---

UNITED STATESSECURITIES AND EXCHANGE COMMISSION
 
 WASHINGTON, D.C. 20549

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FORM 10-Q

|(Mark one) | 
|---------- | 

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

FOR THE QUARTER ENDED MARCH 31, 2000



OR

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

COMMISSION FILE NUMBER 000-24733

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

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

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 53,582,349 shares of the registrant's $.01
   par value Common stock outstanding as of May 4, 2000.

---

ENTRUST
   TECHNOLOGIES INC.

TABLE OF CONTENTS

|PART I. FINANCIAL INFORMATION | Page
|----------------------------- | ----
|                              |     
|Item 1.                       |     
|                              |     
|                              |     
|                              |     
|                              |     
|                              |     
|Item 2.                       |     
|                              |     
|Item 3.                       |     
|                              |     
|PART II. OTHER INFORMATION    |     
|                              |     
|Item 2.                       |     
|                              |     
|Item 6.                       |     
|                              |     
|SIGNATURES                    | 23  



PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ENTRUST TECHNOLOGIES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

|                                     |                                                                             | DECEMBER 31,
   
   1999                   |              | (Unaudited)
   
   MARCH 31,
   
   2000 |             
|------------------------------------ | --------------------------------------------------------------------------- | ------------------------------------------ | ------------ | ---------------------------------------- | ------------
|                                     |                                                                             |                                            |              |                                          |             
|(In thousands)                       |                                                                             |                                            |              |                                          |             
|                                     |                                                                             |                                            |              |                                          |             
|ASSETS                               |                                                                             |                                            |              |                                          |             
|Current assets:                      |                                                                             |                                            |              |                                          |             
|                                     | Cash and cash equivalents                                                   |                                            | $   21,877   |                                          | $  187,886  
|                                     | Short-term marketable investments                                           |                                            | 67,394       |                                          | 56,946      
|                                     | Accounts receivable, net                                                    |                                            | 21,817       |                                          | 25,539      
|                                     | Prepaid expenses and other                                                  |                                            | 4,195        |                                          | 4,369       
|                                     |                                                                             |                                            |              |                                          |             
|                                     | Total current assets                                                        |                                            | 115,283      |                                          | 274,740     
|Long-term marketable investments     |                                                                             | 2,405                                      |              | 1,806                                    |             
|Property and equipment, net          |                                                                             | 6,904                                      |              | 7,229                                    |             
|Other long-term assets               |                                                                             | 5,928                                      |              | 21,918                                   |             
|                                     |                                                                             |                                            |              |                                          |             
|                                     | Total assets                                                                |                                            | $  130,520   |                                          | $  305,693  
|                                     |                                                                             |                                            |              |                                          |             
|                                     |                                                                             |                                            |              |                                          |             
|LIABILITIES AND SHAREHOLDERS' EQUITY |                                                                             |                                            |              |                                          |             
|Current liabilities:                 |                                                                             |                                            |              |                                          |             
|                                     | Accounts payable                                                            |                                            | $      6,636 |                                          | $      8,452
|                                     | Accrued liabilities                                                         |                                            | 9,169        |                                          | 11,493      
|                                     | Deferred income                                                             |                                            | 10,761       |                                          | 11,407      
|                                     | Due to related party                                                        |                                            | 799          |                                          | 799         
|                                     |                                                                             |                                            |              |                                          |             
|                                     | Total liabilities                                                           |                                            | 27,365       |                                          | 32,151      
|                                     |                                                                             |                                            |              |                                          |             
|Shareholders' equity:                |                                                                             |                                            |              |                                          |             
|                                     | Common and special voting stock and
   
         additional paid-in capital |                                            | 123,387      |                                          | 289,898     
|                                     | Unearned deferred compensation and other                                    |                                            | (974         | )                                        | (416        
|                                     | Accumulated deficit                                                         |                                            | (19,258      | )                                        | (15,940     
|                                     |                                                                             |                                            |              |                                          |             
|                                     |                                                                             | Total shareholders' equity                 |              | 103,155                                  |             
|                                     |                                                                             |                                            |              |                                          |             
|                                     |                                                                             | Total liabilities and shareholders' equity |              | $  130,520                               |             
|                                     |                                                                             |                                            |              |                                          |             

See accompanying notes to condensed consolidated
   financial statements





ENTRUST TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                    |  | 
|------------------------------------------------------------------- |  | 
|
|
|(In thousands, except per share data)                               |  | 
|                                                                    |  | 
|Revenues:                                                           |  | 
|License                                                             |  | 
|Services and
     maintenance                                       |  | 
|                                                                    |  | 
|Total
     revenues                                                 |  | 
|                                                                    |  | 
|Cost of revenues:                                                   |  | 
|License                                                             |  | 
|Services and
     maintenance                                       |  | 
|                                                                    |  | 
|Total cost of
     revenues                                         |  | 
|                                                                    |  | 
|Gross profit                                                        |  | 
|                                                                    |  | 
|Operating expenses:                                                 |  | 
|Sales and marketing                                                 |  | 
|Research and
     development                                       |  | 
|General and
     administrative                                     |  | 
|Goodwill
     amortization                                          |  | 
|                                                                    |  | 
|Total
     operating expenses                                       |  | 
|                                                                    |  | 
|Income (loss) from operations                                       |  | 
|Interest income                                                     |  | 
|                                                                    |  | 
|Income before provision for income taxes                            |  | 
|Provision for income taxes                                          |  | 
|                                                                    |  | 
|Net income                                                          |  | 
|                                                                    |  | 
|Net income per share:                                               |  | 
|Basic                                                               |  | 
|Diluted                                                             |  | 
|Weighted average common shares used in per
     share computations: |  | 
|Basic                                                               |  | 
|Diluted                                                             |  | 



See accompanying notes to condensed consolidated financial
   statements



ENTRUST TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                   |  |     
|------------------------------------------------------------------ |  | ----
|                                                                   | 
|                                                                   | 
|                                                                   |  | 1999
|(In thousands)                                                     |  |     
|                                                                   |  |     
|                                                                   |  |     
|CASH FLOWS FROM OPERATING ACTIVITIES:                              |  |     
|Net income                                                         |  |     
|Adjustments to reconcile net income
     to net cash               |  |     
|provided by (used in) operating
     activities:                   |  |     
|Depreciation and
     amortization                                 |  |     
|Adjustment to
     cumulative translation account                  |  |     
|Deferred income
     taxes                                         |  |     
|Deferred compensation
     earned                                  |  |     
|Changes in operating assets and
     liabilities:                  |  |     
|Increase in accounts
     receivable                               |  |     
|Increase in prepaid
     expenses and other                        |  |     
|Increase (decrease) in
     accounts payable                       |  |     
|Increase (decrease) in
     accrued liabilities                    |  |     
|Increase (decrease) in
     deferred income                        |  |     
|Decrease due to related
     party                                 |  |     
|                                                                   |  |     
|Net cash
     provided by (used in) operating activities           |  |     
|                                                                   |  |     
|CASH FLOWS FROM INVESTING ACTIVITIES:                              |  |     
|Purchases of marketable
     investments                           |  |     
|Dispositions of marketable
     investments                        |  |     
|Purchases of property and
     equipment                           |  |     
|Increase in other long-term
     assets                            |  |     
|Payment on purchase of CygnaCom
     Solutions, Inc.               |  |     
|                                                                   |  |     
|Net cash
     provided by (used in) investing activities           |  |     
|                                                                   |  |     
|CASH FLOWS FROM FINANCING ACTIVITIES:                              |  |     
|Repayment of long-term debt                                        |  |     
|Proceeds and tax reduction from
     exercise of stock options and |  |     
|employee
     stock purchase plan                                  |  |     
|Proceeds from issuance of common
     stock, net of issuance costs |  |     
|                                                                   |  |     
|Net cash
     provided by financing activities                     |  |     
|                                                                   |  |     
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS               |  |     
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                   |  |     
|                                                                   |  |     
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                         |  |     
|                                                                   |  |     

See accompanying notes to condensed consolidated financial
   statements

ENTRUST TECHNOLOGIES
   INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)(In thousands, except 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, 2000,
   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,
   1999 contained in Entrust Technologies Inc.'s Form 10-K.

NOTE 2. NET INCOME PER
   SHARE

Basic net
   income per share is computed by dividing the net income by the weighted
   average number of shares of Common stock of all classes outstanding during
   the period. Diluted net income per share is computed by dividing the net
   income 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 per share if their
   effect is antidilutive.

On August
   21, 1998, the Company closed its initial public offering, issuing 5,400,000
   shares of its Common stock at an initial public offering price of $16 per
   share. The net proceeds to the Company from the offering, after deducting
   underwriting discounts and commissions and offering expenses incurred by the
   Company, were approximately $79,098. Concurrent with the closing of the
   initial public offering, the majority shareholder of the Company exercised
   its option to exchange 2,542,711 shares of the Company's Special Voting
   stock into the equivalent number of shares of Common stock, among other
   transactions. After this exchange, the remaining number of issued and
   outstanding Special Voting shares was 5,157,289.

On February 29,
   2000 and March 2, 2000, the Company closed its follow-on offering (which
   included an over-allotment option closing), issuing an aggregate of
   2,074,260 shares of its Common stock at an offering price of $82 per share.
   The net proceeds to the Company from the offering, after deducting
   underwriting discounts and commissions and offering expenses incurred by the
   Company, were approximately $161,513. Concurrent with the closing of the
   follow-on offering, the largest shareholder of the Company exercised its
   option to exchange 5,157,289 shares of the Company's Special Voting stock
   into the equivalent number of shares of Common stock. After this exchange,
   there were no issued and outstanding shares of the Company's Special Voting
   stock.

In
   addition, 861,192 shares of Common stock were issued in the three months
   ended March 31, 2000 related to the exercise of employee stock options and
   the sale of shares under the employee stock purchase plan.
 NOTE 3. MARKETABLE INVESTMENTS
 
  Marketable investments consist of investments 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, primarily 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 and stated at amortized cost. At
   March 31, 2000, the amortized cost of the Company's investments approximated
   fair value.
 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 and
   digital signature. The nature of the Company's products and services is
   similar and, in general, the type of customers for those 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.
 The Company operates in three main
   geographic areas as follows:
 (Unaudited)
   
   Three Months EndedMarch 31,1999
   
   
   
   2000Revenues:United States
   $
   10,533
   
   
   $
   17,109Canada
   
   3,800
   
   
   
   6,602Europe, Asia and
     Other
   
   2,492
   
   
   
   5,351Total
     revenues
   $
   16,825
   
   
   $
   29,062Income before income taxes:United States
   $
   117
   
   
   $
   2,063Canada
   
   (102
   )
   
   
   2,445Europe, Asia and
     Other
   
   319
   
   
   
   232Total income
     before income taxes
   $
   334
   
   
   $
   4,740
 December 31,
   
   1999
   
   
   (Unaudited)March 31,
   
   2000Total assets:United States
   $
   107,517
   
   
   $
   278,575Canada
   
   15,216
   
   
   
   19,940Europe, Asia and
     Other
   
   7,787
   
   
   
   7,178Total
   $
   130,520
   
   
   $
   305,693
 NOTE 5. ACQUISITION OF CYGNACOM
   SOLUTIONS, INC.
 On March
   14, 2000 (the "Acquisition Date"), the Company completed the
   acquisition of all of the outstanding stock of CygnaCom Solutions, Inc.
   ("CygnaCom"), a Virginia corporation, pursuant to a Stock Purchase
   Agreement ("Purchase Agreement"), dated as of March 14, 2000, by
   and among the Company, CygnaCom and the stockholders of CygnaCom. CygnaCom
   is based in McLean, Virginia and is a high technology company that delivers
   information technology products and services, with expertise in public key
   infrastructure, cryptographic technologies, security engineering and systems
   integration and development. The Company intends to continue CygnaCom's
   business substantially in the manner conducted by CygnaCom immediately prior
   to the acquisition.
 Pursuant
   to the Purchase Agreement, on the Acquisition Date, all of the outstanding
   shares of common stock of CygnaCom were exchanged, in the aggregate, for a
   purchase price of $16,000 in cash and $555 in assumed net liabilities and
   acquisition expenses, whereupon CygnaCom became a wholly-owned subsidiary of
   the Company. The Purchase Agreement and the acquisition of CygnaCom were
   approved by the Board of Directors of the Company, and the Board of
   Directors and stockholders of CygnaCom.
 The
   acquisition was accounted for under the purchase method of accounting, and
   accordingly, the purchase price was allocated to the fair value of the
   assets and liabilities acquired, with the remainder allocated to goodwill.
   Goodwill of $16,555 was recorded as a result of this acquisition, and $460
   of goodwill amortization was recorded in the three months ended March 31,
   2000. In addition, the results of operations of CygnaCom are included in the
   Company's financial statements from the Acquisition Date.
 The
   following unaudited pro forma data summarize the combined results of
   operations of Entrust Technologies Inc. and CygnaCom the three months ended
   March 31, 1999 and 2000, as if the acquisition had taken place as of the
   beginning of the respective periods, and accordingly, include a full
   period's goodwill amortization in each period shown.
 (Unaudited)
   Three Months
   
   Ended
   
   March 31,1999
   
   
   2000Revenues
   $
   17,961
   
   
   $
   30,872Net income (loss)
   
   (726
   )
   
   
   2,805Basic net income (loss) per share
   
   (0.02
   )
   
   
   0.06Diluted net income (loss) per share
   
   (0.02
   )
   
   
   0.05
 ITEM 2.
   MANAGEMENT'S DISCUSSION AND ANALYSIS
     OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThis 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.
 OVERVIEW
 We are
   the leading global provider of public-key infrastructure, or PKI, products
   and services to e-businesses and other organizations. We are committed to
   enabling organizations to conduct e-commerce securely, ensuring 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 PKI solution primarily to global enterprises and government
   entities, as well as, small- to mid-sized businesses and individuals. To
   date, over four 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 customer 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. In this regard, 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".
 
 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:
 (Unaudited)
   
   THREE MONTHS ENDEDMARCH 31,1999
   
   
   2000Revenues:License
   69.1
   %
   
   71.9
   %Services
     and maintenance
   30.9
   
   
   28.1Total
     revenues
   100.0
   
   
   100.0Cost of revenues:License
   2.4
   
   
   3.2Services
     and maintenance
   16.9
   
   
   15.7Total
     cost of revenues
   19.3
   
   
   18.9Gross profit
   80.7
   
   
   81.1Operating expenses:Sales and
     marketing
   51.2
   
   
   44.3Research
     and development
   23.0
   
   
   17.2General
     and administrative
   8.9
   
   
   7.5Goodwill
     amortization
   1.0
   
   
   2.3Total
     operating expenses
   84.1
   
   
   71.3Income (loss) from
     operations
   (3.4
   )
   
   9.8Interest income
   5.4
   
   
   6.5Income before provision for income
     taxes
   2.0
   
   
   16.3Provision for income taxes
   
   
   
   4.9Net income
   2.0
   %
   
   11.4
   %REVENUES
 We
   recognize revenues in accordance with the provisions of the American
   Institute of Certified Public Accountants' Statement of Position 97-2
   "Software Revenue Recognition". We generate revenues primarily
   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.
 Accordingly, revenues from perpetual software license agreements are
   recognized as revenues 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 services to other
   customers. Revenues from the sale of Web server certificates by Entrust.net,
   our certification authority service, are also recognized ratably over the
   term of the certificate, which is 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 large custom development
   contracts. Under this method, we recognize revenues 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 project cost estimates in each case are reviewed
   on a regular basis.
 Total Revenues
 Total
   revenues increased 73% from $16.8 million for the three months ended March
   31, 1999 to $29.1 million for the three months ended March 31, 2000. Total
   revenues derived from North America increased 66% from $14.3 million for the
   three months ended March 31, 1999 to $23.7 million for the three months
   ended March 31, 2000, while total revenues derived from outside of North
   America increased 116% from $2.5 million for the three months ended March
   31, 1999 to $5.4 million for the three months ended March 31, 2000. Although
   the majority of the overall growth in total revenues in the first three
   months of 2000 has been experienced in North America, we have also focused
   on growing our revenue base internationally, particularly in Europe and
   Asia. 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.
 License Revenues
 License
   revenues increased 80% from $11.6 million for the three months ended March
   31, 1999 to $20.9 million for the three months ended March 31, 2000,
   representing 69% and 72% of total revenues in the respective periods. The
   increase in license revenues in absolute dollars was primarily due to
   increasing market awareness and acceptance of our product offerings,
   continued enhancement and increasing breadth of our product offerings,
   expansion of our sales and marketing organization, and sales to new industry
   segments. The increase in license revenues as a percentage of total revenues
   reflected our continued focus on the product side of our business and the
   increased use of third-party consulting firms and systems integrators to
   provide implementation services to our customers.
 Services and Maintenance
   Revenues
 Services
   and maintenance revenues increased 57% from $5.2 million for the three
   months ended March 31, 1999 to $8.2 million for the three months ended March
   31, 2000, representing 31% and 28% 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 acquisition of CygnaCom, and increases in
   maintenance revenues from a larger installed product base and as these
   customers continue to renew their maintenance agreements. The growing
   customer base has resulted in an acceleration of demand for consulting
   services to assist these customers as they deploy our solutions. The
   decrease in services and maintenance revenues as a percentage of total
   revenues was largely due to our focus on building the product side of the
   business and building successful partnering relationships with third-party
   service providers to provide services to customers and as we focus internal
   resources on building new service offerings for our customers. We continue
   to focus on building our relationships with outside service providers to
   ensure 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. Cost of license
   revenues increased from $395,000 for the three months ended March 31, 1999
   to $937,000 for the three months ended March 31, 2000, representing 2% and
   3% of total revenues for the respective periods. The increase in cost of
   license revenues in absolute dollars and as a percentage of total revenues
   was primarily a result of higher royalty fees paid to third-party software
   vendors, as we incorporated a higher level of third-party software in our
   products sold in the first three months of 2000, compared to the same period
   of 1999. The mix of third-party products may vary from period to period and
   our gross margins and, consequently, our 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 those services. Cost of services and
   maintenance revenues increased from $2.8 million for the three months ended
   March 31, 1999 to $4.6 million for the three months ended March 31, 2000,
   representing 17% and 16% of total revenues for the respective periods. The
   increase in absolute dollars during the three months ended March 31, 2000
   reflected the increased costs associated with the increased levels of
   services and maintenance revenues experienced during this period. The
   decrease in the cost of services and maintenance revenues as a percentage of
   total revenues in the three months ended March 31, 2000 reflects improved
   productivity and utilization of available services resources compared to the
   same period of the previous year. Further, the decrease as a percentage of
   total revenues is indicative of the fact that license revenues grew more
   rapidly than services and maintenance revenues in the first quarter of 2000.
 Services and maintenance
   gross profit as a percentage of services and maintenance revenues was 45%
   and 44% for the three months ended March 31, 1999 and 2000, respectively.
   This decrease in the services and maintenance margin for the three months
   ended March 31, 2000, compared to the same period in 1999, reflects the
   investment we made in the professional services team through the acquisition
   of CygnaCom during the first quarter of 2000, which represents a slight
   shift in the mix of overall services revenue toward the lower-margin
   professional services revenues.
 OPERATING EXPENSES
 Sales and Marketing
 Sales and marketing
   expenses increased from $8.6 million for the three months ended March 31,
   1999 to $12.9 million for the comparable period in 2000. Sales and marketing
   expenses represented 51% of total revenues for the three months ended March
   31, 1999, compared to 44% for the comparable period in 2000. The increase in
   absolute dollars 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 segments. In addition, we
   continue to make significant investments in marketing to support the launch
   of new products, services and marketing programs. We have continued our
   strategy of (a) investing in hiring and training our direct sales
   organization in anticipation of future market growth, and (b) investing in
   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 decrease in sales and marketing expenses as a
   percentage of total revenues reflects the higher revenue base as well as
   improvements achieved in productivity of sales and marketing personnel and
   efficiencies gained in the related processes.
 Research and Development
 Research and development
   expenses increased from $3.9 million for the three months ended March 31,
   1999 to $5.0 million for the comparable period in 2000. Research
   anddevelopment expenses represented 23% of total revenues
   for the three months ended March 31, 1999, compared to 17% for the
   comparable period
 in 2000. The increased investment in research and development expenses in
   absolute dollars reflects higher expenses related to increased staffing of
   software developers. These employees were added primarily in connection with
   the continuing expansion and enhancement of our product offerings and our
   commitment to quality assurance and testing, and globalization of these
   product offerings. The investment in research and development as a
   percentage of total revenues decreased for the three months ended March 31,
   2000, compared to the same period in 1999, as a result of the growth of
   revenues outpacing the expansion of the development team between those
   periods. However, we believe that we must continue to invest in research and
   development in order to maintain our technological leadership position and,
   thus, expect research and development expenses to continue to increase in
   absolute dollars as we hire additional experienced security experts and
   software engineers.
 General and Administrative
 General and
   administrative expenses increased from $1.5 million for the three months
   ended March 31, 1999 to $2.2 million for the comparable period in 2000.
   General and administrative expenses represented 9% of total revenues for the
   three months ended March 31, 1999, compared to 8% for the comparable period
   in 2000. 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. The decrease as a percentage of total revenues reflected
   efficiencies gained throughout our administrative processes as we have grown
   as a company.
 Goodwill Amortization
 On June 8, 1998, we
   completed the acquisition of r3 Security Engineering AG, a company based in
   Zurich, Switzerland, which provides consulting, applied research and product
   development services related to commercial security and encryption
   solutions. We have recorded $178,000 and $201,000 of amortization with
   respect to the goodwill that arose as a result of this acquisition in the
   three months ended March 31, 1999 and 2000, respectively.
 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 ours. In connection with this acquisition, we recorded
   goodwill of $16.6 million and, accordingly, goodwill amortization of
   $460,000 has been expensed for the three months ended March 31,
   2000.
 Interest Income
 Interest income increased
   from $914,000 for the three months ended March 31, 1999 to $1.9 million for
   the comparable period in 2000, representing 5% and 7% 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 2000.
 Provision for Income Taxes
 We recorded an income tax
   provision of $1.4 million for the three months ended March 31, 2000 compared
   with no income tax provision for the same period of 1999. 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 an adjustment of the valuation
   allowance, and therefore, the recognition of a portion of the tax benefits
   from the significant net operating loss and tax credit carry-forwards
   available.
 LIQUIDITY AND CAPITAL RESOURCES
 We generated cash of $5.5 million from operating
   activities during the three months ended March 31, 2000. This cash inflow
   was primarily a result of an increase in accounts payable, accrued
   liabilities and deferred income and the net income achieved over the period.
   These inflows were partially offset by cash outflows relating to an increase
   in accounts receivable. Our average days sales outstanding at March 31, 2000
   was 79 days, which represents an increase over the 75 days that we reported
   at December 31, 1999, but a decrease from the 84 days at March 31, 1999. The
   overall increase in days sales outstanding from December 31, 1999 reflects
   longer international payment terms experienced and the effect of accounts
   receivables assumed as part of the CygnaCom acquisition. However, the
   overall decrease in days sales outstanding from March 31, 1999 was primarily
   due to the improved collection efforts and the quality of our relationships
   with our customers. 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, 2000, we used $5.9 million of cash in investing activities,
   primarily due to the $15.6 million we invested in the acquisition of
   CygnaCom. This was partially offset by cash provided by the reduction of our
   marketable investments by $11.0 million (net of $24.1 million of marketable
   investment purchases), while we invested $1.1 million in property and
   equipment and $200,000 in other long-term assets. The property and equipment
   investments were primarily computer hardware, furniture and leasehold
   improvements to support our growing organization.
 Cash provided by financing activities for the three
   months ended March 31, 2000 was $166.4 million, primarily due to the net
   proceeds of $161.5 million from the issuance of common stock in the
   follow-on offering in February 2000, and $4.9 million from the exercise of
   employee stock options and the sale of shares under our employee stock
   purchase plan.
 As of March 31, 2000, our
   cash, cash equivalents and short-term investments in the amount of $244.8
   million comprised our principal sources of liquidity. It is our belief that
   cash flows from operations and existing cash and 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;
 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 have 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 have accounted for a significant percentage of our
   revenues. In 1997, three customers accounted for 19%, 12% and 11% of
   revenues, respectively. In 1998, our three largest customers accounted for
   23% of revenues. In 1999, our three largest customers accounted for 31% of
   revenues, with the largest customer accounting for 24% of revenues. We
   anticipate that our 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.
 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, 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.

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

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.

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 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. Surety Technologies, Inc. asserted
   an unsuccessful patent infringement claim against us in February 1999, and
   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 encryption technology
   that is incorporated into and is necessary for the operation of our
   products. For example, we license encryption technology that is fundamental
   to our product from RSA Security Inc., which holds a patent for this
   technology that expires in September 2000. In January 2000, we received
   correspondence from RSA indicating that it believes that, as of November
   1999, we were no longer properly licensed to use this patent. While we
   strongly believe that RSA's assertion is without merit, we cannot assure you
   of the outcome of our discussions with RSA about this matter. An adverse
   outcome could subject us to significant additional licensing fees, money
   damages or other legal relief. In January 2000, RSA filed a complaint
   against us with respect to this matter but did not serve notice, and
   subsequently withdrew, the complaint. There can be no assurance that RSA
   will not institute litigation against us with respect to this matter in the
   future. In addition, 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 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 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.

As of May 4, 2000, Nortel
   Networks Corporation, through its subsidiary, Nortel Networks Inc.,
   beneficially owned approximately 31.5% of our outstanding voting stock and
   two of our eight directors were representatives 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.

YEAR 2000 IMPACT

We have not experienced
   any problems with our computer systems relating to such systems being unable
   to recognize appropriate dates related to the year 2000. We are also not
   aware of any material problems with our clients or vendors. Accordingly, we
   do not anticipate incurring material expenses or experiencing any material
   operational disruptions as a result of any Year 2000 issues.

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, a 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, 2000, the majority of our
   marketable investments 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, 2000, that would have been subject to interest rate risk, and
   the related ranges of maturities as of that date:



|                                                         |   | MATURITY(in thousands)
|-------------------------------------------------------- | - | ----------------------
|                                                        
|                                                        
|                                                         |   |                       
|Investments classified as cash and cash
     equivalents | $ | 171,027               
|Investments classified as marketable
     investments    |   | 52,810                
|                                                         |   |                       
|Total
     amortized cost                                | $ | 223,837               
|                                                         |   |                       
|Fair value                                               | $ | 223,824               
|                                                         |   |                       



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 and Switzerland. However, this exposure is considered to be
   minimal due to the fact that the United Kingdom, German 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.



PART II. OTHER INFORMATION

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, 2000,
   approximately $24.3 million 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 remaining net proceeds are
   invested in short-term, interest-bearing, investment grade securities. The
   entire amount of the net proceeds has 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

|2    |  | Stock Purchase Agreement, dated as of March 14, 2000,
     by and among Entrust Technologies Inc., CygnaCom Solutions, Inc. and
     Santosh Chokhani, Isadore Schoen, Sarbari Gupta, Sadegh Kavoussi, Peter
     Hesse, Scott Shorter, Mike Boberski, Johnny Hsiung, Christine Miller,
     William Taris, Kristina Rogers, Mark Whitaker and Edward Morris is
     incorporated herein by reference to Exhibit 2 to Entrust Technologies
     Inc.'s Current Report on Form 8-K, dated March 14, 2000 (File No.
     000-24733)*
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1 |  | Employment Letter between Entrust Technologies Inc.
     and Robert W. Heard                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.2 |  | Employment Letter between Entrust Technologies Inc.
     and Hansen J. Downer                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|27   |  | Financial Data Schedule                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

Reports on Form 8-K:

| | On March 24, 2000, Entrust Technologies Inc. filed a
     Current Report on Form 8-K, dated March 14, 2000, to report under Item 2
     (Acquisition or Disposition of Assets) its acquisition of all of the
     outstanding equity of CygnaCom Solutions, Inc. No financial statements
     were required to be filed with this initial report.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

* Entrust Technologies Inc. hereby agrees to furnish
   supplementally a copy of any omitted schedules to the Stock Purchase
   Agreement to the Securities and Exchange Commission upon its
   request.



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 9, 2000 |                                                                  
|                   | /s/ David L. Thompson                                            
|                   |                                                                  
|                   | David L. Thompson                                                
|                   | Chief Financial Officer and Senior Vice President of
     Finance
|                   | (Principal Financial and Accounting
     Officer)                
|                   |                                                                  





ENTRUST TECHNOLOGIES INC.

INDEX TO EXHIBITS

|EXHIBIT |  | DESCRIPTION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|2       |  | Stock Purchase Agreement, dated as of March 14, 2000,
     by and among Entrust Technologies Inc., CygnaCom Solutions, Inc. and
     Santosh Chokhani, Isadore Schoen, Sarbari Gupta, Sadegh Kavoussi, Peter
     Hesse, Scott Shorter, Mike Boberski, Johnny Hsiung, Christine Miller,
     William Taris, Kristina Rogers, Mark Whitaker and Edward Morris is
     incorporated herein by reference to Exhibit 2 to Entrust Technologies
     Inc.'s Current Report on Form 8-K, dated March 14, 2000 (File No.
     000-24733)*
|10.1    |  | Employment Letter between Entrust Technologies Inc.
     and Robert W. Heard                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.2    |  | Employment Letter between Entrust Technologies Inc.
     and Hansen J. Downer                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|27      |  | Financial Data Schedule                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

* Entrust Technologies Inc. hereby agrees to furnish
   supplementally a copy of any omitted schedules to the Stock Purchase
   Agreement to the Securities and Exchange Commission upon its request.