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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the Fiscal Year Ended December 31, 2002 or

For the transition period from             to             

Commission File Number 000-31109

Valicert, Inc.

(Exact name of registrant as specified in this charter)

1215 Terra Bella Avenue

Mountain View, CA 94043

(Address of principal executive offices, including zip code)

(650) 567-5400

(Registrant’s Telephone Number, including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

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 þ    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 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 Rule 12b-2 of the Act).  Yes ¨    No þ

The aggregate market value of the Registrant’s voting and non-voting common equity held by non-affiliates of the Registrant, based upon the closing sale price of the common stock as of the last business day of the registrant’s most recently completed second fiscal quarter, as reported on The Nasdaq National Market, as approximately $6,302,978. Shares of common stock held by each officer, director and holder of 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

Number of shares of Common Stock outstanding at February 28, 2003:    25,362,436

Documents Incorporated by Reference:    None.

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VALICERT, INC.

2002 ANNUAL REPORT ON FORM 10-K

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PART I

ITEM 1.    BUSINESS

Company Overview

Valicert, Inc., (“Valicert” or the “Company”) develops and licenses secure Internet communications and identity validation software for file transfer, financial messaging, and business process integration. Enterprises and government agencies primarily use our products to accelerate their financial and corporate supply chain processes and exchange sensitive data inside and outside of their organizations. Using our products, our customers may migrate from private computer networks and paper processes to the Internet, thus reducing their expenses and gaining operating efficiencies.

Our products and services are complementary to the enterprise application integration initiatives underway at many large companies today. These initiatives are intended to integrate the various computing systems at companies and connect them electronically to their customers and partners. This integration creates more efficient end-to-end flows of information, such as orders and payments, resulting in potential cost savings for the companies due to more rapid business processing and reduced needs for paperwork and manual re-entry of data. Our software enables companies to use extranets to securely exchange both structured, e.g., Electronic Data Interchange, or EDI, and eXtensible Markup Language, or XML, and unstructured information with business partners. Our products are available on a range of computing platforms, from laptops to servers and mainframes.

During 2002, we undertook a number of changes. We named John Vigouroux, our former president of field operations, as president and chief executive officer in October 2002 and also appointed him to our board of directors. At that time, Joseph (“Yosi”) Amram resigned as our president and chief executive officer, but he continues to act as an advisor and also serves as a member of our board of directors.

During 2002, we reduced operating costs and refocused efforts in the areas of product development, sales and marketing toward secure Internet communications and identity validation. We discontinued our online service and now sell products using a software license model. Our sales and marketing efforts are primarily focused on the financial services, government and healthcare markets. During 2002, we concentrated our direct sales efforts in North America while internationally, we reduced our direct sales resources and now sell primarily through reselling partners. Our reselling partners include Baltimore Technologies, IBM, Mitsui and Company, Ltd., Operational Research Consultants, Raytheon Systems Company, Sierra Systems and Unisys.

In 2001, we had five software products that we were actively developing, marketing, selling and developing. In 2002, we refocused our resources primarily on two products, SecureTransport and Validation Authority. We continue to maintain and support our Document Authority, Digital Receipts, and Transaction Authority products. In addition, in 2002 we successfully started a research and development group in Bangalore, India.

We were incorporated in California in February 1996 and reincorporated in Delaware in May 1998 as Valicert, Inc. Our principal offices are located at 1215 Terra Bella Avenue, Mountain View, California 94043. Our telephone number is (650) 567-5400. Investors may access our filings with the Securities and Exchange Commission on our website, which is located on the Internet at www.valicert.com, but the information on our website does not constitute a part of this annual report on Form 10-K.

Recent Developments

On February 18, 2003, we signed a definitive agreement to merge with Tumbleweed Communications Corp. (“Tumbleweed”) in a stock-for-stock transaction, where each share of our common stock will be exchanged for .385 shares of Tumbleweed common stock, or approximately 9.8 million shares, which will represent approximately 24% of Tumbleweed’s outstanding stock immediately following the closing of the merger. The merger remains subject to certain closing conditions, which includes approval by our stockholders, and there can be no assurances that the merger will be consummated.

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In September 2002, we transferred listing of our securities from The Nasdaq National Market to The Nasdaq SmallCap Market.

Industry Background

Reliable and secure electronic delivery of data within an organization and with partners, suppliers and customers is a critical component of modern business operations. Increasingly, traditional paper-based or private network-based methods of data exchange are being replaced by solutions that use the Internet and other Internet protocol, or IP,-based networks to deliver data. However, many important systems in the financial services, government and healthcare markets have been unable to use Internet technology due to an inability to validate the identity of the users of the system. We addressed these market needs by providing secure Internet communications and identity validation software products that are robust, secure, automated and can be integrated into various legacy systems.

Requirement for secure, reliable data transfer and automation between enterprises on the Internet

The Internet, with its global reach, cost-effectiveness and ability to enable real-time interactions, is changing the way in which companies, government agencies, and individuals conduct business and interact with one another. The Internet has enabled organizations to more efficiently communicate and conduct commerce directly with their customers, suppliers and partners. The Internet has traditionally been used for non-critical information publishing, e-mail, and more recently, for business-to-consumer electronic commerce. However, it is being increasingly viewed as a medium for conducting a broad range of business-to-business and other electronic transactions.

Companies have begun adopting secure automated file transfer as a cost-effective way to engage in business-to-business commerce, business-to-bank payments, and to implement EDI over the Internet. Electronic ordering and corporate electronic payments have typically been conducted over private networks or directly connected leased telephone lines, using EDI standards for electronic message formats. These messages typically contain information about purchases, invoices and payments. By moving these EDI messages over the Internet, significant cost savings can be achieved by eliminating costly leased lines and private networks, and by connecting to smaller companies that could not afford the expense of these older ways of sending EDI messages. One advantage of secure automated file transfer is that it does not require extensive changes to existing enterprise systems for users to gain the benefits of electronic connectivity. Secure automated file transfer software can be integrated into existing enterprise software systems.

By regulation, the United States government has mandated that healthcare providers, insurers and claims processing companies must protect the information of patients. This regulation, known as the Healthcare Information Portability and Accountability Act, or HIPAA, defines numerous computer security requirements, including encryption of data during electronic communications that healthcare providers, insurers and claims processing companies must implement. To comply with the requirements of HIPAA, and to reduce their costs, these organizations are beginning to adopt secure Internet communications for transmitting patient records, benefits eligibility information, claims and payments. We believe that the security features of our SecureTransport software product address many of the requirements with which organizations subject to HIPAA must comply.

Requirement for identity validation on the Internet

As an open network, the Internet does not restrict access and does not inherently offer the degree of trust, security and provability that many corporations and government agencies increasingly require to ensure confidence in electronic communications and transactions. The people and organizations that rely on the Internet to conduct transactions are subject to risks of theft, loss, alteration or dissemination of confidential data, damage

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to their reputation and economic loss through fraud. To minimize these risks, the Internet requires a framework of trust that meets users’ security requirements and validates the identity of all parties in a communication or transaction.

Public key infrastructure, or PKI, has emerged as an important element for creating this framework of trust for the Internet. Based on public key cryptography, PKI is the underlying system that organizations use to issue and manage electronic credentials, which we refer to as digital certificates, and the keys they contain to facilitate secure communications for a large number of users. The software product or the entity that issues and manages the life cycle of digital certificates is referred to as a certificate authority.

Digital certificates act as proof of identity for users, servers, routers, downloaded programs and other components in a network environment. However, digital certificates do not, by themselves, establish the validity of a party’s credentials or provide real-time authorization to conduct a specific transaction. For example, a digital certificate can verify the identity of an employee before a transaction but cannot provide real-time validation of the employment status of that individual or the specific spending restrictions or other limits that may apply. A credential can be validated only if the revocation status of the digital certificate is known and evaluated against a specific set of policies, which describe the party’s authority to engage in a given transaction. We refer to the software or entity that is used to validate transactions as a validation authority.

Many certificate authorities incorporate some validation capabilities for credentials they issue, but typically do not provide validation of credentials that other vendors issued. Most certificate authorities use specific validation protocols which may not be compatible with the validation protocols used by a given software application. This inability to cross-validate digital certificates limits the use of those certificate authorities for validation in multi-certificate authority environments, which are common for transactions that traverse organizational and geographic boundaries. We believe that there is a need to separate the validation authority from the certificate authority to address the need for cross-validation and to enhance trust standards. We believe that this separation eliminates the opportunity for certificate authority compromise. We have developed our Validation Authority software to provide this separation.

Requirement for secure electronic document collaboration and storage

Companies are increasingly using the Internet as the means by which to negotiate and exchange sensitive documents such as contracts, letters of credit and design plans. Storing and exchanging sensitive information over the public network, however, requires document control and access, assurance of delivery, content integrity, and proof of occurrence. We believe a need exists for a secure, web-accessible application for collaborating on and storing vital documents. We believe a need also exists for the means to manage document-related information such as digital signatures, version control and tamper-evident audit trails.

Valicert’s Software Products and Services

Our software products operate on multiple platforms, including Windows 2000, Windows NT, Solaris, AIX, HP-UX, Linux and some mainframe environments. The pricing of our products consists of upfront software license fees and annual maintenance and support fees.

This table outlines our principal software product offerings:

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SecureTransport software products

Valicert SecureTransport is a secure, enterprise-class file transfer software product family. It enables the transfer of valuable and sensitive information over the Internet in a secure, reliable manner interactively or with automation. SecureTransport is a web-enabled client-server software product that uses open standards and technologies including Secure Sockets Layer, File Transfer Protocol and Hyper Text Transfer Protocol. It includes a range of server configurations, add-on options, and software clients that can address the varied needs of customer deployments at a low total cost of ownership.

SecureTransport provides several advanced capabilities required for secure and automated data delivery in business environments.

To provide security our SecureTransport products incorporate features to:

To provide the reliability and performance attributes needed for business applications, our SecureTransport products have features that:

To provide appropriate return on investment and to protect existing investments in enterprise IT solutions, our SecureTransport products are designed to:

In addition to using SecureTransport for interactive data exchange many customers also take advantage of its data and application integration capabilities when using SecureTransport in conjunction with key business applications. Secure data exchange over the Internet enables cost-effective business process integration for legacy and new applications, expanding the reach of new services to a wider range of customers, suppliers and partners.

Many integration challenges involve data flow between disparate systems, using a variety of formats and data schemas. Our Data Integration Suite for SecureTransport is a product that can be used to effectively address these and other data integration needs using graphical user interface based tools to visually specify data conversion, validation, extraction and loading processes, which are then executed on the SecureTransport server. In addition, our consulting organization can design tools for integrations that need additional user authentication, notification, or data management processes. This wide range of options enables SecureTransport to be used in multiple business processes and applications.

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To respond to a range of deployment requirements, we offer SecureTransport in Standard and Enterprise Editions. The Standard Edition supports a wide range of Internet communication protocols and software clients that can communicate with it. The Enterprise Edition offers additional benefits in the area of higher-grade security, more manageability for large-scale deployments, and a more advanced integration framework.

Validation Authority software products

We provide software products for the high-performance validation of transactions. These products are designed to enable customers to reduce the risks and costs related to the misuse of invalid digital credentials and provide flexible extensions for stateful validation. Stateful validation is a method of validation in which contextual information is used with information on the validity of credentials. This contextual information includes real-time credit status and purchasing authority. Our validation authority software products are based on our multi-protocol architecture, which enables interoperability with leading certificate authorities, directory services and business applications.

The Enterprise VA is the core of our validation product line. We also offer a set of common component software products, VA Publisher, Validator Toolkit and Validator Suite, to facilitate the implementation of our validation authority products.

Enterprise VA Server.    Our enterprise version validation server software supports a wide range of validation protocols, including online certificate status protocol, certificate revocation list and certificate revocation list distribution points. Our Enterprise VA is also bundled with the ability for customers to publish data on revoked credentials to another server for backup and redundancy, data distribution or disaster recovery. Enterprise VA licenses are specifically limited to in-house use by organizations.

VA Common Components.    VA Publisher, Validator Toolkit and Validator Suite are included with all of Valicert’s VA product offerings.

VA Publisher.    Our VA Publisher is used to publish revocation data to a validation authority server or service from a directory server or directly from a certificate authority. In some cases, where we have strategic relationships with certificate authority vendors, the VA Publisher is bundled with the certificate authority to enable real-time publication of revocation data.

Validator Toolkit.    Our Validator Toolkit is a software development toolkit designed to allow for the rapid addition of validation capabilities into applications, which require stateful validation or use digital certificates regardless of the issuing certificate authority. We license the toolkit to independent software vendors to support our validation authority software products and services.

Validator Suite.    Our Validator Suite is a set of software modules that are used for validation in popular web server, web client and e-mail applications. We ship modules for Apache Stronghold Server, Netscape/iPlanet Enterprise Server, Microsoft Address Book, Microsoft’s Internet Explorer, Microsoft Internet Information Server and Microsoft Outlook. We license some of our Validator Suite modules to independent software vendors to include in their software.

Professional services

We offer professional services to assist in site planning, design, installation, integration, training and maintenance of its products and services. Our professional services include consulting services, product and service training, and custom development and support. We employ highly trained professionals in the data networking, network security, cryptography and network operations fields to deliver these services.

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Strategy

Our objective is to further extend our position as a provider of secure communications and authentication software for the financial services, government and healthcare markets. Key elements of our strategy include:

Grow market share.    To increase our market share, we intend to offer more competitive products, develop programs that are targeted at replacing the competition, and to expand the relationships with our resellers.

Expand application areas within our current base of customers.    We intend to build new features into our products to make them more functional and easier to use by customers for these new applications for existing customers. The conversion of manual check clearing processes to the use of electronic check images is an example of expanding from our current successful application area of corporate payments submissions, but staying within the banking industry.

Leverage current customers to expand customer base.    We intend to leverage our customer relationships to increase revenues for products that provide for the delivery of data between corporations and their banks. Another example of expanding sales within our current customer base is to leverage our presence in the health insurance market to sell software to large healthcare providers or healthcare regulators that interact with the insurance companies.

Extend technology expertise through continued product development.    We intend to expand our product capabilities by continuing to invest in product development to continue to provide open, flexible and scalable technologies that implement a range of communications protocols.

Expand strategic alliances to broaden the use of our software products.    To accelerate the widespread adoption of our software products, we have entered into technology, marketing and distribution alliances with industry leaders. We plan to expand existing relationships and establish new strategic alliances with companies that will sell or integrate our technologies with their offerings and participate in joint marketing, training and sales arrangements.

Customers

We license our software products and provide services to a variety of transaction-intensive enterprises and service providers. The following is a selected list of customers that accounted for at least $25,000 of revenue during 2002.

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In fiscal 2002, one customer accounted for 12.0% of our revenues. In fiscal 2001, two customers accounted for 19.5% and 14.3% of our revenues, respectively. In fiscal 2000, no individual customer accounted for more than 10.0% of our revenues.

Reseller and OEM Relationships

As of December 31, 2002, we had reseller relationships with such companies as Baltimore Technologies, IBM, Microsoft, Mitsui and Company, Ltd., Operational Research Consultants, Raytheon Systems Company, Sierra Systems and Unisys. The primary objectives of these relationships are:

Technology

We have built both open and proprietary mechanisms into its core technology, which form the foundation for our software products. Some of the key areas where we have developed technology enable:

Automation and Integration Agent Extension Mechanisms.    We have developed technology that allows for customized software modules to be developed for our secure data transfer products. These modules can be automatically invoked at any stage of data transmission or based on events such as a file transfer initiation or file transfer completion. These modules allow for the addition of capabilities such as virus scanning of files and file format conversion.

Automatic Restart.    Our secure data transfer product incorporates technology that allows for the automatic and rapid resumption of a previously interrupted data transfer. This capability is important for customers to utilize the Internet to efficiently and reliably transfer large data files.

Certificate Validation Mechanisms.    Our certificate validation mechanisms allow us to efficiently distribute large amounts of certificate revocation data on a global basis using most of the currently accepted validation protocols. We use our certificate validation mechanisms to distribute our revocation data to enterprise customers and service provider customers to provide regional validation capabilities across the globe. We believe this enables us to scale our operations globally at a substantially lower cost than our competitors.

Stateful Validation.    Our stateful validation technology allows for customized software modules to be developed for our validation authority products. These customized modules can interface with external systems to enable the use of contextual information, such as credit histories, purchase authorization, or access controls, with the validation process. Interfacing through our stateful policy application program interfaces. These modules do not require modification of our software products to be implemented, which we believe provides us with a strong competitive advantage.

Research and Development

We believe our future success will depend in large part on our ability to develop new products, core technologies and enhancements to product lines. In the past, we have developed our software products and services both independently and through efforts with leading independent software vendors and major customers.

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In 2002, we established a research and development center in Bangalore, India. This wholly owned subsidiary employs approximately 45 employees who are engaged in software quality assurance, product support, custom software development, and selected software development for our products.

As of December 31, 2002, we had 62 employees dedicated to research and development globally. Research and development expenses were $7.1 million in 2002 as compared to $11.7 million in 2001 and $10.4 million in 2000. All development costs have been expensed as incurred. Our research and development efforts are focused primarily on improving our SecureTransport and Validation Authority products and integrating certain elements of our Document Authority, Digital Receipt and Transaction Authority products into our SecureTransport and Validation Authority products, while continuing to support and provide certain enhancements to these products.

Sales

We sell our products and services in the United States primarily through our direct sales force that focuses on key customers in our target industries. Our domestic offices are located in Atlanta, Austin, Chicago, Dallas, Mountain View, New York and Washington D.C. We also market our products and services internationally through our direct sales force and through resellers and system integrators and our service provider customers. We have direct international presence in Japan, The Netherlands and the United Kingdom and have dedicated representatives in Hong Kong, Iberia, Scandinavia and South East Asia.

As of December 31, 2002, 36 employees were dedicated to sales and marketing. Our sales force includes field sales engineers and inside sales personnel who support the account executives. Field sales engineers assist our account executives with technical presentations, customer requirements analysis and initial solution designs. Our inside sales personnel assist the account executives in developing new customer relationships. Our domestic direct sales efforts are also augmented by sales through resellers, system integrators and sales agents.

Our internal telemarketing operation is responsible for customer prospecting, lead generation and lead follow-up. This marketing activity qualifies leads for further follow-up by the direct sales force or inside sales team, or leads the prospect to our website so that the prospect can access information and enroll for our Internet-based products and services.

International sales are an important portion of our business. In 2002, sales to customers outside of North America accounted for 47% of our consolidated net revenue, compared to 61% in 2001 and 52% in 2000. Our primary market outside of the United States is Japan. International sales are subject to certain risks, including, but not limited to, unexpected changes in regulatory requirements, exchange rates, tariffs, and political and economic instability. Our international sales are expected to decline as a percentage of total sales in 2003 due to a greater allocation of our sales resources in North America.

Marketing

We utilize a variety of marketing programs to generate leads and increase brand awareness. Our marketing strategy is organized around three primary areas: industry marketing, product management and marketing communications. Industry marketing identifies target markets and customer opportunities and then develops the positioning, programs and materials to reach customers and support sales activities. Product management translates customer and market requirements into product development plans and works with engineering to ensure completion. Product management also trains the sales force on product information and competition. Marketing communications develops overall market awareness of our company and our products through our Internet website, public relations, industry analyst relationships, product reviews, trade shows and seminars, editorial promotion, industry events and executive speaking engagements. Our website is an important part of its sales lead generation program and, in 2002, we invested in improving the content on its website, adding whitepapers that can be downloaded, and promoting its website in search engines and paid online advertising. We also conducted numerous online web seminars with others such as GT News, IBM and Treasury Solutions.

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Competition

The market for secure Internet communications solutions is intensely competitive and subject to rapid change. A small number of competitors offer a wide range of security products and services, some of which are directly competitive with our software products.

Validation authority software products

We compete primarily with software companies such as Alacris, Computer Associates and Kyberpass.

Secure data transfer software products

We compete with Internet file transfer and electronic data interchange companies such as Computer Associates, Cyclone Commerce, IPNet, Proginet and Sterling Commerce.

Competitive factors

We believe that the principal competitive factors in its market are interoperability, completeness of solution, flexibility, security, customer service and support, ease of use and speed of implementation and low total cost of ownership. We are dedicated to creating software products that are differentiated from the competition by delivering the most security; highest performance, reliability and scalability; best return on investment and lowest total cost of ownership.

Intellectual Property

Legal protections

We rely upon a combination of intellectual property protection including patents, copyrights, trademarks, trade secrets and licensing methods to protect our proprietary technology and other proprietary rights. Our success will depend on our continued ability to have access to these or other technologies that are or may become important to the functionality of our products. Any inability to continue to obtain or use this technology could significantly harm our operations.

Confidentiality agreements

It is our policy to require employees and consultants to enter into confidentiality agreements. We control access to and distribution of our documentation and other proprietary information. The agreements provide that all inventions created by an employee shall be our property. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we consider proprietary. Policing unauthorized use of our products is difficult and we are unable to determine the extent to which piracy of its software products exists. This piracy can be expected to be a persistent problem, particularly in international markets and because of the growing use of the Internet. Our trade secrets and confidentiality agreements may not provide meaningful protection of our proprietary information. Others may independently develop similar technologies or duplicate any technology developed by us. Our technology could infringe upon the patent rights of others. Legal protections of our rights may be ineffective in foreign countries where intellectual property does not have the protection it does in the United States. Our inability to protect its proprietary rights could harm our business.

Patents

We own one issued patent and have filed seven United States and foreign applications and other foreign applications for patents covering our technology. Our pending or future patent applications will be issued or that any issued patents will be enforceable or valid. The coverage claimed in a patent application can be significantly

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reduced before the patent is issued. Our failure to protect our intellectual property in a meaningful manner could materially harm our operations. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and enforceability of the patents of others. Any litigation could result in substantial costs and diversion of management and technical resources and could harm our business.

Even if patents are issued, they may not adequately protect our technology from infringement or prevent others from claiming that our technology infringes their patents. Parties making these claims may be able to obtain injunctive or other equitable relief that could block our ability to further develop or commercialize some or all of our products in the United States and abroad. If a claim of infringement is filed, we may be required to obtain one or more licenses from or pay royalties to third parties. We may not be able to obtain these licenses at a reasonable cost, if at all. Defense of any lawsuit or failure to obtain any of these licenses could hurt our business. We are aware of one patent application, which, if granted, could result in a claim of infringement against us. However, if this were to occur, we believe that we have access to alternative technologies, which would enable us to deliver our products even if a claim of infringement were successfully brought against us.

Employees

As of December 31, 2002, we had 114 employees, of which 62 were employed in research and development, 36 were employed in sales and marketing, six were employed in operations and customer support and 10 were employed in general and administration. In 2002, we completed several cost reduction actions, resulting in the termination of a number of employees. None of our employees is subject to a collective bargaining agreement and we have never experienced a work stoppage. We believe our relations with our employees are good; however, the morale of our employees is low due to the various workforce reductions that occurred in 2001 and 2002, and we may be unable to retain them. The ability to achieve our financial and operational objectives depends in large part upon our continued ability to attract, integrate, train, retain and motivate highly qualified sales, technical and managerial personnel, and upon the continued service of our senior management and key sales and technical personnel.

ITEM 2.    PROPERTIES

Our principal executive and administrative offices are located at 1215 Terra Bella Avenue in Mountain View, California, where we lease approximately 25,000 square feet. This lease expires August 2003. We believe that our facilities are adequate for our needs and that suitable additional or alternative space will be available in the future on commercially reasonable terms to meet any additional needs.

ITEM 3.    LEGAL PROCEEDINGS

A class action lawsuit was filed on December 3, 2001 in the United States District Court for the Southern District of New York on behalf of purchasers of our common stock alleging violations of federal securities laws. Lachance v. Valicert, Inc. et al., No. 01-CV-10889 (SAS) (S.D.N.Y.), related to In re Initial Public Offerings Securities Litigation, No. 21 MC 92 (SAS). The case is brought purportedly on behalf of all persons who purchased our common stock from July 27, 2000 through December 6, 2000. The complaint names as defendants the Company, our former chief executive officer, our chief financial officer, and an investment banking firm that served as our underwriter for our initial public offering in July 2000.

The amended complaint alleges violations of Sections 11 and 15 of the Securities Act, and Sections 10(b) and 20(a) of the Exchange Act, on the grounds that the prospectus incorporated in the registration statement for the offering failed to disclose, among other things, that (i) the underwriter had solicited and received excessive and undisclosed commissions from certain investors in exchange for which the underwriter allocated to those investors material portions of the shares of our stock sold in the initial public offering, and (ii) the underwriter had entered into agreements with customers whereby the underwriter agreed to allocate shares of

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our stock sold in the initial public offering to those customers in exchange for which the customers agreed to purchase additional shares of our stock in the aftermarket at pre-determined prices. The amended complaint also alleges that false analyst repots were issued. No specific damages are claimed. We believe the allegations are without merit and intend to contest them vigorously. Failure to prevail in this lawsuit could have a material adverse effect on our financial position, results of operations and cashflows in the future.

We are aware that similar allegations have been made in other lawsuits filed in the Southern District of New York challenging over 300 other initial public offerings and secondary offerings conducted in 1999 and 2000. Those cases have been consolidated for pretrial purposes before the Honorable Judge Shira A. Scheindlin. On July 15, 2002, Valicert and our affiliated individual defendants (as well as all other issuer defendants) filed a motion to dismiss the complaint. The Court denied the motions to dismiss claims under the Securities Act in all but 10 of the cases, including our case. The Court granted the motion to dismiss the claims under the Exchange Act against us and the individual defendants. Management believes that the allegations against us and our officers are without merit and intend to contest them vigorously. If the outcome of the litigation is adverse to us and if, in addition, we were required to pay significant monetary damages in excess of available insurance, our business would be significantly harmed.

We are a party to various claims in the ordinary course of business. Although the results of litigation and claims cannot be predicted with certainty, we believe the final outcome of such matters will not have a material adverse effect on its financial position, results of operations or cash flows.

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

Not applicable.

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PART II

Our common stock has traded on The Nasdaq SmallCap Market under the symbol “VLCT” since September 2002. From July 2000 to September 2002, our common stock traded on The Nasdaq National Market under the symbol “VLCT.” We have never paid cash dividends and have no present intention to pay cash dividends. On February 28, 2003, there were approximately 358 stockholders of record.

The following table sets forth, for the calendar quarters indicated, the high and low trading prices per share of our common stock, as reported on The Nasdaq National Market and The Nasdaq SmallCap Market, as applicable, based on published financial sources:

ITEM 6.    SELECTED HISTORICAL FINANCIAL DATA

The following selected historical consolidated financial data as of December 31, 2001 and 2002 and for each of the years in the three year period ended December 31, 2002 are derived from our audited consolidated financial statements, which are included elsewhere in this annual report on Form 10-K. The consolidated financial data as of December 31, 1998, 1999 and 2000 and for the years ended December 31, 1998 and 1999 are derived from our audited consolidated financial statements that have not been included or incorporated by reference into this annual report on Form 10-K. The historical results are not necessarily indicative of results to be expected for any future period.

The selected financial data below should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes in this report.

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The following discussion should be read in conjunction with Item 1: Business, Item 6: Selected Financial Information and Item 8: Consolidated Financial Statements and Supplementary Data.

The following discussion contains forward-looking statements within the meaning of the U.S. federal securities laws that involve risks and uncertainties. The statements contained in this discussion that are not purely historical, including, without limitation, statements regarding our expectations, beliefs, intentions or strategies regarding the future, are forward-looking statements. In this report, the words “anticipates”, “believe”, “expect”, “intend”, “may”, “will”, “should”, “plan”, “estimate”, “predict”, “potential”, “future”, “continue”, or similar expressions also identify forward-looking statements. These statements are only predictions. We make these forward-looking statements based upon information available on the date hereof, and we have no obligation (and expressly disclaims any such obligation) to update or alter any such forward-looking statements, whether as a result of new information, future events, or otherwise. Our actual results could differ materially from those anticipated in this discussion as a result of certain factors including, but not limited to, those set forth in the section entitled “Risk Factors” and elsewhere in this report.

Overview

Business

We develop and license secure Internet communications and identity validation software for file transfer, financial messaging, and business process integration. Enterprises and government agencies primarily use our products to accelerate their financial and corporate supply chain processes and exchange sensitive data inside and outside of their organizations. Using our products, our customers may migrate from private computer networks and paper processes to the Internet, thus reducing their expenses and gaining operating efficiencies.

Our products and services are complementary to the enterprise application integration initiatives underway at many large companies today. These initiatives are intended to integrate the various computing systems at companies and connect them electronically to their customers and partners. This integration creates more efficient end-to-end flows of information, such as orders and payments, resulting in potential cost savings for the companies due to more rapid business processing and reduced needs for paperwork and manual re-entry of data. Our software enables companies to use extranets to securely exchange both structured, e.g., Electronic Data Interchange, or EDI, and eXtensible Markup Language, or XML, and unstructured information with business partners. Our products are available on a range of computing platforms, from laptops to servers and mainframes.

Critical Accounting Policies

We have identified the policies below as critical to our business operations and the understanding of its results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. Our preparation of the consolidated financial statements require us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amount of revenue and expenses during the reported period. Our actual results may differ from these estimates.

Restructuring and impairment charges.    In fiscal 2002, we recorded net restructuring and impairment charges of approximately $4.6 million in accordance with EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring), SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, and Staff Accounting Bulletin (“SAB”) 100, Restructuring and Impairment Charges. Our restructuring initiatives involved strategic decisions to cease providing certain services and consolidate corporate facilities. In January 2002, we

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exited our application service provider business. As a result of this action, our management determined that the value of certain equipment was impaired and recorded an impairment charge of approximately $1.0 million. In March 2002, we consolidated our corporate facilities and terminated the long-term facility lease contract for an unutilized facility located in Mountain View, California. As a result of this action, we recorded additional restructuring and impairment charges of approximately $3.6 million, which is comprised of $3.5 million for settlement costs and forfeiture expenses associated with the building, $562,000 related to the impairment of associated equipment and leasehold improvements and the write-off of security deposits, offset by the reversal of previously recorded deferred rent of $434,000. During 2002, we paid $3.3 million in contract termination costs and other administrative fees related to this action.

Valuation of goodwill and other intangible assets.    Our long-lived assets include goodwill and other intangible assets. At December 31, 2002, we had $7.5 million of goodwill and other intangible assets, accounting for 45.0% of our total assets. In assessing the recoverability of our goodwill and other intangibles, we must make certain estimates and assumptions to determine the fair value of the respective assets. If these estimates or assumptions change in the future, we may be required to record impairment charges for these assets. On January 1, 2002, we adopted Statement of Financial Accounting Standards, or SFAS, No. 142, Goodwill and Other Intangible Assets, and are required to analyze our goodwill for impairment on an annual basis and when circumstances suggest impairment may have occurred. We performed the required transitional and annual impairment tests during the quarters ended June 30, 2002 and December 31, 2002, respectively, and determined that there was no impairment.

Allowances for doubtful accounts.    A significant portion of our receivables is concentrated with a small number of customers. At December 31, 2002, two customers accounted for 28% of our net accounts receivable, and at December 31, 2001, two customers accounted for 38% of net accounts receivable. While we record allowances for doubtful accounts for estimated credit losses, future collections from our customers could differ significantly from these estimates, which could negatively affect our future operating results. During the fourth quarter of 2002, we recorded additional allowances of $528,000 due to a customer’s inability to pay.

Revenue recognition.    We derive our revenues from software license fees, subscription fees, consulting services, and maintenance and support. Software license revenues are comprised of upfront fees for the use of our software products. We recognize revenue from license fees when:

Revenue from shipments to resellers is generally recognized at the time of delivery of the software to the reseller, unless collectibility is not reasonably assured, in which case revenue is deferred until the fee is collected. Should our estimates regarding the collectibility of amounts due from resellers change, our future results could be impacted.

When we deliver our software products electronically, we consider the sale complete when we provide the customer with the access codes for immediate possession of the software. When contracts contain multiple product and service elements, we account for the revenue related to these elements using the residual method. We recognize revenues when the fees are fixed and determinable. On occasion, we have in the past, and may in the future, offer extended payment terms beyond its normal business practice. In such cases, we recognize revenue when the fee becomes due. If we do not consider collectibility reasonably assured, we recognize revenue when the fee is collected.

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If maintenance and support or consulting services are included in a license agreement, amounts related to these services are allocated based on vendor-specific objective evidence. We recognize such fees ratably over the related service period. Customer contracts that require delivery of unspecified additional software products in the future are accounted for as subscriptions, and we recognize this revenue ratably over the term of the arrangement beginning with the delivery of the first product. We recognize consulting revenue as these services are provided to the customer. We recognize revenue from maintenance and support arrangements on a straight-line basis over the life of the agreement, which is typically one year.

Stock compensation.    At December 31, 2002, 707,574 shares of common stock underlying notes receivable are subject to variable accounting. As such, we will record additional stock compensation charges related to these shares should the market price of our common stock rise above certain levels. For 208,728 of these shares, these additional charges will begin when the market price exceeds $0.72 per share. For the remaining 498,846 shares, such charges will commence at various market prices, starting at $3.00 per share.

Results of Operations

The following table sets forth, as a percentage of revenues, certain consolidated statement of operations data for the periods indicated.

Fiscal Years Ended December 31, 2002, 2001 and 2000

Net Loss

Our net loss decreased to $21.7 million in 2002 from $28.4 million in 2001. The decrease was due to lower operating expenses and cost of revenues, primarily due to multiple reductions in workforce, and was offset by a decrease in revenues and restructuring and impairment charges of $4.6 million. Our net loss increased slightly to $28.4 million in 2001 from $28.3 million in 2000. The increase was primarily due to increased operating expenses largely offset by revenue growth. In 2001 and 2000, we incurred substantial costs to develop our technologies and software products, to recruit and train personnel for our engineering, sales and marketing and

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technical support organizations, and to establish an administrative department. We have incurred cumulative losses of $96.3 million as of December 31, 2002.

Revenues

Total revenues decreased to $12.2 million in 2002 from $24.2 million in 2001. We believe the decrease in revenues was primarily due to delayed information technology spending and a slowdown in PKI spending. In particular, delayed spending by our international customers adversely impacted us, and we also experienced a decrease in license revenue from service provider customers, who remain cautious about making the significant up-front investment needed to implement our software. Revenues earned from customers outside of North America accounted for 47.1% of total revenues in 2002 compared to 60.8% in 2001 and 51.7% in 2000. Total revenues increased to $24.2 million in 2001 from $11.8 million in 2000. The significant increase in revenues in 2001 was primarily due to higher sales of our Validation Authority products and services, Secure Data Transfer products and professional services. These products and services accounted for revenue growth of $5.9 million from 2000 to 2001.

Software license revenues accounted for 46.1% of our total revenues in 2002 compared to 65.0% in 2001 and 70.7% in 2000. Subscription fees and other service revenues accounted for 53.9% of our total revenues in 2002 compared to 35.0% in 2001 and 29.3% in 2000. License revenues declined, as a percentage of sales, for the reasons noted in the preceding paragraph. Maintenance and support services are the primary components of subscription fees and other services. These services are normally subject to the terms of annual agreements and represented relatively comparable level of revenues, in absolute amounts, between 2001 and 2002. Further, we reduced the headcount in our professional service organization during 2002 that resulted in lower professional services revenues. As a result of these factors, the percentage of sales for subscription fees and other services increased in 2002 as compared to 2001. The increase in subscription fees and other service revenues as a percentage of total revenues during 2001, as compared to 2000, was primarily due to an increase in maintenance and support renewals and an increase in professional services.

Cost of revenues

Cost of software license revenues.    Cost of software license revenues was $370,000 in 2002 compared to $643,000 in 2001 and $1.2 million in 2000. These costs, as a percentage of total revenue, were 3.0% for 2002, 2.7% for 2001 and 10.1% for 2000. Cost of software license revenues from 2001 to 2002 was relatively consistent. The decrease in cost of software revenues as a percentage of total revenues from 2000 to 2001 was primarily due to our reduced utilization of royalty-bearing technology that we licensed from third parties.

Cost of subscription fees and other service revenues.    Our cost of subscription fees and other services revenues decreased to $2.9 million for 2002 from $8.3 million for 2001. The decrease was primarily due to the fact that in January 2002 we completed a reduction in workforce, which resulted in the termination of approximately 75% of the secure data center workforce, and the subsequent actions taken to close the secure data center. In April 2002, we completed an additional reduction in workforce that resulted in the termination of 35% of our consulting and support services workforce. In July 2002, we completed an additional reduction in workforce that resulted in the termination of 38% of our consulting and support services workforce. Our cost of subscription fees and other services revenues increased by $2.4 million to $8.3 million in 2001 from $5.9 million in 2000, primarily due to increased salaries and other personnel-related costs that was a direct result of the increase in our average headcount from 2000 to 2001.

As a percentage of subscription fees and other services revenues, cost of subscription fees and other services revenues was 44.4% in 2002 as compared to 97.4% in 2001 and 170.5% in 2000. This decrease can be attributed to growth in maintenance and support and subscription fees revenues that exceeded the associated cost from 2000 to 2002.

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Operating expenses

Research and development.    Research and development costs decreased to $7.1 million in 2002 from $11.7 million in 2001, a decrease of 39.6%. Of this decrease, $1.0 million related to the reduction in use of third-party consultants and contractors, $901,000 related to facilities costs and $2.7 million related to salaries and other personnel-related costs due to a decrease in headcount in 2002 as compared to 2001. Research and development expenses as a percentage of total revenues increased to 57.8% from 48.2% in 2001 due to costs decreasing at a slower rate than revenues. Research and development expenses increased to $11.7 million in 2001 from $10.4 million in 2000, an increase of 12.5%. Of this increase, $588,000 related to facilities costs, $586,000 related to payments to third-party consultants and contractors and $357,000 related to salaries and other personnel related cost dues to an increase in average headcount in 2001, as compared to 2000. These costs were partially off-set by a decrease in recruiting expenses. Research and development expenses as a percentage of total revenues decreased from 87.8% in 2000 to 48.2% in 2001, due in large part to a reduction in headcount and fixed costs being amortized over a larger revenue base.

Sales and marketing.    Sales and marketing expenses decreased to $11.3 million in 2002 from $21.9 million in 2001, a decrease of 48.4%. Of this decrease, caused primarily by reductions in sales and marketing headcount, $6.8 million related to reduced salaries and other personnel related costs and $1.8 million related to reduced tradeshows and marketing programs. We experienced a 49.6% decrease in total revenues from 2001 to 2002, which resulted in a $3.8 million decrease in commission expense in 2002. Sales and marketing costs as a percentage of total revenues were 92.6% in 2002 compared to 90.4% in 2001. During 2002, we closed international sales offices in Argentina, Canada, France, Germany, Hong Kong, Singapore and Spain. Sales and marketing expenses increased to $21.9 million in 2001 from $13.8 million in 2000, an increase of 58.8%. Of this increase, caused primarily by an increase in sales and marketing headcount in 2001, $5.8 million related to salaries and other personnel related costs, $1.2 million related to facilities costs and $454,000 related to travel and entertainment costs associated with direct sales efforts. In addition, we experienced a 104.8% increase in revenues from 2000 to 2001, which resulted in a significant increase in commission expense for 2001. Sales and marketing costs as a percentage of total revenues were 90.4% for 2001, compared to 116.6% in 2000, primarily due to revenues increasing faster than expenses. During 2001, we opened international sales offices in Argentina, Germany, Singapore and Spain.

General and administrative.    General and administrative expenses decreased to $4.3 million in 2002 compared to $5.3 million in 2001, an 18.2% decrease. Of this decrease, $1.1 million related to reduced salaries and other personnel related costs and $841,000 related to a decrease in use of third-party consultants and contractors offset by allowances for bad debts of $970,000, including $528,000 recorded in the fourth quarter of 2002 due to a customer’s inability to pay. General and administrative costs as a percentage of total revenues were 35.2% in 2002 compared to 21.7% in 2001. General and administrative expenses as a percentage of total revenues increased in 2002 because our revenues decreased at a greater rate than our expenses. General and administrative expenses increased to $5.3 million in 2001 from $4.0 million in 2000, an increase of 31.1%. Of this increase, $912,000 related to salaries and other personnel related costs.

Amortization of goodwill and intangibles.    Amortization of intangibles, related to our December 1999 acquisition of Receipt.com was $611,000 in 2002. In connection with our adoption of SFAS No. 142, Goodwill and Intangible Assets on January 1, 2002, we no longer amortize goodwill or certain intangibles. This resulted in a decrease in annual amortization of $2.6 million in 2002 compared to 2001. Amortization of goodwill and intangibles was $3.2 million for the years ended December 31, 2000 and 1999.

Stock compensation.    Deferred stock compensation represents the difference between the exercise price of stock options granted and the estimated fair market value of the underlying common stock on the date of the grant. As of July 2000, we had recorded deferred stock compensation of $3.7 million for stock options we assumed as part of our acquisition of Receipt.com and an additional $6.0 million related to the grant of other employee stock options (net of $2.6 million reversed due to the cancellation of options of terminated employees).

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Deferred stock compensation is being amortized over the vesting period of the underlying options (generally four years) through September 30, 2004, which resulted in an expense of $1.4 million in 2002, $2.0 million in 2001 and $2.3 million in 2000.

During the year ended December 31, 2002, we determined that certain full-recourse notes, which had originally been issued to employees to exercise stock options, may not be pursued or collected. Under the provisions of EITF Issue No. 00-23, Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25 and FASB Interpretation No. 44, this determination required us to consider all outstanding full-recourse notes to be converted, for accounting purposes, to non-recourse notes. All stock options previously exercised under full-recourse notes were deemed, for accounting purposes, to have been cancelled and replaced with new stock option awards under non-recourse notes. Accordingly, we recorded a charge of $938,000 related to the excess of the outstanding principal and interest balance of the notes over the fair value of the underlying stock at the date that this determination was made. In addition, we expensed $250,000 of unamortized deferred stock compensation related to the unvested portion of the original stock options. Subsequent to this determination, we repurchased 301,151 shares of common stock and forgave the related notes receivable. At December 31, 2002, 707,574 shares of common stock underlying these notes are subject to variable accounting. As such, we will record additional stock compensation charges related to these shares should the market price of our common stock rise above certain levels. For 208,728 of these shares, these additional charges will begin when the market price exceeds $0.72 per share. For the remaining 498,846 shares, such charges will commence at various market prices, starting at $3.00 per share.

Restructuring and impairment charges—During the year ended December 31, 2002, we recorded net restructuring and impairment charges of approximately $4.6 million in accordance with EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring), SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, and Staff Accounting Bulletin (“SAB”) 100, Restructuring and Impairment Charges. Our restructuring initiatives involved strategic decisions to cease providing certain services and consolidate corporate facilities. In January 2002, we exited our application service provider business. As a result of this action, our management determined that the value of certain equipment was impaired and recorded an impairment charge of approximately $1.0 million. In March 2002, we consolidated our corporate facilities and terminated the long-term facility lease contract for an unutilized facility located in Mountain View, California. As a result of this action, we recorded additional restructuring and impairment charges of approximately $3.6 million, which is comprised of $3.5 million for settlement costs and forfeiture expenses associated with the building, $562,000 related to the impairment of associated equipment and leasehold improvements and the write-off of security deposits, offset by the reversal of previously recorded deferred rent of $434,000. During 2002, we paid $3.3 million in contract termination costs and other administrative fees related to this action.

Other income (expense).    Interest income decreased to $266,000 in 2002 from $1.1 million in 2001 and $1.4 million in 2000, primarily due to decreasing cash and investment balances and lower interest rates earned on our investments. Interest and other expenses decreased to $469,000 in 2002 from $785,000 in 2001, primarily due to a decrease in interest costs on our equipment loans and leases. Interest and other expenses decreased to $785,000 in 2001 from $858,000 in 2000, primarily due to a decrease in interest costs on our equipment loans and leases, partially offset by increased losses on foreign exchange.

Income taxes.    We have incurred net losses for federal and state tax purposes and have not recognized any material tax provision or benefit. As of December 31, 2002, we had net operating loss carryforwards of $79.1 million and $33.7 million for federal and state income tax purposes, respectively. These net operating loss carryforwards expire at various times through 2022.

We have taken a full valuation allowance against our net deferred tax assets of $35.4 million at December 31, 2002 due to our assessment that it is unlikely that we will be able to realize the benefits of these assets. We evaluate the recoverability of our net deferred tax assets and the adequacy of the valuation allowance

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on a quarterly basis. When and if we determine that it is more likely than not that the net deferred tax assets will be realized, we will reduce the valuation allowance.

Liquidity and Capital Resources

Funding to date

In July 2000, we completed an initial public offering of our common stock that resulted in raising additional equity, net of offering costs, of approximately $41.1 million. At December 31, 2002, we had cash and cash equivalents of $3.1 million.

In November 2001, we sold 1,734,144 shares of our common stock and issued warrants exercisable for 361,279 shares of our common stock to certain investors pursuant to a common stock purchase agreement. In exchange, we received net proceeds of approximately $5.0 million. We have used these proceeds to provide working capital and to fund our operations.

In December 2001, we purchased certain assets of Tradenable, Inc. Pursuant to the terms of the agreement, we issued 728,000 shares of our common stock to Tradenable.

Uses and sources of cash

Net cash used in operating activities of $19.0 million in 2002, $19.7 million in 2001 and $18.0 million in 2000 was primarily used to fund our net losses. Net cash used for operating activities in 2002 related primarily to a net loss of $21.7 million partially offset by non-cash stock compensation and depreciation and amortization charges of $4.8 million, non-cash restructuring and impairment charges of $1.1 million and other changes in working capital.

Net cash provided by investing activities was $8.6 million in 2002 compared to net cash used by investing activities of $10.7 million in 2001 and $636,000 in 2000. Net cash provided by investing activities in 2002 primarily related to the sale of short-term investments of $8.9 million partially offset by capital expenditures of $378,000. Net cash used in investing activities in 2001 primarily related to net purchases of short-term investments of $8.9 million and capital equipment expenditures of $1.8 million. Capital equipment expenditures primarily related to the purchase of computer hardware and software, office furniture and equipment, and leasehold improvements. We do not expect to substantially increase its capital expenditures in the foreseeable future, nor do we anticipate incurring any significant new equipment lease commitments.

Net cash used in financing activities was $1.2 million in 2002 compared to net cash provided by financing activities of $7.6 million in 2001 and $42.2 million in 2000. Net cash used in financing activities in 2002 primarily related to repayment of borrowings of $1.5 million partially offset by cash received for common stock issuance and stockholder note repayments of $267,000. Net cash provided by financing activities in 2001 was provided primarily from sales of $6.8 million of our common stock to private investors and the proceeds of $792,000 due to the issuance of common stock under our employee stock purchase plan.

Future funding requirements

On February 18, 2003 we entered into a definitive agreement to merge with Tumbleweed Communications Corp. in a stock-for-stock transaction. We believe that, with the cash resources of Tumbleweed, we will have sufficient resources to meet our working capital needs for at least the next 12 months. In the event the merger is not completed, we believe we will need to raise additional working capital in the next 12 months. Due to recurring losses and negative cash flows, there is substantial doubt about our ability to continue as a going concern if additional capital is not raised. We may not be able to obtain adequate or favorable financing at that time. Any additional financing may dilute your ownership interest in our company. New equity securities could have rights senior to those of our common stockholders.

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Contractual Obligations

The following summarizes our contractual obligations at December 31, 2002, and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands):

Recent Accounting Pronouncements

We adopted SFAS No. 142, Goodwill and Intangible Assets on January 1, 2002. SFAS No. 142 stipulates that intangible assets with indefinite lives are not to be amortized, but tested at least annually for impairment. Upon the adoption of SFAS No. 142, we ceased amortizing goodwill and acquired workforce with a net carrying value of $7.5 million and annual amortization of $2.6 million that resulted from our December 1999 acquisition of Receipt.com. As part of our adoption of SFAS No. 142, we completed the initial impairment test during the second quarter of fiscal 2002 and the annual impairment tests during the fourth quarter of fiscal 2002 and these tests resulted in no impairment. On an ongoing basis, we will test goodwill for impairment on at least an annual basis and when circumstances indicate that an impairment may exist.

In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental provisions of SFAS No. 121. SFAS No. 144 also supersedes the accounting and reporting provisions of Accounting Principles Board, or APB, Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. However, it retains the requirement in APB No. 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. We adopted SFAS No. 144 on January 1, 2002. The adoption of this statement did not have a material impact on our consolidated financial position or results of operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principally Emerging Issues Task Force (EITF) Issue No. 94-3. We will adopt SFAS No. 146 for restructuring activities initiated after December 31, 2002. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF Issue No. 94-3, a liability for an exit cost was recognized at the date of our commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS No. 146 may affect the timing and amounts of future restructuring costs recognized.

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. The disclosure requirements of FIN 45 did not have a material effect on our financial statements. We will adopt the recognition and measurement provisions of FIN 45 for guarantees issued or modified after December 31, 2002. We are currently determining what effect, if any, the recognition and measurement provisions of FIN 45 will have on our consolidated financial position or operating results.

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In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation— Transition and Disclosure—an amendment of FASB Statement No. 123. SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosures required by SFAS No. 148 are included in the consolidated financial statements included in Item 15 of this Annual Report on Form 10-K. We have not yet determined the effect that the transition provision of SFAS No. 148 would have on its consolidated financial statements, if any.

Factors That May Impact Future Results

Risks Related to Compliance with Nasdaq Requirements

In September 2002, we transferred our securities from The Nasdaq National Market to The Nasdaq SmallCap Market, which may affect the liquidity of our stock.

In June 2002, the staff of The Nasdaq National Market advised us that it would delist our stock on September 9, 2002 because we failed to meet certain listing qualifications of The Nasdaq National Market, unless we applied to transfer our securities to The Nasdaq SmallCap Market or requested a hearing to appeal the staff’s determination. We transferred our securities to The Nasdaq SmallCap Market on the opening of the market on September 9, 2002. The transfer from The Nasdaq National Market to The Nasdaq SmallCap Market may be a less desirable and a less liquid marketplace.

If our common stock price remains under $1.00, or if we otherwise fail to comply with Nasdaq rules, our common stock may be delisted from The Nasdaq SmallCap Market, which could eliminate the trading market for our common stock.

If the market price for our common stock remains below $1.00 per share through June 6, 2003 or we otherwise fail to meet certain criteria for continued listing on The Nasdaq Small Cap Market, we have been notified by Nasdaq that our common stock may be delisted. Should our common stock be delisted from The Nasdaq Small Cap Market, our common stock would trade on the Over-the-Counter (OTC) Market. If our common stock is traded on the OTC, you likely would find it more difficult to trade in or obtain accurate quotations for the market price of our common stock.

If our common stock is considered “penny stock” under Section 15(g) of the Securities Exchange Act of 1934, it would be subject to rules that impose additional sales practices in broker-dealers who sell our securities. For example, broker-dealers must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to sale. Also, a disclosure schedule must be prepared prior to any transaction involving a penny stock and disclosure is required about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Monthly statements are also required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock. Because of these additional obligations, some brokers may be unwilling to effect transactions in penny stocks. This could have an adverse effect on the liquidity of our common stock and the ability of investors to sell the common stock.

The market price per share of our common stock following a reverse split may drop and may not remain in excess of the $1.00 minimum bid price as required by Nasdaq, as downward pressure may be created by such split or other factors may arise.

As a means to conform to the Nasdaq minimum price rule, we may request stockholders to approve a reverse stock split for the purpose of increasing our stock price above $1.00 per share. We cannot predict

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whether a reverse stock split, if completed, will increase the market price for our common stock. The history of similar stock split combinations for companies in like circumstances is varied. The market price per share of our common stock following the reverse stock split may not remain in excess of the $1.00 minimum bid price as required by Nasdaq or that we will otherwise meet the requirements of Nasdaq for continued inclusion for trading on The Nasdaq Small Cap Market. A reverse stock split could negatively impact the value of our common stock by allowing additional downward pressure on the stock price as its relative value becomes greater following the reverse split. In other words, the stock, at its new higher price, has farther to fall and therefore more room for investors to short or otherwise trade the value of the stock downward. Similarly, a delisting may negatively impact the value of the stock as stocks trading on the OTC market are typically less liquid and trade with larger variations between bid and ask price. The market price of our common stock will also be based on our performance and other factors, some of which are unrelated to the number of shares outstanding. If a reverse split is affected and the market price of our common stock declines, the percentage decline as an absolute number and as a percentage of our overall market capitalization may be greater than would occur in the absence of a reverse stock split. Furthermore, the reduced number of shares that would be outstanding after the reverse stock split could adversely affect liquidity of our common stock. Moreover, our ability to repurchase fractional shares in connection with a reverse split may be limited or prohibited by applicable state law regarding the redemption or repurchase of securities for cash. In any event, effecting such a split will entail substantial cost to comply with applicable federal and state securities laws, particularly in those states where a permit of special qualification is required. We may lack the cash resources to satisfy these costs and therefore effect compliance.

Risks Related to Our Business

We may be unable to continue as a going concern.

Substantial doubt exists as to our ability to continue as a going concern. We incurred net losses of $28.3 million in 2000, $28.4 million in 2001 and $21.7 million in 2002. We must increase our revenues by obtaining new customers and generate additional revenues from existing customers and control its costs. We may not have any revenue growth, our revenues could decline, and we may incur losses for the foreseeable future. If we are unable to increase revenues, we cannot be certain that we can reach profitability or positive cash flows in the future. If we are unable to achieve positive cash flows, and if the proposed merger with Tumbleweed is not completed, we will require additional financing. Additional financing may not be available on acceptable terms, if at all. If we are unable to raise additional capital when needed, we may be unable to continue as a viable company. In the event that the merger with Tumbleweed is not completed and an appropriate financing or an alternative transaction is not implemented promptly following termination of the merger agreement, we may be required to commence bankruptcy or similar liquidation proceedings with little if any value to be realized by our common stockholders.

The costs of operating as an independent public company may not be justified in light of its historical and projected operating results.

The costs of operating a small capitalization public company are considerable and have increased for us as a result of compliance with the Nasdaq listing requirements, regulatory costs arising from the implementation of the Sarbanes-Oxley Act, compliance with the various blue sky and other state laws applicable to small capitalization companies, and otherwise. These increased costs may place a significant and increasing burden on us and divert our management’s attention from operating our business to raising capital and complying with application regulation. Moreover, like many other small capitalization companies, our ability to attract and retain employees with equity compensation has diminished, which may necessitate the need to pay additional cash compensation to employees, management and directors to motivate and retain them. In the event that the merger with Tumbleweed is not completed, we may be unable to operate efficiently as an independent public company in light of these additional costs or otherwise, and the inability to do so would materially and adversely affect our prospects and ability to continue as an independent going concern.

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Our recently announced merger with Tumbleweed may subject our stock price to downward adjustments as a result of adverse developments in Tumbleweed’s business.

We announced on February 18, 2003 that we had entered into a merger agreement with Tumbleweed, pursuant to which our stockholders will receive 0.385 shares of Tumbleweed common stock for each outstanding share of our common stock that they hold. Since we may terminate the agreement only in very limited circumstances and the exchange ratio is not subject to adjustment, our stock price may be affected by changes in Tumbleweed’s stock price. Accordingly, Our stockholders are subject to the risk of downward adjustments in our stock price as a result of adverse developments in Tumbleweed’s business. Moreover, if for any reason we are unable to complete the merger with Tumbleweed, the price of our common stock may be adversely affected.

Our efforts to close the proposed merger with Tumbleweed may harm our business as a result of delays in executing our separate business strategy and uncertainties caused by the proposed merger.

Our efforts to complete the proposed merger with Tumbleweed are complex and time consuming, and may disrupt our business. The attention and effort devoted to the proposed merger may significantly divert management’s attention from our other important business objectives.

Completion of the proposed merger is not certain, and this uncertainty may harm our business by disrupting relationships with employees, customers, suppliers and other strategic relationships.

As a result of these uncertainties and the efforts related to the proposed merger with Tumbleweed, our business could be harmed as a result as a result of:

If we are unable to complete the proposed merger with Tumbleweed, our business may be harmed.

The proposed merger is subject to approval by our stockholders and other customary closing conditions. The proposed merger may not be successfully completed. If so, our business may be harmed as a result of:

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Pursuant to terms of the merger agreement, we have has not pursued other corporate opportunities, including raising additional funds and continuing our operations as a standalone company. As a result, if we do not consummate the merger with Tumbleweed, our financial condition may be inadequate for us to continue to operate our business. In addition, our inability to complete the merger with Tumbleweed may lower our value or reduce our ability to merge with other companies that may have been interested in acquiring our company. In addition, we could be required to pay a termination fee to Tumbleweed upon the occurrence of certain events.

If the merger with Tumbleweed is not consummated, we will have to raise additional capital or we may not be able to develop or enhance our products, services and markets.

If the merger with Tumbleweed is not consummated, we will have to seek additional funding. If we cannot quickly raise funds on acceptable terms, we may be unable to develop or enhance our products and services, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements. We may also be required to reduce operating costs through lay-offs or reduce our sales and marketing or research and development efforts. If we issue equity securities to raise funds, stockholders may experience significant dilution and the new equity securities may have rights, preferences or privileges senior to those of our common stock.

Because we have a limited operating history, it is difficult to evaluate our prospects.

We introduced our first commercial product in the first quarter of 1999 and have generated only limited revenues. Because we have a limited operating history with our products and services, and because our sources of potential revenue may continue to shift as our business develops, our future operating results and our future stock prices are difficult to predict. Our success also depends in part on:

If any of these risks develop, our business could be seriously harmed.

Our quarterly results depend on a number of factors, many of which are beyond our control.

Our quarterly results depend on a number of factors, many of which are beyond our control. Our quarterly results have in the past fluctuated, and may in the future fluctuate, as a result of many factors, including the following:

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We believe that period-to-period comparisons of our results of operations are not meaningful and should not be relied upon as indicators of future performance. Our failure to meet these expectations would likely cause the market price of our common stock to decline.

We have not been profitable, and if we do not achieve profitability, our business may fail.

We have incurred significant net losses. We incurred net losses of $21.7 million in 2002 and $28.4 million in 2001. As of December 31, 2002, we had incurred cumulative losses of $96.3 million. Widespread acceptance of electronic commerce may be adversely affected as a result of general or industry specific economic conditions. As a consequence, the market for our products and services may fail to develop and grow and we may be unable to achieve our financial targets.

We will need to generate significantly higher revenues in order to achieve profitability. Even if we do achieve profitability, we may be unable to sustain or increase profitability on a quarterly or annual basis in the future. If our gross margins do not improve, or if our operating expenses exceed our expectations, our operating results will suffer and our stock price may fall.

If we do not successfully develop new products and services to respond to rapid market changes due to changing technology and evolving industry standards, our business will be harmed.

Our success will depend to a substantial degree on our ability to offer products and services that incorporate leading technology and to respond to technological advances. If we fail to offer products and services that incorporate leading technology and respond to technological advances and emerging standards, we may not generate sufficient revenues to offset our development costs and other expenses, which will hurt our business. The development of new or enhanced products and services is a complex and uncertain process that requires the accurate anticipation of technological and market trends. We may experience development, marketing and other technological difficulties that may delay or limit our ability to respond to technological changes, evolving industry standards, competitive developments or customer requirements. You should also be aware that:

We rely on, and expect to continue to rely on, a limited number of customers for a significant percentage of our revenues, and if any of these or other significant customer stops licensing our software products and services, our revenues could decline.

A limited number of customers have accounted for a significant portion of our revenues. For 2002, one customer accounted for 12% of total revenues. For 2001, two customers accounted for 20% and 14% of total revenues. We anticipate that our operating results in any given period will continue to depend to a significant extent upon revenues from a small number of customers. We do not have long-term contracts with our customers that obligate them to license our software products or use our services. We cannot be certain that we will retain our customers or that we will be able to obtain new customers. If we were to lose one or more customers, our revenues could decline.

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The length of our sales cycle is uncertain, which may cause our revenues and operating results to vary significantly from quarter to quarter, and could cause our stock price to decline.

Any failure of our sales efforts to generate revenues at the times and in the amounts we anticipate could cause significant variations in our operating results. During our sales cycle, we spend considerable time and expense providing information to prospective customers about the use and benefits of our products and services without generating corresponding revenue. Our expense levels are relatively fixed in the short term and there is substantial uncertainty as to when particular sales efforts will begin to generate revenues.

Prospective customers of our products and services often require long testing and approval processes before making a purchase decision. In general, the process of entering into a licensing arrangement with a potential customer may involve lengthy negotiations. As a result, our sales cycle has been and may continue to be unpredictable. In the past, our sales cycle has ranged from one to nine or more months. Our sales cycle is also subject to delays as a result of customer-specific factors over which we have little or no control, including budgetary constraints and internal acceptance procedures. In addition, because our technology must often be integrated with the products and services of other vendors, there may be a significant delay between the use of our software and services in a pilot system and its commercial deployment by our customers. The length of the sales cycle makes it difficult to accurately forecast the timing and amount of our sales. This may cause our revenues and operating results to vary significantly from quarter to quarter and could harm our business.

Our international business exposes us to additional risks.

Products and services provided to our international customers accounted for 51% of our revenues during 2002 and 61% of our revenues during 2001. Conducting business outside of the United States subjects us to additional risks, including:

We must maintain and enter into new collaborative agreements, and any failure to do so could harm our business.

One of our objectives is to enter into strategic or other similar collaborative alliances in order to reach a larger customer base than we could reach through our direct sales and marketing efforts. We will need to maintain or enter into additional strategic alliances to execute our business plan. If we are unable to maintain our strategic alliances or enter into additional strategic alliances, our business would be materially harmed.

We have entered into technology, marketing and distribution agreements with several companies. We may be unable to leverage the brand and distribution power of these agreements to increase the adoption rate of our technology. We have been establishing agreements to ensure that third-party solutions are interoperable with our software products and services. To the extent that our products are not interoperable or our agreements choose not to integrate our technology into their offerings, the adoption of our software products and outsourced services would be inhibited. Furthermore, agreements our success will depend in part on the ultimate success of other parties to these agreements.

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Our existing agreements do not, and any future agreements may not, grant us exclusive marketing or distribution rights. In addition, the other parties may not view their agreements with us as significant for their own businesses. Therefore, these parties could reduce their commitment to us at any time in the future. These parties could also pursue alternative technologies or develop alternative products and services, either on their own or in collaboration with others, including our competitors. Should any of these developments occur, our business will be harmed.

Our success depends on its ability to grow and develop its direct sales and indirect distribution channels.

Our failure to grow and develop our direct sales channel and increase the number of our indirect distribution channels could have a material adverse effect on our business, operating results and financial condition. We must increase the number of strategic and other third-party relationships with vendors of Internet-related systems and application software, resellers and systems integrators. Our existing or future channel partners may choose to devote greater resources to marketing and supporting the products of other companies.

We have made recent changes to its management team and board of directors. The result of these changes is uncertain and may not be effective.

John Vigouroux, our former president of field operations, was named president and chief executive officer and appointed to the board of directors in October 2002. Joseph (“Yosi”) Amram resigned as our president and chief executive officer in October 2002. Mr. Amram continues to act as our advisor and remains on the board of directors. Mr. Vigouroux has not previously served as President or Chief Executive Officer of an independent public company. If Mr. Vigouroux does not effectively integrate into his new leadership role or if he does not work effectively with our existing management team, our business may suffer.

We may be unable to retain qualified personnel, which could harm our business and product development.

We also must continue to train, retain, and motivate highly skilled technical, managerial, sales and marketing and professional services personnel. Due to the various workforce reductions that we completed, the morale of our remaining employees is low, and we may be unable to retain them, particularly in light of our limited cash resources. In addition, if our stock price decreases substantially, it may be more difficult to retain employees who consider stock options an important part of their compensation package. If we encounter difficulties retaining software engineering personnel at a critical stage of product development, our relationship with existing and future customers could be harmed. The failure to retain necessary technical, managerial, sales, marketing and professional services personnel would harm our business.

Our business will suffer if we are unable to protect our intellectual property.

We rely on copyrights, trade secrets, know-how, patents, continuing technological innovations and licensing opportunities to maintain and further develop our market position. In addition, we rely on outside licensors for patent and software license rights in encryption technology that is incorporated into and is necessary for the operation of our products and services. Our success will depend in part on our continued ability to have access to technologies that are or may become important to the functionality of our products and services. The inability to continue to procure or use this technology could harm our business.

Our success will also depend in part on our ability to protect our intellectual property rights from infringement, misappropriation, duplication and discovery by third parties. Others may independently develop substantially equivalent proprietary technology or gain access to our trade secrets or disclose our technology and that we may be unable to meaningfully protect our trade secrets. Attempts by others to utilize our intellectual property rights could undermine our ability to retain or secure customers. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent, as do the laws of the United States. Our attempts to enforce our intellectual property rights could be time consuming and costly.

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Our pending or future patent applications may not be granted and any patents that are issued may not be enforceable or valid. Additionally, the coverage claimed in a patent application can be significantly reduced before the patent is issued. We may not be the first inventor of inventions covered by our issued patent or pending patent applications or that we are the first to file patent applications for such inventions. Moreover, we may have to participate in interference proceedings before the United States Patent and Trademark Office to determine priority of invention, which could result in substantial cost to us. An adverse outcome could subject us to significant liabilities to third parties, require disputed rights to be licensed from or to third parties or require us to cease using the technology in dispute.

Any claim of infringement by third parties could be costly to defend, and if we infringe upon the intellectual property rights of third parties, we may be required to pay substantial licensing fees.

We may increasingly become subject to claims of intellectual property infringement by third parties as the number of our competitors grows and the functionality of their products and services increasingly overlaps with ours. Because we are in an evolving field, customers may demand features which will subject us to a greater likelihood of claims of infringement.

We are aware of pending and issued United States and foreign patent rights owned by third parties that relate to cryptography technology. Third parties may assert that we infringed their intellectual property rights based upon issued patents, trade secrets or know-how that they believe cover our technology. In addition, future patents may issue to third parties which we may infringe. It may be time consuming and costly to defend ourselves against any of these claims and we may not prevail.

Furthermore, parties making such claims may be able to obtain injunctive or other equitable relief that could block our ability to further develop or commercialize some or all of our products in the United States and abroad. In the event of a claim of infringement, we may be required to obtain one or more licenses from or pay royalties to third parties. We may be unable to obtain any such licenses at a reasonable cost, if at all. Defense of any lawsuit or failure to obtain such license could harm our business.

Defects in our software products and services could diminish demand for our products and services, which may harm our business.

Because our products and services are complex, they may contain errors or defects that are not found until after they are used by our customers. Errors or defects that subsequently arise could seriously harm our reputation and our ability to generate sales to new or existing customers.

Our software products and services are used in systems with other vendors’ products. These products and services can be adequately tested only when they are successfully integrated with these systems. Errors may be found in new products or releases after shipment and our products and services may not operate as expected. Errors or defects in our products and services could result in:

Failure to increase our brand awareness could limit our ability to compete effectively.

If the marketplace does not associate us with high-quality, end-to-end secure infrastructure software products and services, we may be unable to keep our existing customers, attract new customers or successfully introduce new products and services. Competitive and other pressures may require us to increase our expenses to

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promote our brand name, and the benefits associated with brand creation may not outweigh the risks and costs associated with establishing our brand name. Our failure to develop a strong brand name or the incurrence of excessive costs associated with establishing our brand name may harm our business.

We rely on public key cryptography and other security techniques that could be breached, resulting in reduced demand for our products and services.

A requirement for the continued growth of electronic commerce is the secure transmission of confidential information over public networks. We rely on public key cryptography, an encryption method that utilizes two keys, a public and private key, for encoding and decoding data, and on digital certificate technology, to provide the security and authentication necessary for secure transmission of confidential information. Regulatory and export restrictions may prohibit us from using the strongest and most secure cryptographic protection available, and thereby may expose us or our customers to a risk of data interception. A party who is able to circumvent our security measures could misappropriate proprietary information or interrupt our or our customers’ operations. Any compromise or elimination of our security could result in risk of loss or litigation and possible liability and reduce demand for our products and services.

We could incur substantial costs resulting from product liability claims relating our customers’ use of our products and services.

Any disruption to a customer’s website or application caused by our products or services could result in a claim for substantial damages against us, regardless of our responsibility for the failure. Our existing insurance coverage may not continue to be available on reasonable terms or in amounts sufficient to cover one or more large claims. Our insurer may also disclaim coverage as to any claims, which could result in substantial costs to us.

We granted options for approximately 1.1 million shares of our common stock that may have violated California securities laws.

On December 12, 2002, we granted options to purchase a total of 1,029,209 shares of our common stock at an exercise price of $0.28 per share, which was the fair market value on the date of grant. Such grants were not properly qualified under the California Corporate Securities Law of 1968, as amended. We are in the process of submitting an application for a permit from the California Department of Corporations in order to effectuate a rescission offer and minimize any liability we may have. If the rescission offer is effected, we estimate that the liability would not be material. If the rescission offer is not effected, optionees may have a claim for the fair value of their option at the time of the grant, which the Department of Corporations historically has set at 20% of the exercise price, or, if an optionee were to exercise the option and thereafter seek rescission, the liability would be a refund of the exercise price paid plus interest from the date of exercise until rescission.

We have been named as a defendant in a stockholder class action lawsuit that is now pending and which arose out of our public offering of securities in 2000. If we do not prevail in this lawsuit, our business may suffer.

A class action lawsuit was filed on December 3, 2001 in the United States District Court for the Southern District of New York on behalf of purchasers of our common stock alleging violations of federal securities laws. Lachance v. Valicert, Inc. et al., No. 01-CV-10889 (SAS) (S.D.N.Y.), related to In re Initial Public Offerings Securities Litigation, No. 21 MC 92 (SAS). The case is brought purportedly on behalf of all persons who purchased our common stock from July 27, 2000 through December 6, 2000. The complaint names as defendants the Company; Joseph (“Yosi”) Amram, our former president and chief executive officer, and current member of our board of directors; Timothy Conley, vice president, finance and chief financial officer; and an investment banking firm that served as an underwriter for our initial public offering in July 2000.

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The amended complaint alleges violations of Sections 11 and 15 of the Securities Act of 1933, as amended, and Sections 10(b) and 20(a) of the Exchange Act on the grounds that the prospectus incorporated in the registration statement for the offering failed to disclose, among other things, the following:

We believe that the allegations against us are without merit and we intend to contest them vigorously. We cannot assure you, however, that we will prevail in this lawsuit. Failure to prevail could have a material adverse effect on our financial position, results of operations and cash flows in the future.

We are aware that similar allegations have been made in other lawsuits filed in the Southern District of New York challenging over 300 other initial public offerings and secondary offerings conducted in 1999 and 2000. Those cases have been consolidated for pretrial purposes before the Honorable Judge Shira A. Scheindlin. On July 15, 2002, the Company and our affiliated individual defendants (as well as all other issuer defendants) filed a motion to dismiss the complaint. The Court denied the motions to dismiss claims under the Securities Act in all but 10 of the cases, including our case. The Court granted the motion to dismiss the claims under the Exchange Act against us and the individual defendants. Management believes that the allegations against us and our officers are without merit and intends to contest them vigorously. If the outcome of the litigation is adverse to us and if, in addition, we were required to pay significant monetary damages in excess of available insurance, our business would be significantly harmed.

In addition, we may become subject to other types of litigation in the future. Litigation is often expensive and diverts management’s attention and resources, which could harm our business.

Additional government regulation relating to the Internet may increase our costs of doing business.

We are subject to regulations applicable to businesses generally and laws or regulations directly applicable to companies utilizing the Internet. Although there are currently few laws and regulations directly applicable to the Internet, it is possible that a number of laws and regulations may be adopted with respect to the Internet. These laws could cover issues like user privacy, pricing, content, intellectual property, distribution, antitrust, legal liability and characteristics and quality of products and services. The adoption of any additional laws or regulations could decrease the demand for our products and services and increase our cost of doing business, or otherwise could harm our business or prospects.

Moreover, the applicability to the Internet of existing laws in various jurisdictions governing issues like property ownership, sales and other taxes, libel and personal privacy is uncertain. For example, tax authorities in a number of states are currently reviewing the appropriate tax treatment of companies engaged in online commerce. New state tax regulations may subject us to additional state sales and income taxes. Any new legislation or regulation, the application of laws and regulations from jurisdictions whose laws do not currently apply to our business, or the application of existing laws and regulations to the Internet and commercial online services could harm our ability to conduct business and our operating results.

We may be required to record impairment charges related to its goodwill in future quarters.

At December 31, 2002, we had recorded goodwill with a net book value of $7.5 million related to our 1999 acquisition of Receipt.com. We test goodwill for impairment at least annually and when evidence of an

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impairment exists. We have not recorded any impairment charges through December 31, 2002. However, if our future financial performance or other events indicate that the value of our recorded goodwill is impaired, we may be required to record impairment charges which could have a material adverse effect on our reported results.

Legislative actions and potential new accounting pronouncements are likely to cause our general and administrative expenses to increase and impact our future financial position and results of operations.

In order to comply with the newly adopted Sarbanes-Oxley Act of 2002, as well as proposed changes to listing standards by Nasdaq, and proposed accounting changes by the Securities and Exchange Commission, we may be required to increase our internal controls, hire additional personnel and additional outside legal, accounting and advisory services, all of which could cause our general and administrative costs to increase. Proposed changes in the accounting rules, including legislative and other proposals to account for employee stock options as compensation expense among others, could increase the expenses that we report under GAAP and adversely affect our operating results.

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Risks Related to Our Industry

The markets for secure online transaction products and services generally, and our products and services specifically, are new and may not develop, which would harm our business.

The market for our products and services is new and evolving rapidly. If the market for our products and services fail to develop and grow, or if our products and services do not gain broad market acceptance, our business and prospects will be harmed. In particular, our success will depend upon the adoption and use by current and potential customers and their end-users of secure online transaction products and services. Our success will also depend upon acceptance of our technology as the standard for providing these products and services. The adoption and use of our products and services will involve changes in the manner in which businesses have traditionally completed transactions. We cannot predict whether our products and services will achieve any market acceptance. Our ability to achieve our goals also depends upon rapid market acceptance of future enhancements of our products. Any enhancement that is not favorably received by customers and end-users may not be profitable and, furthermore, could damage our reputation or brand name.

The intense competition in our industry could reduce our market share or eliminate the demand for our software products and services, which could harm our business.

Competition in the security infrastructure market is intense. If we are unable to compete effectively, our ability to increase our market share and revenue will be harmed. We compete with companies that provide individual products and services that are similar to certain aspects of our software products and services. Certificate authority software vendors and vendors of other security products and services could enter the market and provide end-to-end solutions which might be more comprehensive than our solutions. Many of our competitors have longer operating histories, greater name recognition, larger installed customer bases and significantly greater financial, technical and marketing resources. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the promotion and sale of their products. We anticipate that the market for security products and services that enable valid, secure and provable electronic commerce and communications over the Internet will remain intensely competitive. We expect that competition will increase in the near term and increased competition could result in pricing pressures, reduced margins or the failure of our Internet-based security products and services to achieve or maintain market acceptance, any of which could materially harm our business.

In addition, current and potential competitors have established or may in the future establish collaborative relationships among themselves or with third parties, including third parties with whom we have strategic alliances, to increase the ability of their products to address the security needs of our prospective customers. Accordingly, it is possible that new competitors or alliances may emerge and rapidly acquire significant market share. If this were to occur, our business could be materially affected.

Our business depends on the wide adoption of the Internet for conducting electronic commerce.

In order for us to be successful, the Internet must be widely adopted as a medium for conducting electronic commerce. Because electronic commerce over the Internet is new and evolving, it is difficult to predict the size of this market and its sustainable growth rate. To date, many businesses and consumers have been deterred from utilizing the Internet for a number of reasons, including but not limited to:

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The adoption of the Internet will require a broad acceptance of new methods of conducting business and exchanging information. Companies and government agencies that already have invested substantial resources in other methods of conducting business may be reluctant to adopt new methods. Also, individuals with established patterns of purchasing goods and services and effecting payments may be reluctant to change.

The use of the Internet may not increase or may increase more slowly than we expect because the infrastructure required to support widespread use may not develop. The Internet may continue to experience significant growth both in the number of users and the level of use. However, the Internet infrastructure may not be able to continue to support the demands placed on it by continued growth. Continued growth may also affect the Internet’s performance and reliability. In addition, the growth and reliability of the Internet could be harmed by delays in development or adoption of new standards and protocols to handle increased levels of activity or by increased governmental regulation. Changes in, or insufficient availability of, communications services to support the Internet could result in poor performance and adversely affect its usage. Any of these factors could materially harm our business.

Public key cryptography security, on which our products and services are based, may become obsolete, which would harm our business.

The technology used to keep private keys confidential depends in part on the application of mathematical principles and relies on the difficulty of factoring large numbers into their prime number components. If a simpler factoring method is developed, the security of encryption products using public key cryptography technology could be reduced or eliminated. Even if no breakthroughs in factoring or other methods of attacking cryptographic systems are made, factoring problems can theoretically be solved by computer systems significantly faster and more powerful than those presently available. Any significant advance in techniques for attacking cryptographic systems could render some or all of our existing products and services obsolete or unmarketable.

Security systems based on public key cryptography assign users a public key and a private key, each of which is required to encrypt and decrypt data. The security afforded by this technology depends on the user’s key remaining confidential. It is therefore critical that the private key be kept secure.

Our products are subject to export controls. If we are unable to obtain necessary approvals, our ability to make international sales could be limited.

Exports of software products utilizing encryption technology are generally restricted by the United States and various foreign governments. Cryptographic products typically require export licenses from United States government agencies. We are currently exporting software products and services with requisite export approval under United States law. However, the list of products and countries for which export approval is required, and the related regulatory policies, could be revised beyond their current scope, and we may not be able to obtain necessary approval for the export of our products. Our inability to obtain required approvals under these regulations could limit our ability to make international sales. Furthermore, our competitors may also seek to obtain approvals to export products that could increase the amount of competition we face.

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Risks Related to the Stock Market in General

Our stock price may decline due to market and economic factors.

In recent years the stock market in general, and the market for shares of small capitalization and technology stocks in particular, have experienced extreme price fluctuations, which have often been unrelated to the operating performance of affected companies. There can be no assurance that the market price of our common stock will not experience significant fluctuations in the future, including fluctuations unrelated to our performance. Such fluctuations could materially adversely affect the market price of our common stock.

Provisions in our charter documents and Delaware law could prevent or delay a change in control, which could reduce the market price of our common stock.

We are controlled by our executive officers, directors and major stockholders, whose interests may conflict with yours. Provisions in our charter documents and Delaware law could prevent or delay a change in control, which could reduce the market price of our common stock.

In addition, provisions of Delaware law may discourage, delay or prevent someone from acquiring or merging with us. These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We develop products in the United States and market our products in North America, Europe and Asia/Pacific regions. As a result, our financial results could be affected by changes in foreign currency exchange rates or weak economic conditions in foreign markets. Because substantially all of our revenues are currently denominated in U.S. dollars, a strengthening of the dollar could make our products less competitive in foreign markets. Our interest expense is sensitive to changes in the general level of U.S. interest rates because the interest rate charged on a portion of our long-term debt varies with the prime rate. Due to the nature of our investments and borrowings, we believe that we are not subject to any material exposure to interest rate fluctuations. A hypothetical change in interest rates of 100 basis points would have an immaterial effect on our operating results and cash flows.

As of December 31, 2002, we had not entered into any derivative contracts, either for hedging or trading purposes.

ITEM 8.    CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated Financial Statements and Supplementary Data required by this Item are set forth at the pages indicated in Item 15.

Not applicable.

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PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table provides information concerning our executive officers and directors as of December 31, 2002:

Mr. Elgamal, Mr. Johnston and Ms. Yesil are members of the audit committee. Mr. Johnston is the sole member of the compensation committee.

John Vigouroux has served as our president and chief executive officer since October of 2002. He also served as our president of field operations from July 2002 to October 2002. In November 2001, Mr. Vigouroux co-founded TaraSoft, which specializes in solutions that shorten the software development cycle, and served as their chief executive officer until July 2002. From July 2000 to October 2001, Mr. Vigouroux served as President of AuctionWatch, a company providing sales management software and services for on-line business auctions. From October 1998 to July 2000, Mr. Vigouroux served as the Senior Vice President of sales, marketing and international operations and the Vice President of corporate development at Beyond.com, which provided products and services for corporations and government agencies to conduct electronic commerce. From May 1997 to October 1998, Mr. Vigouroux served as Vice President of business development at NetObjects, a software company providing tools for website developers and designers. In addition, Mr. Vigouroux has previously held senior level positions with Cisco Systems and Adobe Systems. Mr. Vigouroux holds a B.A. degree in organizational behavior and development from Averett University.

Srinivasan (“Chini”) Krishnan co-founded Valicert in February 1996 and has served as our chairman of the board of directors since February 1996 and our senior vice president of product development and services since May 2002. He also served as our chief technology officer from February 1996 through April of 2001. From June 1994 to February 1996, Mr. Krishnan was at Enterprise Integration Technologies where he was instrumental in launching and managing Terisa Systems, a security toolkits company and CommerceNet, an industry consortium to develop business over the Internet. Mr. Krishnan has also served in various engineering positions at Cadence Design Systems between May 1991 and June 1994. Mr. Krishnan holds a B.S. degree in computer science from the Indian Institute of Technology and an M.S. degree in computer science from Duke University.

Timothy Conley has served as our vice president, finance, and chief financial officer since January 2000. From September 1998 to January 2000, Mr. Conley was vice president of finance and chief financial officer of Longboard, Inc., a provider of telecommunications systems. From June 1997 to August 1998, Mr. Conley served as vice president of finance and chief financial officer of Logicvision, a provider of intellectual property for use in the design and testing of semiconductor devices. Previously, from November 1989 to May 1997, Mr. Conley was vice president of finance and chief financial officer of Verilink Corporation, a manufacturer of network access equipment. Mr. Conley holds a B.S. degree in business administration from Wisconsin State University and is a certified public accountant.

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David Jevans has served as our senior vice president of marketing and corporate development since April of 2002. From January 2000 to April 2002, Mr. Jevans served as vice president, corporate development. In April 1994, Mr. Jevans founded Receipt.com and served as its president and chief executive officer until December 1999 when we acquired Receipt.com. From April 1994 to April 1996, Mr. Jevans was the vice president of networks at Catapult Entertainment, an Internet service company. From December 1989 to April 1994, Mr. Jevans was employed at Apple Computer where he served as an e-commerce technology advisor to the chief executive officer and executive management team, and a project leader in the operating systems group. Mr. Jevans holds a B.S. and a M.S. degree in computer science from the University of Calgary, Canada.

Denis Brotzel has served as our vice president of global sales since October 2002. Prior to that, Mr. Brotzel served as our vice president of North American Sales and has been with us since March 2000. From October 1998 to March 2000, Mr. Brotzel was the vice president of global sales for EGS, Inc., a division of Invensys plc, a global leader in business and process automation. From September of 1984 to October 1998, Mr. Brotzel was the vice president of sales and held various senior management positions at Measurex, a division of Honeywell, Inc. Mr. Brotzel holds a B.S. degree in applied physics from the University of Middlesex, London, England.

Joseph (“Yosi”) Amram has served as one of our directors since August of 1997. He also served as our president and chief executive officer from August 1997 to October 2002. From January 1989 to August 1996, Mr. Amram founded and served as chairman and chief executive officer for Individual, Inc., a content aggregation provider of personalized information services. Before that, Mr. Amram was a venture capitalist at the Aegis Funds, and led the product marketing group at Rational Software, a provider of object oriented software. Mr. Amram holds B.S. and M.S. degrees in electrical engineering from the Massachusetts Institute of Technology and an M.B.A. with distinction from Harvard Business School.

Taher Elgamal has served as one of our directors since October 1997. Mr. Elgamal has served as chief executive officer for Securify, an internet security company since June 1998. Mr. Elgamal served as chief scientist for Netscape Communications, an internet software company, from April 1995 to June 1998. Mr. Elgamal holds a B.S. degree in electrical engineering from Cair University and an M.S. degree and a Ph.D. degree in electric engineering from Stanford University.

John Johnston has served as one of our directors since May 1998. Mr. Johnston has been a venture capitalist at August Capital since August 1995 and from 1988 to the present, has been a venture capitalist at Technology Venture Investors. Mr. Johnston holds a B.A. degree in English from Princeton University and an M.B.A. degree from Harvard Business School.

Magdalena Yesil has served as one of our directors since October 1999. Ms. Yesil has been a venture capitalist at US Venture Partners since January 1998. From August 1996 to December 1997, Ms. Yesil founded MarketPay, a software company, and served as its president. From 1994 to August 1996, Ms. Yesil founded Cybercash, a secure electronic payment company, and served as vice president, marketing and technology. Ms. Yesil holds a B.S. degree in industrial engineering and an M.S. degree in electrical engineering.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers, directors and persons who beneficially own more than 10% of our common stock to file initial reports of ownership and reports of changes in ownership with Securities and Exchange Commission. All persons who file reports required by regulations of the Securities and Exchange Commission are required to furnish us with copies of the reports.

Based solely on our review of the forms furnished to us and written representations from the persons filing the reports, we believe that all filing requirements applicable to our executive officers, directors and more than 10% stockholders were complied with and filed in a timely manner, except for a Form 3 filed on behalf of Denis Brotzel in November 2002 and a Form 4 filed on behalf of Srinivasan (“Chini”) Krishnan in December 2002.

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Compensation Committee Interlock and Insider Participation

The members of the compensation committee during the fiscal year ended December 31, 2002 were John Johnston and Scott Loftesness, until May 2002 when Mr. Loftesness’s term as a director expired and he did not stand for re-election to the board. The compensation committee reviews and approves salary and bonus levels and stock option grants for executive officers. During the fiscal year ended December 31, 2002, no member of our compensation committee and none of our executive officers served as a member of the board of directors or a compensation committee of any entity that has one or more of our executive officers serving as a member of that entity’s board of directors or compensation committee. The compensation committee held two meetings during the fiscal year ended December 31, 2002. For additional information concerning the compensation committee, see the following Report of the Compensation Committee on Executive Compensation.

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REPORT OF THE COMPENSATION COMMITTEE

ON EXECUTIVE COMPENSATION

General

The members of the compensation committee during the fiscal year ended December 31, 2002 were John Johnston and Scott Loftesness, until May 2002 when Mr. Loftesness’s term as a director expired and he did not stand for re-election to the board. The compensation committee is responsible for setting and administering the policies governing annual compensation of our executive officers. The compensation committee reviews the performance and compensation levels for executive officers and sets salary levels.

As the industry in which we operate can be extremely competitive, the compensation committee believes that the compensation programs for executive officers should be designed to retain and motivate talented executives responsible for success, and should be determined within the competitive environment in which we are situated and based on the achievement of business objectives, individual contribution, and financial performance. The compensation committee’s goals are to provide a total compensation package that considers the compensation practices of other companies who are competing with us for executive officers, provides variable compensation that is linked to achievement of financial, division, and individual performance goals, and aligns the interests of the executive officers with ours by providing them with an equity stake in Valicert. The components of our compensation policies for executive officers consists of base salary and benefits, bonuses and long-term stock option incentives.

Salary

The compensation committee annually assesses the performance and sets the salary of our president and chief executive officer, John Vigouroux, and our other executive officers. At the beginning of the fiscal year, base salaries were established by our board of directors based on competitive compensation data, top executive’s job responsibilities, experience, individual performance and contributions to the business. No specific formula was applied to determine the weight of each factor. The board of directors’ decision with regard to Mr. Vigouroux’s compensation as president and chief executive officer was based on presidents and chief executive officers of comparable size companies. In addition, the compensation committee considers certain incentive objectives based on Valicert’s performance as it relates to revenue levels and earnings per share levels.

In determining executive officer salaries, the compensation committee reviews recommendations from Mr. Vigouroux, which includes information from salary surveys, performance evaluations and our financial condition. The compensation committee also establishes both financial and operational-based objectives and goals in determining executive officer salaries. These goals and objectives include sales and spending forecasts for the upcoming year and published executive compensation literature for comparable sized companies.

Bonuses

Incentive bonuses are intended to reflect the board of directors’ belief that a significant portion of the compensation of each executive officer should be contingent on our performance, as well as the individual contribution of each executive officer. In consultation with the chief executive officer, the compensation committee annually determines the total amount of cash bonuses available for executive officers and certain other management employees. For the fiscal year ended December 31, 2002, bonus awards were contingent on the achievement of revenue and operating profit targets, set by the compensation committee in consultation with the chief executive officer. Additionally, awards may be weighted so that executives would receive proportionately higher awards when performance targets were met and proportionately smaller awards when performance targets were not met.

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Stock Options

The compensation committee believes that equity ownership by executive officers provides significant motivation to maximize value for our stockholders and, therefore, periodically grants stock options under our stock option plan. Stock options are granted at the current market price and will only have value if the stock price increases over the exercise price. It is the belief of our board of directors that stock options directly motivate an executive to maximize long-term stockholder value.

The compensation committee determines the size and frequency of option grants for executive officers, after consideration of recommendations from our chief executive officer. Recommendations for options are based upon the relative position and responsibilities of each executive officer, previous and expected contributions of each officer and previous option grants to each executive officer.

Compensation of Chief Executive Officer

John Vigouroux has served as our president and chief executive officer since October of 2002. Early in 2003, the compensation committee reviewed Mr. Vigouroux’s performance with regard to performance objectives set by the board of directors in 2002, weighted among specific personal and corporate objectives, in determining his eligibility for bonus compensation. Mr. Vigouroux’s bonus compensation for the fiscal year ended December 31, 2002 was $41,500. In addition, the board of directors set Mr. Vigouroux’s salary at $190,000 per year for 2003.

Section 162(m) of the Internal Revenue Code

We have considered the provisions of Section 162(m) of the Internal Revenue Code and related Treasury Department regulations which restrict deductibility of executive compensation paid to our chief executive officer and each of the next four most highly compensated executive officers holding office at the end of any year if the compensation exceeds $1,000,000 for any of such officers in any year and does not qualify for an exception under the statute or regulations. Income from options granted under our option plans would generally qualify for an exemption from these restrictions so long as the options are granted by a committee of our board of directors whose members are non-employee directors. We expect that the compensation committee will generally be comprised of non-employee directors, and that to the extent the compensation committee is not so constituted for any period of time, the options granted during such period will not be likely to result in compensation exceeding $1,000,000 in any year.

COMPENSATION COMMITTEE

John Johnston

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COMPARISON OF STOCKHOLDER RETURN

Set forth below is a line graph comparing the annual percentage change in the cumulative total return on our common stock with the cumulative total returns of the Nasdaq Computer and Data Processing Index and The Nasdaq Stock Market for the period commencing on July 28, 2000 and ending on December 31, 2002. The line graph also compares the annual percentage change in the cumulative total return on our common stock with the cumulative total returns of the JP Morgan Hambrecht & Quist Internet Index for the period commencing on July 29, 2000 and ending on December 31, 2001. The JP Morgan Hambrecht & Quist Internet Index was discontinued effective on December 31, 2001.

Comparison of Cumulative Total Return From July 28, 2000 Through December 31, 2002 (1):

Valicert, Nasdaq Computer and Data Processing Index,

The Nasdaq Stock Market and

JP Morgan Hambrecht & Quist Internet Index

The information contained above under the captions “Report of the Compensation Committee on Executive Compensation” and “Comparison of Stockholder Return” shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that we specifically incorporate it by reference into a filing.

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ITEM 11.    EXECUTIVE COMPENSATION AND OTHER MATTERS

The following table sets forth information concerning the compensation of our current chief executive officer, our former chief executive officer, our four other most highly compensated executive officers whose total annual salary and bonus exceeded $100,000 per year for services rendered during the years ended December 31, 2000, 2001 and 2002, respectively, and one former executive officer who would have been included had he continued to serve through December 31, 2002.

SUMMARY COMPENSATION TABLE

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Stock Options Granted in 2002

The following table provides the specified information concerning grants of options to purchase our common stock made during the fiscal year ended December 31, 2002 to the persons names in the Summary Compensation Table:

OPTIONS GRANTED IN LAST FISCAL YEAR

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Aggregate Option Exercises for 2001 and 2002 Year-End Values

The following table provides information concerning exercises of options to purchase our common stock during the fiscal year ended December 31, 2002, and unexercised options held on December 31, 2002, by the persons name in the Summary Compensation Table. A portion of the shares subject to these options are not yet vested, and this would be subject to repurchase by us at a price equal to the options exercise price, if the corresponding options were exercised before those shares had vested.

Shares Acquired on Exercise includes all shares that may be purchased under the option, or portion of the option, exercised without deducting shares withheld to satisfy tax obligations, sold to pay the exercise price, or otherwise disposed of. Value realized is calculated by multiplying the difference between the market value of a share of common stock (closing market price) on the exercise date and the exercise price by the number of shares acquired upon exercise.

Compensation of Directors

Directors do not receive any cash compensation from us for their services as members of the board of directors, although members are reimbursed for expenses incurred for attendance at the meetings of the board of directors and the committees. Directors are eligible to participate in our stock plans.

Employment Contracts and Termination of Employment and Change-in-Control Arrangements

We entered into employment agreements with John Vigouroux, David Jevans, Joseph (“Yosi”) Amram, Srinivasan (“Chini”) Krishnan, Timothy Conley and Denis Brotzel, which contain certain provisions regarding compensation to each such individual upon consummation of our proposed merger with Tumbleweed. The terms of the employment agreements are summarized below.

John Vigouroux.    The employment agreement, effective through the closing of the merger, provides for the following terms:

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David Jevans.    The employment agreement, effective through the closing of the merger, provides for the following terms:

Joseph (“Yosi”) Amram.    The employment agreement, effective through the closing of the merger, provides for the following terms:

Srinivasan (“Chini”) Krishnan.    The employment agreement, effective through the closing of the merger, provides for the following terms:

Timothy Conley.    The employment agreement, effective through the closing of the merger, provides for the following terms:

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Denis Brotzel.    The employment agreement, effective through the closing of the merger, provides for the following terms:

In addition, immediately prior to the signing of the merger agreement, each of John Vigouroux, David Jevans, Srinivasan (“Chini”) Krishnan, Tim Conley and Denis Brotzel signed offer letters with Tumbleweed providing these individuals with special employment rights effective upon consummation of the merger. The terms of the offer letters are summarized below.

John Vigouroux Offer Letter.    Mr. Vigouroux’s offer letter provides for the following terms upon the closing of the merger:

David Jevans Offer Letter.    Mr. Jevan’s offer letter provides for the following terms upon the closing of the merger:

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Srinivasan (“Chini”) Krishnan Offer Letter.    Mr. Krishnan’s offer letter provides for the following terms upon the closing of the merger:

Timothy Conley Offer Letter.    Mr. Conley’s offer letter provides for the following terms upon the closing of the merger:

Denis Brotzel Offer Letter.    Mr. Brotzel’s offer letter provides for the following terms upon the closing of the merger:

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Stock Option and Warrant Agreements

John Vigouroux.    We entered into stock option agreements with John Vigouroux, our president, chief executive officer and member of our board of directors. Mr. Vigouroux was granted options to purchase an aggregate of 500,000 shares of our common stock. Mr. Vigouroux has not exercised and of these options. Refer to information above regarding change-in-control arrangements.

Joseph (“Yosi”) Amram.    We entered into stock option and warrant agreements with Joseph (“Yosi”) Amram, our former president, former chief executive officer and a member of our board of directors. Mr. Amram was granted options to purchase an aggregate of 1,798,727 shares of our common stock. Mr. Amram has exercised options to purchase 1,376,062 shares of our common stock. Mr. Amram was granted warrants to purchase 175,484 shares of our common stock. Mr. Amram has not exercised any of these warrants. Refer to information above regarding change-in-control arrangements.

Timothy Conley.    We entered into stock option and warrant agreements with Timothy Conley, our vice president, finance, and chief financial officer. Mr. Conley was granted options to purchase an aggregate of 464,834 shares of our common stock. Mr. Conley has exercised options to purchase 33,333 shares of common stock. Mr. Conley was granted warrants to purchase 33,333 shares of common stock. Mr. Conley has not exercised any of these warrants. Refer to information above regarding change-in-control arrangements.

David Jevans.    We entered into a stock option agreement with David Jevans, our senior vice president, marketing and corporate development. Mr. Jevans was granted options to purchase 760,692 shares of our common stock. Mr. Jevans has exercised options to purchase 209,998 shares of our common stock. Refer to information above regarding change-in-control arrangements.

Srinivasan (“Chini”) Krishnan.    We entered into stock option and warrant agreements with Srinivasan (“Chini”) Krishnan, our senior vice president, product development and services, chief technology officer, chairman of our board of directors and secretary. Mr. Krishnan was granted options to purchase an aggregate of 1,344,730 shares of our common stock. Mr. Krishnan has exercised options to purchase 1,105,397 shares of our common stock. Mr. Krishnan was granted warrants to purchase 83,333 shares of our common stock. Mr. Krishnan has not exercised any of these warrants. Refer to information above regarding change-in-control arrangements.

Alexander Garcia-Tobar.    We entered into stock option and warrant agreements with Alexander Garcia-Tobar, our vice president, business development and channel sales. Mr. Garcia-Tobar was granted options to purchase an aggregate of 353,333 shares of our common stock. Mr. Garcia-Tobar has exercised 200,000 of these options. Mr. Garcia-Tobar was granted warrants to purchase 33,333 shares of our common stock. Mr. Garcia-Tobar has not exercised any of these warrants. These options and warrants were cancelled in October 2002.

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Denis Brotzel.    We entered into stock option and warrant agreements with Denis Brotzel, our vice president, global sales. Mr. Brotzel was granted options to purchase an aggregate of 176,701 shares of our common stock. Mr. Brotzel has exercised 11,111 of these options. Refer to information above regarding change-in-control arrangements.

ITEM 12.    STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of December 31, 2002, certain information with respect to the beneficial ownership of our common stock by:

(i) each stockholder known by us to be the beneficial owner of more than 5% of common stock,

(ii) each of our directors,

(iii) each of our executive officers named in the Summary Compensation Table above, and

(iv) all of our directors and current executive officers as a group.

Except as otherwise indicated, the address of each beneficial owner is c/o Valicert, Inc., 1215 Terra Bella Avenue, Mountain View, California 94043.

Except as indicated in the footnotes to the table, we believe that the persons named in the table have sole voting and dispositive power over all of the shares of common stock that they own, except where community property laws apply. This percentage includes the common stock which each named person has the right to acquire beneficial ownership either currently or within 60 days of December 31, 2002, including upon exercise of stock options and warrants; however, such common stock shall not be deemed outstanding for the purposes of completing the percentage owned by any other person. Percentages of beneficial ownership is based upon 25,301,612 shares of common stock outstanding at December 31, 2002.

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