SAFENET INC - 10-K Annual Report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K


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

		For the fiscal year ended December 31, 2004

OR

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

Commission File Number 0-20634

SafeNet, Inc.

(Exact name of registrant as specified in its charter)


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

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

Registrant’s telephone number, including area code:

(410) 931-7500

Securities registered under Section 12 (b) of the Exchange Act:

NONE

Securities registered under Section 12 (g) of the Exchange Act:


Title of Each Class		Name of Each Exchange on Which Registered

Common Stock, $.01 par value		NASDAQ National Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No 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 þ 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, 2004 was approximately $523,300,000. 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 March 10, 2005 was 24,538,977.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates information by reference from the Registrant’s proxy statement for the Annual Meeting of Stockholders, 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, 2004.

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Annual Report on Form 10-K, the exhibits hereto and the information incorporated by reference herein are considered “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. These statements involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. These risks, uncertainties and other factors include, among others, the risk factors discussed in this Annual Report on Form 10-K. As a general matter, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” or the negative of such terms or other comparable terminology. We expressly disclaim any obligation or undertaking 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.

PART I.


ITEM 1.	*BUSINESS*

Overview

We develop, market, sell, and support a portfolio of hardware and software information security products and services that protect and secure digital identities, communications, and applications. Our products and services are used to create secure wide area networks (WANs) including asynchronous transfer mode (ATM), Frame, Link, and Synchronous Optical Networks (SONET), virtual private networks over the Internet (VPNs); wireless networks including 802.11, security management, intrusion prevention, software anti-piracy and revenue protection; and identity management to prevent security breaches that could result in unauthorized access to confidential data, invasion of privacy and financial loss. Our information security solutions allow our customers to lower the cost of deploying and managing secure, reliable private networks and enable the use of the Internet and wireless networks for secure business communications and transactions with customers, suppliers, and employees.

SafeNet technology is the de facto standard in remote access client software and a market leader in USB authentication tokens that eliminate user names and passwords; Secured Socket Layer (SSL) acceleration devices providing fast and secure online transactions; software security, and licensing products preventing software piracy; high-assurance security products; and SecureIP Technology licensed to Internet infrastructure manufacturers, service providers, and security vendors.

SafeNet’s full range of security capabilities and products include:


	•	Core encryption: WAN, VPN, SSL VPN, two-factor authentication, wireless VPN, satellite link encryption;

	•	Communication security;

	•	Digital rights management;

	•	Digital identities;

	•	Adding other security applications, such as intrusion detection, anti-virus, firewalls, and content inspection technology;

	•	SafeEnterprise^tm Security System to address the enterprise security needs of government and commercial customers; and

	•	Security for wireless devices, PCs and personal devices.

Our products are based on industry standard encryption algorithms and communication protocols that allow for integration into large networks and interoperability with other market-leading network devices and applications. Our solutions incorporate our security technologies, including our silicon chips, smart cards, USB tokens, network appliances, client software, and management software, to provide a vertically integrated solution that addresses the stringent security needs of our customers. Our products enable our customers to expand their existing networks efficiently and to integrate these networks with lower-cost VPNs. 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 Belcamp, Maryland. We have a long history 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 U.S. Department of Homeland Security, Citigroup, and various OEMs, such as Cisco Systems and Texas Instruments, we have considerable experience developing and deploying network security solutions.

We periodically review and consider possible acquisitions of companies that we believe will contribute to our long-term objectives and discuss such acquisitions with the management of those companies. Such acquisitions, which may be material, may be made from time to time.

On December 15, 2004, we completed the acquisition of Datakey, Inc., which expanded our customer base and product offerings to include token-based solutions that simplify enterprise-wide access and identity management. Operations of Datakey are in the process of being integrated into our Enterprise Security Division.

On March 15, 2004, we completed the acquisition of Rainbow Technologies, Inc. Rainbow provided information security solutions for mission-critical data and applications used in business, organization and government computing environments. This merger with Rainbow has had and will continue to have a significant impact on our operations going forward.

On November 18, 2003, we completed the acquisition of the Original Equipment Manufacturers (OEM) Products Group of SSH Communications Security Corp, a company based in Finland. The business acquired included SSH’s VPN client software and security and networking toolkits.

In February 2003, we acquired the assets of Raqia Networks, Inc., a development stage company, consisting primarily of technology-related intangible assets.

In February 2003, we also acquired Cylink Corporation, which expanded our customer base and our product offerings to include security solutions for WANs, such as our ATM, Frame and Link encryptor products. Operations of Cylink were integrated into the Enterprise Security Division.

Industry Background

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, 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, through 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 (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:


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

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

	•	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.

Today’s economy survives on communication — from small businesses to globe-spanning enterprises to government, all require flexible solutions that connect their organizations together and enable the flow of information. Virtual Private Networks (VPNs) have become the overwhelming choice to connect remote workers, branch offices, and wide area networks together using public networks like the Internet. But while VPN gateway hardware addresses the needs of the network and remote access entry points, every VPN also consists of hundreds of individuals who need remote access from their laptops and desktop computers while in small offices, at home, or while traveling.

As a market leader in VPN technology, SafeNet has designed a SSL VPN remote access solution to address the needs of every remote access user which includes an advanced VPN client offering AES encryption, device authentication, and FIPS validation for high-security, mission critical remote access as well as an SSL VPN appliance providing instant remote access using SSL encryption to all communications over the Internet from a standard Web browser. All SafeNet remote access solutions support two-factor authentication for your digital identity.

Software is one of the most valuable assets of the Information Age, running everything from PCs to the Internet. As the number of computers grows, so does the rate of software piracy. Protecting valuable intellectual property and securing revenues are now critical concerns for every software development company. Development of software applications requires major investments in time, money and other resources. Software piracy denies developers their rightful return on investment. In addition, it harms paying customers, who ultimately bear a substantial portion of the cost of software theft in the form of higher license fees.

We believe that developing the necessary tools for protecting revenue rights has become yet another strong security effort for us. The SafeNet product offering has been the industry’s most trusted anti-piracy

solution for more than 20 years, now protecting more than 35 million applications worldwide. With an ongoing commitment to quality products and superior customer service and support, We deliver necessary solutions to help developers defend their applications against the growing threat of software piracy as well as anti-piracy hardware keys to help protect revenues and defends markets against software piracy and licensing non-compliance.

Critical infrastructures cannot afford downtime. The lives and well-being of citizens and military personnel depend on impenetrable network security. Government, finance, utility, communications, medical, and research companies need a high performance solution that also provides extraordinary network security.

SafeNet has developed a complete family of devices for encrypting high-speed communications, offering the flexibility to encrypt data at the Physical (Layer 1), Data Link (Layer 2), and Network layers (Layer 3), and providing the ideal solution for implementing high-speed encryption without changing an organization’s existing network infrastructure. We believe our product line exceeds the industry standards for performance, HighAssurance, and management traditionally offered by network equipment providers.

Whether maintaining or deploying a Synchronous Optical Network (SONET) or Synchronous Digital Hierarchy (SDH) network, SafeNet provides the highest level of encryption protection. SONET Encryptors from SafeNet are now being deployed by larger banks, utilities, and Federal Government agencies. They offer extremely high level security (at 100 million key combinations per second, it would take longer than the age of the universe to decode the encryption). They are also more bandwidth-efficient, which results in a noticeable increase in network performance. And we believe they are faster, easier, and less intrusive to implement than earlier technology.

The SafeNet Solution

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 VPNs. 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 governments, financial institutions, and other security-sensitive commercial customers. By providing a solution that incorporates our security technologies, including our silicon chips, appliances, servers, client software, USB tokens and smart

cards, and management software, we are able to provide a vertically integrated solution that addresses the stringent security needs of these customers.

For the development of technology for top secret and Type 1 secure data, voice, fax, and other electronic communication, we are a leading developer and manufacturer of NSA-certified, high-reliability cryptographic microcircuits, ground units, and flight units for space communication. Our communications security devices include network link encryptors, and crypto cards as well as advanced ASICs and cryptographic/acceleration equipment used in sensitive electronic messaging.

From its beginnings, we have pioneered innovative information security solutions critical to Homeland Security — solutions that demand the utmost from solution providers. Time-to-market, quality and reliability are just a few of the key components. Our history, renown, and expertise enable these key components for any Information Security (INFOSEC) application or environment. As a leading manufacturer of high-grade encryption and decryption equipment essential to homeland security and critical infrastructure protection, our research and development personnel, product manufacturing teams, and facilities operate at the forefront INFOSEC technology. Because satellite uplink commands must be encrypted and authenticated to assure legitimate control of the satellite and its operation, as well as sensitive and classified communications via satellite must be encrypted to protect them from interception and compromise, we develop and maintain space communications security for government and commercial customers.

We also provide, through our Embedded Security Division, a broad range of security solutions, including silicon chips, accelerator cards, servers, licensed intellectual property, and software products, to OEMs that embed them into their own network and wireless products. Added to this are our Rights Management solutions including anti-piracy and revenue protection software and hardware. These solutions provide application developers, content publishers, and appliance manufacturers with the solutions they need to convert sharing of digital media from a revenue drain into an efficient distribution channel — securely leveraging the power of personal networking.

ENTERPRISE SOLUTION BENEFITS:


	•	Broad Product Line. We offer our WAN and VPN solutions as a system that integrates our hardware and software products, or separately as discrete hardware and software products. This enables us to address the needs of large enterprise customers who require complex and integrated systems, as well as customers who may require individual hardware or software components. Our products and services enable our customers to expand their existing WANs efficiently and to integrate these networks with lower cost Internet technologies.

	•	High Level of Security. Our products and services have been designed to meet the high level security needs of our government, financial institution and other commercial customers. We have sold our products and services to other key government agencies, including the Department of Defense, which has used them for battlefield command-and-control applications. In addition, we are developing chips to address classified government security needs and the security requirements of critical infrastructure, such as banks and utilities, as required by the Department of Homeland Security. Our products are designed to meet the standards set forth in the U.S. government’s Crypto Modernization Program.


	•	High Performance Systems. Our appliances are designed to maximize the performance of our solutions across WANs and the Internet. Using our VPN products, our customers are able to transmit secured data at up to 1 Gbps of bi-directional throughput. Our products can support up to 10,000 IPSec tunnels and a maximum of 100,000 simultaneous secure transactions with minimal degradation in network performance.

		We added an appliance that offer encryption over SONET. With high-speed throughput and extremely low latency these products are ideal for high-speed data and time-sensitive voice and video applications. It employs the federally endorsed AES algorithm with the flexibility to be deployed in OC3/STM1 (155Mbps), OC12/STM4 (622Mbps), OC48/STM16 (2.4Gbps), and OC192/STM64 (10Gbps) SONET networks.

	•	Ease of Deployment and Management. Our products require minimal configuration and can be deployed quickly and cost-effectively by end-user customers. Our WAN and VPN security products are centrally managed with our security management software, which enables policy management and cost-effective, secure, scalable monitoring of network devices and applications, network traffic, and security events.

	•	Standards-Based and Network Compatible. We offer products that are based on industry and government standards, including certain required standards, and accepted network communication protocols. These standards and protocols allow our products to interoperate with a large number of products from other vendors.

EMBEDDED SOLUTION BENEFITS:

In addition to some of the benefits discussed above, our Embedded products have the following benefits:


	•	Ease of Development. We offer a complete development environment in which OEMs can build a wide variety of encryption products. This allows OEMs to accelerate time to market, reduce development costs and provide system-level implementation of encryption technology.

	•	Flexible Packaging. Our core technology is available for license to OEMs in various forms, such as embedded intellectual property blocks, silicon chips, or accelerator cards. In particular, embedded intellectual property allows selected elements of our VPN technology to be adapted in single or multiple implementations. This feature allows OEMs to incorporate selective blocks in their silicon chips or processors, resulting in cost effective, high throughput, low power consuming designs.

	•	Price to Performance. Our products are designed for rapid and cost-effective implementation and to match the stringent cost requirements of our customers with their performance needs. As such, our development staff follows a design approach to reduce overall product costs.

Strategy

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


	•	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 new product and technology offerings during 2005. We have assembled a team of experienced developers and engineers with security expertise and encourage a corporate culture that fosters continuous product innovation.

	•	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 acquisitions of Rainbow Technologies and Datakey will continue to provide us with an opportunity to sell new products and services into the larger combined customer base.

• Target the Government and Financial Institution Markets. We have established and created a Government Solutions Sales Unit to focus not just on government agencies and departments, but also on systems integrators to produce more multi-year large dollar contracting opportunities. We intend to expand our position in these markets and leverage this position to target new high growth market opportunities as they arise. For example, our subsidiary Mykotronx, Inc. delivered nearly 100 of its KIV-7HSB high assurance encryption products to a major Homeland Security systems integrator.

• Further penetrate the Digital Rights Management market. We have established a Rights Management Business Unit as part of our Embedded Security Division to develop new initiatives for its Sentinel brand of software protection and license management products.. Through this new business we have begun to offer the next generation in digital rights management software with Sentinel UltraPro.

• 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, servers, and software products. For example, we teamed our Luna Series of products with Adobe’s document services to help customers deploy more secure documents on the Adobe Intelligent Document Platform. We offer comprehensive training and marketing programs to support our OEMs and channel partners. We intend to further develop our relationships with system integrators for the government sector and value added resellers for international markets. For example, Ingram Micro joined SafeNet’s Security Partner Alliance Program in 2004.

• Target the Wireless Market. We continue to target the wireless communications market, expanding our reach from semiconductor companies to handset and cell phone manufacturers. We are currently in the process of developing additional security technology that will address the growing need for secure wireless communication.

• 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.

Products, Services and Technology

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.


	*Enterprise Solutions*

SafeEnterprise^tm Security System. 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. These solutions, which include 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, link, and SONET) 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, Link and SONET Encryptors that employ 3DES and DES algorithms and the iGate SSL appliance.


	•	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. HighAssurance^tmGateways include the HighAssurance 500 Gateway, the HighAssurance 1000 Gateway, HighAssurance 2000 Gateway, and the HighAssurance 4000 Gateway.

	•	SafeEnterprise iGate SSL Appliance: SafeEnterprise iGate SSL Appliance gives users the ability to access their core applications through any high-speed Internet connection without a VPN client. Applications that were not available before through a browser because of security concerns can now be pushed out to remote users easily.

	•	ATM Encryptor: The SafeEnterprise^tm 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 up to OC-12.

	•	Frame Encryptor: SafeEnterprise^tm 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.

	•	Link Encryptor: SafeEnterprise^tm 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.

	•	SONET Encryptor: The SafeEnterprise SONET Encryptor has been designed to integrate transparently and simply into one SONET/SDH network architecture. High-speed throughput and extremely low latency make it ideal for high-speed data and time-sensitive voice and video applications. It supports both path and line SONET/SDH encryption at various rates and distances.


	*Digital Identity and PKI Solutions*


	•	iKey: — Personal Two-Factor USB Authentication Token is a USB-based two-factor authentication token that provides a very cost-effective and easy-to-use control for multiple applications and network services, as in VPNs, and controls Intranet, Extranet, and Internet access. The iKey can also be used in Public Key Infrastructure (PKI).

	•	SafeNet Smart Cards: SafeNet designs all of its smart cards and tokens with security, interoperability, convenience and performance in mind. Our smart cards and tokens are validated for federal information processing standards (FIPS) 140-2 Level 2, an important U.S. government certification that demonstrates the card/token’s cryptographic strength and security.

	•	SafeNet Axis: is a complete software and smart card solution that delivers simplified and secure Single Sign-On (SSO) for a full range of enterprise applications and network resources.

	•	SafeNet CMS (Card Management System): is a Web-based smart card/token and digital credential management solution for enterprises that is used to issue, manage, and support SafeNet cryptographic smart cards and SafeNet iKey^tm USB tokens for identity-based applications throughout the organization. SafeNet CMS gives enterprise customers a powerful, interoperable, and secure system that reduces the cost of deploying and supporting smart cards and iKeys.


	•	The SafeNet Luna® family of products comprises a complete range of hardware security solutions for digital identity applications. Luna products feature true hardware key management to maintain the integrity of encryption keys. Sensitive keys are created, stored, and used exclusively within the secure confines of the Luna hardware security module (HSM) to prevent compromise.


	•	Luna SA Flexible, scalable, high-performance network-attached hardware security module

	•	Luna SP Java application security appliance

	•	Luna CA³L A PKI Root Key hardware security module

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


	•	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.

	•	Luna PKI Toolkit: The Luna PKI Toolkit features robust APIs, proven hardware, and expert support to speed development of custom PKI-enabled applications without requiring specialized security knowledge or lengthy development cycles.

	•	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.

	•	HighAssurance^tm Remote: The HighAssurance^tmRemote client is based on SoftRemote, which contains additional security features for the U.S. government and other agencies. The Department of Defense has purchased a two-year license for HighAssurance^tm Remote for government-wide use. HighAssurance^tm Remote is FIPS certified.

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

	•	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^tm Security System includes the following service:


	•	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 Belcamp, 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.


	*Borderless Security*

Our borderless security solution is a new approach to resolving the information security problems of today’s widely distributed, heterogeneous computing environments. Our solution, known as the borderless security platform, combines authentication, authorization, and confidentiality-wrapped with robust management into an easily deployed and easily managed solution that minimizes the challenges associated with perimeter-based solutions and security point products from multiple vendors. The platform enables granular authentication and authorization to applications, files, and networks, and provides enforcement of role and risk-based authorization policies. This approach is based on open standards, providing an organization with the ability to deploy all or part of the solution, each of which easily co-exists and complements existing technologies and consists of Client, Server, and Management components, tightly integrated in easy-to-deploy packages.

These uniquely packaged components provide a product that merges authentication, Single Sign-On authorization, and confidentiality into one tightly integrated solution for all Web and non-Web applications and resources. With rapid deployment capabilities that leverage and protect existing technology and infrastructure investments, these components allow business units or organizations to respond quickly to opportunities that require electronic access to data by customers, partners, or suppliers.


	*Mykotronx Products*

SafeNet Mykotronx is a premier manufacturer of high-grade INFOSEC and COMSEC devices for use in space and other sensitive digital communication environments.

Space Communications Security: SafeNet Mykotronx offers a wide variety of cryptographic ASIC solutions for both space and commercial voice and data applications. For voice and data applications, our single chip cryptographic solutions include the MYK-82A (“Capstone”), Krypton, and MYK-85 Key Management Unit. For network server acceleration, we offer FastMAP and NSOC3 integrated circuits which

provide the most advanced performance features for public-key cryptography and IPSec processing. And For space applications, SafeNet Mykotronx ASIC products include:


	•	For commercial applications, the MYK-42 Centurion VLSI, and MYK-41 DES VLSI microcircuits.

	•	In the Caribou category, the U-TXZ microcircuit.

	•	In the Pegasus category, the KGV-227 VLSI microcircuit.

	•	In the KI-23 category, the MYK-1 microcircuit.

	•	In the KG-28/46 category, the MYK-11 VLSI microcircuit.

	•	And in the KG-44 and KG-29/57 categories, the KG-44 LSI microcircuit.

Cryptographic Cards: Addressing Type 2 Encryption/ Decryption, Secure Hash, and Key Exchange, the SafeNet Mykotronx FORTEZZA^tm Crypto Card implements cutting-edge cryptographic security and authentication methods in a PCMCIA hardware token for Government and commercial applications. Self-contained, standardized, and easily integrated, the Card provides the ultimate in portable security, together with on-board storage of user credentials, keys, and digital certificates. Fully FORTEZZA^tmcompliant, the card incorporates the National Security Agency-certified CAPSTONE RISC-based cryptographic processor. It is the hardware crypto token chosen to secure the Defense Messaging System (DMS).

A breakthrough in PCMCIA Technology and used by the Government to protect top secret information, the FORTEZZA^tm Plus Cryptocard is the next-generation solution for both current and evolving information security (INFOSEC) applications. MISSI compatible and PC CARD 95, 16-bit data I/ O compliant, the FORTEZZA^tm Plus Cryptocard is the cryptographic engine for the Secure Terminal Equipment (STE). The size of a credit card, FORTEZZA^tm Plus takes advantage of such commercial network technologies as ISDN to deliver high quality secure digital voice/data services. Self-contained, standardized, and easily integrated, the Card provides the ultimate in portable security, together with on-board storage of user credentials, keys, and digital certificates. In addition, the card incorporates the National Security Agency-certified Krypton 4C RISC-based cryptographic processor.

Network Security: The new KIV-7HSB is specifically designed to operate in Time Division Multiple Access (TDMA) architectures to provide secure high bandwidth, wide area, networked data exchange via MILSTAR satellites over a broad range of data rates. It fully accommodates all complex handshaking and resynchronization durations encountered during normal TDMA system operations. A direct replacement for the KIV-7, KIV-7HS and KIV-7HSA modules, the KIV-7HSB maintains full interoperability with KG-84, KG-84A and KG-84C, KIV-7, KIV-7HS and KIV-7HSA units currently installed in traditional, non-TDMA, applications.

The SafeNet Mykotronx WLA-7HS Wireline Interface Adapter Module was developed specifically to interface communications equipment with field wire at data rates from 1.2 kbps to 2.048 Mbps at distances up to 4 kilometers. A user-friendly menu-driven operator interface simplifies programming of all operational features. The standard EIA-530 ciphertext interface supports direct connection to the KIV-7HS and the entire KIV-7 family of products. It also facilitates connections with other communications equipment requiring connectivity to field wire.


	*Embedded Solutions.*

Software Solutions. We provide OEMs with the following portfolio of software and software toolkits:


	•	CGX Library

	•	CGX Mobile Library

	•	QuickSec IPS

	•	QuickSec Toolkit for Access Networks


	•	QuickSec Toolkit for SAN

	•	Secure Shell Toolkit

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


	•	SafeXcel^tm: SafeXcel^tm 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 SSL, encryption. Our SafeXcel^tm product line includes the following series:


	•	SafeXcel^tm Momentum Series. The SafeXcel^tm 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.


	•	SafeXcel-1140

	•	SafeXcel-1141

	•	SafeXcel-1741

	•	SafeXcel-1840

	•	SafeXcel-1841

	•	SafeXcel-1842


	•	SafeXcel^tm Velocity Series. The SafeXcel^tm 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:


	•	SafeXcel-2010, which supports 50 Mbps of IPSec throughput; and

	•	SafeXcel-ISES, an SSL accelerator used in SSL appliances.


	•	SafeXcel^tm Transaction Series. The SafeXcel^tm 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 applications (SafeXcel-810).

	•	SafeXcel^tm Content Inspection Series. This line of silicon chip is targeted at content inspection applications such as intrusion detection and prevention, application firewalls and anti-virus protection. The first product in this series is the SafeXcel-4850 silicon chip, which we developed using technology acquired from Raqia. Our Content Inspection Series enables deep packet inspection, allowing pattern matching at all layers of a communication protocol stack, including the application layer, at wire speeds (SafeXcel-4850).


	•	SafeXcel^tm Cards. SafeXcel^tm Cards are accelerator PCI 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.

SafeZone IP 2.0. SafeZone IP 2.0 is the hardware security foundation essential to security-sensitive applications such as digital rights management (DRM), m-commerce, consumer entertainment, enterprise applications (VPN, Firewall), and antifraud solutions. Designed for cost-effective integration into any mobile or consumer device, it provides a complete platform supporting secure authentication, key management, decryption of protected content, and robust digital rights management.

SafeXcel^tm IP. SafeXcel IP 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. SafeXcel IP 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. SafeXcel IP can be licensed in the following blocks:


	•	Encryption Engines: DES/3DES, AES;

	•	Hash Engines: SHA-1, MD5;

	•	Packet Engines: IPSec, SSL;

	•	Public Key Accelerators: RSA, DSA, and Diffie-Hellman; and

	•	Entropy-based True Random Number Generator (RNG).


	*Rights Management Solutions.*


	Sentinel Rights Management Suite

SafeNet’s Rights Management suite, featuring Sentinel anti-piracy and license management products, enable application developers and appliance manufacturers to defend against the revenue leakage and market erosion caused by piracy and licensing non-compliance and consists of the following products:


	•	Sentinel SuperPro Sentinel’s line of intellectual property protection hardware keys;

	•	Sentinel UltraPro Sentinel’s latest full-featured line of hardware keys that speed integration, manage licenses and offer the highest level security against piracy and license non-compliance; and

	•	Sentinel LM Sentinel’s robust electronic license management software supporting flexible licensing models, dynamic product packaging and electronic license distribution.


	Technology

Our portfolio of VPN security products is based on SecureIP Technology^tm. 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.

Customers and Customer Support

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

Our significant end-user (Enterprise) customers include:


	•	Government: the U.S. Department of Defense, the National Security Agency, the U.S. Department of State, the U.S. Department of the Treasury, including the Internal Revenue Service, and the U.S. Department of Homeland Security including the U.S. Customs Service and Immigration and Naturalization Service.

	•	Financial Institutions: Citigroup, UBS, JPMorgan Chase and SWIFT.

Our significant OEM (Embedded) customers include:


	•	Cisco Systems, Microsoft, WatchGuard, NetScreen, TALLY Systems, 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 from ninety days to two years 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.

Sales and Marketing

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.

To achieve these objectives, our marketing program includes:


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

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

	•	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 conference in Washington, DC;

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

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

	•	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 Industry and Security, 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.

Product Development

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:


	•	Developing wireless security products;

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


	•	Further incorporating in our product lines high assurance security techniques derived from joint development initiatives with U.S. government agencies. For example, we have entered into a contract with the Department of Defense to develop a classified level software client.

We will continue to devote resources to the latest security technology and to meet the increasing demands of our customers and the market. Our internal research and development expenses were $24.2 million on a historical basis for the year ended December 31, 2004, $14.7 million for the year ended December 31, 2003 and $8.5 million on a historical basis for the year ended December 31, 2002.

Backlog

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. Our backlog as of December 31, 2004 was approximately $51.4 million, which we expect to realize in 2005.

Contract Manufacturing

SafeNet designs and develops or participates in the design and development of all key components of our appliances, software and silicon chips, which are fabricated by contract manufacturers and chip foundries. Our silicon chips are primarily manufactured by Samsung, VLSI, Analog Devices and Toshiba. We outsource the manufacturing of our appliance and token products primarily to ISO 9001/ 2000 registered privately-held contract manufacturers. Where we have high volume operations, SafeNet employees reside at the contract manufacturer on a full time basis to assure our quality levels are maintained and we are allocated appropriate levels of capacity to meet our on time delivery targets. The outsourced operations include engineering prototypes, pre-production runs, full turnkey box-builds 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. In order to maintain control over costs, SafeNet has manufacturing service agreements with all key appliance and token contract manufacturers and has negotiated contract pricing with all chip foundries. 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.

Competition

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.

Competitors for our Enterprise Security Division include:


	•	General Dynamics, L3 Communications, NetScreen, Thales, Cisco Systems and Nortel Networks.

Competitors for our Embedded Security Division include:


	•	Aladdin, Discretix, HiFn, Cavium and Certicom.

Patents and Intellectual Property

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 53 United States and foreign patents and have additional pending foreign and domestic patent applications. Our patents and patent applications protect various aspects of our network security technology and have expiration dates ranging from 2005 to 2022.

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 make assurances 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 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.

Employees

As of December 31, 2004, we had 812 employees, including transitional employees, of whom 63 are engaged in production and quality control, 158 in administration and financial control, 410 in engineering, development, and client support, and 181 in sales and marketing. We employ 464 employees in the United States and 348 employees internationally.

RISKS RELATED TO OUR BUSINESS


	*We have a history of losses and if we fail to execute our growth strategy, our business could be materially and adversely affected.*

We experienced substantial net losses, as reported in accordance with generally accepted accounting principles in the United States (GAAP), in 2002 and 2003. As of December 31, 2004, we had an accumulated deficit of $24.1 million. We intend to maintain or increase our expenditures in all areas in order to execute our business plan. As a result, we may continue to incur substantial net losses in the future. The likelihood of our success must be considered in light of the problems, expenses and delays frequently encountered in connection with new technologies, the design and manufacture of information technology security solutions, and the competitive environment in which we operate. You should not consider our historical results and recent growth as being indicative of future revenue levels or operating results. We can neither give assurance that we will operate profitably in the future nor that profitability will be sustained if it is achieved.


	*The loss of significant customers could have a material adverse effect on our business and results of operations.*

We were dependent on four customers for a majority of our consolidated revenues for the year ended December 31, 2004. We have one enterprise customer, a major U.S. Federal Agency, that accounted for 41% of our consolidated revenues for 2004. We had one OEM customer, Cisco Systems, that accounted for 13% of our revenues for 2003. In 2002, Cisco Systems announced the selection of a different vendor for some of its next generation chip technology, which began to impact our revenues in the second quarter of 2003. While Cisco Systems continues to be a major revenue source for us, it is not under any obligation to continue to purchase products and services from us. If our sales to this customer or to our other significant customers decline, our business, financial condition and results of operations could suffer. Any loss of governmental customers could have a material adverse effect on our business and prospects. In addition, we regularly license some of our products to customers who compete with us in other product categories. This potential conflict may deter existing and potential future customers from purchasing or licensing some of our products.


	*We may not be able to successfully integrate companies we acquire in the future.*

There has been substantial consolidation in the security industry, and we expect this consolidation to continue in the near future. As a result of this consolidation, we expect to increasingly compete against larger competitors with broader product offerings and greater resources, including software vendors, network providers and manufacturers of networking and computer equipment and communications devices. In order to remain competitive, we may from time to time pursue acquisitions of businesses that complement or expand our existing business, including acquisitions that could be material in size and scope.

Any future acquisitions will involve various risks, including:


	•	difficulties in integrating the operations, technologies and products of the acquired company, which can be particularly challenging when dealing with complex security technologies;

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

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

	•	insufficient revenues to offset increased expenses associated with the acquisition; and

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

We cannot assure you that our acquisitions will be successful and will not materially adversely affect our business, operating results, or financial condition. We must also manage any growth resulting from such acquisitions effectively. Failure to manage growth effectively and successfully integrate the acquired company’s operations could have a material adverse effect on our business and operating results.


		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 acquisitions of Rainbow Technologies and Datakey will continue to provide us with an opportunity to sell new products and services into the larger combined customer base.

	•	Target the Government and Financial Institution Markets. We have established and created a Government Solutions Sales Unit to focus not just on government agencies and departments, but also on systems integrators to produce more multi-year large dollar contracting opportunities. We intend to expand our position in these markets and leverage this position to target new high growth market opportunities as they arise. For example, our subsidiary Mykotronx, Inc. delivered nearly 100 of its KIV-7HSB high assurance encryption products to a major Homeland Security systems integrator.

	•	Further penetrate the Digital Rights Management market. We have established a Rights Management Business Unit as part of our Embedded Security Division to develop new initiatives for its Sentinel brand of software protection and license management products.. Through this new business we have begun to offer the next generation in digital rights management software with Sentinel UltraPro.

	•	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, servers, and software products. For example, we teamed our Luna Series of products with Adobe’s document services to help customers deploy more secure documents on the Adobe Intelligent Document Platform. We offer comprehensive training and marketing programs to support our OEMs and channel partners. We intend to further develop our relationships with system integrators for the government sector and value added resellers for international markets. For example, Ingram Micro joined SafeNet’s Security Partner Alliance Program in 2004.

	•	Target the Wireless Market. We continue to target the wireless communications market, expanding our reach from semiconductor companies to handset and cell phone manufacturers. We are currently in the process of developing additional security technology that will address the growing need for secure wireless communication.

	•	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.