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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-Q

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2001

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

For the transition period from to

Commission file number: 000-31109

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VALICERT, INC.
(Exact name of registrant as specified in its charter)

Delaware 94-3297861
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)

339 North Bernardo Avenue, Mountain View, California 94043
(Address of Principal Executive Offices) (Zip Code)

(650) 567-5400
(Registrant's telephone number, including area code)

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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

Outstanding at
Class September 30, 2001
----- ------------------

Common Stock, $0.001 par value......... 22,882,700 shares

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VALICERT, INC.

TABLE OF CONTENTS

Page
----

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.............................................. 3

CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2001 AND
DECEMBER 31, 2000............................................... 3

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000............... 4

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 2001 AND 2000........................ 5

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.............. 6

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS........................................... 9

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........ 27

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS................................................. 28

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS......................... 28

ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................... 28

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS................. 28

ITEM 5. OTHER INFORMATION................................................. 28

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.................................. 28

SIGNATURES................................................................ 29

VALICERT(R) and the ValiCert logo are registered trademarks of ValiCert, Inc.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VALICERT, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)

September 30, December 31,
2001 2000
------------- ------------

ASSETS
------

Current assets:

Caseh, cash equivalents and short term investments............. $ 22,088 $ 37,523
Accounts receivable, net....................................... 3,385 3,771
Prepaid expenses and other current assets...................... 2,244 1,333
-------- --------
Total current assets....................................... 27,717 42,627
Property and equipment, net....................................... 4,994 5,417
Goodwill and other intangible assets, net......................... 8,908 11,297
Other assets...................................................... 562 465
-------- --------
Total assets............................................ $ 42,181 $ 59,806
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

Current liabilities:
Accounts payable............................................... $ 824 $ 1,140
Accrued liabilities............................................ 5,944 5,818
Deferred revenue............................................... 5,658 3,113
Short term notes and current portion of long-term obligations.. 1,586 1,122
-------- --------
Total current liabilities.................................. 14,012 11,193
Long term and other liabilities................................... 1,919 2,056
-------- --------
Total liabilities....................................... 15,931 13,249
-------- --------
Stockholders' equity:
Common stock and additional paid-in capital.................... 101,733 102,014
Deferred stock compensation.................................... (4,385) (7,263)
Notes receivable from common stockholders...................... (1,557) (2,033)
Accumulated deficit............................................ (69,541) (46,161)
-------- --------
Total stockholders' equity................................. 26,250 46,557
-------- --------
Total liabilities and stockholders' equity.............. $ 42,181 $ 59,806
======== ========

VALICERT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)

Three Months Nine Months Ended
Ended September 30, September 30,
------------------ ------------------
2001 2000 2001 2000
------- ------- -------- --------

Revenues:
Software licenses....................................... $ 4,433 $ 2,296 $ 12,128 $ 5,390
Subscription fees and other services.................... 2,447 991 5,829 2,291
------- ------- -------- --------
Total revenues...................................... 6,880 3,287 17,957 7,681
Cost of revenues:
Software licenses....................................... 127 348 556 743
Subscription fees and other services.................... 2,004 1,642 6,505 4,005
------- ------- -------- --------
Total cost of revenues.............................. 2,131 1,990 7,061 4,748
------- ------- -------- --------
Gross profit............................................... 4,749 1,297 10,896 2,933
------- ------- -------- --------
Operating expenses:
Research and development................................ 2,785 2,837 9,439 7,249
Sales and marketing..................................... 5,474 3,680 17,324 9,279
General and administrative.............................. 1,413 1,082 3,978 2,706
Amortization of intangibles............................. 802 811 2,389 2,431
Amortization stock compensation......................... 487 634 1,575 1,669
------- ------- -------- --------
Total operating expenses............................ 10,961 9,044 34,705 23,334
------- ------- -------- --------
Operating loss............................................. (6,212) (7,747) (23,809) (20,401)
Interest and other income (expense), net................... 111 341 429 457
------- ------- -------- --------
Net loss................................................... $(6,101) $(7,406) $(23,380) $(19,944)
======= ======= ======== ========
Basic and diluted net loss per share....................... $ (0.27) $ (0.49) $ (1.06) $ (3.01)
======= ======= ======== ========
Shares used in computation of basic and diluted net loss
per share................................................ 22,264 15,189 22,007 6,628
======= ======= ======== ========
* Amortization of stock compensation.......................
Cost of revenues--Subscription fees and other services.. $ 57 $ 7 $ 180 $ 18
Research and development................................ 110 203 373 534
Sales and marketing..................................... 107 167 388 439
General and administrative.............................. 213 257 634 678
------- ------- -------- --------
Total............................................... $ 487 $ 634 $ 1,575 $ 1,669
======= ======= ======== ========

VALICERT, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

Nine Months Ended
September 30,
------------------
2001 2000
-------- --------

Cash flow from operating activities:
Net loss...................................................................... $(23,380) $(19,944)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................. 2,005 1,107
Amortization of deferred stock compensation............................... 1,575 1,669
Amortization of goodwill and intangibles.................................. 2,389 2,431
Issuance of stock options for services.................................... 69 --
Interest on stockholders' notes........................................... (27) --
Changes in operating assets and liabilities:
Accounts receivable.................................................... 386 (1,672)
Prepaid expenses and other current assets.............................. (303) (1,335)
Other assets........................................................... (97) (180)
Accounts payable and accrued liabilities............................... (190) 2,460
Deferred revenue....................................................... 2,545 1,536
-------- --------
Net cash used in operating activities.............................. (15,028) (13,928)
-------- --------
Cash flows from investing activities:
Property and equipment additions.............................................. (1,582) (2,367)
Sale of short-term investments................................................ -- 3,116
-------- --------
Net cash provided by (used in) investing activities................ (1,582) 749
-------- --------
Cash flows from financing activities:
Issuance of preferred and common stock, net................................... 779 42,526
Repayment of borrowing........................................................ (868) --
Proceeds from borrowing....................................................... 1,195 (159)
Repayment of notes receivable from stockholders............................... 69 --
-------- --------
Net cash provided by financing activities.......................... 1,175 42,367
-------- --------
Net increase (decrease) in cash and equivalents.................................. (15,435) 29,188
Cash and equivalents--beginning of period........................................ 37,523 14,023
-------- --------
Cash and equivalents--end of period.............................................. $ 22,088 $ 43,211
======== ========
Non-cash investing and financing activity:
Common stock issued in exchange for stockholder notes............................ $ -- $ 300
======== ========
Supplemental disclosure of cash flow information--cash paid during the period for
interest....................................................................... $ 364 $ 255
======== ========

VALICERT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. Basis of Presentation

The accompanying unaudited interim condensed consolidated financial
statements of ValiCert, Inc. and its subsidiaries ("Company") reflect all
adjustments which, in the opinion of management, are necessary for a fair
presentation of the results of the interim periods presented in conformity with
accounting principals generally accepted in the United States of America (GAAP)
for the interim financial information. Such adjustments are of a normal
recurring nature. Intercompany balances and transactions have been eliminated
in consolidation.

The statements have been prepared in accordance with the regulations of the
Securities and Exchange Commission. Accordingly, they do not include all
information and footnotes required by GAAP. The results of operations for the
three and nine month periods ended September 30, 2001 are not necessarily
indicative of the operating results to be expected for the full fiscal year or
future operating periods. The information included in this report should be
read in conjunction with the audited consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2000 filed with the Securities and Exchange Commission on
April 2, 2001.

2. Initial Public Offering

In July 2000, the Company completed an initial public offering in which it
sold 4,000,000 shares of common stock at $10 per share and, subsequently, an
additional 600,000 shares of common stock were sold at $10 per share in
connection with the exercise of the underwriters' over allotment option. The
total proceeds from this transaction were approximately $41.0 million, net of
underwriters' discounts and other related costs of $5.0 million. Upon the
completion of the offering, all shares of preferred stock were automatically
converted to common stock on a one for three basis.

3. Equity Line of Credit

In June of 2001, the Company entered into a common stock purchase agreement
("equity line") with an investor for up to $50.0 million in equity financing
over a 36-month period. Use of the equity line is subject to a number of terms
and conditions. Related to the equity line, the Company granted the investor
and a third party warrants to buy 200,000 shares of common stock at an exercise
price of $2.92 per share. The warrants expire ten years from the issuance date
and had a fair market value of $422,000, which will be, offset against the
proceeds of any future drawdowns under this agreement. The fair value of the
warrants was determined by using the Black-Scholes model with the following
assumptions: expected life of 10 years; risk-free interest of 6.06%; volatility
of 100%; and no dividends during the expected term.

4. Segment Information

The Company operates in one industry segment: the development and marketing
of cryptographic software products that enable business transactions to be
conducted over the Internet in a secure, reliable and confidential manner.

5. Equipment Financing Line

In May 2001, the Company entered into a three-year equipment financing line
with a finance company that provides for borrowings up to $3.0 million, secured
by the assets acquired with the proceeds of the lease agreement. In connection
with the line, the Company granted the finance company a warrant to buy 87,719
shares of common stock at an exercise price of $2.56 per share. The warrants
expire ten years from the issuance date and

VALICERT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

had a fair market value of $186,000, which is being amortized over the
financing term. The fair value of the warrants was determined by using the
Black-Scholes model with the following assumptions: expected life of 10 years;
risk-free interest of 6.06%; volatility of 100%; and no dividends during the
expected term.

6. Common Stock and Net Loss Per Share

Three Months Nine Months Ended
Ended September 30, September 30,
------------------- ------------------
2001 2000 2001 2000
------- ------- -------- --------
(in thousands, except per share amounts

Net loss, basic and diluted..................................... $(6,101) $(7,406) $(23,380) $(19,944)
======= ======= ======== ========
Weighted average common shares outstanding...................... 22,834 17,075 22,791 8,527
Weighted average common shares outstanding subject to repurchase
and held in escrow............................................ (570) (1,886) (784) (1,899)
------- ------- -------- --------
Shares used in computation, basic and diluted................... 22,264 15,189 22,007 6,628
======= ======= ======== ========
Loss per share, basic and diluted............................... $ (0.27) $ (0.49) $ (1.06) $ (3.01)
======= ======= ======== ========

At September 30, 2001 and 2000, options to purchase 4,342,952 and 3,497,161
shares of common stock, and warrants to purchase 595,399 and 677,046 shares of
common stock, were excluded from the calculation of net loss per share, as
their inclusion would be antidilutive.

7. Comprehensive Loss

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 loss consists of the
Company's reported net loss and the unrealized holding losses on investments
and are as follows.

Three Months Nine Months Ended
Ended September 30, September 30,
------------------ ------------------
2001 2000 2001 2000
------- ------- -------- --------
(in thousands)

Net loss................................................... $(6,101) $(7,406) $(23,380) $(19,944)
Net unrealized loss on investments......................... -- (23) -- (311)
------- ------- -------- --------
Total comprehensive loss................................... $(6,101) $(7,429) $(23,380) $(20,255)
======= ======= ======== ========

8. Recent Accounting Pronouncements

In June 2001, the FASB approved for issuance SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Intangible Assets. Major
provisions of these statements are as follows: all business combinations
initiated after June 30, 2001 must use the purchase method of accounting; the
pooling of interest method of accounting is prohibited except for transactions
initiated before July 1, 2001; intangible assets acquired in a business
combination must be recorded separately from goodwill if they arise from
contractual or other legal rights or are separable from the acquired entity and
can be sold, transferred, licensed, rented or exchanged, either individually or
as part of a related contract, asset or liability; goodwill and intangible
assets with indefinite lives are not amortized but are tested for impairment
annually, except in certain circumstances, and whenever there is an impairment
indicator; all acquired goodwill must be assigned to reporting units for
purposes of impairment

VALICERT, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

testing and segment reporting; and effective for our fiscal year 2002, goodwill
will no longer be subject to amortization. The Company is evaluating the impact
of the adoption of these standards and has not yet determined the effect of
adoption on its consolidated financial position and results of operations. The
Company will adopt SFAS 142 for its fiscal year beginning January 1, 2002. Upon
adoption of SFAS 142, the Company will cease the amortization of existing
goodwill and certain intangible assets with an expected net carrying value of
$7.5 million at the date of adoption and annual amortization of $2.6 million
that resulted from business combinations completed prior to the adoption of
SFAS 141. The Company will evaluate goodwill for impairment under SFAS 142 and
has not determined whether or not there is an impairment loss. Impairment
losses, if any, upon initial adoption will be recognized as a change in
accounting principal.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

This Management's Discussion and Analysis of Financial Condition and Results
of Operations includes a number of forward-looking statements, which reflect
our current views with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and
uncertainties, including those discussed in the "Factors That May Affect Future
Results of Operations" and elsewhere in this report, that could cause actual
results to differ materially from historical results or future anticipated. In
this report, the words "anticipates," "believes," "expects," "future,"
"intends," and similar expressions identify forward-looking statements. We
caution you not to place undue reliance on these forward-looking statements,
which speak only as of the date of this report.

The following management's discussion and analysis of financial condition
and results of operations should be read in conjunction with management's
discussion and analysis of financial condition and results of operations set
forth in our Annual Report on Form 10-K for the year ended December 31, 2000
and Form S-1 filed on October 1, 2001 with the SEC.

Business

ValiCert is a leading provider of software for conducting secure and
paperless business over the Internet. Our customers use our products and
services to help transfer costly and inefficient business processes to the
Internet. We started commercial shipments of our validation authority software
products during the first quarter of 1999. 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 September 30, 2001, we had
over 180 customers, including Federal Reserve Bank, Highmark Blue Cross Blue
Shield, Hitachi, IBM, PricewaterhouseCoopers, Society for Worldwide Interbank
Financial Telecommunication, or S.W.I.F.T., Softbank, State of Connecticut and
Unisys.

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 include 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 which require us to
provide additional services during the subscription period. These fees relating
to additional services 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 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. We do not intend 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.

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 $17.6 million in 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.

Results of Operations

Three months ended September 30, 2001 and 2000

Revenues

Revenues increased to $6.9 million for the three months ended September 30,
2001 from $3.3 million for the three months ended September 30, 2000 primarily
due to an increase in sales of software licenses of $2.1 million and an
increase in subscription fees and other services of $1.5 million. Revenues for
the three months ended September 30, 2001 included $4.4 million for software
license revenues and $2.4 million for subscription fees and other services
revenues.

Cost of revenues

Cost of software license revenues. Cost of software license revenues
consists primarily of royalty costs related to technology licensed from third
parties. These costs decreased to $127,000 for the three months ended September
30, 2001 from $348,000 for the three months ended September 30, 2000 primarily
due to the reduction in utilization of royalty-bearing technology licensed from
third parties. Cost of software license revenues as a percentage of software
license revenues decreased to 2.9% for the three months ended September 30,
2001 from 15.2% for the three months ended September 30, 2000 as a result of
lower royalty expenses.

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. The cost of subscription fees and
other services revenues increased to $2.0 million of subscription fees for the
three months ended September 30, 2001 from $1.6 million for the three months
ended September 30, 2000. During the three months ended September 30, 2001,
these costs included compensation and other personnel-related expenses of $1.0
million and depreciation of $384,000. During the three month ended September
30, 2000, compensation and other personnel-related costs were $884,000 and
depreciation was $348,000. The cost of subscription fees and other services
revenues, as a percentage of subscription fees and other services revenues,
decreased to 81.9% for the three months ended September 30, 2001 from 165.7%
for the three months ended September 30, 2000.

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 were $2.8 million during the three months ended September 30, 2001 and
2000. Research and development expenses, as a percentage of revenues, decreased
to 40.5% for the three months ended September 30, 2001 from 86.3% for the three
months ended September 30, 2000. We expect that research and development
expenses will decline in absolute dollars over the next several quarters from
the level incurred during the three months ended September 30, 2001 due to
reductions in headcount and other expenses, but will fluctuate as a percentage
of revenues.

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 $5.5 million during the three months ended
September 30, 2001 from $3.7 million during the three months ended September
30, 2000, an increase of 48.8%, as we continued to expand our domestic and
international direct sales organization and increased our marketing efforts. Of
this increase, $1.3 million related to salaries, commissions and other
personnel-related costs. Sales and marketing expenses as a percentage of
revenues decreased to 79.6% for the three months ended September 30, 2001 from
112.0% for the three months ended September 30, 2000. We expect that sales and
marketing expenses will decline in absolute dollars over the next several
quarters from the level incurred during the three months ended September 30,
2001 due to reductions in various marketing programs, but will fluctuate as a
percentage of revenues.

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 $1.4 million during the three
months ended September 30, 2001 from $1.1 million during the three months ended
September 30, 2000, an increase of 30.6%. Of this increase, $169,000 related to
legal, accounting and other consulting services and $153,000 related to
salaries and other personnel-related costs. General and administrative expenses
as a percentage of revenues decreased to 20.5% for the three months ended
September 30, 2001 from 32.9% for the three months ended September 30, 2000. We
do not expect that general and administrative expense will fluctuate
significantly in absolute dollars over the next several quarters from the level
incurred during the three months ended September 30, 2001, but will fluctuate
as a percentage of revenues.

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 $802,000 was recorded in the quarter ended
September 30, 2001 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. We incurred additional deferred stock compensation of
$3.5 million related to stock options granted during the six months ended June
30, 2000. Deferred stock compensation costs are being amortized over
approximately four years, which resulted in an expense of $487,000 during the
three months ended September 30, 2001.

Interest and other income, net. Interest and other income, net, consists of
interest earned on cash, cash equivalents, short-term investments offset by
interest expense, primarily incurred on equipment lease obligations and foreign
currency translation adjustments. Net interest income was $111,000 during the
three months ended September 30, 2001 compared to net interest income of
$341,000 during the three months ended September 30, 2000 primarily as a result
of a decrease in cash and cash equivalents and a decrease in interest rates,
partially offset by a decrease in interest paid for equipment leases.

Nine months ended September 30, 2001 and 2000

Revenues

Revenues increased to $18.0 million for the nine months ended September 30,
2001 from $7.7 million for the nine months ended September 30, 2000 due to an
increase in sales of software licenses in the amount of $6.7 million and an
increase in subscription fees and other services in the amount of $3.5 million.
Revenues for the nine months ended September 30, 2001 included $12.1 million
for software license revenues and $5.8 million for subscription fees and other
services revenues.

Cost of revenues

Cost of software license revenues. Cost of software license revenue
decreased to $556,000 for the nine months ended September 30, 2001 from
$743,000 for the nine months ended September 30, 2000 due to the reduction in
utilization of royalty-bearing technology licensed from third parties. Cost of
software license revenues as a percentage of software license revenues
decreased to 4.6% for the nine months ended September 30, 2001 from 13.8% for
the nine months ended September 30, 2000 as a result of lower effective royalty
rates.

Cost of subscription fees and other services revenues. Cost of subscription
fees and other services revenues increased to $6.5 million for the nine months
ended September 30, 2001 from $4.0 million for the nine months ended September
30, 2000. The increase included $1.6 million related to compensation and other
personnel-related expenses. Cost of subscription fees and other services
revenues was 111.6% of subscription fees and other services revenue for the
nine months ended September 30, 2001 compared to 174.8% for the nine months
ended September 30, 2000.

Operating expenses

Research and development. Research and development expenses increased to
$9.4 million for the nine months ended September 30, 2001 from $7.2 million for
the nine months ended September 30, 2000, an increase of 30.2%, as we continued
to invest in the design, testing and deployment of our products and services.
Of the

increase, $1.0 million related to increases in salaries and other
personnel-related costs and $731,000 related to consulting services. Research
and development expenses as a percentage of revenues decreased to 52.6% for the
nine months ended September 30, 2001 from 94.4% for the nine months ended
September 30, 2000.

Sales and marketing. Sales and marketing expenses increased to $17.3 million
for the nine months ended September 30, 2001 from $9.3 million for the nine
months ended September 30, 2000, an increase of 86.7%, as we continued to
expand our global direct sales organization. Of this increase, $5.6 million
related to salaries, commissions and other personnel-related costs, $508,000
related to increased travel costs and $385,000 related to tradeshows and
marketing programs. Sales and marketing expenses as a percentage of revenues
decreased to 96.5% for the nine months ended September 30, 2001 from 120.8% for
the nine months ended September 30, 2000.

General and administrative. General and administrative expenses increased to
$4.0 million for the nine months ended September 30, 2001 from $2.7 million for
the nine months ended September 30, 2000, an increase of 47.0%. Of this
increase, $876,000 related to salaries and other personnel-related costs and
$672,000 related to increased legal, accounting and other consulting services.
General and administrative expenses as a percentage of revenues decreased to
22.2% of total revenues for the nine months ended September 30, 2001 from 35.2%
for the nine months ended September 30, 2000.

Amortization of intangibles. An expense of $2.4 million was recorded during
the nine months ended September 30, 2001 for the amortization of goodwill over
a five year period and other intangibles over three years.

Amortization of stock compensation. Deferred stock compensation costs are
being amortized over approximately four years on the single option method,
which resulted in an expense of $1.6 million during the nine months ended
September 30, 2001.

Interest and other income (expense), net. Net interest income decreased to
$429,000 for the nine months ended September 30, 2001 from $457,000 for the
nine months ended September 30, 2000 due to a decrease in cash and cash
equivalents partially offset by a decrease in interest paid for equipment
leases.

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 Factors That
May Affect Future Results of Operations below and in our Annual Report on Form
10-K for the year ended December 31, 2000. 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. 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

In July 2000, we completed an initial public offering of our common stock
that resulted in raising additional equity, net of offering costs, of
approximately $41.0 million. Prior to the public offering, we funded our
operations through the private sale of our equity securities with aggregate net
proceeds of approximately $30.0 million. At September 30, 2001, we had cash and
cash equivalents and short- term investments of $22.1 million. We also have a
bank credit line in the amount of $2.5 million under which we have pledged
substantially all of our assets, including patents and other intellectual
property, to secure borrowings under this facility. There were no borrowings
outstanding under this line as of September 30, 2001. 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 September 30,

2001, 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 $15.0 million in the nine months
ended September 30, 2001 was primarily used to fund a net loss of $23.4 million
partially offset by non-cash depreciation and amortization expenses of $6.0
million. Net cash used in operating activities of $13.9 million in the nine
months ended September 30, 2000 was primarily used to fund our net loss of
$19.9 million partially offset by non-cash depreciation and amortization
expenses of $5.2 million.

Net cash used in investing activities was $1.6 million for the nine months
ended September 30, 2001 primarily related to capital equipment expenditures to
purchase computer hardware and software, office furniture and equipment and
leasehold improvements. Net cash provided by investing activities was $749,000
for the nine months ended September 30, 2000 primarily due to the sale of
short-term investments partially offset by capital equipment expenditures.

Sources of cash

Net cash provided by financing activities was $1.2 million for the nine
months ended September 30, 2001. Net cash provided by financing activities was
provided primarily from proceeds from borrowings under an equipment lease line.
Net cash provided by financing activities was $42.4 million for the nine months
ended September 30, 2000. Net cash was provided primarily from the exercise of
warrants and stock options and to a more limited extent, borrowings partially
offset by the repayment of borrowings.

Future funding requirements

We reduced our headcount and operating expenses during the three months
ending September 30, 2001. Accordingly, for the next several quarters, we
expect limited increases in the level of our operating expenses. As a potential
source of equity financing, on June 15, 2001 we entered into an equity line
facility for up to $50.0 million of our common stock. However, our ability to
draw on this facility is subject to certain conditions, which may or may not be
met. We anticipate that our 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 and product lines.

We believe that our existing cash and cash equivalents and borrowing 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

are not amortized but are tested for impairment annually, except in certain
circumstances, and whenever there is an impairment indicator; all acquired
goodwill must be assigned to reporting units for purposes of impairment testing
and segment reporting; and effective for our fiscal year 2002, goodwill will no
longer be subject to amortization. Management is evaluating the impact of the
adoption of these standards and has not yet determined the effect of adoption
on our consolidated financial position and results of operations. We will adopt
SFAS 142 for its fiscal year beginning January 1, 2002. Upon completion of SFAS
142, we will cease the amortization of existing goodwill and certain intangible
assets with an expected net carrying value of $7.5 million at the date of
adoption and annual amortization of $2.6 million that resulted from business
combinations completed prior to the adoption of SFAS 141. Management will
evaluate goodwill under the SFAS 142 transition impairment test and has not
determined whether or not there is an impairment loss. Any transitional
impairment loss will be recognized as a change in accounting principle.

Factors That May Affect Future Results of Operations

In addition to the other information in this report, the following factors
should be considered carefully in evaluating our business before purchasing
shares of our stock.

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 the Internet for electronic
commerce and communications;

. the acceptance of existing security measures as adequate for electronic
commerce and communications over the Internet;

. the rate and timing of the growth and use of specific technologies such as
public key infrastructure and electronic payments and other Internet
security technologies;

. our ability to maintain our current, and enter into additional, strategic
relationships; and

. our ability to effectively manage our growth and to attract and retain
skilled professionals.

As a result of these risks, our business could be seriously harmed.

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.

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

Our quarterly results may fluctuate in the future as a result of many
factors, including the following:

. the size, timing, cancellation or delay of customer orders;

. the timing of releases of our new software products;

. the number of transactions conducted using our products and services;

. the long sales cycles for, and complexity of, our software products and
services;

. the timing and execution of large individual contracts;

. the impact of changes in the pricing models for our software products and
services or our competitors' products and services; and

. the continued development of our direct and indirect distribution channels.

Due to these and other factors, our operating results in some future quarter
or quarters may fall below the expectations of securities analysts who might
follow our stock.

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 $6.1
million in the three months ended September 30, 2001, and $7.4 million in the
three months ended September 30, 2000. As of September 30, 2001, we had
incurred cumulative losses of $69.5 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, and we may not become profitable or significantly increase our
revenues. We will continue to increase our sales and marketing, research and
development and general and administrative expenses.

We will need to generate significantly higher revenues in order 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.

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

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

. our technology or systems may become obsolete upon the introduction of
alternative technologies;

. we may incur substantial costs if we need to modify our products and
services to respond to these alternative technologies;

. we may not have sufficient resources to develop or acquire new
technologies or to introduce new products or services capable of competing
with future technologies;

. we may be unable to acquire the rights to use the intellectual property
necessary to implement new technology; and

. when introducing new or enhanced products or services, we may be unable to
manage effectively the transition from older products and services.

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 have accounted for a significant portion of
our revenues. In the three months ended September 30, 2001, five customers
accounted for 54.0%of total revenues. During the three months ended September
30, 2000, five customers accounted for 49.4% of total revenues. We anticipate
that our operating results in any given period will continue to depend to a
significant extent upon revenues from a small number of customers. We do not
have long-term contracts with our customers that obligate them to license our
software products or use our services. We cannot be certain that we will retain
our customers or that we will be able to obtain new customers. If we were to
lose one or more customers, our revenues could decline.

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 introduced a new licensing arrangement in the second quarter of 2000 that
includes a subscription fee during the license period. This new arrangement
resulted 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.

Our international business exposes us to additional risks.

Products and services provided to our international customers accounted for
54.5% of our revenues in the three months ended September 30, 2001 and 36.4% of
our revenues in the three months ended September 30, 2000. Conducting business
outside of the United States subjects us to additional risks, including:

. changes in regulatory requirements;

. reduced protection of intellectual property rights;

. evolving privacy laws;

. tariffs and other trade barriers;

. difficulties in staffing and managing foreign operations;

. problems in collecting accounts receivables; and

. difficulties in authenticating customer information.

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

One of our significant business strategies has been to enter into strategic
or other similar collaborative alliances in order to reach a larger customer
base than we could reach through our direct sales and marketing efforts. We
will need to maintain or enter into additional strategic alliances to execute
our business plan. However, if we are unable to maintain our strategic
alliances or enter into additional strategic alliances, our business could be
materially harmed. We may not be able to enter into additional strategic
alliances or maintain our existing strategic alliances. If we do not, we would
have to devote substantially more resources to the distribution, sales and
marketing of our security products and services than we would otherwise.

We have entered into technology, marketing and distribution agreements with
several companies. However, we may be unable to leverage the brand and
distribution power of these strategic alliances to increase the adoption rate
of our technology. We have been establishing strategic alliances to ensure that
third-party solutions are interoperable with our software products and
services. To the extent that our products are not interoperable or our
strategic allies choose not to integrate our technology into their offerings,
this failure would inhibit the adoption of our software products and outsourced
services. Furthermore, as a result of our emphasis on these strategic
alliances, our success will depend in part on the ultimate success of other
parties to these alliances. Failure of one or more of our strategic alliances
to achieve any of these objectives could materially harm our business.

Our existing strategic alliances do not, and any future strategic alliances
may not, grant us exclusive marketing or distribution rights. In addition, the
other parties may not view their alliances with us as significant for their own
businesses. Therefore, 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. Should any of these developments occur, our
business will be harmed.

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. Any failure to manage growth
effectively could materially harm our business. We have grown from 31 employees
at December 31, 1998 to 193 employees at September 30, 2001. 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.

Any future acquisitions of companies or technologies may not be successful and
as a result, could harm our business.

We may acquire businesses, technologies, product lines or service offerings
which may need to be integrated with our business in the future. Acquisitions
involve a number of risks including, among others:

. the difficulty of assimilating the operations and personnel of the
acquired businesses;

. to the extent the acquisitions are financed with our common stock,
dilution to our existing stockholders;

. our inability to integrate, train, retain and motivate key personnel of
the acquired business;

. the diversion of our management from our day-to-day operations;

. our inability to incorporate acquired technologies successfully into our
software products and services;

. the additional expense associated with completing an acquisition and
amortizing any acquired intangible assets;

. the potential impairment of relationships with our employees, customers
and strategic third-parties; and

. the inability to maintain uniform standards, controls, procedures and
policies.

If we are unable to successfully address any of these risks, our business
could be materially harmed.

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. In particular,
our principal executive offices and data center are located near San Francisco,
California in an area that has been subject to severe earthquakes. At present,
we do not have earthquake insurance on our data center or an operational
disaster recovery facility.

In the event of an earthquake, terrorist act, or other disaster that results in
an operations failure, our operations will be interrupted and our business will
be harmed.

Our principal executive offices and operating facilities are located near
San Francisco, California. This area has been subject to severe earthquakes. In
the event of an earthquake, we may be temporarily unable to continue operations
at our facilities and we may suffer significant property damage. Any such
interruption in our ability to continue operations at our facilities could
delay the development of our products and our manufacturing facilities.

In addition, terrorist acts or acts of war targeted at the U.S. and
specifically Silicon Valley could cause damage or disruption to us, our
employees, facilities, partners and customers, any of which could substantially
harm our business and results of operations.

We currently do not have redundant, multiple site capacity in the event of a
natural disaster or catastrophic event.

We rely on a continuous power supply to conduct our operations, and
California's current energy crisis could disrupt our operations and increase
our operating costs.

Our principal operating facilities are located in California. We rely on a
continuous power supply to conduct our operations, and California currently is
experiencing an energy crisis that could disrupt our operations and increase
our expenses. When power reserves for the State of California have fallen below
1.5%, California has on some occasions implemented, and may in the future
continue to implement, rolling blackouts throughout the State. If such
blackouts interrupt our power supply, we may be temporarily unable to continue
operations at our facilities. Any such interruption in our ability to continue
operations at our facilities could delay the development of our products and
our manufacturing processes. Continuing power interruption could delay
production to the extent it could damage our reputation, harm our ability to
retain existing customers and to obtain new customers, and could result in lost
revenue, any of which could substantially harm our business and results of
operations. To date, the Company has not experienced any significant or
repeated power disruptions that have had a material impact on its business
operations. However, in addition to possible power disruptions, the energy
crisis also may cause natural gas and electricity prices to rise significantly
over the next several months, relative to the rest of the United States, and
our operating expenses will likely increase.

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

We 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.

Since we sell through multiple channels and distribution networks, we may have
to resolve potential conflicts between these channels.

Since we sell through multiple channels and distribution networks, we may
have to resolve potential conflicts between these channels. For example, these
conflicts may result from the different discount levels offered by multiple
channel partners to their customers or, potentially, from our direct sales
force targeting the same accounts as our indirect channel partners. Such
conflicts may harm our business or reputation.

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. Our inability to continue
to license these third-party technologies on commercially reasonable terms will
harm our business. 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
currently use or our failure to obtain the right to use future technologies
could increase our costs and delay or possibly prevent product development. Our
existing licensing agreements may be terminated by the other parties to these
contracts, or may not be renewed on favorable terms or at all. In addition, 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 (Yosi)
Amram, our president and chief executive officer, and Srinivasan (Chini)
Krishnan, our founder and chairman, could significantly delay or prevent the
achievement of our development and strategic objectives.

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

We also must continue to train, retain, and motivate highly skilled
technical, managerial, sales, marketing and professional services personnel.
Due to the workforce reductions that we completed in the second quarter of

2001, the morale of our remaining employees may decrease, and we may be unable
to retain them. In addition, if our stock price decreases substantially, it may
be more difficult to retain employees who consider stock options an important
part of their compensation package. If we encounter difficulties retaining
software engineering personnel at a critical stage of product development, our
relationship with existing and future customers could be harmed. The failure to
retain necessary technical, managerial, sales, marketing and professional
services personnel could harm our business and our ability to obtain new
customers and develop new products.

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

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

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

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

Any claim of infringement by third parties could be costly to defend, and if we
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.
Because we are in a new and evolving field, customers may demand features which
will subject us to a greater likelihood of claims of infringement.

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

Furthermore, parties making such claims may be able to obtain injunctive or
other equitable relief that could block our ability to further develop or
commercialize some or all of our products in the United States and abroad.

In the event of a claim of infringement, we may be required to obtain one or
more licenses from or pay royalties to third parties. We cannot assure you that
we will be able to obtain any such licenses at a reasonable cost, if at all.
Defense of any lawsuit or failure to obtain such license could hurt our
business.

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

Because our products and services are complex 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.

In June 2001, we entered into an equity line facility for up to $50 million
of our common stock. However, our ability to draw on this facility will be
subject to certain conditions, which may not be met. We may be unable to raise
any additional amounts on reasonable terms, or at all, when needed.

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

If the marketplace does not associate ValiCert with high-quality, end-to-
end secure infrastructure software products and services, it may be difficult
for us to keep our existing customers, attract new customers or successfully
introduce new products and services. Competitive and other pressures may
require us to increase our expenses to promote our brand name, and the benefits
associated with brand creation may not outweigh the risks and costs associated
with establishing our brand name. Our failure to develop a strong brand name or
the incurrence of excessive costs associated with establishing our brand name
may harm our business.

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

A requirement for the continued growth of electronic commerce is the secure
transmission of confidential information over public networks. We rely on
public key cryptography, an encryption method that utilizes two keys, a public
and private key, for encoding and decoding data, and on digital certificate
technology, to provide the security and authentication necessary for secure
transmission of confidential information. Regulatory and export restrictions
may prohibit us from using the strongest and most secure cryptographic
protection available, and thereby may expose us or our customers to a risk of
data interception. A party who is able to circumvent our

security measures could misappropriate proprietary information or interrupt our
or our customers' operations. Any compromise or elimination of our security
could result in risk of loss or litigation and possible liability and reduce
demand for our products and services.

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 and our business may be harmed.
Our public root keys are used by applications 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 term
of our root key agreement with Netscape ends in November 2002 and we cannot
assure you that this agreement will be renewed. In addition, our root key
agreement with Microsoft may not be extended to cover subsequent releases of
Microsoft Windows 2000 or the Microsoft Internet Explorer browser. The
agreement also contains financial covenants, including requirements that we
maintain a minimum level of cash and available borrowing capacity and a minimum
level of tangible net worth.

The covenants and restrictions in our existing and future debt instruments
could have a negative effect on our business.

. incurring any indebtedness other than equipment leasing obligations;

. pledging any of our assets, subject to exceptions; and

. making investments in the securities of any other person.

The agreement also contains financial covenants, including requirements that
we maintain a minimum level of cash and available borrowing capacity and a
minimum level of tangible net worth.

The covenants and restrictions in our existing and future debt instruments
could have a negative effect on our business, including impairing our ability
to obtain additional financing and reducing our operational flexibility and
ability to respond to changing business and economic conditions. In addition,
any failure to comply with the restrictions and covenants in our $2.5 million
line of credit agreement or any other credit facility would generally result in
a default under the facility, permitting the lenders to declare all debt
outstanding under that facility to be immediately due and payable. Further, a
default under any debt facility could, under cross-default provisions, result
in defaults under other debt instruments, entitling other lenders to declare
all debt outstanding under those other facilities to be immediately due and
payable. If any declaration of acceleration were to occur, we might be unable
to make those required payments or to raise sufficient funds from other sources
to make those payments. In addition, we have pledged substantially all of our
assets to secure our credit facilities. If a default occurs with respect to
secured indebtedness, the holders of that indebtedness would be entitled to
foreclose on their collateral, which would harm our business.

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,
regardless of our responsibility for the failure. Our existing insurance

coverage may not continue to be available on reasonable terms or in amounts
sufficient to cover one or more large claims. Our insurer may also disclaim
coverage as to any claims, which could result in substantial costs to us.

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

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

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

Risks Related to Our Industry

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

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

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

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

result in pricing pressures, reduced margins or the failure of our
Internet-based security products and services to achieve or maintain market
acceptance, any of which could materially harm our business.

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

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

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

. 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;

. lack of availability of cost-effective, high-speed service;

. limited numbers of local access points for corporate users;

. inability to integrate business applications on the Internet;

. the need to operate with multiple and frequently incompatible products; and

. a lack of tools to simplify access to and use of the Internet.

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

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

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

The technology used to keep private keys confidential depends in part on the
application of mathematical principles and relies on the difficulty of
factoring large numbers into their prime number components. Should a simpler
factoring method be developed, 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. Any
significant advance in techniques for attacking cryptographic systems could
render some or all of our existing products and services obsolete or
unmarketable.

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

Our products are subject to export controls.

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

Risks Related to the Stock Market in General

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

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

In addition, in the past, securities class action litigation has often been
brought against a company following periods of volatility in the market price
of its securities. This risk is especially acute for us because the extreme
volatility of market prices of technology companies has resulted in a larger
number of securities class action claims against them. Due to the potential
volatility of our stock price, we may in the future be the target of similar
litigation. Securities litigation could result in substantial costs and divert
management's attention and resources.

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

We are controlled by our executive officers, directors and major
stockholders, whose interests may conflict with yours. Provisions in our
certificate of incorporation and bylaws may have the effect of delaying or
preventing a change of control or changes in management.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

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

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits.

None.

(b) Reports on Form 8-K.

None.

SIGNATURES

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

VALICERT, INC.

By: /s/ TIMOTHY CONLEY
_____________________________________
Timothy Conley
Chief Financial Officer

Dated: October 30, 2001