Annual Report 2001

1Restructuring to Implement the Focus & Strategy

2The Irresistible Logic of User Authentication

3

Distribution Channels: Making It Easy for Customers to Buy & Use Keyware Products

4

User authentication: A market Destined for Growth

5Keyware Offers Comprehensive Lines of Value added, Market-responsive Products & Services

6

From here to takeoff: Preparing for the Authentication Revolution

Table of contents

4

6

10

11

13

16

Keyware 2001 Highlights

Revenues(in million USD)

21,4

10

22,9

44

3,90

6

2001 2000 1999

Revenues 2001(by geography)

Revenues 2001(by division)

10,8257,046

Rest of Europe

Belgium United States

3,539

Applications Technologies & Solutions

13,903

7,507

Letter from the Chairman

Let’s Be Clear: Glossary of Important Terms

Financial Report 2001

3

18

19

VISION Imagine a world with… 100% User Authentication

... A world where you have full confidence in the identity of aperson and where you can incontestably demonstrate you arewho you claim to be. Distinguishing the “right” person froman imposter is the Key-ware to security and trust.

MISSION

... To become the leading provider of biometric-enabled applications for user authentication

“Some are a melody, but we are the beat.”

- 3 -- 3 -

To Our Shareholders,

Keyware had a difficult year in 2001,largely because we were right about thefuture of biometrics but overly optimisticabout when that future would materialise.And yes, we were strengthened by theexperience, because it resulted in a newfocus & strategy that will put the companyback on its feet and lead it into the future.

The essence of the strategy is a redefini-tion of the company. Our raison d’être isno longer to market biometric technologyper se, but biometric enabled applica-tions, i.e. they can be easily upgraded tobiometrics if and when the customerdecides it is appropriate to do so.

Smart cards are a particular pillar of thisstrategy. Use of these wallet-sized plasticcards with on-board computer chip is liter-ally exploding around the world becausethe technology is generally considered thebest platform for multiple applications. In addition to being very cost effective, a biometric-enabled smart card system can-provide reliable authentication and securelyprotect the individual’s personal information.

This slightly revised orientation has manyimplications for our organisation, productdevelopment, product lines, distributionchannels, partnership arrangements, etc.In essence, your company has been com-pletely transformed. From mainly doingprojects, it now develops & markets prod-ucts. From selling directly, it now sellsmainly indirectly. And from being a collec-tion of loosely linked subsidiaries, it isnow a closely integrated, synergisticallyfunctioning enterprise. All these crucialaspects of your company are explainedin detail throughout this annual report.

It is traditional for the Chairman to dis-sect and comment on the precedingyear’s results. I think the figures for 2001speak for themselves. I would only pointout that they look worse than they reallyare. This is because we have taken thedecision to write-down & write-off all theerrors of the past in a single stroke.

This is only the first manifestation of ourcontinuing commitment to improve trans-parency and create shareholder value.

Finally, I am pleased to assure you thatthe “cash burn” that threatened thecompany in 2001 will stop and we willbe able to secure adequate financialresources to ensure efficient, harmoniousoperations in the coming year. Moreover,I am confident that 2002 will see thecompany approach or achieve positivecash flow towards the end of the year.

Let me conclude with another quotationwhich I think also characterises yourcompany: to prosper in the long term,you must remain alive in the shortterm. The short-term of your company isnow secure. And the long-term appearsto be just over the horizon.

Guido Van der SchuerenChairman of the Board

Letter from the Chairman

‘The only way is up’

From left to right:Frank Coucke, Senior Vice President, Sales & Marketing - Chris Buyse, Chief Financial Officer(CFO), General Manager - Guido Van der Schueren, Chairman - Stéphane Vandervelde, Senior Vice President, Corporate Strategy & Alliances - Alex Ongena, Director Development &Project Engineering - Jean Claeys, Vice President R&D.

- 4 -

Restructuring to Implement the Focus & Strategy

1 2 3 4 5 6

Most new companies, and particularlyhigh-tech companies, are founded on thevision and enthusiasm of a personinspired by a new technology, and thepotential exciting new applications of anexisting technology.

Confidence in the imminent triumph ofbiometric authentication over traditionalmethods was high when Keyware wasfounded in 1996, and remained highwhen the company went public in June2000. But confidence can be intoxicat-ing. We rapidly started acquiring compa-ny after company that had any kind ofrelationship to biometrics and authentica-tion. However, integration of the acquiredentities into a single, synergistically functioning whole never really happened.

The 18 months between going public andthe end of the 2001 fiscal year demon-strated that while the vision is sound,market acceptance of biometric authenti-cation will take longer than anticipated.Although the market continues to grow,today’s best estimates suggest that large-scale implementation probably willnot occur in the next couple of years.Meanwhile, as a company we have afiduciary responsibility to become profitable and create shareholder value.

This is the foundation of our updatedfocus & strategy, which has necessitatedsome harsh decisions such as corporaterestructuring and further cost cutting.

□ Management ChangesAt management level, Francis Declercq,co-founder of Keyware, in November2001 relinquished his positions as ChiefExecutive Officer (CEO) and Chairman ofthe Board. It was Mr. Declercq’s visionthat propelled the company to become arecognised world leader in developing andsupplying biometric enabled products &solutions. Guido Van der Schueren, amember of the board, was electedChairman, while Chris Buyse, ChiefFinancial Officer (CFO), also took on theduties of General Manager. StéphaneVandervelde, co-founder of the Company,became Senior Vice President, CorporateStrategy & Alliances; Frank Couckebecame Senior Vice President, Sales &Marketing; and Jean Claeys, founder ofAlacarte Engineering, became Vice-President R&D.

□ Operational Changes• Create Functional Organisation

The operational structure of the com-pany has also been modified. Wehave changed from a divisional to afunctional reporting organization in aneffort to reduce the “headquarter func-tion” and create synergies by eliminat-ing overlapping functions.Consolidation of the respective divi-sional development teams will resultin product synergies and increase theefficiency & quality of production.The sales & marketing teams havealso been consolidated to respondmore appropriately to customer needsand market opportunities.

• Integrate Acquired CompaniesOver the past couple of years,Keyware acquired nine companieswith particular skills and market posi-tions. The challenge now is to makethe most of these assets. The near-term focus will be on welding thesecompanies into a coherent, cohesive,synergistic economic force. One ormore of these units which, in light ofthe new strategy, have become “non-core” are likely to be divested.

• Encourage Synergies between theProduct GroupsThe previous four essentiallyautonomous divisions have beenmerged into three interrelated prod-uct groups. Sales and marketingactivities for all three groups, onceindependently administered, are nowthe responsibility of one person.Additionally, previously dispersed R&D and Sales &Marketing functions for the threegroups will be consolidated into asingle, central location to facilitatecross-fertilisation and co-ordinatedplanning & execution.

• Facilitate & Manage Increased Indirect SalesAs a key element of the new strategy,we intend to rely more heavily on sell-ing through third parties rather thandirectly through our own sales force.

- 5 -

This implies soliciting, engaging, andclosely dealing with significantlygreater numbers of Qualified Resellers,System Integrators, and OriginalEquipment Manufacturers (OEMs).

□ Financial ChangesImplementing the new strategy hasalready generated cost reductions, andwill continue to do so. During 2001 thecompany identified and put into placecost-reduction measures expected toresult in savings of US $8.5 million annually. The major part of these savingsshould be realised before the end of fiscal 2002.

Keyware is currently well on its waytowards securing funding to implement itsstrategy and bridge the gap until the company becomes cash-flow positive.

1 2 3 4 5 6

Restructuring to Implement the Focus & Strategy

Chris BuyseGeneral Manager

Stephane VanderveldeCorporate Strategy & Alliances

Frank CouckeSales & Marketing

Jean ClaeysDevelopment & Project Engineering

Board of DirectorsChairman

Keyware’s operational structure emphasises functional synergy,rather than the divisional autonomy of the past.

Keyware Technologies NV controls several subsidiaries, all of which were established as separate companies.

Chris BuyseFinance & Adminisration

MIS

Finance & Accounting

Administration

Human Resources

Alliances

Legal

Marketing

Sales

Development

Quality Assurance

Project Engineering

Post-Sales Support

Keyware now operates as a single, integrated company.

KeywareTechnologies NV

Belgium

KeywareSmart CardDivision NV

Belgium

DMP SA(1)

Belgium

KeywareInternetDivision NV

Belgium

Keyware IDDivision NV

Belgium

KeywareFrance SA

France

KeywareSolutions,LLC.

USA

KeywareSpain S.L.

Spain

KeywareTechnologiesSwiss SA

Switzerland

Able NV

Belgium

100% 100% 100% 100% 95% 100%

KeywareTechnologies,Inc.

USA

100% 100%

100%

5 %

100%

(1) Being renamedinto: KeywareTransactionProcessing NV

(2) Being mergedand renamed into:Keyware T&SDivision NV

Neosys NV(2)

Belgium

100%

- 6 -

The Irresistible Logic of User Authentication

1 2 3 4 5 6

□ Authentication is Key!Do you really know who's accessing yourmost sensitive networked informationassets? Who truly accessed your building?

Security is only as good as its weakestlink. Companies make significant invest-ments to protect their networks andpremises through physical access controlsystems, firewalls and encryption sys-tems. However, they often neglect orignore the authentication side of thesecurity system.

“Authentication” is the process of verify-ing the identity of a person. Typically,this is done with a username & pass-word, or an access card. Security is oftenbuilt on static, reusable passwords thathave proven easy for hackers to beat.Access cards, usually in the form of amagnetic stripe card, are transferable toother persons. As a result, security isweak and confidence in the true identityof the person is low. This calls for “strongauthentication”.

Keyware’s vision of providing 100% UserAuthentication consists of two fundamen-tally interrelated components.

• Perceived Identity (Passive) - You canhave full confidence in the true identi-ty of each person with whom youdeal.

• Projected Identity (Active) - As anindividual, you can incontestablydemonstrate your true identity.

The advent of e-business and the effect ofSeptember 11 have made need for rock-solid user authentication more urgentthan ever before.

□ The Evolutionary Nature ofAuthentication Technology

There is a variety of methods and tech-nology to authenticate persons. The useof PIN codes, passwords and tokens(code number generators) is widespread.Such authentication systems are bothinexpensive to implement and easy touse. However, because such devices canbe lost, stolen or transferred, the per-ceived identity of these systems is low.

“Dynamic tokens” such as the DigiPassfrom Vasco® or the SecureID fromRSASecurity® are trying to increase theconfidence level in the identity of the person. A dynamic token, also called aone-time password, is a password that isdifferent for each attempt to log on to asystem equipped with secure passwordtechnology. These passwords are gener-ated by an authentication token carriedby the user attempting to log on. Thepassword is random and the next oneunpredictable. Intercepting a dynamicpassword is valueless since it is differentfor each log-on. The drawback withdynamic tokens is that they do not makethe link between the true identity of theperson and the holder of the token holder.Perceived identity with tokens is higher,but still insufficient.

More recent technology such as digitalcertificates provides strong authentica-tion between systems. A digital certificate is an electronic“credit card” that establishes the hold-er’s credentials when doing business orother transactions via the Internet.Issued by a certification authority, itcontains the holder’s name, a serialnumber, expiration date, a copy of thecertificate holder's “public key” (used toencrypt messages and digital signa-ture), and the digital signature of thecertificate-issuing authority, so thatanyone being shown the certificate canverify that it is genuine. Some digitalcertificates conform to a standard(X.509). Since digital certificates canbe kept in public registries, a user’spublic key is not secret. Again, anincontestable link to one individual person cannot be assured.

Authentication methods based on“what a person has” (e.g. badge, iden-tify card) or “what a person knows”(e.g. password, code number) arereferred to as devised authentication.

“Natural” or biometric authenticationtechnology is a more advanced authen-tication method. Unlike devised authen-tication, biometric authentication relieson “what a person is”. Fingerprint,face, iris, hand geometry, and voicerecognition are the most commonlyused technologies.

- 7 -

The theoretical significant advantages ofbiometric authentication over devisedauthentication are universally recognised.

Personal characteristics of an individualcannot be lost (smart card) or forgotten(PIN code), and they are almost impossi-ble to copy or steal.

The three interlocking elements of anytop-level personal authentication system.

Different levels of security can be achievedby combining the methods. For example, touse a cash-dispensing machine (ATM) orenter a highly sensitive area of a building, aperson might be required to insert a smartcard (plastic card with onboard computerchip), enter a PIN code (personal identifica-tion number), then give a fingerprint orvoice sample. A smart card by itself pro-vides one level of security (a smart cardcan be stolen); a PIN code adds anotherlevel of security (it can also be stolen).However, it is extremely difficult to dupli-cate someone else’s voice or fingerprint.

Practical implementation of these superiormethods, however, has been held back bya number of factor - all of which are rapidly being resolved.

□ HardwareA person’s voice or fingerprint is recognisedby comparing a sample voiceprint to a mas-ter voiceprint in a database in order to find amatch. This is a software function. However,accurately inputting voiceprints and otherbiometric information to the database is ahardware function.

• ComplexityUntil recently, fingerprint readers,voice recognition systems, etc., havebeen rather bulky and difficult to

install & maintain. Advances in computer technology are rapidly elimi-nating this constraint.

• CostThis has been - and continues to be -the key constraint. Because of thecomplexity of the hardware, biometricauthentication has traditionally beentoo expensive for many potential applications. There has also been theproblem of cost inertia.

1 2 3 4 5 6

The Irresistible Logic of User Authentication

“Who you are”

“What you have”

“What youknow” Advantages of Biometric versus

Traditional Authentication Technology

Security • Devised authentication tools (passwords, PIN codes, electronic keys, etc.) can be lost,

forgotten, copied or stolen. • Biometric authentication tools (fingerprints, facial characteristics, hand geometry, iris

features, etc.) are inherent to the individual. They cannot be lost or forgotten, and theyare almost impossible to copy or steal.

Flexibility• Devised authentication methods are “all or nothing”; either you have the right password,

PIN code, electronic key, etc., or you are rejected. • Biometric authentication methods are “thresholded”, i.e. you can specify a degree of cer-

tainty from 0-100% at which the authenticated person is accepted. Example: to enterthe company’s cafeteria might require only 75% certainty the person has the right ofaccess, but enter the company’s central computer room would require 100% certainty.

Personalisation• Devised authentication methods are “artificial” because they require users to memorise

codes and passwords, or use electronic keys and other devices.• Biometric authentication methods are “natural”. Studies show that people prefer to be

recognised for who they are (“Yes, Mr. Jones, come right in!”) rather than as numbersand passwords (“Your PIN code has been recognised as valid. You may now enter.”).

Smart Card

& Biom etricsPhysicall

Access

Telephony

Access

PC

Access

Internet

Access

Network

Access

Application

Access

Data

Access

100% user authentication

TelephonyAccess

InternetAccess

PC AccessPhysicalAccess Network

Access

ApplicationAccess

DataAccess

Smart Card& Biometrics

Common Authentication Security Server

Addition ofPublic Key Infrastructure(PKI)Available

- 8 -

Many currently installed non-biometricsystems are considered adequate fortheir purpose. However, systemsbecome overwhelmed and wear out.When the time comes to expand orreplace an installed system, the addedperformance and declining costs of bio-metrics will move many users towardsthese superior solutions.

□ ReliabilityNo authentication system, including bio-metrics, will be 100% foolproof. Even thevenerated fingerprint, now more than acentury old, is generally considered to beabout 98% accurate. This is because afingerprint, which may have been poorlytaken, had to be visually compared tothousands of photos by fingerprint experts,who were subject to human error. Theadvent of powerful computer hardware &software has largely eliminated thesesources of unreliability. Likewise, powerfulcomputer hardware & software are dra-matically increasing the reliability of otherbiometric authentication methods (voicerecognition, face recognition, hand geometry, etc.).

□ Infrastructure• Until recently, biometric authentica-

tion systems had to be completely dedicated to their purpose, requiring an“all or nothing” decision by potentialusers. Increasingly, elements of biomet-ric authentication have been becominggeneralised.

• Virtually all companies and institutions ofany size today have computers powerfulenough to run biometric software.

• Video surveillance cameras arealready widely in place for facialrecognition.

• Microphones are ubiquitous in fixed-line and mobile telephones.

• And computer manufacturers regular-ly build in microphones, and increas-ingly cameras for video conferencing,into their products.

• And at least one computer manufac-turer is now installing keyboard fin-gerprint recognition terminals as standard equipment.

With so much of the infrastructurealready in place, the incremental cost ofupgrading to biometrics becomes consid-erably less onerous.

□ Market AcceptanceWhilst the logic of biometrics is irre-sistible, the psychology is in flux.People still make a distinction betweenwhat is “normal” and what is “inva-sive”. Few people consider inputting aPIN code as invasive, but carrying aphoto identity badge may be borderline.Because fingerprints are traditionallyassociated with criminals, fingerprintrecognition systems present a particularproblem.

Although significant, these constraintsare temporary. As smart cards (forfinancial transactions), PIN codes (formobile telephones), and other authenti-cation systems become increasinglycommon in business and private life,the distinction between “normal” and“invasive” is likely to disappear.

□ Authentication Media andthe Rise of the Smart Card

The range of “media” devices for storingand retrieving authentication informationis already large and growing.Traditionally, bar codes and magneticstripe cards have been widely used tostore identification data. These are bothlow-cost and easy to develop. However,they do not provide adequate securityand have limited memory for storingapplications and data.

Smart cards are almost universallyrecognised as the best medium for userauthentication because they can incor-porate virtually all the desires andrequirements of governments, compa-nies, organisations, and individuals.They are easily portable (wallet-size);they can store & process large quanti-ties of information; and they can be par-titioned so information needed for onetype of transaction (e.g. withdrawingmoney from a cash-dispensing machine)does not give access to informationneeded for another type of transaction(e.g. entry into a sporting event or asecured area of a building).

Smart cards in Europe are now common-ly used for payment solutions, customerloyalty, mobile phone identification,transport, event ticketing & crowdcontrol (anti-hooliganism), and numer-ous other applications. They havegained such wide market acceptancethat the less functional magnetic stripecard is rapidly losing ground.

- 9 -

The smart card is the ideal medium for user authentication.

1 2 3 4 5 6

The Irresistible Logic of User Authentication

Advantages of Smart Card versus Traditional Authentication Media

Multi-Application CapabilitySmart cards have more data storage capacity, allowing more than one application to reside on a single card (e.g. combination of customer loyalty, electronic payment and ticketing application).

SecuritySmart cards can be partitioned so information needed for one type of transaction (e.g. withdrawing money from a cash-dispensingmachine) does not give access to information needed for another type of transaction (entry into a sporting event or a secured area of abuilding). For example, if a young person wishes to purchase an alcoholic drink, the smart card reader will display only his or her age. If a traffic policeman stops an automobile, the reader will display only data relevant to the person’s driving record. And so on. Smartcards equipped with a microprocessor are basically like a computer; they can perform certain transactions such as an encryption algorithm on the card itself, allowing for very tight security.

FlexibilitySmart cards based on Java or Windows technology permit adding and removing applications and data after the card has already been issued. This provides great flexibility in the type of card combinations that can be used and in the production process.

DurabilityThe expected life of a smart card is three times longer than a magnetic stripe card.

Card Type Security Typical MemorySize

Multi-applicationSupport

Standards Upgrad-ability ReaderTechnology

Smart Card Soild state

Plastic N/A

Magnetic Stripe Solid state,moving parts

2DBar Code

Solid state,optics

Optical Solid state,moving parts

The smart card is perhaps the ideal medium for user authentication.Keyware’s position in biometric-enabled smart card technology is acornerstone of our future prosperity.

• •• Strong Medium Weak

•••••

•••••

•

•••

•••••

•

•••

None None

User authentication:A Market Destined for Growth

1 2 3 4 5 6

Keyware erred on the side of optimism inprematurely forecasting the takeoff of bio-metrics in authentication. However, theforecast that there will be a takeoff, lead-ing to strong growth in market size, is stillvalid. Several elements or “triggers” pleadin favour of this view, fully supported bynumerous market surveys.

“Hardware and Biometric Authentication”,a recent report by International DataCorporation (IDC), dated November 2001,noted that between 1999 and 2000, theworldwide market for biometrics grew 48%from $80.5 million to $118.8 million, anincrease of 48%. IDC predicts that themarket will expand to $887 million by2005, increasing at a compound growthrate of 50% a year. The U.S. will hold thelargest share of the biometrics market at52%, compared to Europe at 27% andAsia/Pacific at 18 %.

IDC also reported a change in productphilosophy, with biometric hardware beingrelegated to commodity status and a dra-matic drive toward providing software-onlysolutions.

The events of 11 September 2001 willalso have an effect on the development ofhardware, software, and biometricsauthentication. For the moment theemphasis, as seen at airports and otherpublic facilities, is on physical security.However, we see an increasing need toprotect the electronic world. As a result,we expect a merger of physical securityand data security.

Within this merged environment, authenti-cation and authorization will be critical.The policy for determining who people are

(i.e. authentication) and what they can do(i.e. authorization) will become para-mount.

There will also be increased use of smartcards. This will allow an enterprise toissue a single badge that grants bothphysical access and the right to log on toa network. These technologies mean thatusers will no longer have to rememberpasswords. Multiple authentication meth-ods also ensure a higher degree of confi-dence in an individual’s identity.

Independent of the events of 11September 2001, the world is becomingincreasingly authentication conscious -both in mature & developing economies.

• Mature Economies. Developmentssuch as e-commerce via the Internet,home banking, cash-dispensingmachines (ATMs), electronic fundstransfer, on-line stock market trading,etc., require increasingly high levels ofcertainty that persons making suchtransactions are really who they saythey are, and are authorised to makethe transactions.

• Developing Economies. Concerns aremore in the area of monitoring popula-tions (in some places the number of people is known with errors of 20-30%) and controlling the distributionof food, clothing, medicine and othersocial aid.

In short, whilst relying on sophisticatedhardware and software, the massive expansion of authentication in general -and biometric authentication in particular- is likely to be a worldwide phenomenon.

It is important to note that Keyware is ingood company in preparing for the flower-ing of user authentication. • Microsoft has begun embedding soft-

ware in Windows to allow later attach-ment of fingerprint readers and eyescanners.

• Fujitsu-Siemens has started adding fin-gerprint readers as standard equip-ment to their computer keyboards.Moreover, such biometric hardware israpidly reaching levels of irreproach-able reliability.

• Microsoft has made smart cardauthentication (rather than user ID andpasswords) its preferred means ofaccess to secured PC networks run-ning on its Windows 2000 operatingsystem.

• Compaq is producing PC models forthe United States with a built-in smartcard reader, largely destined for point-of-sale (POS) use by retailers. Smartcards have been slow to gain wideacceptance in America because, unlikeEurope & Asia, U.S. legislation pro-tects merchants against credit cardfraud. This initiative by Compaq lays acornerstone for massive increase ofsmart card use in the huge Americanmarket by 2005.As with the personal computer marketin the 1980s, the authentication mar-ket is rapidly approaching an inflexionpoint, where traditional authenticationmethods fail to meet rising standards,and cost, convenience, and reliabilitywill make use of biometric authentica-tion de rigueur. Companies makingpreparations today are most likely toprofit from this phenomenon when itinevitably occurs.

- 11 -

From here to takeoff:Preparing for the Authentication Revolution

1 2 3 4 5 6

It would be tempting to say that all ofKeyware’s troubles are in the past, butthis would be an exaggeration. The com-pany is still emerging from a calamitousyear and the future is always full of sur-prises. However, we can confidently saythat the company is now on a firmerconceptual and practical footing, thanksto our updated focus & strategy.

All market research clearly predicts a rev-olution towards user authentication in thenot-too-distant future. This is not a sur-prise to Keyware; our company wasfounded on this premise. In the past, wecommitted the error of promoting theconcept of biometrics - and dedicatingour entire company to it - instead offocusing on delivery of products and solu-tions demanded by our customers.

So, what has changed?

Certainly not our corporate vision.Actively and passively distinguishing the“right” person from an impostor still isthe KEY-ware to security & trust.

We have, however, updated the compa-ny’s mission statement. Rather thanfocusing on marketing pure biometrictechnology, we are focusing on providingmarket-demanded applications, whichcan be biometrically enabled at the customer’s request.

VISION Imagine a world with…

100% User Authentication… A world where you have full confidence in the identity of a person and

where you can incontestably demonstrate you are who you claim tobe. Distinguishing the “right” person from an imposter is the Key-wareto security and trust.

MISSION

... To become the leadingprovider of biometric-enabled applications for user authentication

Keyware JoinsComputerworld’sEmerging CompaniesWatch List

Computerworld, a leading industry publication, in December 2001 addedKeyware to its list of EmergingCompanies to Watch in 2002.

According to the magazine’s citation,the annual list reflects companies that“stay close to their corporate IT (infor-mation technology) customers, deliverinnovative tools and services, and areagile enough to stay a step ahead in atough economy and fast-paced sector”.

- 12 -

Distinguishing the “right” person from an imposteris the Key-ware to security and trust.

Strategy

Historically, our core competency has always been in Authentication Technology and Authentication Media. This uniqueexpertise is the key differentiator in all of our Applications. It provides valuable functionality in a marketplace that isincreasingly concerned with security, and the confidence in your identity.

Traditionally, we have focused our marketing efforts on the promotion of pure biometric technology. However, in most ofour customer solutions we have used biometrics as a complement, rather than a substitute, to other authentication methods such as PIN codes, (dynamic) passwords, and digital certificates. As market research predicts, in the future every solution will probably consist of a combination of Authentication Technologies.

Our expertise in Authentication Media originally derived from magnetic stripe cards and bar codes, but now it stronglyfocuses on smart card technology, platforms and card transaction systems. Today, smart cards are the medium of choicein many of our Applications.

We apply, and combine, these two core competencies in seven types of Applications: Logical Acces, Physical Access, Time & Attendance, Criminal Justice, Event Ticketing, Customer Loyalty and Electronic Payment.

Although Keyware’s raison d’être is no longer to market biometric technology as such, biometric and smart card technology are still the company’s differentiating characteristics.

Smart Card

Token

Magnetic stripe

Biometrics

PIN

Password

Digital CertificateAuth

entic

atio

nTe

chno

logy

Auth

entic

atio

nM

edia

Event Ticketing

Customer Loyalty

E-Payment

Physical Access

Time & Attendance

Criminal Justice

Logical Access

7 application markets

- 13 -

Keyware Offers Comprehensive Lines of Valueadded, Market-responsive Products & Services

1 2 3 4 5 6

Large investments in research & develop-ment over recent years have endowedKeyware with a broad portfolio of prod-ucts and services. In the short term,investment in R & D will be scaled downand efforts will be aimed principally atensuring that we offer value-added, mar-ket-responsive products and services.

Keyware divides its numerous productsinto three product groups. No matter howdifferent they may appear on the surface,they are closely interrelated, because theyall centre on user authentication.

□ ProductsApplications

Applications are specific softwarepackages that provide specific authen-tication solutions to different marketsegments. These include:

• SMART-SHOPPER Customer loyalty -defining & managing loyalty schemes(customers win rewards for repeatedpurchases)

• SMART-SHOW Event ticketing -defining ticket categories (first-class,cheap, groups, handicapped, seniorcitizens, etc.), selling tickets, assign-ing seats, controlling access (anti-hooliganism), data analysis for “one-to-one marketing”

• SMART-WALLET Electronic payment -ensuring safe conduct of e-commerce

• CAS SIGN-ON Logical access control- permitting or denying access to com-puter networks and databases

• KEYFREE Physical access control -permitting or denying access to specific physical locations

• KEYTIME Time & Attendance control- monitoring who is where, when, andfor how long

• FCS Criminal justice - assisting lawenforcement agencies to apprehendand successfully prosecute criminals

Keyware’s Smart-Show terminal is custom-designed to help event organisers (sports, concerts, stage shows, etc.) sell tickets, assignseats, control access (anti-hooliganism), andfacilitate “one-to-one” marketing (direct contactwith individual customers according to their individual tastes & interests).

AppliancesAppliances are combinations ofKeyware software & hardware to pro-vide “off-the-shelf” solutions. Theseare aimed at markets where needs arewell defined; therefore productsrequire little or no customisation.

• aXs Guard. This complete, easy-to-configure, affordable hardware & soft-ware package provides controlledaccess to a company’s computer net-work via Internet. It is of particularinterest to companies with numeroussales representatives on the road orwhich widely use home working.

• CAS Guard. This Linux-based biomet-ric security system is able to managethe complete security requirements ofsmall- and medium-sized companies.

aXs Guard, Keyware’s complete hardware & soft-ware security solution, lets companies establishmaintenance-free access control to their computer networks via the Internet by employees on theroad or working at home.

CAS Guard, Keyware’s hardware & softwareauthentication system, is custom-designed to manage the total security requirements of small-and medium-sized companies.

PlatformsPlatforms are software programs thatadd significant management &administration functions toApplications, and enable them forbiometric authentication.

- 14 -

• CAS ServerThe Common Authentication Software(CAS) platform allows companies tocentrally manage biometric authenti-cation, non-biometric authentication,or combinations of the two.

• Smart-WayThis highly secure platform is ideal formanaging multi-organisation andmulti-application programmes in thefields of electronic payment, accesscontrol, event ticking, customer loyaltyprogrammes, and user identification.

□ Value-added Services

In addition to its extensive and growingproduct lines, Keyware offers a numberof value-added services which stream-line and simplify customer use of theseproducts.

• Transaction ServicesKeyware can monitor, process, authorise, and control smart cardapplications and transactions toensure accurate, efficient, and reliable operation. These servicesapply to all markets and generaterecurring revenues for our companysubsequent to sale of hardware &software.

• Project ServicesKeyware develops and customisessoftware products to provide cus-tomers with more comprehensivesolutions to their specific needs.

Case Study: Cetelem

Cetelem, part of the BNP-Paribas banking group, provides on-line authorization services for electronic payment transactions of their Aurora cards in Belgium and Luxembourg.Aurora cards are accepted on all Banksys terminals in Belgium and all Centrel terminals in Luxembourg. For all payment transactions, Keyware manages card recognition, payment authorization, and data capture of the transaction for its customer Cetelem.

In April 2001, Cetelem began converting all its Aurora cards to the new Aurora PrivateLabel Cards scheme. The scheme is based on the Bancontact/Mister Card chip card used by all Belgian banks for direct debit (i.e. funds are instantly transferred from the customer’s account into the merchant’s account). Direct debit payment transactions withthese cards normally are authorised only by Banksys. Because Cetelem wanted to issuetheir new Aurora cards in connection with the Keyware authorisation centre, a sophisticatednew link had to be established between Keyware and Banksys. Cetelem asked Keyware todevelop this special interface in order to accept and authorise Bancontact/Mister Cashtransactions with Banksys PIN security.

This interface, called On Line To Bank (OLTB), has been installed by 3 major banks inBelgium. Keyware developed the link in only five months. The first transactions wereprocessed in April 2001. The old magnet stripe Aurora card was definitively abandoned in November 2001, when all the old cards had been replaced.

This very important investment now gives Cetelem and Keyware the possibility to signifi-cantly expand their transaction business and positions Keyware as a very credible partnerfor potential new customers.

• Development CapabilitiesKeyware researches and develops newsoftware to extend the functionality ofuser authentication systems, e.g. electronic identity cards, remote moni-toring & maintenance of card systemswith widely dispersed terminals, etc.

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Strong Positions in All Market Segments

The market for authentication (biometric and non-biometric) prod-ucts and services breaks down into seven distinct but interrelatedmarket segments. Keyware has strong positions in all of them.

HealthcareThe importance to healthcare providers and insurers of havingeasy access to a patient’s continually updated medical historyis increasingly recognised. So is the need for this sensitive infor-mation to be limited only to those persons authorised to accessit. Together with its partner Healthcast, Keyware products effi-ciently and cost-effectively address both requirements.

Criminal JusticeThis is still by far the largest market segment. Applications hererange from preventing illegal immigration (U.S. Immigration &Naturalisation Service, Department of Justice) to helping identify (criminal) suspects by their fingerprints and other clues left at a crime scene (Interpol).

Electronic PaymentsMarket demand for systems that ensure secure electronic trans-fer of funds and/or credit card information is rapidly growing. As Internet shopping, home banking, and other e-commerceservices expand, so will demand for secure electronic financialtransactions. Keyware’s software today is embedded in over100,000 (smart) card terminals.

Customer LoyaltyIn highly competitive economies, holding customers is asimportant as winning them. This is the purpose of loyalty programmes, which offer gifts and/or discounts to constant customers. Keyware products efficiently and cost-effectivelymanage such programmes. They also generate vital customer behaviour data to help businesses using loyalty programmes

improve their services (remodel stores, introduce new merchan-dise, expand specific product lines, etc.). With 4 million loyaltycards, Keyware's share of the Belgian loyalty card technologymarket is 73%!

Event TicketingElectronic tickets for sports and other events are cost-effectivefor organisers and convenient for customers. Moreover, theypermit better crowd control by refusing entry to recognised troublemakers (“anti-hooliganism”). In this regard, Keyware’sSmart-Show product was the basis for development of theBelgian Football Fan Card.

IdentificationMany governments are considering replacing paper identity (ID)cards with electronic ones with on-board computer chips.Keyware has already been chosen to write specifications for thenew Belgian electronic ID card.

Physical Access/Time & AttendanceThese are complementary functions. Whilst controlling physicalaccess to certain buildings or areas within buildings, it is alsopossible to monitor who has entered the secured area, at whattime, for how long, etc. This information can be invaluable forassessing employee performance—and revealing suspiciousactivity.

Keyware’s Transaction Services generate recurring revenues byprocessing card transactions for the customer loyalty, electronicpayment, and event ticketing markets. On average, Keyware conducts 1 million card transactions daily for both on- and off-lineapplications. Moreover, the captured data provide valuable customer information for “one-to-one” direct marketing programmes.

On average, Keyware conducts 1 million cardtransactions daily for on- and off-line applications.

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Keyware Offers Comprehensive Lines of Value added

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Distribution Channels:Making It Easy for Customers to Buy & UseKeyware Products

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Having market-responsive products fortoday, and a significant lead in preparingmarket-responsive products for tomor-row, do not in themselves ensure sales.Strong, well-structured, well-manageddistribution channels are necessary topresent these products to customers.

In line with Keyware’s new focus & strat-egy, we have undertaken to redefine ourmarketing channels. The fundamentalchange is a shift in emphasis from directto indirect marketing. In essence, we aredoing less selling ourselves and establish-ing close relationships with reputablesales partners in different markets to han-dle the job on our behalf.

□ Direct Channel Although destined to decline, direct chan-nel marketing of our products will remainan important element in the company’sstrategy. This is carried out by projectwork for key clients such as BritishAirways and the United StatesImmigration & Naturalisation Service.

Direct marketing also includes licensingcompanies and governmental agencies todevelop their own, need-specific authenti-cation systems using Keyware hardware& software.

Finally, direct marketing involves estab-lishing strategic alliances with enterprisesof major stature such as Sony andGemplus. Strategic alliances generallyarise when a company has an idea for anew product for joint development withKeyware. When the product is ready, the

partner company markets it. Actual salesreimburse development costs, and gener-ate revenues & profits for both.

□ Indirect Channel Indirect marketing partners divide intotwo basic categories:• Resellers

These are companies that eitherresell Keyware branded products oruse them in customised installations.The term resellers covers a wide vari-ety of partners, from those wholargely sell Keyware products off theshelf with appropriate advice & coun-sel to the buyer (Value AddedRetailers) to those who use Keywareproducts as components for large,custom-designed security installa-tions (System Integrators).- Examples of Keyware Value AddedResellers (VARs): KPN (Belgium),Continental Resources (USA), Lycos(Greece), Euxia (France), InfoGuard(Switzerland, Italy), Onesync (UK),Heltel (Finland), ACT (USA).- Examples of Keyware SystemIntegrators (SI): CEV (Netherlands).

• Original Equipment Manufacturers(OEMs)These are companies that producetheir own branded authenticationproducts using our components.Keyware actively seeks reputablemanufacturers to whom to supply our“middleware” (software componentsthat will lie at the heart of theirbranded products).

- Examples of Keyware OEMS:Sony (Europe), OnGuard (UK), DAON(USA), Healthcast (USA).

As we pursue our shift towards indirectsales, increasingly the reputation ofKeyware and its products will be influ-enced by third parties. For long-term success, these must be carefully safe-guarded. Keyware therefore engages in anumber of activities to ensure that thereputation of the company and its productare protected and promoted.

• Vendor TrainingWe have developed technical andcommercial training programmes toensure that all indirect vendors fullyunderstand the characteristics andbenefits of Keyware products. Vendorknowledge is regularly updatedthrough refresher courses and weassist our vendors in generating salesleads. We have established aMarketing Development Fund forjoint seminars and workshops, orjoint participation in exhibitions andtrade shows.

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Projections confirm the upward trend for 2002 in biometric authentication systems,especially USA.

• Brand IdentificationAll indirect vendors, whether OEMsor resellers, agree to identify theKeyware component in any productsthey manufacture or sell. This isdone through a highly visible logo:

• Multiple VendorsAs policy, Keyware does not grantproduct or territorial exclusivity toany of its marketing partners. It isKeyware’s ambition to achieve opti-mal balance between active marketcoverage and support for successfulpartners. This will allow us to max-imise commercial results withoutrunning the risk of being limited inour operations.

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Distribution Channels: Making It Easy for Customers

Keyware’s Customers & Partners

□ Direct Marketing• Direct Keyware projectsExamples: British Airways, U.S. Immigration & Naturalisation Service, RVS,Securis, NBIS, Belgian Football League, Delhaize, cora

□ Indirect Marketing• Technology partnersSupply complementary technology or products needed to build or marketKeyware productsExamples: Tivoli, Gemplus, Veridicom, Visionics, Banksys, Healthcast, Iridian,Wondernet

• Business partnersJoint development of future products; remuneration generally based on actuallysales of realised productsExamples: Gemplus

• Sales partnersResell Keyware productsExamples: Continental Resources, OnGuard, KPN

Keyware builds & maintains brand awareness by this unmistakable logo on products manufactured or sold by partners using Keyware components.

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Let’s Be Clear: Glossary of Important Terms

Application:A specific software package providingspecific authentication solutions to differ-ent market segments.

Automated teller machine (ATM): Another name for a cash-dispensingmachine.

Cash-dispensing machine: Also know as an automated tellermachine (ATM).

Certificate Authority: A reputable third-party organisation thatissues digital certificates for conducting e-commerce.

Customer loyalty programmes:Company promotions which rewardrepeat (“loyal”) customers with giftsand/or discounts to retain their businessand encourage additional purchases.

Devised authentication:

Authentication based on fabricated attrib-utes such as passwords, badges, tokens,PIN codes, etc. (See: Inherent authentica-tion)

Digital certificate:

An electronic identity, issued by aCertificate Authority, that officially estab-lishes a person’s credentials for doing e-commerce and validly signing electronicdocuments.

Electronic commerce (e-commerce):

Business conducted by electronic means,mainly via the Internet.

False negative:

Incorrectly rejecting an authorised person.(See: False positive)

False positive:

Incorrectly accepting an unauthorisedperson. (See: False negative)

Inherent (“natural”) authentication:

Authentication based on essential (bio-metric) characteristics native to the indi-vidual, e.g. fingerprints, voice, facialstructure, hand structure, etc. (See: Devised authentication)

Layering:

A technique for combining traditionalauthentication (PIN codes, passwords,badges, smart cards, etc.) with biometricauthentication (fingerprint, voice pat-terns, facial geometry, hand geometry,eye patterns, etc.) into a single, multi-level system adaptable to a wide rangeof security needs.

Logical access control:

Permitting or deny access to computernetworks and databases.

Middleware:

A basic software package used by othercompanies to develop and market theirown products.

One-to-One Marketing:

Proposing new product and servicesdirectly to existing customers based ondata revealing the likes, dislikes, andpurchasing behaviour of each one as anindividual.

Original Equipment Manufacturer (OEM):

A company that produces its own brand-ed authentication products usingKeyware components.

PIN:

Personal identification number

Perceived Identity:

You can have full confidence in the trueidentity of each person with whom youdeal. (See: Projected identity)

Physical access control:

Permitting or denying access to specificphysical locations.

Platform:

A software program that connects twootherwise separate applications. Platformsadd significant management & administra-tion functions to applications, and enablesthem for biometric authentication.

Projected Identity:

As an individual, you can incontestablydemonstrate your true identify. (See:Perceived identity)

Reseller:

A company that either resells Keywarebranded products or uses them in cus-tomised installations.

Smart card:

A wallet-size plastic card with onboardcomputer chip (microprocessor and/ormemory). Scanned by an appropriatereader, a smart card can deliver requiredinformation and perform certain func-tions without on-line connection to acentral database.

Time & attendance control:

Monitoring who is where, when, and forhow long.

Token:

A device like a pocket calculator whichgenerates a different code number eachtime a person wishes to gain logical orphysical access to a restricted area.

ChairmanGuido Van Der Schueren

Chairman and independent director

Co-founder of Artwork Systems

DirectorsMarc Van Rompaey

Founding partner Phytagoras

Luc Pintens

Independent Director

Econocom Benelux

Johan Dejager

Director of Carpinvest

ManagementChris Buyse

General Manager and C.F.O.

Frank Coucke

Senior Vice President Sales & Marketing

Stephane Vandervelde

Managing Director Big Friend,

Co-founder and Senior Advisor Corporate Strategies

Jean Claeys

CTO

Legal CounselAllen Overy Brussels Avenue de Tervueren 268A

B-1150 Brussels, Belgium

Brown, Rudnick, Freed & GersnerOne Financial Center

Boston, MA 02111, USA

Transfer AgentFortis Bank

Warandberg/Montagne du Parc 3

B-1000 Brussels, Belgium

Stock ListingThe Company's Common Stock is traded on the

NASDAQ European Stock Market.

The symbol is KEYW.

Independent AccountantsKlynveld Peat Marwick Goerdeler

Bedrijfsrevisoren

Bourgetlaan 40

B-1130 Brussels, Belgium and

99 High Street, Boston, MA 02110, USA

IR ContactKeyware Corporate Headquarters

Chris Buyse

Excelsiorlaan 32-34

B-1930 Zaventem, Belgium

cbuyse@keyware.com

Annual Meeting of ShareholdersThe annual meeting of shareholders will be

held on Friday, March 15, 2002

Corporate Information