VALICERT INC
424B4, 2000-07-28
COMPUTER PROGRAMMING SERVICES
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<PAGE>

                                               Filed Pursuant to Rule 424(b)(4)
                                                     Registration No. 333-37020

[Logo of ValiCert Appears Here. There is a royal blue circle with a white "V"
and "C" at the top right of the logo. Underneath the circle is the word
ValiCert. There are eleven dots underneath "Cert" in the word ValiCert. At the
bottom of the logo are the words Securing e-Transactions.]

-------------------------------------------------------------------------------
 4,000,000 Shares
 Common Stock
-------------------------------------------------------------------------------

 This is the initial public offering of ValiCert, Inc. and we are offering
 4,000,000 shares of our common stock. The price of our common stock is
 $10.00 per share. Our common stock has been approved for quotation on the
 Nasdaq Stock Market's National Market under the symbol VLCT.

 Investing in our common stock involves risks. See Risk Factors beginning on
 page 6.

 Neither the Securities and Exchange Commission nor any state securities
 commission has approved or disapproved of these securities or passed upon
 the adequacy or accuracy of this prospectus. Any representation to the
 contrary is a criminal offense.

<TABLE>
<CAPTION>
                           Underwriting
                           Discounts
               Price to    and          Proceeds to
               Public      Commissions  ValiCert
   <S>         <C>         <C>          <C>
    Per share  $10.00      $0.70        $9.30
    Total      $40,000,000 $2,800,000   $37,200,000
</TABLE>

 We have granted the underwriters the right to purchase up to 600,000
 additional shares to cover over-allotments.

 Deutsche Banc Alex. Brown                                  Merrill Lynch & Co.

                               ----------------

 Donaldson, Lufkin & Jenrette                                     Wit SoundView

 The date of this prospectus is July 27, 2000
<PAGE>

[The inside front cover is a diagram.  The background of the diagram is the
ValiCert logo which is a light blue circle with a white "V" and "C". Across the
top of the diagram is the ValiCert name and a smaller version of the same logo.
The title of the diagram is Securing an Electronic Transaction with a brief
statement about ValiCert's products and services and its customers.

Across the left side of the diagram are the phrases:  Transaction Stage,
Transaction Function and ValiCert's Products and Services.  Next to Transaction
Stage is an orange arrow with the words Before, During and After. Next to
Transaction Function are four green boxes with the words Validate, Deliver,
Notarize and Vault. Next to ValiCert's Products and Services is a royal blue box
with the words ValiCert Validation Authority, ValiCert Secure Transport,
ValiCert Receipt Notary and ValiCert Receipt Vault. At the bottom of the diagram
is a royal blue arrow with the words Validate, Secure and Prove with a brief
statement about how ValiCert products and services can be used.]
<PAGE>

                               PROSPECTUS SUMMARY

   This summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all of the information that you should
consider before investing in our common stock. You should carefully read the
entire prospectus, including Risk Factors and the financial statements, before
making an investment decision.

                                  Our Business

   ValiCert is a leading provider of end-to-end infrastructure software
products and services that organizations use to conduct valid, secure and
provable transactions over the Internet. We offer solutions that address the
security requirements across the phases of an electronic transaction:

  .  validation of credentials and authorization of parties before a
     transaction;
  .  secure, reliable and tamper-proof transfer of data during a transaction;
     and
  .  electronic notarization of business data to establish an audit trail
     after a transaction.

   Electronic transactions consist of a broad range of events required to
support business activities conducted over the Internet, including procurement,
bill presentment, invoicing and payment, document signing, file transfer, and
e-mail. As organizations increasingly rely on the Internet to conduct these
business activities, they are subject to risks of theft, loss, alteration or
dissemination of confidential data and fraud. To minimize these risks, a
framework of trust is required to ensure reliable and secure transactions.

   To address customers' requirements for secure transactions, we provide:

  .  Scalable, modular products and services based on open standards;
  .  Flexible deployment models, which give our customers the choice to
     implement our software in-house; outsource to us as a trusted third
     party; or outsource to one of our service provider customers;
  .  Products and services that interoperate with leading digital
     certificates and electronic payments solutions; and
  .  A secure data center to deliver hosted services, as well as backup and
     redundancy, data distribution or disaster recovery capabilities.

                           Our Products and Services

   Our products and services have been implemented by organizations in various
industries that are transaction-intensive and have a strong requirement for
security including financial services, government, healthcare and
telecommunications. Our enterprise customers include Aetna, Dell, Identrus,
S.W.I.F.T. and Visa. Our service provider customers, who purchase our products
to offer commercial services, include Bell Canada Emergis, NTT Communications,
PricewaterhouseCoopers, and Thomson-CSF/Cashware. In 1999 our two largest
customers accounted for 21% and 14% of our revenues, and international
customers accounted for over 47% of our revenues. We anticipate that our
operating results in future periods will continue to depend upon revenues from
a small number of customers and we intend to expand our international business
which may subject us to additional risks.

                                 Our Alliances

   We have entered into technology, marketing or distribution alliances with
companies including Baltimore Technologies, Entrust, IBM, Microsoft,
Netscape/iPlanet and Trintech. We need to maintain or enter into additional
strategic alliances to execute our business plan, and our existing alliances do
not grant us exclusive distribution rights.

                         Our History and Losses to Date

   We were incorporated in California in February 1996, reincorporated in
Delaware in May 1998 and emerged from development stage during the quarter
ended March 31, 1999 when we began commercial shipment of our validation
authority products. We have incurred cumulative losses of $23.3 million as of
March 31, 2000, and we expect to continue to incur losses and may not become
profitable. Our business is dependent on the widespread adoption of the
Internet for conducting electronic commerce, and the size of this market and
its sustainable growth rate are difficult to predict.

   Our principal offices are located at 339 North Bernardo Avenue, Mountain
View, California 94043. Our telephone number is (650) 567-5400. Our website
address is www.valicert.com, but the information on our website does not
constitute a part of this prospectus.

                                       3
<PAGE>

                                  The Offering

<TABLE>
<S>                                   <C>
Common stock offered by ValiCert..... 4,000,000 shares

Common stock to be outstanding after
 this offering....................... 21,850,708 shares

Use of proceeds...................... For general corporate purposes.

Dividend policy...................... We intend to retain all future earnings,
                                      if any, to fund the development and
                                      growth of our business. We do not
                                      anticipate paying cash dividends on our
                                      common stock.
Nasdaq National Market symbol........ VLCT
</TABLE>

                     Shares Outstanding After the Offering

   The number of shares of our common stock outstanding after the offering is
based on shares outstanding as of April 30, 2000. This number assumes the
conversion into common stock of all shares of our preferred stock but does not
include:

  .  2,397,328 shares of common stock issuable upon exercise of outstanding
     stock options under our equity incentive plans as of April 30, 2000 at a
     weighted average exercise price of $3.61;

  .  292,000 shares of common stock reserved and available for future
     issuance under our equity incentive plans as of April 30, 2000 and an
     additional 1,333,333 shares of common stock reserved and available for
     future issuance under our equity incentive plans that were approved by
     our board of directors on May 5, 2000;

  .  333,333 shares of common stock reserved and available for issuance under
     our 2000 employee stock purchase plan that was approved by our board of
     directors on May 5, 2000; and

  .  677,046 shares of common stock issuable upon exercise of warrants at a
     weighted average exercise price of $16.05 as of April 30, 2000,
     including:

    -  23,659 shares of common stock issuable upon exercise of a warrant
       which expires upon the close of this offering.

                                Our Assumptions

   Unless otherwise indicated, all information contained in this prospectus
assumes:

  .  no exercise of the underwriters' over-allotment option;

  .  a one-for-three reverse stock split of our stock which will occur before
     the closing of this offering;

  .  the conversion of all outstanding shares of our preferred stock into
     common stock concurrently with the closing of this offering; and

  .  the filing of our amended and restated certificate of incorporation
     which will increase the number of authorized shares of our common stock
     and decrease the number of authorized shares of our preferred stock.

                                 Our Trademarks

   VALICERT(R) and the ValiCert logo are registered trademarks of ValiCert,
Inc. This prospectus contains other trade names, trademarks and service marks
of ValiCert and of other companies.

                                       4
<PAGE>

                             Summary Financial Data
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                          From February 6,       Year Ended           Pro Forma    Three Months
                            1996 through        December 31,          Year Ended  Ended March 31,
                            December 31,   ------------------------  December 31, ----------------
                                1996       1997    1998      1999        1999      1999     2000
                          ---------------- -----  -------  --------  ------------ -------  -------
<S>                       <C>              <C>    <C>      <C>       <C>          <C>      <C>
Statement of Operations
 Data:
Revenues:
 Software licenses......       $ --        $ --   $    60  $    874    $  1,953   $    89  $ 1,396
 Subscription fees and
  other services........         --          --       --        761         994        79      480
                               -----       -----  -------  --------    --------   -------  -------
 Total revenues.........         --          --        60     1,635       2,947       168    1,876
Cost of revenues:
 Software licenses......         --          --         3        93         196         7      153
 Subscription fees and
  other services........         --          --       --        134         254        29    1,041
                               -----       -----  -------  --------    --------   -------  -------
 Total cost of
  revenues..............         --          --         3       227         450        36    1,194
                               -----       -----  -------  --------    --------   -------  -------
Gross profit............         --          --        57     1,408       2,497       132      682
Operating expenses:
 Research and
  development...........         335         373    1,728     5,608       6,800       822    1,911
 Sales and marketing....          26          53    1,445     4,583       5,992       802    2,404
 General and
  administrative........         132          97      977     1,373       3,298       279      686
 Acquired in-process
  research and
  development...........         --          --       --      2,780         --        --       --
 Amortization of
  intangibles...........         --          --       --        --        3,253       --       810
 Amortization of stock
  compensation..........         --          --       --        162       1,120       --       457
                               -----       -----  -------  --------    --------   -------  -------
 Total operating
  expenses..............         493         523    4,150    14,506      20,463     1,903    6,268
                               -----       -----  -------  --------    --------   -------  -------
Operating loss..........        (493)       (523)  (4,093)  (13,098)    (17,966)   (1,771)  (5,586)
Interest income
 (expense), net.........         --           (7)     103       296         121         7      128
                               -----       -----  -------  --------    --------   -------  -------
Net loss................       $(493)      $(530) $(3,990) $(12,802)   $(17,845)  $(1,764) $(5,458)
                               =====       =====  =======  ========    ========   =======  =======
Pro forma basic and
 diluted net loss per
 share..................                                   $  (1.24)                       $ (0.36)
                                                           ========                        =======
Shares used in pro forma
 basic and diluted net
 loss per share.........                                     10,326                         15,135
                                                           ========                        =======
</TABLE>

   The pro forma data for the year ended December 31, 1999:

  .  treats our acquisition of Receipt.com, which occurred on December 30,
     1999, as if the acquisition had been completed on January 1, 1999; and

  .  excludes a $2.8 million expense for acquired in-process research and
     development as it is a material non-recurring charge.

Pro forma net loss per share data and pro forma shares data used in computing
pro forma net loss per share has been calculated by assuming that all of our
outstanding shares of preferred stock had been converted, as of their original
issuance dates, into shares of our common stock.

<TABLE>
<CAPTION>
                                                         March 31, 2000
                                                  ------------------------------
                                                                      Pro Forma
                                                  Actual   Pro Forma As Adjusted
                                                  -------  --------- -----------
<S>                                               <C>      <C>       <C>
Balance Sheet Data:
Cash and cash equivalents........................ $10,983   $10,983    $46,983
Working capital..................................   9,616     9,616     45,616
Total assets.....................................  33,033    33,033     69,033
Long-term obligations............................   2,587     2,587      2,587
Convertible preferred stock......................  34,316       --         --
Total stockholders' equity (deficiency)..........  (8,811)   25,505     61,505
</TABLE>

   The pro forma data as of March 31, 2000 assumes the conversion of all of our
outstanding shares of preferred stock into common stock upon the closing of
this offering. The pro forma as adjusted data gives effect to this conversion
and to the sale of 4,000,000 shares of common stock that we are offering under
this prospectus at an initial public offering price of $10.00 per share and
after deducting the underwriting discounts and commissions and estimated
offering expenses.

                                       5
<PAGE>

                                  RISK FACTORS

   This offering involves a high degree of risk. Investors should carefully
consider the risks and uncertainties and the other information in this
prospectus before deciding whether to invest in shares of our common stock.
These risks could cause the trading price of our common stock to decline.

                         Risks Related to Our Business

Because we have only recently introduced our products and services, it is
difficult for us 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 the rate and timing of the growth and use of public key
infrastructure and electronic payments and other Internet security
technologies.

Our sales cycle causes unpredictable variations in our operating results which
could cause our stock price to decline.

   The length of our sales cycle is uncertain, which makes it difficult to
accurately forecast the quarter in which our sales will occur. This may cause
our revenues and operating results to vary from quarter to quarter. 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 and we do not
know 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. The process
of entering into a licensing arrangement with a potential customer may involve
lengthy negotiations. In the past, our sales cycle has ranged from one to nine
or more months. Our sales cycle is also subject to delays because we have
little or no control over customer-specific factors, including customers'
budgetary constraints and internal acceptance procedures. 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.

   Because the length of our sales cycle is uncertain, 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 $530,000
in 1997, $4.0 million in 1998, $12.8 million in 1999 and $5.5 million in the
three months ended March 31, 2000. As of March 31, 2000, we had incurred
cumulative losses of $23.3 million. You should not consider recent quarterly
revenue growth as indicative of our future performance. We may not sustain
similar levels of growth in future periods and our revenues could decline. We
will continue to increase our sales and marketing, research and development and
general and administrative expenses.

                                       6
<PAGE>

We will need to generate significantly higher revenues to achieve
profitability. Even if we do achieve profitability, we may not be able to
sustain or increase profitability on a quarterly or annual basis in the future.
If our revenues grow more slowly or decline, 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.

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 customers stops licensing our software products and services, our
revenues could decline.

   A limited number of customers has accounted for a significant portion of our
revenues. In 1999, Visa accounted for 21.4% of our revenues and
PricewaterhouseCoopers accounted for 13.9% of our revenues. For the three
months ended March 31, 2000, Netscape/iPlanet accounted for 13.3% of our
revenues, S.W.I.F.T. accounted for 13.2% of our revenues, Hanwha Corporation
accounted for 12.5% of our revenues and Unisys accounted for 10.1% of our
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.

We do not have an adequate history with the recent change in our licensing
arrangements to predict our revenue or operating results, which may prevent
investors from assessing our prospects.

   We recently introduced a new licensing arrangement that includes a
subscription fee during the license period. This new arrangement will result in
our recognizing subscription fees ratably over the related service period.
Previously, our licensing arrangements resulted in our recognizing the majority
of license revenues upon shipment of software to our customers. We do not have
an adequate history with this new licensing arrangement to be able to predict
customers' acceptance of this arrangement or to forecast our revenue or
operating results accurately.

Because our customers may not renew their annual subscriptions, our revenues
may not increase as anticipated.

   We have only recently made our software products and services commercially
available and we do not have a history of customers renewing their annual
subscriptions with us. If a significant portion of our customers do not renew
their annual subscriptions for our software products and services, our revenues
could decline and our business could be harmed. Our service provider customers
are implementing new business models which, if not successful, could result in
our service provider customers not renewing their annual subscriptions with us.

Failure to maintain and enter into new strategic alliances could inhibit the
adoption of our products and services.

   One of our significant business strategies has been to enter into strategic
or other similar collaborative alliances to increase the adoption of our
products and services. If we are unable to maintain our strategic alliances or
enter into additional strategic alliances, the adoption of our products and
services would be impeded.

                                       7
<PAGE>

   Our strategic alliances do not, and any future strategic alliances may not,
grant us exclusive marketing or distribution rights. The other parties may not
view their alliances with us as significant for their own businesses. They
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.

If we fail to manage our potential growth, we may be unable to effectively run
our operations, including the sales, marketing and support of our products.

   Our growth has placed, and any further growth is likely to continue to
place, a significant strain on our resources. If we fail to manage our growth
effectively, we may be unable to provide adequate service to our customers and
our operations may be disrupted. We have grown from 31 employees at
December 31, 1998 to 137 employees at April 30, 2000. We have also opened
additional sales offices and have significantly expanded our operations, both
in the United States and abroad, during this time period. To be successful, we
will need to implement additional management information systems, develop our
operating, administrative, financial and accounting systems and controls, and
maintain close coordination among our executive, engineering, accounting,
finance, marketing, sales and operations organizations.

If our data center proves to be unreliable or is subject to failures, our
reputation could be damaged and our business could be harmed.

   An increasing number of our customers require us to provide computer and
communications hardware, software and Internet networking systems to them as an
outsourced data center service. All data centers, whether hosted by us, our
customers, or by an independent third party to which we outsource this
function, are vulnerable to damage or interruption from natural disasters,
power loss, telecommunications failure or other similar events. Our principal
executive offices and data center are located near San Francisco, California in
an area that has been subject to severe earthquakes. We do not have earthquake
insurance on our data center or an operational disaster recovery facility. If
an earthquake or other disaster causes an operations failure, our operations
will be interrupted, our expenses may increase and our revenues may decline.

Our revenue would likely decline if we do not grow and develop our 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 significantly harm our
ability to sell our products and services. 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
channel partners may choose to devote greater resources to marketing and
supporting the products of other companies.

We depend upon certificate status data made available by third parties; if our
access to that data is limited or denied, our revenues could decline.

   Our business depends upon our continuing access to data for the issuance and
revocation of digital certificates by certificate authorities and other third
parties, including businesses and governmental entities. We depend upon our
ability to negotiate arrangements with these certificate authorities, some of
which are our competitors, and other third parties to make this data available
to us. If our access to this data is limited or denied by one or more
certificate authorities or other third parties, our ability to verify and
validate digital certificates would be impaired, perhaps severely, which could
cause a decline in our revenues and in the value of your investment.

                                       8
<PAGE>

We are dependent on technologies provided by third parties, and any termination
of our right to use these technologies could increase our costs, delay product
development and harm our reputation.

   We have developed our products and services partially based on technology we
license on a non-exclusive basis from third parties. We expect that, in the
future, we will continue to have to license technologies from third parties.
Our inability to continue to license on commercially reasonable terms, one or
more of the technologies that we use or our failure to obtain the right to use
future technologies could increase our costs and delay or possibly prevent
product development. Our licensing agreements may be terminated by the other
parties to these contracts, or may not be renewed on favorable terms or at all.
We may not be able to license new technologies on favorable terms, if at all.

If we lose the services of our senior management or key personnel, our ability
to develop our business and secure customer relationships will suffer.

   We are substantially dependent on the continued services and performance of
our senior management and other key personnel. We do not maintain key person
insurance on any of our executive officers. The loss of the services of any of
our executive officers or other key employees, particularly Joseph Amram, our
president and chief executive officer, and Srinivasan Krishnan, our chairman
and chief technology officer, could significantly delay or prevent the
achievement of our development and strategic objectives.

If we are unable to recruit or retain qualified personnel, we will be unable to
manage our business and develop new products.

   We must continue to identify, recruit, hire, train, retain and motivate
highly skilled technical, managerial, sales and marketing and professional
services personnel, particularly software engineers. The failure to recruit and
retain necessary technical, managerial, sales, marketing and professional
services personnel could harm our ability to obtain new customers and develop
new products. Competition for these personnel is intense, and we may not be
able to successfully recruit, assimilate or retain the kind and number of
qualified personnel we need.

Our failure to protect our intellectual property could reduce our revenue or
cause us to undertake costly litigation.

   Attempts by others to utilize our intellectual property rights could
undermine our ability to retain or secure customers. The laws of some foreign
countries do not protect intellectual property rights to the same extent as do
the laws of the United States. Enforcing our intellectual property rights could
be time consuming and costly. We also rely on outside licensors for patent and
software license rights in encryption technology that is necessary for the
operation of our products and services. Any inability to continue to obtain or
use this technology could increase our expenses and delay our product
development efforts.

Any claim of infringement by third parties could be costly to defend, and if we
are found to be infringing 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.
Any litigation could result in substantial costs and diversion of management's
attention and resources.

                                       9
<PAGE>

   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 infringe their intellectual property rights based upon
issued patents, trade secrets or know-how that they believe cover our
technology. 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
party asserts a claim of infringement against us, we may be required to obtain
one or more licenses from or pay royalties to third parties. We cannot assure
you that we will be able to obtain these licenses at a reasonable cost, if at
all. Defense of any lawsuit or failure to obtain the license could hurt our
business.

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

   Our software products and services are complex and are generally used in
systems with other vendors' products. They 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:

  .  loss of revenues and increased service and warranty costs,

  .  delay in market acceptance and sales and

  .  injury to our reputation.

If we are unable to raise additional capital when needed, we may be unable to
develop or enhance our products and services.

   We may need to seek additional funding in the future. If we cannot raise
funds on acceptable terms, we may not be able 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, stockholders
may experience additional dilution or the new equity securities may have
rights, preferences or privileges senior to those of our common stock.

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 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.

                                       10
<PAGE>

If we are not able to continue to include our public root keys within software
applications, our customers may not use our services.

   If we are not able to continue to include our public root keys within
software applications, including Microsoft Windows 2000, the Microsoft Internet
Explorer browser and the Netscape browser, customers might perceive our
outsourced services as too cumbersome to use. These applications use our public
root keys to insure that digitally signed objects which are generated by our
validation authority and digital receipt services are trustworthy and have not
been tampered with or corrupted. The initial term of our root key arrangement
with Netscape ends in December 2000 and we cannot assure you that this
arrangement will be continued. Our root key arrangement with Microsoft may not
be extended to cover subsequent releases of Microsoft Windows 2000 or the
Microsoft Internet Explorer browser.

We could incur substantial costs resulting from product liability claims
relating to 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. Our
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 on any claims we make, which could result in substantial
costs to us.

                         Risks Related to Our Industry

If the market for our secure online transaction products and services fails to
develop and grow, we may be unable to increase our revenue and achieve
profitability.

   If the market for our products and services fails to develop and grow, or if
our products and services do not gain broad market acceptance, we may not be
able to increase our revenue, achieve profitability and continue operations.
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. 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 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 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. 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
expect that competition will increase which could result in pricing pressures,
reduced margins or the failure of our Internet-based security products and
services to achieve or maintain market acceptance.

                                       11
<PAGE>

Our ability to increase revenue depends on the wide adoption of the Internet
for conducting electronic commerce.

   If the Internet is not widely adopted as a medium for conducting electronic
commerce, we may be unable to increase our revenue and achieve profitability.
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.
Many businesses and consumers have been deterred from utilizing the Internet
for a number of reasons, including:

  .  potentially inadequate development of network infrastructure;

  .  security concerns including the potential for merchant or user
     impersonation and fraud or theft of stored data and information
     communicated over the Internet;

  .  inconsistent quality of service; and

  .  inability to integrate business applications on the Internet.

   The adoption of the Internet will require a broad acceptance of new methods
of conducting business and exchanging information. Companies, government
agencies and individuals may be reluctant to adopt these new methods.

   The use of the Internet may not increase or may increase more slowly than we
expect because of delays in development or adoption of new standards and
protocols to handle expected 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.

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. Should a simpler
factoring method be developed, then the security of encryption products
utilizing 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.

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. Our inability to obtain required approvals under these regulations
could limit our ability to make international sales. We are exporting software
products and services with requisite export approval under United States law.
The list of products and countries for which export approval is required, and
the related regulatory policies, could be expanded and we may not be able to
obtain necessary approval for the export of our products. Our competitors may
also seek to obtain approvals to export products that could increase the amount
of competition we face.

                                       12
<PAGE>

                         Risks Related to this Offering

We expect our stock price will fluctuate significantly and you may not be able
to resell your shares at or above the initial public offering price.

   Before this offering, there has not been a public market for our common
stock and the trading price of our common stock may decline below the initial
public offering price. The trading price of our common stock may fluctuate
significantly in response to a number of factors, some of which are beyond our
control, including:

  .  actual or anticipated declines in our operating results;

  .  changes in financial estimates or recommendations by securities
     analysts;

  .  announcements by us or our competitors of financial results, new
     services, significant technological innovations, strategic partnerships
     and joint ventures; and

  .  stock market price and volume fluctuations, which are particularly
     common among securities of Internet-related companies.

After this offering we will continue to be controlled by our executive
officers, directors and major stockholders, whose interests may conflict with
yours.

   Upon completion of this offering, our executive officers, directors and
major stockholders will beneficially own approximately 41.1% of our outstanding
common stock, based on shares outstanding as of April 30, 2000. These
stockholders will be able to exercise control over all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions, which could have the effect of delaying or
preventing a third party from acquiring control over or merging with us. We
also plan to reserve 15% of the shares offered in this offering under a
directed share program in which our vendors, employees, family members of
employees, customers and other third parties may be able to purchase shares in
this offering at the initial public offering price. This program may further
increase the amount of stock held by persons whose interests are closely
aligned with management's interests.

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.

   Provisions in our certificate of incorporation and bylaws may have the
effect of delaying or preventing a change of control or changes in our
management. 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.

There are a large number of shares of our common stock that may be sold in the
market following this offering, which may depress the market price of our
common stock.

   Sales of substantial numbers of shares of our common stock in the public
market after this offering, or the perception that those sales may be made,
could cause the market price of our common stock to decline. The sale of these
shares could impair our ability to raise capital through the sale of additional
equity securities. Based on shares outstanding as of April 30, 2000, following
this offering, we will have 21,850,708 shares of common stock outstanding or
22,450,708 shares if the underwriters' over-allotment is exercised in full. Of
these, 16,666,824 shares will become available for sale 180 days following the
date of this prospectus upon the expiration of lock-up agreements, subject to
the restrictions imposed by the federal securities laws on sales by affiliates.
Deutsche Bank Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, however, may waive these lock-up restrictions at their sole
discretion without notice.

                                       13
<PAGE>

                   SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS

   This prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as anticipates, believes, plans, expects,
future, intends and similar expressions to identify forward-looking statements.
This prospectus also contains forward-looking statements attributed to third
parties relating to their estimates of the growth of various markets. You
should not place undue reliance on those forward-looking statements, which
apply only as of the date of this prospectus. Our actual results could differ
materially from those anticipated in these forward-looking statements for many
reasons, including the risks to our business described in this prospectus.

   Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. You should not place undue reliance on
these forward-looking statements.

                                       14
<PAGE>

                                USE OF PROCEEDS

   We estimate that our net proceeds from the sale of the 4,000,000 shares of
common stock we are offering will be approximately $36.0 million, based upon an
initial public offering price of $10.00 per share and after deducting
underwriting discounts and commissions and estimated offering expenses. If the
underwriters' over-allotment option is exercised in full, we estimate that our
net proceeds will be approximately $41.6 million.

   We intend to use the proceeds for general corporate purposes, including
working capital and capital expenditures. We may also use a portion of the net
proceeds for acquisitions, although we have no acquisition commitments or
agreements. We have not yet determined all of our expected expenditures and we
cannot estimate the amounts to be used for each purpose. Before these uses, we
intend to invest the net proceeds in cash equivalents and short-term
investments.

                                DIVIDEND POLICY

   We have never declared or paid any cash dividends on our common stock and do
not anticipate paying cash dividends on our common stock. We anticipate that we
will retain all of our future earnings, if any, for use in the development and
expansion of our business and for general corporate purposes. Any determination
to pay dividends in the future will be at the discretion of our board of
directors and will depend upon our financial condition and operating results.
We have entered into a loan agreement with a creditor that restricts our
ability to pay dividends.

                                       15
<PAGE>

                                 CAPITALIZATION

   This table presents our capitalization as of March 31, 2000:

  .  On an actual basis;

  .  On a pro forma basis to reflect:

    -  the conversion of all outstanding shares of our preferred stock into
       13,152,890 shares of common stock effective automatically upon the
       closing of this offering and

    -  the filing of our amended and restated certificate of incorporation
       upon the closing of this offering

  .  On a pro forma basis as adjusted to reflect the sale of 4,000,000 shares
     of common stock in this offering at an initial public price of $10.00
     per share.

This table should be read with our financial statements and the related notes
and Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this prospectus.

<TABLE>
<CAPTION>
                                                    As of March 31, 2000
                                               --------------------------------
                                                                     Pro Forma
                                                Actual   Pro Forma  As Adjusted
                                               --------  ---------  -----------
                                                   (dollars in thousands)
<S>                                            <C>       <C>        <C>
Long-term debt obligations ..................  $  2,587  $  2,587    $  2,587
Reedemable convertible preferred stock,
 14,285,237 shares authorized, and 13,152,890
 shares issued and outstanding, actual;
 2,000,000 shares authorized and no shares
 issued and outstanding, pro forma and pro
 forma as adjusted:                              34,371       --          --
 Notes receivable from convertible preferred
  stockholders...............................       (55)      --          --
Stockholders' equity:
Common stock, 16,666,667 shares authorized
 and 4,413,015 shares issued and outstanding,
 actual; 100,000,000 shares authorized and
 17,565,905 shares issued and outstanding,
 pro forma; 100,000,000 shares authorized and
 21,565,905 shares issued and outstanding,
 pro forma as adjusted.......................         4        18          22
Additional paid-in-capital...................    24,036    58,393      94,389
Deferred stock compensation..................    (7,826)   (7,826)     (7,826)
Notes receivable from common stockholders....    (1,668)   (1,723)     (1,723)
Accumulated other comprehensive loss.........       (65)      (65)        (65)
Accumulated deficit..........................   (23,292)  (23,292)    (23,292)
                                               --------  --------    --------
 Total stockholders' equity (deficiency).....    (8,811)   25,505      61,505
                                               --------  --------    --------
    Total capitalization.....................  $ 28,092  $ 28,092    $ 64,092
                                               ========  ========    ========
</TABLE>

                                       16
<PAGE>

                                    DILUTION

   If you invest in our common stock, the book value of your investment will be
diluted in an amount equal to the difference between the public offering price
per share of our common stock and the pro forma net tangible book value per
share of our common stock after this offering. Pro forma net tangible book
value per share after this offering equals the amount of our tangible assets
minus our total liabilities, divided by the number of outstanding shares of
common stock after the offering.

Pro forma net tangible book value

   Our pro forma net tangible book value as of March 31, 2000 was approximately
$25,505,000 million or $1.45 per share of common stock. The pro forma as
adjusted net tangible book value per share takes into account the estimated net
proceeds from this offering.

Dilution after this offering

   Based upon an initial public offering price of $10.00 per share and after
deducting the underwriting discounts and commissions and estimated offering
expenses, our pro forma as adjusted net tangible book value as of March 31,
2000 would have been approximately $61,505,000 or $2.85 per share. This
represents an immediate increase in pro forma as adjusted net tangible book
value of $1.40 per share to stockholders and an immediate dilution of $7.15 per
share to new investors. This table illustrates this per share dilution:

<TABLE>
<S>                                                                <C>   <C>
Initial public offering price per share..........................        $10.00
 Pro forma net tangible book value per share as of March 31,
  2000...........................................................  $1.45
 Increase per share attributable to new investors................   1.40
                                                                   -----
Pro forma as adjusted net tangible book value per share after the
 offering........................................................          2.85
                                                                         ------
Dilution per share to new investors..............................         $7.15
                                                                         ======
</TABLE>

Summary investment information

   This table summarizes as of March 31, 2000, on the pro forma basis described
above, the number of shares of common stock purchased from us, and the total
consideration paid and the average price per share paid by stockholders and by
new investors, before deducting the estimated underwriting discounts and
commissions and estimated offering expenses. New investors purchasing shares in
this offering at the initial public offering price will contribute 41% of the
total consideration paid to us but will own only 19% of our shares.

<TABLE>
<CAPTION>
                            Shares Purchased  Total Consideration
                           ------------------ ------------------- Average Price
                             Number   Percent   Amount    Percent Paid Per Share
                           ---------- ------- ----------- ------- --------------
<S>                        <C>        <C>     <C>         <C>     <C>
Existing stockholders..... 17,565,905    81%  $58,407,000    59%      $3.33
New investors.............  4,000,000    19%   40,000,000    41%      10.00
                           ----------   ---   -----------   ---
 Total.................... 21,565,905   100%  $98,407,000   100%
                           ==========   ===   ===========   ===
</TABLE>

Additional share information

   Except as noted above, the previous discussion and tables assume no exercise
of any stock options or warrants outstanding at March 31, 2000. As of March 31,
2000, there were options outstanding to purchase 2,212,668 shares of common
stock at a weighted average exercise price of $2.33 and warrants outstanding to
purchase a total of 736,180 shares of our common stock at a weighted average
exercise price of $14.49 per share. If any of these options or warrants are
exercised, there will be further dilution to investors purchasing our common
stock.

                                       17
<PAGE>

                            SELECTED FINANCIAL DATA

   You should read the selected financial data with Management's Discussion and
Analysis of Financial Condition and Results of Operations and our consolidated
financial statements and related notes included elsewhere in this prospectus.
The historical selected financial data as of December 31, 1998 and 1999 and for
the fiscal years ended December 31, 1997, 1998 and 1999 are derived from the
audited financial statements and related notes appearing elsewhere in this
prospectus. The selected financial data for the period from February 6, 1996
through December 31, 1996 and as of December 31, 1997, are derived from audited
financial statements which do not appear in this prospectus. The historical
statement of operations data for the three months ended March 31, 1999 and 2000
and the historical balance sheet data as of March 31, 2000 are derived from our
unaudited financial statements and related notes appearing elsewhere in this
prospectus. In the opinion of management, those unaudited financial statements
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the interim information. Historical
results are not necessarily indicative of results that may be achieved in any
future period.

   On December 30, 1999, we acquired Receipt.com in a transaction accounted for
using the purchase method of accounting. The pro forma statement of operations
data for the year ended December 31, 1999 appearing in this table is unaudited
and has been prepared as if the acquisition had been completed on January 1,
1999. The pro forma statements of operations data was prepared by combining our
statement of operations data for 1999 with the statement of operations data of
Receipt.com for 1999. The pro forma statement of operations data is subject to
a number of estimates, assumptions and uncertainties and do not reflect the
results of operations that would have occurred had the acquisition taken place
on January 1, 1999 or reflect future results of operations. The pro forma
statement of operations data should be read with our financial statements and
the financial statements of Receipt.com and our pro forma condensed combining
financial statements, in each case including the related notes, included
elsewhere in this prospectus.

<TABLE>
<CAPTION>
                          From February 6,  Year Ended December       Pro Forma    Three Months
                            1996 through            31,               Year Ended  Ended March 31,
                            December 31,   ------------------------  December 31, ----------------
                                1996       1997    1998      1999        1999      1999     2000
                          ---------------- -----  -------  --------  ------------ -------  -------
                                                 (dollars in thousands)
<S>                       <C>              <C>    <C>      <C>       <C>          <C>      <C>
Statement of Operations
 Data:
Revenues:
 Software licenses......       $ --        $ --   $    60  $    874    $  1,953   $    89  $ 1,396
 Subscription fees and
  other services........         --          --       --        761         994        79      480
                               -----       -----  -------  --------    --------   -------  -------
 Total revenues.........         --          --        60     1,635       2,947       168    1,876
Cost of revenues:
 Software licenses......         --          --         3        93         196         7      153
 Subscription fees and
  other services * .....         --          --        --       134         254        29    1,041
                               -----       -----  -------  --------    --------   -------  -------
 Total cost of
  revenues..............         --          --         3       227         450        36    1,194
                               -----       -----  -------  --------    --------   -------  -------
Gross profit............         --          --        57     1,408       2,497       132      682
Operating expenses:
 Research and
  development * ........         335         373    1,728     5,608       6,800       822    1,911
 Sales and marketing *
  ......................          26          53    1,445     4,583       5,992       802    2,404
 General and
  administrative *......         132          97      977     1,373       3,298       279      686
 Acquired in-process
  research and
  development...........         --          --       --      2,780         --        --       --
 Amortization of
  intangibles...........         --          --       --        --        3,253       --       810
 Amortization of stock
  compensation..........         --          --       --        162       1,120       --       457
                               -----       -----  -------  --------    --------   -------  -------
 Total operating
  expenses..............         493         523    4,150    14,506      20,463     1,903    6,268
                               -----       -----  -------  --------    --------   -------  -------
Operating loss..........        (493)       (523)  (4,093)  (13,098)    (17,966)   (1,771)  (5,586)
Interest income
 (expense), net.........         --           (7)     103       296         121         7      128
                               -----       -----  -------  --------    --------   -------  -------
Net loss................       $(493)      $(530) $(3,990) $(12,802)   $(17,845)  $(1,764) $(5,458)
                               =====       =====  =======  ========    ========   =======  =======
-------
*  Amortization of stock compensation:
 Cost of revenues:
  Subscription fees and
   other services.......                                   $      4                        $     5
 Research and
  development...........                                         31                            146
 Sales and marketing....                                         78                            120
 General and
  administrative........                                         49                            186
                                                           --------                        -------
                                                           $    162                        $   457
                                                           ========                        =======
</TABLE>


                                       18
<PAGE>

Per share data

   The table below reflects our historical and pro forma net loss per share for
the periods indicated and the weighted average historical and pro forma number
of shares used to calculate net loss per share for the periods. The historical
net loss per share has been calculated on the basis of the weighted average
number of shares of common stock actually outstanding during the periods
indicated. From March 20, 1998 until March 26, 1999, we did not have any shares
of common stock outstanding due to their conversion into preferred stock in
March 1998. We do not believe our historical net loss per share for 1998 and
the three months ended March 31, 1999 are meaningful because they are
substantially greater than they would have been had our common stock been
outstanding during all of 1998 and the first quarter of 1999.
<TABLE>
<CAPTION>
                              From
                          February 6,       Year Ended          Three Months Ended
                          1996 through     December 31,             March 31,
                          December 31, -----------------------  -------------------
                              1996      1997    1998    1999       1999      2000
                          ------------ ------  ------  -------  ----------  -------
                                          (shares in thousands)
Per Share Data:
<S>                       <C>          <C>     <C>     <C>      <C>         <C>
Basic and diluted net
 loss per share.........     $(1.01)   $(0.85) $(8.01) $(48.86) $(2,322.60) $ (2.31)
                             ======    ======  ======  =======  ==========  =======
Shares used in
 computation of basic
 and diluted net loss
 per share..............        487       623     498      262           1    2,364
                             ======    ======  ======  =======  ==========  =======
Pro forma basic and
 diluted net loss per
 share..................                               $ (1.24)             $ (0.36)
                                                       =======              =======
Shares used in pro forma
 basic and diluted net
 loss
 per share..............                                10,326               15,135
                                                       =======              =======
</TABLE>

   The pro forma financial data as of March 31, 2000 shown below assumes the
conversion of all of our outstanding shares of preferred stock into common
stock upon the closing of this offering. The pro forma as adjusted data assumes
this conversion and the sale of the 4,000,000 shares of common stock that we
are offering under this prospectus at an initial public offering price of
$10.00 per share and after deducting the underwriting discounts and commissions
and estimated offering expenses.

<TABLE>
<CAPTION>
                              As of December 31,               As of March 31, 2000
                         --------------------------------  ------------------------------
                                                                               Pro Forma
                         1996    1997     1998     1999    Actual   Pro Forma As Adjusted
                         -----  -------  -------  -------  -------  --------- -----------
                                           (dollars in thousands)
<S>                      <C>    <C>      <C>      <C>      <C>      <C>       <C>
Balance Sheet Data:
Cash and cash
 equivalents............ $ 101  $   518  $ 1,163  $14,023  $10,983   $10,983    $46,983
Working capital.........    36     (478)     644   13,325    9,616     9,616     45,616
Total assets............   140      627    2,436   37,692   33,033    33,033     69,033
Long-term obligations...   --        50      --     2,240    2,587     2,587      2,587
Convertible preferred
 stock..................   566      568    6,748   34,256   34,316       --         --
Total stockholders'
 equity (deficiency)....  (493)  (1,023)  (5,032)  (4,286)  (8,811)   25,505     61,505
</TABLE>

                                       19
<PAGE>

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

   Business

   We develop and market software products and services that organizations use
to conduct valid, secure and provable transactions over the Internet. From 1996
through 1998, we primarily focused our activities on:

  .  conducting research and development,

  .  raising capital,

  .  recruiting personnel and

  .  establishing distribution channels for our software products.

   We started commercial shipments of our validation authority software
products during the first quarter of 1999, and substantially all of our
revenues have come from the licensing of our validation authority products. We
also offer secure data transfer products and digital receipt products and
services which we obtained from our acquisition of Receipt.com in December
1999. As of March 31, 2000, we had over 80 customers, including Hanwha
Corporation, PricewaterhouseCoopers, Society for Worldwide Interbank Financial
Telecommunication, or S.W.I.F.T., Unisys and Visa.

   The general terms of our contracts

   We sell our products and services to enterprise end users who use them to
conduct business within their organization and with their trading partners. Our
contracts with enterprise end users for our validation authority and digital
receipt products consist of a renewable subscription fee that entitles them to
validate or notarize a stated number of transactions during a specified period
and receive maintenance and support services. These customers are required to
renew their subscription to continue using our products and services after
expiration of the initial period. Enterprise end users who purchase our secure
data transfer products enter into perpetual license arrangements for an up
front fee and contract for annual maintenance and support.

   We also sell our products and services to service provider customers who use
them to implement their branded validation and digital receipt products and
services. Our contracts with these customers specify a combination of an
initial software license fee, a renewable subscription fee providing rights
similar to those received by corporate end users, and optional maintenance and
support fees.

   Revenue recognition policy

   During the second quarter of 2000, we introduced new contract arrangements
with our enterprise end-user and service provider customers related to
subscription fees which require us to provide additional services during the
subscription period. These fees will be recognized ratably over the
subscription period, typically one year. By contrast, our previous contract
arrangements, which did not require ongoing service obligations, typically
resulted in recognition of license revenues upon product shipment. Under these
new arrangements the customer is entitled to receive services and use the
license over the license term or the utilization of a stated number of
transactions, if earlier. The fee for the arrangement will be recognized
ratably over the license term and accelerated if the customer utilizes the
stated

                                       20
<PAGE>

maximum number of transactions before the expiration of the term. Upon the
earlier of the expiration of the license term or utilization of the specified
transactions, the customer will be required to pay an additional fee if the
customer desires to continue to use the software. It is not our intention to
grant any concessions for underutilized transactions.

   Our revenues come 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:

  .  an agreement has been signed,

  .  the product has been delivered,

  .  vendor-specific objective evidence exists to allocate a portion of the
     total fee to any undelivered elements of the arrangement.

  .  the fee is fixed or determinable, and

  .  collectibility is probable.

   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 as current accounting standards require. We recognize revenues
when the fees are fixed and determinable. For those arrangements that include
fees that may not be fixed or determinable at the time of shipment, we
recognize revenue when these fees are due and payable. If we do not consider
collectibility probable, we recognize the revenue when the fee is collected.
Any arrangements in the future that include extended payment terms,
cancellation privileges, trial periods or rights to return or exchange software
products will result in the fee not being fixed and determinable.

   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 future subscription 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.

   Acquisition of Receipt.com

   In executing our product development plans, we consider both internal
research and development and the acquisition or licensing of emerging
technologies from third parties. We believe that time-to-market is critical to
success in the rapidly evolving Internet security infrastructure market, where
we must compete with well-established companies and where our products must
integrate with the predominant operating systems and network protocols within
the enterprise computing environment. We must continually evaluate whether it
is more efficient and effective to develop a given solution internally, or to
license or acquire a technology. We acquired Receipt.com in December 1999 for
approximately $21.2 million in common and preferred stock and the assumption of
liabilities. We accounted for the acquisition using the purchase method of
accounting. Receipt.com is a provider of secure data transfer software and, at
the date of acquisition, was in the process of developing its digital receipt
software product.

                                       21
<PAGE>

   If our acquisition of Receipt.com had taken place on January 1, 1999, we
would have had pro forma combined revenues of $2.9 million in 1999. Our pro
forma combined costs and expenses for 1999 would have been $20.9 million,
including $4.8 million of costs and expenses from Receipt.com, $3.2 million in
amortization of intangible assets and $933,000 of deferred compensation expense
for the acquisition. Pro forma combined other income for the year would have
been $121,000 and net loss would have been $17.8 million, or $7.30 per share.
This pro forma data does not include a one-time charge of $2.8 million for
acquired in-process research and development arising from the acquisition, as
it was a material nonrecurring charge. Because of the significance of this
acquisition, our historical financial condition and results of operations
should not be considered as indicative of our future performance. Likewise, our
financial condition and results of operations as of dates and for periods after
the acquisition are not comparable to our financial condition and results of
operations before the acquisition.

   We have incurred substantial costs to develop our technologies and software
products, to recruit and train personnel for our engineering, sales and
marketing and technical support organizations, and to establish an
administrative department. We have incurred net losses in each year of
operation and had an accumulated deficit of $23.2 million as of March 31, 2000.
We expect that our operating expenses will increase substantially in future
periods as we continue to grow our domestic and international sales and
marketing organizations, increase research and development, broaden technical
support services and expand our data center operations. We also expect to incur
non-cash expenses relating to amortization of deferred stock compensation,
goodwill and other intangible assets. We have incurred losses and expect to
continue to incur losses.

Results of Operations

   Three Months Ended March 31, 2000 and 1999

   Revenues

   Revenues increased to $1.9 million for the three months ended March 31, 2000
from $168,000 for the three months ended March 31, 1999 due to increased sales
of software licenses in the amount of $1.3 million related to licenses of our
products and increased subscription fees and other services in the amount of
$401,000 related to increased consulting and support services. Revenues for the
three months ended March 31, 2000 included $1.4 million for software license
revenues and $480,000 for subscription fees and other services revenues.

   Cost of revenues

   Cost of software license revenues. Cost of software license revenues
consists of royalty costs related to technology licensed from third parties.
These costs increased $146,000 to $153,000 for the three months ended March 31,
2000 from $7,000 for the three months ended March 31, 1999 due to increased
software license revenues.

   Cost of subscription fees and other services revenues. Cost of subscription
fees and other services relate to operating our secure data center and
providing consulting and support services. During the three months ended March
31, 2000, these costs included compensation and other personnel-related
expenses of $360,000 and depreciation of $305,000. The cost of subscription
fees and other services revenues increased to $1.0 million for the three months
ended March 31, 2000 from $29,000 for the three months ended March 31, 1999.
This increase was due to the inclusion of expenses related to the operation of
our secure data center which

                                       22
<PAGE>

were included in cost of sales for the first time during the quarter ended
March 31, 2000, as the data center became operational at the end of December
1999.

   Operating expenses

   Research and development. Research and development expenses consist of
salaries and other personnel-related costs, third-party consulting services,
and the costs of facilities and computer equipment. Research and development
expenses increased to $1.9 million during the three months ended March 31, 2000
from $822,000 during the three months ended March 31, 1999, an increase of
131.1%, as we continued to invest in the design, testing and deployment of our
products and services. Of this increase, $934,000 related to increases in
salaries and other personnel-related costs.

   Sales and marketing. Sales and marketing expenses consist of costs related
to salaries and other personnel-related costs, sales commissions, tradeshows,
marketing programs, travel, facilities and computer equipment. Sales and
marketing expenses increased to $2.4 million during the three months ended
March 31, 2000 from $802,000 during the three months ended March 31, 1999, an
increase of 199.2%, as we continued to expand our domestic and international
direct sales organization and increased our marketing efforts. Of this
increase, $761,000 related to salaries and other personnel-related costs.

   General and administrative. General and administrative expenses consist of
salaries and other personnel-related costs for our administrative, finance and
human resources employees; legal and accounting services; and facilities costs.
General and administrative expenses increased to $686,000 during the three
months ended March 31, 2000 from $279,000 during the three months ended March
31, 1999, an increase of 145.8%. Of this increase, $253,000 related to salaries
and other personnel-related costs.

   Amortization of intangibles. On December 30,1999, we acquired Receipt.com in
a transaction which was recorded using the purchase method of accounting. With
this purchase, we recorded goodwill of $12.5 million and other intangibles of
$2.3 million. An expense of $810,000 was recorded in the first quarter of 2000
for the amortization of goodwill over a five year period and other intangibles
over three years.

   Amortization of 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 December 31, 1999, we had recorded deferred stock compensation
costs of $3.7 million for stock options we assumed as part of our acquisition
of Receipt.com and an additional $2.3 million related to the grant of other
employee stock options. Deferred stock compensation costs are being amortized
over approximately four years on the single option method, which resulted in an
expense of $457,000 during the three months ended March 31, 2000. We expect to
incur additional deferred stock compensation through the quarter ending June
30, 2000.

   Interest income (expense), net. Interest income (expense), net, consists of
interest earned on cash, cash equivalents and short-term investments offset by
interest expense, primarily incurred on equipment lease obligations. Net
interest income increased to $128,000 during the three months ended March 31,
2000 from an expense of $7,000 during the three months ended March 31, 1999 due
to an increased level of cash available for investment, primarily from the
proceeds of a private equity financing.

                                       23
<PAGE>

  Fiscal Years Ended December 31, 1999, 1998 and 1997

   Revenues

   Total revenues increased to $1.6 million for the year ended December 31,
1999 from $60,000 for the year ended December 31, 1998. Revenues for 1998
related primarily to consulting and licensing of some of our core technology.
We did not recognize any revenues in 1997, as we had not yet released any of
our products for commercial availability. For the year ended December 31, 1999,
software license revenues accounted for 53.5% of our total revenues and
subscription fees and other services revenues accounted for 46.5% of our total
revenues.

   Cost of revenues

   Cost of software license revenues. Cost of software license revenues
increased to $93,000 for the year ended December 31, 1999 from $3,000 for the
year ended December 31, 1998 due to the increase in software license revenues.
Cost of software license revenues as a percentage of software license revenues
was 10.6% for 1999 and 5.0% for 1998.

   Cost of subscription fees and other services revenues. Our cost of
subscription fees and other services revenues increased to $134,000 for the
year ended December 31, 1999. As a percentage of subscription fees and other
services revenues, cost of subscription fees and other services revenues was
17.6% for 1999. During 1999, we incurred substantial development costs to
design and implement a secure data center to support our validation service
offering. The data center became available for commercial operation at the end
of December 1999 and beginning in the first quarter of 2000 our cost of
subscription fees and other services revenues includes the costs of operating
our secure data center. These costs include salaries and other personnel-
related costs, depreciation, telecommunications and other costs of operating
and maintaining a secure data center.

   Operating expenses

   Research and development. Research and development expenses increased to
$5.6 million for the year ended December 31, 1999 from $1.7 million for the
year ended December 31, 1998, an increase of 229.4%. Of this increase, $1.7
million related to salaries and other personnel-related costs, $778,000 related
to facilities costs and $777,000 related to fees for consultants and
contractors. Research and development expenses as a percentage of total
revenues were 342.5% for the year ended December 31, 1999 as we continued to
expand our research and development organization. Our research and development
staff increased to 36 at December 31, 1999 from 9 at December 31, 1998.
Research and development expenses increased to $1.7 million for the year ended
December 31, 1998 from $373,000 for the year ended December 31, 1997. Of this
increase, $591,000 related to salaries and other personnel-related costs,
$354,000 related to facilities costs and $364,000 related to fees for
consultants and contractors.

   Sales and marketing. Sales and marketing expenses increased to $4.6 million
for the year ended December 31, 1999 from $1.4 million for the year ended
December 31, 1998, an increase of 228.6%. Sales and marketing expenses as a
percentage of total revenues were 280.3% for the year ended December 31, 1999.
As we continued to hire additional sales and marketing personnel, our sales and
marketing costs increased during 1998 and 1999 because of increased salaries
and other personnel-related costs. In 1999, we opened seven sales offices in
the United States as well as sales offices in Amsterdam, Paris and Tokyo.

   General and administrative. General and administrative expenses increased to
$1.4 million for the year ended December 31, 1999 from $1.0 million for the
year ended

                                       24
<PAGE>

December 31, 1998, an increase of 40.0%, due to increases in salaries and other
personnel-related costs to support the increased level of business activities.
General and administrative expenses as a percentage of total revenues were
85.6% for the year ended December 31, 1999. General and administrative expenses
increased to $1.0 million for the year ended December 31, 1998 from $97,000 for
the year ended December 31, 1997. Of this increase, $370,000 related to
salaries and other personnel-related costs, $150,000 related to outside
consulting fees and $146,000 related to legal and accounting fees.

   Acquired in-process research and development. Acquired in-process research
and development of $2.8 million was incurred for our acquisition of Receipt.com
and was charged to expense because technological feasibility had not been
achieved. We believe that at the date of the acquisition, Receipt.com had
completed approximately 60% of the research and development of a system that
stores the digital signatures of the sender and receiver and provides a
verifiable time stamp for each transaction. The remaining efforts for the
development of the digital receipt technology included completion of software
development in several key areas. The key areas are:

  .  management, reporting and access to receipts in the server vault,

  .  application program interfaces, and

  .  the completion of a toolkit for developers who need to add digital
     receipt functionality to their applications.

We incurred approximately 30 person-months of additional development since the
acquisition to complete the initial development of the receipt technology in
March 2000.

   The values assigned to the acquired in-process research and development were
determined by:

  .  estimating the costs to develop the purchased in-process technology into
     a commercially viable product,

  .  estimating the resulting net cash flows from the product and

  .  discounting the net cash flows to their present value.

The revenue projections that were used to value the acquired in-process
research and development were based on estimates of relevant market sizes,
growth factors and expected trends in technology. Operating expenses were
estimated based on historical results and anticipated profit margins. The rates
utilized to discount the net cash flows to their present value were based on
cost of capital calculations. Due to the nature of the forecast and risks of
the projected growth, profitability and the developmental nature of the product
at the time of the acquisition, we used a discount rate of 27.5% to value the
acquired in-process research and development. We determined that this discount
rate was appropriate for this product development and the uncertainties in the
economic estimates described above. At the time of this acquisition, we
determined if the acquired in-process research and development product was not
commercially successful, our business would be materially adversely affected
and the value of other acquired intangible assets would become impaired.

   Amortized stock compensation. As of December 31, 1999, we have recorded
deferred stock compensation costs of $3.7 million for stock options we assumed
as part of our acquisition of Receipt.com and an additional $2.3 million
related to the grant of other employee stock options. These deferred costs are
being amortized over approximately four years on the single option method. Our
results from operations will include deferred compensation expense at least
through 2004. We recognized $162,000 of this expense during the year ended
December 31, 1999.

                                       25
<PAGE>

   Interest income (expense), net. Interest income increased to $477,000 for
the year ended December 31, 1999 from $125,000 for the year ended December 31,
1998, primarily due to interest earned on the proceeds from the August 1999
private placement of our preferred stock. Interest expense for the year ended
December 31, 1999 increased to $181,000 from $22,000 for the year ended
December 31, 1998 due to interest on our equipment loans and leases.

   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, 1999, we had net operating loss carryforwards of $17.5 million for federal
income tax purposes and $11.4 million for state income tax purposes. These net
operating loss carryforwards expire at various times through 2004 if they are
not used.

   We have placed a valuation allowance against our net deferred tax assets to
reduce them to amounts that we believe are more likely than not to be realized.
The allowance totaled $8.0 million at December 31, 1999, resulting in no net
deferred asset. We evaluate on a quarterly basis the recoverability of net
deferred tax assets and the level of the valuation allowance. When we have
determined that it is more likely than not that the net deferred tax assets are
realizable, we will reduce the valuation allowance.

                                       26
<PAGE>

Quarterly Results of Operations

   This table presents unaudited consolidated statements of operations data for
the five quarters following the general availability of our products in January
1999 through March 31, 2000, as well as this information expressed as a
percentage of our total revenues for the periods indicated. The financial
results of Receipt.com are excluded from all periods presented except for the
three months ended March 31, 2000. This information comes from our unaudited
consolidated financial statements which have been prepared on the same basis as
the audited consolidated financial statements contained in this prospectus and
include all adjustments, consisting only of normal recurring adjustments, that
we considered necessary for a fair presentation of this information. Operating
results for any quarter are not necessarily indicative of results for any
future period.

<TABLE>
<CAPTION>
                                         Three Months Ended
                            ----------------------------------------------------
                            Mar. 31,   June 30,   Sept. 30,  Dec. 31,   Mar. 31,
                              1999       1999       1999       1999       2000
                            --------   --------   ---------  --------   --------
                                       (amounts in thousands)
<S>                         <C>        <C>        <C>        <C>        <C>
Revenues:
 Software licenses........  $     89   $    29     $   130   $   626    $ 1,396
 Subscription fees and
  other services..........        79       222         145       315        480
                            --------   -------     -------   -------    -------
 Total revenues...........       168       251         275       941      1,876
                            --------   -------     -------   -------    -------
Cost of revenues:
 Software licenses........         7        11          23        52        153
 Subscription fees and
  other services..........        29        43          30        32      1,041
                            --------   -------     -------   -------    -------
 Total cost of revenues...        36        54          53        84      1,194
Gross profit..............       132       197         222       857        682
Operating expenses:
 Research and
  development.............       822       913       1,245     2,628      1,911
 Sales and marketing......       802       813       1,176     1,792      2,404
 General and
  administrative..........       279       282         313       499        686
 Acquired in-process
  research and
  development.............       --        --          --      2,780        --
 Amortization of
  intangibles.............       --        --          --        --         810
 Amortized stock
  compensation............       --        --           73        89        457
                            --------   -------     -------   -------    -------
 Total operating
  expenses................     1,903     2,008       2,807     7,788      6,268
Operating loss............    (1,771)   (1,811)     (2,585)   (6,931)    (5,586)
Interest income (expense),
 net......................         7       (14)        148       155        128
                            --------   -------     -------   -------    -------
Net loss..................  $ (1,764)  $(1,825)    $(2,437)  $(6,776)   $(5,458)
                            ========   =======     =======   =======    =======
<CAPTION>
                                         Three Months Ended
                            ----------------------------------------------------
                            Mar. 31,   June 30,   Sept. 30,  Dec. 31,   Mar. 31,
                              1999       1999       1999       1999       2000
                            --------   --------   ---------  --------   --------
<S>                         <C>        <C>        <C>        <C>        <C>
Revenues:
 Software licenses........      53.0%     11.6%       47.3%     66.5%      74.4%
 Subscription fees and
  other services..........      47.0      88.4        52.7      33.5       25.6
                            --------   -------     -------   -------    -------
 Total revenues...........     100.0     100.0       100.0     100.0      100.0
Cost of revenues:
 Software licenses........       4.2       4.4         8.4       5.5        8.1
 Subscription fees and
  other services..........      17.3      17.1        10.9       3.4       55.5
                            --------   -------     -------   -------    -------
 Total cost of revenues...      21.5      21.5        19.3       8.9       63.6
Gross margin..............      78.6      78.5        80.7      91.2       36.4
Operating expenses:
 Research and
  development.............     489.3     363.7       452.7     279.3      101.9
 Sales and marketing......     477.4     323.9       427.6     190.5      128.1
 General and
  administrative..........     166.1     112.4       113.8      53.0       36.7
 Acquired in-process
  research and
  development.............       --        --          --      295.4        --
 Amortization of
  intangibles.............       --        --          --        --        43.2
 Amortized stock
  compensation............       --        --         26.5       9.5       24.4
                            --------   -------     -------   -------    -------
 Total operating
  expenses................   1,132.8     800.0     1,020.7     827.7      334.2
Operating loss............  (1,054.2)   (721.5)     (940.0)   (736.5)    (297.9)
Interest income (expense),
 net......................       4.2      (5.6)       53.8      16.2        6.8
                            --------   -------     -------   -------    -------
Net loss..................  (1,050.0)%  (727.1)%    (886.4)%  (720.3)%   (291.1)%
                            ========   =======     =======   =======    =======
</TABLE>

                                       27
<PAGE>

   Revenues

   Software license revenues. Our software license revenues have generally
increased in every quarter after we began commercial shipments of our initial
validation authority software products in the first quarter of 1999. Software
license revenues decreased in the second quarter of 1999 compared to the first
quarter of 1999 due to the variability of initial sales. The generally
increasing trend resulted from growing market acceptance of our products and
services. Software license revenues in the fourth quarter of 1999 and the first
quarter of 2000 increased significantly as we gained additional market
acceptance for our products and were able to offer products resulting from our
acquisition of Receipt.com.

   Subscription fees and other services revenues. Revenues from our
subscription fees and other services revenues have increased in each quarter in
the periods presented, except for the third quarter of 1999. The generally
increasing trend resulted from increases in the number of, and fees from,
consulting engagements and, to a lesser extent, a growing base of maintenance
and support revenues. The decrease in revenues from subscription fees and other
services on an absolute dollar basis and as a percentage of revenues in the
quarter ended September 30, 1999 as compared to the preceding quarter was due
to a lower level of consulting fees.

   Costs of revenues

   Cost of software license revenues. Cost of software license revenues, which
consist primarily of royalty costs to third parties, have generally increased
each quarter since we began commercial sales of our products in the first
quarter of 1999 due to increased sales of our software products.

   Cost of subscription fees and other services revenues. Cost of subscription
fees and other services revenues during 1999 fluctuated due to the amount of
revenues from various consulting projects. The significant increase in costs
during the quarter ended March 31, 2000 resulted primarily from the costs
related to operating our secure data center that became commercially
operational at the end of December 1999.

   Operating expenses

   Research and development. Research and development expenses, except for the
first quarter of 2000, continued to grow during the five quarters ended March
31, 2000 as we continued to develop new products and enhance our products and
services. Until the first quarter of the year 2000, research and development
expenses also included costs for our secure data center. Research and
development expenses declined in the first quarter of 2000 partly because of
the reclassification of secure data center costs to costs of revenues which was
partially offset by the increased research and development expenses resulting
from the Receipt.com acquisition. We believe that continued investment in
research and development is critical to attaining our strategic objectives and
we expect these expenses to increase significantly in absolute dollars in
future periods.

   Sales and marketing. Sales and marketing expenses have increased since we
started to ship our validation authority software product in the first quarter
of 1999 as we have continued to build our sales and marketing organization. The
primary reasons for these increases are increased personnel and associated
sales commissions, expanded marketing programs and expansion of regional sales
offices. The three months ended March 31, 2000 reflect additional sales and
marketing expenses resulting from the Receipt.com acquisition. We expect that
sales and marketing expenses will increase in absolute dollars in future
periods as we continue to add personnel and expand our sales and marketing
efforts.

                                       28
<PAGE>

   General and administrative. General and administrative expenses have
generally grown during the five quarters ended March 31, 2000. We have
continued to increase the number of general and administrative personnel to
support our growing organization and transaction volume. We expect that general
and administrative expenses will increase in absolute dollars in future periods
as we add personnel to support the anticipated growth in our business and incur
costs related to operating as a public company.

   Acquired in-process research and development; amortization of
intangibles. Our operating expenses for the fourth quarter of 1999 included
$2.8 million for acquired in-process research and development, and our expenses
for the first quarter of 2000 included $810,000 for the amortization of
intangibles. Both of these items were attributable to our acquisition of
Receipt.com in the fourth quarter of 1999.

   Amortization of stock compensation. We recorded $2.4 million of deferred
stock compensation during the quarter ended March 31, 2000 related to stock
options granted during the period. We recognized $457,000 in amortized stock
compensation expense during the quarter ended March 31, 2000.

   You should not rely on quarter-to-quarter comparisons of our results of
operations as indicators of future performance due to our limited operating
history, the early stage of our markets and factors discussed in Risk Factors
above and elsewhere in this prospectus. In particular, because our base of
customers and the number of additional customer licenses we enter into each
quarter are still relatively small, the loss or deferral of a small number of
anticipated large customer orders in any quarter could result in a significant
variability in revenues for that quarter. We acquired Receipt.com in December
1999 and our results of operations for periods after that acquisition are not
and will not be comparable to our results of operations for prior periods. If
in some future periods our operating results are below the expectations of
public market analysts or investors, the price of our common stock may fall.

Liquidity and Capital Resources

   Funding to date

   We have funded our operations through March 31, 2000 through the private
sale of our equity securities with aggregate net proceeds of approximately
$30.0 million. At March 31, 2000, we had cash and cash equivalents and short-
term investments of $11.0 million and a secured bank credit line of $1.0
million. In April 2000, the bank credit line was increased to $2.5 million, and
borrowings of $1.0 million were outstanding under that line as of April 30,
2000. We have pledged substantially all of our assets, including patents and
other intellectual property, to secure borrowings under this facility. The bank
credit line requires us to maintain a defined quick ratio of 2.5 and a tangible
net worth of $5.0 million. At April 30, 2000, we were in compliance with these
financial covenants. We anticipate using available cash to provide working
capital and otherwise fund our operations and to purchase capital equipment and
make leasehold improvements.

   Uses of cash

   Net cash used in operating activities of $383,000 in 1997, $3.8 million in
1998, $6.6 million in 1999 and $6.2 million in the three months ended March 31,
2000, was primarily used to fund our operating losses. Net cash used for
operating activities in the three months ended March 31, 2000 related primarily
to an operating loss of $5.5 million partially offset by non-cash depreciation
and amortization expenses of $1.6 million. Net cash used for operating
activities in 1999 related primarily to an operating loss of $12.8 million
partially offset by non-cash depreciation and amortization expenses of $3.7
million, an increase in accounts payable of $2.5 million and other changes in
working capital. Net cash used for operating activities in 1997 and 1998
related primarily to funding our operating losses.

                                       29
<PAGE>

   Net cash used in investing activities was $855,000 in 1998 and $4.4 million
in 1999, and primarily related to capital equipment expenditures and net short-
term investments. Net cash from investing activities of $2.6 million for the
three months ended March 31, 2000 was provided by the sale of short-term
investments offset in part by capital equipment expenditures. Capital equipment
expenditures primarily related to the purchase of computer hardware and
software, office furniture and equipment, and leasehold improvements. We expect
continued increases in capital expenditures and lease commitments due to growth
in operations, infrastructure and personnel.

   Sources of cash

   Net cash provided by financing activities was $830,000 in 1997, $5.3 million
in 1998, $23.9 million in 1999 and $470,000 for the three months ended March
31, 2000. Net cash was provided primarily from sales of capital stock and, to a
more limited extent, borrowings and the exercise of warrants and stock options.

   Future funding requirements

   We expect to experience significant growth in our operating expenses,
particularly research and development and sales and marketing expenses, and our
capital expenditures to execute our business strategy. We anticipate that these
operating expenses and planned capital expenditures will constitute a material
use of our cash resources. We may utilize cash resources to fund acquisitions
of, or investments in, complementary businesses, technologies or product lines.

   We believe that the net proceeds from the sale of the common stock in this
offering, current cash balances and borrowing available under our credit
facilities will be sufficient to meet our working capital needs for at least
the next 12 months. After that, we may require additional funds. We may not be
able to obtain adequate or favorable financing at that time. Any additional
financing may dilute your ownership interest in ValiCert. New equity securities
could have rights senior to those of our common stockholders.

Recent Accounting Pronouncements

   In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. This statement establishes accounting and reporting
standards for derivative instruments, including limited derivative instruments
embedded in other contracts and for hedging activities. This statement is
effective for financial statements for all fiscal quarters of all fiscal years
beginning after June 15, 2000. We intend to adopt this statement when required.
However, this statement is not expected to have a material impact on our
financial position or results of operations.

Change in Accountants

   On October 15, 1999, PricewaterhouseCoopers LLP resigned as our independent
accountants. We subsequently appointed Deloitte & Touche LLP as our independent
auditors. Our decision to change independent auditors was approved by our board
of directors. There were no disagreements with the former accountants during
the fiscal years ended December 31, 1997 and 1998 or during any subsequent
interim period preceding their replacement on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedures, which, if not resolved to the former accountants' satisfaction,
would

                                       30
<PAGE>

have caused them to make reference to the disagreement in their reports. The
former independent accountants issued an unqualified report on the financial
statements as of and for the years ended December 31, 1997 and 1998. We did not
consult with Deloitte & Touche LLP on any accounting or financial reporting
matters in the periods before their appointment.

Quantitative and Qualitative Disclosures About Market Risk

   Most of our debt obligations have been at fixed interest rates, and the fair
value of these obligations is affected by changes in market interest rates. Our
cash equivalents and short-term investments are primarily comprised of high-
grade commercial paper and highly liquid deposits with financial institutions.
A change in market interest rates does not materially affect the fair value of
the underlying securities.


                                       31
<PAGE>

                                    BUSINESS

Overview

   ValiCert is a leading provider of end-to-end infrastructure software
products and services that organizations use to conduct valid, secure and
provable transactions over the Internet. We believe that our products and
services reduce the costs of fraudulent transactions and security breaches,
including direct losses, damage to reputation and productivity losses resulting
from downtime. Our customers include Aetna, Dell, Identrus, NTT Communications
and PricewaterhouseCoopers.

   Our validation authority software products and services verify the status of
digital certificates and establish the authority of a party before conducting a
transaction. Our secure data transfer software products enable the reliable and
tamper-proof transmission of data during a transaction. Our digital receipt
software products and services create and archive detailed information to
provide a provable audit trail after a transaction. To ensure broad application
and platform support for our products and services, we have formed strategic
alliances with Baltimore Technologies, Entrust, IBM, Microsoft,
Netscape/iPlanet and Trintech. We believe that our products, services and
strategic alliances provide a comprehensive solution to address the rapidly
growing Internet security software and services market.

Industry Background

   Growth of Internet commerce and communications

   The Internet, with its global reach, cost-effectiveness and ability to
enable real-time interactions, is fundamentally 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 been traditionally 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. We call
these transactions e-transactions, which include:

  .  electronic commerce and payments,

  .  electronic data interchange,

  .  file sharing,

  .  electronic document signing and

  .  business critical e-mail.

Forrester Research, an independent research firm, reported that the companies
it surveyed expect 78% of their customers and 65% of their trading partners to
conduct electronic commerce with them by 2002. To accommodate this anticipated
growth, organizations are making sizeable investments in Internet
infrastructure products and services, including commerce applications, content
management tools, analytic tools, customer service tools, application servers
and integration software. Forrester Research estimates that the domestic market
for these infrastructure products and services will grow from $13.7 billion in
1999 to $79.3 billion by 2003.


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<PAGE>

   Requirement for valid, secure and provable transactions

   As an open network, the Internet does not restrict access and does not
inherently offer the degree of trust, security and provability that we believe
organizations and individuals increasingly require to ensure confidence in
electronic 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 to their reputation and economic
loss through fraud. To minimize these risks, the Internet requires a framework
of trust that meets users' security requirements before, during and after a
transaction:

  .  Before a transaction, the validity of the credentials used by the
     participants must be verified and the authority of the participants to
     conduct the specific transaction must be confirmed. We refer to this
     process as validation.

  .  During a transaction, the transmission of information must be secure and
     reliable to ensure the integrity and confidentiality of the transaction.
     We refer to this process as secure data transfer.

  .  After a transaction, a receipt or confirmation that records the details
     of the transaction must be promptly generated and archived. This receipt
     must typically include the type of transaction and the time at which it
     occurred. We refer to the process of generating a receipt as transaction
     notarization. We refer to the process of using a receipt to prove a
     transaction occurred as non-repudiation.

   In the physical world, this framework of trust is achieved through a
combination of business and legal practices and policies. These procedures
often include the use of physical credentials, a third-party entity to validate
those credentials, a secure medium to transmit transaction information and a
receipt to provide proof of the transaction. For example, an organization
making a purchase may use a corporate credit card as a physical credential to
establish its identity and credit worthiness, and the vendor will typically
rely on a third-party clearinghouse to validate the purchase. The transaction
data would be transmitted over a secure private network and a point of sale
system would then issue a time-stamped paper receipt as proof of the
transaction's occurrence. This framework of trust is essential as the number of
credentials, people and organizations involved increases and as the number and
value of the transactions conducted rise.

   Evolution of Internet security infrastructure

   Public key infrastructure has emerged as a critical element for creating
this framework of trust for the Internet. Based on public key cryptography,
public key infrastructure, or 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. Each entity within an installed public key
infrastructure is assigned a public key, which is provided to others, and a
private key, which the entity keeps confidential. Information encrypted using
the public key can only be decrypted, or unscrambled, using the corresponding
private key. Conversely, information signed with the private key can be
verified as authentic with the corresponding public key.

   As public key infrastructure is incorporated into various computer
applications, the number of companies that market and distribute digital
certificate products and services has increased. The software product or the
entity that issues and manages the life cycle of digital certificates is
referred to as a certificate authority. As organizations increase their usage
of the Internet to

                                       33
<PAGE>

conduct e-transactions, industry spending on public key infrastructure and
related security infrastructure components is expected to grow rapidly.
International Data Corporation estimates that enterprises will spend $10.5
billion on Internet security software and services by 2003, up from $3.7
billion in 1998.

   Use of digital certificates and the need for validation before a transaction

   Digital certificates act as proofs of identity for users, servers, routers,
downloaded programs and other components in a network environment. These
credentials establish an entity's membership in a specific organization or
community. They have become the primary mechanism for verifying the identities
of parties involved in a transaction before it is executed. 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
issued by other vendors. 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
cross 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 of duties between a validation authority and a certificate
authority mitigates the consequences of certificate authority compromise.

   Securing data during a transaction

   Organizations use a variety of methods to securely transfer data across a
network while conducting an e-transaction. Dedicated private networks, virtual
private networks, referred to as VPNs, and secure e-mail are mechanisms for
ensuring the private and tamper-proof transmission of data. While these
mechanisms provide security, they also typically add set-up time, cost and
complexity to the enterprise's business processes. Enterprises that employ
dedicated private networks, VPNs and secure e-mail can generally securely
transfer data only to those customers, suppliers or trading partners that
employ the same proprietary technology. While these methods are suitable for
some business applications, they are not designed to be an automated, highly-
scalable solution that supports the transfer of large data files, readily
integrates with existing systems, provides notification capabilities, and
generates a secure audit trail for each transmission.

   Creating an audit trail after a transaction

   To provide an audit trail for e-transactions, a framework of trust must
include detailed proof of occurrence. A digital receipt is a securely
documented and archived proof of a transaction and provides the parties to the
transaction with a means for non-repudiation should a dispute arise at a later
date. E-mail confirmations, proprietary receipts and web-based confirmations
are used to prove the occurrence of a transaction. These mechanisms are
typically tied to specific business applications. For example, online stock
trading, consumer

                                       34
<PAGE>

retail purchasing and Internet-based electronic payments are generally limited
in scope and not extensible.

   Many public key infrastructure-based products also include varying degrees
of time stamping functionality to record the time and other details about a
transaction. These time stamping methods often record the information in data
formats that are not easily shared among applications. Transactions over the
Internet are increasingly being conducted using a common format called
extensible markup language, which facilitates the exchange of information
between disparate computer systems and applications. We believe that a digital
receipt based on extensible markup language enables the flexible exchange of
proof of occurrence details among different entities while meeting
organizations' requirements for non-repudiation.

   Need for an end-to-end, secure infrastructure for e-transactions

   We believe that organizations require a trusted, extensible infrastructure
to conduct valid, secure and provable transactions over the Internet. Current
approaches do not provide the necessary trusted infrastructure because they
generally do not address all stages of a transaction, are limited in scope and
are often inflexible, expensive and proprietary in nature. In many cases, the
vendors of security products do not have the operational expertise or have not
built the requisite data center infrastructure to deliver trust services. Trust
services are security services that are offered to organizations that wish to
outsource validation, notarization and non-repudiation to a third party.
Vendors that do not offer trust services can only sell software licenses and
will not be able to provide their customers the flexibility to purchase either
the software or outsourced services.

   We believe that to establish a trusted infrastructure for e-transactions,
organizations require:

  .  end-to-end, modular technologies that effectively address an
     organization's trust requirements before, during and after a
     transaction;

  .  flexible deployment alternatives, including internally managed,
     outsourced and service provider hosted models;

  .  the ability to support a broad range of applications and platforms to
     accommodate investments in public key infrastructure, applications and
     platforms; and

  .  products and services that are based on open standards to provide the
     scalability, flexibility and interoperability that is required among
     multiple certificate authority vendors and payment systems.

The ValiCert Solution

   We offer a suite of end-to-end infrastructure software products and services
that organizations use to conduct valid, secure and provable e-transactions.
Our scalable, high-performance software products and services are based on open
standards and incorporate our technologies, including our certificate
validation mechanisms, stateful validation, secure data transfer and extensible
markup language-based digital receipt technologies. We have established a broad
range of relationships with application and platform vendors which we believe
will enable the widespread adoption of our validation, secure transport and
digital receipt software products and services.

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<PAGE>

   Key components of our offering include:

   End-to-end, modular secure infrastructure software products and services. We
offer end-to-end, modular secure infrastructure software products and services
that address the security requirements at every stage of a transaction. We
provide validation of credentials before a transaction, the secure transfer of
data during a transaction, and transaction notarization and non-repudiation
after a transaction. We have developed technologies to address the performance,
interoperability and scalability issues of digital certificates. We have
designed our architecture to reduce network overhead and increase the
performance of applications which use digital certificates. Customers may
implement one element of our modular software products and services and expand
to include others as their needs require.

   Flexible deployment models. We believe that our software products and
services are attractive to a broad range of customers because we offer a number
of deployment models to meet specific customer requirements. We collectively
refer to this as all-sourcing, which gives our customers three choices:

   .  insourced hosting of our software;

   .  outsourcing to us as a trusted third party service provider; or

   .  outsourcing to one of our service provider customers.

   Customers can select a model based on their specific business application,
available resources, time to market considerations, and desired level of
control and operational responsibility. Because of the common architecture that
underlies our products and services, our customers may migrate their data and
applications from one deployment model to another as their needs change. Our
products and services can be distributed over one or many computer systems.
This feature enhances scalability and allows some functions of credential
validation and digital receipt issuance and management to be installed at the
customers' locations, while maintaining a secure and reliable link to our
global service for back-end processing.

   Extensive security and trusted practices. We believe that our significant
investments in security and trust practices help customers of our software
products and services conduct transactions with the assurance that the security
of the transactions will be maintained. We have adopted industry-endorsed
practices and procedures for conducting secure transactions and adhere to a
strict operations protocol that has been designed by Internet security industry
experts to exceed typical commercial security requirements. We have invested
substantial time and effort in establishing the physical security and controls
essential to operating a secure, large-scale data center. For example, we use
multiple Internet service providers to ensure the reliability of our Internet
connections and we have taken special precautions to prevent security breaches.
Our network is also designed to provide redundancy in case of equipment
failure.

   Certificate authority and payments neutrality. Our products are intended to
support leading certificate authorities and payments solutions. We believe this
neutral position enables our products and services to function as an
independent clearinghouse and complement the infrastructure of entities that
issue digital certificates, authorize transactions and process electronic
payments. Our approach allows our customers to continue to use their
investments in digital certificates and electronic payment applications. We
have established an interoperability lab to ensure the current and future
compatibility of our software products with major certificate authorities,
software applications and platforms, including electronic payments systems. We
also host open trials for industry-standard protocols to promote vendor
interoperability and demonstrate our technical leadership in these areas.

                                       36
<PAGE>

   Broad application and platform support. We have developed a range of
software modules that may be integrated with popular third party software
applications to enable support for secure transactions. Our software
development toolkits are designed to enable application developers and platform
vendors to rapidly and easily add validation and digital receipt capabilities
to their products and services. Our open standards approach allows us to
establish a network of strategic alliances with software application,
certificate authority and platform vendors to ensure broad support for our
products and services. We believe this network increases the value of our
products and services to our customers and provides us with opportunities to
increase our brand awareness and distribution.

   Interoperability and adoption of open standards. Our software products and
services support the major certificate validation protocols. These protocols
include:

  .  certificate revocation list;

  .  certificate revocation list distribution point;

  .  online certificate status protocol; and

  .  our own certificate validation mechanisms.

   We believe that we are the only company that provides support for these
validation protocols in a single set of products and services. We are a
founding member of the Digital Receipt Alliance, an organization of vendors and
users of digital receipt technology, with which we are jointly developing a
standard for extensible markup language digital receipt specifications. We co-
authored and provided one of the first commercial implementations of online
certificate status protocol, which is a widely adopted validation protocol. We
are also the lead author of the simple certificate validation protocol for use
in wireless applications.

The ValiCert Strategy

   Our objective for at least the next 12 months is to further extend our
position as a leading provider of a wide range of software products and
services for use by organizations to conduct valid, secure and provable e-
transactions. Key elements of our strategy include:

   Extend technology leadership and product development. We intend to extend
our technology leadership by continuing to invest in research and development,
and by actively participating in industry standards setting organizations. We
expect to continue to develop and acquire open, flexible and scalable
technologies that can enhance a transaction stream, and to improve our internal
best practices and controls to maintain the security and integrity of our
operations. We participate in a number of standards setting organizations,
including the Internet Engineering Task Force, the Digital Receipt Alliance,
the Wireless Application Protocol forum and the Raddichio consortium for mobile
security standards. We believe that our participation in these groups
influences industry standards and gives us valuable insight into new technology
developments and emerging market opportunities.

   Further establish ValiCert in key industry segments. We have initially
targeted organizations in the financial services, government,
telecommunications and health care segments. These businesses are transaction-
intensive and have a high requirement for security. For example, our software
products and services are used by financial services organizations such as
Identrus, government agencies such as the Defense Information System Agency,
health care companies such as Aetna, and telecommunications companies such as
NTT Communications. We have targeted various business-to-business exchanges
that are becoming transaction clearinghouses in a number of industries. By
taking advantage of our

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<PAGE>

experience in these key industry segments, we believe we are well positioned to
extend our presence in other industries as they rely more on the Internet to
conduct transactions and exchange information.

   Expand global distribution channels. We intend to continue to expand our
global marketing and distribution efforts to address a wide range of markets
and applications for secure infrastructure solutions. We plan to increase the
number of direct sales personnel we have in Europe, Asia and the Americas. We
plan to expand our network of distributors, including software vendors and
system integrators, who either include our software products and services in
their offerings or resell various elements of them. We have international sales
offices in France, Hong Kong, Japan, The Netherlands and the United Kingdom,
and continue to pursue additional global opportunities.

   Grow our service provider business. As part of our marketing strategy, we
are establishing a network of service providers who offer trust services based
on our software products, technology and expertise. We believe that, over time,
this network will represent a global system to validate and notarize
transactions across geographic and organizational boundaries. Our service
provider customers include Bell Canada Emergis, NTT Communications,
PricewaterhouseCoopers and Thomson-CSF/Cashware. By using the brand name and
distribution power of these organizations, we believe that we will be able to
increase the adoption of our products and services. We intend to add
participants to this growing list by targeting service providers in a number of
markets. We believe that this will create a network effect where the utility of
this global system will increase as it expands and will make it more valuable
for current and new participants.

   Expand strategic alliances to broaden the use of our products and
services. To accelerate the widespread adoption of our products and services,
we have entered into technology, marketing or distribution alliances with
industry leaders. We have entered into these types of alliances with companies
that include Baltimore Technologies, Entrust, IBM, Microsoft, Netscape/iPlanet
and Trintech. We plan to expand on existing and establish new strategic
alliances with companies that will integrate our technologies with their
offerings and participate in joint marketing, training and sales arrangements.
We believe these alliances will enable us to accelerate the adoption of our
products and services.

Products and Services

   We offer end-to-end infrastructure software products and services that
combine an extensible, modular architecture with advanced security and
scalability to enable valid, secure and provable e-transactions. Our software
products and services are available in three deployment models: trusted
outsourced services; offerings for service providers and business-to-business
exchanges; and in-house software for enterprises. Our software products and
services operate on multiple platforms, including Windows NT, Solaris, AIX, HP-
UX, Linux and some mainframe environments. The pricing of our software products
and services consists of up front license fees, subscription fees based on
transaction volume and maintenance and support fees. Revenues from a typical
contract range from $25,000 to $250,000.

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<PAGE>

   The figure below illustrates our software products and services:

[The diagram shows an oval with the words validate, secure and prove, at the
top and bottom of the oval. A computer for each of party 1 and party 2 are
shown at the left and right sides of the oval. ValiCert's logo is at the center
of the oval. There is a royal blue circle with a white "V" and "C" at the top
right of the logo. Underneath the circle is the word ValiCert. There are eleven
dots underneath "Cert" in the word ValiCert. At the bottom of the logo are the
words Securing e-Transactions. The diagram shows three boxes beneath the oval.
The first box contains the words validation authority products & services. The
second box contains the words secure data transfer products. The third box
contains the words digital receipt products & services.]

   This table outlines our software products and services offering:

<TABLE>
<CAPTION>
   Products and Services                       Description
   ---------------------                       -----------
<S>                         <C>
Validation Authority
 Products and Services
  Enterprise VA Suite...... Enterprise version of validation software product
  Certificate VA Suite..... Base level original equipment manufacturer version
                            of validation software product
  Affiliate VA Suite....... Service provider version of validation software
                            product
  Global VA Service........ Complete, outsourced or backup validation service

Secure Data Transfer
 Products
  SecureTransport.......... Secure, reliable transport software product

Digital Receipt Products
 and Services
  Receipt Suite............ Enterprise version of digital receipt software
                            product
  Receipt Affiliate........ Service provider version of digital receipt
                            software product
  Receipt Service.......... Complete, outsourced digital receipt service

Professional Services...... Consulting services, product and service training
                            and custom development and support
</TABLE>

                                       39
<PAGE>

   Validation authority software products and services

   We provide a comprehensive line of software products and services for the
high-performance validation of transactions. These products and services 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 and services are based on
our multi-protocol architecture which enables interoperability with leading
certificate authorities, directory services and business applications.

   We offer these validation authority software products and services:
Enterprise VA Suite, Certificate VA Suite, Affiliate VA Suite and Global VA
Service. We offer a set of common component software products, VA Publisher,
Validator Toolkit and Validator Suite, to facilitate the implementation of our
validation authority products and services.

   Validation Authority Suites. Our Enterprise VA Suite, Certificate VA Suite
and Affiliate VA Suite enable customers to offer validation capabilities in
their transaction infrastructure.

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

     Certificate VA Server. Our base level original equipment manufacturer
  version of the Enterprise VA Server is designed to enable certificate
  authority vendors to incorporate validation capabilities in their products.
  The Certificate VA Server supports the online certificate status protocol
  validation protocol and our own certificate validation mechanisms and has
  been designed to be easily upgraded to the Enterprise VA Server.

     Affiliate VA Server. This server software provides functionality that is
  similar to our Enterprise VA Server but is designed for service providers
  and business-to-business exchanges. We license our Affiliate VA Server for
  use by third party trust service providers. Sometimes our service provider
  customers are contractually required to mirror their revocation data to our
  Global VA Service and have the right to mirror the Global VA Service data
  to their local sites for incorporation into their own service offering.
  This requirement is intended to allow for efficient, global cross-
  validation among organizations.

   Global VA Service. The Global VA Service is an outsourced validation service
that we host and operate. This service, which is designed to be available 24
hours a day, seven days a week from our secure data facility, is designed for
customers that wish to outsource the validation authority function to a third
party or validate transactions with entities outside their internal boundaries.
The Global VA Service accepts data from various organizations that wish to
broadly distribute information about credentials that they have revoked. With
our certificate validation mechanisms, we can efficiently distribute large
volumes of revocation data on a worldwide basis to our service provider
customers. We believe that this capability enables us to cost-effectively scale
our global validation service business.

   VA Common Components. VA Publisher, Validator Toolkit and Validator Suite
are included with all of our VA Suite and Global VA Service offerings.

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<PAGE>

     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 Validator Suite modules to independent software
  vendors to include in their software.

   Secure data transfer software products

   Our secure data transfer software product line enables scalable, secure data
transfer over the Internet.

   SecureTransport. Our secure data transfer software product line is designed
to give customers cost-effective, secure, reliable delivery of large
transaction files and documents. The products support commonly used data
transfer protocols, including file transfer protocol and hypertext transfer
protocol. The products can be used in a variety of business application
environments. Like our other software products and services, SecureTransport is
designed to work with a variety of certificate authorities.

   Our secure data transfer software products consist of the SecureTransport
Server and the optional SecureTransport Client. Customers typically install the
SecureTransport Server at their local sites and can distribute the
SecureTransport Client to the entities with whom they conduct business. The
client software adds secure and reliable data transfer through a feature which
enables the rapid resumption of a data transfer in progress if a network
connection has been dropped. The client software supports sophisticated
scheduling of data transfers in a range of business applications.

   We recently upgraded the SecureTransport Server to integrate it with our
other software products and services. We have linked SecureTransport and our
digital receipt products so that customers can automatically generate and
archive an extensible markup language digital receipt to record the event, time
and date of a transfer, and to store the contents of the document. We believe
this capability helps make our secure data transfer product ideal for use in
business-to-business exchanges which have largely standardized on the
extensible markup language business document format. This capability can also
facilitate the resolution of disputes relating to a data transfer and enhances
the use of the product for proof-of-compliance with some government
regulations, including the Health Insurance Portability and Accountability Act.

   Digital receipt software products and services

   We provide a comprehensive line of software products and services that
enables the secure creation, tracking and management of digital receipts. Our
standards-based receipts are digitally signed extensible markup language
documents that contain a customizable set of information about a transaction.
This information could include the identities of the parties

                                       41
<PAGE>

involved, time and date of the transaction, and goods and services purchased or
sold. Our digital receipt software products and services are designed to help
customers lower costs, facilitate dispute resolution and reduce fraud in
transactions conducted over the Internet. Our digital receipt software products
and services are designed to work with a wide variety of certificate
authorities and electronic payments solutions.

   We offer these digital receipt software products and services: Receipt
Suite, Receipt Affiliate and Receipt Service.

   Receipt Suite. Our enterprise software suite is used to create, track and
manage digital receipts. The suite consists of Receipt Notary Server, Receipt
Vault Server and Receipt Toolkit. The suite is bundled with an option for
customers to automatically create Receipt Vault integrity reports and publish
them to the Receipt Service. This functionality provides our customers with a
means of determining whether archived receipt data has been tampered with or
corrupted. Receipt Suite licenses are specifically limited to in-house use.

     Receipt Notary Server. Our server software records the primary elements
  of a transaction and creates a tamper-proof digital receipt with a secure
  timestamp. After the server generates the digital receipt, copies of the
  receipt are stored in the Receipt Vault Server and may be sent to the
  parties involved in the transaction through a variety of configurable
  means, including e-mail, file transfer, or simple web page pictures.

     Receipt Vault Server. Our server software stores large volumes of
  digital receipts and provides comprehensive search and retrieval
  capabilities for customers to use for dispute resolution, data mining and
  other purposes. All items stored in the server are digitally signed and the
  entire contents of the server can be periodically verified for integrity of
  the signatures and the data which they protect. The server is designed to
  interface with high-performance databases including Oracle 8i and NCR
  Teradata.

     Receipt Toolkit. Our Receipt Toolkit is designed to quickly and easily
  add digital receipt capabilities into electronic commerce and other
  applications and provide interfaces to the Receipt Notary Server and
  Receipt Vault Server. We provide the toolkit as part of the Receipt Suite.
  We provide and license it to independent software vendors to support our
  digital receipt software products and services.

   Receipt Affiliate. This server software provides functionality that is
similar to our Receipt Suite but is designed for service providers and
business-to-business exchanges. Our Receipt Affiliate licensees can offer
digital receipt services directly to customers, including the issuance and
management of large volumes of digital receipts. The Receipt Affiliate is
increasingly licensed with our Affiliate VA Suite.

   Receipt Service. Our Receipt Service is a complete, outsourced application
service provider digital receipt service offering. We operate our Receipt
Service out of our secure data facility for customers that desire turnkey,
rapid implementation and wish to take advantage of our infrastructure. The
service is designed to offer 24 hours a day, seven days a week availability.

   Professional services

   We offer a broad range of professional services to assist in site planning,
design, installation, integration, training and maintenance of our 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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<PAGE>

Customers

   We primarily target our software products and services to a variety of
transaction-intensive enterprises and service providers. As of March 31, 2000,
we had over 80 customers.

   This is the list of our top 40 enterprise customers based on software
license and subscription fees and other services revenues since January 1,
1998, computed on a pro forma basis by including revenues recognized by
Receipt.com before our acquisition of that company in December 1999. These
customers have purchased our products or services in 2000 or are ongoing
customers.

Financial Services                        Healthcare
ABN AMRO                                  Aetna Life Insurance Company
BankOne                                   Blue Cross and Blue Shield of
Canadian Imperial Bank of Commerce        Alabama
The Chase Manhattan Bank                  MCC Behavioral Care
La Confederation des Caisses
 Populaires et d'Economie Desjardins      Retail
 du Quebec                                The Gap
Dearborn Financial Publishing             Nike
Dun & Bradstreet Corporation              Sears, Roebuck and Co.
Identrus LLC
Imperial Bank                             Technology / Internet
Insurance Service Office                  Apple Computer
NASD                                      Custom Technology Corporation
NatWest                                   Dell Computer Corporation
PNC Bank                                  IT Security AG
S.W.I.F.T.                                Microsoft Corporation
Trans Union LLC                           Mitsui & Co.
Visa USA                                  Netscape/iPlanet
Wells Fargo Bank                          Symantec Corporation
                                          TC TrustCenter GmbH
Government
Defense Information Systems Agency        Telecommunications
EPOST--Cebra                              MCI Worldcom
Federal Reserve Automated Services        PageNet
Hongkong Post
US Navy                                   Other
                                          Hanwha Corporation

   This is a list of our top ten service provider customers based on software
license and subscription fees and other services revenues since January 1,
1998:

Financial Services                        Systems Integrators
Thomson-CSF/Cashware                      Daou Technology
                                          ID Certify
Government                                PricewaterhouseCoopers
Malaysian Government/ DigiCert            Unisys
United Arab Emirates/Etisalat
                                          Telecommunications
                                          Bell Canada Emergis
                                          Global Crossing
                                          NTT Communications Corporation

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<PAGE>

   In fiscal 1999, Visa accounted for 21.4% of our revenues and
PricewaterhouseCoopers accounted for 13.9% of our revenues. In the three months
ended March 31, 2000, Netscape/iPlanet accounted for 13.3% of our revenues,
S.W.I.F.T. accounted for 13.2% of our revenues, Hanwha Corporation accounted
for 12.5% of our revenues and Unisys accounted for 10.1% of our revenues.

 Customer profiles

   These examples illustrate how customers use our software products and
services. These customer profiles are not intended to be an endorsement by
those customers of ValiCert or our software products and services.

   Identrus LLC. Identrus LLC is a consortium of global financial institutions
that have joined together to create a secure infrastructure for business-to-
business electronic commerce. To help accomplish this goal, Identrus needed a
comprehensive business-to-financial institution authentication solution.
Identrus selected us to help address this need because of our scalable family
of validation authority software products and services, and our expertise in
developing transaction security technologies. Our Enterprise VA software
product is installed in multiple locations within the Identrus network to
validate the digital certificates that participating banks have issued using
multiple, distinct certificate authorities. The Identrus network uses our
software products and services to enable trading parties from around the world
to identify one another over the Internet, creating a means of validation in a
broad array of business-to-business electronic commerce applications.

   Industry Canada. Industry Canada is responsible for managing access to the
radio frequency spectrum for the country of Canada. In October 1999, the agency
conducted Canada's first nationwide online spectrum auction, granting 258 radio
frequency licenses to twelve different companies. According to Industry Canada,
the online auction included bids exceeding Cdn. $170 million--which we believe
to be among the largest business-to-government electronic commerce transactions
ever to take place over the Internet. To ensure the speed and security of the
bid transactions, Industry Canada selected our Enterprise VA Suite to validate
the credentials of auction participants. We were selected due to our high-
performance online certificate status protocol validation capabilities and our
ability to provide a secure audit trail for each of the bid transactions. Based
on the successful use of our Enterprise VA Suite in this auction, Industry
Canada is planning to use our software for its upcoming personal communications
services auction for mobile wireless and related services.

   Chase Manhattan Bank. Chase Manhattan Bank's treasury solutions division
provides treasury management services to corporations, financial institutions,
brokers and dealers and public sector organizations. To provide a secure,
Internet-based financial transaction and document delivery capability to its
customers, Chase integrated our SecureTransport software product into its
electronic commerce infrastructure. We were selected for our ability to deliver
a reliable, secure and scalable data transfer product.

   The Hanwha Corporation. The Hanwha Corporation is one of the largest
conglomerates in South Korea with divisions in the chemical, trade,
construction, telecommunications, pharmaceuticals and information services
industries. To streamline its supply chain processes, Hanwha is converting its
electronic commerce infrastructure from dedicated private networks to the
Internet. To ensure proof of occurrence for purchase transactions, Hanwha is
using our Receipt Suite with its global procurement application. We were
selected due to our technology leadership, global presence and ability to
deliver a scalable, extensible software product offering for non-repudiation.

                                       44
<PAGE>

Strategic Alliances

   As of April 30, 2000, we had over 30 strategic alliances with Baltimore
Technologies, Digital Signature Trust, Entrust, IBM, Microsoft,
Netscape/iPlanet, Operational Research Consultants and Trintech. The purpose of
these alliances is:

  .  To promote the widespread adoption of our software products and services
     through distribution arrangements;

  .  To ensure that third-party technologies interoperate effectively with
     our software products and services; and

  .  To enable widespread application support for our software products and
     services.

   Baltimore Technologies. We have entered into worldwide marketing and
distribution agreements with Baltimore Technologies. Baltimore Technologies
resells our Enterprise VA software products to its customers. Baltimore
Technologies has also integrated our VA Publisher into its UniCert certificate
authority product to provide real-time publication of revocation data to our
software products and services. We also collaborate with Baltimore Technologies
on joint selling and marketing activities.

   Digital Signature Trust. We have entered into a distribution and service
provider agreement with Digital Signature Trust for our Enterprise VA and
Affiliate VA software products. Digital Signature Trust provides hosted,
trusted third-party services to banks, state and federal governments. Digital
Signature Trust is one of three companies which have been awarded the United
States government Access Certificates for Electronic Services project. This
project encompasses the planned use of digital certificates for purposes of
commerce and communication among government agencies and ultimately United
States residents. Digital Signature Trust intends to use our Enterprise VA
Suite for providing validation services for this project.

   Entrust. We have entered into a marketing and interoperability agreement
with Entrust for our Global VA Service and Enterprise VA. As part of this
agreement, we have extensively tested our products and services with Entrust's
public key infrastructure products to ensure compatibility. We have worked with
the Entrust sales force to help them promote our validation authority software
products and services to customers who require support for online certificate
status protocol, such as Identrus member banks.

   IBM. We are a registered member of IBM's PartnerWorld Developer Program. We
have also entered into a software compatibility agreement with IBM. Under this
agreement, our Enterprise VA Suite products have been tested for compatibility
with IBM's SecureWay Vault Registry and Trust Authority products. We are
jointly developing an approach to interface our products with IBM's products
for the financial services market. This initiative includes our validation
authority and digital receipt software products and IBM's middleware offerings,
such as MQSeries, WebSphere web application software platform and Tivoli
SecureWay Policy Director.

   Microsoft. Our public root keys are included in the Microsoft Windows 2000
operating system and Internet Explorer 5.01 browser products. These root keys
are used by applications to ensure that digitally signed objects which are
generated at our Global VA Service and Digital Receipt Service are trustworthy
and have not been tampered with or corrupted. We have also joined the Microsoft
Security Solutions Provider program, which highlights our software products and
services and their compatibility with Microsoft products.

   Netscape/iPlanet. We have entered into marketing and original equipment
manufacturer agreements with Netscape/iPlanet. Under these agreements, our
Certificate VA Suite is

                                       45
<PAGE>

bundled with every copy of the Netscape/iPlanet certificate authority product,
our VA Publisher has been integrated into Netscape/iPlanet's certificate
authority product for real-time publication of revocation data to our software
products and services, and a component of our Validator Suite is bundled with
every copy of Netscape/iPlanet's webserver. We have also entered into
distribution agreements for our secure data transfer and digital receipt
software products and services to be included with Netscape/iPlanet's business-
to-business electronic commerce offerings. We have also entered into an
agreement with Netscape/iPlanet to bundle our public root keys with the
Netscape browser and e-mail clients through December 2000.

   Operational Research Consultants. We have entered into a distribution
agreement with Operational Research Consultants for our Enterprise VA Suite.
Operational Research Consultants provide systems integration services to the
United States government and is one of three companies which has been awarded
the United States government Access Certificate for Electronic Services
project. Operational Research Consultants plan to use our Enterprise VA Suite
for providing validation services for this project.

   Trintech. We have entered into a worldwide marketing and distribution
agreement with Trintech for our digital receipt products and services. Trintech
has also licensed and is integrating our Receipt Toolkit into its electronic
payments solutions. Trintech customers in over 35 countries will have products
that support our digital receipt software products and services.

Technology

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

  .  Efficient distribution of certificate revocation data;

  .  Real-time access to data repositories during the validation process;

  .  Automation of data transfer between disparate applications;

  .  Fault-tolerant, high-integrity data transfer over unreliable
     communication lines; and

  .  Efficient storage and fast search and retrieval of large volumes of
     extensible markup language documents.

   Certificate Validation Mechanisms. Our patented certificate validation
mechanisms allow us to efficiently distribute large amounts of certificate
revocation data on a global basis. We use our certificate validation mechanisms
to distribute our revocation data to enterprise customers, service provider
customers, and our own servers at remote locations to provide regional
validation capabilities across the globe. Another benefit of our certificate
validation mechanisms is that the remote locations where we host certificate
revocation data do not require secure facilities such as those we have built in
our Mountain View, California, facility. 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 and services. These 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 or services to be
implemented, which we view as a strong competitive advantage.

   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

                                       46
<PAGE>

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.

   Rapid Restart. Our secure data transfer engine incorporates technology that
allows for the rapid resumption of a previously interrupted data transfer. This
capability is essential for customers that wish to utilize the Internet to
efficiently and reliably transfer large data files.

   Extensible Markup Language to Relational Schema Mapping. We have developed
technology that allows us to store our extensible markup language-based
documents, such as digital receipts, in our Receipt Vault, which has a database
at its core. This technology can automatically parse an extensible markup
language document and map the individual data fields on to a relational
database schema for fast and efficient storage, manipulation and retrieval of
large volumes of extensible markup language documents.

Network operations and trust infrastructure

   We have made significant investments in developing our network operations
and infrastructure capabilities, including construction of a secure data center
which is designed to exceed typical commercial security requirements. The key
elements of our data center design include data redundancy, a highly scalable
architecture, advanced control and audit capabilities, reliance on multiple
Internet service providers and use of carrier-class equipment. Our network
operations procedures encompass techniques for achieving high security,
reliability, and scalability in a continuously online data center. Our network
operations center serves as the hub for our worldwide operations and service
delivery and is the central point for data exchange with our Affiliate VA
customers. A number of our customers also rely on the network operations center
infrastructure to provide a backup for their transaction data.

   Our transaction services architecture offers automatic failover, capacity
monitoring, security auditing, and load balancing for critical services. To
support this level of security, we have adopted a number of network security
measures including periodic audits and reviews by third parties and
incorporated a variety of provisions such as redundant power supplies. We have
designed and constructed our secure network operations center facility to
mirror the best practices in commercial security establishments, including:

  .  Physical construction techniques, such as eavesdrop-resistant
     enclosures, and constant security monitoring to create and deliver a
     robust level of protection to the site;

  .  Use of sophisticated access control systems, including biometrics,
     audit-ready video recording, and motion and glass break detection
     systems;

  .  Use of tamper-proof, multi-party access controlled cryptographic devices
     for secure data transmissions;

  .  Use of employee background checks and separation of duties for our
     personnel; and

  .  Ongoing policy and practices control and review processes.

   Our data center and related operations function as a secure, distributed 24
hours a day, seven days a week service. To protect from catastrophic failure
situations, we are evaluating business resumption sites.

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

                                       47
<PAGE>

developed our software products and services both independently and through
efforts with leading independent software vendors and major customers.

   As of April 30, 2000, we had 59 employees dedicated to research and
development. Research and development expenses were $373,000 in the period from
February 1996 to December 31, 1997, $1.7 million in 1998, $5.6 million in 1999
and $1.9 million in the first three months of 2000. All development costs have
been expensed as incurred. Our research and development efforts are focused
primarily on:

  .  integrating our validation authority, secure data transfer and digital
     receipt products and services after the acquisition of Receipt.com,

  .  introducing our digital receipt solutions into our trusted third party
     operational framework, and

  .  expanding addressable markets by way of internationalization and
     addressing specific segments such as business-to-business exchanges.

   Our research and development personnel are active in standards-setting
bodies and have contributed to a number of standards in the Internet and data
security areas. We intend to continue recruiting and hiring experienced
research and development personnel and to make other investments in research
and development.

Sales

   We sell our products and services in the United States primarily through our
direct sales force that focuses on key customers in the industries we target.
Our domestic offices include Akron, Arlington, Dallas, Mountain View and New
York. We market our products and services internationally through our direct
sales force and through resellers and system integrators and our service
provider customers. We have international offices in Amsterdam, Hong Kong,
London, Paris and Tokyo. As of April 30, 2000, we employed 43 people as part of
our sales and marketing organizations. We generated 52.6% of our revenues from
domestic customers in 1999 and 66.3% of our revenues from domestic customers
for the quarter ended March 31, 2000. We generated 47.4% of our revenues from
international customers in 1999 and 33.7% of our revenues from international
customers for the quarter ended March 31, 2000.

   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 managing their customer relationships. Our domestic sales effort
is also augmented by the sales forces through resellers and system integrators
and our service provider customers.

   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.

Marketing

   We utilize a variety of marketing programs to generate leads and increase
brand awareness. Our marketing strategy is organized around three primary
areas: product marketing, product management and marketing communications.
Product marketing identifies target markets and customer opportunities and then
develops the positioning, programs and

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<PAGE>

materials to reach customers and support sales activities. Product marketing is
also responsible for branding, corporate identity and maintaining our corporate
website.

   Product management translates customer and market requirements into product
and service development plans and works with engineering to ensure completion.
Product management also trains the sales force on product information and
competition. Marketing communications drives overall market awareness of
ValiCert and our products through public relations, industry analyst
relationships, product reviews, trade shows and seminars, editorial promotion,
industry events and executive speaking engagements.

Competition

   Our security infrastructure products and services address the new and
rapidly evolving market for trusted and secure transactions over the Internet.
The market for our products and services 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 products
and services.

   Validation authority software products and services

   We compete primarily with companies offering commercial certificate
authority products and services such as CertCo, Digital Signature Trust,
Entrust, VeriSign and Xcert.

   Secure data transfer software products and services.

   We compete with Internet electronic data interchange companies such as
CommPress, Harbinger and Sterling Commerce, and with companies offering
document delivery and storage products and services such as Critical Path,
PostX and Tumbleweed Communications.

   Digital receipt software products and services

   We compete with transaction middleware companies, companies that offer
timestamping services, online notarization or point of sale integrated
solutions and payment companies. These competitors include @POS, FirstUse, JCP,
Surety and VeriSign. Many companies may choose to develop their own security
products and services in-house.

   Competitive factors

   We believe that the principal competitive factors in our market are
interoperability, completeness of solution, flexibility, neutrality, customer
service and support, ease of use and speed of implementation.

   Although we believe that we compete favorably with our competitors based on
these factors, we cannot assure you that we can maintain our competitive
position against current and potential competitors. Several of our current and
potential competitors have longer operating histories and significantly greater
financial, technical, marketing and other resources than we do and may be able
to respond more quickly than we can to new or changing opportunities,
technologies, standards and customer requirements. Many of these competitors
also have broader and more established distribution channels that may be used
to deliver competing products or services directly to customers which could
substantially reduce demand for our products and services. Browser companies
that embed our public root keys or feature us as a provider of digital
certificate solutions in their web browsers or on their websites could also
promote our competitors, charge us substantial fees for these promotions in the
future, or terminate their relationship with us.

                                       49
<PAGE>

   New technologies and the expansion of technologies may increase the
competitive pressures on us. We cannot assure you that competing technologies
that others develop or the emergence of new industry standards will not
adversely affect our competitive position or cause our Internet-based security
services or technologies to become noncompetitive or obsolete. Our competitors
in particular segments of the security marketplace may in the future broaden or
enhance their products to provide a more comprehensive offering than ours. We
may also compete in the future for sales of our software products and services
against our original equipment manufacturer licensees, who resell our products
and services under their own brand names. We may not be able to compete
effectively with current or future competitors and competitive pressures that
we face could materially harm our business.

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. We also rely on
outside licensors, including RSA Security, for patent and software license
rights to encryption technology that is incorporated into and is necessary for
the operation of our products and services. 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 our 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. While we
are unable to determine the extent to which piracy of our 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. We cannot
assure you that our trade secrets or confidentiality agreements will provide
meaningful protection of our proprietary information. We cannot assure you that
others will not 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 our 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. We cannot assure you that our pending or future patent applications
will issue or that any patents that issue will be enforceable or valid. The
coverage claimed in a patent application can be significantly 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.

                                       50
<PAGE>

   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 cannot assure you that we
will 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 April 30, 2000, we had 137 employees, of which 59 were employed in
research and development, 43 were employed in sales and marketing, 18 were
employed in operations and customer support and 17 were employed in general and
administration. 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. Our 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, none of whom is bound
by an employment agreement. Competition for qualified personnel in our industry
is intense, particularly in the San Francisco Bay Area.

Properties

   Our principal executive and administrative offices are located at 339 N.
Bernardo in Mountain View, California, where we lease approximately 48,000
square feet. This lease expires April 2007. We also sublease an additional
facility in Mountain View, California, of approximately 25,000 square feet.
This sublease expires February 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.

Legal Proceedings

   We could become involved in litigation relating to claims arising out of our
ordinary course of business. We are not involved in any legal proceedings.

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<PAGE>

                                   MANAGEMENT

Executive Officers and Directors

   The names, ages and positions of our executive officers and directors as of
April 30, 2000, are:

<TABLE>
<CAPTION>
   Name                        Age                    Position
   ----                        ---                    --------
<S>                            <C> <C>
Joseph Amram..................  43 President, Chief Executive Officer and
                                    Director
Srinivasan Krishnan...........  31 Chairman of the Board of Directors, Chief
                                    Technology Officer and Secretary
Timothy Conley................  51 Vice President, Finance, and Chief Financial
                                    Officer
Rajiv Dholakia................  37 Vice President, Product Development and
                                    Operations
Alexander Garcia-Tobar........  32 Vice President, International Operations
David Jevans..................  33 Vice President, Corporate Development
Sathvik Krishnamurthy.........  31 Vice President, Marketing and Business
                                    Development
Martin Yam....................  49 Vice President, Sales and Field Operations
Taher Elgamal.................  45 Director
John Johnston.................  47 Director
Scott J. Loftesness...........  52 Director
Magdalena Yesil...............  42 Director
</TABLE>

   Mr. Elgamal, Mr. Johnston and Ms. Yesil are members of the audit committee.
Mr. Johnston and Mr. Loftesness are members of the compensation committee.

   Joseph Amram has served as our president and chief executive officer since
August 1997. 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 has served three years in the Israeli air force where he attained the
rank of sergeant major. 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.

   Srinivasan Krishnan co-founded ValiCert in February 1996 and has served as
our chairman of the board of directors and chief technology officer since
February 1996. 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 a 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

                                       52
<PAGE>

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.

   Rajiv Dholakia has served as our vice president, product development and
operations since June 1998. From November 1996 to June 1998, Mr. Dholakia
served as vice president of product engineering for TestDrive, an Internet
software distribution company. From February 1996 to November 1996, Mr.
Dholakia served as chief technical officer at VillageTree Software, a
consulting firm for Internet start-up companies. From May 1993 to February 1996
Mr. Dholakia served as director of engineering for platform products at
Taligent, Inc., a cross platform application frameworks company. Mr. Dholakia
also held senior engineering and managerial positions at Sun Microsystems and
Intellicorp from December 1986 to May 1993. Mr. Dholakia holds a B.E. degree in
chemical engineering from M.S. University, Baroda, India and did graduate work
in chemical engineering at the University of South Florida, Tampa.

   Alexander Garcia-Tobar has served as our vice president, international
operations since June 1998. From January 1997 to June 1998, Mr. Garcia-Tobar
served as international director for Forrester Research, Inc., an independent
research firm. Before joining Forrester Research, Mr. Garcia-Tobar served as
executive director and a member of the board of directors of NewsWatch Inc., a
joint venture between Toshiba Corporation, Mitsui & Co. and Individual, Inc.
from October 1995 to January 1997. From March 1994 to October 1995, Mr. Garcia-
Tobar served as international director for Individual. Mr. Garcia-Tobar holds a
B.A. degree in international economics from Yale University.

   David Jevans has served as our vice president, corporate development since
January 2000. In April 1996, Mr. Jevans founded Receipt.com and served as its
president and chief executive officer until December 1999 when we acquired
Receipt.com. Before Receipt.com, Mr. Jevans was the vice president of networks
at Catapult Entertainment, an Internet service company, from April 1994 to
April 1996. 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 an M.S. degree in computer science
from the University of Calgary, Canada.

   Sathvik Krishnamurthy has served as our vice president, marketing and
business development since May 1998. From November 1992 to April 1998, Mr.
Krishnamurthy served in various capacities for Worldtalk Corporation, an e-mail
security company that was recently acquired by Tumbleweed, including vice
president of product planning and development and vice president and general
manager of Deming Internet Security, a Worldtalk company. Before joining
Worldtalk, Mr. Krishnamurthy held engineering positions at various data-
communications companies including Retix, TITN and Touch Communications. Mr.
Krishnamurthy holds a B.S. degree in computer science and engineering from the
University of California, Los Angeles.

   Martin Yam has served as our vice president, sales and field operations
since October 1998. From May 1997 to October 1998, Mr. Yam served as vice
president of sales and services for Accrue Software, Inc., an Internet software
company. Mr. Yam served as vice president of sales and marketing for ParcPlace,
Inc., an object oriented development software company from May 1990 to October
1994. He returned to serve as senior vice president of sales and marketing from
February 1996 to April 1997. Mr. Yam was vice president of sales for NeXT
Software, Inc., an object oriented development software company, from November
1994 through February 1996. Mr. Yam holds a B.S. degree in business
administration and an M.S. degree in technology and management from the
American University.

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<PAGE>

   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 has M.S. degree and 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.

   Scott J. Loftesness has served as one of our directors since March 1998.
Mr. Loftesness has acted as a private investor since July 1999. From August
1998 to July 1999, Mr. Loftesness was interim chief executive officer of
Digicash Incorporated, an electronic payment company that filed for Chapter 11
bankruptcy in 1998. From June 1994 to June 1998, Mr. Loftesness was group
executive at First Data Corporation, an electronic payment processing company.
Mr. Loftesness attended the University of California at Berkeley.

   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 an M.S. degree in
electrical engineering and a B.S. degree in industrial engineering from
Stanford University.

Board of Directors

   Effective upon the closing of this offering, our certificate of
incorporation and bylaws will provide for a board of directors that is divided
into three classes:

  .  Class I, whose term will expire at the annual meeting of stockholders
     expected to be held in June 2001;

  .  Class II , whose term will expire at the annual meeting of stockholders
     expect to be held in June 2002; and

  .  Class III, whose term will expire at the annual meeting of stockholders
     expected to be held in June 2003.

   Only one class of directors will be elected at each annual meeting of
stockholders, with the other classes continuing for the remainder of their
terms. Following the expiration of the initial term of any class of directors,
that class will serve for a three-year term. Effective upon the closing of
this offering, these individuals will serve as our directors:

  .  Taher Elgamal and Magdalena Yesil will be our class I directors;

  .  John Johnston and Scott Loftesness will be our class II directors; and

  .  Joseph Amram and Srinivasan Krishnan will be our class III directors.

   There are no family relationships among any of our directors, officers or
key employees.

Board Committees

   Our board of directors has formed an audit committee and a compensation
committee.

                                      54
<PAGE>

   Audit committee. The audit committee reviews the results and scope of the
annual audit and meets with our independent auditors to review our internal
accounting policies and procedure.

   Compensation committee. The compensation committee reviews and makes
recommendations to our board of directors on our general and specific
compensation policies and practices and administers our 1996 equity incentive
plan, 1998 stock plan and 2000 employee stock purchase plan.

Director Compensation

   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 board of directors and committee meetings. Directors
are eligible to participate in our stock plans.

Compensation Committee Interlocks and Insider Participation

   None of the members of the compensation committee has at any time been one
of our officers or employees. None of our executive officers serves, or has
served, as a member of the board of directors or compensation committee of any
entity that has one or more executive officers serving on our board of
directors or compensation committee. Before the creation of our compensation
committee, all compensation decisions were made by our full board of directors.

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

   We routinely deliver written offer letters containing provisions on salary
bonuses, benefits and stock option grants to prospective members of management
and other employees. We have entered into agreements containing employment and
change-in-control provisions as described below.

   Employment agreement

   We entered into an employment agreement with Joseph Amram, our president and
chief executive officer, in August 1997. Under this agreement, Mr. Amram was
paid an annualized base salary of $150,000 and a bonus of up to $50,000 in
1998. After 1998, the amount of salary and bonus are determined by our
compensation committee. Under his employment agreement, Mr. Amram was granted
options to purchase 1,100,000 shares of series A junior preferred at a purchase
price of $0.03 per share, which will vest over three years, with one-sixth
vesting upon the completion of six months of service and the remainder vesting
in equal monthly installments over the next 30 months of service. If we
terminate Mr. Amram for reasons other than a material breach of his duties, or
significantly interfere with his ability to perform his job duties or
significantly demote him, before all of his options vest, all of his option
shares that remain unvested will vest if the per share value of our common
stock equals or exceeds $9.00; or 50% of Mr. Amram's option shares that remain
unvested will vest if the per share value of our common stock is less than
$9.00. Upon a change-in-control, all of Mr. Amram's unvested option shares will
vest.

   Stock option and warrant agreements

   Joseph Amram. We entered into stock option and warrant agreements with
Joseph Amram, our president, chief executive officer and a director. Mr. Amram
was granted options

                                       55
<PAGE>

to purchase an aggregate of 342,728 shares of common stock. Mr. Amram has
exercised options to purchase 276,062 shares of common stock. Mr. Amram was
granted warrants to purchase 26,455 shares of series B preferred stock and
166,666 shares of common stock. Mr. Amram has not exercised any of these
warrants.The stock option and warrant agreements provide for immediate
termination of our right to repurchase all unvested shares upon a change-in-
control event.

   Srinivasan Krishnan. We entered into stock option and warrant agreements
with Srinivasan Krishnan, our chairman of the board of directors, chief
technology officer and secretary. Mr. Krishnan was granted options to purchase
an aggregate of 933,333 shares of series A junior preferred and an aggregate of
205,396 shares of common stock. Mr. Krishnan has exercised options to purchase
1,105,396 shares of common stock. Mr. Krishnan was granted warrants to purchase
83,333 shares of common stock. Mr Krishnan has not exercised any of these
warrants. The stock option and warrant agreements provide for immediate
termination of our right to repurchase all unvested shares upon a change-in-
control event.

   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 200,000 shares of 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. The stock option and
warrant agreements provide for immediate termination of our right to repurchase
50% of unvested shares upon a change-in-control event.

   Rajiv Dholakia. We entered into stock option and warrant agreements with
Rajiv Dholakia, our vice president, product development and operation. Mr.
Dholakia was granted options to purchase an aggregate of 333,333 shares of
common stock. Mr. Dholakia has exercised all of these options. The stock option
and warrant agreements provide for immediate termination of our right to
repurchase 50% of unvested shares upon a change-in-control event. Mr. Dholakia
was granted warrants to purchase 60,000 shares of common stock. Mr. Dholakia
has not exercised any of these warrants.

   Alexander Garcia-Tobar. We entered into stock option and warrant agreements
with Alexander Garcia-Tobar, our vice president, international operations. Mr.
Garcia-Tobar was granted options to purchase an aggregate of 233,333 shares of
common stock. Mr. Garcia-Tobar has exercised 200,000 of these options. Mr.
Garcia-Tobar was granted warrants to purchase 33,333 shares of common stock.
Mr. Garcia-Tobar has not exercised any of these warrants. The stock option and
warrant agreements provide for immediate termination of our right to repurchase
50% of unvested shares upon a change-in-control event.

   David Jevans. We entered into a stock option agreement with David Jevans,
our vice president, corporate development. Mr. Jevans was granted options to
purchase 429,421 shares of common stock. Mr. Jevans has exercised options to
purchase 166,666 shares of common stock. The stock option agreement provides
for immediate termination of our right to repurchase 50% of unvested options
upon a change-in-control event.

   Sathvik Krishnamurthy. We entered into stock option and warrant agreements
with Sathvik Krishnamurthy, our vice president, marketing and business
development. Mr. Krishnamurthy was granted options to purchase an aggregate of
350,000 shares of common stock. Mr. Krishnamurthy has exercised all of these
options. Mr. Krishnamurthy was granted warrants to purchase 86,666 shares of
common stock. Mr. Krishnamurthy has not exercised

                                       56
<PAGE>

any of these warrants. The stock option and warrant agreements provide for
immediate termination of our right to repurchase 50% of unvested shares upon a
change-in-control event.

   Martin Yam. We entered into stock option and warrant agreements with Martin
Yam, our vice president, sales and field operations. Mr. Yam was granted
options to purchase an aggregate of 233,333 shares of common stock. Mr. Yam has
exercised options to purchase 193,333 shares of common stock. Mr. Yam was
granted warrants to purchase 33,333 shares of common stock. Mr. Yam has not
exercised any of these warrants. The stock option and warrant agreements
provide for immediate termination of our right to repurchase 50% of unvested
shares upon a change-in-control event.

Executive Compensation

   This table presents summary information concerning the compensation paid or
earned by our chief executive officer and our four other most highly
compensated executive officers whose total salary and bonus for the fiscal year
ended December 31, 1999 exceeded $100,000. The total amount of personal
benefits paid to the named executive officers during fiscal year 1999 was less
than the lesser of $50,000 or 10% of the executive officer's total reported
salary and bonus. Our chief financial officer joined us in January 2000 and is
not included in the table below.

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                                         Annual Compensation
                                                      -------------------------

Name and Principal Position                           Year Salary ($) Bonus ($)
---------------------------                           ---- ---------- ---------

<S>                                                   <C>  <C>        <C>
Joseph Amram......................................... 1999  150,000    61,750
 President, Chief Executive Officer and Director

Srinivasan Krishnan.................................. 1999  133,000    28,050
 Chairman of the Board of Directors,
 Chief Technology Officer and Secretary

Rajiv Dholakia....................................... 1999  180,000    17,900
 Vice President, Development and Operations

Sathvik Krishnamurthy................................ 1999  145,000    28,050
 Vice President, Marketing and Business Development

Martin Yam........................................... 1999  135,000    49,932
 Vice President, Sales and Field Operations
</TABLE>

Option Grants in Last Fiscal Year

   This following table presents information on stock option grants to each of
the executive officers named in the summary compensation table above during the
fiscal year ended December 31, 1999. All of these options were granted under
our 1998 stock plan. Generally, the options vest on a monthly basis for 48
months beginning on the first day of the grant.

   This table is based on the grant of options to purchase a total of 1,103,906
shares of our common stock during fiscal year 1999. This number does not
include options to purchase 1,079,023 shares of common stock issued under the
Receipt.com stock plan which we assumed. All options were granted at the fair
market value of our common stock, as determined by the board of directors on
the date of grant. Potential realizable values are net of exercise price, but
before taxes payable on exercise. Amounts represent hypothetical gains

                                       57
<PAGE>

that could be achieved for the options if exercised at the end of the option
term. The assumed 5% and 10% rates of stock price appreciation are required by
the rules of the Securities and Exchange Commission. Unless the market price of
the common stock appreciates over the option term, no value will be realized
from the option grants made to executive officers.

                      Options Granted in Last Fiscal Year

<TABLE>
<CAPTION>
                                                                     Potential Realized
                                                                      Value at Assumed
                                                                       Annual Rates of
                         Number of   % of Total                          Stock Price
                         Securities   Options    Exercise               Appreciation
                         Underlying  Granted to  or Base               for Option Term
                          Options   Employees in  Price   Expiration -------------------
    Name                 Granted(#) Fiscal Year   ($/Sh)     Date     5% ($)    10% ($)
    ----                 ---------- ------------ -------- ---------- --------- ---------

<S>                      <C>        <C>          <C>      <C>        <C>       <C>
Joseph Amram............  133,333       12.1%     $0.90     8/9/09   2,051,854 3,338,314
Srinivasan Krishnan.....   66,666        6.0%     $0.90     8/9/09   1,025,919 1,669,144
Rajiv Dholakia..........      --         --         --         --
Sathvik Krishnamurthy...      --         --         --         --
Martin Yam..............   50,000        4.5%     $0.90     8/9/09     769,447 1,251,871
</TABLE>

Option Exercises and Fiscal Year-End Holdings

   This table presents the number of shares of our common stock acquired and
the value realized upon exercise of stock options during the fiscal year ended
December 31, 1999 by each of the executive officers named in the summary
compensation table above. All options granted under our 1998 stock plan are
immediately exercisable for executive officers, but any shares under those
options may be repurchased by us, at the original exercise price paid per
share, if the option holder ceases to remain with us before the vesting of
their shares. The executive officers named in the table above had exercised all
of their options as of December 31, 1999.

         Option Exercises in Last Fiscal Year and FY-End Option Values

<TABLE>
<CAPTION>
                                                          Shares
                                                       Acquired on     Value
       Name                                            Exercise (#) Realized ($)
       ----                                            ------------ ------------
     <S>                                               <C>          <C>
     Joseph Amram.....................................   276,062      205,637
     Srinivasan Krishnan..............................   172,063       85,295
     Rajiv Dholakia...................................   300,000      180,000
     Sathvik Krishnamurthy............................   300,000       72,000
     Martin Yam.......................................   166,666      115,000
</TABLE>

Stock Option Plans

   1998 stock plan

   Reserved shares. As of April 30, 2000, a total of 3,563,333 shares of common
stock have been reserved for issuance under the 1998 stock plan. In May 2000,
our board of directors reserved an additional 1,333,333 shares for issuance
under this plan. The number of shares reserved under the 1998 stock plan will
automatically increase on the first day of each fiscal year beginning on
January 1, 2001 by the lesser of:

  .  1,224,166 shares;

  .  5% of the number of shares of our common stock that was issued and
     outstanding on the last day of the immediately preceding fiscal year; or

  .  a lesser number of shares as determined by our board of directors.

                                       58
<PAGE>

   Eligible persons and types of options. Under the 1998 stock plan, all of our
employees or employees of a subsidiary, all nonemployee directors and any
consultant who performs services for us are eligible to receive nonstatutory
stock options and restricted stock purchase rights. Employees are also eligible
to receive incentive stock options intended to qualify under section 422 of the
Internal Revenue Code.

   Administration.

   An incentive stock option means an option granted to an employee if:

  .  the option is granted under a plan approved by the stockholders within
     12 months before or after the plan is adopted;

  .  the option is granted within 10 years from the earlier of the date the
     plan is adopted or the date the plan was approved by the stockholders;

  .  the option is not exercisable after 10 years from the date of grant;

  .  the option price is at least 100% of the fair market value of the
     underlying stock on the date of grant; and

  .  the option holder, at the time the option is granted, does not own stock
     equal to 10% or more of the total combined voting power of all classes
     of stock.

   A restricted stock purchase right is the right to buy stock at a fixed price
subject to vesting as long as the option holder is employed by us. If the
option holder ceases to be employed by us, we may have the right to repurchase
the shares for the price paid by the option holder.

   The 1998 stock plan is administered by our board of directors, which selects
the persons who will receive options and restricted stock purchase rights,
determines the number of shares subject to each option and sets other terms and
conditions, including the type of consideration to be paid to us upon exercise
and vesting schedules. This responsibility may be delegated to a committee of
our board of directors.

   Exercise price. The exercise price of nonstatutory stock options granted
under the 1998 stock plan must be at least 85% of the fair market value of our
common stock on the date of grant. The exercise price of incentive stock
options cannot be lower than 100% of the fair market value of our common stock
on the date of grant and, in the case of incentive stock options granted to 10%
stockholders, not less than 110% of the fair market value. The term of an
option cannot exceed 10 years, or five years for an incentive stock option
granted to a 10% stockholder. An individual's options generally expire 30 days
following his termination of service or six or 12 months following the
individual's termination date if the termination was due to his death or
disability.

   Other option terms. Options granted under our 1998 stock plan are generally
immediately exercisable, subject to our right to repurchase any unvested shares
at the option holder's original cost upon the optionholder's termination of
service. Shares subject to options granted under the 1998 stock plan generally
vest over four years, although the board or committee may specify a different
vesting schedule for a particular grant. Options granted under the 1998 stock
plan are generally nontransferable other than by will or the laws of descent
and distribution, although the board or committee may grant nonstatutory stock
options which allows for limited transferability.

   Change-in-control. If there is a change-in-control, the acquiring or
successor corporation may assume, or substitute its stock options for, the
outstanding options granted under the 1998 stock plan. Options granted under
the 1998 stock plan provide for acceleration of vesting

                                       59
<PAGE>

of 50% or 100% of the unvested option shares upon the change in control. The
outstanding options will terminate if the options are not exercised or assumed
or substituted for by the acquiring or successor corporation.

   As of April 30, 2000, 2,015,067 shares of common stock had been issued upon
exercise of options outstanding and options to purchase 1,477,038 shares of
common stock with a weighted average exercise price of $4.83 were outstanding
under the plan.

   1996 equity incentive plan

   Eligible persons and types of options. The plan allows for grants of
incentive stock options and restricted stock purchase rights to employees,
including officers and employee directors. It allows grants of nonstatutory
options and restricted stock purchase rights to employees, non-employee
directors and consultants.

   As of April 30, 2000, 1,805,448 shares of series A junior preferred stock
had been issued upon exercise of options outstanding and options to purchase
67,911 shares of series A junior preferred stock with a weighted average
exercise price of $0.10 were outstanding under the plan. Options for series A
junior preferred stock issued under this plan will automatically convert into
options for common stock upon the closing of this offering. No additional
options will be granted under this plan although options granted under this
plan will remain outstanding.

   Change-in-control. If there is a change-in-control, the acquiring or
successor corporation may assume, or substitute its stock options for, the
outstanding options granted under the 1996 equity incentive plan. Options
granted under the 1996 equity incentive plan provide for acceleration of
vesting of 50% or 100% of the unvested option shares upon the change in
control. The outstanding options will terminate if the options are not
exercised or assumed or substituted for by the acquiring or successor
corporation.

   In 1996, we granted options to employees and consultants primarily before
the adoption of our 1996 equity incentive plan. Options to purchase 58,820
shares of our series A junior preferred stock were outstanding as of April 30,
2000. Options for series A junior preferred stock will automatically convert
into options for common stock upon the closing of this offering. These options
are generally exercisable over a period not to exceed ten years from the date
of grant and are generally exercisable when they vest.

   Receipt.com stock plan

   When we acquired Receipt.com, we assumed the options outstanding under the
Receipt.com stock plan and the options were converted into options to purchase
our common stock. The plan allowed for grants of incentive stock options and
restricted stock purchase rights, within the meaning of section 422 of the
Internal Revenue Code, to employees, including officers and employee directors.
It allowed grants of nonstatutory options and restricted stock purchase rights
to employees, non-employee directors and consultants. As of April 30, 2000,
285,467 shares of common stock had been issued upon exercise of options
outstanding and options to purchase 793,558 shares of common stock with a
weighted average exercise price of $1.92 were outstanding under the plan. No
additional options will be granted under this plan although options granted
under this plan will remain outstanding.

   If there is a change-in-control, the acquiring or successor corporation may
assume, or substitute its stock options for, the outstanding options granted
under the Receipt.com stock

                                       60
<PAGE>

plan. Options granted under the Receipt.com stock plan provide for acceleration
of vesting of 50% or 100% of the unvested option shares upon the change in
control. The outstanding options will terminate if the options are not
exercised or assumed or substituted by the acquiring or successor corporation.

2000 Employee Stock Purchase Plan

   A total of 333,333 shares of common stock have been reserved for issuance
under our 2000 employee stock purchase plan, none of which has been issued.
This number of shares will be increased by 2% of the common shares outstanding
on January 1, 2001 and each January 1 through January 1, 2010. This plan is
intended to qualify under section 423 of the Internal Revenue Code and our
compensation committee will administer the plan. Employees, including officers
and employee directors, are eligible to participate in the plan if they are
employed by us for more than 20 hours per week and more than five months per
calendar year. The plan will be implemented during sequential six-month
offering periods, the first of which will begin on the effective date of this
offering and will terminate on January 31, 2001. After the effective date of
this offering, offering periods under the plan will generally begin on February
and August of each year.

   The 2000 employee stock purchase plan permits eligible employees to purchase
shares of our common stock through payroll deductions, which may not exceed 10%
of the employee's compensation. Stock will be purchased under the plan at a
price equal to 85% of the fair market value of our common stock on either the
first or the last day of the offering period, whichever is lower. Employees may
end their participation in the offering at any time during the offering period,
and participation ends automatically on termination of a participant's
employment with us. Participants may not purchase shares of common stock having
a value, measured at the beginning of the offering period, greater than $25,000
in any calendar year or more than 833 shares.

401(k) Plan

   On September 1, 1997, we adopted an employee savings and retirement plan
intended to be tax-qualified under sections 401(a) and 401(k) of the Internal
Revenue Code. Employees who are at least 21 years old are generally eligible to
participate and may enter the plan as of the first day of hire or the first day
of any month after their date of hire. Participants may make pre-tax
contributions to the plan of up to 20% of their eligible compensation, subject
to a statutorily set annual limit, which is $10,500 in calendar year 2000. Each
participant's contributions and investment earnings on these contributions are
fully vested at all times. The 401(k) plan permits, but does not require,
matching contributions by us on behalf of participants. We have not made these
contributions. Contributions to the 401(k) plan, and the income earned on these
contributions, are generally not taxable to the participants until withdrawn.
Contributions are generally deductible by us when made. The 401(k) plan assets
are held in trust. The trustee of the 401(k) plan invests the assets of the
plan in various investment options as directed by the participants.

Limitations of Liability and Indemnification Matters

   Certificate of incorporation

   We have adopted provisions in our certificate of incorporation which provide
that our directors shall not be personally liable to us or our stockholders for
monetary damages for

                                       61
<PAGE>

breaches of their fiduciary duties as directors, to the fullest extent
permitted by the Delaware General Corporation Law. Under that law, our
directors remain liable for:

  .  breaches of their duty of loyalty to us and our stockholders;

  .  for acts or omissions not in good faith or which involve intentional
     misconduct or knowing violation of law;

  .  under section 174 of the Delaware General Corporation Law relating to
     improper dividends or distributions; or

  .  for any transaction from which the director obtained an improper
     personal benefit.

   Bylaws

   Our bylaws authorize us to indemnify our officers, directors, employees and
agents to the extent permitted by the Delaware General Corporation Law.

   Indemnification agreements

   Before the completion of this offering, we intend to enter into separate
indemnification agreements with each of our directors and executive officers
which may, in some cases, be broader than the specific indemnification
provisions allowed by the Delaware General Corporation Law. The indemnification
agreements will require us to indemnify the executive officers and directors
against liabilities that may arise by reason of their status or service as
directors or executive officers and to advance expenses they spend for any
proceeding against them for which they could be indemnified to the fullest
extent permitted by the Delaware General Corporation Law.

   We intend to obtain liability insurance for our directors and officers and
intend to obtain a rider to extend that coverage for public securities matters.

   There is no pending litigation or proceeding involving a director, officer,
employee or agent of ValiCert where indemnification will be required or
permitted, and we are not aware of any threatened litigation or proceeding that
may result in a claim for indemnification.

                                       62
<PAGE>

                           RELATED PARTY TRANSACTIONS

Loans to Officers

   Since January 1, 1997, the officers listed below have executed promissory
notes and pledge agreements to finance the exercise of their stock options.
Each note bears interest at 6.0% per year and has a term of five years from the
date of issuance. As collateral, the holder of the shares of stock purchased
with each note pledged the stock to us. Each note represents a debt to us that
the holder must repay, with interest, by the earliest of:

  .  The maturity date of the note;

  .  The termination of the holder's employment with us;

  .  A default in the payment of any installment of principal when due;

  .  A sale of the stock pledge as collateral; or

  .  Any other date reasonably necessary for us to comply with any
     regulations adopted by the board of governors of the Federal Reserve
     System affecting the extension of credit for our securities.

   This table summarizes the dates on which these notes were issued and, as of
April 30, 2000, the oustanding principal amount of these notes and the
aggregate number of shares pledged as collateral.

<TABLE>
<CAPTION>
                                                                           Aggregate number
                                                                              of shares
                                                                 Aggregate     pledged
     Note holder                 Dates of issuance of notes       amount    as collateral
     -----------             ----------------------------------- --------- ----------------
   <S>                       <C>                                 <C>       <C>
   Joseph Amram............  December 31, 1997 - August 30, 1999 $187,250     1,376,062
   Srinivasan Krishnan.....  December 31, 1997 - August 30, 1999  182,170     1,132,062
   Timothy Conley..........                        March 6, 2000  165,000        33,333
   Rajiv Dholakia..........     June 18, 1999 - January 18, 2000  193,000       316,667
   Alexander Garcia-Tobar..     June 18, 1999 - January 19, 2000  209,000       200,000
   David Jevans............                        March 6, 2000  388,598       166,666
   Sathvik Krishnamurthy...      May 25, 1999 - January 20, 2000  259,500       350,000
   Martin Yam..............     June 18, 1999 - February 1, 2000  173,000       193,333
</TABLE>

Consulting and License Revenues

   TekEdge, an affiliate of Girish Gaitonde, one of the holders of more than 5%
of our capital stock, provides software development and consulting services to
us. We paid $147,000 in 1998 and $682,000 in 1999 for these services.

                                       63
<PAGE>

Preferred and Common Stock Sales

   These directors, executive officers, holders of more than 5% of a class of
voting securities and members of these persons' immediate families purchased
from us shares of our series B preferred stock and series C preferred stock and
common stock. Immediately before the closing of this offering, each outstanding
share of series B preferred stock and series C preferred stock will
automatically convert into one share of common stock.

<TABLE>
<CAPTION>
                                                   Series B  Series C   Common
   Purchaser                                       Preferred Preferred   Stock
   ---------                                       --------- --------- ---------
<S>                                                <C>       <C>       <C>
Joseph Amram......................................       --       --     200,000
 Aurelle Amram Trust..............................       --       --      71,364
 Oz Amram Trust...................................       --       --      71,364
 Nancy Schary Trust...............................    10,949      --         --
Srinivasan Krishnan...............................       --       --     172,063
Timothy Conley....................................       --       --      33,333
Rajiv Dholakia....................................       --       --     333,333
Alexander Garcia-Tobar............................       --       --     200,000
David Jevans......................................       --       --     303,926
Sathvik Krishnamurthy.............................       --       --         --
 Krishnamurthy Trust..............................       --       --     346,500
 L. Malathy Villar................................       --       --       2,500
 L. Malathy Villar, custodian for Arya Bruno......       --       --         500
 L. Malathy Villar, custodian for Harmon Bruno....       --       --         500
Martin Yam........................................       --       --     193,333
Scott J. Loftesness...............................    27,363      --       1,575
August Capital, L.P............................... 1,507,936  373,134        --
Intel Corporation.................................   529,100  165,837        --
Lucent Venture Partners...........................       --   746,268        --
US Venture Partners V, L.P........................   264,550  663,405  1,318,104
</TABLE>

   Ms. Villar is the sister of Mr. Krishnamurthy. Mr. Krishnamurthy disclaims
beneficial ownership of these securities. The shares held by US Venture
Partners V, L.P. include shares held by parties affiliated with US Venture
Patners V, L.P.

   This is a summary of sales of our preferred and common stock that are
presented in the table above.

   Series B financing. On May 6, 1998, we sold a total of 3,282,540 shares of
our series B preferred stock at a price of $1.89 per share convertible into an
aggregate of 3,282,540 shares of common stock.

   Series C financing. On July 21, 1999 and August 6, 1999, we sold a total of
3,247,928 and 560,639 shares of series C preferred stock at a price of $6.03
per share convertible into an aggregate of 3,808,567 shares of common stock.

   Receipt.com merger. On December 30, 1999, US Venture Partners V, L.P.
received 580,486 shares of our series C preferred stock and 530,272 shares of
our common stock in exchange for 3,365,385 shares of Receipt.com series B
preferred stock.

   We entered into agreements with the holders of our preferred stock providing
for rights to register these shares. The most recent agreement is an amended
and restated investor rights

                                       64
<PAGE>

agreement dated July 21, 1999, which restates and incorporates the registration
rights of all investors.

 Common stock financing.

   On June 18, 1999, Mr. Joseph Amram exercised an option to acquire 142,728
shares of common stock at an exercise price of $0.24 per share.

   On August 30, 1999, Mr. Joseph Amram exercised an option to acquire 133,333
shares of common stock at an exercise price of $0.90 per share.

   On February 3, 2000, Mr. Joseph Amram purchased 66,666 shares of common
stock from Mr. David Jevans at a price of $4.77 per share.

   On June 24, 1999, Mr. Srinivasan Krishnan exercised an option to acquire
105,396 shares of common stock at an exercise price of $0.24 per share.

   On August 30, 1999, Mr. Srinivasan Krishnan exercised an option to acquire
66,666 shares of common stock at an exercise price of $0.90 per share.

   On March 6, 2000, Mr. Timothy Conley exercised an option to acquire 33,333
shares of common stock at an exercise price of $4.95 per share.

   On June 14, 1999, Mr. Rajiv Dholakia exercised an option to acquire 300,000
shares of common stock at an exercise price of $0.24 per share.

   On January 18, 2000, Mr. Rajiv Dholakia exercised an option to acquire
33,333 shares of common stock at an exercise price of $3.75 per share.

   On June 18, 1999, Mr. Alexander Garcia-Tobar exercised an option to acquire
100,000 shares of common stock at an exercise price of $0.24 per share.

   On September 9, 1999, Mr. Alexander Garcia-Tobar exercised an option to
acquire 66,666 shares of common stock at an exercise price of $0.90 per share.

   On January 19, 2000, Mr. Alexander Garcia-Tobar exercised an option to
acquire 33,333 shares of common stock at an exercise price of $3.75 per share.

   On December 30, 1999, Mr. David Jevans received 220,593 shares of common
stock in exchange for 1,400,000 shares of Receipt.com, Inc. common stock.

   On March 6, 2000, Mr. David Jevans exercised options to acquire 43,331 and
123,335 shares of common stock at exercise prices of $0.66 and $2.16 per share,
respectively.

   On May 25, 1999, Mr. Sathvik Krishnamurthy exercised an option to acquire
300,000 shares of common stock at an exercise price of $0.24 per share.

   On January 20, 2000, Mr. Sathvik Krishnamurthy exercised an option to
acquire 50,000 shares of common stock at an exercise price of $3.75 per share.

   On June 6, 1999, Mr. Martin Yam exercised an option to acquire 116,666
shares of common stock at an exercise price of $0.24 per share.

   On August 30, 1999, Mr. Martin Yam exercised an option to acquire 50,000
shares of common stock at an exercise price of $0.90 per share.

   On February 1, 2000, Mr. Martin Yam exercised an option to acquire 26,666
shares of common stock at an exercise price of $3.75 per share.

   On March 7, 2000, Mr. Scott Loftesness exercised an option to acquire 1,575
shares of common stock at an exercise price of $0.66 per share.

   On December 30, 1999, US Venture Partners V, L.P. received 787,833 shares of
common stock in exchange for 5,000,000 shares of Receipt.com common stock.

                                       65
<PAGE>

                             PRINCIPAL STOCKHOLDERS

   This table presents information concerning the beneficial ownership of the
shares of our common stock as of April 30, 2000. The table also contains
information about beneficial ownership, as adjusted to reflect the sale of
common stock in this offering assuming:

    .  17,850,708 shares of common stock outstanding as of April 30, 2000
       and 21,850,708 shares outstanding immediately following the
       completion of this offering,

    .  conversion of all outstanding shares of convertible preferred stock
       into common stock, and

    .  no exercise of the underwriters' over-allotment option.

   Specifically, the table reflects beneficial ownership information about:

    .  each person we know to be the beneficial owner of 5% or more of the
       outstanding shares of common stock;

    .  each of our executive officers listed on the summary compensation
       table;

    .  each of our directors; and

    .  all of our executive officers and directors as a group.

   Beneficial ownership is determined under the rules of the Securities and
Exchange Commission and generally includes voting or investment power over
securities. Except in cases where community property laws apply or as indicated
in the footnotes to this table, we believe that each stockholder identified in
the table possesses sole voting and investment power over all shares of common
stock shown as beneficially owned by the stockholder. Shares of common stock
subject to options and warrants that are exercisable or exercisable within 60
days of April 30, 2000 are considered outstanding and beneficially owned by the
person holding the options for the purpose of computing the percentage
ownership of that person but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person.

   Generally, shares of common stock subject to options granted by us and
shares of common stock which were purchased by exercising options granted by us
are subject to a right of repurchase in favor of ValiCert which lapses for one
eighth of the shares after six months of vesting and then ratably on a monthly
basis for 48 months. Unless indicated below, the address of each individual
listed below is 339 North Bernardo Avenue, Mountain View, CA 94043.

<TABLE>
<CAPTION>
                                                             Percentage of
                                              Number of    Shares Outstanding
                                                Shares    --------------------
                                             Beneficially Before the After the
Name and Address                                Owned      Offering  Offering
----------------                             ------------ ---------- ---------
<S>                                          <C>          <C>        <C>
August Capital..............................  1,881,071      10.5%      8.6%
 2480 Sand Hill Road, Suite 101
 Menlo Park, CA 94025
Gaitonde Living Trust.......................  1,631,577       9.1%      7.5%
 c/o Girish Gaitonde
 Tekedge Corporation
 5400 Betsy Ross Drive
 Santa Clara, CA 95054
Srinivasan Krishnan.........................  1,427,549       8.0%      6.5%
US Venture Partners V, L.P. and affiliated
 entities...................................  2,246,060      12.6%     10.3%
 2180 Sand Hill Road, Suite 300
 Menlo Park, CA 94025
</TABLE>

                                       66
<PAGE>

<TABLE>
<CAPTION>
                                                          Percentage of Shares
                                              Number of    Beneficially Owned
                                                Shares    --------------------
                                             Beneficially Before the After the
Name and Address                                Owned      Offering  Offering
----------------                             ------------ ---------- ---------
<S>                                          <C>          <C>        <C>
Joseph Amram................................  1,599,388       8.9%      7.3%
Rajiv Dholakia..............................    361,904       2.0%      1.7%
Sathvik Krishnamurthy.......................    389,833       2.2%      1.8%
Martin Yam..................................    246,031       1.4%      1.1%
Taher Elgamal...............................     60,000       0.3%      0.3%
John Johnston...............................  1,881,070      10.5%      8.6%
Scott J. Loftesness.........................     82,219       0.5%      0.4%
Magdalena Yesil.............................  2,286,060      12.8%     10.5%
All executive officers and directors of
 ValiCert as a group........................  9,341,710      50.1%     41.2%
</TABLE>
--------
 Mr. Krishnan's shares include

   .  immediately exercisable options to purchase 33,333 shares of common
      stock at an exercise price of $9.00 per share that are subject to a
      right of repurchase which lapses over time; and

   .  warrants to purchase 19,096 shares of common stock at an exercise price
      of $18.90 per share.

 The shares held by US Venture Partners V, L.P. and affiliated entities include

   .  2,021,455 shares held by US Venture Partners V, L.P.; and

   .  224,604 shares held by parties affiliated with US Venture Partners V,
      L.P. US Venture Partners V, L.P. disclaims voting power and beneficial
      ownership of the shares held by its affiliated parties.

 Mr. Amram's shares include

   .  immediately exercisable options to purchase 66,666 shares of common
      stock at an exercise price of $9.00 per share that are subject to a
      right of repurchase which lapses over time;

   .  warrants to purchase 38,194 shares of common stock at an exercise price
      of $18.90 per share; and

   .  warrants to purchase 26,455 shares of series B preferred stock at an
      exercise price of $1.89 per share.

 Mr. Dholakia's shares include warrants to purchase 28,571 shares of common
stock at an exercise price of $18.90 per share.

 Mr. Krishnamurthy's shares include

   .  346,500 shares held by the Krishnamurthy Trust; and

   .  warrants to purchase 43,333 shares of common stock at an exercise price
      of $18.00 per share.

 Mr. Yam's shares include

   .  immediately exercisable options to purchase 6,666 shares of common
      stock at an exercise price of $3.75 per share that are subject to a
      right of repurchase which lapses over time;

                                       67
<PAGE>

   .  immediately exercisable options to purchase 33,333 shares of common
      stock at an exercise price of $9.00 per share subject to a right of
      repurchase which lapses over time; and

   .  warrants to purchase 12,698 shares of common stock at an exercise price
      of $18.90 per share.

   Mr. Elgamal's shares include immediately exercisable options to purchase
13,333 shares of common stock at an exercise price of $0.24 per share.

   Share attributed to Mr. Johnston consist of shares held by August Capital,
L.P. Mr. Johnston disclaims voting power and beneficial ownership of the shares
held by August Capital, L.P.

   Mr. Loftesness' shares include warrants to purchase 6,613 shares of series A
junior preferred stock at an exercise price of $1.89 per share.

   Ms. Yesil's shares consist of 40,000 shares held in trust for her children
and shares held by US Venture Partners V, L.P. and affiliated entities. Ms.
Yesil disclaims voting power and beneficial ownership of the shares held by
entities affiliated with US Venture Partners V, L.P.

                                       68
<PAGE>

                          DESCRIPTION OF CAPITAL STOCK

   Upon the closing of this offering, our authorized capital stock will consist
of 100,000,000 shares of common stock, and 2,000,000 shares of preferred stock.
As of April 30, 2000, there were outstanding 4,491,165 shares of common stock
and 13,359,543 shares of preferred stock. These shares were held of record by a
total of 215 stockholders.

   This is a summary of all material terms of our common stock, preferred stock
and outstanding warrants to purchase common stock, as well as some of the terms
of our amended and restated certificate of incorporation and bylaws which will
become effective after this offering closes and amended and restated investor
rights agreement. This summary does not describe all of the terms and
provisions of our common and preferred stock or warrants and those other
instruments and agreements.

Common Stock

   Subject to preferences that may apply to shares of preferred stock
outstanding at the time, the holders of outstanding shares of common stock are
entitled to receive dividends out of assets legally available for that purpose
at the times and in the amounts as our board of directors may determine.

   Each common stockholder is entitled to one vote for each share of common
stock held on all matters submitted to a vote of common stockholders.
Cumulative voting for the election of directors is not provided for in our
certificate of incorporation, which means that the holders of a majority of the
outstanding shares of common stock can elect all of the directors then standing
for election.

   Our common stock is not entitled to preemptive rights and is not subject to
conversion or redemption.

   Upon our liquidation, dissolution or winding-up, the assets legally
available for distribution to our stockholders are distributable ratably among
the holders of our common stock after payment of liquidation preferences, if
any, on any outstanding preferred stock and payment of or provision for claims
of creditors.

   Each outstanding share of common stock is, and all shares of common stock to
be outstanding upon completion of this offering will be, fully paid and
nonassessable.

Preferred Stock

   Upon the closing of this offering, each outstanding share of preferred stock
then outstanding will be converted into one share of common stock.

   After this offering, our board of directors will be authorized, without any
vote or action by our stockholders, to issue preferred stock in one or more
series, to establish the number of shares to be included in each series and to
designate the rights, preferences and privileges of the shares of each series
and their qualifications, limitations or restrictions.

   Our board of directors may authorize the issuance of preferred stock with
voting, conversion or other rights that could adversely affect the voting power
or other rights of the holders of our common stock. The issuance of preferred
stock, while providing flexibility in possible acquisitions and other corporate
purposes, could have the effect of delaying or preventing a change in control
of ValiCert. The issuance of preferred stock may also cause the market price of
our common stock to decline or impair the voting and other rights of the
holders of our common stock. We have no plans to issue any shares of preferred
stock.

                                       69
<PAGE>

Warrants

   As of April 30, 2000, we had outstanding:

  .  warrants to purchase 471,666 shares of common stock with an exercise
     price of $18.90 per share, which expire in 2010;

  .  warrants to purchase 86,666 shares of common stock with an exercise
     price of $18.00 per share, which expire in 2008;

  .  warrants to purchase 56,427 shares of series A junior preferred stock
     with a weighted average exercise price of $2.06 per share, which expire
     in 2008;

  .  warrants to purchase 26,455 shares of series B preferred stock with an
     exercise price of $1.89 per share, which expire in 2008; and

  .  warrants to purchase 35,832 shares of series C preferred stock with a
     weighted average exercise price of $6.37 per share, which expire in
     2010.

   Following the closing of this offering the warrants to purchase series A
junior preferred stock, series B preferred stock and series C preferred stock
will entitle the holders to purchase the same number of shares of our common
stock.

Registration Rights

   The holders of 9,090,564 shares of our series A senior, series B and series
C preferred stock and the holders of warrants to purchase 186,861 shares of
preferred stock have the right to require us to register the shares of common
stock issued or issuable on conversion of that preferred stock with the
Securities and Exchange Commission so that the common stock may be resold.

   The holders of 9,090,564 shares of our series A senior, series B and series
C preferred stock and 3,054,236 shares of common stock and series A junior
preferred stock and the holders of warrants to purchase 186,861 shares of
preferred stock have the right to require that we include the shares of common
stock issuable on conversion of that preferred stock and those shares of common
stock in any registration statement we file with the SEC.

   After this offering, these registration rights will continue to be
applicable to those shares of common stock issued on conversion of our
preferred stock and to those shares of common stock and shares of common stock
issued upon conversion of those shares of series A junior preferred stock. The
underwriters of any underwritten offering will have the right to limit the
number of shares to be included in the filed registration statement.

   Demand registration rights

   The holders of 50% of the aggregate number of shares of our common stock
issued or issuable on conversion of our series A senior, series B and series C
preferred stock have the right to demand that we register their shares, on two
occasions, under the Securities Act of 1933.

   If we are eligible to file a registration statement on Form S-3, any holder
of our series A senior, series B and series C preferred stock has the right to
demand that we file a registration statement on Form S-3 covering the shares of
common stock issuable on conversion of that preferred stock, as long as the
amount of securities to be sold under the registration statement exceeds
$1,000,000. We are not required to register their shares on Form S-3 on more
than two occasions in any twelve-month period.

   Piggyback registration rights

   If we register securities for public sale, the holders of our series A
senior, series B and series C preferred stock and some holders of common stock
and series A junior preferred stock will be entitled to include the common
stock issuable on conversion of those shares in the registration statement.

                                       70
<PAGE>

   Expenses of registration

   We will pay all registration expenses of all demand and piggyback
registrations. These registration expenses exclude underwriting discounts and
commissions but include the reasonable fees of a single counsel acting on
behalf of all selling holders not to exceed $30,000. Holders requesting a
registration on Form S-3 as described above will be required to pay all
registration expenses.

   Expiration of registration rights

   All registration rights will expire seven years after this offering is
completed.

Delaware Anti-Takeover Law and Charter Provisions

   The provisions of the Delaware General Corporation Law, our amended and
restated certificate of incorporation and our bylaws described below may have
the effect of delaying, deferring or discouraging another person from acquiring
control of us.

   Section 203 of the Delaware General Corporation Law

   We will be subject to the provisions of section 203 of the Delaware General
Corporation Law regulating corporate takeovers. This section prohibits, subject
to exceptions, publicly traded Delaware corporations from engaging in a
business combination, which includes a merger or sale of more than 10% of the
corporation's assets, with any interested stockholder. An interested
stockholder is generally defined as a person who, with its affiliates and
associates, owns or, within three years before the time of determination of
interested stockholder status, owned 15% or more of a corporation's outstanding
voting securities. This prohibition does not apply if:

  .  the transaction is approved by the board of directors before the time
     the interested stockholder attained that status;

  .  upon the closing of the transaction that resulted in the stockholder
     becoming an interested stockholder, the interested stockholder owned at
     least 85% of the voting stock of the corporation outstanding at the
     start of the transaction; or

  .  at or after the time the stockholder became an interested stockholder,
     the business combination is approved by the board and authorized at an
     annual or special meeting of stockholders by at least two-thirds of the
     outstanding voting stock that is not owned by the interested
     stockholder.

   A Delaware corporation may opt out of this provision with an express
provision in its original certificate of incorporation or an express provision
in its certificate of incorporation or bylaws resulting from an amendment
approved by at least a majority of the outstanding voting shares. However, we
have not opted out of this provision. This provision of the Delaware General
Corporation Law could prohibit or delay a merger or other takeover or change-
in-control attempts and may discourage attempts to acquire us.

   Certificate of incorporation and bylaws

   Provisions of our amended and restated certificate of incorporation and
bylaws, which will become effective upon the closing of this offering, may have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of ValiCert.
These provisions could cause the price of our common stock to decrease. Some of
these provisions allow us to issue preferred stock without any vote or

                                       71
<PAGE>

further action by the stockholders, eliminate the right of stockholders to act
by written consent without a meeting and eliminate cumulative voting in the
election of directors. These provisions may make it more difficult for
stockholders to take specific corporate actions and could have the effect of
delaying or preventing a change in control of ValiCert. Upon the closing of
this offering, our certificate of incorporation will provide that the board of
directors will be divided into three classes of directors, with each class
serving a staggered three-year term. The classification system of electing
directors may discourage a third party from making a tender offer or attempting
to obtain control of us and may maintain the incumbency of the directors,
because the classification of the board of directors generally increases the
difficulty of replacing a majority of the directors.

Indemnification of Directors and Executive Officers and Limitation of Liability

   Our certificate of incorporation will limit the liability of directors to
the fullest extent permitted by the Delaware General Corporation Law. Our
bylaws will provide that we will indemnify our directors and officers to the
fullest extent permitted by the Delaware General Corporation Law. Our bylaws
will also provide that we will indemnify officers and directors against losses
that they may incur in investigations and legal proceedings resulting from
their services to us. We intend to enter into separate indemnification
agreements, before the closing of this offering, with our directors and
executive officers, which may be more broad than the specific indemnification
provisions contained in the Delaware General Corporation Law. These provisions
and agreements may have the effect of preventing changes in our management.

Transfer Agent and Registrar

   The transfer agent and registrar for the common stock is ChaseMellon
Shareholder Services. The address of our transfer agent and registrar is
235 Montgomery Street, San Francisco, CA 94105, and its telephone number at
this location is (415) 743-1421.

Listing

   Our common stock has been approved for listing on the Nasdaq National Market
under the symbol VLCT.

                                       72
<PAGE>

                        SHARES ELIGIBLE FOR FUTURE SALE

Sales in the Public Market Could Hurt the Market Price of Our Stock

   Before this offering, there has not been a public market for our common
stock. Future sales of substantial amounts of our common stock in the public
market could adversely affect prevailing market prices and our ability to raise
equity capital in the future. The holders of a substantial majority of the
shares of our common stock outstanding before this offering will be restricted
from reselling those shares for 180 days after the date of this prospectus.
Future sales of substantial amounts of our common stock in the public market
after the lock-up restrictions lapse could adversely affect the prevailing
market price of our common stock.

Outstanding Shares and Freely Tradeable Shares

   Upon completion of this offering, we will have 21,850,708 shares of common
stock outstanding, based on shares outstanding at April 30, 2000. This assumes
no exercise of the underwriters' over-allotment option, no exercise of
outstanding options and warrants and no issuance of additional shares after
April 30, 2000. The 4,000,000 shares sold in this offering will be freely
tradable without restriction under the Securities Act, unless purchased by our
affiliates, as that term is defined in Rule 144 under the Securities Act,
generally, officers, directors or 10% stockholders.

   The shares of our common stock outstanding before this offering will be
eligible for sale in the public market, subject in some cases to compliance
with the volume and other limitations of Rule 144, as follows.

<TABLE>
<CAPTION>
Days after Date of this  Shares Eligible
Prospectus                  for Sale                       Comment
-----------------------  ---------------                   -------
<S>                      <C>             <C>
180 days................   16,666,824    A substantial number of these shares will
                                         be subject to volume limitations and
                                         restrictions under Rule 144 because they
                                         will have been held for over one year but
                                         less than two years or they are held by
                                         some of our officers and directors.

After 180 days..........    1,183,884    Substantially all of these shares have been
                                         exercised but are subject to vesting. Some
                                         of these shares are subject to restrictions
                                         of Rule 144.
</TABLE>

Lock-Up Agreements

   Stockholders holding a substantial majority of the shares of common stock
outstanding before this offering have agreed not to sell any shares of our
common stock, except any shares they acquire in the open market, without the
prior written consent of Deutsche Bank Securities Inc. and Merrill Lynch,
Pierce, Fenner & Smith Incorporated until 180 days after the date of this
prospectus. Deutsche Bank Securities Inc. and Merrill Lynch, Pierce, Fenner &
Smith Incorporated may release any restricted shares in whole or in part at any
time without prior public notice.

Stock Options

   We intend to file one or more registration statements on Form S-8 under the
Securities Act to register approximately 8,465,572 shares of common stock
issued under our stock option

                                       73
<PAGE>

and equity incentive plans. These registration statements are expected to be
filed soon after the date of this prospectus and will automatically become
effective upon filing. Shares registered under these registration statements
will be available for sale in the open market, unless the shares are subject to
vesting restrictions with ValiCert or the lock-up restrictions above.

Rule 144

   In general, under Rule 144 a person, or persons whose shares are aggregated,
who has beneficially owned those shares for at least one year is entitled to
sell within any three-month period beginning 90 days after the date of this
prospectus a number of shares that does not exceed the greater of:

  .  1% of the number of shares of common stock outstanding, or approximately
     218,507 of the shares outstanding immediately after this offering; or

  .  the average weekly trading volume of the common stock on the Nasdaq
     National Market during the four calendar weeks preceding the filing of a
     notice on Form 144 for the sale.

   Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.

Rule 144(k)

   Under Rule 144(k), a person who is not and has not been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years, is
entitled to sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Unless
otherwise restricted, shares that have been held by a non-affiliate for at
least two years may be sold in the open market immediately after the lock-up
agreements expire.

Rule 701

   Any employee, officer of director of, or consultant to, us who purchased his
shares under a written compensatory plan or contract may be entitled to sell
his shares in reliance on Rule 701. Rule 701 permits affiliates to sell their
Rule 701 shares under Rule 144 without complying with the holding period
requirements of Rule 144. Rule 701 further provides that non-affiliates may
sell these shares in reliance on Rule 144 without having to comply with the
holding period, public information, volume limitation or notice provisions of
Rule 144. All holders of Rule 701 shares are required to wait until 90 days
after the date of this prospectus before selling those shares.

Registration Rights

   Upon completion of this offering, the holders of 9,090,564 shares of common
stock, or their transferees, may demand that we register their shares under the
Securities Act and holders of 12,144,800 shares of common stock, or their
transferees, may elect to include their shares in any other registration
statement we may file under the Securities Act, subject to exceptions. If these
shares are registered, they will be freely tradable without restriction under
the Securities Act.

                                       74
<PAGE>

                                  UNDERWRITING

General

   On the terms and conditions contained in an underwriting agreement, the
underwriters named below, through their representatives Deutsche Bank
Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as
joint bookrunners, and Donaldson, Lufkin & Jenrette Securities Corporation and
Wit SoundView Corporation, have agreed to purchase from us the numbers of
shares of common stock appearing opposite their names in the table below at the
initial public offering price less the underwriting discounts and commissions.
As joint bookrunners, Deutsche Bank Securities Inc. and Merrill Lynch, Pierce,
Fenner & Smith Incorporated will have equal responsibility for managing this
offering.

<TABLE>
<CAPTION>
                                                                        Number
   Underwriter                                                         of Shares
   -----------                                                         ---------
   <S>                                                                 <C>
   Deutsche Bank Securities Inc....................................... 1,170,000
   Merrill Lynch, Pierce, Fenner & Smith
            Incorporated.............................................. 1,170,000
   Donaldson, Lufkin & Jenrette Securities Corporation................   720,000
   Wit SoundView Corporation..........................................   540,000
   First Analysis Securities Corporation..............................   200,000
   Pacific Crest Securities, Inc......................................   200,000
                                                                       ---------
     Total............................................................ 4,000,000
                                                                       =========
</TABLE>

   The underwriting agreement provides that the obligations of the underwriters
are subject to specified conditions. The underwriting agreement provides that
the underwriters will purchase all of the shares of common stock offered by
this prospectus, other than those covered by the over-allotment option
described below, if any of the shares are purchased.

   We have been advised by the representatives of the underwriters that the
underwriters propose to offer the shares of common stock to the public at the
initial public offering price specified on the cover page of this prospectus
and to selected dealers at a price that represents a concession not in excess
of $0.40 per share from the initial public offering price. The underwriters may
allow, and those dealers may re-allow, a concession not in excess of $0.10 per
share to other dealers. After the initial public offering, the representatives
of the underwriters may change the offering price and other selling terms.

Underwriters' option to purchase additional shares

   We have granted to the underwriters an option to purchase up to 600,000
additional shares of common stock at the initial public offering price less the
underwriting discounts and commissions shown on the cover page of this
prospectus. The underwriters may exercise this option not later than 30 days
after the date of this prospectus. The underwriters may exercise this option
only to cover over-allotments for the sale of common stock offered by this
prospectus. If the underwriters exercise this option, each of the underwriters
will become obligated to purchase approximately its pro rata share of the
option shares that the underwriters have elected to purchase. An underwriter's
pro rata share will be equal to the percentage that the number of shares of
common stock shown next to its name in the table above bears to the total
number of shares shown in that table. We will be obligated to sell those
additional shares of common stock to the underwriters if the option is
exercised.

                                       75
<PAGE>

Underwriting discounts and commissions and expenses

   The underwriting discounts and commissions per share are equal to the
initial public offering price per share of common stock less the amount paid by
the underwriters to us per share of common stock. The underwriting discounts
and commissions are 7% of the initial public offering price. We have agreed to
pay the underwriters the following discounts and commissions, assuming either
no exercise or full exercise by the underwriters of the underwriters' over-
allotment option:

<TABLE>
<CAPTION>
                                            Total Discounts and Commissions
                        Discounts and -------------------------------------------
                         Commissions   Without Exercise of  With Full Exercise of
                          Per Share   Over-Allotment Option Over-Allotment Option
                        ------------- --------------------- ---------------------
<S>                     <C>           <C>                   <C>
Discounts and
 commissions paid by
 us....................    $ 0.70          $ 2,800,000           $ 3,220,000
</TABLE>

   We estimate that the total expenses of this offering, excluding underwriting
discounts and commissions, will be approximately $1.2 million.

Indemnification of underwriters

   We have agreed to indemnify the underwriters against some specified types of
liabilities, including liabilities under the Securities Act. We have agreed to
contribute to payments the underwriters may be required to make because of
these liabilities.

Lock-up agreements

   Each of our officers and directors and the holders of a substantial majority
of the outstanding shares of our common stock have agreed not to offer, sell or
dispose of any shares of our common stock or any securities exercisable for
shares of our common stock for a period of 180 days after the date of this
prospectus without the prior written consent of both Deutsche Bank Securities
Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated. This consent may
be given at any time without public notice. This prohibition does not apply to
shares acquired in the open market. We have entered into a similar agreement
with the representatives of the underwriters, except that we may

  .  issue shares upon the exercise of outstanding stock options and
     warrants,

  .  grant options and sell shares under our 1998 stock plan and 2000
     employee stock purchase plan,

  .  issue stock in mergers and acquisitions, and

  .  issue stock with the prior written consent of both Deutsche Bank
     Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated.
     This consent may be given at any time without notice.

We may only issue stock in mergers and acquisitions if the recipients of that
stock agree not to offer, sell or dispose of those shares during the period of
180 days after the date of this prospectus.

No sales to discretionary accounts

   The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.

Market stabilization activities

   To facilitate this offering, the underwriters may engage in transactions
that stabilize, maintain or affect the market price of our common stock. The
underwriters may over-allot shares of our common stock, thus creating a short
position in our common stock. Covered short sales are sales of shares made in
an amount not greater than the underwriters' over-allotment option to purchase
additional shares in this offering. The underwriters may close out

                                       76
<PAGE>

any covered short position by either exercising their over-allotment option or
purchasing shares in the open market. The underwriters may also make naked
short sales, which are sales in excess of the over-allotment option. The
underwriters must close out any naked short position by purchasing shares in
the open market. A naked short position is more likely to be created if the
underwriters are concerned that there may be downward pressure on the price of
the shares in the open market after pricing that could adversely affect
investors who purchase in the offering. In determining the source of shares to
close out any covered short position, the underwriters may consider the price
of shares available for purchase in the open market as compared to the price at
which they may purchase shares through the over-allotment option. The
representatives on behalf of the underwriters may also reclaim selling
concessions allowed to an underwriter or dealer.

   Similar to other purchase transactions, the underwriters' purchases to cover
the syndicate short position may raise or maintain the market price of our
common stock or prevent or retard a decline in the market price of our common
stock. The price of our common stock may be higher than the price that might
otherwise exist in the open market. The underwriters are not required to engage
in these activities and, if begun, may end any of these activities at any time.

Reserved share program

   At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 600,000 shares for sale to our vendors, employees,
family members of employees, customers and other third parties. The number of
shares of our common stock available for sale to the general public will be
reduced if these reserved shares are purchased. Any reserved shares that are
not purchased by these persons will be offered by the underwriters to the
general public on the same basis as the other shares in this offering.

Electronic prospectus

   A prospectus in electronic format is being made available on an Internet
website maintained by Wit SoundView's affiliate, Wit Capital Corporation. Other
dealers purchasing shares from Wit SoundView in this offering have agreed to
make a prospectus in electronic format available on websites maintained by
those dealers. Other than the prospectus in electronic format, the information
on any website maintained by Wit Capital or any dealer is not part of this
prospectus or the registration statement of which this prospectus forms a part,
has not been approved or endorsed by us or any underwriter and should not be
relied upon by investors.

Pricing of this offering

   Before this offering, there has been no public market for our common stock.
Consequently, the initial public offering price for our common stock was
determined by negotiation between us and the representatives of the
underwriters. Among the factors considered in determining the initial public
offering price were:

  .  prevailing market conditions;

  .  our results of operations in recent periods;

  .  the present stage of our development;

  .  the market capitalizations and stages of development of other companies
     that we and the representatives of the underwriters believe to be
     comparable to us; and

  .  estimates of our business potential.

                                       77
<PAGE>

                                 LEGAL MATTERS

   The validity of the common stock offered will be passed upon for us by Gray
Cary Ware & Freidenrich LLP, Palo Alto, California. Brown & Wood LLP, San
Francisco, California will act as counsel for the underwriters.

                                    EXPERTS

   The ValiCert, Inc. consolidated financial statements as of and for the year
ended December 31, 1999 and the Receipt.com, Inc. financial statements for the
year ended December 31, 1998 and the period from January 1, 1999 to December
30, 1999 have been included in this prospectus in reliance upon the report of
Deloitte & Touche LLP, independent auditors, appearing elsewhere in the
registration statement, and upon the authority of the firm as experts in
auditing and accounting.

   The financial statements of Valicert, Inc., as of December 31, 1998 and for
each of the two years then ended, included in this prospectus and registration
statement, have been audited by PricewaterhouseCoopers LLP, independent
accountants. These financial statements have been so included in reliance on
the report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of the firm as experts in auditing and accounting.

                      WHERE YOU CAN FIND MORE INFORMATION

   We have filed with the SEC a registration statement on Form S-1 under the
Securities Act that registers the shares of our common stock to be sold in this
offering. The registration statement, including the attached exhibits and
schedules, contains additional information about us and our capital stock. The
rules and regulations of the SEC allow us to omit various information included
in the registration statement from this document.

   Upon completion of this offering, we will become subject to the reporting
and information requirements of the Securities Exchange Act of 1934 and will
file periodic reports, proxy statements and other information with the SEC. You
may read and copy this information at the following public reference rooms of
the SEC:

  450 Fifth Street, N.W.    7 World Trade Center    500 West Madison Street
  Room 1024                 Suite 1300              Suite 1400
  Washington, DC 20549      New York, NY 10048      Chicago, IL 60661-2511

   You may also obtain copies of this information by mail from the public
reference section of the SEC, 450 Fifth Street, N.W. Room 1024, Washington, DC
20549, at set rates. You may obtain information on the operation of the public
reference rooms by calling the SEC at 1-(800) SEC-0330.

   The SEC also maintains an Internet website that contains reports, proxy
statements and other information about issuers, like ValiCert, who file
electronically with the SEC. The address of that website is http://www.sec.gov.

   We intend to furnish our stockholders with annual reports containing audited
financial statements, and make available to our stockholders quarterly reports
for the first three quarters of each fiscal year containing unaudited interim
financial information.

                                       78
<PAGE>

                                 VALICERT, INC.

                   Index to Consolidated Financial Statements

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
ValiCert, Inc.:
  Independent Auditors' Report--Deloitte & Touche LLP.....................  F-2
  Report of Independent Accountants--PricewaterhouseCoopers LLP...........  F-3
  Consolidated Balance Sheets as of December 31, 1998 and 1999 and March
   31, 2000 (Unaudited)...................................................  F-4
  Consolidated Statements of Operations for the Years Ended December 31,
   1997, 1998 and 1999 and the Three-Month Periods Ended March 31, 1999
   (Unaudited) and 2000 (Unaudited).......................................  F-5
  Consolidated Statements of Stockholders' Deficiency and Comprehensive
   Loss for the Years Ended December 31, 1997, 1998 and 1999 and the
   Three-Month Period Ended March 31, 2000 (Unaudited)....................  F-6
  Consolidated Statements of Cash Flows for the Years Ended December 31,
   1997, 1998 and 1999 and the Three-Month Periods Ended March 31, 1999
   (Unaudited) and 2000 (Unaudited).......................................  F-7
  Notes to Consolidated Financial Statements..............................  F-8

Receipt.com, Inc.:
  Independent Auditors' Report............................................ F-27
  Statements of Operations and Comprehensive Loss for the Year Ended
   December 31, 1998 and from January 1, 1999 to December 30, 1999........ F-28
  Statements of Cash Flows for the Year Ended December 31, 1998 and from
   January 1, 1999 to December 30, 1999................................... F-29
  Notes to Financial Statements for the Year Ended December 31, 1998 and
   from January 1, 1999 to December 30, 1999.............................. F-30

Pro Forma Condensed Combining Financial Information (Unaudited):
  Pro Forma Condensed Combining Financial Statement (Unaudited)........... F-35
  Pro Forma Condensed Combining Statements of Operations (Unaudited)...... F-37
  Notes to Pro Forma Condensed Combining Financial Statement (Unaudited).. F-38
</TABLE>

                                      F-1
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
 ValiCert, Inc.:

   We have audited the accompanying consolidated balance sheet of ValiCert,
Inc. ("Company") as of December 31, 1999, and the related consolidated
statements of operations, stockholders' deficiency and comprehensive loss, and
cash flows for the year ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.

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

   In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of ValiCert, Inc. at December 31,
1999, and the results of its operations and its cash flows for the year ended
December 31, 1999 in conformity with accounting principles generally accepted
in the United States of America.

/s/ DELOITTE & TOUCHE LLP

San Jose, California
April 14, 2000
(May 5, 2000 as to Note 15)


                                      F-2
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders
 of Valicert, Inc.:

   In our opinion, the accompanying balance sheet as of December 31, 1998 and
the related statements of operations, stockholders' deficiency and
comprehensive loss and cash flows present fairly, in all material respects, the
financial position of Valicert, Inc. (the Company), a development stage
company, at December 31, 1998 and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 1998, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above. We have not audited the consolidated financial
statements of Valicert, Inc. for any period subsequent to December 31, 1998."

/s/ PricewaterhouseCoopers LLP

San Jose, California
March 19, 1999
(May 5, 2000 as to Note 15)

                                      F-3
<PAGE>

                                 VALICERT, INC.

                          CONSOLIDATED BALANCE SHEETS
               (In thousands, except share and par value amounts)

<TABLE>
<CAPTION>
                                                                      Pro Forma
                                                                     Stockholders
                                         December 31,                   Equity
                                       -----------------  March 31,   March 31,
                                        1998      1999      2000         2000
                                       -------  --------  ---------  ------------
                                                               (Unaudited)
<S>                                    <C>      <C>       <C>        <C>
ASSETS
Current assets:
Cash and equivalents.................  $ 1,163  $ 14,023  $ 10,983
Short-term investments...............      --      3,404       308
Accounts receivable, net of
 allowances of $0, $75 and $125......      --      1,079     2,471
Prepaid expenses and other current
 assets..............................      185       227       735
                                       -------  --------  --------
   Total current assets..............    1,348    18,733    14,497
Property and equipment, net..........      778     3,848     3,867
Employee receivables.................      125       125       125
Goodwill, net of accumulated
 amortization of $0, $0 and $560.....      --     12,491    11,931
Intangible assets, net of accumulated
 amortization of $0, $0 and $188.....      --      2,266     2,078
Other assets.........................      185       229       535
                                       -------  --------  --------
   Total assets......................  $ 2,436  $ 37,692  $ 33,033
                                       =======  ========  ========
LIABILITIES REDEEMABLE PREFERRED
 STOCK AND STOCKHOLDERS' EQUITY
 (DEFICIENCY)
Current liabilities:
Accounts payable.....................  $   170  $  1,762  $    767
Accrued compensation and related
 benefits............................      160       517        90
Other accrued liabilities............      374       868     1,888
Deferred revenue.....................      --        814     1,133
Short term notes.....................      --        737       153
Current portion of long-term
 obligations.........................      --        710       850
                                       -------  --------  --------
   Total current liabilities.........      704     5,408     4,881
                                       -------  --------  --------
Long-term obligations................      --      2,240     2,587
Other liabilities....................       16        74        60
Commitments and contingencies (Note
 8)
Redeemable convertible preferred
 stock, $0.001 par value; shares
 authorized 42,855,713 (aggregate
 liquidation preference of $39,578 at
 December 31, 1999):
 Series A--Senior shares designated,
  1,865,239; issued and outstanding:
  1998, 1999 and 2000, 3,730,474
  shares; pro forma, none............      565       565       565
 Series A--Junior shares designated,
  8,612,618; issued and outstanding:
  1998, 9,036,577 shares; 1999,
  11,406,613 shares; 2000,
  12,041,300 shares; pro forma,
  none...............................       94       154       183
 Series B shares designated,
  5,200,000; issued and outstanding:
  1998, 9,847,623 shares; 1999 and
  2000 10,165,083 shares; pro forma,
  none...............................    6,150     6,445     6,445
 Series C shares designated,
  6,787,414; issued and outstanding:
  1998, none; 1999 and 2000,
  13,521,817 shares; pro forma,
  none...............................      --     27,147    27,178
 Notes receivable from convertible
  preferred stockholders.............      (61)      (55)      (55)
Stockholders' equity (deficiency):
 Common stock, $0.001 par value;
  authorized--16,666,667 shares;
  1998, none; 1999, 3,621,057; 2000,
  4,413,015; pro forma, 17,565,905...      --          4         4           18
 Additional paid-in capital..........      --     19,998    24,036       58,393
 Deferred stock compensation.........      --     (5,843)   (7,826)      (7,826)
 Notes receivable from common
  stockholders.......................      --       (611)   (1,668)      (1,723)
 Accumulated other comprehensive
  loss...............................      --        --        (65)         (65)
 Accumulated deficit.................   (5,032)  (17,834)  (23,292)     (23,292)
                                       -------  --------  --------     --------
   Total stockholders' equity
    (deficiency).....................   (5,032)   (4,286)   (8,811)      25,505
                                       -------  --------  --------     --------
   Total liabilities and
    stockholders' equity
    (deficiency).....................  $ 2,436  $ 37,692  $ 33,033
                                       =======  ========  ========
</TABLE>

                See notes to consolidated financial statements.

                                      F-4
<PAGE>

                                 VALICERT, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                       Years Ended          Three Months Ended
                                      December 31,              March 31,
                                 -------------------------  -------------------
                                  1997    1998      1999       1999      2000
                                 ------  -------  --------  ----------  -------
                                                               (Unaudited)
<S>                              <C>     <C>      <C>       <C>         <C>
Revenues:
 Software licenses.............  $  --   $    60  $    874  $       89  $ 1,396
 Subscription fees and other
  services.....................     --       --        761          79      480
                                 ------  -------  --------  ----------  -------
   Total revenues..............     --        60     1,635         168    1,876
                                 ------  -------  --------  ----------  -------
Cost of revenues:
 Software licenses.............     --         3        93           7      153
 Subscription fees and other
  services.....................     --       --        134          29    1,041
                                 ------  -------  --------  ----------  -------
   Total cost of revenues......     --         3       227          36    1,194
                                 ------  -------  --------  ----------  -------
Gross profit...................     --        57     1,408         132      682
Operating expenses:
 Research and development......     373    1,728     5,608         822    1,911
 Sales and marketing...........      53    1,445     4,583         802    2,404
 General and administrative....      97      977     1,373         279      686
 Acquired in-process research
  and development..............     --       --      2,780         --       --
 Amortization of intangibles...     --       --        --          --       810
 Amortization of stock
  compensation*................     --       --        162         --       457
                                 ------  -------  --------  ----------  -------
   Total operating expenses....     523    4,150    14,506       1,903    6,268
                                 ------  -------  --------  ----------  -------
Operating loss.................    (523)  (4,093)  (13,098)     (1,771)  (5,586)
Other income (expense):
 Interest income...............     --       125       477           7      190
 Interest expense..............      (7)     (22)     (181)        --       (62)
                                 ------  -------  --------  ----------  -------
   Total other income
    (expense)..................      (7)     103       296           7      128
                                 ------  -------  --------  ----------  -------
Net loss.......................  $ (530) $(3,990) $(12,802) $   (1,764) $(5,458)
                                 ======  =======  ========  ==========  =======
Net loss attributable to common
 stockholders..................  $ (549) $(3,990) $(12,802) $   (1,764) $(5,458)
                                 ======  =======  ========  ==========  =======
Basic and diluted net loss per
 share.........................  $(0.85) $ (8.01) $ (48.86) $(2,322.60) $ (2.31)
                                 ======  =======  ========  ==========  =======
Shares used in computation of
 basic and diluted net loss per
 share.........................     623      498       262           1    2,364
                                 ======  =======  ========  ==========  =======
Pro forma basic and diluted net
 loss per share (Note 1)
 (unaudited)...................                   $  (1.24)             $ (0.36)
                                                  ========              =======
Shares used in pro forma basic
 and diluted net loss per share
 (Note 1) (unaudited)..........                     10,326               15,135
                                                  ========              =======
</TABLE>
--------
*  Amortization of stock compensation:
<TABLE>
<S>                                                               <C>  <C>  <C>
 Cost of revenues:
  Subscription fees and other services..........................  $  4 $--  $  5
 Research and development.......................................    31  --   146
 Sales and marketing............................................    78  --   120
 General and administrative.....................................    49  --   186
                                                                  ---- ---- ----
                                                                  $162 $--  $457
                                                                  ==== ==== ====
</TABLE>

                See notes to consolidated financial statements.

                                      F-5
<PAGE>

                                VALICERT, INC.

  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY AND COMPREHENSIVE LOSS
                     (In thousands, except share amounts)

<TABLE>
<CAPTION>
                                                              Notes      Accumulated
                    Common stock   Additional   Deferred    Receivable      Other                               Total
                  ----------------  Paid-In      Stock         from     Comprehensive Accumulated           Comprehensive
                   Shares   Amount  Capital   Compensation Stockholders     Loss        Deficit    Total        Loss
                  --------- ------ ---------- ------------ ------------ ------------- ----------- --------  -------------
<S>               <C>       <C>    <C>        <C>          <C>          <C>           <C>         <C>       <C>
Balances,
January 1,
1997............        --   $ --   $   --      $   --       $   --         $ --       $   (493)  $   (493)   $    --
Net loss and
comprehensive
loss............                                                                           (530)      (530)       (530)
                  ---------  ----   -------     -------      -------        -----      --------   --------    --------
Balances,
December 31,
1997............        --     --       --          --           --           --         (1,023)    (1,023)        --
Issuance of
Series A-Senior
preferred
stock...........                                                                            (19)       (19)
Net loss and
comprehensive
loss............                                                                         (3,990)    (3,990)     (3,990)
                  ---------  ----   -------     -------      -------        -----      --------   --------    --------
Balances,
December 31,
1998............        --     --       --          --           --           --         (5,032)    (5,032)        --
Issuance of
common stock and
common stock
options in
connection with
acquisition
(note 2)........  2,182,139     4    17,166      (3,733)         (52)                               13,385
Exercise of
common stock
options and
issuance of
stockholder
notes...........  1,438,918             560                     (541)                                   19
Interest on
stockholder
notes...........                                                 (18)                                  (18)
Deferred stock
compensation....                      2,272      (2,272)
Amortization of
stock
compensation....                                    162                                                162
Net loss and
comprehensive
loss............                                                                        (12,802)   (12,802)    (12,802)
                  ---------  ----   -------     -------      -------        -----      --------   --------    --------
Balances,
December 31,
1999............  3,621,057     4    19,998      (5,843)        (611)         --        (17,834)    (4,286)        --
Exercise of
common stock
options and
issuance of
stockholder
holder notes*...    791,958           1,598                   (1,091)                                  507
Deferred stock
compensation*...                      2,440      (2,440)
Amortization of
stock
compensation*...                                    457                                                457
Interest on
stockholder
notes*..........                                                 (16)                                  (16)
Repayment of
notes receivable
from
stockholders*...                                                  50                                    50
Net loss*.......                                                                         (5,458)    (5,458)     (5,458)
Change in net
unrealized loss
from short-term
investments*....                                                              (65)                     (65)        (65)
                                                                                                              --------
Comprehensive
loss*...........                                                                                              $ (5,523)
                  ---------  ----   -------     -------      -------        -----      --------   --------    ========
Balances, March
31, 2000*.......  4,413,015  $  4   $24,036     $(7,826)     $(1,668)       $ (65)     $(23,292)  $ (8,811)
                  =========  ====   =======     =======      =======        =====      ========   ========
</TABLE>
-----
* Unaudited

                See notes to consolidated financial statements.

                                      F-6
<PAGE>

                                 VALICERT, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                          Years Ended           Three Months
                                          December 31,         Ended March 31,
                                     ------------------------  ----------------
                                     1997    1998      1999     1999     2000
                                     -----  -------  --------  -------  -------
                                                                 (Unaudited)
<S>                                  <C>    <C>      <C>       <C>      <C>
Cash flows from operating
 activities:
 Net loss..........................  $(530) $(3,990) $(12,802) $(1,764) $(5,458)
 Adjustments to reconcile net loss
  to net cash used in operating
  activities:
 Depreciation and amortization.....     14      125       720       69      422
 Interest on stockholder notes.....    --       --        (18)     --       (16)
 Amortization of deferred stock
  compensation.....................    --       --        162      --       457
 In-process research and
  development......................    --       --      2,780      --       --
 Amortization of goodwill and
  intangibles......................    --       --        --       --       749
 Expenses related to professional
  services.........................     32      --        --       --       --
 Changes in assets and liabilities
  (net of acquisitions--Note 2):
  Accounts receivable..............    --       --       (952)    (169)  (1,393)
  Prepaid expenses and other
   current assets..................    (39)    (149)      (41)       8     (508)
  Other assets.....................    (15)    (160)       (2)      (3)    (306)
  Loans to employees...............    --      (125)      --       --       --
  Accounts payable.................    (44)     155     2,470      428     (994)
  Accrued compensation and related
   benefits........................    --       --        120      --      (427)
  Other accrued liabilities........    145      381       390        7    1,019
  Deferred revenue.................     54      (54)      486      (56)     319
  Other liabilities................    --        16        59      (16)     (14)
                                     -----  -------  --------  -------  -------
   Net cash used in operating
    activities.....................   (383)  (3,801)   (6,628)  (1,496)  (6,150)
                                     -----  -------  --------  -------  -------
Cash flows from investing
 activities:
 Property and equipment additions..    (30)    (855)   (2,247)    (544)    (441)
 Cash from acquisitions............    --       --        834      --       --
 Purchase of short-term
  investments......................    --       --     (3,031)     --       --
 Sale of short-term investments....    --       --        --       --     3,031
 Repayment of notes receivable from
  stockholders.....................    --       --        --       --        50
                                     -----  -------  --------  -------  -------
   Net cash used in (provided by)
    investing activities...........    (30)    (855)   (4,444)    (544)   2,640
                                     -----  -------  --------  -------  -------
Cash flows from financing
 activities:
 Exercise of common stock options..    --       --         83      --       507
 Exercise of preferred stock
  warrants and options.............    --       --        294      215       59
 Proceeds from issuance of
  preferred stock, net.............    --     5,351    22,934      --       --
 Repurchase of preferred stock.....    --       --          2      --       --
 Repayment of notes payable........    --       (50)      --       --      (584)
 Proceeds from notes payable.......    830      --        --       --       --
 Borrowings under line-of-credit
  agreements.......................    --       --      2,689      873      488
 Repayment of borrowings...........    --       --     (2,070)     --       --
                                     -----  -------  --------  -------  -------
   Net cash provided by financing
    activities.....................    830    5,301    23,932    1,088      470
                                     -----  -------  --------  -------  -------
Net increase (decrease) in cash and
 equivalents.......................    417      645    12,860     (952)  (3,040)
Cash and equivalents--beginning of
 period............................    101      518     1,163    1,163   14,023
                                     -----  -------  --------  -------  -------
Cash and equivalents--end of
 period............................  $ 518  $ 1,163  $ 14,023  $   211  $10,983
                                     =====  =======  ========  =======  =======
Noncash investing and financing
 activities:
 Preferred stock issued for
  professional services............  $   2  $   --   $    --   $   --   $   --
                                     =====  =======  ========  =======  =======
 Notes payable issued for
  professional services............  $  30  $   --   $    --   $   --   $   --
                                     =====  =======  ========  =======  =======
 Common stock issued in exchange
  for stockholder notes............  $ --   $   --   $    541  $   --   $ 1,091
                                     =====  =======  ========  =======  =======
 Payable converted into preferred
  stock............................  $ --   $   810  $    --   $   --   $   --
                                     =====  =======  ========  =======  =======
 Assets acquired under capital
  lease............................  $ --   $   --   $  1,117  $   --   $   --
                                     =====  =======  ========  =======  =======
 Equity issued for purchase of
  Receipt.com (Note 2), net of cash
  acquired.........................  $ --   $   --   $ 16,815  $   --   $   --
                                     =====  =======  ========  =======  =======
Supplemental disclosure of cash
 flow information--cash paid during
 the period for interest...........  $ --   $     3  $    132  $   --   $    60
                                     =====  =======  ========  =======  =======
</TABLE>

                See notes to consolidated financial statements.

                                      F-7
<PAGE>

                                 VALICERT, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              Years Ended December 31, 1997, 1998 and 1999 and the
   Three-Month Periods Ended March 31, 1999 (Unaudited) and 2000 (Unaudited)

1. Business and Significant Accounting Policies

   Business--ValiCert, Inc. (the Company), incorporated in California in
February 6, 1996, develops and markets software products and services that
provide infrastructure to enable businesses to conduct valid, secure and
provable transactions. In February 1998, the Company reincorporated in
Delaware. During 1999, the Company exited development stage for financial
reporting purposes as it completed its initial product development activities
and commercially released its software products.

   In March 1998, the Company effected a recapitalization which included a 1-
to-1 conversion of common stock into series A-junior preferred stock and a 1-
to-1 conversion of preferred stock into series A senior preferred stock. In May
1998, the Company approved a 2-for-1 stock split, and accordingly all share
information for all prior periods presented has been retroactively adjusted to
reflect the recapitalization and stock split.

   Principles of Consolidation--The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All intercompany
transactions and balances have been eliminated in consolidation.

   Cash Equivalents--The Company considers all highly liquid debt instruments
purchased with a remaining maturity of three months or less to be cash
equivalents.

   Property and Equipment--Property and equipment are stated at cost. Computer
software costs for internal use are capitalized and accounted in accordance
with Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, issued by the American
Institute of Certified Public Accountants. Depreciation and amortization are
computed using the straight-line method over estimated useful lives of the
assets ranging from three to five years, or the lease term, as appropriate.

   Goodwill--Goodwill related to the Receipt.com acquisition (Note 2) is being
amortized on a straight-line basis over five years.

   Intangible Assets--Intangible assets, consisting of purchased technology and
acquired workforce, are related to the acquisition of Receipt.com, described in
Note 2. Amortization is recorded on a straight-line basis over a period of
three years.

   Impairment of Long-Lived Assets--The Company evaluates its long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets, goodwill or other intangibles may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value.

   Software Development Costs--Costs for the development of new software
products and substantial enhancements to existing software products are
expensed as incurred until technological feasibility has been established, at
which time any additional costs would be capitalized in accordance with
Statement of Financial Accounting Standards (SFAS) No. 86.

   Computer Software To Be Sold, Leased or Otherwise Marketed. Because the
Company believes its current process for developing software is essentially
completed with the establishment of technological feasibility, no costs have
been capitalized to date.

                                      F-8
<PAGE>

                                 VALICERT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              Years Ended December 31, 1997, 1998 and 1999 and the
   Three-Month Periods Ended March 31, 1999 (Unaudited) and 2000 (Unaudited)


   Notes Receivable from Stockholders--The notes receivable from stockholders
were issued for redeemable convertible preferred stock and common stock, bear
interest at 6% per annum, and are due between December 2002 and September 2004.

   Revenue Recognition--The Company's revenue recognition policy is consistent
with Statement of Position No. 97-2, Software Revenue Recognition, as amended.
License revenues are comprised of fees for the Company's software products.
Revenue from resellers and end users for license fees is recognized when an
agreement has been signed, delivery of the product has occurred, the fee is
fixed or determinable, collectibility is probable and vendor-specific objective
evidence exists to allocate a portion of the total fee to any undelivered
elements of the arrangement. For electronic delivery, the software is
considered to have been delivered when the Company has provided the customer
with the access codes that allow for immediate possession of the software. If
the fee due from the customer is not fixed or determinable, revenue is
recognized as payments become due. If collectibility is not considered
probable, revenue is recognized when the fee is collected.

   Other service revenues are comprised of revenue from maintenance
arrangements, consulting fees and training. Maintenance arrangements do not
provide for specified upgrade rights and provide technical support and the
right to unspecified upgrades on an if-and-when available basis. Revenue from
maintenance arrangements is recognized on a straight-line basis as service
revenue over the life of the related agreement, which is typically one year. If
maintenance or consulting services are included in an arrangement that includes
a license agreement, amounts related to maintenance or consulting are allocated
based on vendor-specific objective evidence ("VSOE"). When contracts contain
multiple elements and VSOE exists for all undelivered elements, the Company
accounts for the delivered elements in accordance with the Residual Method
prescribed by SOP 98-9. VSOE is determined by reference to either the price
charged when the element is sold separately or for an element that is not being
sold separately the price established by management having the relevant
authority. VSOE could vary from customer to customer based on competitive
pricing factors. Such factors could include the type, size, strategic
significance or future sales potential. Consulting and training revenue is
recognized as services are provided to the customer. Customer advances and
amounts billed to customers in excess of revenue recognized are recorded as
deferred revenue.

   Fees from license arrangements that include a service element for which VSOE
does not exist are recognized ratably over the license term as subscription
fees. Fees from arrangements that require the delivery of unspecified
additional products in the future are accounted for as subscriptions. The
entire fee is recognized ratably over the term beginning with the delivery of
the first product.

   All revenues for the periods presented have been derived from licensing and
other services.

   Income Taxes--Income taxes are provided using an asset and liability
approach which requires recognition of deferred tax liabilities and assets, net
of valuation allowances, for the expected future tax consequences of temporary
differences. These temporary differences are between the financial statement
carrying amounts and the tax bases of assets and liabilities and net operating
loss and tax credit carryforwards.

                                      F-9
<PAGE>

                                 VALICERT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              Years Ended December 31, 1997, 1998 and 1999 and the
   Three-Month Periods Ended March 31, 1999 (Unaudited) and 2000 (Unaudited)


   Stock Compensation--The Company accounts for stock-based awards to employees
using the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees. The Company complies
with the disclosure provisions of SFAS No. 123, Accounting for Stock-Based
Compensation.

   Net Loss per Common Share--Basic net loss per share excludes dilution and is
computed by dividing net loss by the weighted average number of common shares
outstanding for the period. Diluted net loss per share was the same as basic
net loss per share for all periods presented. The effect of any potentially
dilutive securities was excluded as they are anti-dilutive because of the
Company's net losses. This calculation excludes shares subject to repurchase
and under escrow.

   Pro Forma Net Loss per Common Share--Pro forma basic and diluted net loss
per share is computed by dividing net loss by the weighted average number of
common shares outstanding for the period and the weighted average number of
common shares resulting from the assumed conversion of outstanding shares of
convertible preferred stock. These calculations exclude shares subject to
repurchase and under escrow.

   Concentration of Credit Risk--Financial instruments that potentially expose
the Company to concentrations of credit risk consist of cash and equivalents,
short-term investments and trade receivables. The Company limits its exposure
to concentration of credit risk for cash and equivalents and short-term
investments by placing them in high quality securities with major banks and
financial institutions. The Company does not require collateral or other
security to support accounts receivable. To reduce credit risk, management
performs ongoing credit evaluations of its customers' financial condition. The
Company maintains allowances for probable credit losses. At December 31, 1999
two customers accounted for 23% and 17% of the accounts receivable balance.

   Financial Instruments--The Company's financial instruments include cash and
equivalents, short term investments, notes receivable from stockholders and
long-term debt. At December 31, 1998 and 1999, the fair value of these
financial instruments approximated their financial statement carrying amounts
because of the short maturity of these instruments or because the stated
interest rates approximate market rates.

   Significant Estimates--The preparation of financial statements in conformity
with accounting principles generally accepted in the Unites States requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities. Management must also disclose contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from these estimates.

   Certain Significant Risks and Uncertainties--The Company operates in the
software industry and can be affected by a variety of factors. Management
believes that changes in the following areas could have a significant negative
effect on the Company in terms of its future financial position, results of
operations and cash flows; ability to attain profitability; regulatory changes;
fundamental changes in the technology underlying software products; market
acceptance of the Company's products under development; development of sales
channels; litigation or other claims against the Company; the hiring, training
and retention of key employees; successful and timely completion of product
development efforts; and defects in products.

                                      F-10
<PAGE>

                                 VALICERT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              Years Ended December 31, 1997, 1998 and 1999 and the
   Three-Month Periods Ended March 31, 1999 (Unaudited) and 2000 (Unaudited)


   Unaudited Pro Forma Information--The Company's unaudited pro forma balance
sheet information assumes that the conversion upon closing of an initial public
offering of each share of preferred stock to one share of common stock had
actually occurred at March 31, 2000. Estimated proceeds from the common shares
to be issued as a result of such initial public offering are excluded.

   Unaudited Interim Financial Information--The interim financial information
as of March 31, 2000 and for the three months ended March 31, 1999 and 2000 are
unaudited and have been prepared on the same basis as the audited financial
statements. In management's opinion, such unaudited financial information
includes all adjustments (consisting only of normal recurring adjustments)
necessary for a fair presentation of the interim information. Operating results
for the three months ended March 31, 2000 are not indicative of the results
that may be expected for the year ended December 31, 2000.

   Comprehensive Income (Losses)--The Company reports comprehensive income
(loss) in accordance with SFAS No. 130, Reporting Comprehensive Income, which
established standards for reporting and developing comprehensive income.
Comprehensive income (loss) consists of the Company's reported net loss and the
unrealized holding losses on investments. At December 31, 1999, there were no
significant differences between the fair value and cost of such investments.

   Recently Issued Accounting Standard--In June 1998, the Financial Accounting
Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement requires companies to record
derivatives on the balance sheet as assets or liabilities measured at fair
value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. Subsequently, the FASB issued SFAS
No. 137 which deferred the effective date of SFAS No. 133. SFAS No. 133 will be
effective for the Company's fiscal year ending December 31, 2001. Although
management has not fully assessed the implications of SFAS 133, management
believes that this statement will not have a significant impact on the
Company's financial position, results of operations or cash flows.

   Reclassifications--Certain prior period amounts have been reclassified to
conform to current period presentation.

                                      F-11
<PAGE>

                                 VALICERT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              Years Ended December 31, 1997, 1998 and 1999 and the
   Three-Month Periods Ended March 31, 1999 (Unaudited) and 2000 (Unaudited)


2. Acquisition

   On December 30, 1999, the Company acquired Receipt.com (Receipt), which is a
provider of secure data transfer software. The Company exchanged 2,096,137
shares of series C preferred stock with a fair value of $4,213,000 and
2,182,139 shares of common stock with a fair value of $12,314,000 for all the
outstanding shares of Receipt. In addition, the Company converted outstanding
warrants and options to purchase Receipt common stock into options and warrants
to purchase 2,155,603 shares of common stock of the Company with an aggregate
fair value of $998,000. The fair value of the options and warrants converted
were determined using the Black-Scholes option pricing model with the following
assumptions: expected life of 3.5 years, risk-free interest rate of 6.07%,
volatility of 60% and no dividends during the expected term. For unvested
options that were converted, the fair value of $3,733,000 representing the
portion of the intrinsic value was allocated to deferred compensation to be
amortized over the future service period. The aggregate fair value of the
transaction, which was accounted for as a purchase, was $17,649,000 assuming an
underlying fair value of $5.64 for the Company's common stock. Acquisition
costs were $124,000. Of the total shares issued under the agreement, 1,237,520
shares of the series C preferred stock and common stock are being held in
escrow for a period of one year from the closing as collateral for general
representations and warranties made by Receipt under the agreement. Any
adjustment to the shares held in escrow upon release will result in a change to
previously recorded goodwill. Assets acquired and liabilities assumed in the
acquisition were as follows (in thousands):

<TABLE>
     <S>                                                                <C>
     Tangible assets................................................... $ 1,855
     In-process research and development...............................   2,780
     Purchased technology..............................................   1,833
     Acquired workforce................................................     433
     Goodwill..........................................................  12,491
     Liabilities assumed...............................................  (1,743)
                                                                        -------
                                                                        $17,649
                                                                        =======
</TABLE>

   The allocation of the purchase price to the intangibles was based on
management's estimates of the after-tax cash flows. This allocation gave
explicit consideration to the Securities and Exchange Commission's view on
purchased in-process research and development as set forth in its September 9,
1998 letter to the American Institute of Certified Public Accountants.
Management's estimates gave consideration to the following: (i) the employment
of a fair market value premise excluding any Company-specific considerations
that could result in estimates of investment value for the subject assets; (ii)
comprehensive due diligence concerning all potential intangible assets; (iii)
the determination that none of the technology development had been completed at
the time of acquisition; and (iv) the allocation to in-process research and
development based on a calculation that considered only the efforts completed
as of the transaction date, and only the cash flow associated with these
completed efforts for one generation of the products currently in process.

   The Company allocated $2.8 million to acquired in-process research and
development that had not reached technological feasibility as of the date of
the transaction. The acquired in-process research and development was
approximately 60% complete towards development of a system that captures the
digital signatures of the sender and receiver and provides a verifiable time
stamp for each transaction. The primary remaining efforts associated with the
development of the digital receipt technology included code completion in
several key areas. The key areas were management, reporting and access to
receipts in the server vault, application program interfaces and the completion
of a toolkit for developers who need to add digital receipt functionality to
their applications. The Company incurred approximately 30 person-months of

                                      F-12
<PAGE>

                                 VALICERT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              Years Ended December 31, 1997, 1998 and 1999 and the
   Three-Month Periods Ended March 31, 1999 (Unaudited) and 2000 (Unaudited)

additional development since the acquisition to complete the initial
development of the digital receipt technology in March 2000.

   The values assigned to the acquired in-process research and development was
determined by estimating the costs to develop the purchased in-process
technology into a commercially viable product, estimating the resulting net
cash flows from the product and discounting the net cash flows to their present
value. The revenue projections used to value the acquired in-process research
and development were based on estimates of relevant market sizes, growth
factors, expected trends in technology and other factors. Operating expenses
were estimated based on historical results and anticipated profit margins.

   The rates used to discount the net cash flows to their present value were
based on cost of capital calculations. Due to the nature of the forecast and
risks associated with the projected growth, profitability and the developmental
nature of the product, a discount rate of 27.5% was used to value the in-
process research and development. This discount rate was commensurate with the
stage of development and the uncertainties in the economic estimates described
above. If the acquired in-process research and development product is not
commercially successful, the Company's business, operating results and
financial condition may be materially adversely affected in future periods. In
addition, the value of other intangible assets acquired may become impaired.

   The operating results of Receipt since the date of acquisition to December
31, 1999 were nominal. The unaudited pro forma results of operations for the
year ended December 31, (in thousands, except per share data) shown below
assumes that the acquisition took place at the beginning of fiscal 1998.

<TABLE>
<CAPTION>
                                                              1998      1999
                                                            --------  --------
     <S>                                                    <C>       <C>
     Revenues.............................................. $    993  $  2,947
     Net loss.............................................. $(10,527) $(17,845)
     Basic and diluted loss per common share............... $  (3.92) $  (7.30)
</TABLE>

   The pro forma results of operations include adjustments to amortization of
purchased intangibles and goodwill. The $2,780,000 charge for acquired in-
process technology has been excluded from the pro forma results as it is a
material non-recurring charge.

   The pro forma amounts are based on certain assumptions and estimates and do
not necessarily represent results which would have occurred if the acquisition
had taken place on the basis assumed above, nor are they indicative of results
of future combined operations.

3. Short-Term Investments

   Short-term investments at December 31, 1999 consist of (in thousands):

<TABLE>
     <S>                                                              <C>
     Debt securities--available for sale (original maturities less
      than one year)................................................. $ 3,031
     Option to acquire equity securities--available for sale.........     373
                                                                      -------
                                                                      $ 3,404
                                                                      =======
</TABLE>

   At December 31, 1999, the cost of the investments approximated their fair
values. Gains and losses on investments are calculated using the specific
identification method.

                                      F-13
<PAGE>

                                 VALICERT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              Years Ended December 31, 1997, 1998 and 1999 and the
   Three-Month Periods Ended March 31, 1999 (Unaudited) and 2000 (Unaudited)


4. Property and Equipment

   Property and equipment consist of:

<TABLE>
<CAPTION>
                                                                 December 31,
                                                                 --------------
                                                                 1998    1999
                                                                 -----  -------
                                                                      (In
                                                                  thousands)
     <S>                                                         <C>    <C>
     Equipment.................................................. $ 646  $ 3,762
     Furniture and fixtures.....................................   189      253
     Leasehold improvements.....................................    86      824
     Software...................................................   --        52
                                                                 -----  -------
                                                                   921    4,891
     Accumulated depreciation and amortization..................  (143)  (1,043)
                                                                 -----  -------
                                                                 $ 778  $ 3,848
                                                                 =====  =======
</TABLE>

5. Employee Receivables

   The Company loaned $125,000 to two shareholder employees which bear interest
at 6% per annum and mature in September 2003. The loans are secured by 200,000
shares of series A-Junior preferred stock of the Company.

6. Short Term Notes

   In connection with the acquisition of Receipt (Note 2), the Company assumed
promissory notes for $670,000 repayable with interest at 10%. The Company
repaid those notes through April 2000.

7. Long-Term Obligations

   Long-term obligations consist of:

<TABLE>
<CAPTION>
                                                                    December
                                                                       31,
                                                                   -----------
                                                                   1998  1999
                                                                   ---- ------
                                                                       (In
                                                                   thousands)
     <S>                                                           <C>  <C>
     Equipment finance obligation................................. $ -- $  620
     Convertible loan.............................................   --    142
     Capital lease obligations....................................   --  1,164
     Short-term obligation subsequently refinanced under the
      equipment lease line........................................   --  1,024
                                                                   ---- ------
                                                                     --  2,950
     Less current portion.........................................   --    710
                                                                   ---- ------
                                                                   $ -- $2,240
                                                                   ==== ======
</TABLE>

 Loan and Security Agreement

   In December 1998, the Company entered into a subordinated loan and security
agreement with a finance company that provides for borrowings. These borrowings
are secured by a first priority perfected security interest in the assets of
the Company. Borrowings under the loan

                                      F-14
<PAGE>

                                 VALICERT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              Years Ended December 31, 1997, 1998 and 1999 and the
   Three-Month Periods Ended March 31, 1999 (Unaudited) and 2000 (Unaudited)

mature thirty-six months from the date of each borrowing. The loan bears
interest at 11%. Prepayments during the first twelve months of a note will be
subject to a penalty equal to 1.5% of the principal balance being paid. The
Company had equipment finance obligations of $620,000 and capital lease
obligations of $1,117,000 outstanding under this subordinated loan and security
agreement at December 31, 1999.

   The Company granted the finance company a warrant to buy 70,977 shares of
the series C preferred stock at an exercise price of $1.81 per share expiring
in 5 years from date of grant or upon the effectiveness of an initial public
offering. The fair value of the warrant of approximately $95,000 is being
amortized to interest expense over the period of the agreement. The fair value
was determined using the Black-Scholes model with the following assumptions:
expected life 3.5 years; risk-free interest rate of 4.74%; volatility of 60%
and no dividend during the expected term.

 Convertible Loan

   In connection with the acquisition of Receipt (Note 2), the Company assumed
$142,000 due under a convertible loan bearing interest at the Federal Funds
rate (8.5% at December 31, 1999). The loan, payable in monthly installments of
approximately $6,000 through November 2001, is convertible at the option of the
holder into shares of common stock at the market price of common stock on the
date of conversion in the event of an equity financing in which the Company
receives in excess of $2 million.

 Line of Credit

   In September 1998, the Company entered into a $1,000,000 line of credit
agreement with a bank under which a maximum of $500,000 may be used to purchase
equipment, software and furniture. The line of credit bears interest at a rate
of one-half percent plus prime per annum (8.5% at December 31, 1999) and is
secured by the assets of the Company. The Company had no amounts outstanding
under this line of credit at December 31,1999.

   On April 18, 2000, the Company amended the terms of the agreement with the
bank to borrow up to a maximum $2,500,000 at a rate of interest of one quarter
percent over the prime rate. The terms of the revolving facility contain
requirements for meeting a predefined quick asset ratio of 2.5 and a tangible
net worth of $5 million. At December 31,1999, the Company was in compliance of
these financial covenants. The Company granted the bank a warrant to purchase
6,667 shares of the series C preferred stock at an exercise price of $6.00 per
share. The warrant expires five years from the issuance date. The Company
determined the fair value of the warrant to be nominal.

 Equipment Lease Line

   In December 1999, the Company entered into an equipment lease line with a
finance company that provides for borrowings up to $2,000,000, secured by the
assets acquired through the financing. In January 2000, the Company granted the
finance company a warrant to buy 29,851 shares of series C preferred stock at
an exercise price of $2.01 per share.

                                      F-15
<PAGE>

                                 VALICERT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              Years Ended December 31, 1997, 1998 and 1999 and the
   Three-Month Periods Ended March 31, 1999 (Unaudited) and 2000 (Unaudited)

The warrant expires seven years from the issuance date and has a fair value of
$29,000 which will be amortized over the financing term.

   The Company determined the fair value of the warrants by using the Black-
Scholes model with the following assumptions: expected life 3.5 years; risk-
free interest rate of 6.6%; volatility of 60%; and no dividend during the
expected term. Subsequent to year end, the Company drew on this line to
refinance $1,024,000 which was due to suppliers of capital equipment as of
December 31, 1999. As a result, the amount refinanced has been shown as a long-
term obligation at December 31, 1999.

 Capital Leases--Receipt.com, Inc.

   In conjunction with the acquisition of Receipt (Note 2), the Company assumed
obligations under capital leases repayable in monthly installments due through
fiscal 2002. At December 31, 1999, approximately $47,000 was due under these
obligations.

   Annual maturities under the long-term obligations are as follows:

<TABLE>
<CAPTION>
                                                          Capital
     Fiscal Year Ending December 31,                      Leases  Other  Total
     -------------------------------                      ------- ------ ------
                                                             (In thousands)
     <S>                                                  <C>     <C>    <C>
       2000.............................................. $  365  $  482 $  847
       2001..............................................    469     562  1,031
       2002..............................................    475     534  1,009
       2003..............................................    188     208    396
                                                          ------  ------ ------
     Total...............................................  1,497  $1,786 $3,283
                                                                  ====== ======
     Amount representing interest........................    333
                                                          ------
     Present value.......................................  1,164
     Current portion.....................................    228
                                                          ------
     Long term portion................................... $  936
                                                          ======
</TABLE>

   Equipment and leasehold improvements with a net book value of $1,191,000 at
December 31, 1999 (net of accumulated amortization of $183,000) have been
leased under capital leases.

8. Operating Lease Commitments

   The Company leases its facilities under noncancelable operating leases for
which rent expense is ratably recognized over the lease term. The Company
subleases certain office space with an expiration date on December 2000. In
March 2000, the Company entered into a lease for office space in Mountain View,
California. Under the agreement, the Company is required to initially furnish
an unconditional irrevocable standby letter of credit for $1,000,000 as a
security deposit. The Company's obligations under the lease are included in the
future minimum lease payments disclosed below. Rent expense was approximately
$368,000 and $1,049,900 in 1998 and 1999, respectively. Rental income was
$4,000 and $251,000 in 1997 and 1999, respectively. There was no rental income
in 1998.

                                      F-16
<PAGE>

                                 VALICERT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              Years Ended December 31, 1997, 1998 and 1999 and the
    Three-Month Periods Ended March 31, 1999 Unaudited and 2000 (Unaudited)


   Future minimum payments under the Company's operating leases are:

<TABLE>
<CAPTION>
                                                              Operating Sublease
                                                               Leases    Income
                                                              --------- --------
                                                                (In thousands)
     <S>                                                      <C>       <C>
     2000....................................................  $ 2,497    $160
     2001....................................................    3,105     --
     2002....................................................    3,180     --
     2003....................................................    2,678     --
     2004....................................................    2,645     --
     Thereafter..............................................    6,382     --
                                                               -------    ----
     Total...................................................  $20,487    $160
                                                               =======    ====
</TABLE>

9. Redeemable Preferred Convertible Stock and Stockholders' Equity

 Redeemable Convertible Preferred Stock

   In March, April and October 1996, 1,844,638 shares of series A-junior and
3,700,000 shares of series A-senior convertible preferred stock were sold at
prices ranging from $0.008 to $0.075 and a range of $0.08 to $0.75 per share,
respectively; in January and May 1997, 29,468 shares of series A-junior
convertible preferred stock were issued at $0.075 and $0.02 per share; in May
1998, 9,847,623 shares of series B and 30,474 shares of series A-senior
convertible preferred stock were sold at $0.63 and $0.75 per share,
respectively; and in July 1999 and August 1999, 9,743,784 and 1,681,918 shares
of series C convertible preferred stock were sold at $2.01 per share.

   The significant terms of the convertible preferred stock are as follows:

  .  Each share of series A-junior, series A-senior, series B and series C
     preferred stock is convertible into 1/3 of a share of common stock, at
     the option of the holder, subject to adjustments for dilution.
     Additionally, each share of series A-senior preferred stock is
     convertible into series A-junior, at the option of the holder, on a 1-
     to-1 conversion ratio, subject to adjustment for dilution. Each share of
     series A-senior, series A-junior, series B and series C preferred stock
     automatically converts into the number of shares of common stock into
     which such shares are convertible at the then effective conversion ratio
     upon (1) the closing of a public offering of common stock at a per share
     price of at least $5 with gross proceeds of at least $15,000,000 or
     other transactions which result in a change in control, or (2) the
     consent of the holders of the majority of preferred stock.

  .  Each share of series A-junior, series A-senior, series B and series C
     preferred stock has voting rights equivalent to the number of shares of
     common stock into which it is convertible. The series B and series C
     stockholders are also entitled to some protective provisions relating to
     changes in their rights and preferences.

  .  Holders of series B and series C preferred stock are entitled to receive
     noncumulative dividends at the per annum rate of $0.032 per share and
     $0.100 per share, respectively, when and if declared by the Board of
     Directors prior and in preference to any declaration or payment of any
     dividend on the series A-senior, series A-junior

                                      F-17
<PAGE>

                                 VALICERT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              Years Ended December 31, 1997, 1998 and 1999 and the
    Three-Month Periods Ended March 31, 1999 Unaudited and 2000 (Unaudited)

     and common stock. The holders of series A-senior are entitled to receive
     noncumulative dividends at the per annum rate of $0.0075 per share when
     and if declared by the Board of Directors prior and in preference to any
     declaration or payment of any dividend on series A-junior and common
     stock. The holders of series A-junior are entitled to receive
     noncumulative dividends at the per annum rate of $0.0075 per share when
     and if declared by the Board of Directors prior and in preference to any
     declaration or payment of any dividend on common stock. No dividends on
     preferred stock have been declared by the Board from inception through
     March 31, 2000.

  .  In the event of any liquidation, dissolution or winding up of the
     Company, including a merger, acquisition or sale of assets, where the
     beneficial owners of the Company's stock hold less than 50% of the
     voting power of the surviving entity, the holders of series B and series
     C preferred stock are entitled to receive $0.63 per share and $2.01 per
     share, respectively, plus all declared but unpaid dividends prior and in
     preference to any distribution to the holders of series A-senior, series
     A-junior and common stock. Upon completion of the initial distribution,
     the holders of series A-senior are entitled to receive $0.078 per share
     plus all declared but unpaid dividends prior and in preference to any
     distribution to the holders of series A-junior and common stock. Upon
     completion of the initial and secondary distributions, the series A-
     junior are entitled to receive $0.50 per share plus declared but unpaid
     dividends prior and in preference to any distribution to the holders of
     common stock. Upon completion of the initial, secondary and tertiary
     distributions, the holders of common stock are entitled to receive the
     remaining assets of the Company.

  .  The convertible preferred shareholders have certain registration rights.

   The Company and certain holders of series C preferred stock have entered
into a right of first refusal and co-sale agreement with two founders for their
series A-junior preferred stock, series B preferred stock and common stock
warrants.

 Restricted Stock

   The Company has the right to repurchase the unvested portion of restricted
common stock exercised by employees under the 1998 stock plan at the original
purchase price. The Company's right to repurchase these shares expires over 48
months from the grant date. Additionally, certain officers and employees
exercised unvested stock options with full recourse notes. The related shares
of common stock are subject to repurchase by the Company at the original
purchase price per share upon the purchaser's cessation of service prior to the
vesting of such shares. The restricted stock continues to vest in accordance
with the terms of the original stock option. The related notes bear interest at
6% and mature five years from the loan date. At December 31, 1999, 1,224,667
outstanding shares of such stock were subject to repurchase.

 Warrants

   In connection with a loan, the Company issued warrants to an officer of the
Company to purchase 79,365 shares of series B preferred stock for $0.63 per
share in April 1998. Such

                                      F-18
<PAGE>

                                 VALICERT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              Years Ended December 31, 1997, 1998 and 1999 and the
   Three-Month Periods Ended March 31, 1999 (Unaudited) and 2000 (Unaudited)

warrants are outstanding at December 31, 1999 and expire in 2008. The Company
determined that the warrants had nominal fair value at the date of grant.

   In connection with promissory notes subsequently converted to preferred
stock, the Company issued warrants to purchase 328,236 shares of series A-
junior preferred stock for $0.117 per share in February 1997. Such warrants are
outstanding at December 31, 1999 and expire in 2007. The Company determined
that the warrants had nominal fair value at the date of grant.

   In connection with an advisory agreement, the Company issued warrants to
purchase 80,000 shares of series A-junior preferred stock for $0.75 per share
in August 1997. Such warrants are outstanding at December 31, 1999 and expire
in 2007. The Company determined that the warrants had nominal fair value at the
date of grant.

   In connection with the conversion of notes into Series B preferred stock,
the Company issued warrants to purchase 111,107 shares of series A-junior
preferred stock at $0.63 per share in May 1998. Such warrants are outstanding
at December 31, 1999 and expire in 2008. The Company determined that the
warrants had nominal fair value at the date of grant.

   In June, October and December 1998, the Company issued warrants to employees
to purchase 191,667 shares of common stock at prices ranging from $18.00 to
$18.90 per share. Such warrants vest monthly over a 42-month period and expire
in 2008.

   During 1999, the Company issued warrants to employees to purchase 316,667
shares of common stock at $18.90 per share. Such warrants generally vest over a
42 or 48- month period and expire in 2009.

   In connection with the acquisition of Receipt, the Company assumed a warrant
to purchase 28,783 shares of common stock at $4.77 per share.

 Deferred Stock Compensation

   In connection with grants of stock options to employees and issuance of
options upon the Receipt merger, the Company recorded deferred compensation of
$6,005,000 and $2,440,000 in fiscal 1999 and in the three months ended March
31, 2000, respectively. This deferred compensation represents the difference
between the deemed fair value for accounting purposes and the stock price as
determined by the Board of Directors on the date of grant. This amount has been
presented as a reduction of stockholders' equity and is being amortized to
expense over the vesting period of the related stock options (generally four
years). Amortization of deferred stock compensation for the year ended December
31, 1999 and the three-month period ended March 31, 2000 was $162,000 and
$457,000, respectively.

 Stock Incentive Plans

   The Company has adopted several stock plans ("Plans") that provide for the
grant of options and restricted stock to employees, consultants and directors.
Incentive stock options are granted at fair value as determined by the Board of
Directors at the date of grant. Nonstatutory options may be offered at not less
than 85% of the fair market value. Options

                                      F-19
<PAGE>

                                 VALICERT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              Years Ended December 31, 1997, 1998 and 1999 and the
   Three-Month Periods Ended March 31, 1999 (Unaudited) and 2000 (Unaudited)

generally vest between three and four years and have a maximum term of ten
years. Under these Plans, the Company was authorized to grant a total of
4,642,357 shares of common stock and 5,658,417 shares of the series A-junior
preferred stock. The following is the summary of the stock option activity for
the years ended December 31, 1997, 1998 and 1999 and the three months ended
March 31, 2000.

 Common Stock

<TABLE>
<CAPTION>
                                                                      Weighted
                                             Options                  Average
                                            Available   Number of   Option Price
                                            for Grant    Options     Per Share
                                            ----------  ----------  ------------
   <S>                                      <C>         <C>         <C>
   Balances at January 1, 1998............         --          --      $ --
   Authorized for grant...................   2,000,000         --        --
   Granted (weighted average fair value of
    $0.054)...............................  (1,413,219)  1,413,219      0.24
   Canceled...............................      58,667     (58,667)     0.24
                                            ----------  ----------     -----
   Balances, December 31, 1998............     645,448   1,354,552      0.24
   Authorized for grant...................   2,642,357         --        --
   Granted (weighted average fair value of
    $1.24)................................  (1,103,907)  1,103,907      1.26
   Assumed upon Receipt.com acquisition--
    Note 2 (weighted average fair value of
    $4.23)................................  (1,079,023)  1,079,023      1.85
   Exercised..............................         --   (1,438,919)     0.39
   Canceled...............................      71,371     (71,371)     0.33
                                            ----------  ----------     -----
   Balances, December 31, 1999............   1,176,246   2,027,192      1.54
   Granted (weighted average fair value of
    $3.38)................................    (694,365)    694,365      5.18
   Exercised..............................         --     (783,625)     2.02
                                            ----------  ----------     -----
   Balances, March 31, 2000 ..............     481,881   1,937,932     $4.68
                                            ==========  ==========     =====
   Options vested and exercisable at
    December 31, 1998.....................                  59,050     $0.24
                                                        ==========     =====
</TABLE>

   Additional information for options outstanding as of December 31, 1999 is as
follows:

<TABLE>
<CAPTION>
                       Options Outstanding        Options Exercisable
                --------------------------------- --------------------
                              Weighted
                              Average    Weighted             Weighted
   Range of                  Remaining   Average              Average
   Exercise       Number    Contractual  Exercise   Number    Exercise
   Prices       Outstanding Life (Years)  Price   Exercisable  Price
   --------     ----------- ------------ -------- ----------- --------
   <S>          <C>         <C>          <C>      <C>         <C>
   $0.24-0.30      330,669      8.92      $0.24      38,545    $0.24
    0.60-0.90      382,952      9.55       0.69      93,954     0.65
      1.35          53,333      9.94       1.35         --       --
    1.95-2.55    1,260,238      9.84       2.14       9,199     2.04
   -----------   ---------      ----      -----     -------    -----
   $0.24-$2.55   2,027,192      9.64      $1.54     141,698    $0.63
   ===========   =========      ====      =====     =======    =====
</TABLE>


                                      F-20
<PAGE>

                                 VALICERT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              Years Ended December 31, 1997, 1998 and 1999 and the
   Three-Month Periods Ended March 31, 1999 (Unaudited) and 2000 (Unaudited)

   During fiscal 1999, 935,215 stock options with a weighted average exercise
price of $0.96 and a weighted average fair value of $0.36 were issued at less
than the estimated fair value at grant date.

 Series A-Junior Stock

<TABLE>
<CAPTION>
                                                                      Weighted
                                               Options                Average
                                              Available    Options    Exercise
                                              for Grant  Outstanding   Price
                                             ----------- -----------  --------
   <S>                                       <C>         <C>          <C>
   Balances, January 1, 1997................   1,137,494   5,705,394   $ 0.01
   Shares authorized for grant..............   4,800,000         --       --
   Granted (weighted average fair value
    $0.005)................................. (4,622,912)   4,622,912     0.02
   Exercised................................         --   (6,400,000)    0.04
   Canceled.................................     481,000   (481,000)     0.01
                                             ----------- -----------   ------
   Balances, December 31, 1997..............   1,795,582   3,447,306     0.02
   Shares removed from plan.................   (541,582)         --       --
   Granted (weighted average fair value
    $0.007)................................. (1,254,000)   1,254,000     0.03
   Exercised................................         --    (642,471)     0.03
   Canceled.................................         --          --       --
                                             ----------- -----------   ------
   Balances, December 31, 1998..............         --    4,058,835     0.03
   Exercised................................         --  (2,735,691)     0.03
   Canceled.................................         --        (242)     0.04
                                             ----------- -----------   ------
   Balances, December 31, 1999 .............         --    1,322,902   $ 0.03
   Exercised................................         --     (498,692)    0.03
                                             ----------- -----------   ------
   Balances, March 31, 2000.................         --      824,210   $ 0.03
                                             =========== ===========   ======
   Options vested and exercisable at
    December 31, 1998.......................               3,126,164   $ 0.02
                                                         ===========   ======
</TABLE>

   Additional information for options outstanding as of December 31, 1999 is as
follows:

<TABLE>
<CAPTION>
                                       Options Vested and
              Options Outstanding at     Exercisable at
                 December 31, 1999     December 31, 1999
              ----------------------- --------------------
                           Weighted
                            Average
                           Remaining              Weighted
                          Contractual             Average
   Exercise     Number       Life       Number    Exercise
   Price      Outstanding   (Years)   Exercisable  Price
   --------   ----------- ----------- ----------- --------
   <S>        <C>         <C>         <C>         <C>
   $0.008        342,860     6.12       342,860   $ 0.008
    0.010         86,000     7.67        86,000     0.010
    0.025        130,000     8.09        86,190     0.025
    0.035        658,692     8.13       268,571     0.035
    0.050         33,600     6.32        33,600     0.050
    0.075         71,750     6.98        71,750     0.075
               ---------     ----       -------   -------
               1,322,902     7.46       888,971   $ 0.025
               =========     ====       =======   =======
</TABLE>

   SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net loss had the Company adopted the fair value method
as of the beginning of

                                      F-21
<PAGE>

                                 VALICERT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              Years Ended December 31, 1997, 1998 and 1999 and the
   Three-Month Periods Ended March 31, 1999 (Unaudited) and 2000 (Unaudited)

fiscal 1995. Under SFAS No. 123, the fair value of stock-based awards to
employees is calculated through the use of option pricing models, even though
such models were developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The Company's
calculations were made using the minimum value option pricing model with the
following weighted average assumptions: expected life of generally 5 years;
risk free interest rate, 6.22% in 1997, 4.56% in 1998 and 4.6% to 6% in 1999;
and no dividends during the expected term. The Company's calculations are based
on a single option valuation approach and forfeitures are recognized as they
occur. If the computed fair values of the 1997, 1998 and 1999 awards had been
amortized to expense over the vesting period of the awards, pro forma net loss
(net of amortization of deferred compensation expense already recorded for the
year ended December 31, 1999, as discussed above) would have been approximately
$0.55 million ($0.88 per basic and diluted share) in 1997, $4.03 million ($8.01
per basic and diluted share) in 1998 and $12.89 million ($48.86 per basic and
diluted share) in 1999.

   At December 31, 1999, the Company has reserved shares of common stock for
issuance as follows:

<TABLE>
   <S>                                                                <C>
   Conversion of preferred stock..................................... 12,941,329
   Issuance available under stock plans..............................  3,644,405
   Exercise of warrants..............................................    760,346
                                                                      ----------
   Total............................................................. 17,346,080
                                                                      ==========
</TABLE>

10. Net Loss per Share

   The following is a reconciliation of the numerators and denominators used in
computing basic and diluted net loss per share (in thousands):

<TABLE>
<CAPTION>
                                                            Three Months Ended
                                 Year Ended December 31,        March 31,
                                 -------------------------  -------------------
                                  1997    1998      1999       1999      2000
                                 ------  -------  --------  ----------  -------
<S>                              <C>     <C>      <C>       <C>         <C>
Net loss (numerator), basic and
 diluted.......................  $ (530) $(3,990) $(12,802) $   (1,764) $(5,458)
Shares (denominator):
  Weighted average common
   shares outstanding..........     623      498       717           1    3,919
  Weighted average common
   shares stock subject to
   repurchase..................     --       --       (454)              (1,504)
  Weighted average common
   shares outstanding held in
   Escrow......................     --       --         (1)        --       (51)
                                 ------  -------  --------  ----------  -------
Shares used in computation,
 basic and diluted.............     623      498       262           1    2,364
                                 ------  -------  --------  ----------  -------
Net loss per share, basic and
 diluted.......................  $(0.85) $ (8.01) $ (48.86) $(2,322.60) $ (2.31)
                                 ======  =======  ========  ==========  =======
</TABLE>

                                      F-22
<PAGE>

                                 VALICERT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              Years Ended December 31, 1997, 1998 and 1999 and the
   Three-Month Periods Ended March 31, 1999 (Unaudited) and 2000 (Unaudited)


   For the above mentioned periods, the Company had securities outstanding
which could dilute basic earnings per share in the future. These securities
were excluded from the computation of diluted net loss per share in the periods
presented, as their effect would have been antidilutive. Such outstanding
securities consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                               Three Months
                                       Year Ended December      Ended March
                                               31,                  31,
                                       ----------------------  --------------
                                        1997    1998    1999    1999    2000
                                       ------  ------  ------  ------  ------
   <S>                                 <C>     <C>     <C>     <C>     <C>
   Convertible preferred stock,
    series A-senior, A-junior, series
    B and series C...................   3,991   7,498  12,941   7,605  13,086
   Shares of common stock subject to
    repurchase.......................  (3,126) (1,587)   (981)   (489) (1,504)
   Outstanding options...............   1,149   2,707   2,468   3,506   2,213
   Warrants..........................     136     391     761     423     777
                                       ------  ------  ------  ------  ------
   Total.............................   2,150   9,009  15,189  11,045  14,572
                                       ------  ------  ------  ------  ------
   Weighted average exercise price of
    options..........................  $ 0.07  $ 0.16  $ 1.28  $ 0.51  $ 4.11
                                       ------  ------  ------  ------  ------
   Weighted average exercise price of
    warrants.........................  $ 0.72  $ 9.37  $10.66  $ 9.26  $14.03
                                       ======  ======  ======  ======  ======
</TABLE>

11. Income Taxes

   The Company's deferred income tax assets (liabilities) are comprised of the
following at December 31:

<TABLE>
<CAPTION>
                                                                  1998    1999
                                                                 ------  ------
                                                                      (In
                                                                  thousands)
   <S>                                                           <C>     <C>
   Net deferred tax assets:
     Net operating loss carryforward............................ $1,552  $7,515
     Accruals deductible in different periods...................    --      523
     Deferred revenue...........................................    --      162
     Credits....................................................     62     382
     Depreciation and amortization..............................    --      319
                                                                 ------  ------
                                                                  1,614   8,901
   Less valuation allowance..................................... (1,614) (7,998)
                                                                 ------  ------
   Deferred tax assets..........................................    --      903
   Deferred tax liabilities--purchased intangibles..............    --     (903)
                                                                 ------  ------
   Net deferred tax............................................. $  --   $  --
                                                                 ======  ======
</TABLE>

                                      F-23
<PAGE>

                                 VALICERT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              Years Ended December 31, 1997, 1998 and 1999 and the
   Three-Month Periods Ended March 31, 1999 (Unaudited) and 2000 (Unaudited)


   A reconciliation of the statutory federal income tax rate and the effective
income tax rate on pre-tax income is as follows:

<TABLE>
<CAPTION>
                                                     1997     1998     1999
                                                    ------   ------   ------
   <S>                                              <C>      <C>      <C>
   Statutory federal rate.......................... (35.00)% (35.00)% (35.00)%
   Nondeductible charge for acquired in-process
    technology.....................................   7.40      --       --
   Research and development tax credit.............  (2.98)   (1.61)   (2.04)
   Other...........................................   1.01     0.30     0.34
   Valuation allowance.............................  29.57    36.31    36.70
                                                    ------   ------   ------
   Effective tax rate..............................    --  %    --  %    --  %
                                                    ======   ======   ======
</TABLE>

   At December 31, 1998 and 1999, the Company has fully reserved its net
deferred tax assets of approximately $1,614,000 and $7,998,000, respectively,
to reduce them to amounts that are more likely than not to be realized.

   At December 31, 1999, the Company has net operating loss (NOL) carryforwards
of approximately $17,494,000 and $11,365,000 for federal and state income tax
purposes, respectively. The federal NOL carryforwards expire through 2019 while
the state NOL carryforwards expire through 2004.

   At December 31, 1999, the Company also has research and development credit
carryforwards of approximately $168,000 and $215,000 available to offset future
federal and state income taxes, respectively. The federal credit carryforward
expires in 2019, while the state credit carryforward has no expiration.

   The extent to which the loss and credit carryforwards can be used to offset
future taxable income and tax liabilities may be limited, depending on
ownership changes within any three-year period.

12. Related Party Transactions

   An affiliate of one of the stockholders provides software development and
consulting services to the Company. Such services totaled $147,000 and $682,000
for the year ended December 31, 1998 and 1999, respectively. Software license
revenues for fiscal 1999 include an aggregate of $132,000 from three investors
in the Company of which $126,000 was included in the accounts receivable
balance at December 31, 1999.

13. Segment Information, Operations by Geographic Area and Significant
Customers

   The Company operates primarily in one industry segment: the development and
marketing of internet cryptographic software products. Geographic revenue
information is based on the ship-to location of the customer. Geographic long-
lived asset information is based on the physical location of the assets at each
period end. No single country outside of the United States accounted for 10% or
more of long-lived assets.

                                      F-24
<PAGE>

                                 VALICERT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              Years Ended December 31, 1997, 1998 and 1999 and the
   Three-Month Periods Ended March 31, 1999 (Unaudited) and 2000 (Unaudited)


 Geographic Information

<TABLE>
<CAPTION>
                                                                     Three Months Ended
                                 Years Ended December 31,                March 31,
                         ---------------------------------------- ------------------------
                           1997        1998            1999         1999        2000
                         -------- --------------- --------------- -------- ---------------
                                                                        (Unaudited)
                                                  (In thousands)
                                           Long-           Long-                    Long-
                                           Lived           Lived                    Lived
                         Revenues Revenues Assets Revenues Assets Revenues Revenues Assets
                         -------- -------- ------ -------- ------ -------- -------- ------
<S>                      <C>      <C>      <C>    <C>      <C>    <C>      <C>      <C>
United States...........   $ --     $60     $963   $  859  $4,077   $ 96    $1,243  $4,402
Korea...................     --      --       --       --      --     --       235      --
Japan...................     --      --       --      164      --     --        --      --
United Kingdom..........     --      --       --      272      --     --        --      --
Rest of the world.......     --      --       --      340      --     72       398      --
                           ----     ---     ----   ------  ------   ----    ------  ------
                           $ --     $60     $963   $1,635  $4,077   $168    $1,876  $4,402
                           ====     ===     ====   ======  ======   ====    ======  ======
</TABLE>

 Significant Customers

   There was no revenue earned during 1997, and during 1998, one customer
accounted for 100% of total revenues. During 1999, two customers accounted for
21% and 14% of total revenues.

14. Employee Benefit Plan

   The Company has a 401(k) tax-deferred savings plan, whereby eligible
employees may contribute a percentage of their eligible compensation (presently
from 2% to 20% up to the maximum allowed under IRS rules). Company
contributions are discretionary; no such Company contributions have been made
since the beginning of this plan.

15. Subsequent Events

   On May 5, 2000 ValiCert's Board of Director's approved the following:

  .  One-for-three reverse split of the outstanding shares of common stock.
     The stock split will be effective prior to consummation of the initial
     public offering. All share and per share amounts in these financial
     statements have been adjusted to give effect to the reverse stock split.

  .  Increasing the authorized capital of the Company to 100,000,000 shares
     of Common Stock, $ 0.001 par value and authorizing the issuance of
     2,000,000 shares of Preferred Stock, $ 0.001 par value.

  .  An amendment to the 1998 stock plan to increase the number of shares of
     common stock that can be issued under the plan by 1,333,333 to a total
     of 3,781,667 shares on a post split basis. In addition, the number of
     shares reserved under the plan will automatically increase on the first
     day of each fiscal year by an amount equal to the lesser of 5% of the
     common stock outstanding on the last day of the preceding fiscal

                                      F-25
<PAGE>

                                 VALICERT, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
              Years Ended December 31, 1997, 1998 and 1999 and the
   Three-Month Periods Ended March 31, 1999 (Unaudited) and 2000 (Unaudited)

   year, 2,448,333 shares or a lesser number of shares as determined by the
   board of directors.

  .  The 2000 employee stock purchase plan was approved subject to
     stockholder approval. The Plan becomes effective upon the closing of the
     initial public offering. The Company reserved 333,333 shares for
     issuance under the 2000 employee stock purchase plan which will
     automatically increase annually by 2% of the common shares outstanding
     on the first day of the preceding fiscal year.

                                   * * * * *

                                      F-26
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
 Receipt.com, Inc.:

   We have audited the accompanying statements of operations and comprehensive
loss and cash flows of Receipt.com, Inc. (the "Company") for the year ended
December 31, 1998 and the period from January 1, 1999 to December 30, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

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

   In our opinion, such financial statements present fairly, in all material
respects, the results of the Company's operations and its cash flows for the
above stated periods in conformity with accounting principles generally
accepted in the United States of America.

/s/ Deloitte & Touche LLP

San Jose, California
March 3, 2000
(May 5, 2000 as to Note 7)


                                      F-27
<PAGE>

                               RECEIPT.COM, INC.

                STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

<TABLE>
<CAPTION>
                                                                 Period From
                                                   Year Ended  January 1, 1999
                                                  December 31, to December 30,
                                                  ------------ ---------------
                                                      1998          1999
                                                  ------------ ---------------
                                                         (In thousands)
<S>                                               <C>          <C>
Revenues:
  License revenue................................   $   835        $ 1,079
  Service revenue................................        98            233
                                                    -------        -------
    Total revenues...............................       933          1,312
                                                    -------        -------
Cost of revenues.................................
  License revenue................................        15            103
  Service revenue................................         4            120
                                                    -------        -------
    Total cost of revenues.......................        19            223
                                                    -------        -------
Gross profit.....................................       914          1,089
Operating expenses:
  Sales and marketing............................       258          1,409
  Research and development.......................       741          1,192
  General and administrative.....................     2,272          1,925
  Amortized stock compensation...................       --              25
                                                    -------        -------
    Total operating expenses.....................     3,271          4,551
                                                    -------        -------
Loss from operations.............................    (2,357)        (3,462)
Other income (expense):
  Interest income................................        31             11
  Interest expense...............................       (24)          (186)
                                                    -------        -------
    Total other income (expense).................         7           (175)
                                                    -------        -------
Net loss.........................................    (2,350)        (3,637)
Other comprehensive income--unrealized gain on
 investments, net of taxes of $0.................       --             373
                                                    -------        -------
Comprehensive loss...............................   $(2,350)       $(3,264)
                                                    =======        =======
</TABLE>


                       See notes to financial statements.

                                      F-28
<PAGE>

                               RECEIPT.COM, INC.

                            STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                   Period from
                                                                    January 1,
                                                       Year Ended    1999 to
                                                      December 31, December 30,
                                                          1998         1999
                                                      ------------ ------------
                                                           (In thousands)
<S>                                                   <C>          <C>
Cash flows from operating activities:
  Net loss...........................................   $(2,350)     $(3,637)
  Adjustments to reconcile net loss to net cash used
   in operating activities:
    Depreciation.....................................        38          125
    Amortization of warrants issued..................         3          146
    Amortization of deferred stock compensation......       --            25
    Changes in assets and liabilities:
      Accounts receivable............................      (287)         309
      Deposit........................................         6          (35)
      Accounts payable...............................       134           (3)
      Accrued compensation and related benefits......        22            9
      Other accrued liabilities......................        (2)         263
      Deferred revenues..............................       186          611
                                                        -------      -------
        Net cash used in operating activities........    (2,250)      (2,187)
                                                        -------      -------
Cash flows used in investing activities--
  Property and equipment additions...................      (251)        (251)
                                                        -------      -------
Cash flows from financing activities:
  Sale of preferred stock............................     3,710          --
  Exercise of stock options..........................       --            19
  Exercise of common stock warrants, net of
   stockholders' receivables.........................       --           118
  Repayment of obligations...........................       (50)         (78)
  Borrowing under loan agreement.....................       --         2,035
  Borrowing under bank line of credit................       --           650
  Repayments under bank line of credit...............       --          (650)
                                                        -------      -------
        Net cash provided by financing activities....     3,660        2,094
                                                        -------      -------
Net increase (decrease) in cash and equivalents......     1,159         (344)
Cash and equivalents--beginning of period............        19        1,178
                                                        -------      -------
Cash and equivalents--end of period..................   $ 1,178      $   834
                                                        =======      =======
Noncash investing and financing activities:
  Property and equipment acquired under capital
   leases............................................   $   --       $    61
                                                        =======      =======
  Conversion of notes payable into stock.............   $   250      $ 1,377
                                                        =======      =======
  Unrealized gain on marketable securities...........   $   --       $   373
                                                        =======      =======
</TABLE>

                       See notes to financial statements.

                                      F-29
<PAGE>

                               RECEIPT.COM, INC.

                         NOTES TO FINANCIAL STATEMENTS
  Year Ended December 31, 1998 and the period from January 1, 1999 to December
                                    30, 1999

1. Business and Significant Accounting Policies

   Business--Receipt.com, Inc. (the "Company"), formerly named Digital Commerce
Corporation and Differential, Inc., incorporated in California in 1994, a
provider of secure data transfer software. On December 30, 1999, the Company
consummated its merger with ValiCert, Inc. (Note 7). The financial statements
for the period ended December 30, 1999 reflect the transactions up to the date
of the merger.

   Property and equipment are stated at cost. Computer software costs for
internal use are capitalized and accounted for in accordance with Statement of
Position (SOP) 98-1, Accounting for Costs of Computer Software Developed or
Obtained for Internal Use issued by the American Institute of Certified Public
Accountants (AICPA). Depreciation is computed using the straight-line method
over estimated useful lives of three years for software and computer equipment
and seven years for office equipment.

   Impairment of Long-Lived Assets--The Company evaluates its long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets or intangibles may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future undiscounted net cash flows expected to
be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.

   Software Development Costs--Costs for the development of new software
products and substantial enhancements to existing software products are
expensed as incurred until technological feasibility has been established, at
which time any additional costs would be capitalized in accordance with
Statement of Financial Accounting Standards (SFAS) No. 86, Computer Software To
Be Sold, Leased or Otherwise Marketed. Because the Company believes its current
process for developing software is essentially completed with the establishment
of technological feasibility, no costs have been capitalized to date.

   Revenue Recognition--Revenue consists primarily of fees for licenses of the
Company's software products, maintenance and customer support.

     License Revenue--Revenue from software licenses is recognized upon
  shipment of the software or delivery of authorization codes if collection
  of the resulting receivable is probable, an agreement has been signed, the
  fee is fixed or determinable and vendor-specific objective evidence exists
  to allocate a portion of the total fee to any undelivered elements of the
  arrangement. Such undelivered elements in these arrangements typically
  consist of services. Vendor specific evidence is based on the price
  generally charged when an element is sold separately or, if not yet sold
  separately, is established by management. If the license fees are not fixed
  on determinable revenue is recognized as payments are due.

     Service Revenue--Revenue from customer training, support and consulting
  services is recognized as the services are performed. Maintenance revenue
  is recognized ratably over the term of the maintenance contract. If
  maintenance or services are included in an arrangement that includes a
  license agreement, amounts related to maintenance are allocated based on
  vendor specific objective evidence.

                                      F-30
<PAGE>

                               RECEIPT.COM, INC.

                  NOTES TO FINANCIAL STATEMENTS--(Continued)
 Year Ended December 31, 1998 and the period from January 1, 1999 to December
                                   30, 1999

   In October 1997, the AICPA issued SOP 97-2, Software Revenue Recognition.
This statement provides guidance on applying generally accepted accounting
principles in recognizing revenue on software transactions. The Company
adopted the provisions of SOP 97-2 in fiscal 1998.

   Research and Development--Research and development costs are expensed as
incurred.

   Income Taxes--Income taxes are provided using an asset and liability
approach. This approach requires recognition of deferred tax liabilities and
assets, net of valuation allowances, for the expected future tax consequences
of temporary differences between the financial statement carrying amounts and
the tax bases of assets and liabilities and net operating loss and tax credit
carryforwards.

   Stock Compensation--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.

   Major Customers--During 1998, three customers accounted for 24%, 12% and
11% of total revenues. During 1999, one customer accounted for 29% of total
revenues.

   Significant Estimates--The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the disclosures of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.

   Certain Significant Risks and Uncertainties--The Company operates in the
software industry and can be affected by a variety of factors. Management of
the Company believes that changes in any of the following areas could have a
significant negative effect on the Company in terms of its future financial
position, results of operations and cash flows; ability to obtain additional
financing; regulatory changes; fundamental changes in the technology
underlying software products; market acceptance of the Company's products
under development; development of sales channels; litigation or other claims
against the Company; the hiring, training and retention of key employees;
successful and timely completion of product development efforts; and new
product introductions by competitors.

   Comprehensive Income--The Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, Reporting Comprehensive Income, which requires an
enterprise to report, by major components and as a single total, the change in
its net assets during the period from nonowner sources. The Company's only
source of comprehensive income is the unrealized gain on its investments.

2. Long-Term Obligations

   In January 1997, the Company secured a $260,000 convertible loan which
bears interest at the Federal Funds Rate (8.5% at December 30, 1999). The loan
is payable in 48 monthly installments and is convertible, at the option of the
holder, into shares of capital stock under an equity financing in which the
company receives in excess of $2 million.

                                     F-31
<PAGE>

                               RECEIPT.COM, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)
  Year Ended December 31, 1998 and the period from January 1, 1999 to December
                                    30, 1999

   In September 1999, the Company issued $1,535,000 of convertible promissory
notes bearing interest at 5.36% to various investors. In connection with the
merger of the Company (see Note 7), the noteholders agreed to either convert
their notes into common stock at $0.75 per share before a merger or to be paid
for the outstanding indebtedness plus 10% immediately after the merger date. In
December 1999, noteholders converted $877,000 of the promissory notes and
accrued interest into 1,169,941 shares of common stock.

   With the sale of the notes, the Company issued warrants to purchase 409,333
shares of common stock at $0.75 per share, expiring five years from issuance.
The fair value of such warrants at the date of issuance of $79,000 is being
recorded as interest expense. At December 30, 1999, holders of such warrants to
buy 226,667 shares of common stock had exercised their rights.

3. Line of Credit

   In April 1999, the Company entered into a $650,000 line of credit with a
bank which expired in December 1999. Borrowings under the line bear interest at
the bank's base rate (8.5% at December 30, 1999) plus 1%. At December 30, 1999,
there were no borrowings under the line. In connection with the line of credit,
the Company issued warrants to purchase up to 173,163 shares of Series B
preferred stock expiring five years from issuance at an exercise price of $1.04
per share. The fair value of the warrants of $45,000 has been charged to
interest in 1999.

4. Lease Commitments

   The Company leases equipment under capital leases and its principal facility
under a noncancelable operating lease expiring in 2001. Rent expense under
operating leases was $97,654 and $253,709 in 1998 and 1999, respectively.

5. Stockholders' Equity

 Deferred Stock Compensation

   In connection with grants of stock options to employees, the Company
recorded $2,955,000 as the difference between the deemed fair value for
accounting purposes and the stock price as determined by the Board of Directors
on the date of grant in fiscal 1999. This amount is amortized to expense over
the vesting period of the related stock options, generally four years.
Amortization of deferred stock compensation for the period ended December 30,
1999 was $25,000.

 Stock Option Plan

   The Company has reserved 6,932,644 shares of common stock for issuance, at
the discretion of the Board of Directors, to officers, directors, employees and
consultants under its 1996 Stock Plan. At December 30, 1999, there were no
shares available for future grant.

   Options granted under the 1996 Stock Plan must be granted at not less than
fair market value at the date of grant as determined by the Board of Directors,
generally vest over four years and expire ten years from the date of grant.

                                      F-32
<PAGE>

                               RECEIPT.COM, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)
  Year Ended December 31, 1998 and the period from January 1, 1999 to December
                                    30, 1999

   Additional information for options under the 1996 Stock Plan is as follows:

<TABLE>
<CAPTION>
                                                                     Weighted
                                                                     Average
                                                        Number of  Option Price
                                                         Options    Per Share
                                                        ---------  ------------
   <S>                                                  <C>        <C>
   Outstanding, January 1, 1998 (37,500 exercisable at
    a
    weighted average exercise price of $0.10)..........   150,000     $0.10
   Granted (weighted average fair value of $0.04 per
    share)............................................. 1,099,975      0.10
   Canceled............................................  (474,475)     0.10
                                                        ---------     -----
   Outstanding, December 31, 1998 (278,821 exercisable
    at a weighted average exercise price of $0.10).....   775,500      0.10
   Granted (weighted average fair value of $0.14 per
    share)............................................. 6,991,684      0.29
   Exercised...........................................  (192,593)     0.10
   Canceled............................................  (559,514)     0.10
   Expired.............................................  (167,083)     0.10
                                                        ---------     -----
   Outstanding, December 30, 1999...................... 6,847,994     $0.29
                                                        =========     =====
</TABLE>

   Additional information for options outstanding as of December 30, 1999 is as
follows:

<TABLE>
<CAPTION>
                   Options Outstanding        Options Exercisable
             -------------------------------- --------------------
                          Weighted
                           Average
                          Remaining  Weighted             Weighted
 Range of                Contractual Average              Average
 Exercise      Number       Life     Exercise   Number    Exercise
  Prices     Outstanding   (Years)    Price   Exercisable  Price
 --------    ----------- ----------- -------- ----------- --------
<S>          <C>         <C>         <C>      <C>         <C>
   $0.10      1,394,842     8.00      $0.10     468,273    $0.10
    0.34      5,453,152     9.96       0.34      60,709     0.34
-----------   ---------     ----      -----     -------    -----
$0.10-$0.34   6,847,994     9.55      $0.29     528,982    $0.13
              =========     ====      =====     =======    =====
</TABLE>

   SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net loss had the Company adopted the fair value method
as of the beginning of fiscal 1995. Under SFAS No. 123, the fair value of
stock-based awards to employees is calculated through the use of option pricing
models, even though such models were developed to estimate the fair value of
freely tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models also
require subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values. The
Company's calculations were made using the minimum value option pricing model
with the following weighted average assumptions: expected life, 48 months
following vesting in 1998 and 1999; risk free interest rate, 6% in 1998 and 7%
in 1999; and no dividends during the expected term. The Company's calculations
are based on a single option valuation approach and forfeitures are recognized
as they occur. If the computed fair values of the 1998 and 1999 awards had been
amortized to expense over the vesting period of the awards, pro forma net loss
would have been $2,353,000 in 1998 and $3,662,000 in 1999.

                                      F-33
<PAGE>

                               RECEIPT.COM, INC.

                   NOTES TO FINANCIAL STATEMENTS--(Continued)
  Year Ended December 31, 1998 and the period from January 1, 1999 to December
                                    30, 1999

6. Income Taxes

   The Company's effective tax rate differs from the federal statutory tax rate
at December 31, 1998 and December 30, 1999 due to the increase in the valuation
allowance on the deferred tax assets.

   At December 30, 1999, the Company has net operating loss (NOL) carryforwards
of approximately $5,281,000 and $2,845,000 for federal and state income tax
purposes, respectively. The federal NOL carryforwards expire through 2010,
while the state NOL carryforwards expire through 2004. The net operating loss
carryforwards available for state tax purposes are substantially less than for
federal tax purposes, primarily because only 50% of state net operating losses
can be utilized to offset future state taxable income.

   The extent to which the loss and credit carryforwards can be used to offset
future taxable income and tax liabilities, respectively, may be limited,
depending on the extent of ownership changes within any three-year period.

7. Subsequent Event

   After year end, the Company consummated a merger with ValiCert, Inc.
("ValiCert"). Under the terms of the agreement, stockholders of the Company
received 2,182,139 shares of common stock and 2,096,137 of series C convertible
preferred stock of ValiCert. ValiCert also assumed and exchanged all of the
Company's outstanding options for options to purchase shares of ValiCert common
stock. The fair value consideration paid was approximately $17.65 million. The
merger, approved by the shareholders of both the Company and ValiCert and the
regulatory authorities, was accounted for under the purchase method.

                                   * * * * *

                                      F-34
<PAGE>

                                 VALICERT, INC.

               PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENT
                    Year Ended December 31, 1999 (Unaudited)

   On December 30, 1999, ValiCert acquired all of the outstanding shares and
assumed the outstanding options of Receipt.com, Inc. (Receipt), a company which
develops and markets software products which enable users to conduct secure and
nonrepudiated electronic transactions over the Internet. As consideration for
the acquisition, ValiCert issued shares of series C preferred stock and shares
of common stock, and issued options to purchase common stock in exchange for
Receipt.com stock options.

   The acquisition was accounted for using the purchase method of accounting.
The aggregate purchase price was allocated to the assets and liabilities
acquired based on their fair value. The total consideration is expected to
exceed the fair value of the net assets acquired by approximately $17,537,000,
which represents the following intangible estimated assets (in thousands):

<TABLE>
<CAPTION>
                                                                     Period of
                                                          Amount(s) Amortization
                                                          --------- ------------
   <S>                                                    <C>       <C>
   Intangible assets:
     In-process research and development.................  $ 2,780       --
     Purchased technology................................    1,833       3
     Acquired workforce..................................      433       3
     Goodwill............................................   12,491       5
                                                           -------
                                                           $17,537
                                                           =======
</TABLE>

   The acquired technology provides a comprehensive framework to manage and
provide legally binding proof that a transaction occurred through the capture
of digital signatures of the sender and receiver and verifiable time stamping.
The in-process research and development had not yet reached technological
feasibility at the time of the acquisition and did not have alternative future
uses. This amount of $2,780,000 was charged to ValiCert's operations in
December 1999 when the transaction was consummated. The in-process research and
development was identified and valued through extensive interviews and
discussions with ValiCert and Receipt management and the analysis of data
provided by Receipt concerning developmental products, their stages of
development, the time and resources needed to complete them, their expected
income generating ability, target markets and associated risks. The income
approach, which includes an analysis of the markets, cash flows, and risks
associated with achieving such cash flows, was the primary technique utilized
in valuing the in-process research and development project. A portion of the
purchase price was allocated to the developmental project based on the
appraised fair value of such project.

   The accompanying pro forma financial statements are presented in accordance
with Article 11 of Regulation S-X.

   The unaudited pro forma condensed combining statements of operations were
prepared as if the acquisition was completed at the beginning of the period
presented. To prepare the pro forma unaudited condensed combining statements of
operations, the ValiCert statement of operations for the year ended December
31, 1999 has been combined with the statement of operations of Receipt for the
period from January 1, 1999 to December 30, 1999. This method of combining the
companies is only for presentation of pro forma unaudited condensed combining
financial statements.

   The unaudited pro forma condensed combining financial statements are subject
to a number of estimates, assumptions and uncertainties. These statements do
not claim to reflect the results of operations that would have occurred had
this acquisition taken place on the date indicated nor do they claim to reflect
results of operations that will occur in the future. The unaudited pro

                                      F-35
<PAGE>

                                 VALICERT, INC.

         PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENT--(Continued)
                    Year Ended December 31, 1999 (Unaudited)

forma condensed combining financial statements should be read in conjunction
with the historical financial statements of ValiCert and Receipt.

   The unaudited pro forma condensed combining statements of operations do not
include the one-time $2.8 million charge for purchased in-process technology
arising from this acquisition, as it is a material nonrecurring charge. This
charge is included in the actual consolidated statement of operations of
ValiCert from the date of the acquisition.

                                      F-36
<PAGE>

                                 VALICERT, INC.

             PRO FORMA CONDENSED COMBINING STATEMENTS OF OPERATIONS
                    Year Ended December 31, 1999 (Unaudited)
               (In thousands, except share and per share amounts)

<TABLE>
<CAPTION>
                                                    Pro Forma        Pro Forma
                                ValiCert  Receipt  Adjustments Notes Combined
                                --------  -------  ----------- ----- ---------
<S>                             <C>       <C>      <C>         <C>   <C>
Revenues
 Software licenses............. $    874  $ 1,079    $   --          $  1,953
 Subscription fees and other
  services.....................      761      233        --               994
                                --------  -------    -------         --------
   Total revenues..............    1,635    1,312        --             2,947
                                --------  -------    -------         --------
Cost of revenues
 Software licenses.............       93      103                         196
 Subscription fees and other
  services.....................      134      120                         254
                                --------  -------    -------         --------
   Total cost of revenues......      227      223        --               450
                                --------  -------    -------         --------
Gross profit...................    1,408    1,089        --             2,497
Operating expenses:
 Research and development......    5,608    1,192                       6,800
 Sales and marketing...........    4,583    1,409                       5,992
 General and administrative....    1,373    1,925                       3,298
 Acquired in-process research
  and development..............    2,780              (2,780)     1       --
 Amortization of stock
  compensation.................      162       25        933      3     1,120
 Amortization of intangibles...                        3,253      2     3,253
                                --------  -------    -------         --------
   Total operating expenses....   14,506    4,551      1,406           20,463
                                --------  -------    -------         --------
Operating loss.................  (13,098)  (3,462)       --           (17,966)
Other income (expense), net....      296     (175)       --               121
                                --------  -------    -------         --------
Net loss....................... $(12,802) $(3,637)   $ 1,406         $(17,845)
                                ========  =======    =======         ========
Pro forma basic and diluted
 loss per share................ $ (48.86)                            $  (7.30)
                                ========                             ========
Shares used in pro forma basic
 and diluted loss per share....      262               2,182            2,444
                                ========             =======         ========
</TABLE>


        See notes to pro forma condensed combining financial statements.

                                      F-37
<PAGE>

                                 VALICERT, INC.

           NOTES TO PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENT

                    Year Ended December 31, 1999 (Unaudited)

   The following pro forma adjustments have been made to the pro forma
condensed combining financial statements:

   1. Reflects the one-time charge of $2,780,000 for acquired in-process
research and development identified in the purchase price allocation.

   2. Reflects pro forma amortization of the purchased intangibles over the
estimated useful lives as follows (in thousands):

<TABLE>
<CAPTION>
                                                                        1999
                                                        Period Of   Amortization
Intangible Asset                               Amount  Amortization    Charge
----------------                               ------- ------------ ------------
<S>                                            <C>     <C>          <C>
Purchased technology.......................... $ 1,833   3 years       $  611
Acquired workforce............................     433   3 years          144
Goodwill......................................  12,491   5 years        2,498
                                               -------                 ------
                                               $14,757                 $3,253
                                               =======                 ======
</TABLE>

   3. Reflects the pro forma adjustments of the deferred compensation relating
to the unvested options to employees of Receipt which were assumed upon the
acquisition (in thousands):

<TABLE>
<CAPTION>
                                                                                   1999
             Amount of                                                           Deferred
              Deferred                   Period of                             Compensation
            Compensation                Amortization                              Charge
            ------------                ------------                           ------------
            <S>                         <C>                                    <C>
               $3,733                     4 years                                  $933
</TABLE>

                                      F-38
<PAGE>

You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide information different from that contained in
this prospectus. We are offering to sell, and seeking offers to buy, shares of
common stock only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only for the date of this
prospectus, regardless of the time of delivery of this prospectus or of any
sale of our common stock.

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
Prospectus Summary.......................................................   3
Risk Factors.............................................................   6
Special Note On Forward-Looking Statements...............................  14
Use of Proceeds..........................................................  15
Dividend Policy..........................................................  15
Capitalization...........................................................  16
Dilution.................................................................  17
Selected Financial Data..................................................  18
Management's Discussion and Analysis of Financial Condition and Results
 of Operations...........................................................  20
Business.................................................................  32
Management...............................................................  52
Related Party Transactions...............................................  63
Principal Stockholders...................................................  66
Description of Capital Stock.............................................  69
Shares Eligible for Future Sale..........................................  73
Underwriting.............................................................  75
Legal Matters............................................................  78
Experts..................................................................  78
Where You Can Find More Information......................................  78
Index to Consolidated Financial Statements............................... F-1
</TABLE>

Until August 22, 2000, 25 days after the date of this prospectus, all dealers
that buy, sell or trade in these securities, whether or not participating in
this offering, may be required to deliver a prospectus. Dealers are also
obligated to deliver a prospectus when acting as underwriters and for their
unsold allotments or subscriptions.

-------------------------------------------------------------------------------

[VALICERT LOGO APPEARS HERE. There is a royal blue circle with a white "V" and
"C" at the top right of the logo. Underneath the circle is the word ValiCert.
There are eleven dots underneath "Cert" in the word ValiCert. At the bottom of
the logo are the words Securing e-Transactions.]

  4,000,000 Shares

  Common Stock

  Deutsche Banc Alex. Brown
  Merrill Lynch & Co.
  Donaldson, Lufkin & Jenrette
  Wit SoundView

   Prospectus

   July 27, 2000


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