<PAGE>

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

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

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

                                   FORM 10-Q
       (Mark one)

    [X]  Quarterly report pursuant to Section 13 or 15(d) of the Securities
                              Exchange Act of 1934

                      FOR THE QUARTER ENDED MARCH 31, 2001

                                       OR

    [_]  Transition report pursuant to Section 13 or 15(d) of the Securities
                              Exchange Act of 1934

                        COMMISSION FILE NUMBER 000-24733

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

                           ENTRUST TECHNOLOGIES INC.
             (Exact name of registrant as specified in its charter)



               MARYLAND                               62-1670648
     (State or other jurisdiction of       (IRS employer identification no.)
     incorporation or organization)

                             ONE PRESTON PARK SOUTH
                       4975 PRESTON PARK BLVD., SUITE 400
                                PLANO, TX 75093
              (Address of principal executive offices & zip code)

       Registrant's telephone number, including area code: (972) 943-7300


     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  [ ]

     There were 63,075,050 shares of the registrant's $.01 par value Common
stock outstanding as of May 11, 2001.

--------------------------------------------------------------------------------
<PAGE>

                           ENTRUST TECHNOLOGIES INC.

                               TABLE OF CONTENTS



PART I. FINANCIAL INFORMATION                                               Page
                                                                            ----
  Item 1.  Financial Statements
           Condensed Consolidated Balance Sheets...........................   3
           Condensed Consolidated Statements of Operations.................   4
           Condensed Consolidated Statements of Cash Flows.................   5
           Notes to Condensed Consolidated Financial Statements............   6

  Item 2.  Management's Discussion and Analysis of Financial Condition and
           Results of Operations...........................................   9

  Item 3.  Quantitative and Qualitative Disclosures about Market Risk......  21

PART II. OTHER INFORMATION

  Item 1.  Legal Proceedings...............................................  22

  Item 2.  Changes in Securities and Use of Proceeds.......................  23

  Item 6.  Exhibits and Reports on Form 8-K................................  23

SIGNATURES.................................................................  24


     Entrust and getAccess are registered trademarks of Entrust Technologies
Inc. or a subsidiary of Entrust Technologies Inc. in certain countries.
Entrust.Net is a trademark of Entrust Technologies Inc. or a subsidiary of
Entrust Technologies Inc. in certain countries. All other trademarks and service
marks used in this quarterly report are the property of their respective owners.

                                       2
<PAGE>

PART I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS


                           ENTRUST TECHNOLOGIES INC.

                     CONDENSED CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                             (Unaudited)
                                               DECEMBER 31,   MARCH 31,
                                               ------------  ----------
                                                   2000          2001
                                                   ----          ----
(In thousands)

<S>                                            <C>           <C>
ASSETS
Current assets:
  Cash and cash equivalents...................  $  24,241   $  17,200
  Short-term marketable investments...........    203,446     178,351
  Accounts receivable, (net of allowance for
   doubtful accounts of $2,932 at December
   31, 2000 and $3,717 at March 31, 2001).....     46,301      41,167
  Prepaid expenses and other..................      9,603      10,616
                                                ---------   ---------
    Total current assets......................    283,591     247,334
Property and equipment, net...................     25,168      27,827
Purchased product rights, net.................     19,259      17,882
Goodwill, net.................................    365,127     338,432
Other purchased intangibles, net..............     22,054      19,849
Long-term investments.........................     16,675      18,110
Other long-term assets, net...................      2,232       3,054
                                                ---------   ---------
    Total assets..............................  $ 734,106   $ 672,488
                                                =========   =========


LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
 Accounts payable.............................  $  16,989   $  17,325
 Accrued liabilities..........................     22,311       9,734
 Deferred revenue.............................     19,466      20,710
 Due to related party.........................        799         799
                                                ---------   ---------
    Total current liabilities.................     59,565      48,568
Long-term liabilities.........................        477         399
                                                ---------   ---------
    Total liabilities.........................     60,042      48,967
                                                ---------   ---------
Shareholders' equity:
 Common stock, par value $0.01 per share;
  62,753,738 and 63,067,916 issued and
  outstanding shares at December 31, 2000
  and March 31, 2001, respectively............        628         631
 Additional paid-in capital...................    775,604     777,525
 Unearned compensation........................       (316)       (260)
 Accumulated deficit..........................   (101,518)   (152,397)
 Accumulated other comprehensive loss.........       (334)     (1,978)
                                                ---------   ---------
    Total shareholders' equity................    674,064     623,521
                                                ---------   ---------
    Total liabilities and shareholders'
     equity...................................  $ 734,106   $ 672,488
                                                =========   =========
</TABLE>


     See accompanying notes to condensed consolidated financial statements

                                       3
<PAGE>

                           ENTRUST TECHNOLOGIES INC.

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                 (Unaudited)
                                                             THREE MONTHS ENDED
                                                                  MARCH 31,
                                                                  --------
                                                               2000       2001
                                                               ----       ----
(In thousands, except per share data)

<S>                                                          <C>       <C>
Revenues:
  License..................................................   $20,889   $ 10,559
  Services and maintenance.................................     8,173     20,946
                                                              -------   --------
    Total revenues.........................................    29,062     31,505
                                                              -------   --------
Cost of revenues:
  License..................................................       937        901
  Services and maintenance.................................     4,568     13,346
                                                              -------   --------
    Total cost of revenues.................................     5,505     14,247
                                                              -------   --------
Gross profit...............................................    23,557     17,258
                                                              -------   --------
Operating expenses:
  Sales and marketing......................................    12,857     26,580
  Research and development.................................     4,993      9,487
  General and administrative...............................     2,192      4,687
  Amortization of purchased product rights.................         -      1,377
  Amortization of goodwill and other purchased
   intangibles.............................................       661     28,900
                                                              -------   --------
    Total operating expenses...............................    20,703     71,031
                                                              -------   --------
Income (loss) from operations..............................     2,854    (53,773)
Investment income..........................................     1,886      3,244
                                                              -------   --------
Income (loss) before provision for income taxes............     4,740    (50,529)
Provision for income taxes.................................     1,422        350
                                                              -------   --------
Net income (loss)..........................................   $ 3,318   $(50,879)
                                                              =======   ========

Net income (loss) per share:
    Basic..................................................   $  0.07   $  (0.81)
    Diluted................................................   $  0.06   $  (0.81)
Weighted average common shares used in per
 share computations:
    Basic..................................................    49,250     62,911
    Diluted................................................    57,760     62,911
</TABLE>



     See accompanying notes to condensed consolidated financial statements


                                       4
<PAGE>

                           ENTRUST TECHNOLOGIES INC.

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                          (Unaudited)
                                                                      THREE MONTHS ENDED
                                                                           MARCH 31,
                                                                           ---------
                                                                         2000       2001
                                                                         ----       ----
(In thousands)

<S>                                                                   <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)................................................   $  3,318    $(50,879)
  Adjustments to reconcile net income (loss) to net cash
   provided by (used in) operating activities:
    Depreciation and amortization..................................      1,527      32,503
    Unearned compensation amortized................................         58          56
    Revenue from non-monetary transaction..........................         --        (353)
  Changes in operating assets and liabilities, net of
   effects of acquisitions:
    (Increase) decrease in accounts receivable.....................     (3,080)      4,295
    Increase in prepaid expenses and other.........................       (149)       (764)
    Increase in accounts payable...................................      1,491         260
    Increase (decrease) in accrued liabilities.....................      1,257     (12,873)
    Increase in deferred revenue...................................        446         950
                                                                      --------    --------
      Net cash provided by (used in) operating activities..........      4,868     (26,805)
                                                                      --------    --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of marketable investments..............................    (24,140)    (47,623)
  Dispositions of marketable investments...........................     35,187      72,778
  Purchases of property and equipment..............................     (1,075)     (5,073)
  Increase in long-term investments................................       (190)     (1,496)
  Increase in other long-term assets...............................         --      (1,016)
  Net cash payments in purchase transactions.......................    (15,649)         --
                                                                      --------    --------
      Net cash provided by (used in) investing activities..........     (5,867)     17,570
                                                                      --------    --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Repayment of long-term liabilities...............................         (3)        (72)
  Proceeds from exercise of stock options and employee stock
   purchase plan...................................................      4,897       1,924
  Proceeds from issuance of common stock, net of issuance costs....    161,513          --
                                                                      --------    --------
      Net cash provided by financing activities....................    166,407       1,852
                                                                      --------    --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH............................        601         342
                                                                      --------    --------
NET INCREASE IN CASH AND CASH EQUIVALENTS..........................    166,009      (7,041)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD...................     21,877      24,241
                                                                      --------    --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.........................   $187,886    $ 17,200
                                                                      ========    ========
</TABLE>

     See accompanying notes to condensed consolidated financial statements

                                       5
<PAGE>

                           ENTRUST TECHNOLOGIES INC.

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)
                (In thousands, except share and per share data)


NOTE 1.   BASIS OF PRESENTATION

     The accompanying unaudited condensed consolidated financial statements have
been prepared on the same basis as the audited annual consolidated financial
statements and, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position, results of operations and cash flows.
The results of operations for the three months ended March 31, 2001 are not
necessarily indicative of the results to be expected for the full year. Certain
information and footnote disclosures normally contained in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. These condensed consolidated financial statements should
be read in conjunction with the Notes to Consolidated Financial Statements for
the year ended December 31, 2000 contained in Entrust Technologies Inc.'s Form
10-K.

NOTE 2.   NET INCOME (LOSS) PER SHARE AND SHARES OUTSTANDING

     Basic net income (loss) per share is computed by dividing the net income
(loss) by the weighted average number of shares of Common stock of all classes
outstanding during the period.  Diluted net income (loss) per share is computed
by dividing the net income (loss) by the weighted average number of shares of
Common stock and potential Common stock outstanding, and when dilutive,
exchangeable Special Voting stock on an as-if exchanged basis, and options to
purchase Common stock using the treasury stock method.  The dilutive effect of
the exchangeable Special Voting stock and the options to purchase Common stock
are excluded from the computation of diluted net income (loss) per share if
their effect is antidilutive.  For the three months ended March 31, 2001, the
antidilutive effect excluded from the diluted net loss per share computation due
to the options to purchase Common stock was 2,889,126 shares.

     In the three months ended March 31, 2001, the Company issued 314,178 shares
of Common stock related to the exercise of employee stock options and the sale
of shares under the employee stock purchase plan.

NOTE 3.   INVESTMENTS AND EQUITY HEDGING INSTRUMENT

     The Company maintains marketable investments mainly in a strategic cash
management account.  This account is invested primarily in highly rated
corporate securities, in securities guaranteed by the U.S. government or its
agencies and highly rated municipal bonds, with a remaining maturity of not more
than 12 months.  The Company has the intent and ability to hold all investments
until maturity.  Therefore, all such investments are classified as held to
maturity investments, in current assets, and are stated at amortized cost.  At
March 31, 2001, the amortized cost of the Company's held to maturity investments
approximated fair value.

     In addition, the Company has invested in an equity instrument of a
publicly traded technology company.  This investment has been classified as
available for sale, in current assets, and is carried at fair value based on
quoted market prices. This instrument is considered to be short-term in nature
as it is management's intention to dispose of this investment within the year.
Realized gains and losses on disposition of available for sale marketable
investments are included in investment income in the results of operations.
Unrealized gains and losses are included in other comprehensive income, except
that the portion designated as being hedged in a fair value hedge is recognized
in investment income during the period of the hedge.

                                       6
<PAGE>

     The Company has a policy that allows for the use of hedges on equity
investments in publicly traded companies.  The Company had entered into and
designated such a hedge on the investment classified as available for sale, in
the form of a call option hedge that enables the Company to receive, from the
investee, a combination of cash and additional in-kind equity securities equal
to any deficiency between the original cost basis of the equity securities and
the aggregate of the market values on the dates that the securities are made
available for sale on the applicable public equity market.  This option is
accounted for as a "fair value hedge" in accordance with SFAS No. 133.  As of
March 31, 2001, the fair value of the call option was $1,776, which is equal to
the total of the realized and unrealized losses on the related investment.

     Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities", as amended by SFAS No. 137
and SFAS No. 138, which establishes accounting and reporting standards for
derivative financial instruments and hedging activities and requires the
recognition of all derivatives as either assets or liabilities on the balance
sheet and measurement at fair value.  The adoption of SFAS No. 133 did not have
a significant impact on the Company's financial position or results of
operations because the Company is engaged in limited derivatives use. In
implementing SFAS No. 133, the Company reclassified both the unrealized loss on
the investment and the offsetting unrealized gain on the related hedge of $1,457
from accumulated other comprehensive income to results of operations with zero
net effect on earnings.

     The Company holds equity securities stated at cost, which represent long-
term investments in private companies made for business and strategic alliance
purposes.  The Company's ownership share in these companies ranges from 1% to
10% of their voting share capital.  Consistent with the Company's policies for
other long-lived assets, the carrying value of these long-term investments is
periodically reviewed for impairment based upon such quantitative measures as
undiscounted cash flows as well as qualitative factors.  In addition, the
Strategic Investment Committee of the Board of Directors monitors and assesses
the ongoing operating performance of the underlying companies for evidence of
impairment.  No loss from impairment had been recorded as of March 31, 2001.

     The Company recorded revenues representing less than 2% of total revenues
for the three months ended March 31, 2001, with respect to arm's-length
transactions with companies in which it has made strategic equity investments
recorded at cost.


NOTE 4.   SEGMENT AND GEOGRAPHIC INFORMATION

Segment information

     The Company conducts business in one operating segment: the design,
production and sale of software products and related services for encryption,
digital signature and authorization. The nature of the Company's products and
services is similar and, in general, the type of customers for these products
and services is not distinguishable. The Company does, however, prepare
information for internal use by the Chief Operating Decision Maker ("CODM"), the
President and Chief Executive Officer, on a geographic basis. Accordingly, the
Company has included a summary of the segment financial information reported to
the CODM as follows in the next section regarding geographic information.

Geographic information

     Revenues are attributed to specific geographical areas based on where the
sales order originated.  Company assets are identified with operations in the
respective geographic areas.

                                       7
<PAGE>

     The Company operates in three main geographic areas as follows:

<TABLE>
<CAPTION>
                                                                                              (Unaudited)
                                                                                           Three Months Ended
                                                                                           ------------------
                                                                                               March 31,
                                                                                               ---------

                                                                                         2000                2001
                                                                                         ----                ----
<S>                                                                                    <C>                <C>

Revenues:
      United States.........................................................           $ 17,109            $ 14,212
      Canada................................................................              6,602               5,895
      Europe, Asia and Other................................................              5,351              11,398
                                                                                       --------            --------

          Total revenues....................................................           $ 29,062            $ 31,505
                                                                                       ========            ========

Income (loss) before income taxes:
      United States.........................................................           $  2,063            $(41,903)
      Canada................................................................              2,445             (10,020)
      Europe, Asia and Other................................................                232               1,394
                                                                                       --------            --------

          Total income (loss) before income taxes...........................           $  4,740            $(50,529)
                                                                                       ========            ========
</TABLE>

<TABLE>
<CAPTION>
                                                                                                         (Unaudited)
                                                                                      December 31,        March 31,
                                                                                         2000                2001
                                                                                         ----                ----
<S>                                                                                   <C>                <C>

Total assets:
      United States.........................................................           $671,103            $604,687
      Canada................................................................             45,628              50,514
      Europe, Asia and Other................................................             17,375              17,287
                                                                                       --------            --------

          Total.............................................................           $734,106            $672,488
                                                                                       ========            ========
</TABLE>




NOTE 5.   COMPREHENSIVE INCOME (LOSS)

     The components of comprehensive income (loss) are as follows:

<TABLE>
<CAPTION>
                                                                                         (Unaudited)
                                                                                         Three Months
                                                                                         ------------
                                                                                        Ended March 31,
                                                                                        ---------------

<S>                                                                                <C>              <C>
                                                                                     2000              2001
                                                                                     ----              ----

Net income (loss)..............................................................    $3,318           $(50,879)
Translation adjustments........................................................       601             (1,643)
                                                                                   ------           --------
Comprehensive income (loss)....................................................    $3,919           $(52,522)
                                                                                   ======           ========
</TABLE>

NOTE 6.   LEGAL PROCEEDINGS

        On July 7, 2000, an action entitled Frankel v. Entrust Technologies
Inc., et al., No. 2-00-CV-119, was filed against the Company and certain of its
officers. The action was filed in the U.S. District Court for the Eastern
District of Texas. Subsequently, several similar actions were filed in the same
court. All of these actions have been consolidated. On January 22, 2001, a
consolidated amended complaint was filed. The consolidated amended complaint
purports to be a class action lawsuit brought on behalf of persons who purchased
or otherwise acquired the Company's common stock during the period from October
19, 1999 through July 3, 2000. The complaint alleges that the defendants
misrepresented and failed to disclose certain information about the Company's
business and prospects. The complaint asserts claims under the Securities
Exchange Act of 1934. The complaint does not specify the amount of damages
sought. No trial date or other schedule has been established. The Company
believes this class action is without merit and intends to deny all material
allegations and to defend itself vigorously. An adverse judgment or settlement
in this lawsuit could have a significant adverse impact on the Company's future
financial condition or results of operations.

        The Company is subject to various other legal proceedings and claims,
either asserted or unasserted, which arise in the ordinary course of business.
While the outcome of these claims cannot be predicted with certainty, management
does not believe that the outcome of any of these other legal matters will have
a material adverse effect on the Company's consolidated results of operations or
consolidated financial position.

                                       8
<PAGE>

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

     This report contains forward-looking statements that involve risks and
uncertainties. The statements contained in this report that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including without limitation statements regarding our expectations,
beliefs, intentions or strategies regarding the future. All forward-looking
statements included in this report are based on information available to us, up
to and including, the date of this document, and we assume no obligation to
update any such forward-looking statements.  Our actual results could differ
significantly from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth below, under "Overview",
"Certain Factors that May Affect Our Business" and elsewhere in this report.  We
undertake no obligation to update any forward-looking statements.

OVERVIEW

     We are the leading global provider of public-key infrastructure, or PKI,
and authorization products and services to e-businesses and other organizations.
We are committed to enabling organizations to conduct e-commerce securely,
ensuring that they benefit from increased service efficiency, technology cost
savings and the confidence associated with trusted e-business technologies. Our
products and services enable organizations and their partners to manage trusted,
secure electronic transactions and communications over today's advanced
networks, including intranets, extranets and the Internet.  Since 1994, we have
provided our award-winning PKI solution primarily to global enterprises and
government entities, as well as small- to mid-sized businesses and individuals.
To date, over six million users worldwide have been licensed to use Entrust
products.

     Our quarterly operating results have varied substantially in the past and
are likely to vary substantially from quarter to quarter in the future due to a
variety of factors. In particular, our period-to-period operating results are
significantly dependent upon the completion date of large license agreements. In
this regard, the purchase of our products often requires a significant capital
investment, which customers may view as a discretionary cost, and, therefore, a
purchase that can be deferred or canceled due to budgetary or other business
reasons.  Estimating future revenues is also difficult because we ship our
products soon after an order is received and, therefore, we do not have a
significant backlog. Thus, quarterly license revenues are heavily dependent upon
orders received and shipped within the same quarter. Moreover, we have generally
recorded a significant portion of our total quarterly revenues in the third
month of a quarter, with a concentration of these revenues in the last half of
that third month. This concentration of revenues is influenced by customers'
tendencies to make significant capital expenditures at the end of a fiscal
quarter. We expect these revenue patterns to continue for the foreseeable
future. In addition, quarterly license revenues are dependent on the timing of
revenue recognition, which can be affected by many factors, including the timing
of customer installations and acceptance.  Accordingly, we have from time to
time experienced delays in recognizing revenues with respect to certain orders.
In any period a significant portion of our revenue may be derived from large
sales to a limited number of customers.  Despite the uncertainties in our
revenue patterns, our operating expenses are based upon anticipated revenue
levels and such expenses are incurred on an approximately ratable basis
throughout the quarter.   As a result, if expected revenues are delayed or
otherwise not realized in a quarter for any reason, our business, operating
results and financial condition would be adversely affected in a significant
way.  See "Certain Factors That May Affect Our Business".

                                       9
<PAGE>

RESULTS OF OPERATIONS

     The following table sets forth certain condensed consolidated statement of
operations data expressed as a percentage of total revenues for the periods
indicated:

<TABLE>
<CAPTION>
                                                                (Unaudited)
                                                            THREE MONTHS ENDED
                                                                 MARCH 31,
                                                                 ---------
                                                               2000      2001
                                                               ----      ----
<S>                                                          <C>       <C>

Revenues:
  License...................................................   71.9%     33.5%
  Services and maintenance..................................   28.1      66.5
                                                             ------    ------

      Total revenues........................................  100.0     100.0
                                                             ------    ------

Cost of revenues:
  License...................................................    3.2       2.8
  Services and maintenance..................................   15.7      42.4
                                                             ------    ------

      Total cost of revenues................................   18.9      45.2
                                                             ------    ------

Gross profit................................................   81.1      54.8
                                                             ------    ------

Operating expenses:
  Sales and marketing.......................................   44.3      84.4
  Research and development..................................   17.2      30.1
  General and administrative................................    7.5      14.9
  Amortization of purchased product rights..................      -       4.4
  Amortization of goodwill and other purchased intangibles..    2.3      91.7
                                                             ------    ------

      Total operating expenses..............................   71.3     225.5
                                                             ------    ------

Income (loss) from operations...............................    9.8    (170.7)
Investment income...........................................    6.5      10.3
                                                             ------    ------

Income (loss) before provision for
   income taxes.............................................   16.3    (160.4)
Provision for income taxes..................................    4.9       1.1
                                                             ------    ------

Net income (loss)...........................................   11.4%   (161.5)%
                                                             ======    ======
</TABLE>

REVENUES

     We generate revenues from licensing the rights to our software products to
end-users and, to a lesser extent, from sublicense fees from resellers. We also
generate revenues from consulting, training and post-contract support, or
maintenance, performed for customers who license our products. We recognize
revenues in accordance with the provisions of the American Institute of
Certified Public Accountants' Statement of Position ("SOP") No. 97-2,
"Software Revenue Recognition" and SOP No. 98-9, "Modifications of SOP 97-2,
Software Revenue Recognition, with Respect to Certain Transactions".

                                       10
<PAGE>

     Revenues from perpetual software license agreements are recognized as
revenue upon receipt of an executed license agreement, or an unconditional order
under an existing license agreement, and shipment of the software, if there are
no significant remaining vendor obligations, collection of the receivable is
probable and payment is due within twelve months.

     Revenues from maintenance services are recognized ratably over the term of
the maintenance period, which is typically one year. If maintenance services are
included free of charge or discounted in a license agreement, such amounts are
unbundled from the license fee at their fair market value based upon the value
established by independent sales of such maintenance to customers. Revenues from
the sale of Entrust.Net(TM) Web server certificates are also recognized ratably
over the term of the certificate (typically one to two years).

     Consulting and training revenues are generally recognized as the services
are performed. Consulting services are typically performed under separate
service agreements and are usually performed on a time and materials basis. Such
services primarily consist of implementation services related to the
installation and deployment of our products and do not include significant
customization or development of the underlying software code.

     We use the percentage of completion method to account for fixed price
custom development contracts. Under this method, we recognize revenue and profit
as the work on the contract progresses. Revenues are recognized by applying the
percentage of the total cost incurred to date divided by the total estimated
contract cost to the total contract value, and any projected loss is recognized
immediately. The total project cost estimates are reviewed on a regular basis.


Total Revenues

     Total revenues increased 8% from $29.1 million for the three months ended
March 31, 2000 to $31.5 million for the three months ended March 31, 2001.
Total revenues derived from North America decreased 15% from $23.7 million for
the three months ended March 31, 2000 to $20.1 million for the three months
ended March 31, 2001, while total revenues derived from outside of North America
increased 111% from $5.4 million for the three months ended March 31, 2000 to
$11.4 million for the three months ended March 31, 2001.  The majority of the
overall growth in total revenues in the first three months of 2001 was
experienced outside of North America, which is reflective of the resources
invested to focus on those regions in recent quarters. We focused on growing our
revenue base internationally, particularly in Europe, Asia and South America,
which resulted in a significant increase in non-North American revenues in the
three months ended March 31, 2001 compared to the same quarter in 2000. However,
the level of non-North American revenues has fluctuated from period to period
and this trend is expected to continue for the foreseeable future. In the first
quarter of 2001, no single customer accounted for 10% or more of total revenues.


License Revenues

     License revenues decreased 49% from $20.9 million for the three months
ended March 31, 2000 to $10.6 million for the three months ended March 31, 2001,
representing 72% and 34% of total revenues in the respective periods. The
decrease in license revenues in absolute dollars was primarily due to the
slowing of the global economy, particularly the economic downturn experienced
in North America. The types of license transactions most significantly impacted
by the less favorable economic conditions were those license transactions
greater than $500,000 in value, which normally represent a substantial
deployment to a broad base of users or the addition of new applications to
customers' previously installed infrastructure. The rapid global downturn has
had a significant impact on information technology projects and, as a result,
customers could not make the commitments we were expecting at the end of the
first quarter of 2001. License revenues as a percentage of total revenues
decreased for the three months ended March 31, 2001 compared to the same period
in 2000, partly due to continued strong demand for services and maintenance from
our customers and increased professional services revenues from the addition of
CygnaCom Solutions, Inc. in March 2000, and enCommerce, Inc. in June 2000, and
partly due to decreased license revenues in the first three months of 200l.

                                       11
<PAGE>

Services and Maintenance Revenues

     Services and maintenance revenues increased 155% from $8.2 million for the
three months ended March 31, 2000 to $20.9 million for the three months ended
March 31, 2001, representing 28% and 66% of total revenues in the respective
periods.  The increase in services and maintenance revenues in absolute dollars
was primarily the result of an increase in demand for consulting services and
customer support, the acquisitions of CygnaCom and enCommerce, and increases in
maintenance revenues from a larger installed product base and strong customer
renewals of annual maintenance agreements.  The growth in our customer base
resulted in acceleration in the demand from customers to assist them in
deploying our solutions, as well as strong demand to outsource our solutions on
their behalf.  We have invested heavily in additional professional services
resources in response to this increased demand from customers.  In addition,
revenue from our Entrust.Net(TM) certification authority business, which began
operating in May 1999, started to contribute significantly to total services and
maintenance revenues in the latter part of 2000 and in the first quarter of
2001. The increase in services and maintenance revenues as a percentage of total
revenues reflected a continuing shift in mix of revenues from license to service
and maintenance revenues in the first quarter of 2001 compared to the same
period in 2000.  This shift was largely due to the continued growth of our
services and maintenance business in response to customer demand, the impact of
the professional services revenues of CygnaCom and enCommerce since their
respective acquisitions, and the decrease in license revenues in the first
quarter of 2001.  We continue to focus on developing new service offerings for
our customers and also on building our relationships with third-party service
providers so that we have adequate resources available to meet the demand of our
customers.


COST OF REVENUES

Cost of License Revenues

     Cost of license revenues consists primarily of costs associated with
product media, documentation, packaging and royalties to third-party software
vendors.  Amortization of purchased product rights acquired as part of the
acquisition of enCommerce has been excluded from cost of license revenues and
instead has been included in operating expenses.  Cost of license revenues
decreased from $937,000 for the three months ended March 31, 2000 to $901,000
for the three months ended March 31, 2001, representing 3% of total revenues in
each of the respective periods.  The decrease in cost of license revenues in
absolute dollars was primarily a result of lower royalty fees paid to third-
party software vendors, which reflects the decrease in license revenues in
general for the first three months of 2001, compared to the same period in 2000.
The mix of third-party products may vary from period to period and,
consequently, our gross margins and results of operations could be adversely
affected.

Cost of Services and Maintenance Revenues

     Cost of services and maintenance revenues consists primarily of personnel
costs associated with customer support, training and consulting services, as
well as amounts paid to third-party consulting firms for these services.  Cost
of services and maintenance revenues increased from $4.6 million for the three
months ended March 31, 2000 to $13.3 million for the three months ended March
31, 2001, representing 16% and 42% of total revenues for the respective periods.
The increase in absolute dollars during the three months ended March 31, 2001
reflected the increased costs associated with the increased levels of services
and maintenance revenues experienced in this period and the increased costs
associated with the CygnaCom and enCommerce resources.  The increase in the cost
of services and maintenance revenues as a percentage of total revenues in the
three months ended March 31, 2001 reflected the rapid growth of services and
maintenance revenues in comparison to license revenues, and reflected the
significant shift in the mix of revenues from license to services and
maintenance revenues in the first quarter of 2001 compared to the first quarter
of 2000.  As the services and maintenance revenues represented the larger
proportion of total revenues and grew faster than total revenues, the cost of
generating those services and maintenance revenues represented a much larger
percentage when compared against total revenues, because significant investment
was necessary in order to prepare for current and future growth in this
business.  Also, we made significant investments in additional customer support
personnel to support the growing base of customers with previously installed
products.

                                       12
<PAGE>

     Services and maintenance gross profit as a percentage of services and
maintenance revenues was 44% and 36% for the three months ended March 31, 2000
and 2001, respectively.  This decrease in the services and maintenance gross
profit as a percentage of services and maintenance revenues for the three months
ended March 31, 2001, compared to the same period in 2000, reflected the
investment we made in the professional services team through the acquisition of
CygnaCom late in the first quarter of 2000 and enCommerce at the end of the
second quarter of 2000, which represented a slight shift in the mix of overall
services revenues toward the lower-margin professional services revenues.  Also,
the decrease in the services and maintenance gross profit as a percentage of
services and maintenance revenues reflected the investment made in additional
customer support personnel since the first quarter of 2000, and the continued
development and rollout of our new services offerings.

OPERATING EXPENSES

Sales and Marketing

     Sales and marketing expenses increased from $12.9 million for the three
months ended March 31, 2000 to $26.6 million for the comparable period in 2001.
Sales and marketing expenses represented 44% of total revenues for the three
months ended March 31, 2000, compared to 84% for the same period in 2001.  The
increase in absolute dollars in the first quarter of 2001 was primarily the
result of costs associated with the expansion of our sales and marketing
organization, both domestically and internationally, in order to support the
growing revenue base as we continue to penetrate new markets and industry
verticals, and as a result of the addition of the enCommerce sales and marketing
team.  In addition, we continued to make significant investments in marketing to
support the launch of new products, services and marketing programs.  We have
continued our strategy of investing in (a) hiring and training the members of
our direct sales organization in anticipation of future market growth, and (b)
marketing efforts in support of new product launches.  Failure of these
investments to generate future revenues could have a significant adverse effect
on our operations.  The increase in sales and marketing expenses as a percentage
of total revenues for the three months ended March 31, 2001, compared to the
same period in 2000, was mainly due to the combination of lower than expected
license revenues in the first quarter of 2001, and sales and marketing expenses
that were largely fixed prior to the beginning of the first quarter of 2001
based on expected license revenues for that period.  The increase in sales and
marketing expenses as a percentage of total revenues in the first quarter of
2001 also reflected the impact of the integration of the getAccess(TM) sales
team of enCommerce into the existing sales organization. We continue to focus on
improving the productivity of our sales and marketing organizations.

Research and Development

     Research and development expenses increased from $5.0 million for the three
months ended March 31, 2000 to $9.5 million for the comparable period in 2001.
Research and development expenses represented 17% of total revenues for the
three months ended March 31, 2000, compared to 30% for the same period in 2001.
The increase in research and development expenses in absolute dollars in the
first quarter of 2001 reflected higher expenses related to increased staffing of
software developers.  We hired these employees primarily in connection with the
continuing expansion, enhancement and globalization of our product offerings,
our commitment to quality assurance and testing, and the addition of development
employees in connection with the acquisition of enCommerce.  Research and
development expenses as a percentage of total revenues increased for the three
months ended March 31, 2001, compared to the same period in the previous year,
due primarily to the lower than expected license revenues, as these costs were
largely fixed prior to the start of the quarter, and due to the acquisition of
enCommerce and the corresponding addition of the getAccess(TM) development team.
However, we believe that we must continue to invest in research and development
in order to maintain our technological leadership position and, thus, we expect
research and development expenses to continue to increase in absolute dollars as
additional experienced security experts and software engineers are hired.

                                       13
<PAGE>

General and Administrative

     General and administrative expenses increased from $2.2 million for the
three months ended March 31, 2000 to $4.7 million for the comparable period in
2001. General and administrative expenses represented 8% of total revenues for
the three months ended March 31, 2000, compared to 15% for the same period in
2001.  The increase in general and administrative expenses in absolute dollars
reflected our continued investment in increased staffing and related expenses
for the enhancement of the infrastructure necessary to support our growing
business, including investor relations programs, improved management information
systems and the increased utilization of outside professional service firms. In
addition, the increase in general and administrative expenses compared to the
first quarter of 2000 was partly due to expenses we incurred in connection with
the resignation of a senior executive. General and administrative expenses as a
percentage of total revenues increased for the three months ended March 31,
2001, compared to the same period in the previous year, due primarily to the
lower than expected license revenues, as these costs were largely fixed prior to
the start of the quarter. We continue to look for ways to gain additional
efficiencies in our administrative processes.

Amortization of Goodwill, Purchased Product Rights and Other Purchased
Intangibles

     On March 14, 2000, we completed the acquisition of CygnaCom, a company
based in McLean, Virginia that delivers information technology products and
services, with expertise in public key infrastructure, cryptographic
technologies, security engineering and systems integration and development.
Pursuant to the stock purchase agreement dated March 14, 2000, entered into
between us, CygnaCom and the shareholders of CygnaCom, we agreed to acquire all
of the outstanding shares of CygnaCom for an aggregate purchase price of $16.6
million, which included cash consideration of $16.0 million.  The acquisition
was recorded under the purchase method of accounting and, therefore, the results
of operations of CygnaCom are included in our financial statements from the
acquisition date. Upon consummation of the acquisition, CygnaCom became a wholly
owned subsidiary of Entrust. In connection with this acquisition, we recorded
goodwill of $16.6 million and goodwill amortization of $460,000 and $1.4 million
was expensed in the three months ended March 31, 2000 and 2001, respectively.

     On June 26, 2000, we completed the acquisition of enCommerce, a company
based in Santa Clara, California that provides software and services for
managing global e-business relationships at business-to-business and business-
to-consumer portals. The acquisition of enCommerce's outstanding capital stock,
options and warrants for a total consideration of $505.5 million was accounted
for under the purchase method of accounting, which resulted in an allocation of
$449.6 million to purchased product rights, goodwill and other purchased
intangibles.  Also, in connection with this acquisition, an appraisal was done
of the intangible assets, resulting in $29.6 million of the purchase price being
allocated to in-process research and development that had not yet reached
technological feasibility and had no alternative future use.  This in-process
research and development was expensed in 2000.  Amortization of purchased
product rights of $1.4 million and amortization of goodwill and other purchased
intangibles of $27.3 million were expensed in the three months ended March 31,
2001.

Investment Income

     Investment income increased from $1.9 million for the three months ended
March 31, 2000 to $3.2 million for the comparable period in 2001, representing
7% and 10% of total revenues in the respective periods.  This increase in
investment income reflected the interest earned on the net proceeds of our
initial public offering in August 1998, on cash provided by operations in 1999
and 2000, and on the net proceeds of our follow-on offering in February and
March 2000.

Provision for Income Taxes

     We recorded an income tax provision of $1.4 million and $350,000 for the
three months ended March 31, 2000 and 2001, respectively.  We account for income
taxes in accordance with Statement of Financial Accounting Standards No. 109.
The effective income tax rates differed from statutory rates primarily due to
the non-deductible amortization of goodwill, purchased product rights, and other
purchased intangible assets, as well as an adjustment of the valuation
allowance, that results in the recognition of a portion of the tax benefits from
the significant net operating loss and tax credit carry-forwards available.

                                       14
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

     We used cash of $26.8 million from operating activities during the three
months ended March 31, 2001.  This cash outflow was primarily a result of a net
loss before non-cash charges of $18.7 million, and a decrease in accrued
liabilities of $12.9 million, partially offset by cash inflows resulting in a
decrease in accounts receivable of $3.5 million during the period. Our average
days sales outstanding at March 31, 2001 was 118 days, which represented an
increase from the 87 days that we reported at December 31, 2000. The overall
increase in days sales outstanding from December 31, 2000 reflected the lower
than expected revenues for the quarter, slow collections and longer payment
terms for international customers and the shift in revenue mix towards a higher
percentage of professional services revenues, which generally remain in accounts
receivable longer than license revenues. For purposes of calculating average
days sales outstanding, we divide ending accounts receivable by the current
quarter's revenues and multiply this amount by 90 days. The level of accounts
receivable at each quarter end will be affected by the concentration of revenues
in the final weeks of each quarter and may be negatively affected by expanded
international revenues in relation to total revenues as licenses to
international customers often have longer payment terms.

     During the three months ended March 31, 2001, we generated $17.6 million of
cash from investing activities, primarily due to cash provided by reductions in
our marketable investments in the amount of $25.2 million (net of $47.6 million
of marketable investment purchases). This was partially offset by $5.1 million
invested in property and equipment, $1.4 million invested in a long-term
investment and $1.1 million invested in other long-term assets. The property and
equipment investments were primarily computer hardware, furniture and leasehold
improvements to support our growing organization, largely costs related to the
fit-up of our new facility in Santa Clara, California and completion of the fit-
up of our new facility in Ottawa, Canada. The long-term investment funded was
strategic in nature, represented an investment in less than 10% of the capital
stock of a privately held electronic security and technology company, and was
accounted for on a cost basis. Equity investments such as this give us better
access to various geographic and vertical markets, as well as access to emerging
technologies and products. The investment in other long-term assets relates
primarily to the purchase of a license for technology to be used in the
provision of services to customers.

     Cash provided by financing activities for the three months ended March 31,
2001 was $1.9 million, primarily from the exercise of employee stock options and
the sale of shares under our employee stock purchase plan.

     As of March 31, 2001, our cash, cash equivalents and short-term investments
in the amount of $195.6 million provided our principal sources of liquidity.  We
believe that cash flows from operations and existing cash, cash equivalents and
short-term investments will be sufficient to meet our needs for at least the
next twelve months.



Certain Factors That May Affect Our Business

Our quarterly revenues and operating results are subject to significant
fluctuations and such fluctuations may lead to a reduced market price for our
stock

     Our quarterly revenues and operating results have varied in the past and
may continue to fluctuate in the future. We believe that period-to-period
comparisons of our operating results are not necessarily meaningful, but
securities analysts and investors often rely upon these comparisons as
indicators of future performance. If our operating results in any future period
fall below the expectations of securities analysts and investors, the market
price of our securities would likely decline. Factors that have caused our
results to fluctuate in the past and which are likely to affect us in the future
include the following:

     .  length of sales cycles associated with our product offerings;

     .  the timing, size and nature of our licensing transactions;

                                       15
<PAGE>

     .  market acceptance of new products or product enhancements by us or our
        competitors;

     .  the relative proportions of revenues derived from licenses and services
        and maintenance;

     .  the timing of new personnel hires and the rate at which new personnel
        become productive;

     .  changes in pricing policies by our competitors;

     .  changes in our operating expenses; and

     .  fluctuations in foreign currency exchange rates.


Estimating future revenues is difficult, and our failure to do so accurately may
lead to a reduced market price for our stock and reduced profitability

     Estimating future revenues is difficult because we ship our products soon
after an order is received and, as such, we do not have a significant backlog.
Thus, quarterly license revenues depend heavily upon orders received and shipped
within the same quarter. Moreover, we historically have recorded 60% to 80% of
our total quarterly revenues in the third month of the quarter, with a
concentration of revenues in the second half of that month. We expect that this
concentration of revenues, which is attributable in part to the tendency of some
customers to make significant capital expenditures at the end of a fiscal
quarter and to sales patterns within the software industry, will continue for
the foreseeable future.

     Our expense levels are based, in significant part, upon our expectations as
to future revenues and are largely fixed in the short term. We may be unable to
adjust spending in a timely manner to compensate for any unexpected shortfall in
revenues. Any significant shortfall in revenues in relation to our expectations
could have an immediate and significant effect on our profitability for that
quarter and may lead to a reduced market price for our stock.


Because of the lengthy and unpredictable sales cycle associated with our large
PKI transactions, we may not succeed in closing transactions on a timely basis
or at all, which would adversely affect our revenues and operating results

     Transactions for our PKI solution often involve large expenditures, and the
sales cycles for these transactions are often lengthy and unpredictable. Factors
affecting the sales cycle include:

     .  customers' budgetary constraints;

     .  the timing of customers' budget cycles; and

     .  customers' internal approval processes.

     We may not succeed in closing such large transactions on a timely basis or
at all, which could cause significant variability in our revenues and results of
operations for any particular period. If our results of operations and cash
flows fall below the expectations of securities analysts, our stock price may
decline.


A limited number of customers has accounted for a significant percentage of our
revenues, which may decline if we cannot keep or replace these customer
relationships

     Historically, a limited number of customers has accounted for a significant
percentage of our revenues.  In 1999, our three largest customers accounted for
31% of revenues, with the largest customer accounting for 24% of revenues.   In
2000, our three largest customers accounted for 12% of revenues.  Our three
largest customers accounted for 14% of revenues for the three months ended March
31, 2001.  We anticipate that our

                                       16
<PAGE>

results of operations in any given period will continue to depend to a
significant extent upon revenues from a small number of customers. In addition,
we anticipate that such customers will continue to vary over time, so that the
achievement of our long-term goals will require us to obtain additional
significant customers on an ongoing basis. Our failure to enter into a
sufficient number of large licensing agreements during a particular period could
have a significant adverse effect on our revenues.


If the e-business security market does not continue to grow, demand for our
products and services will be adversely affected

     The market for e-business security solutions is at an early stage of
development. Continued growth of the e-business security market will depend, in
large part, on the following:

     .  the continued expansion of Internet usage and the number of
        organizations adopting or expanding intranets and extranets;

     .  the ability of network infrastructures to support an increasing number
        of users and services;

     .  the public recognition of the potential threat posed by computer hackers
        and other unauthorized users; and

     .  the continued development of new and improved services for
        implementation across the Internet, intranets and extranets.

     A decline in the growth of this market could reduce demand for our
products, adversely affecting our revenues and results of operations.


A breach of security at one of our customers, whether or not due to our
products, could harm our reputation and reduce the demand for our products

     The processes used by computer hackers to access or sabotage networks and
intranets are rapidly evolving. A well-publicized actual or perceived breach of
network or computer security at one of our customers, regardless of whether such
breach is attributable to our products, or any significant advance in techniques
for decoding or ''cracking'' encrypted information, could adversely affect the
market's perception of us and our products, and could have an adverse effect on
our reputation and the demand for our products.


If our products contain errors or bugs, sales of our products would likely
decline

     Our products may contain errors, failures or bugs that our existing testing
procedures have not detected. The errors may become evident at any time during
the life of our products. The discovery of any errors, failures or bugs in any
products may result in:

     .  adverse publicity;

     .  product returns;

     .  the loss or delay of market acceptance of our products; and

     .  third-party claims against us.

     Accordingly, the discovery of any errors, failures or bugs would have a
significant adverse effect on the sales of our products.

                                       17
<PAGE>

Our revenues may decline if we cannot compete successfully in an intensely
competitive market

     We target our products at the rapidly evolving market for e-business
security solutions. Many of our current and potential competitors have longer
operating histories, greater name recognition, larger installed bases and
significantly greater financial, technical, marketing and sales resources than
we do. As a result, they may be able to react more quickly to emerging
technologies and changes in customer requirements, or to devote greater
resources to the promotion and sale of their products. In addition, certain of
our current competitors in particular segments of the security marketplace may
in the future broaden or enhance their offerings to provide a more comprehensive
solution competing more fully with our functionality.

     Increased competition, as well as consolidation of competitors, could
result in lower prices, reduced margins or the failure of our products and
services to achieve or maintain market acceptance, any of which could have a
serious adverse effect on our business, financial condition and results of
operations.

Our business will not be successful if we do not keep up with the rapid changes
in our industry

     The emerging market for e-business security products and related services
is characterized by rapid technological developments, frequent new product
introductions and evolving industry standards. To be competitive, we have to
continually improve the performance, features and reliability of our products
and services, particularly in response to competitive offerings, and be first to
market with new products and services or enhancements to existing products and
services. Our failure to develop and introduce new products and services
successfully on a timely basis and to achieve market acceptance for such
products and services could have a significant adverse effect on our business,
financial condition and results of operations.


We may have difficulty managing our expanding operations, which could adversely
affect our ability to successfully grow our business

     The growth in the size and complexity of our business over the past few
years has placed a significant strain on our managerial, operational and
financial resources. Our ability to manage future growth, if any, will depend
upon our ability to:

     .  continue to implement and improve operational, financial and management
        information systems on a timely basis; and

     .  expand, train, motivate and manage our work force.

     Our personnel, systems, procedures and controls may not be adequate to
support our operations. The geographic dispersal of our operations, including
the separation of our headquarters in Plano, Texas, from our research and
development facility in Ottawa, Canada and enCommerce's facilities in Santa
Clara, California may make it more difficult to manage our growth.


If we fail to continue to attract and retain qualified personnel, our business
may be harmed

     Our future success depends upon our ability to continue to attract and
retain highly qualified scientific, technical, sales and managerial personnel.
Competition for such personnel is intense, particularly in the field of
cryptography, and there can be no assurance that we can retain our key
scientific, technical, sales and managerial employees or that we can attract,
motivate or retain other highly qualified personnel in the future. If we cannot
retain or are unable to hire such key personnel, our business, financial
condition and results of operations could be significantly adversely affected.


Future acquisitions or investments could disrupt our ongoing business, distract
our management and employees, increase our expenses and adversely affect our
results of operations

     It is possible, as part of our future growth strategy, that we will from
time-to-time acquire or make

                                       18
<PAGE>

investments in companies, technologies, product solutions or professional
services offerings. With respect to these acquisitions, we would face the
difficulties of assimilating personnel and operations from the acquired
businesses and the problems of retaining and motivating key personnel from such
businesses. In addition, these acquisitions may disrupt our ongoing operations,
divert management from day-to-day business, increase our expenses and adversely
impact our results of operations. Any future acquisitions would involve certain
other risks, including the assumption of additional liabilities, potentially
dilutive issuances of equity securities and incurrence of debt. In addition,
these types of transactions often result in charges to earnings for such items
as amortization of goodwill or in-process research and development expenses.


We face risks associated with our international operations and plans for
expansion, which, if not managed properly, could have a significant adverse
effect on our business, financial condition or results of operations

     In the future, we may establish additional foreign operations, hire
additional personnel and establish relationships with additional partners
internationally. This expansion would require significant management attention
and financial resources and could have an adverse effect on our business,
financial condition and results of operations. Although our international sales
currently are primarily denominated in U.S. dollars, we may increasingly
denominate sales in foreign currencies in the future. In addition, our
international business may be subject to the following risks:

     .  difficulties in collecting international accounts receivable;

     .  difficulties in obtaining U.S. export licenses, especially for products
        containing encryption technology;

     .  potentially longer payment cycles for customer payments;

     .  increased costs associated with maintaining international marketing
        efforts;

     .  introduction of non-tariff barriers and higher duty rates;

     .  difficulties in enforcement of contractual obligations and intellectual
        property rights;

     .  difficulties managing personnel and operations in remote locations; and

     .  increased complexity in global corporate tax structure.

     Any one of these could significantly and adversely affect our business,
financial condition or results of operations.


If the laws regarding exports of our products further limit or otherwise
restrict our business, we could be prohibited from shipping our products to
restricted countries, which would result in a loss of revenues

     Some of our products are subject to export controls under laws of the U.S.,
Canada and other countries. The list of products and countries for which exports
are restricted, and the relevant regulatory policies, are likely to be revised
from time to time. If we cannot obtain required government approvals under these
regulations, we may not be able to sell products abroad or make products
available for sale internationally via computer networks such as the Internet.
Furthermore, U.S. governmental controls on the exportation of encryption
products and technology may in the future restrict our ability to freely export
some of our products with the most powerful information security encryption
technology.

We may not be able to protect our intellectual property rights, which could make
us less competitive and cause us to lose market share

     Our future success will depend, in part, upon our intellectual property
rights and our ability to protect these rights. We rely on a combination of
patent, copyright, trademark and trade secret laws, nondisclosure

                                       19
<PAGE>

agreements, shrink-wrap licenses and other contractual provisions to establish,
maintain and protect our proprietary rights. Despite our efforts to protect our
proprietary rights, unauthorized third parties may:

     .  copy aspects of our products;

     .  obtain and use information that we regard as proprietary; or

     .  infringe upon our patents.

     Policing piracy and other unauthorized use of our products is difficult,
particularly in international markets and as a result of the growing use of the
Internet. In addition, third parties might successfully design around our
patents or obtain patents that we would need to license or design around.
Finally, the protections we have obtained may not be sufficient because:

     .  some courts have held that shrink-wrap licenses, because they are not
        signed by the licensee, are not enforceable;

     .  our trade secrets, confidentiality agreements and patents may not
        provide meaningful protection of our proprietary information; and

     .  we may not seek additional patents on our technology or products and
        such patents, even if obtained, may not be broad enough to protect our
        technology or products.

     Our inability or failure to protect our proprietary rights could have a
significant adverse effect on our business, financial condition or results of
operations.


We have been subject to, and may in the future become subject to, intellectual
property infringement claims that could be costly and could result in a
diversion of management's attention

     As the number of security products in the industry increases and the
functionality of these products further overlaps, software developers and
publishers may increasingly become subject to claims of infringement or
misappropriation of the intellectual property or proprietary rights of others.
We received notice from one of our customers stating that we may be responsible
for indemnifying that customer under a product license agreement for
infringement of patents assigned to a third party.  To date, the customer has
not made a formal claim for indemnification from us.  In addition, third parties
may assert infringement or misappropriation claims against us in the future.
Defending or enforcing our intellectual property could be costly and could
result in a diversion of management's attention, which could have a significant
adverse effect on our business, financial condition or results of operations. A
successful claim against us could also have a significant adverse effect on our
results of operations for the period in which damages are paid.


We may lose access to technology that we license from outside vendors, which
loss could adversely affect our ability to sell our products

     We rely on outside licensors for patent and/or software license rights in
technology that is incorporated into and is necessary for the operation of our
products. For example, our ability to provide Web server certificates is
currently dependent upon a licensing agreement we have with Thawte Consulting
(Pty.) of South Africa, which was acquired in January 2000 by Verisign, Inc.,
one of our primary competitors.  Our success will depend in part on our
continued ability to have access to such technologies that are or may become
important to the functionality of our products.  Any inability to continue to
procure or use such technology could have a significant adverse effect on our
ability to sell some of our products.


Our stock price is volatile and may continue to be volatile in the future.

     The trading price of our common stock has been, and is expected to continue
to be, highly volatile and

                                       20
<PAGE>

may be significantly and adversely affected by factors such as:

     .  actual or anticipated fluctuations in our operating results;

     .  announcements of technological innovations;

     .  new products or new contracts by us or our competitors;

     .  developments with respect to patents, copyrights or propriety rights;

     .  conditions and trends in the security industry;

     .  changes in financial estimates by securities analysts; and

     .  general market conditions and other factors.


Nortel Networks is able to exercise substantial influence over all matters
requiring stockholder and board approval and could make decisions about our
business that conflict with the Interests of other stockholders.

     Nortel Networks Corporation, through its subsidiary, Nortel Networks Inc.,
beneficially owned approximately 25.6% of our outstanding voting stock as of
April 30, 2001, and one of our eight directors is a representative of Nortel
Networks. Accordingly, Nortel Networks has the ability to exert significant
influence over our affairs, including the election of directors and decisions
relating to our strategic and operating activities. This concentration of
ownership and board representation may have the effect of delaying or preventing
a change in control that other stockholders may find favorable.


Provisions of our charter and bylaws may delay or prevent transactions that are
in your best interests.

     Our charter and bylaws contain provisions, including a staggered board of
directors that may make it more difficult for a third party to acquire us, or
may discourage bids to do so. These provisions could limit the price that
investors might be willing to pay for shares of our common stock and could make
it more difficult for a third party to acquire, or could discourage a third
party from acquiring, a majority of our outstanding voting stock. Our board of
directors also has the authority to issue up to 5,000,000 shares of preferred
stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of the holders of common stock will be
subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. The issuance of preferred
stock could make it more difficult for a third party to acquire, or may
discourage a third party from acquiring, a majority of our outstanding voting
stock.



ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Risk Associated with Interest Rates

     Our investment policy states that we will invest our cash reserves,
including cash, cash equivalents and marketable investments, in investments that
are designed to preserve principal, maintain liquidity and maximize return.   We
actively manage our investments in accordance with these objectives.  Some of
these investments are subject to interest rate risk, whereby a change in market
interest rates will cause the principal amount of the underlying investment to
fluctuate.  Therefore, depreciation in principal value of an investment is
possible in situations where the investment is made at a fixed interest rate and
the market interest rate then subsequently increases.  We try to manage this
risk by maintaining our cash, cash equivalents and marketable investments with
high quality financial institutions and investment managers.  We also restrict
the investments to primarily securities with short-term maturities, such that,
at March 31, 2001, the majority of our marketable investments

                                       21
<PAGE>

had maturities of less than six months from that date. As a result, we believe
that our exposure to market risk related to interest rates is minimal.

     The following table presents the cash, cash equivalents and marketable
investments that we held at March 31, 2001, that would have been subject to
interest rate risk, and the related ranges of maturities as of that date:

<TABLE>
<CAPTION>
                                                                                         MATURITY
                                                                                      (in thousands)

                                                                                                              Greater
                                                                                                               than
                                                                 Within 3 Months        3-6 Months           6 Months
                                                                 ---------------        ----------           --------
<S>                                                              <C>                    <C>                  <C>
Investments classified as cash and cash equivalents...........        $  4,862                 --                 --
Investments classified as marketable investments..............         132,357            $30,898             $7,197
                                                                      --------            -------             ------
  Total amortized cost........................................        $137,219            $30,898             $7,197
                                                                      ========            =======             ======
Fair value....................................................        $137,408            $30,942             $7,197
                                                                      ========            =======             ======
</TABLE>

Risk Associated with Exchange Rates

     We are subject to foreign exchange risk as a result of exposures to changes
in currency exchange rates, specifically between the United States and Canada,
the United Kingdom, Germany, France, Japan and Switzerland.  However, this
exposure is considered to be minimal due to the fact that the United Kingdom,
German, French, Japanese and Swiss operations are not significant, and the
Canadian operations are naturally hedged against exchange rate fluctuations
since both revenues and expenses are denominated in Canadian dollars.
Therefore, an unfavorable change in the exchange rate for the Canadian
subsidiary would result in lower revenues when translated into U.S. dollars, but
the expenses would be lowered in a corresponding fashion.

     As a result, we do not engage in formal hedging activities, but we do
periodically review the potential impact of this risk to ensure that the risk of
significant potential losses remains minimal.


Risk Associated with Equity Investments

     We hold short-term equity securities of a publicly traded company.  It is
possible that the market value of these securities could decline significantly
in the near future.  For example, due to recent stock market volatility, we
recorded cumulative unrealized and realized losses of $1.8 million in this
investment based on its market value at March 31, 2001.  In connection with this
investment, we have engaged in a hedging transaction that provides us with the
right to receive an amount equal to the difference between the price we paid for
these securities and the aggregate of the fair market values on the dates that
the securities are made available for sale on the public market.  We recorded an
unrealized gain of $1.8 million as of March 31, 2001 as a result of this hedging
transaction.  However, this hedging activity may not sufficiently cover the
value of this investment.

     In addition, we have invested in several privately held companies, most of
which are technology companies in the start-up or development stage, or are
companies with technologies and products that are targeted at geographically
distant markets.  If the demand for the technologies and products offered by
these privately held companies materializes slowly, to a minimum extent, or not
at all in the relevant markets, we could lose all or substantially all of our
investments in these companies.  To date, we have recorded no loss from
impairment in connection with any of these investments.


PART II.  OTHER INFORMATION


ITEM 1.   LEGAL PROCEEDINGS

     On July 7, 2000, an action entitled Frankel v. Entrust Technologies Inc.,
et al., No. 2-00-CV-119, was filed against us and certain of our officers.  The
action was filed in the U.S. District Court for the Eastern District of Texas.
Subsequently, several similar actions were filed in the same court.  All of
these actions have

                                       22
<PAGE>

been consolidated. On January 22, 2001, a consolidated amended complaint was
filed. The consolidated amended complaint purports to be a class action lawsuit
brought on behalf of persons who purchased or otherwise acquired our common
stock during the period from October 19, 1999 through July 3, 2000. The
complaints allege that the defendants misrepresented and failed to disclose
certain information about our business and prospects. The complaint asserts
claims under the Securities Exchange Act of 1934. The complaint does not specify
the amount of damages sought. No trial date or other schedule has been
established. We believe this class action is without merit and intend to deny
all material allegations and to defend ourselves vigorously. An adverse judgment
or settlement in this lawsuit could have a significant adverse impact on our
future financial condition or results of operations.

     We are subject to various other legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business.  While
the outcome of these claims cannot be predicted with certainty, management does
not believe that the outcome of any of these legal matters will have a
significant adverse effect on our consolidated results of operations or
consolidated financial position.




ITEM 2.   CHANGES IN SECURITIES AND USE OF PROCEEDS

(d) Use of Proceeds.

     On August 21, 1998, we closed an initial public offering of our common
stock, $.01 par value. The Registration Statement on Form S-1 (File No. 333-
57275) was declared effective by the Securities and Exchange Commission on
August 17, 1998 and we commenced the offering on that date.

     After deducting the underwriting discounts and commissions and the offering
expenses, the net proceeds to us from the offering were approximately
$79,097,515.

     As of March 31, 2001, all of the net proceeds of the offering had been used
to fund working capital, expansion of our facilities and our investments in
other long-term assets. The entire amount of the net proceeds had been allocated
for general corporate purposes and working capital, including product
development and the possible acquisition of additional businesses and
technologies that are complementary to our current or future business.  None of
the proceed amounts were paid directly or indirectly to any director, officer,
or general partner of us or our associates, persons owning 10 percent or more of
any class of equity securities, or an affiliate of us.



ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

List of Exhibits

     None

Reports on Form 8-K:

     None

                                       23
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.


                                         ENTRUST TECHNOLOGIES INC.
                                    -----------------------------------
                                               (Registrant)

Dated: May 14, 2001

                                           /s/ David L. Thompson
                                    -----------------------------------
                                             David L. Thompson
                        Executive Vice President, Finance and Administration and
                                           Chief Financial Officer
                                (Principal Financial and Accounting Officer)

                                       24