SDI contracts for the manufacture of its Access Control Module ("ACM") hardware products with one assembly operation located in New England and for the manufacture of a substantial portion of its SecurID tokens with RJP International, Ltd. ("RJP"), a sub-assembly subcontractor located in China. SDI recently qualified a second source supplier in the United States for the manufacture of one model of its SecurID token. Although SDI is currently working with this supplier to develop a cost structure that is comparable with that of RJP, SDI anticipates that RJP may continue to provide a substantial portion of SDI's SecurID tokens.

SDI purchases all of these sole or limited source components pursuant to purchase orders placed from time to time and, except as described above, has no guaranteed supply arrangements. The inability to obtain sufficient manufactured goods or sole or limited source components as required, or to obtain or develop alternative sources at competitive prices and comparable quality if and as required in the future, could result in delays in product shipments or increase SDI's material costs, either of which would adversely affect SDI's financial condition or results of operations. See "Business -- SDI -- Manufacturing, Suppliers and Quality Control."

Risks Associated with Doing Business in China. SDI contracts for the manufacture of a substantial portion of its SecurID tokens from RJP, a subcontractor located in a "special economic zone" in Guangdong Province, China. The importation of these products from China exposes SDI to the possibility of product supply disruption and increased costs in the event of changes in the policies of the Chinese government, political unrest or unstable economic conditions in China or developments in the United States that are adverse to trade, including enactment of protectionist legislation. In addition, the preferential tax treatment granted to enterprises located in "special economic zones" could also be withdrawn which could adversely affect the costs of manufacturing in China. In the United States, the so-called "Special 301" law (19 U.S.C. sec. 2242) provides that the United States Trade Representative ("USTR") is to designate certain priority foreign countries for special scrutiny or investigation in connection with the failure to adequately

protect intellectual property rights. On different occasions, China has been so designated under Special 301 provisions. To date, this designation has not had an adverse impact on products imported by SDI. However, SDI is unable to predict whether current actions being taken by the USTR with regard to China or any future actions taken under Special 301 will result in the imposition of sanctions by the United States against China, or whether any such sanctions will result in increases in cost or reductions in the supply of SecurID tokens. The United States also provides China with most-favored-nation ("MFN") status, allowing China to receive the same tariff treatment that the United States extends to its "most favored" trading partners. Notwithstanding this current policy, the President or Congress could seek to revoke MFN status for China, or condition its renewal on factors such as China's human rights record. Any revocation of China's MFN status could result in higher tariffs on SDI's SecurID tokens manufactured in China, which higher tariffs could have a material adverse effect on SDI's financial condition or results of operations.

RS & Co. was retained based on RS & Co.'s experience as a financial advisor in connection with mergers and acquisitions and in securities valuations generally as well as RS & Co.'s investment banking relationship and familiarity with SDI. RS & Co. has provided financial advisory and investment banking services to SDI from time to time, including acting as a managing underwriter for each of the two public offerings of shares of the SDI Common Stock. With respect to both transactions, RS & Co. has been compensated for such services in the form of customary underwriting discounts and commissions. In addition, RS & Co. maintains a market in shares of SDI Common Stock.

SDI engaged RS & Co. by means of an engagement letter, dated April 8, 1996. Such letter provides that, for its services, RS & Co. is to be paid a transaction fee of $2,000,000 for acting as financial advisor in connection with the Merger, including the rendering of its fairness opinion. Payment of $500,000 was due and payable upon delivery of RS & Co.'s fairness opinion to the SDI Board and execution of the Merger Agreement. The remainder is due and payable upon consummation of the Merger. SDI has also agreed to indemnify RS & Co. for certain liabilities relating to or arising out of services provided by RS & Co. as financial advisor to SDI.

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