          |               |  |             |         |   |  |   |         |  
|Balance, December 31, 2002                                                 |  |              | 62,144,158 |          |  |          | 621 |                |  |            | 100,824  |               |  |        | 354,496 |        |  |  | 5,077,463  |   |  |   | (190,554 | )             |  |             | (1,953  | ) |  |   | 263,434 |  
|                                                                           |  |              |            |          |  |          |     |                |  |            |          |               |  |        |         |        |  |  |            |   |  |   |          |               |  |             |         |   |  |   |         |  
|Issuance of common stock
from exercise of stock
options and purchase plans |  |              |            |          |  |          |     |                |  | $          | (106,309 | )             |  |        | (9,602  | )      |  |  | (3,803,895 | ) |  |   | 136,702  |               |  |             |         |   |  |   | 20,791  |  
|Tax benefit on the exercise
of stock options                               |  |              |            |          |  |          |     |                |  |            | 5,485    |               |  |        |         |        |  |  |            |   |  |   |          |               |  |             |         |   |  |   | 5,485   |  
|Comprehensive income:                                                      |  |              |            |          |  |          |     |                |  |            |          |               |  |        |         |        |  |  |            |   |  |   |          |               |  |             |         |   |  |   |         |  
|Translation adjustment                                                     |  |              |            |          |  |          |     |                |  |            |          |               |  |        |         |        |  |  |            |   |  |   |          |               |  |             | 4,229   |   |  |   | 4,229   |  
|Net income                                                                 |  |              |            |          |  |          |     |                |  |            |          |               |  |        | 14,836  |        |  |  |            |   |  |   |          |               |  |             |         |   |  |   | 14,836  |  
|                                                                           |  |              |            |          |  |          |     |                |  |            |          |               |  |        |         |        |  |  |            |   |  |   |          |               |  |             |         |   |  |   |         |  
|Total comprehensive income                                                 |  |              |            |          |  |          |     |                |  |            |          |               |  |        |         |        |  |  |            |   |  |   |          |               |  |             |         |   |  |   | 19,065  |  
|                                                                           |  |              |            |          |  |          |     |                |  |            |          |               |  |        |         |        |  |  |            |   |  |   |          |               |  |             |         |   |  |   |         |  
|Balance, December 31, 2003                                                 |  |              | 62,144,158 |          |  | $        | 621 |                |  |            |         |               |  | $      | 359,730 |        |  |  | 1,273,568  |   |  | $ | (53,852  | )             |  | $           | 2,276   |   |  | $ | 308,775 |  
|                                                                           |  |              |            |          |  |          |     |                |  |            |          |               |  |        |         |        |  |  |            |   |  |   |          |               |  |             |         |   |  |   |         |  

See accompanying notes to consolidated financial statements.

45



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##### Table of Contents






RSA SECURITY INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)

|                                                                                                    |                                                                                 |                                                              |                                                      |                                                      |        |                          |         |        |         |        |          |          |         |          |        |  
|--------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | ------------------------------------------------------------ | ---------------------------------------------------- | ---------------------------------------------------- | ------ | ------------------------ | ------- | ------ | ------- | ------ | -------- | -------- | ------- | -------- | ------ | -
|                                                                                                    |                                                                                 |                                                              |                                                      |                                                      |        | Years Ended December 31,
|                                                                                                    |                                                                                 |                                                              |                                                      |                                                      |        |                         
|                                                                                                    |                                                                                 |                                                              |                                                      |                                                      |        | 2003                     |         | 2002   |         | 2001  
|                                                                                                    |                                                                                 |                                                              |                                                      |                                                      |        |                          |         |        |         |       
|Cash flows from operating activities                                                                |                                                                                 |                                                              |                                                      |                                                      |        |                          |         |        |         |        |          |         
|Net income (loss)                                                                                   |                                                                                 | $                                                            | 14,836                                               |                                                      |        | $                        | (96,824 | )      |         | $      | (2,507   | )       
|Adjustments to reconcile net income (loss) to net cash provided by (used for) operating
activities: |                                                                                 |                                                              |                                                      |                                                      |        |                          |         |        |         |        |          |         
|                                                                                                    | Depreciation                                                                    |                                                              |                                                      | 13,223                                               |        |                          |         | 16,612 |         |        |          | 15,184   |        
|                                                                                                    | Amortization of goodwill and intangible assets                                  |                                                              |                                                      |                                                     |        |                          |         | 9,924  |         |        |          | 14,452   |        
|                                                                                                    | Tax benefit from exercise of stock options                                      |                                                              |                                                      | 5,485                                                |        |                          |         | 328    |         |        |          | 15,828   |        
|                                                                                                    | In process research and development                                             |                                                              |                                                      |                                                     |        |                          |         |       |         |        |          | 7,891    |        
|                                                                                                    | Non cash restructuring                                                          |                                                              |                                                      |                                                     |        |                          |         | 9,242  |         |        |          | 4,350    |        
|                                                                                                    | Non cash stock option compensation                                              |                                                              |                                                      |                                                     |        |                          |         |       |         |        |          | 751      |        
|                                                                                                    | Amortization of convertible debentures deferred financing costs                 |                                                              |                                                      | 1,605                                                |        |                          |         | 1,611  |         |        |          | 329      |        
|                                                                                                    | Non cash warrant accretion                                                      |                                                              |                                                      | 1,400                                                |        |                          |         | 1,375  |         |        |          | 251      |        
|                                                                                                    | (Income) loss from investing activities                                         |                                                              |                                                      | (1,542                                               | )      |                          |         | 2,249  |         |        |          | (48,008  | )      
|                                                                                                    | Investment valuation impairment                                                 |                                                              |                                                      | (26                                                  | )      |                          |         | 28,689 |         |        |          | 7,172    |        
|                                                                                                    | Impairment of intangible assets                                                 |                                                              |                                                      |                                                     |        |                          |         | 19,140 |         |        |          |         |        
|                                                                                                    | Deferred taxes                                                                  |                                                              |                                                      | 11,825                                               |        |                          |         | 2,204  |         |        |          | 6,665    |        
|                                                                                                    | Increase (decrease) in cash from changes in, net of the effect of acquisitions: |                                                              |                                                      |                                                      |        |                          |         |        |         |        |          |          |        
|                                                                                                    |                                                                                 | Accounts receivable                                          |                                                      |                                                      | 2,857  |                          |         |        | 22,782  |        |          |          | 1,657   |         
|                                                                                                    |                                                                                 | Inventory                                                    |                                                      |                                                      | (1,676 | )                        |         |        | 6,923   |        |          |          | (5,221  | )       
|                                                                                                    |                                                                                 | Prepaid expenses and other assets                            |                                                      |                                                      | (846   | )                        |         |        | 5,482   |        |          |          | 12,600  |         
|                                                                                                    |                                                                                 | Accounts payable                                             |                                                      |                                                      | 916    |                          |         |        | (198    | )      |          |          | (3,206  | )       
|                                                                                                    |                                                                                 | Accrued payroll and related benefits                         |                                                      |                                                      | 4,201  |                          |         |        | (472    | )      |          |          | (7,328  | )       
|                                                                                                    |                                                                                 | Accrued expenses and other liabilities                       |                                                      |                                                      | 1,170  |                          |         |        | 3,037   |        |          |          | (4,656  | )       
|                                                                                                    |                                                                                 | Accrued restructurings                                       |                                                      |                                                      | (9,781 | )                        |         |        | 27,566  |        |          |          | 6,389   |         
|                                                                                                    |                                                                                 | Refundable income taxes and income taxes accrued and payable |                                                      |                                                      | 36,657 |                          |         |        | (21,459 | )      |          |          | (33,451 | )       
|                                                                                                    |                                                                                 | Deferred revenue                                             |                                                      |                                                      | 1,202  |                          |         |        | 3,825   |        |          |          | 3,173   |         
|                                                                                                    |                                                                                 |                                                              |                                                      |                                                      |        |                          |         |        |         |        |          |         
|                                                                                                    |                                                                                 |                                                              |                                                      | Net cash provided by (used for) operating activities |        |                          | 81,506  |        |         |        | 42,036   |          |         |          | (7,685 | )
|                                                                                                    |                                                                                 |                                                              |                                                      |                                                      |        |                          |         |        |         |        |          |         
|Cash flows from investing activities                                                                |                                                                                 |                                                              |                                                      |                                                      |        |                          |         |        |         |        |          |         
|                                                                                                    | Purchases of marketable securities                                              |                                                              |                                                      |                                                     |        |                          |         |       |         |        |          | (36,411  | )      
|                                                                                                    | Sales and maturities of marketable securities                                   |                                                              |                                                      |                                                     |        |                          |         | 1,150  |         |        |          | 75,593   |        
|                                                                                                    | Purchases of property and equipment                                             |                                                              |                                                      | (4,247                                               | )      |                          |         | (4,665 | )       |        |          | (36,173  | )      
|                                                                                                    | Proceeds from Crosby Finance, LLC                                               |                                                              |                                                      |                                                     |        |                          |         |       |         |        |          | 53,460   |        
|                                                                                                    | Investments                                                                     |                                                              |                                                      | 3,041                                                |        |                          |         | 317    |         |        |          | (23,231  | )      
|                                                                                                    | Acquisitions, net of cash acquired                                              |                                                              |                                                      | 3,370                                                |        |                          |         | (997   | )       |        |          | (226,146 | )      
|                                                                                                    | Other                                                                           |                                                              |                                                      | (1,377                                               | )      |                          |         | (117   | )       |        |          | 515      |        
|                                                                                                    |                                                                                 |                                                              |                                                      |                                                      |        |                          |         |        |         |        |          |         
|                                                                                                    |                                                                                 |                                                              | Net cash provided by (used for) investing activities |                                                      |        | 787                      |         |        |         | (4,312 | )        |          |         | (192,393 | )     
|                                                                                                    |                                                                                 |                                                              |                                                      |                                                      |        |                          |         |        |         |        |          |         
|Cash flows from financing activities                                                                |                                                                                 |                                                              |                                                      |                                                      |        |                          |         |        |         |        |          |         
|                                                                                                    | Proceeds from exercise of stock options and purchase plans                      |                                                              |                                                      | 20,791                                               |        |                          |         | 3,961  |         |        |          | 33,594   |        
|                                                                                                    | Share repurchase program                                                        |                                                              |                                                      |                                                     |        |                          |         |       |         |        |          | (89,974  | )      
|                                                                                                    | Issuance of convertible debentures, net                                         |                                                              |                                                      |                                                     |        |                          |         |       |         |        |          | 75,235   |        
|                                                                                                    | Settlement of put option contracts                                              |                                                              |                                                      |                                                     |        |                          |         |       |         |        |          | (63,815  | )      
|                                                                                                    | Sale of put options                                                             |                                                              |                                                      |                                                     |        |                          |         |       |         |        |          | 7,565    |        
|                                                                                                    | Other                                                                           |                                                              |                                                      |                                                     |        |                          |         | (18    | )       |        |          |         |        
|                                                                                                    |                                                                                 |                                                              |                                                      |                                                      |        |                          |         |        |         |        |          |         
|                                                                                                    |                                                                                 |                                                              | Net cash provided by (used for) financing activities |                                                      |        | 20,791                   |         |        |         | 3,943  |          |          |         | (37,395  | )     
|                                                                                                    |                                                                                 |                                                              |                                                      |                                                      |        |                          |         |        |         |        |          |         
|Effect of exchange rate changes on cash and cash equivalents                                        |                                                                                 |                                                              | 1,209                                                |                                                      |        |                          | (583    | )      |         |        | (2,478   | )       
|                                                                                                    |                                                                                 |                                                              |                                                      |                                                      |        |                          |         |        |         |        |          |         
|Net increase (decrease) in cash and cash equivalents                                                |                                                                                 |                                                              | 104,293                                              |                                                      |        |                          | 41,084  |        |         |        | (239,951 | )       
|Cash and cash equivalents, beginning of year                                                        |                                                                                 |                                                              | 103,030                                              |                                                      |        |                          | 61,946  |        |         |        | 301,897  |         
|                                                                                                    |                                                                                 |                                                              |                                                      |                                                      |        |                          |         |        |         |        |          |         
|Cash and cash equivalents, end of year                                                              |                                                                                 | $                                                            | 207,323                                              |                                                      |        | $                        | 103,030 |        |         | $      | 61,946   |         
|                                                                                                    |                                                                                 |                                                              |                                                      |                                                      |        |                          |         |        |         |        |          |         

Cash payments for interest expense
were $5,724, $3,947 and zero in 2003, 2002 and 2001,
respectively.
Cash payments for income taxes were approximately $1,749, $1,791 and $11,357 in 2003, 2002 and 2001, respectively.

See accompanying notes to consolidated financial statements

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

1.     Nature of Business and Summary of Significant Accounting Policies

Nature of Business  RSA Security Inc. and its subsidiaries (the Company)
provide interoperable solutions for establishing online identities, access
rights and privileges for people, applications and devices. Built to work
seamlessly in the complex environments of its customers, the Companys
portfolio of e-security solutions includes identity and access management,
secure mobile and remote access, secure enterprise access and secure
transactions. The Company sells to Enterprise customers seeking turnkey
security solutions, and to Developers seeking software development components
for embedding security in software applications or hardware devices.

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

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

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

For arrangements which contain an initial prepaid license fee with the payment
of ongoing royalties, the Company recognizes revenue on the initial prepaid
license fee when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed or determinable and collection is considered
probable. The ongoing royalties are recognized at the time a reliable estimate
can be made of the actual usage that has occurred, provided collection is
probable. Annual license fees or onetime license fee arrangements typically
contain non-refundable terms, therefore the Company recognizes revenue when
persuasive evidence of an arrangement exists, delivery has occurred, the fee is
fixed or determinable and collection is considered probable.

The Company recognizes revenue allocated to professional service elements as
the services are performed. When the customization is essential to the
functionality of the licensed software, then both the software license and
professional services revenue are recognized under the percentage of completion
method, which requires revenue to be recognized as a percentage of the project
completed. The Company recognizes revenue and gross profit using labor hours as
an input measure of progress to completion on these arrangements.

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

Allowance for Doubtful Accounts  The Company maintains allowances for doubtful
accounts for estimated losses resulting from the inability of the Companys
customers to make required payments. The Company analyzes accounts receivable
and the composition of
the accounts receivable aging, historical bad debts, customer creditworthiness,
current economic trends, and changes in customer

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payment terms when evaluating
the adequacy of the allowance for doubtful accounts. Bad debt expense is
included in marketing and selling expenses in the consolidated statements of
operations.

Allowance for Warranty Obligations  The Companys standard practice is to
provide a warranty on all RSA SecurID® hardware authenticators for the customer
selected programmed life of the authenticator (generally two to five years) and
to replace any defective authenticators (other than authenticators damaged by a
users abuse or alteration) free of charge. The Company sells its other
products to customers with a warranty for product defects for a specified
period, generally ninety days. The Company provides reserves for warranty
obligations based on historical failure and defective return rates and includes
these costs as a component of product cost of revenue. The Company reevaluates
the estimate of warranty and defective return obligations, including the
assumptions about estimated failure and return rates, each quarter.

During 2002 and 2003, the Companys quarterly analysis of historical failure
and defective return rates indicated that certain authenticators produced
between 2000 and 2002 were subject to higher defect and failure rates. The
Company has increased its provisions for warranty expense accordingly. The
Company will continue to monitor warranty claims and reevaluate its estimate of
warranty and defective return obligations in future periods, which may result
in the Company recording additional warranty expense.

The Company monitors warranty claims and addresses defects through its quality
and design processes, which are managed by its product engineering, quality
control and technical support organizations. During the last several years,
the Company has increased resources and initiated new programs to build an
expanded family of high performance authentication solutions. These programs
have resulted in the redesign and re-engineering of authenticator products to
improve performance and reliability by incorporating new microprocessors,
electronics, firmware and batteries with longer life.

Accrued warranty reserve is included in accrued expenses and other liabilities
in the condensed consolidated balance sheets and was as follows:

|                               |  |                          |        |      |  |      |        |   |  |   |      |  
|------------------------------ |  | ------------------------ | ------ | ---- |  | ---- | ------ | - |  | - | ---- | -
|                               |  | Years Ended December 31,
|                               |  |                         
|                               |  | 2003                     |        | 2002 |  | 2001
|                               |  |                          |        |      |  |     
|Balance, beginning of period   |  | $                        | 1,566  |      |  | $    | 124    |   |  | $ | 105  |  
|Provision for warranty expense |  |                          | 4,614  |      |  |      | 2,752  |   |  |   | 490  |  
|Deductions                     |  |                          | (2,302 | )    |  |      | (1,310 | ) |  |   | (471 | )
|                               |  |                          |        |      |  |      |        |   |  |   |      |  
|Balance, end of period         |  | $                        | 3,878  |      |  | $    | 1,566  |   |  | $ | 124  |  
|                               |  |                          |        |      |  |      |        |   |  |   |      |  

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

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

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

Goodwill and Intangible Assets  Goodwill and other acquisition related
identifiable intangible assets are stated at fair value as of the date acquired
in a business acquisition accounted for as a purchase, net of accumulated
amortization. Effective January 1, 2002 the adoption of SFAS No. 142, Goodwill
and Other Intangible Assets, required that the amortization of goodwill and
indefinite lived intangible assets be discontinued, and instead be evaluated at
least annually for impairment. Accordingly, the Company discontinued amortizing
goodwill and indefinite lived intangible assets as of January 1, 2002. The
Company evaluates goodwill for impairment on November 30 of each year and at an
interim date if events or circumstances occur that would more likely than not
reduce the fair value of the goodwill below its carrying amount. The Company
evaluates the carrying value of goodwill and other intangible assets against
the estimated fair value of its assets and will record an impairment charge in
the amount by which the carrying value of the assets exceed their estimated
fair value. Estimated fair value is determined based on estimated discounted
future cash flows or a market multiple valuation method.

Impairment of Long-Lived Assets Other Than Goodwill  The Company tests
long-lived assets for recoverability whenever events or
changes in circumstances indicate that their carrying amount may not be
recoverable. The recoverability of long-lived assets is assessed by comparing
the undiscounted cash flows expected to be generated to the carrying value of
the assets. If the sum of the undiscounted cash flows is less than the
carrying value of the assets, an impairment charge is recognized. The amount of
an

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impairment charge is determined by comparing the carrying amount of the
long-lived asset to its fair value. Fair value is determined based on
estimated discounted cash flows.

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

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

The Company accounts for its investment in Crosby Finance, LLC (Crosby) under
Emerging Issues Task Force (EITF) Issue No. 96-12, Recognition of Interest
Income and Balance Sheet Classification of Structured Notes. The Company is
carrying its interest in Crosby at fair value with all changes in fair value
included in income from investing activities in the consolidated statements of
operations. The Company determines the fair value based on the fair value of
Crosbys right to potentially receive additional cash proceeds under a variable
delivery forward contract that Crosby holds.

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

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

Advertising  Advertising costs are expensed as incurred and were
approximately $869, $2,950, and $4,496 in 2003, 2002 and 2001, respectively.

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

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

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

Earnings (Loss) Per Share  The Company computes basic earnings (loss) per
share using the weighted average number of common shares outstanding. The
Company computes diluted earnings per share using the weighted average number
of shares outstanding plus
the effect of potential outstanding shares, including options and warrants,
using the treasury stock method. Diluted loss per share excludes the effect
of equity instruments including convertible debentures, options and warrants,
as such instruments are antidilutive.

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

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

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

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

Stock-Based Compensation Plans  Stock-based compensation cost is accounted
for using the intrinsic value method in accordance with Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees. Under this
intrinsic value method, compensation expense, if any, is recognized based on
the difference between the fair value of the underlying stock and the price of
the option at the measurement date. Measurement date is defined as that time
when both the number of shares and the exercise price become known.

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 (loss) and pro forma net income (loss) per
share would have been as follows:

|                                                                                                                     |                                                 |   |                          |       |      |   |          |       |   |   |         |       |  
|-------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------- | - | ------------------------ | ----- | ---- | - | -------- | ----- | - | - | ------- | ----- | -
|                                                                                                                     |                                                 |   | Years Ended December 31,
|                                                                                                                     |                                                 |   |                         
|                                                                                                                     |                                                 |   | 2003                     |       | 2002 |   | 2001    
|                                                                                                                     |                                                 |   |                          |       |      |   |         
|Net income (loss) as reported                                                                                        |                                                 | $ | 14,836                   |       |      | $ | (96,824  | )     |   | $ | (2,507  | )    
|Add: stock based compensation expense included in reported net loss,
net of related tax effects                      |                                                 |   |                         |       |      |   |         |       |   |   | 488     |      
|Less: stock based compensation expense determined under fair value
method for all awards, net of related tax effects |                                                 |   | (36,178                  | )     |      |   | (37,676  | )     |   |   | (25,711 | )    
|                                                                                                                     |                                                 |   |                          |       |      |   |          |       |   |   |         |      
|Pro forma net loss                                                                                                   |                                                 | $ | (21,342                  | )     |      | $ | (134,500 | )     |   | $ | (27,730 | )    
|                                                                                                                     |                                                 |   |                          |       |      |   |          |       |   |   |         |      
|Net income (loss) per share:                                                                                         |                                                 |   |                          |       |      |   |          |       |   |   |         |      
|                                                                                                                     | Basic earnings (loss) per share  as reported   |   | $                        | 0.25  |      |   | $        | (1.71 | ) |   | $       | (0.04 | )
|                                                                                                                     |                                                 |   |                          |       |      |   |          |       |   |   |         |      
|                                                                                                                     | Basic loss per share  pro forma                |   | $                        | (0.36 | )    |   | $        | (2.38 | ) |   | $       | (0.49 | )
|                                                                                                                     |                                                 |   |                          |       |      |   |          |       |   |   |         |      
|                                                                                                                     | Diluted earnings (loss) per share  as reported |   | $                        | 0.24  |      |   | $        | (1.71 | ) |   | $       | (0.04 | )
|                                                                                                                     |                                                 |   |                          |       |      |   |          |       |   |   |         |      
|                                                                                                                     | Diluted loss per share  pro forma              |   | $                        | (0.36 | )    |   | $        | (2.38 | ) |   | $       | (0.49 | )
|                                                                                                                     |                                                 |   |                          |       |      |   |          |       |   |   |         |      

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

|                                                     |  |                          |      |      |  |      |      |   |  |   |       |  
|---------------------------------------------------- |  | ------------------------ | ---- | ---- |  | ---- | ---- | - |  | - | ----- | -
|                                                     |  | Years Ended December 31,
|                                                     |  |                         
|                                                     |  | 2003                     |      | 2002 |  | 2001
|                                                     |  |                          |      |      |  |     
|Stock Option Plans:                                  |  |                          |      |      |  |      |      |   |  |   |       |  
|Risk-free interest rate                              |  |                          | 2.8  | %    |  |      | 3.8  | % |  |   | 4.6   | %
|Expected life of option grants (years)               |  |                          | 4.3  |      |  |      | 4.4  |   |  |   | 4.1   |  
|Expected volatility of underlying stock              |  |                          | 87.0 | %    |  |      | 90.0 | % |  |   | 83.0  | %
|Expected dividend payment rate                       |  |                          | 0.0  | %    |  |      | 0.0  | % |  |   | 0.0   | %
|Expected forfeiture rate                             |  |                          | 7.5  | %    |  |      | 7.5  | % |  |   | 7.5   | %
|Weighted average fair value of stock options granted |  | $                        | 6.57 |      |  | $    | 3.11 |   |  | $ | 18.93 |  

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|                                                       |  |                          |      |      |  |      |       |   |  |   |       |  
|------------------------------------------------------ |  | ------------------------ | ---- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                                                       |  | Years Ended December 31,
|                                                       |  |                         
|                                                       |  | 2003                     |      | 2002 |  | 2001
|                                                       |  |                          |      |      |  |     
|Employee Stock Purchase Plan:                          |  |                          |      |      |  |      |       |   |  |   |       |  
|Risk-free interest rate                                |  |                          | 1.1  | %    |  |      | 1.7   | % |  |   | 5.7   | %
|Expected life of option grants (years)                 |  |                          | 0.5  |      |  |      | 0.5   |   |  |   | 0.5   |  
|Expected volatility of underlying stock                |  |                          | 77.0 | %    |  |      | 112.0 | % |  |   | 83.0  | %
|Expected dividend payment rate                         |  |                          | 0.0  | %    |  |      | 0.0   | % |  |   | 0.0   | %
|Weighted average fair value of purchase rights granted |  | $                        | 2.68 |      |  | $    | 2.14  |   |  | $ | 14.91 |  

Reclassification  Certain previously disclosed and prior year amounts have
been reclassified to conform to the 2003 presentation, including amortization
of technology related intangible assets of $6,587 and $3,281 for the years
ended December 31, 2002 and 2001, respectively, and impairments of technology
related intangible assets of $14,333 for the year ended December 31, 2002, have
been reclassified from operating expenses to cost of revenue.

New Accounting Pronouncements Interpretation No. 46  In January 2003, the
Financial Accounting Standards Board (FASB) issued Interpretation No. 46,
Consolidation of Variable Interest Entities, which was revised by FIN 46R
issued in December 2003 (FIN46). This interpretation of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, addresses consolidation
by business enterprises of variable interest entities (VIE) that either: do
not have sufficient equity investment at risk to permit the entity to finance
its activities without additional subordinated financial support, or for which
the equity investors lack an essential characteristic of a controlling
financial interest. FIN 46 also sets forth certain disclosure requirements
regarding interests in VIE that are deemed significant, even if consolidation
is not required. FIN 46 applies to interim periods ending after March 15,
2004. The Company believes the adoption of FIN 46 will not require the
consolidation of the Companys investment in Crosby and therefore will not have
a significant impact on its consolidated financial position or results of
operations.

2.     Acquisitions

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

On September 4, 2001, the Company completed its acquisition of all of the
capital stock of Securant Technologies, Inc., (Securant) a privately held
company that developed the ClearTrust Web access management solution; on May
16, 2001, the Company completed its acquisition of all of the capital stock of
3-G International, Inc., (3GI) a privately held company that developed smart
card and biometric authentication products; on May 22, 2001, the Company
completed its acquisition of substantially all the assets of Transindigo Inc
(Transindigo), a privately held company that developed real time Web access
management software products; and on February 12, 2001, the Company completed
its acquisition of all of the capital stock of Xcert International, Inc.,
(XCert) a privately held company that developed digital certificate-based
products for securing e-business transactions.

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

|                                     |  |          |         |       |  |             |        |       |  |         |        |  |  |   |         | 
|------------------------------------ |  | -------- | ------- | ----- |  | ----------- | ------ | ----- |  | ------- | ------ |  |  | - | ------- | 
|                                     |  |          |         |       |  |             |        |       |  | 3GI and |        |  |  |  
|                                     |  | Securant |         | Xcert |  | Transindigo |        | Total
|                                     |  |          |         |       |  |             |        |      
|Cash paid to sellers or shareholders |  | $        | 131,203 |       |  | $           | 64,366 |       |  | $       | 19,752 |  |  | $ | 215,321 | 
|Stock options assumed                |  |          |        |       |  |             | 3,095  |       |  |         |       |  |  |   | 3,095   | 
|Acquisition costs                    |  |          | 7,924   |       |  |             | 5,357  |       |  |         | 1,421  |  |  |   | 14,702  | 
|Litigation costs                     |  |          |        |       |  |             |       |       |  |         | 2,525  |  |  |   | 2,525   | 
|                                     |  |          |         |       |  |             |        |       |  |         |        |  |  |   |         | 
|Total purchase price                 |  | $        | 139,127 |       |  | $           | 72,818 |       |  | $       | 23,698 |  |  | $ | 235,643 | 
|                                     |  |          |         |       |  |             |        |       |  |         |        |  |  |   |         | 

Pursuant to two separate escrow agreements entered into in connection with the
Securant acquisition, $21,000 of the cash purchase price otherwise payable to
Securants shareholders was placed in escrow, pending settlement of any claims
for breach of representations, warranties or covenants in the merger agreement.
One escrow agreement put $20,000 of the purchase price into an escrow fund. The
Company received $3,300 from this Securant escrow fund during the year ended
December 31, 2003 in final settlement of outstanding escrow fund claims, which
resulted in a decrease to goodwill of $3,300. The remainder of the escrow fund
was released to the selling shareholders during March 2003. The second escrow
agreement put $1,000 of the Securant purchase price
into an escrow fund. The remaining unclaimed balance of the $1,000 Securant
escrow fund not subject to a pending claim is scheduled to be released to the
selling shareholders during 2005.

Pursuant to an escrow agreement, $3,000 of the cash purchase price otherwise
payable to 3GIs stockholders was placed in escrow, pending settlement of any
claims for breaches of representations, warranties or covenants in the merger
agreement. The Company submitted claims against the 3GI escrow totaling
approximately $3,000 and received an aggregate of $2,637 from the 3GI escrow
fund

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in settlement of these claims, of which $70 was received during 2003,
resulting in a decrease to goodwill of $70 during 2003. The remainder of the
escrow fund was released to the selling stockholders during March 2003.

Pursuant to an escrow agreement, $10,500 of the cash purchase price otherwise
payable to Xcerts stockholders was placed in escrow, pending settlement of any
claims for breaches of representations, warranties or covenants in the merger
agreement. The Company released all but $500 of the Xcert escrow fund to the
selling stockholders in August 2002. The Company received approximately $64
from the escrow fund in settlement of certain tax issues during 2002, and the
balance of the $500 was released to the selling stockholders during 2003.

As a result of the Companys adoption of SFAS No. 142, Goodwill and Other
Intangible Assets, on January 1, 2002 the Company reclassified in-place
workforce related intangible assets of $5,689, $2,021 and $569 arising from the
acquisitions of Xcert, 3GI and Transindigo, respectively, into goodwill,
resulting in an increase to goodwill and a decrease to the carrying value of
intangible assets of $8,279. In addition, upon reclassification of in-place
workforce related intangible assets to goodwill and the determination of
indefinite lived assets, the Company reversed the deferred tax liabilities
related to these intangible assets. The reversal of deferred tax liabilities of
$2,269 and $852 relating to the Xcert and 3GI acquisitions, respectively,
resulted in a decrease to goodwill and deferred tax liabilities of $3,121 for
the year ended December 31, 2002.

In 2002, the Company paid $591 to Xcert stockholders upon finalization of the
working capital calculation. The cost of the working capital adjustment has
been added to the purchase price of Xcert and resulted in an increase to
goodwill of $591 during the year ended December 31, 2002.

The Company incurred litigation expenses in connection with a patent litigation
relating to the products acquired in the May 2001 acquisition of 3GI and
recorded these expenses as related costs of acquisition. The costs to defend
the 3GI lawsuit were covered by the escrow fund set aside from the 3GI purchase
price. The costs of litigation and disbursements from the 3GI escrow resulted
in a net increase to goodwill of $39 during the year ended December 31, 2002.

Allocation of the purchase prices for all four acquisitions completed during
2001 was based on estimates of the fair value of the assets acquired and
liabilities assumed based on independent appraisals. These allocations were as
follows at December 31, 2003:

|                                       |  |                       |         |       |  |             |        |       |  |         |        |   |  |   |         |           |  |              |  | 
|-------------------------------------- |  | --------------------- | ------- | ----- |  | ----------- | ------ | ----- |  | ------- | ------ | - |  | - | ------- | --------- |  | ------------ |  | 
|                                       |  | Estimated Fair Values |         |       |  |            
|                                       |  |                       |         |       |  |            
|                                       |  |                       |         |       |  |             |        |       |  | 3GI and |        |   |  |   |         | Estimated
|                                       |  | Securant              |         | Xcert |  | Transindigo |        | Total |  | Life   
|                                       |  |                       |         |       |  |             |        |       |  |        
|Assets and liabilities, including cash |  | $                     | (584    | )     |  | $           | 4,756  |       |  | $       | 6,791  |   |  | $ | 10,963  |           |  |              |  | 
|Goodwill                               |  |                       | 123,597 |       |  |             | 57,783 |       |  |         | 13,595 |   |  |   | 194,975 |           |  |              |  | 
|Intangible assets (1)                  |  |                       | 19,650  |       |  |             | 12,856 |       |  |         | 2,851  |   |  |   | 35,357  |           |  | 1 to 7 years
|Deferred tax liabilities, net (1)      |  |                       | (7,286  | )     |  |             | (5,148 | )     |  |         | (1,109 | ) |  |   | (13,543 | )         |  |              |  | 
|In process research and development    |  |                       | 3,750   |       |  |             | 2,571  |       |  |         | 1,570  |   |  |   | 7,891   |           |  |              |  | 
|                                       |  |                       |         |       |  |             |        |       |  |         |        |   |  |   |         |           |  |              |  | 
|Total purchase price                   |  |                       | 139,127 |       |  |             | 72,818 |       |  |         | 23,698 |   |  |   | 235,643 |           |  |              |  | 
|Less: assumption of stock options      |  |                       |        |       |  |             | (3,095 | )     |  |         |       |   |  |   | (3,095  | )         |  |              |  | 
|Less: cash acquired                    |  |                       | (2,136  | )     |  |             | (377   | )     |  |         | (6,883 | ) |  |   | (9,396  | )         |  |              |  | 
|                                       |  |                       |         |       |  |             |        |       |  |         |        |   |  |   |         |           |  |              |  | 
|Net cash paid                          |  | $                     | 136,991 |       |  | $           | 69,346 |       |  | $       | 16,815 |   |  | $ | 223,152 |           |  |              |  | 
|                                       |  |                       |         |       |  |             |        |       |  |         |        |   |  |   |         |           |  |              |  | 



|(1) |  | The Company recorded an impairment charge of $19,140 during
2002, which reduced the carrying value of these intangible assets to
zero at December 31, 2002. Accordingly, the Company did not record
any amortization expense related to these intangible assets after
December 31, 2002. As a result of this impairment charge, the
Company reduced the related deferred tax liabilities to zero at
December 31, 2002.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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|                           |                                            |                                    |                                 |      |                          |   |         |       |      |   |        |       |      |       | 
|-------------------------- | ------------------------------------------ | ---------------------------------- | ------------------------------- | ---- | ------------------------ | - | ------- | ----- | ---- | - | ------ | ----- | ---- | ----- | 
|                           |                                            |                                    |                                 |      | Years Ended December 31,
|                           |                                            |                                    |                                 |      |                         
|                           |                                            |                                    |                                 |      | 2003                     |   | 2002    |       | 2001
|                           |                                            |                                    |                                 |      |                          |   |         |       |     
|Reported net income (loss) |                                            | $                                  | 14,836                          |      |                          | $ | (96,824 | )     |      | $ | (2,507 | )    
|Add: Goodwill amortization |                                            |                                    |                                |      |                          |   |        |       |      |   | 7,667  |      
|                           |                                            |                                    | In-place workforce amortization |      |                          |  |         |       |      |  |        |       |      | 1,575 | 
|                           |                                            |                                    | Trademark amortization          |      |                          |  |         |       |      |  |        |       |      | 100   | 
|Less: Tax effect           |                                            |                                    |                                |      |                          |   |        |       |      |   | (3,737 | )    
|                           |                                            |                                    |                                 |      |                          |   |         |       |      |   |        |      
|Adjusted net income (loss) |                                            | $                                  | 14,836                          |      |                          | $ | (96,824 | )     |      | $ | 3,098  |      
|                           |                                            |                                    |                                 |      |                          |   |         |       |      |   |        |      
|Per share amounts          |                                            |                                    |                                 |      |                          |   |         |       |      |   |        |      
|                           | Reported basic earnings (loss) per share   |                                    | $                               | 0.25 |                          |   | $       | (1.71 | )    |   | $      | (0.04 | )   
|                           |                                            | Effect of SFAS No. 141 and No. 142 |                                 |      |                         |   |         |       |     |   |        |       | 0.10 |      
|                           |                                            |                                    |                                 |      |                          |   |         |       |      |   |        |      
|                           | Adjusted basic earnings (loss) per share   |                                    | $                               | 0.25 |                          |   | $       | (1.71 | )    |   | $      | 0.06  |     
|                           |                                            |                                    |                                 |      |                          |   |         |       |      |   |        |      
|                           | Reported diluted earnings (loss) per share |                                    | $                               | 0.24 |                          |   | $       | (1.71 | )    |   | $      | (0.04 | )   
|                           |                                            | Effect of SFAS No. 141 and No. 142 |                                 |      |                         |   |         |       |     |   |        |       | 0.09 |      
|                           |                                            |                                    |                                 |      |                          |   |         |       |      |   |        |      
|                           | Adjusted diluted earnings (loss) per share |                                    | $                               | 0.24 |                          |   | $       | (1.71 | )    |   | $      | 0.05  |     
|                           |                                            |                                    |                                 |      |                          |   |         |       |      |   |        |      

At December 31, 2002, the Company applied the provisions of SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, to its
acquired technologies, customer list, trademark and non-compete agreements
intangible assets due to circumstances that indicated the carrying value of
these intangible assets may not be recoverable. The circumstances that led the
Company to believe that the carrying value of its intangible assets may not be
recoverable primarily include lower than expected sales from the Companys
products and higher than anticipated selling and marketing costs associated
with the Companys products that contained or incorporated the acquired
technology or products, and estimates of higher than initially anticipated
resources needed to continue to be competitive in the selling environment of
these products and technologies. During 2002, the Company prepared forecasts of
estimated future cash flows for each of the product lines that incorporated the
acquired technologies, customer list and non-compete agreements intangible
assets and determined that the estimated undiscounted cash flows expected to be
generated from the use of these intangible assets were less than the carrying
value of the corresponding assets. These estimated undiscounted cash flows
were based upon internal and external data, including an analysis of the
current competitive selling environment, historical sales data, known
operational resources and industry trends. The Company determined the amount of
the impairment loss related to these intangible assets by comparing the
carrying amount of these assets to their fair value at December 31, 2002. The
Company determined the fair value based on estimated discounted cash flows
expected to be generated from the use of these assets. The fair value of the
intangible assets was determined to be zero at December 31, 2002, and
accordingly, the Company recorded a $19,140 impairment charge for the year
ended December 31, 2002 to reduce the carrying amount of its intangible assets
to their fair value.

Intangible assets other than goodwill consisted of the following at December
31, 2003 and 2002:

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

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

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3. Investments and Financial Instruments

The Companys investments were as follows at:

|                                                 |  |              |        |      |  |   |         |  
|------------------------------------------------ |  | ------------ | ------ | ---- |  | - | ------- | -
|                                                 |  | December 31,
|                                                 |  | 2003         |        | 2002
|                                                 |  |              |        |     
|Equity securities recorded at cost               |  | $            | 1,000  |      |  | $ | 26,220  |  
|Impairment of equity securities recorded at cost |  |              | (1,000 | )    |  |   | (24,820 | )
|                                                 |  |              |        |      |  |   |         |  
|Total equity securities recorded at cost         |  |              |       |      |  |   | 1,400   |  
|                                                 |  |              |        |      |  |   |         |  
|Investment in Crosby Finance, LLC                |  |              | 208    |      |  |   | 186     |  
|                                                 |  |              |        |      |  |   |         |  
|Total investments                                |  | $            | 208    |      |  | $ | 1,586   |  
|                                                 |  |              |        |      |  |   |         |  

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

Income (loss) from investing activities includes the following gains (losses):

|                                                            |  |                          |       |      |  |      |         |   |  |   |        |  
|----------------------------------------------------------- |  | ------------------------ | ----- | ---- |  | ---- | ------- | - |  | - | ------ | -
|                                                            |  | Years Ended December 31,
|                                                            |  |                         
|                                                            |  | 2003                     |       | 2002 |  | 2001
|                                                            |  |                          |       |      |  |     
|Gain on sale of marketable securities, net                  |  |                          |      |      |  | $    | 834     |   |  | $ | 6,165  |  
|Income (loss) on sale of investments                        |  | $                        | 1,542 |      |  |      | (3,082  | ) |  |   |       |  
|Increase (decline) in fair value of Crosby Finance, LLC     |  |                          | 26    |      |  |      | (6,823  | ) |  |   |       |  
|Settlement of forward contracts held by Crosby Finance, LLC |  |                          |      |      |  |      |        |   |  |   | 41,843 |  
|Investment impairment charges                               |  |                          |      |      |  |      | (21,866 | ) |  |   | (7,172 | )
|                                                            |  |                          |       |      |  |      |         |   |  |   |        |  
|Total income (loss) from investing activities               |  | $                        | 1,568 |      |  | $    | (30,937 | ) |  | $ | 40,836 |  
|                                                            |  |                          |       |      |  |      |         |   |  |   |        |  

During 2002, the Company recognized total investment impairment charges
totaling $21,866 related to its investments in privately held companies.
Included in total investment impairment charges in 2002 and as a result of its
initiation of a process to sell its equity investments the Company recorded an
impairment charge of $11,966 to reflect the investments at their estimated
realizable value, less costs of disposal. Also during 2002, and included in
total investment impairment charges the Company recorded an impairment charge
of $9,900 based upon valuations and anticipated cash proceeds to reduce the
carrying amount of three investment to their estimated fair value for three
companies in which the Company had invested that were in the process of
obtaining additional financing or being sold. The Company considered offers to
buy, recent valuations and current financial positions of the investments in
estimating realizable value. Estimated realizable value of these investments
less costs of disposal was $1,400 and was included in investments on the
consolidated balance sheet at December 31, 2002. The Company completed the sale
of these investments during 2003 and recognized income of $1,542 from the sale
of investments.

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

At December 31, 2003, Crosby held 2,027,325 shares of VeriSign common stock and
the VDF contract. The VDF contract entitles Crosby to receive cash proceeds of
up to $35,336 depending on the market price of VeriSign common stock on January
3, 2006. The closing price of VeriSigns common stock on The NASDAQ National
Market on December 31, 2003 was $16.30 per share. Unless the value of the
VeriSign stock appreciates to at least $87.16 per share in January 2006, Crosby
will not be entitled to any cash proceeds. Crosby has no liability or
obligation to its members or to the counterparty to the VDF contract other than
to deliver the shares of VeriSign common stock to the counterparty upon
maturity of the VDF contract and to distribute the cash proceeds, if any, to
its members. After settlement of the VDF in January 2006, Crosby will
dissolve.

The carrying amount of the Companys 99% interest in Crosby was $208 and $186
at December 31, 2002 and 2001, respectively, and is included in other assets on
the consolidated balance sheets. The Company accounts for its investment in
Crosby under the guidelines of EITF No. 96-12, Recognition of Interest Income
and Balance Sheet Classification of Structured Notes. Before the settlement
of the Forwards, the Company used the retrospective interest method to account
for the Companys interest in Crosby as the Company believed it would recover a
substantial amount of its interest. Any increases in the cost basis of the Companys interest
in Crosby, determined by applying the retrospective interest method, were
recorded in interest income. Any changes in the fair value

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of the Companys
interest in Crosby were recorded in other comprehensive income in stockholders
equity. In the fourth quarter of 2001, after the settlement of the last
Forward, it became reasonably possible that the Company could lose all or
substantially all of the value of its remaining interest, and therefore could
no longer apply the retrospective interest method to its interest in Crosby.
Accordingly, the Company is carrying its interest at fair value with all
changes in fair value reported in income from investing activities in the
statement of operations. The Company determines the fair value of its interest
in Crosby is being determined based on the fair value of Crosbys right to
potentially receive additional cash proceeds upon maturity of the VDF. The
increase in the fair value of the Companys interest in Crosby was $26 for the
year ended December 31, 2003.

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

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

4. Property and Equipment

Property and equipment were as follows at:

|                                                |       |   |              |         |      |   |         |         | 
|----------------------------------------------- | ----- | - | ------------ | ------- | ---- | - | ------- | ------- | 
|                                                |       |   | December 31,
|                                                |       |   | 2003         |         | 2002
|                                                |       |   |              |         |     
|Land                                            |       | $ | 7,068        |         |      | $ | 6,371   |        
|Building                                        |       |   | 20,707       |         |      |   | 18,664  |        
|Furniture and equipment                         |       |   | 83,356       |         |      |   | 80,358  |        
|Leasehold improvements                          |       |   | 32,435       |         |      |   | 31,778  |        
|                                                |       |   |              |         |      |   |         |        
|                                                | Total |   |              | 143,566 |      |   |         | 137,171 | 
|Less: Accumulated depreciation and amortization |       |   | (75,417      | )       |      |   | (63,795 | )      
|                                                |       |   |              |         |      |   |         |        
|Property and equipment, net                     |       | $ | 68,149       |         |      | $ | 73,376  |        
|                                                |       |   |              |         |      |   |         |        

5. Convertible Debentures

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

Interest is payable in cash semi-annually in arrears on January 1 and July 1 of
each year at a fixed rate of 7% per annum. At any time and at their option,
each holder may convert any outstanding debentures it holds into shares of the
Companys common stock at a conversion price of $13.745 per share, which upon
conversion of all of the outstanding debentures would result in the issuance of
approximately 5,820,298 shares of the Companys common stock. The conversion
price of the debentures may be adjusted under certain circumstances, such as
events that would cause dilution of the debenture holders interest. The
Company may redeem all or a portion of the debentures for cash at any time
after October 17, 2002 as long as the arithmetic average of the weighted
average price of the Companys common stock on each trading day during the
fifteen trading day period immediately before the election to redeem is at
least 150% of the conversion price. The redemption feature was not exercisable
at December 31, 2003. The debentures are unsecured and are subordinated to all
existing and future senior indebtedness. The agreements governing the
convertible debentures contain covenants including restrictions on the
Companys ability to incur and guarantee additional debt. The covenants limit
the amount of additional debt the Company may incur to the lesser of 30% of the
Companys consolidated stockholders equity, which was $92,633 at December 31,
2003, or a total of $180,000 including the balance of the 7% convertible
debentures outstanding.

In connection with the issuance of the convertible debentures, and as described
in Note 7, the Company issued warrants on its
common stock to the holders of the convertible debentures. The Company recorded
the fair market value of the warrants as additional paid-in capital during the
year ended December 31, 2001 and is amortizing the fair market value through
October 2004. This charge is included in interest expense in the consolidated
statement of operations. In addition, in connection with the issuance of the 7%

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convertible debentures, the Company paid investment bank fees, legal fees and
other financing costs of $4,796 which are being amortized through October 2004
using the straight-line method, which is not materially different from the
effective interest rate method. Unamortized deferred financing costs of $1,271
are included in other assets on the consolidated balance sheets at December 31,
2003 and 2002. The carrying value of the 7% convertible debentures is as
follows at December 31, 2003:

|                                              |  |   |        |  
|--------------------------------------------- |  | - | ------ | -
|Principal amount of 7% convertible debentures |  | $ | 80,000 |  
|Less: value of warrants                       |  |   | (4,149 | )
|Add: accumulated accretion                    |  |   | 3,026  |  
|                                              |  |   |        |  
|Carrying value, December 31, 2003             |  | $ | 78,877 |  
|                                              |  |   |        |  

6. Line of Credit

The Company had a $10,000 line of credit agreement with a major financial
institution that was canceled by the Company in November 2003.

7. Stockholders Equity

Common Stock Warrants  In connection with the issuance of the 7% convertible
debentures in October and November 2001, the Company issued warrants to
purchase shares of its common stock to the holders of the convertible
debentures. The holders may exercise the warrants for an aggregate of 873,045
shares of the Companys common stock at an exercise price of $13.745 per share.
The exercise price of the warrants may be adjusted under certain circumstances,
such as events that would cause dilution of the holders interest. The
warrants were immediately exercisable upon issuance and expire on October 17,
2006. The fair value of the warrants of $4,149 was estimated using the
Black-Scholes model with the following assumptions: risk free interest rate of
2.5%, expected life of 2.5 years, dividend yield of 0%, and expected volatility
of 83%. The Company recorded the fair market value of the warrants as
additional paid-in capital. As of December 31, 2003, none of the warrants had
been exercised.

Stockholder Rights Plan  On July 20, 1999, the Companys Board of Directors
adopted a Stockholder Rights Plan, and a Rights Agreement to govern the Plan,
under which common stock purchase rights (each, a Right) were distributed to
the Companys stockholders at the rate of one Right for each share of the
Companys common stock. Each Right entitles the stockholder that owns the
Right to purchase one share of the Companys common stock at a purchase price
of $83.33 per share, subject to adjustment (the Purchase Price). The
Companys stockholders may exercise the Rights (1) if another party acquires,
or obtains the right to acquire, beneficial ownership of 15% or more of the
Companys common stock, or (2) upon the commencement of a tender or exchange
offer that, if consummated, would result in another party acquiring 15% or more
of the Companys common stock. In the event of such an acquisition or similar
event, each Right, other than those owned by the acquiring party, will enable
the stockholder that owns the Right to purchase the number of shares of the
Companys common stock that equals the Purchase Price divided by one-half of
the current market price (as defined in the Rights Agreement) of the common
stock.

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

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

At December 31, 2003, 2002 and 2001, the Company had zero shares of its
common stock covered by outstanding put options. The Company received $7,565
from the sale of put options on its common stock during the year ended December
31, 2001. During 2001 and upon maturity of one of the Companys put options
contracts covering 375,000 shares of its common stock, the Company
repurchased 375,000 shares of its common stock for $13,943 or $37.18 per share.

During 2000, the Company entered into forward equity contracts for 1,500,000
shares of its common stock in order to set purchase prices for its future
repurchase of shares under its share repurchase program. Upon maturity of the
forward equity contracts in

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May 2001, the Company chose to settle the contracts
by repurchasing 1,500,000 shares of its common stock for $65,020 or $43.35 per
share.

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

8. Stock Option and Purchase Plans

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

The 1994 Stock Option Plan, as amended  1998 Restatement, as amended (1994
Plan), allows the Company to grant to its employees, officers, directors and
consultants options to purchase common stock intended to qualify as incentive
stock options, options that do not qualify as incentive stock options
(non-statutory options), restricted stock awards and other stock-based awards.
Option exercise prices for incentive stock options granted under the 1994 Plan
may not be less than 100% of the fair market value of the shares. In general,
1994 Plan option grants become exercisable as to 25% on the first anniversary
of the grant date, and in equal quarterly amounts thereafter for three years.
In general, no installment is exercisable after the fourth anniversary of the
date on which such installment first becomes exercisable, and options generally
expire eight years from the grant date.

The 1994 Director Stock Option Plan, as amended (Director Plan), allowed the
Company to grant non-statutory stock options to purchase common stock to
non-employee members of the Board of Directors. During 2003, the Company
terminated the Director Plan except with respect to options already granted.
The Company will no longer grant options under this plan.

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

At December 31, 2003, there were 17,355,000 shares of the Companys common
stock authorized and 783,293 shares available for grant under the 1994 Plan,
and 21,062,764 shares authorized and 7,131,028 shares available for grant under
the 1998 Plan.

A summary of stock option activity under all plans follows:

|                                 |  |        |             |                 |  |                  |       | 
|-------------------------------- |  | ------ | ----------- | --------------- |  | ---------------- | ----- | 
|                                 |  |        |             |                 |  | Weighted Average
|                                 |  |        |             |                 |  | Exercise        
|                                 |  | Shares |             | Price Per Share
|                                 |  |        |             |                
|Outstanding at January 1, 2001   |  |        | 19,973,011  |                 |  | $                | 24.10 | 
|Granted                          |  |        | 6,547,363   |                 |  |                  | 28.80 | 
|Exercised                        |  |        | (2,325,828  | )               |  |                  | 12.86 | 
|Canceled and expired             |  |        | (12,246,527 | )               |  |                  | 31.99 | 
|                                 |  |        |             |                 |  |                  |       | 
|Outstanding at December 31, 2001 |  |        | 11,948,019  |                 |  |                  | 21.07 | 
|Granted                          |  |        | 8,516,721   |                 |  |                  | 4.61  | 
|Exercised                        |  |        | (218,399    | )               |  |                  | 6.95  | 

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|                                 |  |        |            |                 |  |                  |       | 
|-------------------------------- |  | ------ | ---------- | --------------- |  | ---------------- | ----- | 
|                                 |  |        |            |                 |  | Weighted Average
|                                 |  |        |            |                 |  | Exercise        
|                                 |  | Shares |            | Price Per Share
|                                 |  |        |            |                
|Canceled and expired             |  |        | (3,718,092 | )               |  |                  | 21.54 | 
|                                 |  |        |            |                 |  |                  |       | 
|Outstanding at December 31, 2002 |  |        | 16,528,249 |                 |  |                  | 12.48 | 
|Granted                          |  |        | 4,955,700  |                 |  |                  | 9.96  | 
|Exercised                        |  |        | (3,033,433 | )               |  |                  | 5.90  | 
|Canceled and expired             |  |        | (1,557,309 | )               |  |                  | 14.48 | 
|                                 |  |        |            |                 |  |                  |       | 
|Outstanding at December 31, 2003 |  |        | 16,893,207 |                 |  | $                | 12.70 | 
|                                 |  |        |            |                 |  |                  |       | 
|Exercisable at December 31, 2001 |  |        | 4,982,928  |                 |  | $                | 17.06 | 
|                                 |  |        |            |                 |  |                  |       | 
|Exercisable at December 31, 2002 |  |        | 8,648,763  |                 |  | $                | 14.45 | 
|                                 |  |        |            |                 |  |                  |       | 
|Exercisable at December 31, 2003 |  |        | 8,450,301  |                 |  | $                | 15.99 | 
|                                 |  |        |            |                 |  |                  |       | 

The following table sets forth information regarding stock options outstanding
at December 31, 2003 under all plans:

|                |  |           |            |                |  |                  |       |             |  |                  |     |                    |  |  |           |                  |  |   |       | 
|--------------- |  | --------- | ---------- | -------------- |  | ---------------- | ----- | ----------- |  | ---------------- | --- | ------------------ |  |  | --------- | ---------------- |  | - | ----- | 
|                |  |           |            |                |  |                  |       |             |  | Weighted Average |     |                    |  |  |           | Weighted Average
|                |  |           |            |                |  | Weighted         |       | Remaining   |  | Number           |     | Exercise Price for
|Range of        |  | Number of |            | Average        |  | Contractual Life |       | Currently   |  | Currently       
|Exercise Prices |  | Shares    |            | Exercise Price |  | (Years)          |       | Exercisable |  | Exercisable     
|                |  |           |            |                |  |                  |       |             |  |                 
|$2.93  4.04    |  |           | 2,215,471  |                |  | $                | 3.85  |             |  |                  | 6.5 |                    |  |  | 348,490   |                  |  | $ | 3.68  | 
|$4.42  6.30    |  |           | 4,479,785  |                |  | $                | 4.88  |             |  |                  | 6.4 |                    |  |  | 1,694,618 |                  |  | $ | 5.03  | 
|$6.65  9.35    |  |           | 1,475,005  |                |  | $                | 7.87  |             |  |                  | 5.0 |                    |  |  | 1,212,248 |                  |  | $ | 8.03  | 
|$9.99  14.67   |  |           | 3,399,414  |                |  | $                | 12.74 |             |  |                  | 7.2 |                    |  |  | 769,664   |                  |  | $ | 12.31 | 
|$15.00  19.88  |  |           | 2,372,184  |                |  | $                | 17.96 |             |  |                  | 3.8 |                    |  |  | 2,133,584 |                  |  | $ | 18.10 | 
|$22.69  32.96  |  |           | 2,556,632  |                |  | $                | 28.15 |             |  |                  | 4.8 |                    |  |  | 1,970,108 |                  |  | $ | 28.14 | 
|$34.03  49.38  |  |           | 394,716    |                |  | $                | 37.31 |             |  |                  | 4.6 |                    |  |  | 321,589   |                  |  | $ | 37.40 | 
|                |  |           |            |                |  |                  |       |             |  |                  |     |                    |  |  |           |                  |  |   |       | 
|$2.93  49.38   |  |           | 16,893,207 |                |  | $                | 12.70 |             |  |                  | 5.8 |                    |  |  | 8,450,301 |                  |  | $ | 15.99 | 
|                |  |           |            |                |  |                  |       |             |  |                  |     |                    |  |  |           |                  |  |   |       | 

The Company cancelled certain stock options assumed in connection with the
acquisition of Xcert in February 2001 and recognized compensation expense of
$751 in 2001.

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, 2003, 3,100,000 shares
were authorized under the Purchase Plan, and 946,983 shares were available for
purchase. The cumulative total shares purchased under the plan through 2003,
2002 and 2001 were 2,153,016, 1,382,835, and 962,230, respectively.

9. Comprehensive Income (Loss)

Comprehensive income (loss) was as follows:

|                                         |                                                                    |   |                          |       |      |   |         |       |   |   |         |         |  
|---------------------------------------- | ------------------------------------------------------------------ | - | ------------------------ | ----- | ---- | - | ------- | ----- | - | - | ------- | ------- | -
|                                         |                                                                    |   | Years Ended December 31,
|                                         |                                                                    |   |                         
|                                         |                                                                    |   | 2003                     |       | 2002 |   | 2001   
|                                         |                                                                    |   |                          |       |      |   |        
|Net income (loss)                        |                                                                    | $ | 14,836                   |       |      | $ | (96,824 | )     |   | $ | (2,507  | )      
|Comprehensive income (loss), net of tax: |                                                                    |   |                          |       |      |   |         |       |   |   |         |        
|                                         | Holding losses arising during period                               |   |                          |      |      |   |         |      |   |   |         | (6,250  | )
|                                         | Less: reclassification adjustment for gains included in net income |   |                          |      |      |   |         | (422  | ) |   |         | (27,723 | )
|                                         |                                                                    |   |                          |       |      |   |         |       |   |   |         |        
|                                         | Decrease in net unrealized gains on marketable securities          |   |                          |      |      |   |         | (422  | ) |   |         | (33,973 | )
|                                         |                                                                    |   |                          |       |      |   |         |       |   |   |         |        
|                                         | Foreign currency translation adjustments                           |   |                          | 4,229 |      |   |         | 2,938 |   |   |         | (2,188  | )
|                                         |                                                                    |   |                          |       |      |   |         |       |   |   |         |        
|Comprehensive income (loss)              |                                                                    | $ | 19,065                   |       |      | $ | (94,308 | )     |   | $ | (38,668 | )      
|                                         |                                                                    |   |                          |       |      |   |         |       |   |   |         |        

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

10. Earnings (Loss) Per Share

Equity instruments that were considered antidilutive and therefore were not
included in the computation of diluted earnings or loss per share include the
following shares of the Companys common stock:

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|                       |  |                          |           |      |  |      |            |  |  |  |            | 
|---------------------- |  | ------------------------ | --------- | ---- |  | ---- | ---------- |  |  |  | ---------- | 
|                       |  | Years Ended December 31,
|                       |  |                         
|                       |  | 2003                     |           | 2002 |  | 2001
|                       |  |                          |           |      |  |     
|Employee stock options |  |                          | 8,497,066 |      |  |      | 16,528,249 |  |  |  | 11,948,019 | 
|Convertible debentures |  |                          | 5,820,298 |      |  |      | 5,820,298  |  |  |  | 1,240,003  | 
|Common stock warrants  |  |                          | 873,045   |      |  |      | 873,045    |  |  |  | 873,045    | 

11. Income Taxes

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

|                                                          |  |                          |        |      |  |      |          |   |  |   |        |  
|--------------------------------------------------------- |  | ------------------------ | ------ | ---- |  | ---- | -------- | - |  | - | ------ | -
|                                                          |  | Years Ended December 31,
|                                                          |  |                         
|                                                          |  | 2003                     |        | 2002 |  | 2001
|                                                          |  |                          |        |      |  |     
|Domestic                                                  |  | $                        | 5,834  |      |  | $    | (143,808 | ) |  | $ | (1,440 | )
|Foreign                                                   |  |                          | 12,722 |      |  |      | 7,108    |   |  |   | 1,488  |  
|                                                          |  |                          |        |      |  |      |          |   |  |   |        |  
|Income (loss) before provision (benefit) for income taxes |  | $                        | 18,556 |      |  | $    | (136,700 | ) |  | $ | 48     |  
|                                                          |  |                          |        |      |  |      |          |   |  |   |        |  

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

|          |         |       |       |                          |        |      |         |         |         |   |       |        |        |  
|--------- | ------- | ----- | ----- | ------------------------ | ------ | ---- | ------- | ------- | ------- | - | ----- | ------ | ------ | -
|          |         |       |       | Years Ended December 31,
|          |         |       |       |                         
|          |         |       |       | 2003                     |        | 2002 |         | 2001   
|          |         |       |       |                          |        |      |         |        
|Current:  |         |       |       |                          |        |      |         |         |         |   |       |       
|          | Federal |       | $     | (9,335                   | )      |      | $       | (43,315 | )       |   | $     | (4,276 | )     
|          | Foreign |       |       | 1,230                    |        |      |         | 1,235   |         |   |       | 166    |       
|          |         |       |       |                          |        |      |         |         |         |   |       |       
|          |         | Total |       |                          | (8,105 | )    |         |         | (42,080 | ) |       |        | (4,110 | )
|          |         |       |       |                          |        |      |         |         |         |   |       |       
|Deferred: |         |       |       |                          |        |      |         |         |         |   |       |       
|          | Federal |       |       | 11,825                   |        |      |         | 2,246   |         |   |       | 6,954  |       
|          | Foreign |       |       |                         |        |      |         | (42     | )       |   |       | (289   | )     
|          |         |       |       |                          |        |      |         |         |         |   |       |       
|          |         | Total |       |                          | 11,825 |      |         |         | 2,204   |   |       |        | 6,665  |  
|          |         |       |       |                          |        |      |         |         |         |   |       |       
|Total     |         | $     | 3,720 |                          |        | $    | (39,876 | )       |         | $ | 2,555 |       
|          |         |       |       |                          |        |      |         |         |         |   |       |       

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

|                                                 |                                                   |   |              |         |      |   |        |         |  
|------------------------------------------------ | ------------------------------------------------- | - | ------------ | ------- | ---- | - | ------ | ------- | -
|                                                 |                                                   |   | December 31,
|                                                 |                                                   |   | 2003         |         | 2002
|                                                 |                                                   |   |              |         |     
|Deferred tax assets  current:                   |                                                   |   |              |         |      |   |        |        
|                                                 | Revenue related items and other                   |   | $            | 2,942   |      |   | $      | 3,829   |  
|                                                 |                                                   |   |              |         |      |   |        |        
|Net deferred tax assets  current                |                                                   | $ | 2,942        |         |      | $ | 3,829  |        
|                                                 |                                                   |   |              |         |      |   |        |        
|Deferred tax assets (liabilities)  non current: |                                                   |   |              |         |      |   |        |        
|                                                 | Net operating loss carryforwards                  |   | $            | 34,317  |      |   | $      | 25,430  |  
|                                                 | Deferred gain  Investment in Crosby Finance, LLC |   |              | (26,298 | )    |   |        | (26,289 | )
|                                                 | Acquired intangible assets                        |   |              | (1,789  | )    |   |        | (862    | )
|                                                 | Investment valuation reserve                      |   |              | 350     |      |   |        | 6,808   |  
|                                                 | Compensation                                      |   |              | 263     |      |   |        | 4,413   |  
|                                                 | Restructurings                                    |   |              | 12,504  |      |   |        | 15,176  |  
|                                                 | Merger expenses                                   |   |              | (3,946  | )    |   |        | (3,946  | )
|                                                 | Other                                             |   |              | 966     |      |   |        | 928     |  
|                                                 | Purchased research and development                |   |              | 2,017   |      |   |        | 2,180   |  
|                                                 | Less: valuation allowance                         |   |              | (25,430 | )    |   |        | (25,430 | )
|                                                 |                                                   |   |              |         |      |   |        |        
|Net deferred tax liabilities  non current       |                                                   |   | (7,046       | )       |      | $ | (1,592 | )      
|                                                 |                                                   |   |              |         |      |   |        |        

Tax benefits arising from the exercise of stock options were $5,485, $328 and
$15,828 in 2003, 2002 and 2001, respectively. The tax benefits are allocated
directly to additional paid-in capital in stockholders equity when realized.

Cash payments for income taxes were approximately $1,749, $1,791 and $11,357 in
2003, 2002 and 2001, respectively.

The Company has net operating loss carryforwards of approximately $98,048
expiring on various dates through 2023. The Company acquired $72,655 of these
operating loss carryforwards as a result of the acquisitions that it completed
during 2001. Internal Revenue Code Section 382 may limit the utilization of
the net operating losses attributable to the pre acquisition periods of
acquired

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subsidiaries. Furthermore, pre acquisition net operating losses may
not be utilizable in future years in the event of a substantial discontinuation
of the acquired business. The remainder of the net operating loss
carryforwards were generated during the year ended December 31, 2003.

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

The reconciliation between the statutory and effective income tax rates for the
years ended December 31, 2003 and 2002 is as follows:

|                                      |  |      |       |      |  |  |      |  
|------------------------------------- |  | ---- | ----- | ---- |  |  | ---- | -
|                                      |  | 2003 |       | 2002
|                                      |  |      |       |     
|Statutory tax rate                    |  |      | 35.0  | %    |  |  | 35.0 | %
|Change in estimated deferred tax rate |  |      |      |      |  |  | (3.2 | )
|Foreign tax rate differentials        |  |      | (16.2 | )    |  |  | (0.9 | )
|Other                                 |  |      | 1.2   |      |  |  | (1.7 | )
|                                      |  |      |       |      |  |  |      |  
|Effective income tax rate             |  |      | 20.0  | %    |  |  | 29.2 | %
|                                      |  |      |       |      |  |  |      |  

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

12. Restructurings

During 2002 and 2001, the Company evaluated and initiated restructuring actions
in order to consolidate some of its operations, enhance operational efficiency
and reduce expenses. These actions resulted in the Company recording six
separate restructuring charges based upon separate and distinct plans, the
total of which resulted in total restructuring charges of zero, $56,036 and
$19,956
for the years ended December 31, 2003, 2002 and 2001, respectively. The Company
continues to monitor and assess its facility obligations, the real estate
market and its operating expenses.

The Company continues to monitor and assess its facility obligations, real
estate markets and operating expenses. As a result of these ongoing
assessments, during 2003 the Company revised estimates used in previously
recorded restructuring charges. These revisions resulted in no net change to
the Companys restructuring liability at December 31, 2003. The Company
revised estimates of facility exit costs based upon the terms of finalized
subleases obtained during 2003, due to lower than anticipated operating costs
and other direct costs associated with certain exited facilities and due to
revisions in anticipated headcount growth. These revised estimates of facility
exit costs resulted in a net increase to facility exit costs of $774 at
December 31, 2003. In addition, the Company reduced its severance
restructuring reserve by $566 at December 31, 2003 when it determined its
remaining severance and other outplacement costs were lower than originally
estimated. The Company also reduced its restructuring reserve of costs
associated with the liquidation of the Companys Swedish development operations
and the sale of certain Swedish assets by $208 at December 31, 2003 when it
determined the Company had no legal and consulting costs remaining in
connection with this transaction.

Restructuring charges recorded during 2002 and 2001 consist of facility exit
costs, including impairment of leasehold improvements and furniture and
fixtures, costs associated with the sale and liquidation of the Companys
Swedish development operations, and severance and other costs associated with
the reduction of employee headcount.

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

Included in the 2002 restructuring charges are costs of $44,014 consisting of
facility exit costs and related impairment of leasehold improvements and
furniture and fixtures. Facility exit costs consist of estimated shortfalls of
sublease rental income compared to obligations due under certain exited
facilities leases which are payable through 2009. The remaining unreserved
lease obligations related to certain exited facilities amount to $8,170, which
represents the Companys estimated sublease income from these facilities from
the end of the reserve period to the end of the lease term. Impairment of
leasehold improvements and furniture and fixtures included in facility exit
costs are for unamortized leasehold improvements and furniture and fixtures
that the Company believes will not be recoverable upon sublease of exited
facilities. Total facility exit costs for 2002 include costs of $35,718 that
the Company

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incurred when it revised estimates used in previously recorded
restructuring charges. The Company revised the estimates included in facility
exit costs due to the extension of the period of time estimated to obtain
sublease tenants for certain exited facilities, based on the terms of finalized
subleases obtained during 2002, due to higher than anticipated operating costs
associated with certain exited facilities, and due to the continued uncertainty
and deterioration in the commercial real estate and sublet markets in the
Boston metropolitan area.

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

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

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

Included in the 2001 restructuring
charges are costs of $9,731 consisting of
facility exit costs, related impairment of leasehold improvements and other
direct costs. Facility exit costs primarily consist of up to 18 months of
minimum lease payments due under certain exited facilities lease agreements.
Impairment of leasehold improvements included in facility exit costs is for
unamortized leasehold improvements that the Company believes will not be
recoverable upon sublease of exited facilities.

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

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

Restructuring charges accrued and unpaid at December 31, 2003 were as follows:

|                                                             |  |                 |         |           |  |             |        |             |  |       |        |   |  |   |        |   |  |   |         |  
|------------------------------------------------------------ |  | --------------- | ------- | --------- |  | ----------- | ------ | ----------- |  | ----- | ------ | - |  | - | ------ | - |  | - | ------- | -
|                                                             |  | Facility Exit   |         |           |  |             |        | Liquidation |  |       |        |   |  |   |        |  
|                                                             |  | Costs & Related |         |           |  |             |        | of Sweden   |  |       |        |   |  |   |        |  
|                                                             |  | Asset           |         | Severance |  | Development |        | Purchased   |  |       |        |  
|                                                             |  | Impairments     |         | Costs     |  | Operations  |        | Technology  |  | Total
|                                                             |  |                 |         |           |  |             |        |             |  |      
|Balance at January 1, 2001                                   |  | $               | 347     |           |  |             |       |             |  |       |       |   |  |   |       |   |  | $ | 347     |  
|Total restructuring charges  2001                           |  |                 | 9,731   |           |  | $           | 5,875  |             |  |       |       |   |  | $ | 4,350  |   |  |   | 19,956  |  
|Payments  2001                                              |  |                 | (276    | )         |  |             | (4,592 | )           |  |       |       |   |  |   |       |   |  |   | (4,868  | )
|Write offs  2001                                            |  |                 |        |           |  |             |       |             |  |       |       |   |  |   | (4,350 | ) |  |   | (4,350  | )
|                                                             |  |                 |         |           |  |             |        |             |  |       |        |   |  |   |        |   |  |   |         |  
|Total payments and write offs  2001                         |  |                 | (276    | )         |  |             | (4,592 | )           |  |       |       |   |  | $ | (4,350 | ) |  |   | (9,218  | )
|                                                             |  |                 |         |           |  |             |        |             |  |       |        |   |  |   |        |   |  |   |         |  
|Balance at December 31, 2001                                 |  |                 | 9,802   |           |  |             | 1,283  |             |  |       |       |   |  |   |       |   |  |   | 11,085  |  
|                                                             |  |                 |         |           |  |             |        |             |  |       |        |   |  |   |        |   |  |   |         |  
|Restructuring charges  2002                                 |  |                 | 8,296   |           |  |             | 5,704  |             |  | $     | 4,380  |   |  |   |       |   |  |   | 18,380  |  
|Revision of previously recorded
restructuring charges  2002 |  |                 | 35,718  |           |  |             |       |             |  |       | 1,938  |   |  |   |       |   |  |   | 37,656  |  
|                                                             |  |                 |         |           |  |             |        |             |  |       |        |   |  |   |        |   |  |   |         |  
|Total restructuring charges  2002                           |  |                 | 44,014  |           |  |             | 5,704  |             |  |       | 6,318  |   |  |   |       |   |  |   | 56,036  |  
|                                                             |  |                 |         |           |  |             |        |             |  |       |        |   |  |   |        |   |  |   |         |  
|Payments  2002                                              |  |                 | (5,791  | )         |  |             | (5,590 | )           |  |       | (5,700 | ) |  |   |       |   |  |   | (17,081 | )
|Write offs  2002                                            |  |                 | (12,114 | )         |  |             |       |             |  |       |       |   |  |   |       |   |  |   | (12,114 | )
|                                                             |  |                 |         |           |  |             |        |             |  |       |        |   |  |   |        |   |  |   |         |  
|Total payments and Write offs  2002                         |  |                 | (17,905 | )         |  |             | (5,590 | )           |  |       | (5,700 | ) |  |   |       |   |  |   | (29,195 | )
|                                                             |  |                 |         |           |  |             |        |             |  |       |        |   |  |   |        |   |  |   |         |  
|Balance at December 31, 2002                                 |  |                 | 35,911  |           |  |             | 1,397  |             |  |       | 618    |   |  |   |       |   |  |   | 37,926  |  

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|                                                             |  |                 |        |           |  |             |      |             |  |       |      |   |  |  |   |  |  |   |         |  
|------------------------------------------------------------ |  | --------------- | ------ | --------- |  | ----------- | ---- | ----------- |  | ----- | ---- | - |  |  | - |  |  | - | ------- | -
|                                                             |  | Facility Exit   |        |           |  |             |      | Liquidation |  |       |      |   |  |  |   | 
|                                                             |  | Costs & Related |        |           |  |             |      | of Sweden   |  |       |      |   |  |  |   | 
|                                                             |  | Asset           |        | Severance |  | Development |      | Purchased   |  |       |      |  
|                                                             |  | Impairments     |        | Costs     |  | Operations  |      | Technology  |  | Total
|                                                             |  |                 |        |           |  |             |      |             |  |      
|Revision of previously recorded
restructuring charges  2003 |  |                 | 774    |           |  |             | (566 | )           |  |       | (208 | ) |  |  |  |  |  |   |        |  
|Payments  2003                                              |  |                 | (8,789 | )         |  |             | (581 | )           |  |       | (410 | ) |  |  |  |  |  |   | (9,780  | )
|Write offs  2003                                            |  |                 | (242   | )         |  |             |     |             |  |       |     |   |  |  |  |  |  |   | (242    | )
|                                                             |  |                 |        |           |  |             |      |             |  |       |      |   |  |  |   |  |  |   |         |  
|Total payments and Write offs  2003                         |  |                 | (9,031 | )         |  |             | (581 | )           |  | $     | (410 | ) |  |  |  |  |  |   | (10,022 | )
|                                                             |  |                 |        |           |  |             |      |             |  |       |      |   |  |  |   |  |  |   |         |  
|Balance at December 31, 2003                                 |  | $               | 27,654 |           |  | $           | 250  |             |  |       |     |   |  |  |  |  |  | $ | 27,904  |  
|                                                             |  |                 |        |           |  |             |      |             |  |       |      |   |  |  |   |  |  |   |         |  

In 1999, the Company commenced and substantially completed consolidation of
certain operations in order to enhance operational efficiency. The Company
recorded facility exit costs consisting primarily of estimated shortfalls of
sublease rental income compared to minimum lease payments due under a lease
agreement. During the year ended December 31, 2003 the Company revised its
estimates of these facility exit costs and reduced the reserve for these
facility exit costs to zero.

The Company expects to pay the remaining restructuring costs accrued at
December 31, 2003 as follows:

|                                             |  |   |       | 
|-------------------------------------------- |  | - | ----- | 
|Year ending December 31, 2004                |  | $ | 9,043 | 
|Year ending December 31, 2005                |  |   | 7,362 | 
|Year ending December 31, 2006                |  |   | 6,647 | 
|Year ending December 31, 2007                |  |   | 2,854 | 
|Year ending December 31, 2008                |  |   | 1,347 | 
|Year ending December 31, 2009 and thereafter |  |   | 651   | 

13. Segment Information

The Company has one reportable segment, e-Security Solutions. The operations of
the e-Security Solutions segment consist of the sale of software licenses,
hardware, maintenance and professional services through two product groups,
Enterprise solutions and Developer solutions. Enterprise solutions include
sales of RSA SecurID® authenticators, RSA ACE/Server® software, RSA Keon®
software, RSA ClearTrust® software, and maintenance and professional services
associated with these products. Developer solutions include sales of RSA BSAFE®
encryption software and protocol products, RSA Keon components, and maintenance
and professional services associated with these products. The segment was
determined primarily based on how management views and evaluates the Companys
operations.

Prior to January 1, 2003, the Company reported two segments, e-Security
Solutions and RSA Capital. The Company has modified its segment disclosure to
reflect the divestiture of substantially all of its investments held in RSA
Capital and the reduction of resources allocated to RSA Capital. Accordingly,
the Company began reporting one segment, the e-Security Solutions segment,
after January 1, 2003. The Company has revised its segment disclosure to
conform to the current period presentation.

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

|                           |  |                          |         |      |  |      |         |  |  |   |         | 
|-------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                           |  | Years Ended December 31,
|                           |  |                         
|Product and service groups |  | 2003                     |         | 2002 |  | 2001
|                           |  |                          |         |      |  |     
|Enterprise
solutions       |  | $                        | 235,739 |      |  | $    | 204,671 |  |  | $ | 229,170 | 
|Developer
solutions        |  |                          | 24,127  |      |  |      | 27,413  |  |  |   | 53,550  | 
|                           |  |                          |         |      |  |      |         |  |  |   |         | 
|                           |  | $                        | 259,866 |      |  | $    | 232,084 |  |  | $ | 282,720 | 
|                           |  |                          |         |      |  |      |         |  |  |   |         | 

|                         |  |                          |         |      |  |      |         |  |  |   |         | 
|------------------------ |  | ------------------------ | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                         |  | Years Ended December 31,
|                         |  |                         
|Geographic areas         |  | 2003                     |         | 2002 |  | 2001
|                         |  |                          |         |      |  |     
|United States of
America |  | $                        | 155,021 |      |  | $    | 138,539 |  |  | $ | 162,799 | 
|Europe and
other         |  |                          | 80,163  |      |  |      | 70,224  |  |  |   | 91,553  | 
|Asia
Pacific             |  |                          | 24,682  |      |  |      | 23,321  |  |  |   | 28,368  | 
|                         |  |                          |         |      |  |      |         |  |  |   |         | 
|                         |  | $                        | 259,866 |      |  | $    | 232,084 |  |  | $ | 282,720 | 
|                         |  |                          |         |      |  |      |         |  |  |   |         | 

During 2003, two of the Companys distributors merged in a business
combination. The combined revenue from the two distributors accounted for 10%
of total revenue for the year ended December 31, 2003.

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

|                            |  |                      |         |               |  |        |         |              |  |   |        |  |  |   |       | 
|--------------------------- |  | -------------------- | ------- | ------------- |  | ------ | ------- | ------------ |  | - | ------ |  |  | - | ----- | 
|                            |  | At December 31, 2003
|                            |  |                     
|                            |  | Total                |         | United States |  | Europe |         | Asia Pacific
|                            |  |                      |         |               |  |        |         |             
|Property and equipment, net |  | $                    | 68,149  |               |  | $      | 35,104  |              |  | $ | 29,852 |  |  | $ | 3,193 | 
|Goodwill, net               |  |                      | 189,260 |               |  |        | 189,260 |              |  |   |       |  |  |   |      | 
|Other assets                |  |                      | 6,879   |               |  |        | 5,278   |              |  |   | 67     |  |  |   | 1,534 | 

|                            |  |                      |         |               |  |        |         |              |  |   |        |  |  |   |       | 
|--------------------------- |  | -------------------- | ------- | ------------- |  | ------ | ------- | ------------ |  | - | ------ |  |  | - | ----- | 
|                            |  | At December 31, 2002
|                            |  |                     
|                            |  | Total                |         | United States |  | Europe |         | Asia Pacific
|                            |  |                      |         |               |  |        |         |             
|Property and equipment, net |  | $                    | 73,376  |               |  | $      | 41,423  |              |  | $ | 28,741 |  |  | $ | 3,212 | 
|Goodwill, net               |  |                      | 192,629 |               |  |        | 192,629 |              |  |   |       |  |  |   |      | 
|Other assets                |  |                      | 7,374   |               |  |        | 5,505   |              |  |   | 154    |  |  |   | 1,715 | 

|                            |  |                      |         |               |  |        |         |              |  |   |        |  |  |   |       | 
|--------------------------- |  | -------------------- | ------- | ------------- |  | ------ | ------- | ------------ |  | - | ------ |  |  | - | ----- | 
|                            |  | At December 31, 2001
|                            |  |                     
|                            |  | Total                |         | United States |  | Europe |         | Asia Pacific
|                            |  |                      |         |               |  |        |         |             
|Property and equipment, net |  | $                    | 94,840  |               |  | $      | 59,881  |              |  | $ | 31,285 |  |  | $ | 3,674 | 
|Goodwill, net               |  |                      | 186,561 |               |  |        | 186,561 |              |  |   |       |  |  |   |      | 
|Intangible assets, net      |  |                      | 37,346  |               |  |        | 37,346  |              |  |   |       |  |  |   |      | 
|Other assets                |  |                      | 7,117   |               |  |        | 5,274   |              |  |   | 165    |  |  |   | 1,678 | 

Included in the Companys property and equipment in Europe is land and a
building purchased during 2000 in the United Kingdom which had a net carrying
value of $20,707 at December 31, 2003.

14. Retirement and Savings Plan

The Company has a 401(k) retirement and savings plan that allows each
participant to defer up to 20% of the participants annual earnings up to an
annual statutory maximum amount. The Company may make, at its discretion,
matching and profit-sharing contributions to the plan. Generally, matching and
profit-sharing contributions made by the Company vest annually over four years.
Matching contributions are paid in cash and were $1,412, $1,360 and $1,354 in
2003, 2002 and 2001, respectively. No profit sharing contributions were made
for 2003, 2002 and 2001.

The Company also has a non-qualified deferred compensation program which
permits key employees to annually elect to defer, for their personal income tax
purposes, a portion of their compensation for not less than three years or
until their retirement, termination, death or disability. To assist in the
financing of the funding of the deferred compensation program, the Company
invests the compensation that is withheld and deferred in Company-owned life
insurance policies. Amounts withheld and deferred for key employees under the
Companys deferred compensation program were $545, $868 and $2,445 in 2003,
2002 and 2001, respectively, and are included in operating expenses.

15. Commitments

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

|                          |  |             |        |                |  |                     |       |  |  |   |        | 
|------------------------- |  | ----------- | ------ | -------------- |  | ------------------- | ----- |  |  | - | ------ | 
|                          |  |             |        |                |  | Facility Exit Costs |       |  |  |  
|                          |  | Gross Lease |        | included in    |  | Net Lease          
|Years Ending December 31, |  | Commitments |        | Restructurings |  | Commitments        
|                          |  |             |        |                |  |                    
|2004                      |  | $           | 21,651 |                |  | $                   | 9,043 |  |  | $ | 12,608 | 
|2005                      |  |             | 19,167 |                |  |                     | 7,112 |  |  |   | 12,055 | 
|2006                      |  |             | 16,446 |                |  |                     | 6,647 |  |  |   | 9,799  | 
|2007                      |  |             | 16,516 |                |  |                     | 2,854 |  |  |   | 13,662 | 
|2008                      |  |             | 14,514 |                |  |                     | 1,347 |  |  |   | 13,167 | 
|2009 and thereafter       |  |             | 70,467 |                |  |                     | 651   |  |  |   | 69,816 | 

Net rent expense was approximately $11,624, $13,764 and $12,603 in 2003, 2002
and 2001, respectively. Rent collected from existing subleases and not included
in restructuring charges was $9, $700, and $656 in 2003, 2002 and 2001,
respectively.

In November 2000, the Company entered into fifteen year non-cancelable
operating leases for a new corporate headquarters facility located in Bedford,
Massachusetts and moved into these facilities in February 2002. The Company is
actively looking to sublease its

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former headquarters and other exited facilities. During 2002 and 2001, the
Company recorded restructuring charges totaling $53,426, which represent lease
obligations due through 2009 under certain excess facilities lease agreements,
net of estimated sublease rental income, impaired leasehold improvements and
furniture and fixtures for certain exited facilities, and other associated
facilities expense.

The Company is also required to pay royalties under various other licensing
agreements. Total royalty expense under all agreements was $5,375, $5,978 and
$5,538 in 2003, 2002 and 2001, respectively.

16. Related Party Transactions

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

In 1997, the Company entered into a license agreement with VeriSign under
which, among other things, the Company had the exclusive right to distribute
some of VeriSigns certificate authority software. The agreement also gave the
Company the right to terminate the agreement at any time if the Company paid
specified termination fees to VeriSign. Unamortized prepaid license fees were
$5,221 at December 31, 2000. During the year ended December 31, 2001 the
Company expensed $5,221 in prepaid license fees to cost of product revenue when
it was determined that they did not have future realizable value as a result of
the Companys acquisition of Xcert in February 2001. A former director of the
Company who is also a director of VeriSign provided consulting services to the
Company and received $60 in 2001. This consulting agreement expired in
February 2001, and the director resigned from the Companys Board of Directors
in May 2002.

17. Litigation

On or about February 2, 2001, Leon Stambler filed a complaint for patent
infringement in U.S. District Court for the District of Delaware against the
Company, VeriSign, Inc., First Data Corporation, Openwave Systems Inc., and
Omnisky Corporation, Case Number 01-0065. In his complaint, Mr. Stambler
alleged that certain products marketed by each of the defendants infringed
various patents that he owns, and he sought unspecified damages as well as a
preliminary and permanent injunction enjoining the defendants from infringing
the claims asserted. The trial took place in March 2003, and the jury
determined that the Companys products did not infringe Mr. Stamblers patents.
On April 17, 2003, the court entered final judgment in the Companys favor on
all claims of non-infringement. In May 2003, Mr. Stambler filed a motion asking
the court to set aside the jurys verdict, and in November 2003, the court
denied Mr. Stamblers motion. On or about December 8, 2003, Mr. Stambler filed
a notice of appeal to the United States Court of Appeals. The Company plans to
vigorously defend the appeal, and it believes that the final disposition of
this matter will not have a material adverse effect its continuing operations
and consolidated financial position.

On or about December 20, 2001, France Telecom and Telediffusion de France
(FT) filed a Request for Arbitration with the International Court of
Arbitration. FT claims that the Company breached a license agreement with FT
and sought unspecified damages including a payment in excess of $110,000 plus
the legal fees and other costs associated with the arbitration. The arbitration
took place in June 2003, and the Company expects the arbitrator to make a
final, binding decision in the first half of 2004. The Company believes that
FTs claims are without merit. In a related matter, FT has also filed a patent
infringement suit in Delaware against Novell, Inc., one of the Companys
licensees. In August 2002, the Company signed a letter agreement with Novell
agreeing that if a court requires Novell to pay FT damages, the Company will
reimburse Novell for 50% of the damages, up to a maximum payment of $2,500 by
it. If the damages payable by Novell exceed $5,000, then the indemnification
provisions of the Companys license agreement with Novell will govern its
indemnification obligations. Although the Company believes that FTs claims
against Novell are without merit, it cannot predict the ultimate outcome of
this matter. However, the Company believes that neither the disposition of its
arbitration with FT nor the disposition of the litigation between Novell and FT
will have a material adverse effect on its continuing operations and
consolidated financial position.

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

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

Not applicable




ITEM 9A. CONTROLS AND PROCEDURES



| | (a) |  | Our management, with the participation of our chief executive officer
(CEO) and chief financial officer (CFO), evaluated the effectiveness
of our disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as
of December 31, 2003. Based on this evaluation, our CEO and CFO
concluded that as of December 31, 2003, our disclosure controls and
procedures were (1) designed to ensure that material information related
to us, including our consolidated subsidiaries, is made known to our CEO
and CFO by others within RSA and our subsidiaries, particularly during
the period in which this report was being prepared and (2) effective, in
that they provide reasonable assurance that information required to be
disclosed by us in the reports that we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms; but also concluded that
there are certain weaknesses in our foreign subsidiary translation
process. We have dedicated resources to correcting these issues and
have implemented the necessary corrections. These weaknesses did not
have a material impact on the accuracy of our financial statements.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Other than the steps we have taken to correct certain weaknesses in the
foreign subsidiary translation process, no change in our internal control
over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) occurred during the year ended December 31, 2003
that has materially affected or is reasonably likely to materially affect,
our internal control over financial reporting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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PART III




ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF RSA SECURITY

The information required by this item is contained in our Proxy Statement for
our Annual Meeting of Stockholders to be held on May 27, 2004 (our 2004 Proxy
Statement) under the captions Our Board of Directors, Our Executive
Officers, Committees of our Board of Directors  Audit Committee, Governance
and Nominating Committee, Section 16(a) Beneficial Ownership Reporting
Compliance and Corporate Governance. This information is incorporated by
reference into this Report.




ITEM 11. EXECUTIVE COMPENSATION

The information required by this item is contained under the captions
Compensation of our Directors and Executive Officers and Comparative Stock
Performance in our 2004 Proxy Statement and is incorporated by reference into
this Report.






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

The information required by this item is contained under the captions
Securities Authorized for Issuance under our Equity Compensation Plans and
Stock Ownership of Certain Beneficial Owners and Management in our 2004 Proxy
Statement and is incorporated by reference into this Report.




ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item is contained under the caption Certain
Relationships and Related Transactions in our 2004 Proxy Statement and is
incorporated by reference into this Report.




ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is contained under the caption Proposal
2  Ratification of the Appointment of Auditors in our 2004 Proxy Statement
and is incorporated by reference into this Report.

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PART IV




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



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



| | 1. |  | Financial Statements. The Consolidated Financial Statements are
filed as part of this Report. The Consolidated Financial Statements
include:                                                                                   
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | Independent Auditors
Report
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
|
| | 2. |  | Financial Statement Schedule. Financial Statement Schedule II
Valuation and Qualifying Accounts immediately following the Exhibit
Index is filed as part of this Report.                                                     
|
| | 3. |  | Exhibits. The Exhibits listed in the Exhibit Index following
the signature page to this Report are filed as part of this Report.                                                                                               



|(b) |  | Current Reports on Form 8-K:                                                                                                                                                                       
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | On October 16, 2003, we filed with the SEC a Current Report on Form 8-K
containing a press release announcing our financial results for the third
quarter and nine months ended September 30, 2003.
|   
|    |  | On November 10, 2003, we furnished to the SEC a Current Report on Form 8-K
containing our presentation entitled RSA Investor Day, dated November 11,
2003.                                         

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SIGNATURES

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

|                    |     |                                      
|------------------- | --- | -------------------------------------
|                    |     | RSA Security Inc.                    
|                    |     |                                      
|                    | By: | /s/ Arthur W. Coviello, Jr.          
|                    |     |                                      
|                    |     | Arthur W. Coviello, Jr.              
|                    |     | Chief Executive Officer and President
|Date: March 4, 2004 |     |                                      

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

|                                                   |  |                                                                                                                                   |  |              
|-------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------- |  | -------------
|Signature                                          |  | Title                                                                                                                             |  | Date         
|                                                   |  |                                                                                                                                   |  |              
|/s/ Arthur W. Coviello, Jr.Arthur W. Coviello, Jr. |  | Chief Executive Officer,
President and Director (Principal
Executive Officer)                                                     |  | March 4, 2004
|                                                   |  |                                                                                                                                   |  |              
|/s/ Jeffrey D. GliddenJeffrey D. Glidden           |  | Senior Vice President, Finance
and Operations, Chief Financial
Officer and Treasurer (Principal
Financial and Accounting Officer) |  | March 4, 2004
|                                                   |  |                                                                                                                                   |  |              
|/s/ James K. SimsJames K. Sims                     |  | Chairman of the Board of Directors                                                                                                |  | March 4, 2004
|                                                   |  |                                                                                                                                   |  |              
|/s/ Robert P. BadavasRobert P. Badavas             |  | Director                                                                                                                          |  | March 4, 2004
|                                                   |  |                                                                                                                                   |  |              
|/s/ Richard A. DeMilloRichard A. DeMillo           |  | Director                                                                                                                          |  | March 4, 2004
|                                                   |  |                                                                                                                                   |  |              
|/s/ Richard L. EarnestRichard L. Earnest           |  | Director                                                                                                                          |  | March 4, 2004
|                                                   |  |                                                                                                                                   |  |              
|/s/ Taher ElgamalTaher Elgamal                     |  | Director                                                                                                                          |  | March 4, 2004
|                                                   |  |                                                                                                                                   |  |              
|/s/ Gloria C. LarsonGloria C. Larson               |  | Director                                                                                                                          |  | March 4, 2004
|                                                   |  |                                                                                                                                   |  |              
|/s/ Joseph B. Lassiter, IIIJoseph B. Lassiter, III |  | Director                                                                                                                          |  | March 4, 2004
|                                                   |  |                                                                                                                                   |  |              
|/s/ Charles R. Stuckey, Jr.Charles R. Stuckey, Jr. |  | Director                                                                                                                          |  | March 4, 2004

68



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EXHIBIT INDEX

|      |  |                                                                                                                                                                                                                                                                                                                                                                               
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1   |  | Our Third Restated Certificate of Incorporation, as amended, is incorporated herein by reference to
Exhibit 3.1 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.                                                                                                                                                                                     
|3.2   |  | Our Amended and Restated By-Laws, as amended, is incorporated herein by reference to Exhibit 3.3 to
our Registration Statement on Form S-1 (File No. 33-85606) (the Form S-1).                                                                                                                                                                                              
|4.1   |  | Specimen Certificate for shares of our common stock, $.01 par value per share, is incorporated herein
by reference to Exhibit 4.1 to our Current Report on Form 8-K dated September 10, 1999.                                                                                                                                                                                 
|4.2   |  | Rights Agreement, dated as of July 20, 1999, between RSA Security and State Street Bank and Trust
Company, which includes as Exhibit A the Form of Rights Certificate and as Exhibit B the Summary of
Rights to Purchase Common Stock, is incorporated herein by reference to Exhibit 1 to our Registration
Statement on Form 8-A (File No. 000-25120) filed on July 23, 1999.
|4.3   |  | Amendment to Rights Agreement, dated as of November 2, 2001, among RSA Security, State Street Bank and
Trust Company and EquiServe Trust Company, N.A. is incorporated herein by reference to Exhibit 4.1 to
our Current Report on Form 8-K dated November 2, 2001.                                                                                                           
|4.4   |  | Amendment No. 2 to Rights Agreement, dated as of March 19, 2002, between RSA Security and EquiServe
Trust Company, N.A. is incorporated herein by reference to Exhibit 4.2 to our Current Report on Form
8-K dated November 2, 2001.                                                                                                                                          
|4.5   |  | Securities Purchase Agreement, dated as of October 17, 2001, among RSA Security and the Investors
named therein is incorporated herein by reference to Exhibit 99.1 to our Current Report on Form 8-K
dated October 17, 2001.                                                                                                                                                 
|4.6   |  | Securities Purchase Agreement, dated as of October 29, 2001, among RSA Security and the Investors
named therein is incorporated herein by reference to Exhibit 99.1 to our Current Report on Form 8-K
dated October 29, 2001.                                                                                                                                                 
|4.7   |  | Securities Purchase Agreement, dated as of November 5, 2001, among RSA Security and the Investors
named therein is incorporated herein by reference to Exhibit 99.1 to our Current Report on Form 8-K
dated November 5, 2001.                                                                                                                                                 
|4.8   |  | Second Amended and Restated Registration Rights Agreement, dated as of November 5, 2001, among RSA
Security and the Investors named therein is incorporated herein by reference to Exhibit 99.2 to our
Current Report on Form 8-K dated November 5, 2001.                                                                                                                     
|4.9   |  | Form of 7% Convertible Subordinated Debenture due October 17, 2004 is incorporated herein by reference
to Exhibit 99.3 to our Current Report on Form 8-K dated November 5, 2001.                                                                                                                                                                                              
|4.10  |  | Form of Warrant to Purchase Common Stock is incorporated herein by reference to Exhibit 99.4 to our
Current Report on Form 8-K dated November 5, 2001.                                                                                                                                                                                                                        
|*10.1 |  | 1994 Stock Option Plan, as amended  1998 Restatement, as amended, is incorporated herein by reference
to Appendix A to our Preliminary Schedule 14A filed March 5, 1999.                                                                                                                                                                                                     
|*10.2 |  | 1994 Director Stock Option Plan, as amended, is incorporated herein by reference to Exhibit 10.1 to
our Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.                                                                                                                                                                                                   
|*10.3 |  | Amended and Restated 1998 Non-Officer Employee Stock Incentive Plan, as amended, is incorporated
herein by reference to Exhibit 10.4 to our Annual Report on Form 10-K for the year ended December 31,
2001.                                                                                                                                                                  
|*10.4 |  | 1994 Employee Stock Purchase Plan, as amended, is incorporated herein by reference to Exhibit 10.2 to
our Quarterly Report on Form 10-Q for the quarter ended March 31, 2001.                                                                                                                                                                                                 
|*10.5 |  | 2000 Deferred Compensation Plan is incorporated herein by reference to Exhibit 10.1 to our Quarterly
Report on Form 10-Q for the quarter ended March 31, 2000.                                                                                                                                                                                                                
|*10.6 |  | First Amendment to the 2000 Deferred Compensation Plan is incorporated herein by reference to Exhibit
10.6 to our Annual Report on Form 10-K for the year ended December 31, 2002.                                                                                                                                                                                            
|*10.7 |  | Second Amendment to the 2000 Deferred Compensation Plan is incorporated herein by reference to Exhibit
10.2 to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.                                                                                                                                                                                        
|*10.8 |  | RSA Security Inc. Grantor Trust Agreement, dated March 13, 2000, between RSA Security and Wachovia
Bank, N.A. is incorporated herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000.                                                                                                                                  
|*10.9 |  | Employment Agreement, dated as of April 1, 2000, between RSA Security and Arthur W. Coviello, Jr. is
incorporated herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000.                                                                                                                                               

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|       |  |                                                                                                                                                                                                                                                                                                                  
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*10.10 |  | Third Amended and Restated Employment Agreement, dated as of December 27, 2001, between RSA Security
and Charles R. Stuckey, Jr. is incorporated herein by reference to Exhibit 10.9 to our Annual Report
on Form 10-K for the year ended December 31, 2001.                                                     
|10.11 |  | Progress Software Application Partner Agreement, dated December 5, 1994, as amended, between RSA
Security and Progress Software Corporation is incorporated herein by reference to Exhibit 10.17 to the
Form S-1.                                                                                                
|10.12 |  | Second Amendment to Progress Software Application Partner Agreement, dated as of November 29, 1995,
between RSA Security and Progress Software Corporation is incorporated herein by reference to Exhibit
10.3 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 (SEC file no.
000-25120).
|10.13 |  | Third Amendment to Progress Software Application Partner Agreement, dated as of November 15, 1996,
between RSA Security and Progress Software Corporation is incorporated herein by reference to Exhibit
10.4 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 (SEC file no.
000-25120). 
|10.14 |  | Fourth Amendment to Progress Software Application Partner Agreement, dated as of April 1, 1998,
between RSA Security and Progress Software Corporation is incorporated herein by reference to Exhibit
10.1 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (SEC file no.
000-25120).    
|10.15 |  | Fifth Amendment to Progress Software Application Partner Agreement, dated as of February 18, 1999,
between RSA Security and Progress Software Corporation is incorporated herein by reference to Exhibit
10.22 to our Annual Report on Form 10-K for the year ended December 31, 1999.                           
|10.16 |  | Sixth Amendment to Progress Software Application Partner Agreement, dated as of October 26, 1999,
between RSA Security and Progress Software Corporation is incorporated herein by reference to Exhibit
10.23 to our Annual Report on Form 10-K for the year ended December 31, 1999.                            
|10.17 |  | Seventh Amendment to Progress Software Application Partner Agreement, dated as of November 28, 2001,
between RSA Security and Progress Software Corporation is incorporated herein by reference to Exhibit
10.16 to our Annual Report on Form 10-K for the year ended December 31, 2001.                         
|10.18 |  | Eighth Amendment to Progress Software Application Partner Agreement, dated as of November 27, 2002,
between RSA Security and Progress Software Corporation is incorporated herein by reference to Exhibit
10.17 to our Annual Report on Form 10-K for the year ended December 31, 2002.                          
|#10.19 |  | Ninth Amendment to Progress Software Application Partner Agreement, dated as of December 2, 2003,
between RSA Security and Progress Software Corporation.                                                                                                                                                        
|10.20  |  | Lease, dated as of November 16, 2000, between RSA Security and Bedford Woods Limited Partnership I is
incorporated herein by reference to Exhibit 10.31 to our Annual Report on Form 10-K for the year ended
December 31, 2000.                                                                                  
|10.21  |  | Lease, dated as of November 17, 2000, between RSA Security and Bedford Woods Limited Partnership I is
incorporated herein by reference to Exhibit 10.32 to our Annual Report on Form 10-K for the year ended
December 31, 2000.                                                                                  
|10.22  |  | Indenture of Lease, dated as of March 11, 1996, between RSA Security and Beacon Properties, L.P. is
incorporated herein by reference to Exhibit 10.17 to our Registration Statement on Form S-4 (File No.
333-7265).                                                                                             
|10.23  |  | Rider to Indenture of Lease, dated as of March 11, 1996 between RSA Security and Beacon Properties,
L.P. is incorporated herein by reference to Exhibit 10.6 to our Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998 (SEC file no. 000-25120).                                                 
|10.24  |  | First Amendment to Lease, dated as of May 10, 1997, between RSA Security and Beacon Properties, L.P.
is incorporated herein by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997 (SEC file no. 000-25120).                                                      
|10.25  |  | Second Amendment to Lease, dated as of April 8, 1998, between RSA Security and EOP  Crosby Corporate
Center, L.L.C. is incorporated herein by reference to Exhibit 10.5 to our Quarterly Report on Form
10-Q for the quarter ended March 31, 1998 (SEC file no. 000-25120).                                     
|10.26  |  | Third Amendment to Lease, dated as of May 9, 2000, between RSA Security and EOP  Crosby Corporate
Center, L.L.C. is incorporated herein by reference to Exhibit 10.4 to our Quarterly Report on Form
10-Q for the quarter ended June 30, 2000.                                                                  
|10.27  |  | Sublease Agreement, dated as of September 19, 2002, between RSA Security and NVIDIA Corporation is
incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter
ended September 30, 2002.                                                                               
|10.28  |  | Agreement of Sublease, dated as of January 10, 2003, between RSA Security and Atex Media Command, Inc.
is incorporated herein by reference to Exhibit 10.24 to our Annual Report on Form 10-K for the year
ended December 31, 2002.                                                                              

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|      |  |                                                                                                                                                                                                                                                                                           
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.29 |  | Agreement of Sublease, dated as of December 10, 2003, between RSA Security and 170 Systems, Inc.                                                                                                                                                                                          
|10.30 |  | Agreement of Sublease, dated as of January 2004, between RSA Security and Intersense, Inc.                                                                                                                                                                                                
|10.31 |  | Lease Agreement, dated as of August 15, 1997, between RSA Security and Peninsula Office Park
Associates, L.P. is incorporated herein by reference to Exhibit 10.7 to our Quarterly Report on Form
10-Q for the quarter ended March 31, 1998 (SEC file no. 000-25120).                     
|10.32 |  | Lease Agreement, dated as of December 19, 1997, between RSA Security and Peninsula Office Park
Associates, L.P. is incorporated herein by reference to Exhibit 10.8 to our Quarterly Report on Form
10-Q for the quarter ended March 31, 1998 (SEC file no. 000-25120).                   
|10.33 |  | Sublease Agreement, dated as of January 22, 2002, between RSA Security and Serena Software, Inc. is
incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter
ended March 31, 2002.                                                           
|21.1  |  | Subsidiaries of RSA Security.                                                                                                                                                                                                                                                             
|23.1  |  | Consent of Deloitte & Touche LLP, Independent Auditors.                                                                                                                                                                                                                                   
|31.1  |  | Certification of our CEO pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.                                                                                                                                                                                   
|31.2  |  | Certification of our CFO pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.                                                                                                                                                                                   
|32.1  |  | Certifications of our CEO and CFO pursuant to 18 U.S.C. §1350.                                                                                                                                                                                                                            
|99.1  |  | Letter agreement, dated August 5, 2002, between RSA Security and Novell, Inc. is incorporated herein
by reference to Exhibit 99.1 to our Quarterly Report on Form 10-Q for the quarter ended September 30,
2002.                                                                          
|99.2  |  | Stock trading plan, pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended,
adopted by Robert P. Badavas on November 17, 2003.                                                                                                                                     
|99.3  |  | Stock trading plan, pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended,
adopted by Arthur W. Coviello, Jr. on August 7, 2003 is incorporated herein by reference to Exhibit
99.1 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.
|99.4  |  | Stock trading plan, pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended,
adopted by Taher Elgamal on September 9, 2003 is incorporated herein by reference to Exhibit 99.2 to
our Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.       
|99.5  |  | Stock trading plan, pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended,
adopted by Jeffrey D. Glidden on December 5, 2003.                                                                                                                                     
|99.6  |  | Stock trading plan, pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended,
adopted by William L. McQuaide on April 1, 2003 is incorporated herein by reference to Exhibit 99.2 to
our Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.         
|99.7  |  | Stock trading plan, pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended,
adopted by Scott T. Schnell on August 21, 2003 is incorporated herein by reference to Exhibit 99.3 to
our Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.      
|99.8  |  | Stock trading plan, pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended,
adopted by Margaret K. Seif on October 31, 2003.                                                                                                                                       
|99.9  |  | Stock trading plan, pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended,
adopted by Charles R. Stuckey, Jr. on November 24, 2003.                                                                                                                               
|99.10 |  | Stock trading plan, pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended,
adopted by Joseph Uniejewski on November 20, 2003.                                                                                                                                     
|99.11 |  | Stock trading plan, pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended,
adopted by Vivian M. Vitale on November 30, 2003.                                                                                                                                      



---

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

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SCHEDULE II

RSA SECURITY INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS
(In thousands)

|                                     |  |              |       |            |  |            |        |            |  |        |       |        |  |   |        |     |  |         |       | 
|------------------------------------ |  | ------------ | ----- | ---------- |  | ---------- | ------ | ---------- |  | ------ | ----- | ------ |  | - | ------ | --- |  | ------- | ----- | 
|                                     |  |              |       |            |  |            |        |            |  |        |       |        |  |   |        |     |  | Balance
|                                     |  | Balance at   |       | Charged to |  | Charged to |        |            |  |        |       | at    
|                                     |  | Beginning of |       | Costs and  |  | Other      |        |            |  |        |       | End of
|                                     |  | Period       |       | Expenses   |  | Accounts   |        | Deductions |  | Period
|                                     |  |              |       |            |  |            |        |            |  |       
|Allowance for doubtful accounts      |  |              |       |            |  |            |        |            |  |        |       |        |  |   |        |     |  |         |       | 
|For the year ended December 31, 2003 |  | $            | 2,494 |            |  |            |       |            |  | $      | 812   | (A)    |  | $ | 1,457  | (B) |  | $       | 1,849 | 
|For the year ended December 31, 2002 |  |              | 2,659 |            |  |            | 1,553  |            |  |        | 1,441 | (A)    |  |   | 3,159  | (B) |  |         | 2,494 | 
|For the year ended December 31, 2001 |  |              | 2,006 |            |  |            | 6,227  |            |  |        | 203   | (A)    |  |   | 5,777  | (B) |  |         | 2,659 | 
|Allowance for sales returns          |  |              |       |            |  |            |        |            |  |        |       |        |  |   |        |     |  |         |       | 
|For the year ended December 31, 2003 |  | $            | 4,122 |            |  | $          | 1,595  |            |  |        |      |        |  | $ | 3,294  |     |  | $       | 2,423 | 
|For the year ended December 31, 2002 |  |              | 3,656 |            |  |            | 7,074  |            |  |        |      |        |  |   | 6,608  |     |  |         | 4,122 | 
|For the year ended December 31, 2001 |  |              | 4,024 |            |  |            | 18,207 |            |  |        |      |        |  |   | 18,575 |     |  |         | 3,656 | 
|Inventory allowance                  |  |              |       |            |  |            |        |            |  |        |       |        |  |   |        |     |  |         |       | 
|For the year ended December 31, 2003 |  | $            | 473   |            |  | $          | 132    |            |  |        |      |        |  | $ | 150    |     |  | $       | 455   | 
|For the year ended December 31, 2002 |  |              | 451   |            |  |            | 1,693  |            |  | $      | 22    |        |  |   | 1,693  |     |  |         | 473   | 
|For the year ended December 31, 2001 |  |              | 221   |            |  |            | 130    |            |  |        | 100   |        |  |   |       |     |  |         | 451   | 



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

72