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(Exact name of registrant as specified in its charter)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Rule 12b-2). Yes x No o

The aggregate market value of the Common Stock issued and outstanding and held by non-affiliates of the Registrant, based upon the closing price for the Common Stock on the Nasdaq National Market on June 30, 2002 was approximately $97,000,000. All executive officers and directors of the registrant have been deemed, solely for the purpose of this calculation, to be “affiliates” of the registrant. This determination of the affiliate status is not necessarily conclusive.

The number of shares of the registrant’s Common Stock outstanding as of February 9, 2004 was 13,350,400.

Part III incorporates information by reference from the registrant’s proxy statement for the Annual Meeting of Shareholders, which proxy statement in definitive form will be filed no later than 120 days after the close of the registrant’s fiscal year ended December 31, 2002.

This amendment to SafeNet, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2002, which was filed with the Securities and Exchange Commission on March 31, 2003, as amended by Amendment No. 1 on Form 10-K/A, which was filed on April 29, 2003, is being filed to revise and expand disclosures in Item 1—Business, Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8—Financial Statements and Supplementary Data. No further changes have been made to the Form 10-K. In connection with the filing of this amendment and pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as amended, SafeNet, Inc. is including certain currently dated certifications and an updated consent of its independent auditors. This amendment continues to speak as of the date of the original filing of the Form 10-K and the Company has not updated the disclosure in this amendment to speak to any later date.

In this Annual Report on Form 10-K/A, “SafeNet,” “we,” “us,” and “our” refer to SafeNet, Inc. and its subsidiaries, unless the context otherwise requires.

This Annual Report on Form 10-K, the exhibits hereto and the information incorporated by reference herein contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements usually contain the words “estimate”, “anticipate”, “expect”, or similar expressions. All forward-looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties. These uncertainties could cause actual results to differ materially from those expected for the reasons set forth below under Risk Factors. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. SafeNet, Inc. undertakes no obligation to publicly release any revisions to “forward looking statements” to reflect events or circumstances after the date that this report is filed with the Securities and Exchange Commission or to reflect the occurrence of anticipated events.

We develop, market, sell and support a portfolio of hardware and software network security products and services that enable secure communications and data services. Our products and services are used to create secure wide area networks (WANs) and virtual private networks over the Internet (VPNs) to prevent security breaches that could result in unauthorized access to confidential data, invasion of privacy and financial loss. Our security solutions allow our customers to lower the cost of deploying and managing secure, reliable private networks and enable the use of the Internet for secure business communications and transactions with customers, suppliers and employees.

Our products and services address a wide range of customer and market needs. Through our Enterprise Security Division, we sell high-performance security solutions to address the needs of our government, financial institutions and other security-sensitive commercial customers. We also provide, through our Embedded Security Division, a broad range of security products, including silicon chips, accelerator cards, licensed intellectual property and software products, to original equipment manufacturers (OEMs) that embed them into their own network and wireless products. We believe that our relationships with both enterprises and OEMs allow us to provide security products to a broad spectrum of end-users.

Our products are based on industry standard encryption algorithms and communication protocols that allow for integration into large networks and interoperability with other network devices and applications. Our solutions incorporate our security technologies, including our silicon chips, appliances, client software and management software, to provide a vertically integrated solution that addresses the stringent security needs of our customers. Our security products are centrally managed with our management software, which enables policy management and the secure, scalable monitoring of network devices, applications, network traffic and security events.

Founded in 1983, we are headquartered in Baltimore, Maryland. We have a long track record of technology and security innovation and dedication to continuous product improvement. In 1995, we developed our first Internet VPN solution for a major financial institution. Through business

relationships with end-user customers, such as the U.S. Department of Defense, the Internal Revenue Service, the Immigration and Naturalization Service and Citigroup, and OEMs, such as Cisco Systems and Texas Instruments, we have considerable experience developing and deploying network security solutions.

In February 2003, we completed our acquisition of Cylink Corporation (“Cylink”), a California Corporation which developed, manufactured, marketed and supported a comprehensive portfolio of hardware and software security products for mission-critical private networks and business communication over the Internet and private networks. Operations of Cylink were integrated into our Enterprise Security Division and function as part of that business unit. This acquisition will have a significant impact on our business operations going forward. As the transaction closed subsequent to December 31, 2002, the Cylink acquisition has not been considered in the discussion of our business as of and for the year ended December 31, 2002. However, due to its significance to our business, a discussion of the Cylink acquisition and its anticipated impact is included at the end of Item 1. Business.

Also in February 2003, we acquired substantially all the assets of Raqia Networks, Inc. (“Raqia”), a development stage company, consisting primarily of technology-related intangible assets. Total consideration we paid was 389,640 shares of our common stock with an estimated value of $6.7 million plus $805,000 in cash. We had previously invested $1.0 million in Raqia. We will obtain an independent valuation of the acquired assets, in order to allocate the purchase price during the first quarter of 2003.

In January 2002, we acquired Pijnenburg Secuealink, Inc. a Delaware corporation primarily engaged in the manufacture of security chips for e-commerce transactions through its European subsidiary. Securealink develops, markets and sells security chips and intellectual property, primarily in Europe and Asia. We integrated the operations of Securealink into our Embedded Security Division.

Enterprises increasingly require secure and reliable networks to conduct electronic commerce, collaborate with customers and provide remote access for employees. The pervasive use of WANs and the Internet is substantially increasing the volume of electronic communications and transactions and the demand for network security products and services.

Today, large networks contain numerous points of vulnerability, which can make passwords, network architecture and other critical information vulnerable to attack. Communications may pass through dozens of countries, over satellites, numerous operating systems in computers and routers, and through a variety of organizations or communications providers and their premises. Consequently, multiple parties have access, or can acquire access, to proprietary data within these networks. Because of this exposure, enterprises must have access to secure paths of communication.

Secure electronic communications and transactions have traditionally required costly private networks and dedicated leased lines. Over time, enterprises have invested heavily in WANs (asynchronous transfer mode, or ATM, frame relay and link) to conduct secure communications and transactions, resulting in a significant installed base of these networks. However, there are several limitations that exist with traditional leased-line WANs. Their proprietary, fixed nature results in significant costs and reduced flexibility and scalability. The need for dedicated leased lines and excess capacity to meet peak load requirements results in networks that are significantly more expensive to maintain and administer. Additionally, providing network access is made difficult and expensive by the need to add another dedicated leased-line for each new location, partner and employee that needs to be connected to the network. In the future, we expect that most networks will utilize both WANs and the Internet, but will increasingly depend on the Internet as they expand to support a much larger number of users. As a result, these enterprises will require solutions that seamlessly manage both types of network technologies.

The adoption of VPNs and, more recently, the Internet Protocol Security (IPSec), a widely used industry protocol to enable secure transmissions over the Internet, has enabled the secure

transfer of information and data over the Internet. A VPN is a communications system using encryption technology that creates a private “tunnel” through the Internet and other communications systems, assuring authentication of users and privacy of information. Increased availability of VPN services has allowed a secure alternative to traditional WANs. VPNs allow organizations to use public networks for their communications backbone. Because the Internet is less expensive to use than private networks, enterprises can generally achieve substantial cost savings by using VPNs while taking advantage of the global availability and access to the Internet. VPNs have three key uses:

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Remote access VPNs connect teleworkers and mobile workers to the corporate network;

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Site-to-site VPNs connect the central office of an enterprise to its various branch and satellite offices; and

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Extranet VPNs connect an enterprise and its suppliers and business partners, allowing them to exchange real-time information such as inventory levels or pricing.

Some network security products emphasize one or more forms of security technology other than VPNs, such as firewalls, intrusion detection and anti-virus. Firewalls use filtering technology to control external access to an enterprise network. Intrusion detection, or intrusion prevention, is intended to alert network operators of attempts to penetrate customers’ networks. Similarly, anti-virus products address the prevalence of virus attacks that proliferate through the Internet, and migrate into private networks through their users’ computers. We believe that encryption and authentication should be the first line of defense in the network’s security strategy, with firewalls, intrusion detection and anti-virus solutions providing additional defense for communications received from remaining, unsecured sources. We further believe that encryption, by protecting the privacy of the information, ensuring the integrity of the data and authenticating the source and destination of the communication, is the foundation technology upon which a secure network can be built.

We develop, market, sell and support a portfolio of hardware and software network security products and services that provide secure communications and data services over WANs and the Internet. Our products and services address a wide range of customer and market needs. Through our Enterprise Security Division, we sell high-performance security solutions to address the high-level security needs of our government, financial institution and other security-sensitive commercial customers. By providing a solution that incorporates our security technologies, including our silicon chips, appliances, client software and management software, we are able to provide a vertically integrated solution that addresses the stringent security needs of these customers. We also provide, through our Embedded Security Division, a broad range of security solutions, including silicon chips, accelerator cards, licensed intellectual property and software products, to OEMs that embed them into their own network and wireless products.

Our objective is to be the leading provider of products and services that enable secure communications and data services over WANs and the Internet. To achieve this objective, we continue to pursue the following strategies:

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Extend our Technology and Introduce New Products. We intend to leverage our technology and product strength and expertise to further expand our core product functionality, continue to develop complementary products, and expand our target market. We will continue to invest in research and development and expect to announce several new product and technology offerings during 2003. For example in 2003, we expect to introduce content inspection chips designed for intrusion detection and prevention, application firewalls and anti-virus protection. We have

assembled a team of experienced developers and engineers with security expertise and encourage a corporate culture that fosters continuous product innovation.

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Further Penetrate our Existing Enterprise Customer Base. We have an established customer base of government, financial institution and other commercial enterprises. The strategic importance of our products allows us to develop long-term relationships with the key technology and security decision-makers within our customer base. The breadth of our existing enterprise product line allows us to address a wide range of customer needs. We intend to generate incremental sales from our existing customer base through the introduction of new and enhanced products and services. We believe that the acquisition of Cylink provides us with an opportunity to sell new products and services into the larger combined customer base, including selling our VPN solutions to Cylink’s customers.

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Expand Strategic OEM Relationships and Other Distribution Channels. We intend to continue to focus on our OEM relationships and to expand distribution channels to develop new markets. We believe that these relationships allow us to provide our security solutions to the largest number of end-user customers. We sell a variety of security products to OEMs, including silicon chips, accelerator cards, licensed intellectual property and software products. We currently have OEM relationships with major companies, such as Cisco Systems, Texas Instruments, ARM, Advanced Micro Devices and Samsung. We offer comprehensive training and marketing programs to support our OEMs. We intend to further develop our relationships with system integrators for the government sector and value added resellers for international markets.

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Target the Government and Financial Institution Markets. We continue to target government agencies and financial institutions. We believe these markets represent, over the long-term, a significant growth opportunity for sales of high-end network security products. Governmental agencies as well as financial institutions have increasingly focused on enhancing the security of their networks, especially after the September 11, 2001 terrorist attacks. We intend to expand our position in these markets and leverage this position to target new high growth market opportunities as they arise.

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Target the Wireless Market. We have recently targeted the wireless communications market. We are currently in the process of developing additional security technology that will address the growing need for secure wireless communication.

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Pursue Strategic Acquisitions on a Selective Basis. We explore acquisitions from time to time to acquire businesses, products or technologies that we believe will enhance and expand our current product offerings and our customer base.

Our enterprise products and services are typically sold to government agencies, financial institutions and other commercial customers. Our embedded products are typically sold to OEM customers as components, such as silicon chips, accelerator cards, licensed intellectual property and software.

SafeEnterprise™ Security System. Our SafeEnterprise™ Security System provides security solutions for government and financial institutions that require a high level of security to protect their networks from unauthorized access and to protect sensitive information as it travels over both WANs and the Internet. This solution, which includes both appliances and software that can be sold as an integrated turnkey solution or separately as discreet hardware and software products, consists of network gateways, backbone encryptors, remote access, client software and our management software. The SafeEnterprise system provides management functionality, including policy creation,

policy enforcement, network monitoring, activity auditing and troubleshooting. SafeEnterprise™ provides a secure solution for both WANs (ATM, frame relay and link) and the Internet.

Appliances. The SafeEnterprise™ Security System includes HighAssurance™ Gateways that employ the U.S. government endorsed Triple Data Encryption Standard (3DES) and Data Encryption Standard (DES) algorithms and Advanced Encryption Standard (AES) algorithms. In addition, the SafeEnterprise™ Security System also includes ATM, Frame and Link Encryptors that employ 3DES and DES algorithms.

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HighAssurance™ Gateways: Our HighAssurance™ Gateway line provides a portfolio of IPSec VPN gateways covering small, medium and large network requirements. The gateways are differentiated by the performance needs of the network and where they are placed in the network. Our gateways integrate advanced features, such as load balancing and fail-over, secure multi-casting, firewalls and routing, and are all IPSec standards-compliant.


Product	IPSec Throughput	IPSec Tunnels(1)

HighAssurance™ 500 Gateway	1.5 Mbps		500
HighAssurance™ 1000 Gateway	10 Mbps		1,000
HighAssurance™ 2000 Gateway	100 Mbps		10,000
HighAssurance™ 4000 Gateway	1 Gbps		1,024

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ATM Encryptor: The SafeEnterprise™ ATM Encryptor provides data privacy and access control for connections over public and private ATM networks and protects all workstations, servers and other end nodes connected to a local area network. This product allows the flexibility to choose desired interface modules across a range of speeds.

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Frame Encryptor: SafeEnterprise™ Frame Encryptor provides security for frame relay networks at speeds up to 52 Mbps. This product is used across a wide range of frame relay networks and applications.

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Link Encryptor: SafeEnterprise™ Link Encryptor secures sensitive data transmitted over high-speed, point-to-point, or dial-up communication links at speeds up to 52 Mbps. The Link Encryptor is designed for organizations that rely heavily on close-looped secure networks for the transport of highly sensitive data.

Software. The SafeEnterprise™ Security System includes the following software products:

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Security Management Center: Our Security Management Center product provides security management for our VPN and WAN appliances and software clients, including authentication, definition and enforcement of security policy, configuration, monitoring and audit capabilities. The Security Management Center allows customers to manage all aspects of their VPN and WAN networks and allows for easy migration from WAN to VPN technology. The Security Management Center is a Java-based management platform.

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SoftRemote: SoftRemote allows for remote access to corporate networks. This product provides VPN access capabilities for desktops and portable computers for all versions of Microsoft® Windows®, including Windows XP®. The client software provides secure client-

to-client or client-to-gateway communications over the Internet, dial-up connections and wireless local area networks. Key features include personal firewall capabilities and support for strong two-factor authentication through industry-standard smart cards. SoftRemote additionally includes policy protection and support for browser certificates. We also sell versions of our SoftRemote VPN client software to OEMs who are able to co-brand the client and offer it as part of their overall solution.

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HighAssurance™ Remote: The HighAssurance™ Remote client is based on SoftRemote, which contains additional security features for the U.S. government and other agencies. HighAssurance™ Remote is federal information processing standards (FIPS) certified.

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SoftRemoteLT- SoftRemoteLT is a streamlined version of SoftRemote that offers all the features of SoftRemote except for personal firewall capabilities.

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SoftRemotePDA: SoftRemotePDA is based on SoftRemote and designed specifically to extend VPN access to mobile devices, such as personal digital assistants, or PDAs. SoftRemotePDA is designed to combat the vulnerabilities in wireless communications by applying the IPSec technologies utilized by SoftRemote to handheld portable devices. It allows PDA users to securely communicate over wireless links to retrieve email, access corporate information from a network or browse the Internet. SoftRemotePDA is available for both Palm OS® and Pocket PC® handheld devices.

Services. The SafeEnterprise™ Security System includes the following services:

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SafeNet Trusted Services: SafeNet Trusted Services provides a complete outsourced VPN solution. Our managed services allow organizations to implement our VPNs without the investment in equipment, facilities and security expertise. SafeNet Trusted Services provides system availability in excess of 99.9% and our primary network operations center, located in Baltimore, Maryland, has been approved by several U.S. government security organizations. Qualified security specialists perform around-the-clock functions necessary to maintain VPN security, including providing help desk services and other maintenance functions. SafeNet Trusted Services specialists work closely with the customer to define and implement its security policy.

Hardware Solutions. We provide OEMs with the following portfolio of silicon chips and accelerator cards:

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SafeXcel™: SafeXcel™ is our line of silicon chips that addresses the needs of OEMs for embedded, accelerated security. This product line includes high-performance integrated circuits and privacy products for both IPSec and Secured Socket Layer, or SSL, encryption. Our SafeXcel™ product line includes the following series:

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SafeXcel™ Momentum Series. The SafeXcel™ Momentum Series of silicon chips is developed for the consumer and small office/home office, or SOHO, markets. These chips are designed for low cost applications, such as broadband access, SOHO routers, wireless access devices, VPN gateways and firewalls. The Momentum Series includes the following silicon chips with the indicated IPSec throughputs:

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SafeXcel™ Velocity Series. The SafeXcel™ Velocity Series of silicon chips is designed for higher performing networking appliances, such as routers, firewalls, gateways and remote access servers. The Velocity Series includes the following silicon chips:

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SafeXcel™ Transaction Series. The SafeXcel™ Transaction Series of silicon chips is designed for point-of-sale terminals, keyboards and smart cards, which may be used in e-commerce, financial and medical transactions.

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SafeXcel™ Cards. SafeXcel™ Cards are accelerator cards that provide cryptographic throughput and acceleration for operations such as encryption, hashing, public key computations, key negotiation, signatures and random number generation. SafeXcel Cards include SafeXcel 140-PCI, SafeXcel 141-PCI, SafeXcel 171-PCI and SafeXcel 241-PCT. Also available is a PCI card based on SafeXcel-4850.

EmbeddedIP™. EmbeddedIP™ is the delivery of our technology in a form that allows OEMs to embed security in their silicon chips, including products designed specifically for the wireless market. EmbeddedIP™ is available for license in intellectual property cores or blocks, whereby selected elements of the VPN encryption technology can be adapted in single or multiple implementations. This allows OEMs to incorporate selective blocks in their own silicon chips to allow for cost-effective, high throughput, low power-consuming designs. EmbeddedlP can be licensed in the following blocks:

We also license our CGX (CryptoGraphic eXtensions) Library, a library of more than 60 cryptographic commands, which allows OEMs to deploy applications with reduced development time.

Our portfolio of VPN security products is based on SecureIP Technology. SecureIP Technology is the intellectual property underlying the building blocks of security applications that enable entities to securely use the Internet and other shared networks. SecureIP Technology is implemented in our CGX Library, a library of more than 60 cryptographic commands, processes and interfaces that provides a flexible and secure application that is portable across many processors and operating systems. The CGX Library is embedded in our chips, accelerator cards and software clients forming a seamless suite of readily embeddable products for our OEM customers. In addition, we apply our security technologies at each layer of the enterprise; not only the embedded technologies, but also in the designs of the gateways and the systems resulting in integrated enterprise security systems with high level performance.

The majority of our customers are U.S. government agencies, financial institutions and many of the leading OEMs.

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Government: U.S. Department of Defense, U.S. Customs Service, Internal Revenue Service, U.S. Department of State and Immigration and Naturalization Service.

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Network Infrastructure: Cisco Systems, Microsoft, WatchGuard, NetScreen and SonicWall.

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Wireless/Semiconductor: Advanced Micro Devices, Texas Instruments and ARM.

We provide customer support through a staff of support engineers knowledgeable in both our network security systems and products, and complex computer networks. In addition to supporting customers, this group of engineers performs system level quality assurance testing of new products and product enhancements. We provide customer telephone support, including 24 hour a day “hot line” support. In addition, we offer on-site training, installation and trouble-shooting services, generally on a fee basis.

We provide limited warranties on our hardware products for one year upon delivery of the product. After warranty expiration, clients may purchase an extended warranty support contract. This contract extends warranty service for an additional one-year period, providing repair or replacement of defective products and telephone support. We also offer support on a time and materials basis.

We sell our products and services primarily through direct sales personnel dedicated to both enterprise and OEM markets and internationally primarily through value added resellers. The unique requirements of our customers require us to maintain specialized sales personnel. Our Enterprise Security Division sales group, which includes a federal sales group and a commercial sales group, specifically targets government organizations and worldwide financial entities and utilizes federal systems integrators to fulfill customer purchase orders as a contract vehicle for our federal customers. The Embedded Security Division sales organization is responsible for pursuing and managing sales to OEMs who embed our technology and products into their own network and wireless products. We have sales offices in the United States, the United Kingdom, Singapore, Switzerland and the Netherlands.

Our marketing department is dedicated to marketing communications, developing sales tools and sales support programs, public relations, product launch support, events and partner programs. Our marketing efforts focus on building brand recognition and developing leads for our sales force.

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Direct marketing efforts through a Web marketing program and website, as well as email and direct-mail promotions;

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Programs to ascertain the requirements of existing and prospective end-user and OEM customers;

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Trade-shows and seminars to increase the visibility of our solutions and generate leads for our sales force, such as the RSA Security Conference in San Jose, California and E-Gov in Washington, DC;

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European brand awareness through exhibitions such as CEBIT in Hanover, Germany and new European sales offices;

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Increased coverage of our technology and products in leading trade publications; and

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Public relations efforts and joint marketing and co-branding arrangements with our partners.

Some of our network security products contain encryption algorithms that are subject to the export restrictions administered by the Bureau of Export Control, U.S. Department of Commerce. These restrictions permit the export of encryption products based on country, algorithm and class of end-user. They prohibit the export of encryption products to some countries and to business entities that are not included in a range of end-users.

We have assembled a team of engineers with experience in the fields of computing, network systems design, Internet routing protocols, security standards and software. Our engineering team has experience in developing and delivering hardware, software, encryption and authentication technology, accelerator cards and integrated custom silicon chips.

We believe strong product development capabilities are essential to our strategy of enhancing our core technology, developing additional product functionality and maintaining the competitiveness of our products. Our current initiatives include:

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Expanding our products to address the firewall, intrusion detection and prevention and anti-virus markets through the release of a content inspection product; and

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Further incorporating in our product lines high assurance security techniques derived from joint development initiatives with U.S. government agencies.

We will continue to devote resources to the latest security technology and to meet the increasing demands of our customers and the market.

Orders for our products are usually placed by customers on an as-needed basis and we typically ship products within five days to 10 weeks of receipt of a customer’s firm purchase order. Our backlog consists of all orders received, where the anticipated shipping date is typically within six months. Because of the possibility of customer changes in delivery schedules or cancellations of orders, our backlog as of any particular date may not be indicative of sales in any future period. We seldom maintain long-term contracts with our customers that require them to purchase our products.

We design and develop all key components of our appliances, software and silicon chips, which are fabricated by contract foundries. Our silicon chips are primarily manufactured by Analog Devices and Samsung. We outsource the manufacturing of our other products primarily to a small privately-held manufacturer. The outsourced operations include engineering prototypes, pre-production runs, full turnkey boxbuilds and product drop shipments. We also design, specify and monitor all the testing required to meet our internal and external quality control guidelines. Outsourcing allows us to reduce fixed overhead and personnel costs and provides greater flexibility to match product and market demands. However, the unavailability of the contract manufacturers and foundries we utilize could substantially decrease our control of the cost, quality and timeliness of the manufacturing process.

The network security market is highly competitive and subject to rapid technological changes. We expect to face increasing competitive pressures from competitors as network security becomes more prevalent. We currently compete against companies that have substantially greater financial resources, sales and marketing organizations, market penetration and research and development capabilities, as well as broader product offerings and greater market presence and name recognition. There are also a number of other hardware and software data encryption methods and security technologies on the market that compete with our products.

We believe that the principal competitive factors affecting the network security market include standards compliance, product quality and reliability, technical features, network compatibility, ease of use, client service and support, distribution and price. Although we believe our technology and products currently compete favorably with respect to such factors, there can be no assurance that we can maintain our competitive position against current and potential competitors.

We face numerous competitors. Our key OEM competitive threat comes from potential customers electing to develop internal capabilities similar to those provided by our products rather than buying solutions from us or another outside vendor. The key enterprise competitive threat is that customers select vendors with greater financial, research and marketing resources.

Our success and ability to compete is dependent, in part, upon our ability to maintain the proprietary nature of our technologies. We rely on a combination of patent, trade secret, copyright and trademark law and nondisclosure agreements to protect our intellectual property. We own 21 United States and foreign patents and have additional pending foreign and domestic patent applications. These patents cover our SafeXcel chips, CGX Security Platform, SafeNet Dial and the AX400.

We seek to protect the source codes to our computer software programs, which are essential elements of our products, by means of copyright and trade secrets laws. The protection of our intellectual property and information we develop will be limited to such protection as we may be able to secure pursuant to trade secret or copyright laws or under any confidentiality agreements into which we may enter. We own federally registered trademarks for the SafeNet name and for certain of our products. However, we cannot assure you as to the validity, enforceability or lack of infringement of these trademarks.

At present, we have confidentiality agreements with our officers, directors and employees. There can be no assurance that the scope of any such protection we are able to secure will be adequate to protect our intellectual property or that we will have the financial resources to engage in litigation against parties who may infringe such intellectual property. In addition, we cannot assure you that others will not develop similar technology independent of us.

We believe that our products do not infringe the proprietary rights of third parties. There can be no assurance, however, that third parties will not assert infringement claims in the future.

As of March 3, 2003, we had 215 employees, of whom 17 are engaged in production and quality control, 25 in administration and financial control, 112 in engineering, development, and client support, and 61 in marketing and sales. We employ 165 employees in the United States, 39 employees in the Netherlands, 8 employees in United Kingdom, and 3 employees in Singapore. Approximately 65 of those employees are from the acquisition of Cylink.

SafeNet operates in a rapidly changing environment that involves numerous risks, some of which are beyond our control. The following discussion highlights some of the possible risks.

The Company has experienced substantial net losses in four of the last five years, including 2002. As of December 31, 2002, SafeNet had an accumulated deficit of $20,225,000. Although our revenues are subject to fluctuation, SafeNet intends to maintain or increase our expenditures in all areas in order to execute the

Company’s business plan. As a result, the Company may incur substantial additional losses. The likelihood of SafeNet’s success must be considered in light of the problems, expenses and delays frequently encountered in connection with new technologies utilized with the transition to an Internet VPN business and the competitive environment in which SafeNet operates. Investors should not consider the Company’s historical results indicative of future revenue levels or operating results. SafeNet can neither give assurance that it will operate profitably in the future nor that the Company may sustain profitability if it is achieved.

On February 6, 2003, SafeNet acquired Cylink, a manufacturer of security appliances and software for securing the Internet and private network communications. SafeNet expects this acquisition to facilitate the Company’s growth in the enterprise systems aspects of the business through access to a broader range of government and commercial enterprise customer accounts, a broader and more complete product offering, and the fortified support of SafeNet’s key government and financial customers.

Also, on February 27, 2003, SafeNet acquired substantially all the assets of Raqia, a development stage company, consisting primarily of technology-related intangible assets. In addition, the Company may from time to time pursue other acquisitions of businesses that it believes compliments or expands its existing business, including acquisitions that could be material in size and scope.

The acquisitions of Cylink and Raqia and other future acquisitions involve various risks, including:

	•		Difficulties in integrating the operations, technologies, and products of the acquired company;

	•		The risk of diverting management’s attention from normal daily operations of the business;

	•		Potential difficulties in completing projects associated with in-process research and development;

	•		Risks of entering markets in which SafeNet has no or limited direct prior experience and where competitors in such markets have stronger market positions;

	•		Initial dependence on unfamiliar supply chains or relatively small supply partners;

	•		Insufficient revenues to offset increased expenses associated with the acquisition;

	•		The potential loss of key employees of the acquired company.

There can be no assurance that the Company’s acquisitions of Cylink and Raqia, or other businesses, will be successful and will not materially adversely affect SafeNet’s business, operating results, or financial condition. The acquisition of Cylink in particular will have a significant impact on the Company’s business operations going forward and failure to integrate this acquisition effectively could have a material adverse effect on the Company’s business and operating results. SafeNet must also manage any growth resulting from such acquisitions effectively. Failure to manage such growth effectively and successfully integrate the acquired company’s operations could have a material adverse effect on SafeNet’s business and operating results.

Quarterly Operating Results May Fluctuate and Future Revenues and Profitability Are Uncertain

SafeNet has experienced significant fluctuations in its quarterly operating results and anticipates continued substantial fluctuations in its future operating results. A number of factors have contributed to these quarterly fluctuations including:

	•		Market acceptance and demand for SafeNet products;

	•		Length of sales cycle including the size, timing, cancellation, or delay of customer orders;

	•		Introduction of new products and product enhancements by SafeNet or its competitors;

	•		Market acceptance of new products introduced by SafeNet or its competitors;

	•		Budgeting cycles of customers;

	•		The timing and execution of individual contracts;

	•		The product mix sold in a given quarter;

	•		Changes in the percentage of revenues attributable to OEM license fees and royalties;

	•		Length of time required by OEM’s to embed SafeNet products into their products which generate royalties to the Company;

	•		The percentage of products sold through the SafeNet direct sales force and its indirect distribution channels;

	•		Product development expenses;

	•		Business combinations and asset acquisitions as well as business disposals

	•		Competitive conditions in the industry;

	•		Changes in general economic conditions.

The Company’s expenses are based, in part, on its expectations regarding future revenues, and are largely fixed in nature, particularly in the short-term. SafeNet may be unable to predict future revenues accurately or to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall of revenues in relation to expectations could cause significant declines in quarterly operating results.

Due to all of the foregoing factors, SafeNet’s quarterly revenues and operating results are difficult to forecast. Therefore, management believes that period-to-period comparisons of the Company’s operating results will not necessarily be meaningful, and investors should not rely upon them as an indication of future performance. Also, it is likely that operating results will fall below expectations and the expectations of securities analysts or investors in some future quarter. In such event, the market price of SafeNet common stock could be materially adversely affected.

The network security industry is characterized by rapid changes, including evolving industry standards, frequent new product introductions, continuing advances in technology, and changes in customer requirements and preferences. SafeNet expects technological developments to continue at a rapid pace in the computer and communications industries, and there can be no assurance that technological developments will not cause the Company’s technology to be rendered obsolete or non-competitive.

Future SafeNet products may not keep pace with technological changes implemented by competitors, developers of operating systems or networking systems, or persons seeking to breach network security. The introduction of new technologies could also require the Company to invest in research and development at much higher rates with no assurance of developing competitive products. Changes in technologies or customer requirements may also cause the development cycle for new products to be significantly longer than the Company’s historical product development cycle, resulting in higher development costs or a loss in market share. SafeNet products may not satisfy evolving preferences of customers and prospects. Failure to develop and introduce new products and improve current products in a timely fashion could adversely affect the Company. Because of the complexity of SafeNet products, which operate on or utilize multiple platforms and communications protocols, the Company has from time to time experienced delays in introducing new products and product enhancements primarily due to development difficulties or shortages of development personnel. There can be no assurance that the Company will not experience longer delays

or other difficulties that could delay or prevent the successful development, introduction, or marketing of new products or product enhancements.

The loss of a commercial customer that accounted for a significant portion of SafeNet’s revenues during 2002 could have a material adverse effect on SafeNet’s business and results of operations.

SafeNet has one commercial client, Cisco Systems, Inc., that accounted for 41% of its consolidated revenues for the year ended December 31, 2002. A loss of this customer or significant cutback in its orders for SafeNet’s products would have a material adverse effect on SafeNet’s business and results of operations. In 2003, Cisco Systems announced the selection of a different vendor to supply some of its next generation chip technology, for which SafeNet had previously been the sole provider. SafeNet’s business continues to evolve in an effort to reduce to significant customer exposure through the introduction of new customers and more products. Cisco Systems continues to be a major revenue source for SafeNet.

Currently SafeNet sells products internationally and intends to continue to expand relationships with international distributors and resellers. International sales and operations could be subject to the following risks:

	•		The imposition of governmental controls;

	•		Export license requirements;

	•		Restrictions on the export of critical technology;

	•		Trade restrictions;

	•		Changes in tariffs.

Some SafeNet network security products are cryptographic devices and are subject to the export restrictions administered by the Bureau of Export Control, U.S. Department of Commerce. These restrictions permit the export of encryption products based on country, algorithm, and class of end-user. They prohibit the export of encryption products to a number of countries and to business entities that are not included in a range of end-users. There is no assurance, however, that the applicable regulations or policies concerning the export of such technology will not become more restrictive. SafeNet foreign distributors may also be required to secure licenses or formal permission before encryption products can be imported.

The security industry is relatively new, highly competitive, and subject to rapid technological changes. SafeNet’s success will depend, in large part, on its ability to establish and maintain an advantageous market position. The Company currently competes with companies that have substantially greater financial resources, sales and marketing organizations, market penetration, and research and development capabilities, as well as broader product offerings and greater market presence and name recognition. SafeNet management expects to face increasing competitive pressures from current competitors and new market entrants. This competitive risk will increase to the extent that competitors begin to include software vendors, network providers, and manufacturers of networking and computer equipment and communication devices. These manufacturers and network providers may be in a better position to develop security products in anticipation of developments in their products and networks. Competitive factors in the VPN market include:

	•		Standards compliance;

	•		Product quality and reliability;

	•		Technical features;

	•		Product ease of use;

	•		Network compatibility;

	•		Client service and product support;

	•		Distribution;

	•		Price.

There can be no assurance that the Company can continue to compete successfully against new or existing competitors.

There has been substantial consolidation in the information security industry, and SafeNet expects that there will be significant additional consolidation in the near future. As a result of that increasing consolidation, the Company expects that it will increasingly compete with larger firms that have broader product offerings and greater financial resources. SafeNet management believes that such competition may have a significant negative effect on current and developing collaborative, marketing, distribution and reselling relationships, product pricing and product development budget and capabilities. Any of those negative effects could significantly impair the Company’s financial condition and results of operations.

SafeNet’s success and ability to compete is dependent, in part, upon the Company’s ability to maintain the proprietary nature of its technologies. SafeNet relies on a combination of patent, trade secret, copyright and trademark law, and nondisclosure agreements to protect its proprietary technology. Although SafeNet holds several patents and has several pending patent applications that cover certain aspects of the Company’s technology, such patents, and patent applications do not protect some of SafeNet’s security products. Current and future patent applications may not be granted. Additionally, current patents may not be broad enough to protect the core technology critical to SafeNet security products.

Confidentiality agreements and other methods on which SafeNet relies to protect its trade secrets and proprietary information and rights may not be adequate to protect all proprietary rights. Litigation to defend and enforce the Company’s intellectual property rights could result in substantial costs and diversion of resources and could have a material adverse effect on financial conditions and results of operations regardless of the final outcome of such litigation. Despite SafeNet’s efforts to safeguard and maintain its proprietary rights, it may not be successful in doing so or the steps taken by the Company in this regard may not be adequate to deter misappropriation or independent third-party development of SafeNet technology or prevent an unauthorized third party from copying or otherwise obtaining and using SafeNet products, technology, or other information that the Company regards as proprietary. SafeNet trade secrets or non-disclosure agreements may not provide meaningful protection of its proprietary information. Also, others may independently develop similar technologies or duplicate any technology developed by SafeNet. The Company’s inability to protect its proprietary rights would have a material adverse effect on its financial condition and results of operations.

Further, as the number of network security products in the industry increases and the functionality of these products further overlaps, SafeNet may become subject to claims of infringement or misappropriation of the intellectual property or proprietary rights of others. Third parties could assert infringement or misappropriation claims against the Company in the future with respect to current or future products. SafeNet may also be subject to additional risks as the Company enters into transactions in countries where intellectual property laws are not well developed or are poorly enforced. Legal protections of its rights may be ineffective in such countries, and technology developed in such countries may not be protected in jurisdictions where protection is ordinarily available. Any claims or litigation, with or without merit, could be costly and could result in a diversion of management’s attention, which could have a material adverse effect on its financial condition and results of operations. Adverse determinations in such claims or

litigation could also have a material adverse effect on the Company’s financial condition and results of operations.

SafeNet relies on both our direct sales force and an indirect channel distribution strategy for the sale and marketing of its products. The Company’s sales and marketing organization may be unable to successfully compete against the more extensive and well-funded sales and marketing operations of certain of its current and future competitors. SafeNet may also be unable to continue to attract integrators and resellers that can market its legacy products effectively and provide timely and cost-effective customer support and service. Additionally, the Company’s distributors, integrators, and resellers may carry competing lines of network security solutions. The loss of important sales personnel, distributors, integrators, or resellers could adversely affect SafeNet.

SafeNet may experience schedule overruns in product development triggered by factors such as insufficient staffing or the unavailability of development-related software, hardware, or technologies. Further, when developing new network security products, development schedules may be altered as a result of the discovery of software bugs, performance problems or changes to the product specification in response to customer requirements, technology market developments or self-initiated changes. All of these factors can cause a product to enter the market behind schedule, which may adversely affect market acceptance of the product or place it at a disadvantage to a competitor’s product that has already gained market share or market acceptance during the delay.

The sale and installation of SafeNet’s network security systems and products within the computer networks of its customers and the operation of its SafeNet facility entails a risk of product failure, product liability or other claims. An actual or perceived breach of network or computer security, regardless of whether such breach is attributable to the Company’s products, could adversely affect its reputation and financial condition or results of operations. The complex nature of SafeNet products can make the detection of errors or failures difficult when products are introduced. If errors or failures are subsequently discovered, this may result in delays and lost revenues during the correction process. A malfunction or the inadequate design of SafeNet products could result in product liability claims. Management attempts to reduce the risk of such losses through warranty disclaimers and liability limitation clauses. However, SafeNet may not have obtained adequate contractual protection in all instances or where otherwise required under agreements it has entered into with others.

SafeNet currently maintains product liability insurance. However, the insurance coverage may not be adequate and any product liability claim for damages resulting from security breaches could be substantial. In the event of product liability litigation, insufficient insurance coverage could have a material adverse effect on SafeNet’s financial condition and results of operations. Further, certain customers and potential customers may require minimum product liability insurance coverage as a condition precedent to purchasing SafeNet products. Failure to satisfy such insurance requirements could impede the Company’s ability to achieve product sales, which would have a material adverse effect on its financial condition and results of operations. There is no assurance that such insurance will be available at a reasonable cost or will be sufficient to cover all possible liabilities.

SafeNet relies upon third party contractors for the manufacture of components and sub-assemblies for SafeNet products. There is no assurance that the Company will be able to obtain and/or maintain satisfactory contractual relations with qualified vendors or suppliers. The unavailability of such third parties may substantially decrease SafeNet’s control of the cost, quality and timeliness of the manufacturing process. At present, the Company is not a party to any exclusive supply contracts with third party contractors for its legacy products. All purchases of components or parts for SafeNet products are

accomplished by the use of purchase orders issued in the ordinary course of business. While SafeNet has not experienced any significant supply problems in the past, and there have been no materially late deliveries of components or parts, it is possible that in the future the Company may encounter shortages in parts, components, or other elements vital to the manufacture, production, and sale of SafeNet products. The Company’s business would suffer if the supply of such components were interrupted.

The network security industry is highly specialized and the competition for qualified employees is intense. SafeNet expects this to remain so for the near future. The Company believes its success depends significantly upon a number of key technical and management employees, and upon its ability to retain and hire additional key personnel. The loss of the services of key personnel or the inability to attract additional qualified personnel could materially and adversely affect results of operations and product development efforts. SafeNet may be unable to achieve its revenue and operating performance objectives unless it can attract and retain technically qualified and highly skilled engineers, sales, technical, marketing, and management personnel. Such personnel are particularly important to research and development efforts, where SafeNet employs a large number of technical personnel holding advanced degrees. Further, additions of new and departures of existing personnel, particularly in key positions, can be disruptive and can result in further departures of SafeNet personnel, which could in turn harm the business and results of operation.

In 2002, SafeNet entered into a five-year employment agreement with Anthony A. Caputo, its Chairman, Chief Executive Officer, and President. However, the Company has not historically provided such types of employment agreements other employees. This may adversely affect the Company’s ability to attract and retain the necessary technical, management, and other key personnel.

Market prices for SafeNet’s common stock and the securities of other network security companies have been volatile. Factors such as announcements of technological innovations or new products by SafeNet or by its competitors and market conditions for network security company and other technology stocks in general can have a significant impact on the market for SafeNet’s common stock, which could reduce SafeNet’s stock price regardless of its operating performance.

SafeNet periodically reviews and considers possible acquisitions of companies that it believes will contribute to its long-term objectives. In addition, depending on market conditions, liquidity requirements and other factors, SafeNet considers, from time to time, accessing the capital markets. Such events may also affect the market prices for SafeNet’s common stock and reduce such prices regardless of operating performance.

Anti-takeover provisions in SafeNet’s charter documents and Delaware law could prevent or delay a change in control.

SafeNet’s certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable by authorizing the issuance of “blank check” preferred stock. In addition, certain provisions of Delaware law may also discourage, delay or prevent a third party from acquiring or merging with SafeNet, even if such action were beneficial to some, or even a majority, of SafeNet’s stockholders.

The Company has never paid nor declared any cash or other dividends on its common stock since its inception and does not presently anticipate that dividends will be paid on its common stock in the foreseeable future.

In February 2003, SafeNet completed its acquisition of Cylink. Operations of Cylink were integrated into the Enterprise Security Division of SafeNet and function as part of that business unit. This acquisition will have a significant impact on the Company’s business operations going forward.

Cylink developed, manufactured, marketed and supported a comprehensive portfolio of hardware and software security products for mission-critical private networks and business communications over the Internet. Cylink’s solutions enabled its customers to merge their operations and transactions onto existing networks, maximize network use, reduce the costs of operations and expand their businesses. Cylink’s customers included leading Fortune 500 companies, multinational corporations, financial institutions and numerous agencies within the United States Government.

Cylink’s solutions offered competitive advantages to its customers by lowering the cost of deploying and managing secure, reliable private networks, while enabling its customers’ use of the Internet for trusted transactions with their business partners. Cylink offered “drop-in” hardware encryption products that are easily deployed within its customers’ existing high-speed data networks known as Local Area Networks, LANs, and Wide Area Networks, WANs, including VPNs, that use the Internet.

Cylink’s products were centrally managed by a proprietary software management system. This system allowed Cylink’s customers’ network security managers to remotely configure and operate all of Cylink’s products without risk of tampering by other network operations personnel. In addition, Cylink’s public key-based solutions included the NetHawk, which creates a secure VPN for transmitting high-value information. Cylink also offered a unified management platform for all of its security appliances to authenticate these devices, configure their use and centrally manage their operation. Such solutions included Cylink’s public key infrastructure, or PKI, for managing the digital identities and privileges of all correspondents on the customer’s network. Cylink’s products created trust in its customers’ networks by securing the access, privacy and integrity of its customers’ important information when such information is transmitted over their LANs, WANs, and the Internet.

These products, along Cylink’s commitment and focus to customer service and support, will be integrated as a part of SafeNet’s industry leading product offerings as well as world class standards of customer service and support. These products will work to build and improve SafeNet’s base product mix as well as improve certain technology and software offerings from the SafeNet product family. SafeNet believes that these products provide SafeNet a bridge to the next generation of security solutions. Specifically, Cylink’s Nethawk technology is a critical piece of SafeNet’s High Assurance Gateway technology line. Cylink’s PrivaCy Manager is a critical piece of SafeNet’s Security Management Center technology product package bridging WAN and related technology infrastructures to the VPN and Internet environment with minimal costs and maximum benefits.

See Note 16 in the Notes to the Consolidated Financial Statements for further discussion.

SafeNet maintains its leased corporate and administrative facilities at 8029 Corporate Drive, Baltimore, Maryland. The building, constructed in 1988, has approximately 25,000 square feet and is also used for SafeNet’s executive headquarters, United States production, and SafeNet Trusted Services facility. The lease, which expires in December 2003, provides for annual increases in rentals during each year of the lease and will require the Company to pay approximately $115,000 in 2003.

Cylink leases approximately 47,000 square feet in Santa Clara, California. The lease, which expires in August 2009, requires annual rental of $1,346,000. SafeNet also holds the lease to the former Cylink ATM Center, comprising approximately 10,000 square feet in Raleigh, North Carolina, which expires in June 2003. We also lease facilities for sales offices in New Jersey, Virginia, North Carolina, Belgium, the United Kingdom and Singapore. We believe that our current facilities are well maintained and are adequate for the foreseeable future.

SafeNet leases approximately 20,000 square feet related to its abandoned administrative and production facilities in Regensdorf, Switzerland. The lease, which expires on December 31, 2003, calls for an annual rental of approximately $348,000.

SafeNet BV leases approximately 13,700 square feet for its operations in Vught, The Netherlands. The lease, which expires on March 31, 2007, requires annual rental of approximately $180,000.

SafeNet also leases office space in Danvers, Massachusetts with annual rent of approximately $99,000.

SafeNet is not aware of any material litigation or proceeding, pending or threatened, to which it is or may become a party.

In 1998, Cylink filed amended Quarterly Reports on Form 10-Q for the first and third quarters of 1998 and an amended Annual Report on Form 10-K for the 1997 fiscal year, reflecting restated financial results for those quarters, and for the fourth quarter of 1997. Between November 6, 1998 and December 14, 1998 several securities class action complaints were filed against Cylink and certain of its current and former Directors and officers in federal courts in California. These complaints alleged, among other things, that Cylink’s previously issued financial statements were materially false and misleading and that the defendants knew or should have known that these financial statements caused Cylink’s common stock price to rise artificially. The actions variously alleged violations of Section 10(b) of the Securities Exchange Act of 1934, as amended, and SEC Rule 10b-5 promulgated thereunder, and Section 20 of the Exchange Act. The securities class action lawsuits were ordered consolidated into a single action pending in the United States District Court for the Northern District of California, captioned In Re Cylink Securities Litigation, No. C98-4292 (VRW). On October 16, 2002, Cylink entered into an agreement with all plaintiffs in the securities class action lawsuit to settle all claims in the class action for $6.2 million. The settlement amount will be paid entirely from insurance proceeds under insurance policies held by Cylink. The settlement agreement is subject to approval by the United States District Court for the Northern District of California. The court preliminarily approved the settlement agreement on November 12, 2002. A motion by the plantiffs was filed on Feb 24, 2003 and was heard on March 6, 2003. The court requested additional information from Cylink’s litigation expert. The information was provided to the court on March 20, 2003.

A Special Meeting of Stockholders was held on February 5, 2003, to consider and vote upon the merger of Cylink with a wholly-owned subsidiary of SafeNet pursuant to an agreement and plan of reorganization dated October 30, 2002, the issuance of shares of SafeNet common stock pursuant to the merger and related transactions (collectively, the “Merger Proposal”). At the meeting, the stockholders approved the Merger Proposal. There were 4,941,305 shares cast in favor of the Merger Proposal, 65,137 shares cast against the Merger Proposal, and 6,817 shares abstained.

SafeNet’s Common Stock is listed on the Nasdaq National Market under the symbol SFNT. The following table sets forth the quarterly range of per share high and low bid prices for SafeNet’s Common Stock as reported by the Nasdaq National Market for the periods indicated.

On March 28, 2003, the last reported per share sale price of SafeNet’s Common Stock on the Nasdaq National Market was $20.89. As of that date, there were approximately 217 holders of record of the Common Stock and approximately 4,000 beneficial holders of the Common Stock. We have not paid dividends on our Common Stock and intend for the near future to retain earnings, if any, to finance the expansion and development of our business.

The selected financial data set forth below as of and for each of the five years ended December 31, 2002 is derived from our audited financial statements. The selected financial data is qualified by and should be read in conjunction with the Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein.

The accompanying financial data has been restated to reflect the net assets of the disposed operations of GretaCoder Data Systems (GDS) as current assets, non-current assets, and current liabilities of discontinued operations. The following data should be read in conjunction with Note 3 to the Consolidated Financial Statements.

The following is a summary of the quarterly results of operations for the years ended December 31, 2002 and 2001. All periods’ results have been restated to separately disclose discontinued operations.

During the quarter ended March 31, 2002, the Company recorded a charge of $3,375,000 related to the write-off of in process research and development assets acquired in connection with the purchase of Securealink on January 2, 2002. During that quarter, the Company also recorded a charge of $3,506,000 related to the loss on the disposal of the GDS business.

ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Except for historical information contained herein, the statements in this Item are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause SafeNet’s actual results in future periods to differ materially from forecasted results. Those risks include, among others, the risks described in Item 1 — Business.

SafeNet designs, manufactures and markets enterprise network security solutions using encryption technology. Our products are used in electronic commerce applications by financial institutions, government agencies and large corporations to secure data transmissions on private and public computer networks, such as the Internet.

In January 2002, we acquired Securealink. Securealink develops, markets and sells security chips and intellectual property, primarily in Europe and Asia.

In February 2002, management decided to discontinue our Swiss operations at GDS, which was formerly our European operations segment (see note 3 to the audited financial statements). The operating results of the discontinued businesses has been reported in the discontinued operations section of the consolidated statement of operations. The following comparisons of operating results focuses on the continuing operations of the Company.

SafeNet’s historical operating results have been dependent on a variety of factors including, but not limited to, the length of the sales cycle, the timing of orders from and shipments to clients, product development expenses and the timing of development and introduction of new products. Our expense levels are based, in part, on expectations of future revenues. The size and timing of our historical revenues have varied substantially from quarter to quarter and year to year. Accordingly, the results of a particular period, or period-to-period comparisons of recorded sales and profits may not be indicative of future operating results.

While management is committed to the long-term profitability of SafeNet, the recent growth of the computer security industry has made it important that market share be obtained. We have undertaken various strategies in order to increase our revenues and improve our future operating results, including new product offerings such as our SafeNet EmbeddedIP and SafeNet Soft Remote. Management believes that growth in the market for products that provide secure remote access to computer networks requires SafeNet to increase its investment in development, sales and marketing activities to allow SafeNet to take advantage of this market opportunity and to achieve long-term profitability, thereby maximizing shareholder value. However, there can be no assurance that these strategies will be successful.

The following table sets forth certain Consolidated Statement of Operations data of SafeNet as a percentage of revenues for the years ended December 31.

The Company has two reportable segments: products, chips and software designed and manufactured for sale to companies that will embed the Company’s products into their products for ultimate sale to end-users (“Embedded Security Division”), and network security products designed and manufactured for direct sales to end-users and remote access software sold to OEM’s (“Enterprise Security Division”). The segments are strategic business units that offer different products. The segments are managed separately because each segment requires different technology and marketing strategies (see note 13 to the audited consolidated financial statements).

The acquisition of Cylink in February 2003, is expected to have a significant impact on the Company’s results of operations and financial condition. Since the transaction closed subsequent to December 31, 2002, the Cylink acquisition has not been considered in the Company’s discussion of its results of operations and financial condition as of and for the year ended December 31, 2002. However, due to its significance to the Company’s business, a discussion of the Cylink acquisition and its anticipated impact is included at the end of Item 7: Management’s Discussion and Analysis.

Revenues increased 96%, or $15,773,000, to $32,235,000 for the period ended December 31, 2002, from $16,462,000 in 2001. The Embedded Security Division revenues increased 234% or $12,815,000 due to the full year presence of the Securealink acquisition for 2002, which resulted in increased revenues of approximately $2,217,000, as well as increased revenue from our largest commercial customer, Cisco Systems, Inc. Cisco Systems accounted for 41% of our consolidated revenues for the year ended December 31, 2002. The Enterprise Security Division segment increased 27% or $2,958,000 due primarily to revenues of approximately $3,050,000 earned under additional long-term government contracts. These contracts are the result of the government’s approach to internet and communication security in light of the Homeland Security Initiative.

Gross margin remained consistent, 72% for the period ended December 31, 2002, from 73% in 2001. Gross margins in the Embedded Security Division decreased to 72% in 2002 from 77% in 2001, due to the change in product mix with the addition of Securealink delivering lower margin products. Enterprise Security

Division margins increased to 74% in 2002 from 71% in 2001 based on increased customer base of higher margin customers as well changes in product mix with higher volumes in higher margin products such as license revenue.

Research and development expenses increased 39%, or $2,386,000 to $8,504,000 for the period ended December 31, 2002, from $6,118,000 in 2001. The increase is primarily related to the addition of the Securealink business, with the main cost of that business being research and development costs. Research and development expenses for the Embedded Security Division were focused on the next generation products (chips), designed to be a very cost-effective, high throughput, low power-consuming chips in the tradition of SafeNet’s other silicon products. Research and development expenses for the Enterprise Security Division were focused on SafeNet’s High Assurance product line, including gateways, software, and other appliances. Some of these products were made available in 2002 with the remaining products coming to market in 2003.

Sales and marketing expenses increased 45%, or $2,280,000 to $7,341,000 for the period ended December 31, 2002, from $5,061,000 in 2001. The additional expense reflects increased headcount, higher commissions from higher revenues, as well as additional promotional dollars spent on the branding of the Securealink products and name. As a percentage of revenues, the expenses were 23% and 31% in 2002 and 2001, respectively.

General and administrative expenses increased 86%, or $1,905,000, to $4,108,000 for the period ended December 31, 2002, from $2,203,000 in 2001. The increase is due to the additional office space obtained with the Securealink acquisition, additional corporate employees, increased bonus expenses, and additional professional fees incurred related to new corporate governance requirements. As a percentage of revenues, the expenses were 13% in 2002 and 2001.

The write-off of acquired in-process research and development assets, which totaled $3,375,000 for the year ended December 31, 2002, relates to the January 2002 acquisition of Securealink. This represents the estimated fair value of the in-process research and development projects that had not yet reached technological feasibility at the acquisition date, and had no alternative future use. Accordingly, this amount was immediately expensed at the acquisition date. The value assigned to the acquired in-process technology relates entirely to the development of a new application specific integrated circuit. The estimated fair value of this project was determined by the use of a discounted cash flow model, using a discount rate that took into account the stage of completion and the risks surrounding the successful development and commercialization of the technology. Subsequent to the acquisition, the Company incurred approximately $750,000 in additional research and development charges to complete the development of the technology, which was licensed to a customer during fiscal year 2002.

Amortization of intangible assets, which totaled $1,488,000 for the year ended December 31, 2002, also relates to the January 2002 acquisition of Securealink. Intangible assets, which consist primarily of developed technology and patents, are amortized over estimated useful lives ranging from one to five years.

Investment income and other expenses decreased by $667,000, to $669,000 for the period ended December 31, 2002, from $1,336,000 in 2001. Investment income and other expenses decreased primarily due to lower interest rates throughout 2002 as compared to 2001.

For the year ended December 31, 2002, the Company incurred operating losses, however, the Company also experienced an income tax benefit related to the amortization of acquired intangibles from the Securealink acquisition. For the year ended December 31, 2001, the Company incurred operating losses and therefore, did not record income tax expense. The Company’s income tax benefit related to these losses has been offset by a valuation allowance for the full amount of the net deferred tax assets since the Company’s ability to use the remaining net operating loss carryforward is dependent upon future taxable income.

The Company had a loss from continuing operations of $785,000 for the year ended December 31, 2002 compared to a loss from continuing operations of $109,000 for the same period in 2001. The loss from

continuing operations per common share was $0.10 in 2002 compared to loss from continuing per common share of $0.01 in 2001.

Revenues decreased 35%, or $8,816,000, to $16,462,000 for the period ended December 31, 2001, from $25,278,000 in 2000. The Embedded Security Division revenues decreased 15% or $941,000 due to the adverse impact of the economic slowdown on customers, causing them to delay purchases of software licenses and upgrades, and accelerator boards. The Enterprise Security Division segment decreased 42% or $7,875,000 primarily due to delayed purchases of SafeNet’s VPN products from government customers in the wake of the September 11^th tragedy.

Gross margin decreased to 73% for the period ended December 31, 2001, from 77% in 2000. The Company recorded additional inventory reserves related primarily to legacy products with diminishing future demand. These additional reserves aggregated $173,000 in the second quarter of 2001 and negatively impacted gross margins by 1%. For the year, the additional inventory reserves affected the Embedded and Enterprise segments by $58,000, and $115,000, respectively, impacting gross margins by 0%, and 1%, respectively. Gross margins in the Embedded Security Division increased to 77% in 2001 from 68% in 2000, due to increased royalty revenues earned on chip sales and license fees associated with intellectual property sales. Enterprise Security Division’ margins decreased to 71% from 80% based primarily on the change in product mix to include a lesser amount of higher margin software sales.

Research and development expenses decreased 4%, or $224,000 to $6,118,000 for the period ended December 31, 2001, from $6,342,000 in 2000. The decrease is primary related to lower external development costs of chip fabrication.

Sales and marketing expenses increased 6%, or $305,000 to $5,061,000 for the period ended December 31, 2001, from $4,756,000 in 2000. The additional expense reflects management’s focus on increasing sales and marketing resources in new markets. Additional expenses include the costs associated with new employees and expanded marketing programs such as the SafeNet Secure Tour and two trade shows. As a percentage of revenues, the expenses were 31% and 19% in 2001 and 2000, respectively.

General and administrative expenses decreased 18%, or $478,000, to $2,203,000 for the period ended December 31, 2001, from $2,681,000 in 2000. The decrease is due to cost saving measures including staff reductions, reductions in performance-based compensation, travel expenses, and professional fees. As a percentage of revenues, the expenses were 13% and 11% of revenues in 2001 and 2000, respectively.

Interest income and other expenses increased by $16,000, to $1,336,000 for the period ended December 31, 2001, from $1,320,000 in 2000. Interest income remained steady despite declining interest rates in 2001 due to larger average cash and short-term investment holdings throughout 2001 compared to 2000.

For the year ended December 31, 2001, the Company has incurred operating losses and therefore, did not record income tax expense. The Company’s income tax benefit related to these losses has been offset by a valuation allowance for the full amount of the net deferred tax assets since the Company’s ability to use the remaining net operating loss carryforward is dependent upon future taxable income. For the year ended December 31, 2000, the Company did not recognize income tax expense due to the reversal of the valuation allowance on net operating loss carryforwards available to offset earnings.

The Company had a loss from continuing operations of $109,000 for the year ended December 31, 2001 compared to income from continuing operations of $7,260,000 for the same period in 2000. The loss from continuing operations per common share was $0.01 in 2001 compared to diluted income from continuing per common share of $1.01 in 2000.

SafeNet believes that its current cash resources will be sufficient to meet its needs for the next year. As of December 31, 2002, SafeNet had working capital of $31,987,000 including cash and short-term investments of $32,162,000. SafeNet did not have any material commitments for capital expenditures in 2002 and does not have any such commitments for the forseeable future.

Material recurring uses of working capital include salaries and other compensation, which accounted for approximately $12,200,000 in 2002, sales and marketing expenses, which accounted for approximately $3,700,000 in 2002, and research and development projects, which accounted for approximately $2,200,000 in 2002.

In January 2002, as partial consideration for the acquisition of Securealink, SafeNet paid $2,000,000 in cash and issued contingent convertible promissory notes, which were paid in May 2002, in the aggregate amount of $1,618,000.

Additionally, after closing of the acquisition in January 2002, SafeNet advanced to Securealink approximately $1,484,000 in order to repay Securealink’s line of credit.

As discussed in Note 3 to the consolidated financial statements, in February 2002, SafeNet management decided to discontinue operations at GDS based on the amount of GDS operating and cash losses during 2000 and 2001 as well as a significant downturn in future business prospects. GDS suffered cash losses of $2,284,000 and $756,000 during the years ended December 31, 2001 and 2000, respectively. Management’s decision to discontinue operations at GDS positively impacted cash flows in 2002.

In 2002, cash and short-term investments increased $1,478,000. The increase was mainly attributable to cash provided by operating activities of $5,933,000. Cash used in investing activities during 2002 included investments in computer software development costs and equipment totaling $833,000 and cash paid for Securealink was $3,769,000, net of cash required. Cash provided by financing activities in 2002 included $2,187,000 from the exercise of stock options.

SafeNet has expended and will continue to expend portions of its operating cash for acquisition and integration costs related to acquisitions. The Cylink acquisition expended $386,000 for acquisition costs in 2002 and $255,000 for integration costs in 2002. We expect the cash outflow to be significant in 2003 as we integrate Cylink throughout the majority of 2003. Actual cash outflows for the Cylink integration and acquisition for 2003 through February 2003 were $1,126,000. The Raqia acquisition will also require cash outflows, including $1,305,000 through February 2003. There will also be additional investments made into the acquired technology from the Raqia acquisition in 2003. We estimated the integration costs for Cylink and Raqia during 2003 to be $4,000,000 and $250,000, respectively. We estimate the acquisition costs for Cylink and Raqia during 2003 to be $4,600,000 and $200,000, respectively. SafeNet believes that its current cash resources will be sufficient to meet its needs for the next year.

SafeNet does not believe that inflation will significantly impact its business. We do not believe our business is seasonal. However, because we generally recognize product revenues upon shipment and software revenues upon establishing fair value of undelivered elements, recognition may be irregular and uneven, thereby disparately impacting quarterly operating results and balance sheet comparisons.

In June 2002, the Financial Accounting Standards Board issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). Statement No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized at fair value when the liability is incurred rather than at the date of a commitment to an exit plan. Costs covered by Statement No. 146 include one-time termination benefits and certain contract termination costs, including operating lease termination costs that are associated with an exit or disposal activity. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002.

The Company’s accounting policies are more fully described in Note 2 of the Notes to Consolidated Financial Statements. As discussed in this note, the preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty; therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements.

SafeNet believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. SafeNet Senior Management has discussed each of these critical accounting policies with the Company’s audit committee.

SafeNet maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company calculates its allowance based on a specific analysis of past due balances and also considers historical trends of write-offs. If the financial condition of SafeNet’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

SafeNet provides for its estimated inventory obsolescence or unmarketable inventory equal to the difference between the cost of the inventory and the estimated market value based upon assumptions about future demand and market conditions. The Company utilizes projected sales by product to determine the net realizable value of the inventory. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

SafeNet calculates amortization of its capitalized software development costs based on the greater of the amount computed using the ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product or the straight-line method over the remaining estimated economic life of the product including the period being reported on. In addition, SafeNet assesses the recoverability of software development costs by comparing the unamortized balance to the net realizable value of the asset and writes off the amount by which the unamortized capitalized costs exceed the net realizable value.

These calculations require management to make assumptions about future demand for its products, future revenues to be generated from the sale of its products, as well as the estimated useful lives of developed technology. If actual market conditions or product demand is different from those assumptions, or if changes in technology limit the useful life of SafeNet’s core technology, additional amortization or write-downs may be required.

SafeNet accounts for acquired businesses using the purchase method of accounting. A portion of the purchase prices for these businesses is allocated to identifiable tangible and intangible assets and assumed liabilities based on estimated fair values at the dates of acquisitions. Any excess purchase price is allocated to goodwill.

The identified intangible assets include patents, developed technology, purchase orders, contract backlog and acquired in-process research and development assets. Research and development assets are written off at the date of acquisition in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method. The fair values were determined by management, generally based upon information supplied by the management of the acquired entities and valuations prepared by independent valuation

experts. The valuations have been based primarily upon future cash flow projections for the acquired assets, discounted to present value using a risk-adjusted discount rate. For certain classes of intangible assets, the valuations have been based upon estimated cost of replacement. The assigned useful lives, which range from one to five years, are based upon periods of estimated cash flows and other factors. If SafeNet used different assumptions and estimates in the calculation of the fair value of identified intangible assets and the estimation of the related useful lives, the amounts allocated to these assets, as well as the related amortization expense, would have been significantly different than the amounts recorded.

Effective January 1, 2002, SafeNet adopted the provisions of FASB Statement No. 142, Goodwill and Other Intangible Assets. Under Statement 142, goodwill is no longer amortized but is reviewed annually for impairment, or more frequently if impairment indicators exist. Impairment exists when the carrying amount of goodwill exceeds its implied fair value using impairment testing methodology in Statement 142. Indicators of potential impairment include operating losses, loss of a significant customer and adverse industry developments. The first annual impairment test for goodwill, all of which was assigned to the Embedded Security division, was performed on October 1, 2002. The impairment test was based upon a comparison of the estimated fair value of the Embedded Security division to the sum of the carrying value of the assets and liabilities allocated to that division. The fair values used in this evaluation were estimated based upon discounted future cash flow projections for the division as well as comparable revenue and earnings multiples. In order to project future cash flows, management made a number of assumptions concerning such things as future sales volume levels, future price levels, and rates of increase in operating expenses. Since the estimated fair value of the division exceeded the carrying value of the recorded net assets, no impairment was identified or recorded. However, if SafeNet used different assumptions and estimates in the calculation of the fair value of the division, an impairment of goodwill could have been identified.

SafeNet derives revenue from software and technology licenses, product sales, maintenance and other services. Software and technology licenses contain multiple elements, including the product license, maintenance and/or other services. The recognition of revenue under these arrangements requires management to make judgments about the likelihood of granting future concessions and the ultimate collectibility of fees.

Revenues that are earned under long-term contracts to develop high assurance encryption technology are recognized using contract accounting. Under contract accounting, revenue from these arrangements is recognized using the percentage-of-completion method. Progress to completion is measured using contract milestones. Accounting for these contracts requires the estimation of the cost, scope and duration of each milestone and each contract. If the Company does not accurately estimate the resources required or the scope of work to be performed, or does not manage its projects properly within the planned periods of time or satisfy its obligations under the contracts, then future margins may be significantly and negatively affected or losses on existing contracts may need to be recognized. Any such resulting reductions in margins or contract losses could be material to the Company’s results of operations.

The results of Cylink’s business operations will be included in the Company’s Consolidated Financial Statements from February 6, 2003 forward.

The aggregate purchase price for Cylink was approximately $35.1 million, consisting primarily of 1,648,000 shares of common stock valued at $31.2 million, 194,000 options and warrants assumed with an aggregate value of $1.7 million, and estimated direct costs of the acquisition of $2.2 million. The Company is in the process of obtaining third-party valuations on this acquisition and the assets included.

On February 11, 2003, the Company filed a Form 8-K related to the acquisition of Cylink. The Company will file an 8-K/A on or about April 21, 2003 that will include historical audited financial statements of the acquired company and unaudited pro forma financial information.

Market risk is the risk of loss to future earnings, to fair values or to future cash flows that may result from changes in the price of financial instruments. SafeNet is exposed to financial market risks, primarily related to changes in foreign currency exchange rates. SafeNet currently does not have any derivative financial instruments to protect against adverse currency movements. SafeNet manages its exposure to market risks related to operations through regular operating and financing activities. All of the potential impacts noted below are based on a sensitivity analysis performed as of December 31, 2002. Actual results may differ materially

SafeNet derives approximately 10% of its revenues from customers outside of the U.S. This business is transacted primarily through a wholly owned subsidiary located in the Netherlands that operates using the Euro as the functional currency. Expenses are also incurred in Euros to match the subsidiary’s revenues and minimize exposure of operating margins to exchange rate fluctuations. A hypothetical 10% adverse change in the average Euro exchange rate would have decreased net operating income in 2002 by approximately $353,000. SafeNet views the investment in this subsidiary as long-term. The effect of a change in the Euro exchange rate on the net investment in the foreign subsidiary is reflected in other comprehensive income (loss). A 10% depreciation in the Euro relative to the U.S. dollar would result in a decrease in consolidated stockholders’ equity at December 31, 2002 of approximately $363,000.

At December 31, 2002 and 2001, SafeNet did not have any interest bearing obligations. In addition, SafeNet does not hold any derivative instruments and does not have any commodity market risk.

Consolidated Balance Sheets as of December 31, 2002 and 2001

Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000

Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2002, 2001 and 2000

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2002, 2001 and 2000

Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001, and 2000

The following consolidated financial statement schedule of SafeNet, Inc. and subsidiaries is included in this item:

All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.

We have audited the accompanying consolidated balance sheets of SafeNet, Inc. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. 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, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of SafeNet, Inc. and subsidiaries at December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for the each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 7 to the financial statements, in 2002 the Company changed its method of accounting for goodwill.

Consolidated Statements of Operations
(Amounts in thousands, except per share data)

Consolidated Statements of Comprehensive (Loss) Income
(Amounts in thousands)

SafeNet, Inc. (“SafeNet” or the “Company”) delivers a widely deployed Virtual Private Network, or VPN, technology for secure business communications over the Internet, offering both Original Equipment Manufacturer (“OEM”) technology and end-user products for VPN and e-commerce applications. The Company provides its network security solutions worldwide for financial, enterprise, telecommunications,

and government use. The Company’s technology is sold and licensed in various formats, including software, hardware, silicon chips, and intellectual property.

In January 2002, the Company acquired Pijnenburg Securealink, Inc. (“Securealink”), a European manufacturer of security chips for e-commerce transactions (see Note 4). In February 2003, the Company acquired Cylink, Inc. (“Cylink”). Cylink develops, markets, and supports a comprehensive portfolio of hardware and software security products for mission-critical private networks and business communications over the Internet (see Note 16).

As discussed in Note 3, in February 2002, the Company made a decision to discontinue the operations of its Swiss subsidiary, GretaCoder Data Systems (“GDS”). The financial position and results of operations of GDS have been disclosed as discontinued operations in the accompanying consolidated financial statements.

The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. Significant intercompany accounts and transactions have been eliminated in consolidation.

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect reported amounts reported in the consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.

The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. The Company had approximately $3,399 and $14,819 of cash equivalents at December 31, 2002 and 2001, respectively, consisting primarily of overnight repurchase agreements, short-term money market funds and commercial paper.

Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts to maturity computed under the effective interest method. Such amortization is included in investment income. Interest on securities classified as held-to-maturity is included in investment income. The Company had $28,763 and $15,865 of held-to-maturity securities at December 31, 2002 and 2001, respectively, consisting primarily of corporate debt instruments. As of December 31, 2002, substantially all of the held-to-maturity securities are due in one year or less.

The Company reports accounts receivable at net realizable value. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company calculates its allowance based on a specific analysis of past due balances and also considers historical trends of write-offs.

Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method.

Property and equipment is stated at cost and depreciation is computed using the straight-line method over estimated useful lives ranging primarily from three to seven years. Amortization of leasehold improvements is computed using the straight-line method over the lesser of the useful life of the asset or the remaining term of the lease.

Costs for the development of new software products and substantial enhancements to existing software products are expensed as research and development costs as incurred until technological feasibility has been established, at which time any additional development costs are capitalized until the product is available for general release to customers. The Company defines the establishment of technological feasibility as the completion of a working model of the software product that has been tested to be consistent with the product design specifications and that is free of any uncertainties related to known high-risk development issues.

Amortization of software development costs, which is included in cost of revenues, begins upon general release of the software. These costs are amortized on a product by-product basis using the greater of: (i) the amount computed using the ratio that current gross revenues for each product bear to the total of current and anticipated future revenue for that product, or (ii) the amount computed using the straight-line method over the estimated economic useful life of three to five years. Such costs are amortized beginning on product release dates. The Company assesses the recoverability of computer software development costs by comparing the unamortized balance to the net realizable value of the asset and writes off the amount by which the unamortized capitalized costs exceed the estimated net realizable value. During the year ended December 31, 2001, the Company wrote off $218 of capitalized software development costs for which the unamortized balance exceeded the estimated net realizable value. This write off has been included as a charge to 2001 research and development expenses.

Goodwill is initially measured as the excess of the cost of an acquired company over the sum of the amounts assigned to tangible and intangible assets acquired less liabilities assumed. SafeNet does not amortize goodwill, but rather reviews the carrying value of the asset for impairment at least annually in accordance with the provisions of FASB Statement No. 142, Goodwill and Intangible Assets, the provisions of which SafeNet adopted effective January 1, 2002.

The goodwill impairment test under Statement 142 involves a two-step approach. Under the first step, SafeNet determines the fair value of each reporting unit to which goodwill has been assigned. SafeNet then compares the fair value of the reporting unit to its carrying value, including goodwill. If the fair value exceeds the carrying value, no impairment loss is recognized. If the carrying value exceeds the fair value, the goodwill of the reporting unit is considered potentially impaired and the second step is completed in order to measure the impairment loss. Under the second step, SafeNet calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets, including any unrecognized intangible assets, of the reporting unit from the fair value of the reporting unit as determined in the first step. SafeNet then compares the implied fair value of goodwill to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, SafeNet recognizes an impairment loss equal to the difference.

Intangible assets with finite lives are amortized over their estimated useful lives ranging from one to five years, with a weighted average useful live of 28 months (see Note 8).

Long-lived assets, including amortized intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If an impairment indicator is present, the Company evaluates whether an impairment exists on the basis of undiscounted expected future cash flows from the assets over the remaining amortization period. If impairment exists, the asset is reduced by the estimated difference between its fair value and its carrying value. Fair value is usually determined using discounted cash flows. Assets to disposed of are reported at the lower of carrying value or fair value less costs to sell.

SafeNet offers a one-year warranty for substantially all of its products. The specific terms and conditions of those warranties vary depending upon the product sold and country in which SafeNet does business. SafeNet estimates the costs that may be incurred under its basic limited warranty and records a liability in the amount of such costs at the time product revenue is recognized. Factors that affect SafeNet’s warranty liability include the number of installed units, historical and anticipated rates of warranty claims and cost per claim. SafeNet periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary. The balance in SafeNet’s warranty accrual totaled $50 at December 31, 2002 and 2001.

The Company derives revenue from software and technology licenses, product sales, maintenance (post contract customer support), and services. Software and technology licenses typically contain multiple elements, including the product license, maintenance, and/or other services. The Company allocates the total arrangement fee among each deliverable based on the fair value of each of the deliverables determined based on vendor-specific objective evidence.

License revenue is comprised of perpetual and time-based license fees, which are derived from arrangements with end-users, original equipment manufacturers and resellers. For each software license arrangement, the Company defers revenue recognition until: (a) persuasive evidence of an arrangement exists; (b) delivery of the software or technology has occurred and there are no remaining obligations or substantive customer acceptance provisions; (c) the fee is fixed or determinable; and (d) collection of the fee is probable. For both perpetual and time-based licenses, once all of these conditions are satisfied, the Company recognizes license revenue based on the residual method after all elements other than maintenance have been delivered as prescribed by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions. Royalties are recognized as they are earned.

Revenues that are earned under long-term contracts to develop high assurance encryption technology are recognized using contract accounting. Under contract accounting, revenue from these arrangements is recognized using the percentage-of-completion method. Progress to completion is measured using contract milestones. Management considers contract milestones to be the best available measure of progress on these contracts since each milestone contains customer-specified acceptance criteria. Any estimated losses are provided for in their entirety in the period they are first determined. Actual remaining costs under fixed price contracts could vary significantly from the Company’s estimates, and such differences could be material to the financial statements.

The Company also sells hardware and related encryption products. For each product sale, the Company defers revenue recognition until: (a) persuasive evidence of an arrangement exists; (b) delivery has occurred and there are no remaining obligations or substantive customer acceptance provisions; (c) the selling price to the customer is fixed or determinable; and (d) collectibility of the selling price is reasonably assured.

Maintenance revenue is derived from support arrangements. Maintenance arrangements provide technical customer support and the right to unspecified upgrades on an if-and-when-available basis. In accordance with SOP 97-2, Software Revenue Recognition, vendor specific objective evidence of fair value of maintenance is determined based on the price charged for the maintenance element when sold separately. The maintenance term is typically one year in duration and maintenance revenue is recognized ratably over the maintenance term. Unrecognized maintenance fees are included in deferred revenue.

Other service revenue is comprised of revenue from consulting fees, training, engineering services and long-term arrangements for custom development of high assurance encryption devices. Except for services provided under long-term arrangements, service revenue is recognized when the services are provided to the customer. The Company’s policy is to recognize software license revenue when these associated services are not essential to the functionality of the product. To date, these services have not been essential to the functionality of the product. Vendor specific objective evidence of fair value of these services is determined by reference to the price that a customer will be required to pay when the services are sold separately, which is based on the price history that the Company has developed for separate sales of these services.

The financial statements of foreign subsidiaries for which the local currency is the functional currency have been translated into U.S. dollars in accordance with FASB Statement No. 52, Foreign Currency Translation. All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date. Income statement amounts have been translated using the average exchange rate for the year. The gains and losses resulting from the changes in exchange rates from year to year have been reported in other comprehensive income. Transactions of foreign subsidiaries for which the U.S. dollar is the functional currency have been remeasured into U.S. dollars with any resulting gain or loss reported as a component of income. The effect on the consolidated statements of operations of all transaction gains and losses is insignificant for all years presented.

The Company uses the liability method in accounting for income taxes. Under this method, deferred income tax assets and liabilities are determined based on difference between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

At December 31, 2002, the Company had five stock-based employee compensation plans, which are described more fully in Note 12. The Company accounts for those plans using the intrinsic value method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

The following table illustrates the effect on net (loss) income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

Pro forma information regarding net income and earnings per share required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The weighted-average grant date fair value per share of options granted during 2002, 2001, and 2000 was $8.85, $11.50, and $20.45, respectively. The fair value for these options was estimated at the dates of grant using a Black-Scholes option-pricing model with the following weighted-average assumptions for 2002, 2001, and 2000, respectively: risk-free interest rates of 3.88%, 4.42%, and 5.10%; expected volatility of 119%, 139%, and 180%; dividend yield and expected dividend growth rate of 0% in all years; and weighted-average expected remaining life of 3 to 7 years in all years. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period.

Comprehensive (loss) income includes all changes in equity that result from recognized transactions and other economic events of a period other than transactions with owners in their capacity as owners. Certain non-owner changes in equity, consisting primarily of foreign currency translation adjustments, are included in “other comprehensive (loss) income.” The Company reports comprehensive (loss) income in the statement of comprehensive (loss) income and discloses the accumulated total of other comprehensive (loss) income in the stockholders’ equity section of the balance sheet.

The carrying amount of financial instruments, including cash and cash equivalents and held-to-maturity securities approximates fair value based on the short-term nature of these instruments.

Where appropriate, certain amounts in the prior year consolidated financial statements have been reclassified to conform to the 2002 presentation.

As discussed further in Note 4, on January 2, 2002, SafeNet acquired 100 percent of the outstanding common shares of Pijnenburg Securealink, Inc. (“Securealink”). SafeNet’s acquisition of Securealink resulted in changes to SafeNet’s business initiatives. One of the areas impacted was the Company’s Swiss subsidiary, GDS. Based on the amount of GDS operating and cash losses during 2000 and 2001, as well as a significant downturn in future business prospects due to the loss of two substantial contracts in February 2002, SafeNet management made the decision to discontinue operations at GDS. Certain employees from GDS’s sales and marketing team were transferred to SafeNet to create a new European sales office focused on selling SafeNet’s Enterprise Security products in Europe. All of the operations at GDS, including research and development, manufacturing and administration were closed and 26 employees were terminated during the first and second quarters of 2002.

As a result of the discontinued operations, the Company recorded a one-time charge of $3,506 in the first quarter of 2002 related to the write-off of the abandoned assets and the accrual of the estimated costs of the closing and severance and related costs. The disposition of GDS operations represents the disposal of a business segment under FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Accordingly, the results of this operation have been classified as discontinued during all periods presented. For business segment reporting purposes, GDS’s business results were previously classified as the segment “European Operations.”

Summarized operating results from the discontinued operation included in the consolidated statements of operations, excluding the loss on disposal, are as follows for the years ended December 31:

Assets and liabilities of the discontinued operations at December 31 were as follows:

The fair value of assets to be disposed was based on estimated net realizable value at the time of disposal. The significant components of the loss on disposal of the GDS operations is as follows:

On January 2, 2002, SafeNet acquired 100% of the outstanding common shares of Securealink in accordance with an Agreement and Plan of Reorganization dated December 14, 2001. The purchase price the Company paid to the stockholders of Securealink in connection with the acquisition totaled $14,778 and consisted of an aggregate of 575 shares of SafeNet, Inc. common stock valued at $10,636, $2,000 in cash, contingent convertible promissory notes with an aggregate principal amount of $2,000, the resolution and payment of which were satisfied on May 16, 2002 in the aggregate amount of $1,617, and direct costs of acquisition of $525. The fair market value of common shares was based on the average market price of the shares over the period from three days before to three days after the closing date. The cash portion of the consideration was funded with cash on hand.

The amount and type of consideration was determined on the basis of arm’s length negotiations between the Company and Securealink. Securealink develops security chips and sells them in Europe and throughout the world. Securealink is continuing to operate as a provider of security chips and is now a subsidiary of SafeNet. As a result of the acquisition, SafeNet has broadened its market with the addition of new technologies and a larger presence in Europe. Additionally, Securealink brings over thirty cryptographic experts who have complimented and strengthened development team. The results of Securealink have been included in the Company’s consolidated results beginning on the date of acquisition.

The following table summarizes the changes to assets (other than cash) and liabilities in connection with this acquisition:

All of the assets and liabilities were assigned to the Embedded Security segment. As noted above, $3,375 of the purchase price represents the estimated fair value of acquired in-process research and development projects that had not yet reached technological feasibility and had no alternative future use. Accordingly, this amount was immediately expensed in the Consolidated Statement of Operations on the acquisition date. The value assigned to purchased in-process technology relates entirely to the development of a new application specific integrated circuit.

The estimated fair value of this project was determined using the income approach, which involves two general steps. The first step is to establish a forecast of the estimated future net cash flows expected to accrue to SafeNet resulting from ownership of the asset or a group of assets. The second step involves discounting these estimated future net cash flows to their present value. In order to estimate future net cash flows, SafeNet employed a multi-period excess earnings method, under which it prepared a forecast of cash inflows, cash outflows, and pro-forma charges for economic returns of and on tangible assets employed and other enabling intangible assets, including patents and core technologies. The cash inflows included in the forecast were projected to commence in the third quarter of fiscal year 2002 and continue until the end of fiscal year 2005 and were based on pricing that was consistent with historical sales of similar application specific integrated circuit products and technology.

Cash outflows include direct and indirect expenses for costs to complete, cost of sales based on historical gross margin rates for similar products of approximately 80%, sales, marketing, general and administrative, and income taxes assuming a 35% effective income tax rate. The net cash inflows over an estimated economic life of approximately four years were then discounted to net present value using a risk adjust discount rate of 25%. The discount rate used in this calculation takes into account the stage of completion and the risks surrounding the successful development and commercialization of each purchased in-process technology project that was valued.

The unaudited pro forma combined historical results, as if Securealink had been acquired on January 1, 2001, is as follows:

The pro forma results include the estimated amortization of intangibles and interest expense on the promissory notes used to finance part of the purchase. As described in Note 2, the Company does not record amortization expense related to the goodwill. The pro forma results are not necessarily indicative of the results that would have occurred if the acquisition had actually been completed on January 1, 2001, nor are they necessarily indicative of future consolidated results.

Inventories related to continuing operations consisted of the following at December 31:

Property and equipment related to continuing operations consisted of the following at December 31:

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Statement 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. Statement 142 requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. Additionally, Statement 142 requires that goodwill included in the carrying value of equity method investments no longer be amortized.

The following table sets forth the Company’s net income (loss) for all periods presented adjusted to exclude amortization expense recognized in those periods related to goodwill. There was no impact on income (loss) from continuing operations for all periods presented.

The changes in the carrying amount of goodwill for the year ended December 31, 2002 consist of goodwill acquired in connection with the acquisition of Securealink (see Note 4) and the impact of translating the Euro denominated goodwill into U.S. dollars at the balance sheet date.

Acquired intangible assets consisted of the following at December 31, 2002, all related to the Embedded Security segment:

The amortization expense for the year ended December 31, 2002 was $1,488. The estimated amortization expense for the years ending December 31 is as follows:

The Company recorded no provision for income taxes on earnings from continuing operations for the years ended December 31, 2002 and 2001. Significant components of the Company’s income tax benefit on earnings from continuing operations for the year ended December 31, 2002 are as follows:

Deferred tax assets and liabilities arising from continuing operations are comprised of the following at December 31:

The reconciliation of the reported income tax expense (benefit) to the amount that would result by applying the U.S. federal statutory tax rate of 34% to income (loss) from continuing operations is as follows:

In assessing the realization of deferred tax assets, management considers whether it is more likely than not that all or some portion of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences are deductible and net operating losses are utilized. Based on consideration of these factors, the Company has established a valuation allowance of $8,141 and $9,172 at December 31, 2002 and 2001, respectively.

Prior to the third quarter of fiscal year 2000, the Company followed the practice of computing its income tax expense using the assumption that current year stock option deductions were used first to offset its financial statement taxable income. The remaining net operating loss carryforwards could then be used to offset any excess of financial statement taxable income over current year stock option deductions. Because the stock option deductions are not recognized as an expense for financial reporting purposes, the tax benefit from stock option deductions must be credited to additional paid-in capital with an offsetting charge to income tax expense in the statement of operations.

Effective July 1, 2000, the Company changed its method of accounting for income taxes to recognize the tax benefits from current and prior years’ stock option deductions after the utilization of net operating losses from operations (i.e., net operating losses determined without deductions for the exercise of non-qualified stock options and disqualified disposition of incentive stock options) to reduce income tax expense. The Company believed that this change was to a preferable method because the Company will not realize any tax benefit from stock compensation deductions until it has fully utilized its current and prior net operating loss carryforwards from operations. Thus, this method more accurately reflects the incremental effect of the Company’s stock option deductions in the appropriate accounting period. Because

the Company was generating net operating losses prior to 2000 rather than utilizing them, this accounting change had no effect on prior years’ tax provisions or additional paid-in capital.

At December 31, 2002, the Company had net operating loss carryforwards related to its discontinued Swiss subsidiary of approximately $7,111, which expire from 2007 to 2009 and are available to offset future taxable income of that subsidiary. Also at December 31, 2002, the Company had net operating loss carryforwards related to its Netherlands subsidiary of approximately $4,132, which do not expire and are available to offset future taxable income of that subsidiary. And finally, at December 31, 2002, the Company had net operating loss carryforwards for U.S. income tax purposes of approximately $14,875, which expire from 2011 to 2022 and are available to offset future U.S. taxable income. The exercise of non-qualified stock options and disqualified disposition of incentive stock options (“stock option deductions”) have generated all of the remaining U.S. net operating loss carryforwards. When these net operating loss carryforwards are utilized, the resulting reduction in the valuation allowance will be recorded as a direct increase to stockholders’ equity. During the year ended December 31, 2002, an increase to stockholders’ equity of $450 was recorded related to the tax benefit of stock option deductions.

The Company leases office facilities and equipment under non-cancelable operating leases expiring at various dates through 2007. The leases require the Company to pay a proportionate share of real estate taxes, insurance and maintenance. The Company recognizes rent expense on a straight-line basis. The future minimum payments under the leases for the years ending December 31, are as follows:

Rent expense under all operating leases related to continuing operations for the years ended December 31, 2002, 2001, and 2000 was $517, $360, and $334, respectively.

The Company sponsors a defined contribution pension plan for employees who have completed three months of service. The Plan permits pre-tax contributions by participants pursuant to Section 401(k) of the Internal Revenue Code (the Code) of 3% to 15% of base compensation up to the maximum allowable contributions as determined by the Code. The Company matches up to 50% of the first 4% of employee compensation that is contributed to the plan. The Company’s matching contributions vest with the participant over a 5-year period on a pro rata basis. The Company may also make additional discretionary contributions. The Company incurred expenses for its matching contributions for the years ended December 31, 2002, 2001 and 2000 totaling $77, $137 and $73, respectively.

The Company sponsors four stock option plans that provide for the granting of stock options to officers, directors, consultants and employees of the Company. Options have been granted with exercise prices that are equal to the fair market value of the common stock on the date of grant and, subject to termination of employment, expire seven years from the date of grant. Either incentive stock options or non-qualified stock options may be granted under the plans. The vesting and exercise periods are determined by the Board of Directors and may not exceed ten years. Options issued to date generally vest in equal amounts over a vesting period of either three or four years. Option activity during 2000, 2001 and 2002 was as follows:

The following table summarizes information about stock options outstanding at December 31, 2002:

At December 31, 2002, the Company had reserved 2,313 shares of common stock for exercise of outstanding stock options and additional stock options authorized for granting under existing stock option plans.

During 2002, the Company adopted the SafeNet, Inc. Employee Stock Purchase Plan. The plan allows eligible employees to purchase shares of common stock at 85% of the lower of the closing price of the Company’s common stock on the first trading day or the last trading day of each semi-annual offering period. Employees may authorize the Company to withhold up to 10% of their compensation during any offering period, subject to certain limitations. During 2002, 7 shares were issued under the plan at a price of $15.06 per share.

The Company has two reportable segments related to continuing operations: products, chips and software designed and manufactured for sale to companies that will embed the Company’s products into their products for ultimate sale to end-users (“Embedded Security Division”), and network security products designed and manufactured for direct sales to end-users and remote access software sold to OEM’s (“Enterprise Security Division”). The reportable segments are strategic business units that offer different products. The segments are managed separately because each segment requires different technology and marketing strategies. The Embedded Security Division and Enterprise Security Division include some international sales mainly to South America, Europe and Asia.

The Company does not allocate assets to its reportable segments, as assets generally are not specifically attributable to any particular segment. Accordingly, asset information by reportable segment is not presented. Where the underlying assets can be specifically attributed to a segment, the related depreciation and amortization have been classified accordingly. The remaining depreciation is allocated based on a percentage of revenue.

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of accounts receivable. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. Sales terms with clients, including distributors, do not provide for right of return privileges for credit, refund or other products. The Company’s payment terms are generally 30 days from delivery of products, but could fluctuate depending on the terms of each specific contract. The Company’s clients, who include both commercial companies and governmental agencies, are in various industries, including banking, security, communications and distributors of electronic products.

In 2002, one commercial client of the Embedded Security Division accounted for 41% of the Company’s consolidated revenues. In 2001, one commercial client of the Enterprise Security Division accounted for 15% of the Company’s consolidated revenues. In 2000, one commercial client of the Enterprise Security Division accounted for 11% and one commercial client of the Embedded Security Division accounted for 18% of the Company’s consolidated revenues.

As of December 31, 2002, 4 commercial clients of the Enterprise Security Division accounted for 11% of accounts receivable and 3 commercial clients of the Embedded Security Division accounted for a combined 42% of accounts receivable. As of December 31, 2001, three commercial clients of the Enterprise Security Division accounted for 37% of accounts receivable and two commercial clients of the Embedded Security Division accounted for a combined 30% of accounts receivable.

The following table sets forth the computation of basic and diluted income (loss) from continuing operations per common share for the years ended December 31:

Diluted loss from continuing operations per common share in 2002 and 2001 is equal to basic loss per common share because if potentially dilutive securities were included in the computation, the result would be anti-dilutive. These securities consist of company stock options.

On February 6, 2003, SafeNet acquired 100% of the outstanding common shares of Cylink Corporation (“Cylink”) in accordance with an Agreement and Plan of Reorganization dated as of October 30, 2002. The results of operations of Cylink will be included in the Company’s consolidated results of operations beginning on February 6, 2003. Cylink, develops, manufactures, markets and supports a comprehensive portfolio of hardware and software security products for mission-critical private networks and business communications over the Internet. Cylink’s solutions enable its customers to merge their operations and transactions onto existing networks, maximize network use, reduce the costs of operations and expand their businesses. As a result of the acquisition, the Company believes that it will be able to grow its base of government and commercial customers, enhance its product line, expand its international sales and provide broader technology and expertise to its customers. It also expects to reduce costs through economies of scale.

The aggregate purchase price was $35,102 consisting primarily of 1,684 shares of common stock valued at $31,256, 194 options and warrants assumed with an aggregate value of $1,691, and estimated direct costs of the acquisition of $2,156. The value of the common shares issued was determined based on the average market price of the Company’s common shares over the period including three days before and after the terms of the acquisition were agreed to and announced.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. The Company is in the process of completing third-party valuations of certain intangible assets; thus, the allocation of the purchase price is subject to refinement.

The $3,317 assigned to acquired in-process research and development assets will be written off at the date of acquisition in accordance with FASB Interpretation No. 4, “Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method.”

The $24,997 of goodwill was assigned to the Enterprise Security segment. Of that total amount, none is expected to be deductible for tax purposes.

The unaudited pro forma combined historical results, as if Cylink had been acquired on January 1, 2002, is as follows:

The pro forma results include the estimated amortization of intangibles. As described in Note 2, the Company does not record amortization expense related to the goodwill. The pro forma results are not necessarily indicative of the results that would have occurred if the acquisition had actually been completed on January 1, 2002, nor are they necessarily indicative of future consolidated results.

On February 27, 2003, SafeNet acquired substantially all the assets of Raqia Networks, Inc., a development stage company, consisting primarily of technology-related intangible assets. Total consideration paid by SafeNet was 389,640 shares of SafeNet common stock with an estimated value of $6,715 plus $805 in cash. SafeNet had previously invested $1,000 in Raqia Networks. The Company will obtain an independent valuation of the acquired assets, in order to allocate the purchase price during the first quarter of 2003.

ITEM 9 – CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

The information required by this item is incorporated herein by reference to the definitive Proxy Statement of SafeNet, which will be filed with the Securities and Exchange Commission no later than 120 days after the close of SafeNet’s fiscal year ended December 31, 2002.

As required by Rule 13a-15 under the Exchange Act, within 90 days prior to the filing date of this annual report (the “Evaluation Date”), the Company carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of the Company’s management, including the Company’s chief executive officer and chief financial officer. Based upon that evaluation, the Company’s chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures are effective. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the Company’s reports filed under the Exchange Act is accumulated and communicated to management, including the Company’s chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosures.

There were no significant changes in the Company’s internal controls or in other factors that could

significantly affect the Company’s internal controls subsequent to the Evaluation Date, nor any significant deficiencies or material weaknesses in such internal controls requiring corrective actions.

(a)

1. The financial statements filed as part of this report are listed separately on the Index To Financial Statements on page 30 of this Form 10-K.

	2.		Financial Statement Schedules: Schedule II Valuation and Qualifying Accounts

(b)		Reports on Form 8-K: The Company filed a Current Report on Form 8-K with the Securities and Exchange Commission on November 1, 2002 in connection with entering into a definitive agreement and plan of reorganization with Cylink Corporation

(c)		Exhibits required by Item 601 of Regulation S-K:

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 behalf of the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Delaware		52-1287752
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)

4690 Millennium Drive
Belcamp, Maryland		21017
(Address of principal executive offices)		(Zip Code)


		Name of each
Title of each class		exchange on which registered

Common Stock, $.01 par value		Nasdaq National Market


		High		Low

2002:
	Fourth Quarter	$	29.10	$	13.05
	Third Quarter		21.65		13.32
	Second Quarter		16.50		10.37
	First Quarter		19.41		9.70
2001:
	Fourth Quarter		19.71		5.81
	Third Quarter		10.10		5.81
	Second Quarter		17.55		7.10
	First Quarter		64.69		10.75


		Year Ended December 31,

(Amounts in thousands, except per share data)		2002			2001			2000			1999			1998

Revenues		$	32,235		$	16,462		$	25,278		$	10,565		$	11,624
Cost of revenues			8,963			4,525			5,834			4,352			5,527

	Gross profit		23,272			11,937			19,444			6,213			6,097

Research and development expenses			8,504			6,118			6,342			4,580			3,446
Sales and marketing expenses			7,341			5,061			4,756			5,251			5,889
General and administrative expenses			4,108			2,203			2,681			2,227			2,292
Write-off in in-process research and development			3,375			—			—			—			—
Amortization of intangibles			1,488			—			—			—			—
(Recovery of) reserve for Cyberguard advance			—			—			(275	)		(375	)		772

	Total operating expenses		24,816			13,382			13,504			11,683			12,399

	Operating (loss) income		(1,544	)		(1,445	)		5,940			(5,470	)		(6,302	)
Investment income and other expenses, net			669			1,336			1,320			95			232

	(Loss) income from continuing operations before income taxes		(875	)		(109	)		7,260			(5,375	)		(6,070	)
Income tax benefit, net			(90	)		—			—			—			—

	(Loss) income from continuing operations	$	(785	)	$	(109	)	$	7,260		$	(5,375	)	$	(6,070	)

(Loss) income from continuing operations per common share
	Basic	$	(0.10	)	$	(0.01	)	$	1.08		$	(0.98	)	$	(1.12	)

	Diluted	$	(0.10	)	$	(0.01	)	$	1.01		$	(0.98	)	$	(1.12	)

Shares used in computation
	Basic		7,730			7,057			6,751			5,504			5,409

	Diluted		7,730			7,057			7,195			5,504			5,409


	At December 31,

	2002		2001		2000		1999		1998

Balance Sheet Data:
Working capital	$	31,987	$	32,385	$	33,695	$	23,035	$	11,081
Intangible assets		13,900		727		1,516		2,107		1,527
Total assets		55,319		39,877		43,106		31,896		18,940
Stockholders’ equity		48,378		35,459		37,723		27,636		15,400


(Mark One)
x		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934


		2002 Quarter Ended

		March 31			June 30			Sept. 30		Dec. 31

Revenues		$	6,154		$	7,428		$	8,827	$	9,826
Cost of revenues			1,953			2,061			2,580		2,369

	Gross profit		4,201			5,367			6,247		7,457
Operating (loss) income			(4,016	)		222			754		1,496
(Loss) income from continuing operations			(3,742	)		246			877		1,834
(Loss) income from discontinued operations			(3,784	)		(398	)		116		112

Net (loss) income		$	(7,526	)	$	(152	)	$	993	$	1,946

(Loss) Earnings Per Share, Basic:
	(Loss) income from continuing operations	$	(0.49	)	$	0.03		$	0.12	$	0.24

	(Loss) income from discontinued operations	$	(0.49	)	$	(0.05	)	$	0.01	$	0.01

	Net (loss) income	$	(0.98	)	$	(0.02	)	$	0.13	$	0.25

(Loss) Earnings Per Share, Diluted:
	(Loss) income from continuing operations	$	(0.49	)	$	0.03		$	0.11	$	0.22

	(Loss) income from discontinued operations	$	(0.49	)	$	(0.05	)	$	0.01	$	0.01

	Net (loss) income	$	(0.98	)	$	(0.02	)	$	0.12	$	0.23

Shares used in computation
	Basic		7,677			7,689			7,736		7,824

	Diluted		7,677			7,932			8,062		8,625


		2001 Quarter Ended

		March 31			June 30			Sept. 30			Dec. 31

Revenues		$	5,641		$	3,134		$	3,602		$	4,085
Cost of revenues			1,489			1,444			874			718

	Gross profit		4,152			1,690			2,728			3,367
Operating (loss) income			648			(1,845	)		(448	)		200
(Loss) income from continuing operations			1,066			(1,497	)		(167	)		489
(Loss) income from discontinued operations			(635	)		(1,278	)		(550	)		(990	)

Net (loss) income		$	431		$	(2,775	)	$	(717	)	$	(501	)

(Loss) Earnings Per Share, Basic:
	(Loss) income from continuing operations	$	0.15		$	(0.21	)	$	(0.02	)	$	0.07

	(Loss) income from discontinued operations	$	(0.09	)	$	(0.18	)	$	(0.08	)	$	(0.13	)

	Net (loss) income	$	0.06		$	(0.39	)	$	(0.10	)	$	(0.06	)

(Loss) Earnings Per Share, Diluted:
	(Loss) income from continuing operations	$	0.15		$	(0.21	)	$	(0.02	)	$	0.07

	(Loss) income from discontinued operations	$	(0.09	)	$	(0.18	)	$	(0.08	)	$	(0.14	)

	Net (loss) income	$	0.06		$	(0.39	)	$	(0.10	)	$	(0.07	)

Shares used in computation
	Basic		6,999			7,059			7,079			7,092

	Diluted		7,465			7,059			7,079			7,092


		December 31,

		2002			2001

Assets
Current assets:
	Cash and cash equivalents	$	3,399		$	14,819
	Held-to-maturity securities		28,763			15,865
	Accounts receivable, less allowance of $244 in 2002 and $150 in 2001		4,534			3,225
	Inventories, less reserve of $958 in 2002 and $482 in 2001		1,008			1,260
	Prepaid expenses		1,002			850
	Current assets of discontinued operations		93			784

	Total current assets		38,799			36,803
Property and equipment, net			1,246			969
Computer software development costs, less accumulated amortization of $1,513 in 2002 and $3,113 in 2001			479			727
	Goodwill		12,826			—
	Intangible assets, less accumulated amortization of $1,640 in 2002		595			—
	Non-current assets of discontinued operations		—			537
	Other assets		1,374			841

	Total assets	$	55,319		$	39,877

Liabilities and Stockholders’ Equity
Current liabilities:
	Accounts payable	$	1,456		$	988
	Accrued compensation and related expenses		2,162			713
	Other accrued expenses		1,424			577
	Advance payments and deferred revenue		1,393			1,918
	Current liabilities of discontinued operations		377			222

	Total current liabilities		6,812			4,418
	Deferred income taxes		129			—
	Commitments and contingencies		—			—
Stockholders’ equity:
	Preferred stock, $.01 par value per share. Authorized 500 shares, no shares issued and outstanding		—			—
	Common stock, $.01 par value per share. Authorized 50,000 shares, issued and outstanding shares of 7,894 in 2002 and 7,108 in 2001		79			71
	Additional paid-in capital		65,665			52,400
	Accumulated deficit		(20,225	)		(15,486	)
	Accumulated other comprehensive income (loss)		2,859			(1,526	)

	Total stockholders’ equity		48,378			35,459

	Total liabilities and stockholders’ equity	$	55,319		$	39,877


		Year ended December 31

		2002			2001			2000

Revenues:
	Licenses and royalties	$	7,398		$	4,031		$	15,223
	Products		21,588			9,732			7,901
	Service and maintenance		3,249			2,699			2,154

Total revenues			32,235			16,462			25,278

Cost of revenues:
	Licenses and royalties		811			644			2,637
	Products		7,699			3,423			2,810
	Service and maintenance		453			458			387

Total cost of revenues			8,963			4,525			5,834

Gross profit			23,272			11,937			19,444

Operating expenses:
	Research and development expenses		8,504			6,118			6,342
	Sales and marketing expenses		7,341			5,061			4,756
	General and administrative expenses		4,108			2,203			2,681
	Write-off of acquired in-process research and development		3,375			—			—
	Amortization of acquired intangible assets		1,488			—			—
	Other		—			—			(275	)

Total operating expenses			24,816			13,382			13,504

Operating (loss) income			(1,544	)		(1,445	)		5,940
Other income (expense):
	Investment income		539			1,337			1,321
	Other expense, net		130			(1	)		(1	)

(Loss) income from continuing operations before income taxes			(875	)		(109	)		7,260
Income tax benefit			(90	)		—			—

(Loss) income from continuing operations			(785	)		(109	)		7,260
Loss from operations of discontinued GDS business (including loss on disposal of $3,506 in 2002)			(3,954	)		(3,453	)		(1,503	)

Net (loss) income		$	(4,739	)	$	(3,562	)	$	5,757

(Loss) income from continuing operations per common share
	Basic	$	(0.10	)	$	(0.01	)	$	1.08

	Diluted	$	(0.10	)	$	(0.01	)	$	1.01

Loss from operations of discontinued GDS business per common share
	Basic	$	(0.51	)	$	(0.49	)	$	(0.23	)

	Diluted	$	(0.51	)	$	(0.49	)	$	(0.21	)

Net (loss) income per common share
	Basic	$	(0.61	)	$	(0.50	)	$	0.85

	Diluted	$	(0.61	)	$	(0.50	)	$	0.80


											Accumulated
											Other
	Common stock				Additional						Comprehensive			Total
					Paid-in			Accumulated			(Loss)			Stockholders’
	Shares		Amount		Capital			Deficit			Income			Equity

Balance at January 1, 2000		6,542	$	65	$	46,547		$	(17,681	)	$	(1,295	)	$	27,636
Stock options exercised		392		4		4,082			—			—			4,086
Stock warrants exercised		7		—		118			—			—			118
Stock option compensation		—		—		128			—			—			128
Net income		—		—		—			5,757			—			5,757
Foreign currency translation adjustment		—		—		—			—			(112	)		(112	)
Other		—		—		(20	)		—			130			110

Balance at December 31, 2000		6,941		69		50,855			(11,924	)		(1,277	)		37,723
Stock options exercised		167		2		1,547			—			—			1,549
Net loss		—		—		—			(3,562	)		—			(3,562	)
Foreign currency translation adjustment		—		—		—			—			(165	)		(165	)
Other		—		—		(2	)		—			(84	)		(86	)

Balance at December 31, 2001		7,108		71		52,400			(15,486	)		(1,526	)		35,459
Issuance of stock in connection with the acquisition of Securealink		575		6		10,630			—			—			10,636
Issuance of stock under Employee Stock Purchase Plan		6		—		217			—			—			217
Stock options exercised		205		2		1,968			—			—			1,970
Income tax benefit related to stock option exercises		—		—		450			—			—			450
Net loss		—		—		—			(4,739	)		—			(4,739	)
Reclassification adjustment - realization of foreign currency translation adjustment upon disposal of GDS business		—		—		—			—			1,526			1,526
Foreign currency translation adjustment		—		—		—			—			2,904			2,904
Other		—		—		—			—			(45	)		(45	)

Balance at December 31, 2002		7,894	$	79	$	65,665		$	(20,225	)	$	2,859		$	48,378


Severance costs	$	697
Lease termination costs		573
Goodwill		316
Reclassification of foreign currency translation losses		1,526
Other		394

Total	$	3,506


Current assets, excluding cash of $374	$	1,271
Property and equipment		787
Goodwill		10,859
Acquired in-process research and development costs		3,375
Intangible assets subject to amortization		1,905

Total assets acquired, excluding cash	$	18,197

Short-term borrowings	$	(1,484	)
Deferred income taxes		(670	)
Other current liabilities		(1,639	)

Total liabilities assumed		(3,793	)

Purchase price, net of cash received	$	14,404


Revenues		$	23,345
Loss from continuing operations		$	(4,373	)
Net loss		$	(7,825	)
Loss per common share - basic and diluted:
	Loss from continuing operations	$	(0.57	)
	Net loss	$	(1.03	)


	2002			2001

Raw materials	$	252		$	222
Finished goods		1,714			1,520

		1,966			1,742
Reserve for excess and obsolete inventory		(958	)		(482	)

	$	1,008		$	1,260


	2002			2001

Furniture and equipment	$	4,350		$	3,036
Computer software		912			521
Leasehold improvements		718			536

		5,980			4,093
Accumulated depreciation and amortization		(4,734	)		(3,124	)

	$	1,246		$	969


	Gross Carrying		Accumulated
	Amount		Amortization

Patents and related	$	738	$	(143	)
Developed technology		1,336		(1,336	)
Purchase orders and contract backlog		161		(161	)

Total	$	2,235	$	(1,640	)


Current:
	Federal	$	—
	State		179
	Foreign		—

			179
Deferred (benefit):
	Federal		271
	State		—
	Foreign		(540	)

			(269	)

Total benefit		$	(90	)


		2002			2001

Deferred tax assets:
	Inventories	$	272		$	278
	Net operating loss carryforward		7,191			8,428
	Stock option and deferred compensation		200			142
	Other		478			336

			8,141			9,184

Deferred tax liabilities:
	Other		(129	)		(12	)

			(129	)		(12	)

	Net deferred tax asset		8,012			9,172
	Less valuation allowance		(8,141	)		(9,172	)

		$	(129	)	$	—


						Weighted
						Average
		Number			Range of	Exercise
		of Shares			Exercise Prices	Price

Outstanding at January 1, 2000			1,199		$ 3.09 to $31.50	$	10.28
	Granted		752		$14.75 to $43.50	$	22.66
	Canceled		(217	)	$ 4.50 to $25.63	$	11.25
	Exercised		(392	)	$ 3.09 to $20.25	$	10.42

Outstanding at December 31, 2000			1,342		$ 3.09 to $43.50	$	17.01
	Granted		825		$ 5.85 to $43.63	$	11.79
	Canceled		(117	)	$ 3.25 to $43.50	$	25.78
	Exercised		(167	)	$ 3.09 to $24.87	$	9.41

Outstanding at December 31, 2001			1,883		$ 4.38 to $43.63	$	14.85
	Granted		404		$11.10 to $16.51	$	13.09
	Canceled		(106	)	$ 8.53 to $33.63	$	17.94
	Expired		(52	)	$ 9.19 to $18.06	$	9.47
	Exercised		(205	)	$ 5.13 to $24.13	$	9.50

Outstanding at December 31, 2002			1,924		$ 4.38 to $43.63	$	15.08

Exercisable at December 31, 2002			1,121		$ 4.38 to $43.63	$	14.92


	Options Outstanding					Options Exercisable

			Weighted	Weighted				Weighted
			Average	Average				Average
Range of	Number		Remaining	Exercise		Number		Exercise
Exercise Prices	of shares		Contractual Life	Price		of Shares		Price

$4.38 to $8.70		415	3.9 years	$	6.91		240	$	7.00
$9.19 to $17.56		1,035	5.3 years	$	13.16		610	$	13.23
$18.13 to $26.00		359	3.3 years	$	22.98		207	$	22.68
$31.50 to $43.63		115	3.3 years	$	37.30		64	$	35.71

		1,924	4.4 years	$	15.08		1,121	$	20.62


	December 31,

Geographic Information	2002		2001		2000

Revenues:
United States	$	28,945	$	15,134	$	23,877
All other countries		3,290		1,328		1,401

Consolidated revenues	$	32,235	$	16,462	$	25,278

Long-lived assets, from continuing operations:
United States	$	1,140	$	1,696	$	2,696
All other countries		585		—		—

Consolidated long-lived assets	$	1,725	$	1,696	$	2,696


Current assets	$	17,346
Property and equipment		786
Goodwill		24,997
Acquired in-process research and development assets		3,317
Intangible assets subject to amortization (2.7 year weighted average useful life)		17,432
Other assets		728

Total assets acquired	$	64,606

Current liabilities	$	20,225
Deferred income taxes, less current portion		4,394
Other long-term liabilities		4,885

Total liabilities assumed	$	29,504

Net assets acquired	$	35,102


Revenues	$	59,759
Loss from continuing operations	$	(20,410	)
Net loss	$	(24,364	)
Loss per share from continuing operations - basic and diluted	$	(2.17	)
Loss per share — basic and diluted	$	(2.59	)


	Balance
	at		Charged								Balance
	Beginning		to Costs		Charges						at End
	of		and		to Other						of
	Period		Expenses		Accounts		Deductions(a)		Recovery		Period

Allowance for doubtful accounts:
Year ended December 31, 2002	$	150	$	94	$	—	$	—	$	—	$	244
Year ended December 31, 2001		196		32		—		78		—		150
Year ended December 31, 2000		215		60		—		79		—		196
Reserve for obsolete inventory:
Year ended December 31, 2002	$	482	$	477	$	—	$	—	$	—	$	958
Year ended December 31, 2001		207		284		—		9		—		482
Year ended December 31, 2000		207		—		—		—		—		207


2A	Agreement and Plan of Reorganization dated October 30, 2002 by and among the Registrant, Sapphire Acquisition Corp. and Cylink Corporation	I/B/R(1)

3A	Restated Certificate of Incorporation of Registrant, as filed with the Secretary of State of Delaware on May 23, 2001	I/B/R(2)

3B	By-laws of Registrant	I/B/R(3)

4	Specimen of Common Stock Certificate of Registrant	I/B/R(3)

10A	Sublease dated November 2, 1993 for facility at 8029 Corporate Drive, Baltimore, MD	I/B/R(4)

10B	Stock Option Plan of 1989	I/B/R(5)

10C	Joint Development and Marketing Agreement between the Registrant and CyberGuard Corporation	I/B/R(6)

10D	Agreement between SafeNet Secure Solutions, Inc. (wholly-owned subsidiary of the Registrant) and Analog Devices, Inc.	I/B/R(7)

10E	1999 Employee Stock Option Plan	I/B/R(8)

10F	1999 Stock Bonus Plan	I/B/R(8)

10G	Non-Employee Director Stock Option Plan	I/B/R(8)

10H	2000 Employee and Directors Stock Option Plan	I/B/R(8)

10I	2001 Omnibus Stock Option Plan	I/B/R(9)

10J	Employment Agreement with Anthony Caputo	I/B/R(10)

10K	Employment Agreement with Cees Jan Koomen	I/B/R(10)


10L	Employee Stock Purchase Plan	I/B/R(9)

10M	Second Amendment to Lease and Partial Termination Agreement dated October 30, 2002 by and between Cylink Corporation and Orchard Jay Investors, LLC for facilities located in Santa Clara, California	I/B/R(11)

10N	Stipulation and Agreement of Settlement filed on November 5, 2002, in the United States District Court for the Northern District of California, No. C98-4292 (VRW)	I/B/R(11)

21	Subsidiaries of Registrant	†

23.1	Consent of Ernst & Young LLP, independent auditors


31.1	Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.



31.2	Certification pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.



32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


†		Previously filed.


(1)		Filed as an exhibit to the Registration Statement on Form S-4 (File No. 333-101577) of the Registrant and incorporated herein by reference.

(2)		Filed as an exhibit to the Form 10-Q for the quarterly period ended June 30, 2002 and incorporated herein by reference.

(3)		Filed as an exhibit to the Registration Statement on Form S-18 (File No. 33-28673) of the Registrant and incorporated herein by reference.

(4)		Filed as an exhibit to Form 10-KSB for the fiscal year ended December 31, 1993 and incorporated herein by reference.

(5)		Filed as an exhibit to the Registration Statement on Form S-1 (File No. 33-52066) of the Registrant and incorporated herein by reference.

(6)		Filed as an exhibit to Form 10-K for the fiscal year ended December 31, 1996 and incorporated herein by reference.

(7)		Filed as an exhibit to Form 10-Q for the quarterly period ended September 30, 1996 and incorporated herein by reference.

(8)		Filed as an exhibit to a Definitive Proxy Statement on Schedule 14A for the Annual Meeting of Shareholders held on July 28, 1999 and incorporated herein by reference.

(9)		Filed as an exhibit to the Registration Statement on Form S-8 (File No. 333-98029) of the Registrant and incorporated herein by reference.

(10)		Filed as an exhibit to the Form 10-Q for the quarterly period ended September 30, 2002 and incorporated herein by reference.

(11)		Filed as an exhibit to the Form 10-Q of Cylink Corporation (File No. 0-27742) for the quarterly period ended September 29,2002 and incorporated herein by reference.


	By:	/s/ Anthony A. Caputo

		Anthony A. Caputo
		Chairman, Chief Executive Officer and President


Signature	Title	Date

/s/ Anthony A. Caputo Anthony A. Caputo	Chairman, Chief Executive Officer And President	February 10, 2004

/s/ Carole D. Argo Carole D. Argo	Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)	February 10, 2004

/s/ Thomas A. Brooks Thomas A. Brooks	Director	February 10, 2004

/s/ Shelley A. Harrison Shelley A. Harrison	Director	February 10, 2004

/s/ Ira A. Hunt, Jr. Ira A. Hunt, Jr.	Director	February 10, 2004

/s/ Bruce R. Thaw Bruce R. Thaw	Director	February 10, 2004