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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



(Mark one)



x QUARTERLY REPORT UNDER SECTION
13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934



For the quarterly period ended March 31, 2004



OR



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



For the transition period from to



Commission File Number 000-24733



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ENTRUST, 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 HANOVER PARK,
SUITE 800

16633 DALLAS PARKWAY

ADDISON, TX 75001

(Address of principal executive offices & zip code)



Registrants telephone number, including area code: (972) 713-5800



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 ̈



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



There were 63,566,734 shares of the registrants $.01 par value Common stock outstanding
as of May 3, 2004.



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##### Table of Contents

ENTRUST, INC.



TABLE OF CONTENTS



|                              |  |         |  |                                                                                       |  |     
|----------------------------- |  | ------- |  | ------------------------------------------------------------------------------------- |  | ----
|                              |  |         |  |                                                                                       |  | Page
|PART I. FINANCIAL INFORMATION |  |        
|                              |  |         | 
|                              |  | 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 |  | 12  
|                              |  |         | 
|                              |  | Item 3. |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 35  
|                              |  |         | 
|                              |  | Item 4. |  | Controls and Procedures                                                               |  | 36  
|                              | 
|PART II. OTHER INFORMATION    |  |        
|                              |  |         | 
|                              |  | Item 2. |  | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities      |  | 37  
|                              |  |         | 
|                              |  | Item 6. |  | Exhibits and Reports on Form 8-K                                                      |  | 37  
|                              | 
|SIGNATURES                    |  | 38     



Entrust, Entrust-Ready, and getAccess
are registered trademarks of Entrust, Inc. or a subsidiary of Entrust, Inc. in certain countries. Entrust Authority, Entrust TruePass, Entrust GetAccess, Entrust Entelligence, Entrust Cygnacom, are trademarks or service marks of Entrust, Inc. or a
subsidiary of Entrust, Inc. in certain countries. All other trademarks and service marks used in this quarterly report are the property of their respective owners.



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



ENTRUST, INC.



CONDENSED
CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                                    |  | (Unaudited)   |          |   |                  |  
|                                                                                                                                                                                    |  |              
|                                                                                                                                                                                    |  | MARCH 31,2004 |          |   | DECEMBER 31,2003 |  
|(In thousands, except share data)                                                                                                                                                   |  |               |          |   |                  |  
|ASSETS                                                                                                                                                                              |  |               |          |   |                  |   |          |  
|Current assets:                                                                                                                                                                     |  |               |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                                           |  | $             | 50,201   |   |                  | $ | 37,903   |  
|Short-term marketable investments                                                                                                                                                   |  |               | 49,330   |   |                  |   | 54,386   |  
|Accounts receivable (net of allowance for doubtful accounts of $1,981 at March 31, 2004 and$4,032 at December 31, 2003)                                                             |  |               | 18,284   |   |                  |   | 18,771   |  
|Prepaid expenses and other receivables                                                                                                                                              |  |               | 4,861    |   |                  |   | 3,980    |  
|                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|                                                                                                                                                                                    |  |              
|Total current assets                                                                                                                                                                |  |               | 122,676  |   |                  |   | 115,040  |  
|Long-term marketable investments                                                                                                                                                    |  |               | 9,005    |   |                  |   | 12,379   |  
|Property and equipment, net                                                                                                                                                         |  |               | 6,608    |   |                  |   | 7,678    |  
|Goodwill, net                                                                                                                                                                       |  |               | 11,186   |   |                  |   | 11,186   |  
|Long-term equity investment                                                                                                                                                         |  |               | 451      |   |                  |   | 660      |  
|Other long-term assets, net                                                                                                                                                         |  |               | 1,949    |   |                  |   | 1,809    |  
|                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|                                                                                                                                                                                    |  |              
|Total assets                                                                                                                                                                        |  | $             | 151,875  |   |                  | $ | 148,752  |  
|                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|                                                                                                                                                                                    |  |              
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                |  |               |          |   |                  |   |          |  
|Current liabilities:                                                                                                                                                                |  |               |          |   |                  |   |          |  
|Accounts payable                                                                                                                                                                    |  | $             | 6,655    |   |                  | $ | 6,192    |  
|Accrued liabilities                                                                                                                                                                 |  |               | 10,765   |   |                  |   | 9,619    |  
|Accrued restructuring charges                                                                                                                                                       |  |               | 33,902   |   |                  |   | 35,426   |  
|Deferred revenue                                                                                                                                                                    |  |               | 19,830   |   |                  |   | 16,615   |  
|                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|                                                                                                                                                                                    |  |              
|Total current liabilities                                                                                                                                                           |  |               | 71,152   |   |                  |   | 67,852   |  
|Long-term liabilities                                                                                                                                                               |  |               | 228      |   |                  |   | 228      |  
|                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|                                                                                                                                                                                    |  |              
|Total liabilities                                                                                                                                                                   |  |               | 71,380   |   |                  |   | 68,080   |  
|                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|                                                                                                                                                                                    |  |              
|Shareholders equity:                                                                                                                                                               |  |               |          |   |                  |   |          |  
|Common stock, par value $0.01 per share; 250,000,000 authorized shares; 63,570,137 and63,593,188 issued and outstanding shares at March
31, 2004 and December 31, 2003,respectively |  |               | 636      |   |                  |   | 636      |  
|Additional paid-in capital                                                                                                                                                          |  |               | 778,783  |   |                  |   | 779,339  |  
|Unearned compensation                                                                                                                                                               |  |               | (45      | ) |                  |   | (51      | )
|Accumulated deficit                                                                                                                                                                 |  |               | (698,849 | ) |                  |   | (699,368 | )
|Accumulated other comprehensive income (loss)                                                                                                                                       |  |               | (30      | ) |                  |   | 116      |  
|                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|                                                                                                                                                                                    |  |              
|Total shareholders equity                                                                                                                                                          |  |               | 80,495   |   |                  |   | 80,672   |  
|                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|                                                                                                                                                                                    |  |              
|Total liabilities and shareholders equity                                                                                                                                          |  | $             | 151,875  |   |                  | $ | 148,752  |  
|                                                                                                                                                                                    |  |               |          |   |                  |   |          |  



See notes to condensed
consolidated financial statements



3



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ENTRUST, INC.



CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                               |  |                              |        |   |      |   |        |  
|-------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                               |  | (Unaudited)                  |       
|                                                               | 
|                                                               |  | THREE MONTHS ENDED MARCH 31, |       
|                                                               |  | 2004                         |        |   | 2003 |  
|(In thousands, except per share data)                          |  |                              |        |   |      |  
|Revenues:                                                      |  |                              |        |   |      |   |        |  
|License                                                        |  | $                            | 6,506  |   |      | $ | 7,212  |  
|Services and maintenance                                       |  |                              | 16,503 |   |      |   | 14,492 |  
|                                                               |  |                              |        |   |      |   |        |  
|                                                               |  |                             
|Total revenues                                                 |  |                              | 23,009 |   |      |   | 21,704 |  
|                                                               |  |                              |        |   |      |   |        |  
|                                                               |  |                             
|Cost of revenues:                                              |  |                              |        |   |      |   |        |  
|License                                                        |  |                              | 508    |   |      |   | 767    |  
|Services and maintenance                                       |  |                              | 7,962  |   |      |   | 7,942  |  
|Amortization of purchased product rights                       |  |                              |       |   |      |   | 284    |  
|                                                               |  |                              |        |   |      |   |        |  
|                                                               |  |                             
|Total cost of revenues                                         |  |                              | 8,470  |   |      |   | 8,993  |  
|                                                               |  |                              |        |   |      |   |        |  
|                                                               |  |                             
|Gross profit                                                   |  |                              | 14,539 |   |      |   | 12,711 |  
|                                                               |  |                              |        |   |      |   |        |  
|                                                               |  |                             
|Operating expenses:                                            |  |                              |        |   |      |   |        |  
|Sales and marketing                                            |  |                              | 6,405  |   |      |   | 8,627  |  
|Research and development                                       |  |                              | 4,634  |   |      |   | 5,910  |  
|General and administrative                                     |  |                              | 3,332  |   |      |   | 3,414  |  
|                                                               |  |                              |        |   |      |   |        |  
|                                                               |  |                             
|Total operating expenses                                       |  |                              | 14,371 |   |      |   | 17,951 |  
|                                                               |  |                              |        |   |      |   |        |  
|                                                               |  |                             
|Income (loss) from operations                                  |  |                              | 168    |   |      |   | (5,240 | )
|                                                               |  |                              |        |   |      |   |        |  
|                                                               |  |                             
|Other income (expense):                                        |  |                              |        |   |      |   |        |  
|Interest income                                                |  |                              | 264    |   |      |   | 530    |  
|Foreign exchange gain (loss)                                   |  |                              | 425    |   |      |   | (41    | )
|Loss from equity investment                                    |  |                              | (209   | ) |      |   | (105   | )
|                                                               |  |                              |        |   |      |   |        |  
|                                                               |  |                             
|Total other income                                             |  |                              | 480    |   |      |   | 384    |  
|                                                               |  |                              |        |   |      |   |        |  
|                                                               |  |                             
|Income (loss) before income taxes                              |  |                              | 648    |   |      |   | (4,856 | )
|Provision for income taxes                                     |  |                              | 129    |   |      |   | 174    |  
|                                                               |  |                              |        |   |      |   |        |  
|                                                               |  |                             
|Net income (loss)                                              |  | $                            | 519    |   |      | $ | (5,030 | )
|                                                               |  |                              |        |   |      |   |        |  
|                                                               |  |                             
|Net income (loss) per share:                                   |  |                              |        |   |      |   |        |  
|Basic                                                          |  | $                            | 0.01   |   |      | $ | (0.08  | )
|Diluted                                                        |  | $                            | 0.01   |   |      | $ | (0.08  | )
|Weighted average common shares used in per share computations: |  |                              |        |   |      |   |        |  
|Basic                                                          |  |                              | 63,582 |   |      |   | 63,994 |  
|Diluted                                                        |  |                              | 65,695 |   |      |   | 63,994 |  



See notes to condensed
consolidated financial statements



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ENTRUST, INC.



CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                              |  |                              |         |   |      |   |         |  
|--------------------------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                              |  | (Unaudited)                  |        
|                                                                                              | 
|                                                                                              |  | THREE MONTHS ENDED MARCH 31, |        
|                                                                                              |  | 2004                         |         |   | 2003 |  
|(In thousands)                                                                                |  |                              |         |   |      |  
|OPERATING ACTIVITIES:                                                                         |  |                              |         |   |      |   |         |  
|Net income (loss)                                                                             |  | $                            | 519     |   |      | $ | (5,030  | )
|Non-cash items in net income (loss):                                                          |  |                              |         |   |      |   |         |  
|Depreciation and amortization                                                                 |  |                              | 1,287   |   |      |   | 1,662   |  
|Unearned compensation amortized                                                               |  |                              | 23      |   |      |   | 8       |  
|Loss from equity investment                                                                   |  |                              | 209     |   |      |   | 105     |  
|Reduction in allowance for doubtful accounts                                                  |  |                              | (1,181  | ) |      |   |        |  
|Changes in operating assets and liabilities:                                                  |  |                              |         |   |      |   |         |  
|Decrease in accounts receivable                                                               |  |                              | 1,663   |   |      |   | 3,250   |  
|(Increase) decrease in prepaid expenses and other receivables                                 |  |                              | (881    | ) |      |   | 260     |  
|Increase (decrease) in accounts payable                                                       |  |                              | 462     |   |      |   | (2,871  | )
|Increase (decrease) in accrued liabilities                                                    |  |                              | 1,143   |   |      |   | (602    | )
|Decrease in accrued restructuring charges                                                     |  |                              | (1,524  | ) |      |   | (1,306  | )
|Increase in deferred revenue                                                                  |  |                              | 3,211   |   |      |   | 758     |  
|                                                                                              |  |                              |         |   |      |   |         |  
|                                                                                              |  |                             
|Net cash provided by (used in) operating activities                                           |  |                              | 4,931   |   |      |   | (3,766  | )
|                                                                                              |  |                              |         |   |      |   |         |  
|                                                                                              |  |                             
|INVESTING ACTIVITIES:                                                                         |  |                              |         |   |      |   |         |  
|Purchases of marketable investments                                                           |  |                              | (16,883 | ) |      |   | (36,564 | )
|Dispositions of marketable investments                                                        |  |                              | 25,313  |   |      |   | 41,177  |  
|Purchases of property and equipment                                                           |  |                              | (104    | ) |      |   | (481    | )
|Increase in other long-term assets                                                            |  |                              | (256    | ) |      |   | (29     | )
|                                                                                              |  |                              |         |   |      |   |         |  
|                                                                                              |  |                             
|Net cash provided by investing activities                                                     |  |                              | 8,070   |   |      |   | 4,103   |  
|                                                                                              |  |                              |         |   |      |   |         |  
|                                                                                              |  |                             
|FINANCING ACTIVITIES:                                                                         |  |                              |         |   |      |   |         |  
|Repayment of long-term liabilities                                                            |  |                              |        |   |      |   | (44     | )
|Repurchase of common stock                                                                    |  |                              | (970    | ) |      |   | (2,847  | )
|Increase in long-term deposits                                                                |  |                              |        |   |      |   | 12      |  
|Proceeds from exercise of stock options and sale of shares under employee stock purchase plan |  |                              | 397     |   |      |   | 236     |  
|                                                                                              |  |                              |         |   |      |   |         |  
|                                                                                              |  |                             
|Net cash used in financing activities                                                         |  |                              | (573    | ) |      |   | (2,643  | )
|                                                                                              |  |                              |         |   |      |   |         |  
|                                                                                              |  |                             
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                                                       |  |                              | (130    | ) |      |   | (261    | )
|                                                                                              |  |                              |         |   |      |   |         |  
|                                                                                              |  |                             
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                          |  |                              | 12,298  |   |      |   | (2,567  | )
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                              |  |                              | 37,903  |   |      |   | 32,043  |  
|                                                                                              |  |                              |         |   |      |   |         |  
|                                                                                              |  |                             
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                    |  | $                            | 50,201  |   |      | $ | 29,476  |  
|                                                                                              |  |                              |         |   |      |   |         |  





See notes to condensed consolidated financial statements



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ENTRUST, INC.



NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



(in thousands, except share and per share data, unless
indicated otherwise)



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 of Entrust, Inc., a Maryland corporation, and its consolidated subsidiaries (collectively, the Company). The results of operations for the three months ended March 31, 2004 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 accounting principles generally accepted in the United States of America 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, 2003 contained in the Companys Annual Report on Form
10-K. Certain reclassifications have been made to prior years balances in order to conform to fiscal 2004 presentation, namely, the classification of amortization of purchased product rights on the condensed consolidated statements of
operations.



NOTE 2. STOCK-BASED COMPENSATION AND STOCK OPTION PLANS



Stock-based compensation arising from stock option grants is accounted
for using the intrinsic value method under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Statement of Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock-Based Compensation encourages, but does not require, the cost of stock-based compensation arrangements with employees to be measured based on the fair value of the equity instrument awarded. As permitted by SFAS No. 123, the Company
applies APB Opinion No. 25 and related interpretations in accounting for stock-based compensation awards to employees under its stock option plans. For all options granted to employees in the periods disclosed, the exercise price of each option
granted was equal to the fair value of the underlying stock at the date of grant and, therefore, no stock-based compensation costs are reflected in earnings for these options. Had compensation costs for the Companys 1996 Plan, 1999 Plan,
Special Plan and enCommerce 1997 Plans been determined based on the fair value of the options at the grant date for awards to employees under these plans, consistent with the methodology prescribed under SFAS No. 123, the Companys net loss and
net loss per share would have been as follows, on a pro forma basis.



|                                                                                                                                    |  |                                  |        |   |                                  |   |        |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------ | - | -------------------------------- | - | ------ | -
|                                                                                                                                    |  | Three MonthsEnded March 31, 2004 |        |   | Three MonthsEnded March 31, 2003 |  
|Net income (loss), as reported:                                                                                                     |  | $                                | 519    |   |                                  | $ | (5,030 | )
|Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax
effects |  |                                  | (2,619 | ) |                                  |   | (3,828 | )
|                                                                                                                                    |  |                                  |        |   |                                  |   |        |  
|                                                                                                                                    |  |                                 
|Pro forma net loss                                                                                                                  |  | $                                | (2,100 | ) |                                  | $ | (8,858 | )
|                                                                                                                                    |  |                                  |        |   |                                  |   |        |  
|                                                                                                                                    |  |                                 
|Net income (loss) per share:                                                                                                        |  |                                  |        |   |                                  |   |        |  
|Basicas reported                                                                                                                   |  | $                                | 0.01   |   |                                  | $ | (0.08  | )
|Basicpro forma                                                                                                                     |  | $                                | (0.03  | ) |                                  | $ | (0.14  | )
|Dilutedas reported                                                                                                                 |  | $                                | 0.01   |   |                                  | $ | (0.08  | )
|Dilutedpro forma                                                                                                                   |  | $                                | (0.03  | ) |                                  | $ | (0.14  | )



In the pro forma calculations above,
the weighted average fair value for stock options granted during the three months ended March 31, 2004 and March 31, 2003 was estimated at $3.86 and $2.38 per option, respectively. The fair values of options were estimated as of the date of grant
using the Black-Scholes option pricing model. The following weighted average assumptions were used in the calculations.



|                               |  |                                   |   |  |                                   |  
|------------------------------ |  | --------------------------------- | - |  | --------------------------------- | -
|                               |  | Three Months Ended March 31, 2004 |   |  | Three Months Ended March 31, 2003 |  
|Expected option life, in years |  | 5                                 |   |  | 5                                 |  
|Risk free interest rate        |  | 3.02                              | % |  | 3.03                              | %
|                               |  |                                  
|Dividend yield                 |  |                                  |   |  |                                  |  
|Volatility                     |  | 106                               | % |  | 114                               | %



6



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The Company recorded amortization of unearned compensation of $23 and $8 into compensation expense for the three months
ended March 31, 2004 and 2003, respectively, related to options granted to non-employees in a prior year.



Stock Option Plans



The
following tables summarize information concerning outstanding options and warrants as at March 31, 2004:



|                         |  |                                           |  |                                            |  |                                |       |                                           |           |                                 |   |      
|------------------------ |  | ----------------------------------------- |  | ------------------------------------------ |  | ------------------------------ | ----- | ----------------------------------------- | --------- | ------------------------------- | - | -----
|                         |  | Options and Warrants Outstanding          |  | Options and Warrants Exercisable          
|Range of Exercise Prices |  | Number of Options andWarrants Outstanding |  | Weighted Average RemainingContractual Life |  | Weighted AverageExercise Price |       | Number of Options andWarrants Exercisable |           | Weighted Average Exercise Price
|$0.12 to $2.44           |  | 755,082                                   |  | 3.6 years                                  |  | $                              | 1.89  |                                           | 715,121   |                                 | $ | 1.86 
|$2.46 to $4.99           |  | 6,354,903                                 |  | 8.9 years                                  |  |                                | 3.52  |                                           | 526,916   |                                 |   | 3.32 
|$5.01 to $6.72           |  | 679,341                                   |  | 6.6 years                                  |  |                                | 5.50  |                                           | 526,441   |                                 |   | 5.57 
|$6.75 to $6.86           |  | 3,085,184                                 |  | 5.7 years                                  |  |                                | 6.75  |                                           | 2,735,005 |                                 |   | 6.75 
|$6.87 to $10.00          |  | 4,323,683                                 |  | 7.1 years                                  |  |                                | 6.89  |                                           | 2,702,829 |                                 |   | 6.89 
|$10.01 to $50.00         |  | 695,899                                   |  | 5.9 years                                  |  |                                | 21.31 |                                           | 626,089   |                                 |   | 21.83
|$50.01 to $112.50        |  | 23,675                                    |  | 4.1 years                                  |  |                                | 78.78 |                                           | 23,346    |                                 |   | 78.96
|                         |  |                                           |  |                                            |  |                                |       |                                           |           |                                 |   |      
|                         |  |                                           |  |                                            | 
|Total:                   |  | 15,917,767                                |  |                                            |  | $                              | 5.96  |                                           | 7,855,747 |                                 | $ | 7.46 
|                         |  |                                           |  |                                            |  |                                |       |                                           |           |                                 |   |      



The following table sets forth a
comparison as of March 31, 2004, of the number of shares subject to options with exercise prices at or below the closing price per share of our Common stock on March 31, 2004 (In-the-Money options) to the number of shares of our Common
stock subject to options with exercise prices greater than the closing price per share of our Common stock on such date (Out-of-the-Money options) (in actual shares):



In-the-Money and Out-of-the-Money Option Information as of March 31, 2004 (1)



|                          |  |             |  |               |  |            |  |                                       |  
|------------------------- |  | ----------- |  | ------------- |  | ---------- |  | ------------------------------------- | -
|                          |  | Exercisable |  | Unexercisable |  | Total      |  | Percentage ofTotal OptionsOutstanding |  
|In-the-Money              |  | 1,185,787   |  | 4,415,148     |  | 5,600,935  |  | 35                                    | %
|Out-of-the-Money          |  | 6,669,960   |  | 3,646,872     |  | 10,316,832 |  | 65                                    | %
|                          |  |             |  |               |  |            |  |                                       |  
|                          |  |             |  |              
|Total Options Outstanding |  | 7,855,747   |  | 8,062,020     |  | 15,917,767 |  | 100                                   | %
|                          |  |             |  |               |  |            |  |                                       |  



|(1) | The closing price of our Common stock was $4.36 on March 31, 2004, as reported by The NASDAQ National Market.
|--- | -------------------------------------------------------------------------------------------------------------



NOTE 3. EQUITY INVESTMENT IN ENTRUST JAPAN CO., LTD. (Entrust Japan)



The Company has included its share of post-acquisition losses of Entrust
Japan, in the amount of $209 for the three months ended March 31, 2004 in its consolidated losses for the current fiscal year. The Company has recorded cumulative losses from its investment in Entrust Japan of $1,414, since its increased investment
in the second quarter of 2002.



Financial Accounting Standards Board
Interpretation No. 46, Consolidation of Variable Interest Entities (FIN No. 46), issued in January 2003, requires a company to consolidate a variable interest entity (VIE) if the company has variable interests
that give it a majority of the expected losses or a majority of the expected residual returns of the entity. The Company has evaluated the applicability of FIN No. 46 to its investment in Entrust Japan and the possible impact on its consolidated
results of operations and consolidated balance sheet. Entrust Japan is a private Japanese corporation founded in June 1998. Entrust Japan is engaged in selling, servicing and supporting solutions that enable organizations to secure digital
identities and information in the Japanese market. Entrust Japan has an exclusive license to market and sell Entrust products in Japan. They also provide professional services and support for the software solutions that they sell. Entrust Japan
generates annual revenues of approximately $4,000, with total assets of approximately $3,500 at March 31, 2004. Entrust made an original investment of $393 for approximately 10% of the common stock. In April 2002, the Company increased its
investment to the current approximately 37% through the contribution of $1,481 of cash and cash deposits, $385K of Entrust products and exclusivity rights. The cash equity investment that Entrust has made totals $1,881 plus $385 of in-kind
investment. The Company has concluded that the $1,881 represents its total equity at risk and would be the maximum exposure to loss as a result of its involvement with the variable interest entity. In addition, we do not have any obligation



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to provide additional cash funding to them. The Company has concluded that Entrust Japan meets the definition of a VIE,
as described in FIN No. 46, as it does not have an equity investment at risk that is sufficient to permit Entrust Japan to finance its

activities without
additional subordinated financial support from other parties. Although the Company holds a significant variable interest, it has determined that it is not the primary beneficiary of Entrust Japan because the Companys interests do not give it a
majority of the expected losses and residual returns of the entity. Accordingly, there was no impact on the Companys consolidated results of operations and consolidated balance sheet, as a result of the adoption of FIN No. 46.



NOTE 4. STOCK REPURCHASE PROGRAM AND SHARE REGISTRATIONS



On July 29, 2002, the Company announced that its board of directors had authorized the
Company to repurchase up to an aggregate of 7,000,000 shares of its Common stock. On July 22, 2003, the Company announced that its board of directors had authorized an extension to this stock repurchase program. Entrusts original stock
repurchase program would have expired on July 28, 2003. The extended plan permits the new purchase of up to 7,000,000 shares of the Companys Common stock through September 1, 2004, in addition to the 2,229,200 shares already purchased prior to
the extension. During the three months ended March 31, 2004, the Company repurchased 191,650 shares of its Common stock for a total cash outlay of $970, or an average price of $5.06 per share, including commissions paid to brokers. As of March 31,
2004, the Company has repurchased 2,420,850 shares of its Common stock under this program, for a total cash outlay of $6,907, at an average price of $2.85 per share, including commissions paid to brokers.



Repurchases under the stock repurchase program may take place from time to time until
September 1, 2004, or an earlier date determined by the Companys board of directors, in open market, negotiated or block transactions, and may be suspended or discontinued at any time. The Companys management will determine the timing
and amount of shares repurchased based on its evaluation of market and business conditions. The repurchased shares will be considered authorized but unissued shares of the Company and will be available for issuance under the Companys stock
incentive, employee stock purchase and other stock benefit plans, and for general corporate purposes, including possible acquisitions. The stock repurchase program will be funded using the Companys working capital.



Nortel Networks Inc. had the right to sell its shares under Rule 144 of the Securities Act of
1933 or through the exercise of demand registration rights. The Company received notice of a demand registration from Nortel Networks Inc. pursuant to its Amended and Restated Registration Rights Agreement, dated as of July 29, 1998, with the
Company. The demand was for the registration of all the 7,301,259 shares of the Companys common stock that Nortel Networks Inc. held at December 31, 2003. The Amended and Restated Registration Rights Agreement was set to expire in August of
2003. The Company complied with that demand and filed a registration statement on Form S-3 with the Securities and Exchange Commission on July 31, 2003, as a result of that demand. This Form S-3 was declared effective by the Securities and Exchange
Commission on January 30, 2004. On February 3, 2004, Nortel Networks Inc. sold all 7,301,259 shares of the Companys common stock that they owned.



NOTE 5. RECOVERY OF ACCOUNT RECEIVABLE UNDER SETTLEMENT AGREEMENT



During the first quarter of 2004, the Companny reached a settlement agreement on a significant and long outstanding receivable related to a license agreement executed in
June 2000. This receivable had been completely provided for in fiscal 2001, because it had been determined that the likelihood of full payment was less than probable, despite the fact that the Company had undertaken all avenues of collection
available to it, including litigation. As part of the process of pursuing collection through the court system, the Company entered into settlement discussions with the customer. As a result of these discussions, a settlement was reached under which
full payment of the original invoiced amount of approximately $2,000 was assured upon execution of a new agreement, half of which was received prior to March 31, 2004, while the other half remained in accounts receivable at that date and was
collected in April 2004. In total, the Company reduced its allowance for doubtful accounts by approximately $2,000 due to the settlement. As part of this settlement agreement, we also agreed to provide this customer with additional software products
and professional services, the related costs of which were provided for from the allowance for bad debts that had previously been set up against this receivable. The remaining allowance in the amount of $1,300 was reversed against sales and
marketing expenses as a recovery of this bad debt.



NOTE 6. ACCRUED
RESTRUCTURING CHARGES



May 2003 Restructuring Plan



Following the first quarter of 2003, when the Companys revenue
attainment fell short of its expectations and guidance, management began a re-assessment of the Companys operations to ensure that its expenses were optimally aligned to its customers and markets, and structured such that it could achieve its
financial break even target for the fourth quarter of 2003.



On May 27, 2003,
the Company announced a restructuring plan aimed at lowering costs and better aligning its resources to customer needs. The plan allows the Company to have tighter integration between customer touch functions, which better positions the Company to
take advantage of the market opportunities for its new products, and solutions. The restructuring plan included

eliminating positions to lower operating
costs, closing under-utilized office capacity, and re-assessing the useful life of related excess



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long-lived assets. The Company also announced non-cash charges related to the impairment of a long-term strategic
investment and the impairment of purchased product rights acquired through the enCommerce acquisition of June 2000.



The Company conducted its assessment of the accounting effects of the May 2003 restructuring plan in accordance with SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, APB Opinion No. 9, Reporting the Results of Operations, and the relevant provisions of the SECs SAB
No. 100, Restructuring and Impairment Charges.



The workforce
portion of the restructuring plan included severance and related costs for 151 positions from all functional areas of the Company and had been significantly completed by June 30, 2003, with the remaining costs of $524 incurred in the third quarter
of 2003. The consolidation of under-utilized facilities included costs relating to lease obligations through the first quarter of 2009, primarily from the Companys Santa Clara, California and Addison, Texas facilities, and accelerated
amortization of related leaseholds and equipment. The facilities plan was executed by September 30, 2003 and, as a result, the Company recorded $3,759 of charges during the third quarter of 2003 relating to these facilities, including $953 for
accelerated amortization on leaseholds and equipment whose estimated useful lives had been impacted by the plan to cease using the related excess capacity in the Companys facilities and $2,806 for lease obligations related to excess capacity
at Company locations for which the cease-use date occurred during the third quarter of 2003. The total amount of the workforce and facilities charges was $8,929. Of this amount, $4,646 had been incurred by June 30, 2003 and was charged to the
restructuring charges line in the consolidated statement of operations for the second quarter of 2003, while the remaining $4,283 was recorded in the third quarter of 2003.



The Company continues to evaluate ongoing possibilities to settle its May 2003 restructuring obligations in the most cost-effective manner
and, therefore, has classified them as current in nature. However, in terms of long-term liquidity requirements, the current obligations would require the Company to fund $1,000 of its accrued restructuring charges for the May 2003 restructuring
before the end of fiscal 2004, with the remaining accrued restructuring charges for the May 2003 restructuring to be paid as follows: $900 in fiscal 2005, $100 in fiscal 2006, $100 in fiscal 2007 and $300 in fiscal 2008 and beyond.



Summary of Accrued Restructuring Charges for May 2003 Restructuring



The following table is a summary of the accrued restructuring charges related to the May
2003 plan at March 31, 2004:



|                                              |  |                                            |     |               |   |                                                 |  |   |    
|--------------------------------------------- |  | ------------------------------------------ | --- | ------------- | - | ----------------------------------------------- |  | - | ---
|                                              |  | Total Charges Accrued at Beginning of Year |     | Cash Payments |   | Accrued Restructuring Charges at March 31, 2004
|                                              |  | (in millions)                             
|Workforce reduction and other personnel costs |  | $                                          | 0.9 |               | $ | 0.4                                             |  | $ | 0.5
|Consolidation of excess facilities            |  |                                            | 2.2 |               |   | 0.3                                             |  |   | 1.9
|                                              |  |                                            |     |               |   |                                                 |  |   |    
|                                              |  |                                            |    
|Total                                         |  | $                                          | 3.1 |               | $ | 0.7                                             |  | $ | 2.4
|                                              |  |                                            |     |               |   |                                                 |  |   |    



June 2001 Restructuring Plan



On June 4, 2001, the Company announced a Board-approved restructuring
plan to refocus on the Companys most significant market opportunities and to reduce operating costs due to the macroeconomic factors that were negatively affecting technology investment in the market. The restructuring plan included a
workforce reduction, consolidation of excess facilities, and discontinuance of non-core products and programs.



The workforce portion of the restructuring plan was largely completed by the end of the fourth quarter of 2001 and primarily related to severance costs, fringe benefits due to severed employees and outplacement
services.



The consolidation of excess facilities included the closure of eight
offices throughout the world, but the majority of the costs related to the Companys facility in Santa Clara, California. These costs are payable contractually over the remaining term of the Santa Clara facility lease, which runs through 2011,
reduced by estimated sublease recoveries. The discontinuance of non-core products and programs was primarily related to the discontinuance of certain of the Companys business program initiatives and certain applications that had not achieved
their growth and profitability objectives. In addition, the Company withdrew from certain committed marketing events and programs. The cash outflow related to the majority of these discontinued products and programs was substantially completed by
the end of the second quarter of 2002, while remaining marketing and distribution agreement obligations related to certain discontinued products were settled in the third quarter of 2003. The Company had initiated all actions required by the
restructuring plan by the end of the second quarter of 2002.



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The Company continues to evaluate ongoing possibilities to settle its June 2001 restructuring obligations in the most
cost-effective manner and, therefore, has classified them as current in nature. However, the current obligations would require the Company to fund

$2,900
of its accrued restructuring charges for the June 2001 restructuring before the end of fiscal 2004, with the remaining accrued restructuring charges for the June 2001 restructuring to be paid as follows: $3,000 in fiscal 2005, $3,400 in fiscal 2006,
$5,000 in fiscal 2007 and $17,200 in fiscal 2007 and beyond.



Summary of
Accrued Restructuring Charges for June 2001 Restructuring



The following
table is a summary of the accrued restructuring charges related to the June 2001 plan at March 31, 2004:



|                                                 |  |                                            |      |               |   |                                                 |  |   |     
|------------------------------------------------ |  | ------------------------------------------ | ---- | ------------- | - | ----------------------------------------------- |  | - | ----
|                                                 |  | Total Charges Accrued at Beginning of Year |      | Cash Payments |   | Accrued Restructuring Charges at March 31, 2004
|                                                 |  | (in millions)                             
|Consolidation of excess facilities               |  | $                                          | 32.1 |               | $ | 0.7                                             |  | $ | 31.4
|Discontinuance of non-core products and programs |  |                                            | 0.2  |               |   | 0.1                                             |  |   | 0.1 
|                                                 |  |                                            |      |               |   |                                                 |  |   |     
|                                                 |  |                                            |     
|Total                                            |  | $                                          | 32.3 |               | $ | 0.8                                             |  | $ | 31.5
|                                                 |  |                                            |      |               |   |                                                 |  |   |     



As of March 31, 2004, the Company had
estimated a total of $23,600 of sublease recoveries in our restructuring accrual. Of this amount, $23,400 is related to the Santa Clara facility. In addition, $9,000 of the $23,600 is recoverable under existing sublease agreements and the remaining
$14,600 of rent recoveries is based on estimates that may be subject to adjustments based upon changes in the real estate sublet markets.



NOTE 7. 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, options to purchase Common stock using
the treasury stock method. The dilutive effect of the options to purchase Common stock are excluded from the computation of diluted net income (loss) per share if the effect is antidilutive. For the three months ended March 31, 2004, the number of
shares of Common stock issuable upon exercise of options under the treasury stock method included in the diluted net income per share computation was 2,113,541 shares. For the three months ended March 31, 2003, the 673,636 shares of Common stock
issuable upon exercise of options under the treasury stock method were excluded from the diluted net loss per share computation due to their antidilutive effect. In addition, options which had exercise prices in excess of the average market price
during those periods were also excluded from the computation of diluted net loss per share.



In the three months ended March 31, 2004, the Company issued 168,599 shares of Common stock related to the exercise of employee stock options.



NOTE 8. MARKETABLE AND OTHER INVESTMENTS



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, primarily with a remaining maturity of not more than 24 months. The Company has the intent and ability to hold all of these investments until maturity.
Therefore, all such investments are classified as held to maturity investments, and are stated at amortized cost. At March 31, 2004, the amortized cost of the Companys held to maturity investments approximated fair value. Based on contractual
maturities, these marketable investments were classified in either current assets or long-term assets.



Realized gains and losses on disposition of available for sale marketable investments are included in other 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 other investment income during the period of the hedge. As at March 31, 2004, the Company does not hold any available for sale marketable
investments.



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 the outstanding voting share capital at March 31, 2004. Consistent
with the Companys policies for other long-lived assets, the carrying value of these long-term strategic investments is periodically reviewed for impairment based upon such quantitative measures as expected undiscounted cash flows, as well as
qualitative factors. In addition, the Audit Committee of the Board of Directors monitors and assesses the ongoing operating performance of the underlying companies for evidence of impairment. To date, the Company has

recorded impairments totalling $14,818 with respect to these investments, as a result of other than temporary declines in fair value.



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These strategic investments had a net remaining carrying value of $nil and $2,858 at March 31, 2004 and 2003,
respectively.



In addition, the Company holds an equity interest in Entrust
Japan, which represents approximately 37% of the voting share capital of Entrust Japan that is accounted for by the Company using the equity method of accounting for investments in common stock. See Note 3 for additional discussion.



The Company recorded revenues representing less than 1% of total revenues in each of the
three months ended March 31, 2004 and 2003, with respect to arms-length transactions with companies in which it has made strategic equity investments recorded at cost. In addition, revenues recorded by the Company from Entrust Japan
represented approximately 2% and 3% of total revenues in the three months ended March 31, 2004 and 2003, respectively.



NOTE 9. SEGMENT AND GEOGRAPHIC INFORMATION



Segment information



The Company conducts business in one operating segment: namely, the design, production and sale of software products and related services for securing digital identities and information. The nature of the
Companys different 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 Chairman and Chief
Executive Officer on a geographic basis. Accordingly, the Company has included a summary of the segment financial information, on a geographic basis, as reported to the Chairman and Chief Executive Officer.



Geographic information



Revenues are attributed to specific geographical areas based on where the sales orders
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 Ended March 31, |        
|                                        |  | 2004                         |         | 2003              |  
|Revenues:                               |  |                              |         |                   |   |         |  
|United States                           |  | $                            | 13,051  |                   | $ | 11,465  |  
|Canada                                  |  |                              | 4,544   |                   |   | 3,770   |  
|Europe, Asia and Other                  |  |                              | 5,414   |                   |   | 6,469   |  
|                                        |  |                              |         |                   |   |         |  
|                                        |  |                             
|Total revenues                          |  | $                            | 23,009  |                   | $ | 21,704  |  
|                                        |  |                              |         |                   |   |         |  
|                                        |  |                             
|Income (loss) before income taxes:      |  |                              |         |                   |   |         |  
|United States                           |  | $                            | 90      |                   | $ | (1,161  | )
|Canada                                  |  |                              | 358     |                   |   | (3,683  | )
|Europe, Asia and Other                  |  |                              | 200     |                   |   | (12     | )
|                                        |  |                              |         |                   |   |         |  
|                                        |  |                             
|Total income (loss) before income taxes |  | $                            | 648     |                   | $ | (4,856  | )
|                                        |  |                              |         |                   |   |         |  
|                                        |  |                             
|                                        |  | (Unaudited)                  |         |                   |  
|                                        |  |                             
|                                        |  | March 31, 2004               |         | December 31, 2003 |  
|Total assets:                           |  |                              |         |                   |   |         |  
|United States                           |  | $                            | 116,599 |                   | $ | 153,498 |  
|Canada                                  |  |                              | 33,294  |                   |   | 21,206  |  
|Europe, Asia and Other                  |  |                              | 1,982   |                   |   | 3,376   |  
|                                        |  |                              |         |                   |   |         |  
|                                        |  |                             
|Total                                   |  | $                            | 151,875 |                   | $ | 178,080 |  
|                                        |  |                              |         |                   |   |         |  



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NOTE 10. COMPREHENSIVE INCOME (LOSS)



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



|                                         |  |                              |      |   |      |   |        |  
|---------------------------------------- |  | ---------------------------- | ---- | - | ---- | - | ------ | -
|                                         |  | (Unaudited)                  |     
|                                         |  | Three Months Ended March 31, |     
|                                         |  | 2004                         |      |   | 2003 |  
|Net income (loss)                        |  | $                            | 519  |   |      | $ | (5,030 | )
|Foreign currency translation adjustments |  |                              | (146 | ) |      |   | 583    |  
|                                         |  |                              |      |   |      |   |        |  
|                                         |  |                             
|Comprehensive income (loss)              |  | $                            | 373  |   |      | $ | (4,447 | )
|                                         |  |                              |      |   |      |   |        |  



NOTE 11. LEGAL PROCEEDINGS



Frankel v. Entrust Technologies Inc.



On July 7, 2000, an action entitled Frankel v. Entrust Technologies Inc., et al., No.
2-00-CV-119, was filed in the U.S. District Court for the Eastern District of Texas. Subsequently, several similar actions were also filed. These actions were consolidated and on January 22, 2001, a consolidated complaint was filed. The consolidated
complaint purported to be a class action lawsuit brought on behalf of persons who purchased or otherwise acquired Common stock of the Company during the period from October 19, 1999 through July 3, 2000. The consolidated complaint alleged that the
defendants misrepresented and failed to disclose certain information about the Companys business and prospects, as required by the Securities Exchange Act of 1934. It did not specify the amount of damages sought.



On September 30, 2002, Judge T. John Ward of the U.S. District Court for the Eastern District
of Texas issued an order dismissing this purported securities class action lawsuit pending against the Company with prejudice; however, the order is subject to the possibility of an appeal. As of the date of the filing of this report, the Company
has not learned of any appeal being filed. If an appeal is granted, 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.



Other Legal Matters



The Company is subject, from time to time, 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.



NOTE
12. CONTINGENCIES



Entrust entered into a contract with the General
Services Administration (GSA) on March 31, 2000. It had come to the Companys attention that it might have a potential liability to the GSA under this contract, and the Company has advised the GSA of this matter. The Company has
been conducting a self-assessment of its compliance and internal processes with respect to the agreement, as well as the pricing requirements of the agreement. At this time, the Companys self-assessment is nearing completion and, as a result,
the Company has been able to make a reasonable estimate of its probable minimum liability. The Company accrued this estimated amount in 2003. Management believes that the self-assessed liability is not material and based on the current information
available, that the final outcome will not have a material adverse effect on the Companys consolidated results of operations or consolidated financial condition.



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 and Certain Factors That May Affect Our
Business and elsewhere in this report. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our



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condensed consolidated financial statements and notes thereto appearing elsewhere in this report.



OVERVIEW





We are a global provider of Identity and Access Management
solutions. Our software enables enterprises and governments to extend their business reach to customers, partners and employees. Our solutions for secure identity management, secure messaging and secure data increase productivity and improve
extended relationships by transforming the way transactions are done online. Over 1,250 organizations in more than 50 countries use our proven software and services to turn business and security challenges into secure business opportunities.



We conduct business in one operating segment. We develop, market and sell
software solutions that secures digital identities and information. We also perform professional services to install, support and integrate our software solutions with other applications. All of these activities may be fulfilled in conjunction with
partners and are managed through a global functional organization.



EXECUTIVE OVERVIEW



We are a global provider of software that
helps our customers achieve their goals of securely managing their wide range of identities across different platforms, architectures and devices. Our customer value is achieved when we serve as a trusted advisor to our customer and our products are
successfully deployed. We accomplish this by delivering software and services for our customers Identity and Access Management needs.



The Identity and Access Management market, commonly called the I&AM market, is the overall segment of the information technology market place that we participate in.



Our products and services provide customers with I&AM solutions, which
help to meet their specific needs for Secure Messaging, Secure Identity Management and Secure Data. Our broad set of capabilities in these three areas gives Entrust a strong portfolio in the I&AM market. Customers benefit from their ability to
purchase one set of capabilities from Entrust to meet their I&AM needs and have, at the same time, the option to extend their investment in our products and services across the requirements of their business. We believe this is a competitive
advantage for us. Our approach of blending best-in-class products and services, whether developed by Entrust or one of its partners, to deliver a comprehensive suite to the market space also goes along well with the trusted advisor role that we have
taken with our customers. We have the capabilities to assist our customers across their wide range of needs for I&AM, where many of our competitors can only assist them with respect to a narrow range of needs. We look to continue to grow our
market share in the I&AM space.



We sell our products and services in both
the enterprise and government market space. In Q1, 2004, 17% of our software sales were in our extended government vertical market, which includes healthcare. This was down from 46% in 2003. A combination of increased enterprise sales in the first
quarter and lower government spending drove the change. We are well positioned in both markets, and we see growth opportunities in each area. In the extended government vertical market, we have a strong penetration in the U.S. Federal government
market space, the government of Canada, Singapore, Denmark, United Kingdom and across continental Europe. As governments continue to increase spending on e-government initiatives and security projects, we are well positioned to help them in their
I&AM needs. In the enterprise market, the need for a deeper integration with partners, suppliers and customers, coupled with the need for security and lower costs, continues to be key drivers for our customers to purchase our offerings. Budgets,
timing, and allocation of budget dollars continue to keep us guarded on our growth expectations in the coming year; however, we feel the spending environment is better than it has been in the last two years.



We rely significantly on large deals in each quarter. Our software revenue from our top five
customers in a given quarter is on average approximately 17%. In the past we have had quarters where this was a much lower percentage, which has sometimes dramatically reduced both our total revenue and our earnings and earnings per share. Also
impacting software revenue has been the process that our customers are going through to complete a proof of concept, which sometimes has proven to produce a longer sales cycle. We are also impacted by our customers recent buying behavior,
which is to buy only for immediate need as opposed to making a larger purchase in order to get a better discount. All of these factors can come into play in impacting our revenue on a quarterly basis.



In order to support our market opportunities, we have a marketing organization focused on
creating brand awareness and new business opportunities for the Company. Key branding initiatives include Web advertising, search engine optimization for key word



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searches, public relations initiatives and sponsorships of key security and government events and forums. One of these
key initiatives that has carried over from 2003 to 2004 is our focus on positioning ourselves as a thought leader in information security governance

(ISG).
In 2003 we co-chaired a task force for the Business Software Alliance to focus on this issue. The task force launched an in-depth framework for enterprise ISG. Also in 2003, we were selected to co-chair the Department of Homeland Securities Task
Force on Cybersecurity. This task force is also looking at the ISG issue, but from a homeland security standpoint. In April of this year, the task force released its findings and is currently working to gain industry and government support for the
recommendations. We are hopeful that our work on ISG will position us to be a key component of the quality process that companies adopt to secure their most critical digital resources.



Assisting us in our growth strategy in this market will be our ability to serve as the trusted advisor to our clients. In this capacity we
will continue to expand our offerings by building new products and solutions, partnering with technology providers and bringing it all together for the customer with our services offerings. Our services group gives us the capabilities to help our
customers deploy a total solution that meets their demands for securing digital identities and information. In Q1, 2004, our services organization achieved their highest quarterly revenue in over two and a half years as they helped support customers
in the architecture and deployment of our products and services. Our services group also provides support and maintenance to our customers, which is purchased on an annual basis. We have invested heavily in this area and, with our support and
maintenance revenues at a record level in Q1, 2004; we feel the investment is paying off. We remain positive on our outlook for services in 2004. However, budgets, adoption of our software and our leveraging of our services partners are all factors
that could impact our ability to create services revenue.



We earn revenue by
providing both software and services to our customers. We earn software revenue mainly on a per user basis under a perpetual licensing agreement. We earn services revenue by providing support and maintenance to our customers along with professional
services for the planning, architecture and deployment of our products and services. In Q1, 2004, 28% of our revenue was from software sales and 72% was from services. Over the last three years, we have become a more services-led company as we have
been focused on helping our customers deploy our products. In 2004, we will continue to focus on providing services to our customers, but we will also look to increase the percentage of software sales in relation to services, primarily through the
introduction of new software products.



Over the past three years, we have
focused on keeping our cost structure in line with our current revenue opportunity. In the second quarter of 2003, we restructured the Company and established a goal of reaching breakeven by the end of 2003. In the fourth quarter of 2003 we met this
goal and produced a $60 thousand net profit. We followed that accomplishment up with a net profit of $519 thousand in Q1, 2004. This achievement was an important step in our strategy of returning the Company to a growth and leadership position in
the I&AM market space.



We have a history of providing valued security
solutions to our customers. In 2003, we released a number of new products that are beginning to be deployed in the market. Evidence of new product deployment came in the fourth quarter of 2003 and first quarter of 2004, as eight of our top ten deals
in the two quarters contained at least one component of our newly released product offerings. Our strong global customer base, our record support and maintenance revenue, increasing professional services revenue, and the deployment of our new and
classic products and services are our strengths.



Our management uses the
following metrics to measure performance:



| | Number of license revenue transactions;
|- | ---------------------------------------



| | Average license revenue transaction size;
|- | -----------------------------------------



| | Top-five license revenue transactions as a percentage of total revenues;
|- | ------------------------------------------------------------------------



| | License and services revenues as a percentage of total revenues and services and maintenance; and
|- | -------------------------------------------------------------------------------------------------



| | Gross profit as a percentage of services and maintenance revenues.
|- | ------------------------------------------------------------------



BUSINESS OVERVIEW



During the first quarter of 2004, we continued our strategy of focusing on core vertical and geographic markets. Software license revenues decreased 10% from the first
quarter of 2003 driven by our lower software transactions closure rate despite a higher average purchase value in the first quarter of 2004. Services and maintenance revenues improved 14% in the first quarter of 2004, due to higher professional
services revenues, and record customer support revenues. The breakout by solutions group for software in the quarter was 26% Secure Desktop, 15% Secure Web Portal and 59% Infrastructure. Infrastructure played a higher percentage of revenue as we had
a number deals in the Secure Data area that are currently rolling into infrastructure. Entrust Certificate Services





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continued to gain traction in the SSL Web Server certificate market with their sixth consecutive quarter of revenue
growth and highest revenue achievement since entering this market in 1999. The finance vertical accounted for approximately 56% of first

quarter software
revenue, producing its largest contribution to software revenue in nearly four years. Software sales to the enterprise market achieved the highest revenue level in five quarters. Extended Enterprises accounted for 83%, while Extended Government
accounted for 17% of the software revenue in the quarter.



Other highlights
from the first quarter of 2004 included:



| | Our largest transaction in the quarter involved our Secure Data solution to an industry-owned financial cooperative that supplies secure, standardized messaging services and
interface software to financial institutions in over 200 countries. Four of the top five customers in the quarter purchased our Secure Identity Management Solution to provide Identity and Access Management for internal and external use. Two of these
customers were global governments, one customer was a large auto manufacturer and the other customer was a large investment fund technology infrastructure provider.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Eight out of the top ten software sales in the Q1, 2004 and Q4, 2003 included new product and new solutions that were launched in the middle of 2003. We also had more new customer
software transactions compared to Q4, 2003.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Services and maintenance revenues reached $16.5 million, the highest level in nearly three years. Our support and maintenance revenues matched Q4, 2003 record levels. This
achievement was driven by a record amount of customer support renewals in the quarter.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Entrust Cygnacom, a subsidiary of Entrust, Inc. which is focused on providing security services to the U.S. Federal government, achieved their highest revenue level ever. Entrust
Cygnacom continues to grow their position as a trusted advisor in meeting the security needs of the U.S. Federal government.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Professional services in the United States attained their highest revenues in three years reflecting increased activity in the extended enterprise market.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| | The top five software transactions accounted for 17% of Q1, 2004 revenues, which is in line with our 2003 average of 18%. The average purchase size this quarter was $103,000, an
increase of 12% from Q1, 2003. Enterprise software transactions totalled 62, which is consistent with Q4, 2003.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our key technology-related accomplishments during the first quarter of 2004 included the following:



| | Entrust and Tumbleweed Communications announced a patent cross-licensing agreement intended to expand the companies secure messaging initiatives. Under the terms of the
agreement, Entrust and Tumbleweed entered into a broad cross-license covering their respective patent portfolios. The agreement covers selected patents and patents issuing from patent applications that have been filed or that may be filed, by either
company over the next three years. The cross-license agreement builds on the two companies commitment to further the growth of secure Internet communications. This intellectual property exchange will allow each company to continue to innovate
and broaden its range of commercial products and services.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | The Corporate Governance Task Force of the National Cyber Security Partnership (NCSP) released a management framework and call to action to industry, non-profits and educational
institutions, challenging them to integrate effective information security governance (ISG) programs into their corporate governance processes. Entrust served as Co-chair of the task force and continued our leadership position in this area.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Entrust was a founding member of the Cyber Security Industry Alliance (CSIA), launched in February 2004. The CSIA is a non-profit corporate-membership organization, whose mission is
to improve cyber security through public policy initiatives, public sector partnerships, corporate outreach, academic programs, alignment behind emerging industry technology standards and public education. Entrust CEO, Bill Conner, has been selected
as the co-chair of the CSIA public policy committee.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Entrust and Passlogix®, announced that Entrust has added market-leading Passlogix v-GO SSO® to the Entrust Secure Identity Management Solution. The move enables Entrust to provide customers, such as Czech Telecom, with a complete best-of-breed solution that extends
across client-server, Web, and Web services environments.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Entrust announced that SC Magazine has named the Entrust® USB Token the Best Buy in a competitive lab review of hardware authentication products. This recognition distinguishes the hardware
authentication product as a leading authentication solution for global enterprises and governments. Under the SC Magazine product review ranking system, the overall rating for the Entrust USB Token was five stars, their highest distinction in a
competitive lab review. The Entrust USB Token is an integral component of the Entrust Secure Identity Management solution, helping meet the strong authentication requirements of customers deploying sensitive applications.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | Entrust was part of an eleven vendor team that in conjunction with the U.S. General Service Administration (GSA) E-Gov E-Authentication Initiative, demonstrated interoperability of
the Security Assertion Markup Language (SAML), an OASIS Standard for the exchange of authentication and authorization information.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



CRITICAL ACCOUNTING POLICIES



In the first quarter of 2004, our most complex accounting judgments were made in the areas of software revenue recognition, allowance for doubtful accounts, restructuring
charges and related adjustments, accounting for long-term strategic and equity investments, the provision for income taxes and stock-based compensation. The restructuring and related charges are not anticipated to be recurring in nature. However,
the financial reporting of restructuring and related charges will continue to require judgments until such time as the corresponding accruals are fully paid out and/or no longer required. Software revenue recognition, allowance for doubtful
accounts, accounting for long-term strategic investments, provision for income taxes and stock-based compensation are expected to continue to be ongoing elements of our critical accounting processes and judgments.



Software Revenue Recognition



With respect to software revenue recognition, we recognize revenues in accordance with the
provisions of the American Institute of Certified Public Accountants Statement of Position No. 97-2, Software Revenue Recognition, Statement of Position No. 98-9, Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions and related accounting guidance and pronouncements. Due to the complexity of some software license agreements, we routinely apply judgments to the application of software revenue recognition accounting
principles to specific agreements and transactions. We analyze various factors, including a review of the specifics of each transaction, historical experience, credit worthiness of customers and current market and economic conditions. Changes in
judgments based upon these factors could impact the timing and amount of revenues and cost recognized. Different judgments and/or different contract structures could lead to different accounting conclusions, which could have a material effect on our
reported earnings.



Revenues from perpetual software license agreements are
recognized when we have received an executed license agreement or an unconditional order under an existing license agreement, the software has been shipped (if there are no significant remaining vendor obligations), collection of the receivable is
probable and payment is due within twelve months. Revenues from license agreements requiring the delivery of significant unspecified software products in the future are accounted for as subscriptions and, accordingly, are recognized ratably over the
term of the agreement from the first instance of product delivery. This policy is applicable to all sales transactions, including sales to resellers and end user customers. License revenues are generated both through direct sales to end users as
well as through various partners, including system integrators, value-added resellers and distributors. License revenue is recognized when the sale has occurred for an identified end user, provided all other revenue recognition criteria are met. We
are notified of a sale by a reseller to the end user customer in the same period that the actual sale took place. We do not offer a right of return on sales of our software products.



For all sales, we use a binding contract, purchase order or another form of documented agreement as evidence of an arrangement with the
customer. Sales to our distributors are evidenced by a master agreement governing the relationship, together with binding purchase orders on a transaction-by-transaction basis. We consider delivery to occur when we ship the product, so long as title
and risk of loss have passed to the customer. If an arrangement includes undelivered products or services that are essential to the functionality of the delivered product, delivery is not considered to have occurred until these products or services
are delivered.



At the time of a transaction, we assess whether the sale amount
is fixed or determinable based upon the terms of the documented agreement. If we determine the fee is not fixed or determinable at the onset, we recognize revenue when the fee becomes fixed and determinable. We assess if collection is probable based
on a number of factors, including past transaction history with the customer and the creditworthiness of the customer. If we determine that collection is not probable, we do not record revenue until such time as collection becomes probable, which is
generally upon the receipt of cash.



We do not generally include acceptance
provisions in arrangements with customers. However, if an arrangement includes an acceptance provision, we recognize revenue upon the customers acceptance of the product, which occurs upon the earlier of receipt of a written customer
acceptance or expiration of the acceptance period.



We are sometimes subject to
fiscal funding clauses in our software licensing transactions with the United States government and its agencies. Such clauses generally provide that the license is cancellable if the legislature or funding authority does not appropriate the funds
necessary for the governmental unit to fulfill its obligations under the licensing arrangement. In these circumstances, software licensing arrangements with governmental organizations containing a fiscal funding clause are evaluated to determine
whether the uncertainty of a possible license arrangement cancellation is a remote contingency. If the likelihood of cancellation is assessed as remote, then the software licensing arrangement is considered non-cancellable and the related software
licensing revenue is recognized when all other revenue recognition criteria have been met.



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For arrangements involving multiple elements, we allocate revenue to each component of the arrangement using the residual
value method, based on the vendor-specific objective evidence of the fair value of the various elements. These elements may include one or more of the following: software licenses, maintenance and support, consulting services and training. We first
allocate the arrangement fee, in a multiple-element transaction, to the undelivered elements based on the total fair value of those undelivered elements, as indicated by vendor-specific objective evidence. This portion of the arrangement fee is
deferred. Then the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. We attribute the discount offered in a multiple-element arrangement
entirely to the delivered elements of the transaction, which are typically software licenses. Fair values for the future maintenance and support services are based upon separate sales of renewals of maintenance and support contracts. Fair value of
future services, training or consulting services is based upon separate sales of these services to other customers. In some instances, a group of contracts or agreements with the same customer may be so closely related that they are, in effect, part
of a single multiple-element arrangement, and therefore, we would undertake to allocate the corresponding revenues amongst the various components, as described above.



Our consulting services generally are not essential to the functionality of the software. Our software products are fully functional upon
delivery and do not require any significant modification or alteration. Customers purchase these consulting services to facilitate the adoption of our technology and dedicate personnel to participate in the services being performed, but they may
also decide to use their own resources or appoint other consulting service organizations to provide these services. When the customization is essential to the functionality of the licensed software, then both the software license and consulting
services revenues are recognized under the percentage of completion method, which requires revenue to be recognized based upon the percentage of work effort completed on the project.



Allowance for Doubtful Accounts



We maintain doubtful accounts allowances for estimated losses resulting from the inability of our customers to make required payments. At the time of a transaction, we
assess whether the fee associated with the revenue transaction is fixed and determinable based on the payment terms associated with the transaction and the creditworthiness of the customer. We also assess whether collection is reasonably assured. If
any portion of a fee is due after 365 days from the invoice date, we account for the fee as not being fixed and determinable. In these cases, we recognize revenue as the fees become due.



We assess collection based on a number of factors, including previous transactions with the customer and the creditworthiness of the
customer. We do not request collateral from our customers. If we determine that collection of a fee is not reasonably assured, we defer the fee and recognize revenue at the time collection becomes reasonably assured, which is generally upon receipt
of cash.



We base our ongoing estimate of allowance for doubtful accounts
primarily on the aging of the balances in the accounts receivable, our historical collection patterns and changes in the creditworthiness of our customers. Based upon the analysis and estimates of the uncollectibility of our accounts receivable, we
record an increase in the allowance for doubtful accounts when the prospect of collecting a specific account receivable becomes doubtful. The allowance for doubtful accounts is established based on the best information available to us and is
re-evaluated and adjusted as additional information is received. We exhaust all avenues and methods of collection, including the use of third party collection agencies, before writing-off a customer balance as uncollectible. While credit losses have
historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Each circumstance in which we conclude that a provision for
non-payment by a customer may be required must be carefully considered in order to determine the true factors leading to that potential non-payment to ensure that it is proper for it to be categorized as an allowance for bad debts. Our accounts
receivable include material balances from a limited number of customers, with five customers accounting for 39% of gross accounts receivable at March 31, 2004, compared to 35% of gross accounts receivable at March 31, 2003. One customer accounted
for 20% of net accounts receivable at March 31, 2004. For more information on our customer concentration, see our related discussion in Certain Factors That May Affect Our Business. Therefore, changes in the assumptions underlying this
assessment or changes in the financial condition of our customers, resulting in an impairment of their ability to make payments, and the timing of information related to the change in financial condition could result in a different assessment of the
existing credit risk of our accounts receivable and thus, a different required allowance, which could have a material impact on our reported earnings.



During the first quarter of 2004, we reached a settlement agreement on a significant and long outstanding receivable related to a license agreement executed in June 2000.
This receivable had been completely provided for in fiscal 2001, because it was our determination that the likelihood of full payment was less than probable, despite the fact that we had undertaken all avenues of collection available to us,
including litigation. As part of the process of pursuing collection through the court system, we entered into settlement discussions with the customer. As a result of these discussions, a settlement was reached under which full payment of the
original invoiced amount of $2,000 was assured upon execution of a new agreement, half of which was received prior to March 31, 2004, while the other half remained in accounts receivable at that date and was collected in April 2004. In total, we
reduced our allowance for doubtful accounts by approximately $2,000 due to the settlement. As part of this settlement agreement, we also agreed to provide this customer with additional software products and professional services, the related costs
of which were provided for from the allowance that had previously been set up against the receivable. The remaining allowance in the amount of $1.3 million was reversed against sales and marketing expenses as a recovery of this bad debt.



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As of March 31, 2004, the accounts receivable total is $18.3 million, net of an allowance for doubtful accounts of $2.0
million.



Restructuring Charges and Adjustments



June 2001 Restructuring Plan



On June 4, 2001, we announced that our Board of Directors had approved a restructuring plan
to refocus on the most significant market opportunities and to reduce operating costs due to the macroeconomic factors that were negatively affecting technology investment in the market. The restructuring plan included a workforce reduction,
consolidation of excess facilities, and discontinuance of non-core products and programs.



As a result of the restructuring plan and the impact of macroeconomic conditions on us and our global base of customers, we recorded restructuring charges of $65.5 million in the second quarter of 2001, with a
subsequent reduction of $1.1 million in the first half of 2002. In the second quarter of 2003, we made a further adjustment to increase the restructuring charges that we had previously recorded related to the June 2001 restructuring plan by $6.7
million to reflect a change in our projected sublet lease recoveries for our Santa Clara, California facility. We concluded that this was required as a result of our realization that the market for leased facilities in that region will not recover
in the timeframe that we had estimated, as evidenced by significantly lower projected sublease rates for our facility as supplied to us by our external real estate advisors. We also recorded a $2.1 million reduction to our June 2001 restructuring
accrual in the third quarter of 2003, as a result of the July 2003 settlement of an existing contractual obligation under a marketing and distribution agreement, at a value significantly less than the full accrued obligation.



We conducted our assessment of the accounting effects of the June 2001 restructuring plan in
accordance with EITF No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity, SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of, APB Opinion No. 9, Reporting the Results of Operations and the relevant provisions of the SECs SAB No. 100, Restructuring and Impairment Charges.



Our assessment required assumptions in estimating the original accrued restructuring charges
of $65.5 million at June 30, 2001, including estimating future recoveries of sublet income from excess facilities, liabilities from employee severances, and costs to exit business activities. Changes in these assessments with respect to the accrued
restructuring charges for the June 2001 restructuring program, particularly the estimation of sub lease income for restructured facilities, of $31.5 million at March 31, 2004, could have a material effect on our reported results, as actual results
could vary from these assumptions and estimates. As of March 31, 2004, we estimated a total of $23.6 million of sublease recoveries in our restructuring accrual. Of this amount, $23.4 million is related to the Santa Clara facility. In addition, $9.0
million of the $23.6 million is recoverable under existing sublease agreements, and the remaining $14.6 million of rent recoveries is based on estimates which may be subject to adjustment based upon changes in the real estate sublet markets.



The restructuring plan announced on June 4, 2001 was completed by June 2002.
No further charges are anticipated. However, actual results could vary from the currently recorded estimates.



May 2003 Restructuring Plan



On May 27,
2003, we announced a restructuring plan aimed at lowering costs and better aligning our resources to customer needs. The plan allows us to have tighter integration between the groups in our organization that interact with customers, which better
positions us to take advantage of the market opportunities for our new products. The restructuring plan included the elimination of employee positions to lower operating costs, closing of under-utilized office space, and re-assessing the value of
related excess long-lived assets.



The workforce portion of the restructuring
plan included severance and related costs of $4.8 million for 151 positions from all functional areas of the company and had been completed by December 31, 2003. The consolidation of under-utilized facilities included costs relating to lease
obligations through the first quarter of 2009 (primarily from excess space in the Companys Santa Clara, California and Addison, Texas facilities) and accelerated amortization on related leaseholds and equipment. The facilities plan was
executed by September 30, 2003 and, as a result, the Company recorded $4.1 million of charges during 2003 related to these facilities, including $1.3 million for accelerated amortization on leaseholds and equipment whose estimated useful lives had
been impacted by the plan to cease using the related excess space in the Companys facilities. The total amount of the workforce and facilities charges was $8.9 million. Of this amount, $4.6 million had been incurred by June 30, 2003 and
charged to the restructuring charges line in the consolidated statement of operations for the second quarter of 2003, while the remaining $4.3 million was recorded in the third quarter of 2003.



We conducted our assessment of the accounting effects of the May 2003 restructuring plan in
accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, SFAS No. 144, Accounting for the Impairment or Disposal of



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Long-Lived Assets, APB Opinion No. 9, Reporting the Results of Operations, and the relevant provisions
of the SECs SAB No. 100, Restructuring and Impairment Charges.



Our assessment required assumptions in estimating the restructuring charges of $8.9 million, including estimating liabilities related to employee severance, future recoveries of sublet income from excess facilities, and other costs to exit
activities. Changes in these assessments with respect to the accrued restructuring charges for the May 2003 restructuring plan of $2.4 million at March 31, 2004 could have a material effect on our reported results. In addition, actual results could
vary from these assumptions and estimates, in particular with regard to the sublet of excess facilities, resulting in an adjustment that could have a material effect on our future financial results. Our accrual related to the May 2003 restructuring
at March 31, 2004 includes a total of $0.9 million of estimated sublease recoveries, which may be subject to adjustment based upon changes in the real estate sublet markets.



The restructuring plan announced on May 27, 2003 was completed by December 31, 2003. No further changes are anticipated. However, actual
results could vary from the currently recorded estimates.



Accounting for
Long-term Strategic and Equity Investments



We assess the
recoverability of the carrying value of strategic investments on an on-going basis, but at least annually. Factors that we consider important in determining whether an assessment is warranted and could trigger impairment include, but are not limited
to, the likelihood that the company in which we invested would have insufficient cash flows to operate for the next twelve months, significant changes in the companys operating performance or business model and changes in overall market
conditions. These investments are in private companies of which we typically own less than 10% of the outstanding stock. We account for these investments under the cost method. Because there is not a liquid market for these securities, we often must
make estimates of the value of our investments.



To date, we have recorded a
total of $14.8 million of impairment charges with respect to our long-term strategic investments due to other than temporary declines in the value of these strategic investments. These impairments were related to our investments in several different
companies. We have no other strategic investments recorded as of March 31, 2004.



In April 2002, we began accounting for our investment in Entrust Japan under the equity method in accordance with the provisions of APB No. 18, The Equity Method of Accounting for Investments in Common Stock and ARB No. 51,
Consolidated Financial Statements. Accordingly, on the step-by-step acquisition method, during the second quarter of 2002, we recorded a retroactive adjustment to consolidated accumulated deficit to record our share of the
post-acquisition losses of Entrust Japan for prior years in the amount of $393 thousand, as required by this accounting guidance. This retroactive adjustment is attributable to our pro rata share of losses recorded by Entrust Japan during the period
in which we owned less than 10% of its voting stock, to the extent of our previous investment and affected the results of periods prior to those shown here.



In addition, we recorded our share of post-acquisition losses of Entrust Japan, in the amount of $209 thousand and $105 thousand in our consolidated losses for the first
quarter of 2004 and 2003, respectively. These losses are attributable to our pro rata share of Entrust Japans losses while we have had an equity ownership of approximately 37% of its voting stock and, to date, have totalled $1.4 million.



During 2002, Entrust Japan exceeded the performance targets established at the
date of our increased investment. However, during 2003 and first quarter of 2004, the actual growth of Entrust Japan was less than the original projections. It is possible that future growth will also fall short of projections, and due to Entrust
Japans history of operating losses, it is possible that all or substantially all of the remaining $451 thousand equity investment in Entrust Japan at March 31, 2004 may be expensed through our operating results in future quarters as a result
of our recognition of our equity share of losses in Entrust Japan. However, we do not have any obligation to provide additional cash funding to them. As of March 31, 2004, we believe that there has not been any additional impairment of our
investment in Entrust Japan beyond the equity share of losses recorded to date.



In addition, we have concluded, based on our understanding of the facts, that Entrust Japan meets the definition of a VIE, as described in FIN No. 46, as it does not have an equity investment at risk that is sufficient to permit Entrust
Japan to finance its activities without additional subordinated financial support from other parties. Although we hold a significant variable interest, we believe that we are not the primary beneficiary of Entrust Japan because our interests do not
give us a majority of the expected losses and residual returns of the entity. Accordingly, we have not consolidated the results and financial position of Entrust Japan with our consolidated results of operations and consolidated balance sheet for
financial reporting purposes.



Provision for Income Taxes



The preparation of our consolidated financial statements requires us
to estimate our income taxes in each of the jurisdictions in which



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we operate, including those outside the United States. In addition, we have based the calculation of our income taxes in
each jurisdiction upon inter-company agreements, which could be challenged by tax authorities in these jurisdictions. The income tax accounting process involves our estimating our actual current exposure in each jurisdiction together with assessing
temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in the recognition of deferred tax assets and liabilities. We then record a valuation allowance to
reduce our deferred tax assets to the amount that is more likely than not to be realized.



Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against deferred tax assets. We recorded a
valuation allowance of $129.0 million as of March 31, 2004, which offsets deferred income tax assets relating to United States and foreign net operating loss (NOL) and tax credit carry-forwards in the amount of $103.0 million and $26.0 million of
deferred tax assets resulting from temporary differences. This valuation allowance represents the full value of our deferred tax assets, due to uncertainties related to our ability to utilize our deferred tax assets as a result of our recent history
of financial losses. Therefore, our balance sheet includes no net deferred tax benefits related to these NOLs and tax credit carry-forwards. In the event that actual results differ from these estimates or we adjust these estimates in future
periods, we may need to adjust our valuation allowance, which could materially impact our financial position and results of operations



Stock-Based Compensation



Our stock option program is a broad-based, long-term retention program that is intended to contribute to our success by attracting, retaining and motivating talented
employees and to align employee interests with the interests of our existing stockholders. Stock options are typically granted to employees when they first join us but can also be granted when there is a significant change in an employees
responsibilities and, occasionally, to achieve equity within a peer group. The Compensation Committee of the Board of Directors may, however, grant additional options to executive officers and key employees for other reasons. Under the stock option
plans, the participants may be granted options to purchase shares of Common stock and substantially all of our employees and directors participate in at least one of our plans. Options issued under these plans generally are granted at fair market
value at the date of grant, become exercisable at varying rates, generally over three or four years and generally expire ten years from the date of grant.



We recognize that stock options dilute existing shareholders and have attempted to control the number of options granted while remaining competitive with our compensation
packages. At March 31, 2004, a large percentage (approximately 65%) of our outstanding employee stock options carried exercise prices in excess of the closing market price of our Common stock on that day. The Compensation Committee of the Board of
Directors overseas the granting of all stock-based incentive awards.



We
account for our stock option plans under the recognition and intrinsic value measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related accounting guidance. Accordingly, no stock-based
compensation expense is reflected in net earnings for grants to employees under these plans, when the exercise price for options granted under these plans is equal to the market value of the underlying Common stock on the date of grant. All of the
options granted to employees in the periods after 1998 had exercise prices equal to the fair value of the underlying stock on the date of grant and therefore, no stock-based compensation costs are reflected in earnings for these options in these
periods. Compensation expense was recognized for our stock-based compensation plans in 1998 because the exercise price of some options granted in that period were determined, for accounting purposes, to be below the fair value of the underlying
stock as of the grant date for such stock options. If we had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based compensation, the effect would have been to create a net
loss in the three months ended March 31, 2004 of $2.1 million and to increase our loss for the three months ended March 31, 2003 to $8.9 million, and consequently, we would have reported a net loss per share of $0.03 and $0.14, respectively.
However, we believe, that due to the volatility of our stock and the inherent limitations of option valuation models, the expenses that would be recorded under SFAS No. 123 are not as meaningful as a careful consideration of the outstanding option
data, which is disclosed in note 2 to our condensed consolidated financial statements, included in this report.



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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 MONTHSENDED MARCH 31, |  
|                                         |  | 2004                        |   |  | 2003  |   
|Revenues:                                |  |                             |   |  |       |   
|License                                  |  | 28.3                        | % |  | 33.2  | % 
|Services and maintenance                 |  | 71.7                        |   |  | 66.8  |   
|                                         |  |                             |   |  |       |   
|                                         |  |                            
|Total revenues                           |  | 100.0                       |   |  | 100.0 |   
|                                         |  |                             |   |  |       |   
|                                         |  |                            
|Cost of revenues:                        |  |                             |   |  |       |   
|License                                  |  | 2.2                         |   |  | 3.5   |   
|Services and maintenance                 |  | 34.6                        |   |  | 36.6  |   
|Amortization of purchased product rights |  |                            |   |  | 1.3   |   
|                                         |  |                             |   |  |       |   
|                                         |  |                            
|Total cost of revenues                   |  | 36.8                        |   |  | 41.4  |   
|                                         |  |                             |   |  |       |   
|                                         |  |                            
|Gross profit                             |  | 63.2                        |   |  | 58.6  |   
|                                         |  |                             |   |  |       |   
|                                         |  |                            
|Operating expenses:                      |  |                             |   |  |       |   
|Sales and marketing                      |  | 27.8                        |   |  | 39.8  |   
|Research and development                 |  | 20.2                        |   |  | 27.2  |   
|General and administrative               |  | 14.5                        |   |  | 15.7  |   
|                                         |  |                             |   |  |       |   
|                                         |  |                            
|Total operating expenses                 |  | 62.5                        |   |  | 82.7  |   
|                                         |  |                             |   |  |       |   
|                                         |  |                            
|Income (loss) from operations            |  | 0.7                         |   |  | (24.1 | ) 
|                                         |  |                             |   |  |       |   
|                                         |  |                            
|Other income (expense):                  |  |                             |   |  |       |   
|Interest income                          |  | 1.2                         |   |  | 2.4   |   
|Foreign exchange gain (loss)             |  | 1.8                         |   |  | (0.2  | ) 
|Loss from equity investment              |  | (0.9                        | ) |  | (0.5  | ) 
|                                         |  |                             |   |  |       |   
|                                         |  |                            
|Total other income                       |  | 2.1                         |   |  | 1.7   |   
|                                         |  |                             |   |  |       |   
|                                         |  |                            
|Income (loss) before income taxes        |  | 2.8                         |   |  | (22.4 | ) 
|Provision for income taxes               |  | 0.5                         |   |  | 0.8   |   
|                                         |  |                             |   |  |       |   
|                                         |  |                            
|Net income (loss )                       |  | 2.3                         | % |  | (23.2 | )%
|                                         |  |                             |   |  |       |   



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 SOP No. 97-2, Software Revenue Recognition, SOP No. 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions and related accounting guidance and pronouncements.



Revenues from perpetual software license agreements are recognized as revenue
when we have received a copy of an executed license agreement or an unconditional order under an existing license agreement, the software has been shipped (if there are no significant remaining vendor obligations), collection of the receivable is
probable and payment is due within twelve months. Revenues from license agreements requiring the delivery of significant unspecified software products in the future are accounted for as subscriptions and, accordingly, are recognized ratably over the
term of the agreement from the first instance of product delivery. This policy is applicable to all sales transactions, including sales to resellers and end user customers. We are notified of a sale by a reseller to the end user customer in the same
period that the actual sale took place. We do not offer a right of return on sales of our software products.



The Company is sometimes subject to fiscal funding clauses in its software licensing transactions with the United States government



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and its agencies. Such clauses generally provide that the license is cancelable if the legislature or funding authority
does not appropriate the funds necessary for the governmental unit to fulfill its obligations under the licensing arrangement. In these circumstances, software licensing arrangements with governmental organizations containing a fiscal funding clause
are evaluated to determine whether the uncertainty of a possible license arrangement cancellation is a remote contingency. If the likelihood of cancellation is assessed as remote, then the software licensing arrangement is considered non-cancelable
and the related software licensing revenue is recognized when all other revenue recognition criteria have been met.



For arrangements involving multiple elements, we allocate revenue to each component of the arrangement using the residual value method, based on the vendor-specific
objective evidence of the fair value of the various elements. These elements may include one or more of the following: software licenses, maintenance and support, consulting services and training. We first allocate the arrangement fee, in a
multiple-element transaction, to the undelivered elements based on the total fair value of those undelivered elements, as indicated by vendor-specific objective evidence. This portion of the arrangement fee is deferred. Then the difference between
the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. We attribute the discount offered in a multiple-element arrangement entirely to the delivered elements of the
transaction, which are typically software licenses. Fair values for the future maintenance and support services are based upon separate sales of renewals of separate maintenance and support contracts. Fair value of future services training or
consulting services is based upon separate sales of these services to other customers. In some instances, a group of contracts or agreements with the same customer may be so closely related that they are, in effect, part of a single multiple-element
arrangement, and therefore, we would undertake to allocate the corresponding revenues amongst the various components, as described above.



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 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. These services are not essential to the functionality of the underlying software licensed to the customer.



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 projects cost
estimates are reviewed on a regular basis.



Total Revenues



Total revenues were $23.0 million for the three months ended March
31, 2004, which represented an increase of 6% from the $21.7 million of total revenues for the three months ended March 31, 2003. Total revenues derived from North America of $17.6 million for the three months ended March 31, 2004 represented an
increase of 15% from the $15.2 million for the three months ended March 31, 2003, while the total revenues derived from outside of North America of $5.4 million for the three months ended March 31, 2004 represented a decrease of 17% from the $6.5
million for the three months ended March 31, 2003. The overall increase in total revenues in the first three months of 2004 was driven by increased overall services revenue, particularly in the United States, despite weaker license revenues
resulting from a reduced closure rate for software transactions when compared to the same quarter of 2003. The effect of the decline in license revenues was felt most strongly in Europe, Asia and other international locales, due to the continued
soft economic climate internationally. 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 addition, extended government revenues, which includes
healthcare, generated in the United States decreased from $5.5 million in the first quarter of 2003 to $4.3 million in the first quarter of 2004, or 22%. In the three months ended March 31, 2004, one individual customer accounted for 15% of total
revenues, while no other customer accounted for more than 10% of total revenues. No individual customer accounted for 10% or more of total revenues in the three months ended March 31, 2003. The United States and Canadian governments represented 15%
and 9% of total revenues in the first quarter of 2004, when including revenues sold through resellers to the government end users. However, direct sales to the United States and Canadian governments represented only 9% and 6% of total revenues in
the first quarter of 2004.



License Revenues



License revenues of $6.5 million for the three months ended March 31, 2004 represented a
decrease of 10% from the $7.2 million for the three months ended March 31, 2003, representing 28% and 33% of total revenues in the respective periods. The decrease in the first quarter of 2004 when compared to the same quarter in 2003 is primarily
due to reduced U.S. government spending due to



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continued delays in budget approvals, driven by the soft economic climate internationally and concerns over the war in
Iraq. New project purchases remained subject to governmental budgetary constraints, particularly in the United States. In addition, the global downturn experienced from 2001 through 2003 continues to have a significant impact on information
technology projects and the commitments that customers have made to expenditures in this area, with customers buying for their immediate needs, as opposed to buying total project or enterprise wide. Highlighting this trend, we had 62 license revenue
transactions (a license revenue transaction is defined as a license sale in excess of $10 thousand) in the first quarter of 2004, down from 74 in the same quarter of 2003, or a 16% decrease. The impact on revenues was partially offset by the fact
that the average license revenue transaction size increased from $92 thousand for the first three months of 2003 to $103 thousand for the same period of 2004, or an increase of 12%. In general, the top-five average quarterly license revenue
transactions as a percentage of total revenues was consistent from the first quarter of 2003 to the same quarter of 2004 at 17% in each respective quarter. These measures reflect a lower volume of small dollar software license transactions in the
first quarter of 2004, particularly in transactions less than $200,000. License revenues as a percentage of total revenues decreased for the three months ended March 31, 2004 compared to the same period in 2004, due to a stronger demand for
services, primarily maintenance and support services and North American professional services, relative to the demand for software.



Services and Maintenance Revenues



Services and maintenance revenues of $16.5 million for the three months ended March 31, 2004 represented an increase of 14% from the $14.5 million for the three months
ended March 31, 2003, representing 72% and 67% of total revenues in the respective periods. The increase in services revenues is due to strong demand for Entrusts architecture and deployment services, record support and maintenance revenue and
record certificate services revenue. The increase in services revenue in the first quarter of 2004 when compared to the same quarter of 2003 has been driven by increased professional services revenue in the United States, including record revenue
from our Entrust CygnaCom division, and support and maintenance revenues, and related support contract renewals, which continue to be at the highest levels in our history. We believe this support revenue performance reflects the value our products
provide to our customers globally, the increasing customer deployment of solutions and the level of service quality that our support and maintenance team delivers. Also important to services growth has been the six consecutive quarters of revenue
growth in our certificate services (SSL certificates) business, with the first quarter of 2004 representing its highest revenue attainment in three years. Support and maintenance revenues grew $0.8 million for the first three months of 2004 when
compared to the same period of 2003, while professional services revenues increased $1.2 million primarily due to a $0.8 million growth in revenues in our Entrust CygnaCom division. The increase in services and maintenance revenues as a percentage
of total revenues for the three months ended March 31, 2004 compared to the same period in 2003 reflected the shift in the mix of revenues from license to services and maintenance revenues discussed in the previous section. This shift was largely
due to the strength of demand for our services and maintenance business relative to the demand for software.



EXPENSES



Total Expenses



Total expenses consist of costs of revenues and operating expenses
associated with sales and marketing, research and development, and general and administrative. Total expenses of $22.8 million for the three months ended March 31, 2004 represented a decrease of 15% from $26.9 million for the three months ended
March 31, 2003. The decrease from the first quarter of March 31, 2003 was due to the impact of cost savings associated with our May 2003 restructuring plan of approximately $4.1 million and the collection of a long outstanding receivable for which
bad debt expense had been recorded in a previous year, which netted approximately $1.3 million reduction in selling and marketing expenses for the quarter ended March 31, 2004. These savings were partially offset by increased costs in the first
quarter of 2004 of $1.3 million related to our corporate bonus plan. As of March 31, 2004, we had 503 full-time employees globally, compared to 665 full-time employees at March 31, 2003. No employees are covered by any collective bargaining
agreements.



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 was $508,000 for the three months ended March 31, 2004, which represented a 34% decrease from $767,000 for the three months ended March 31, 2003,
representing 2% and 4% of total revenues in each of the respective periods. The $0.3 million decrease in third-party royalties was primarily due to a shift in the mix of software sales in the first quarter of 2004 away from products that incorporate
third party technology, which resulted in a $0.2 million savings. This also accounted for the decline in cost of license revenues as a percentage of total revenues for the first three months of 2004. In addition, third party royalties decreased by
$0.1 million due to the overall lower level of license revenues in the first quarter of 2004 compared to the same quarter of 2003. The mix of third-party products and the relative gross margins achieved with respect to these products may vary from
period to period and from transaction to transaction and, consequently, our gross margins and results of operations



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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 was $8.0 million for the three months ended March 31, 2004, which represented a 1% increase from $7.9 million for the three months ended March 31,
2003, representing 35% and 37% of total revenues for the respective periods. The slight increase in the cost of services and maintenance revenues in absolute dollars in the first quarter of 2004 compared to the same quarter of 2003 was due to the
net effect of decreased costs associated with our May 2003 restructuring, which resulted in a $0.2 million reduction in the cost structure of our professional services team, despite improved revenue performance, offset by increased investment in our
support and maintenance team of $0.3 million in the first quarter of 2004. The decrease in the cost of services and maintenance revenues as a percentage of total revenues in the first three months of 2004 compared to the same period of 2003
reflected the fact that we were able to grow services and maintenance revenues, and in turn, total revenues, without significant increases in spending on our services and maintenance cost structure, through improved utilization of existing
resources. This decrease in the cost of services and maintenance revenues as a percentage of total revenues in the first quarter of 2004 was partially offset by the lower software revenue performance, particularly as a result of the reduced closure
rate for software transactions, and the shift in the mix of revenues from license to services and maintenance revenues compared to the same quarter of 2003, whereby services and maintenance revenues as a percentage of total revenues increased to 72%
in the first quarter of 2004 from 67% in the first quarter of 2003. As the services and maintenance revenues represented the larger proportion of total revenues and declined less than total revenues, the cost of generating those services and
maintenance revenues represented a much larger percentage when compared against total revenues. Without this effect, services and maintenance expenses would have decreased an additional 3% in relation to total revenues.



Services and maintenance gross profit as a percentage of services and maintenance revenues
was 52% for the three months ended March 31, 2004 and 45% for the three months ended March 31, 2003. The increase in services and maintenance gross profit as a percentage of services and maintenance revenues in the first quarter of 2004, compared to
the same quarter of 2003, was primarily due to improved professional services revenues and operating efficiencies achieved in the form of higher productivity and utilization of available professional services resources, particularly in North
America, meaning lower relative costs associated with professional services in light of these improved revenues, which resulted in higher margin attainment by our professional services team. These increases in professional services revenues
accounted for a seven-percentage point increase in the services and maintenance gross profit as a percentage of services and maintenance revenues for the first three months of 2004 when compared to the same period of 2003. In addition, growth in
revenues for our certificate services team resulted in a two-percentage point increase in the services and maintenance gross profit as a percentage of services and maintenance revenues for the first three months of 2004 when compared to the same
period of 2003. However, support and maintenance margins declined slightly due to the significant investment made in this team to ensure continued quality of service, which resulted in an offsetting two-percentage point decrease in the services and
maintenance gross profit as a percentage of services and maintenance revenues. We plan to continue to optimize the utilization of existing professional services resources, while addressing significant incremental customer opportunities that may
arise in the near future with the help of partners and other sub-contractors, until the investment in additional full-time resources is justifiable. This may have an adverse impact on the gross profit for services and maintenance, as the gross
profit realized by using partners and sub-contractors is generally lower. The mix of services and maintenance revenues may vary from period to period and from transaction to transaction and, consequently, our gross margins and results of operations
could be adversely affected



Operating Expenses



Operating ExpensesSales and Marketing



Sales and marketing expenses decreased to $6.4 million for the three months ended March 31,
2004 from $8.6 million for the comparable period in 2003. Sales and marketing expenses represented 28% of total revenues for the three months ended March 31, 2004, compared to 40% for the comparable period in 2003. The decrease in absolute dollars
was due mainly to the continued management discipline with respect to spending and savings achieved as a result of our May 2003 restructuring, and more specifically due to the collection of a long outstanding receivable, which netted an approximate
$1.3 million reduction in selling and marketing expenses in the first quarter of 2004. However, these savings were partially offset by an additional provision of $0.5 million for aged receivables in the first quarter of 2004. The decrease in sales
and marketing expenses as a percentage of total revenues for the first quarter of 2004, compared to the same quarter of 2003, reflected the effect of cost savings realized through our May 2003 restructuring and reduced spending through efficiencies
and discipline implemented in our sales processes, which decreased sales and marketing expenses as a percentage of total revenues by six-percentage points, a two-percentage point decrease as a result of improved revenue achievement in the first
three months of 2004 compared to the same period of 2003, and a six-percentage point decrease due to the bad debt recovery. These savings were partly offset by a two-percentage point increase in sales and marketing expenses as a percentage of total
revenues due to new bad debt provisions in the quarter. We intend to continue to focus on improving the productivity of these organizations with a view to gaining efficiencies in the related processes in light of



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current economic conditions. However, we believe it is necessary for us to continue to make significant investments in
sales and marketing to support the launch of new products, services and marketing programs by maintaining our strategy of (a) investing in hiring and training our direct and partner sales organizations in anticipation of future market growth, and
(b) investing in marketing efforts in support of new product launches. We feel it is necessary to invest in marketing programs that will improve the awareness and understanding of information security governance, and will work with and support the
Business Software Alliance Information Security Governance Task Force toward that goal. Failure to make such investments could have a significant adverse effect on our operations. While we are focused on marketing programs and revenue-generating
opportunities to increase software revenues, there can be no assurances that these initiatives will be successful.



During the first quarter of 2004, the allowance for doubtful accounts decreased to $2.0 million due primarily to the settlement of a long outstanding receivable discussed
above, which had been fully provided for in fiscal 2001, and also due to effective cash collections during the period. As a result, we recorded a net bad debt recovery of $1.2 million in the first quarter of 2004, after providing for the settlement
costs related to the recovered bad debt and recording a provision for other aged receivables.



Operating ExpensesResearch and Development



Research and development expenses decreased to $4.6 million for the three months ended March 31, 2004 from $5.9 million for the comparable period in 2003. Research and development expenses represented 20% of total
revenues for the three months ended March 31, 2004, compared to 27% for the comparable period in 2003. The decrease in research and development expenses in absolute dollars for the three months ended March 31, 2004, compared to the same period in
2003, was due mainly to the continued management discipline in spending and savings achieved as a result of our May 2003 restructuring, which reduced expenses in this area by approximately $1.6 million. This decrease was partially offset by
increased compensation costs associated with our corporate bonus plan of approximately $0.3 million in the first quarter of 2004. Research and development expenses as a percentage of total revenues for the three months ended March 31, 2004 decreased
compared to the same period in 2003, mainly due to a six-percentage point decrease as a result of reduced spending from the May 2003 restructuring. In addition, the improved revenues during the first quarter of 2004 accounted for a one-percentage
point decrease in these expenses as a percentage of total revenues. We believe that we must continue to maintain our investment in research and development in order to protect our technological leadership position, software quality and security
assurance leadership. We therefore expect that research and development expenses may have to increase in absolute dollars in the future if additional experienced security experts and software engineers are required.



Operating ExpensesGeneral and Administrative



General and administrative expenses decreased to $3.3 million for the three months ended
March 31, 2004 from $3.4 million for the comparable period in 2003. General and administrative expenses represented 14% of total revenues for the three months ended March 31, 2004, compared to 16% for the comparable period in 2003. General and
administrative expenses in absolute dollars remained relatively flat between the first quarter of 2004 and the same quarter in 2003, but this was due to net effect of continued management discipline in these areas, which meant savings of $0.2
million, and the implementation of our restructuring plan in May 2003, which resulted in reduced spending of $0.6 million, offset by increased compensation costs associated with the corporate bonus plan of $0.7 million in the first quarter of 2004.
General and administrative expenses as a percentage of total revenues have decreased for the first three months of 2004 compared to the same period of 2003, due in large part to the reduction in spending, which accounted for three-percentage points
of the decrease, and improved revenue achievement during the first quarter of 2004, which resulted in an additional one-percentage point decrease, as these expenses include a high degree of fixed costs. However, the increased costs related to the
bonus plan resulted in an offsetting three-percentage point increase in general and administrative expenses as a percentage of total revenues in the first quarter 2004, compared to the same period of the prior year. We continue to look for ways to
gain additional efficiencies in our administrative processes and to contain expenses in these functional areas.



Amortization of Purchased Product Rights



There was no amortization expense in connection with acquisition-related intangibles in the first quarter of 2004. Amortization of purchased product rights of $284,000
was expensed for the three months ended March 31, 2003. This expense was recorded as a component of cost of revenues. No amortization expense was recorded with respect to the purchase product rights in the first quarter of 2004, as this asset had
been fully amortized or impaired by the end of 2003.



Restructuring and
Other Charges



Following the first quarter of 2003, when our revenue
attainment fell short of our expectations and guidance, we began a re-assessment of our operations to ensure that our expenses were optimally aligned to our customers and markets, and structured such that we could achieve our financial break even
target for the fourth quarter of 2003.



On May 27, 2003, we announced a
restructuring plan aimed at lowering costs and better aligning our resources to customer needs. The plan allows us to have tighter integration between the groups in our organization that interact with customers, which better positions us to take
advantage of the market opportunities for our new products. The restructuring plan included the elimination of



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employee positions through layoffs and attrition to lower operating costs, the closing of under-utilized office space and
reassessing the useful life of related excess long-lived assets, and review of the realizability of developed technology impacted by the restructuring.



The workforce portion included severance and related costs of $4.8 million for 151 positions from all functional areas and had been completed by December 31, 2003. The
consolidation of under-utilized facilities included costs relating to lease obligations through the first quarter of 2009 (primarily from excess space in our Santa Clara, California and Addison, Texas facilities), and accelerated amortization of
related leaseholds and equipment. The facilities plan was executed by September 30, 2003 and, as a result, we recorded $4.1 million of charges during 2003 relating to these facilities, including $1.3 million for accelerated amortization on
leaseholds and equipment whose estimated useful lives had been impacted by the plan to cease using the related excess space in our facilities. The total amount of the workforce and facilities charges was $8.9 million. Of this amount, $4.6 million
had been incurred by June 30, 2003 and charged to the restructuring charges line in the consolidated statement of operations for the second quarter of 2003, while the remaining $4.3 million was recorded in the third quarter of 2003.



The restructuring resulted in a reduction of all expense lines including: total cost of
revenues, sales and marketing expenses, research and development expenses and general and administrative expenses. As a result of the implementation of the restructuring plan, our total expenses (operating expenses plus cost of revenues) were $23.7
million in the fourth quarter of 2003, a reduction of $5.1 million from the $28.8 million incurred during the second quarter of 2003.



The May 2003 restructuring plan reduced quarterly expenses by approximately $4.8 million with savings distributed as follows:



|                                          |  |   |            
|----------------------------------------- |  | - | -----------
|Cost of services and maintenance revenues |  | $ | 1.1 million
|Sales and marketing                       |  | $ | 1.5 million
|Research and development                  |  | $ | 1.6 million
|General and administrative                |  | $ | 0.6 million



Interest Income



Interest income decreased to $264,000 for the three months ended
March 31, 2004 from $530,000 for the three months ended March 31, 2003, representing 1% and 2% of total revenues in the respective periods. The decrease in investment income from the first quarter of 2003 to the same quarter of 2004 reflected
the reduced balance of funds invested, as these amounts have been drawn down to fund cash flow from operations and stock repurchases and to acquire long-lived assets. The funds invested decreased to $108.5 million at March 31, 2004 from $124.3
million at March 31, 2003. In addition, the decrease was due to the lower interest rates that have been available in 2003 and 2002, compared to the preceding years. In 2003 and 2002, the rate of return on our marketable investments dropped to
approximately 1.1% in the first quarter of 2004 compared to a rate of return of just less than 1.3% in the first quarter of 2003.



Loss from Equity Investment



We recorded $209,000 of losses related to our investment in Entrust Japan in the first quarter of 2004, compared to $105,000 of losses in the first quarter of 2003, which
is accounted for under the equity method of accounting for investments in common stock, since we have the potential to significantly influence the operations and management of Entrust Japan. These losses represent our share of the operating losses
of Entrust Japan for the three months ended March 31, 2004 on an equity accounting basis, based on an approximate 37% ownership interest in the voting capital of Entrust Japan.



Provision for Income Taxes



We recorded an income tax provision of $129,000 for the three months ended March 31, 2004, compared to $174,000 for the same period of 2003. These provisions represent
primarily the taxes payable in certain foreign jurisdictions. The effective income tax rates differed from statutory rates in these periods primarily due to the amortization of purchased product rights, as well as an adjustment of the valuation
allowance that has offset the tax benefits from the significant net operating loss and tax credit carry-forwards available.



LIQUIDITY AND CAPITAL RESOURCES



We generated cash of $4.9 million in operating activities during the three months ended March 31, 2004. This cash inflow was primarily a result of a net income before
non-cash charges of $0.8 million, a decrease in accounts receivable of $1.7 million, an



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increase in deferred revenue of $3.2 million, and an increase in accounts payable and accrued liabilities of $1.6
million, partially offset by cash outflows resulting from a decrease in accrued restructuring charges of $1.5 million and an increase in prepaid expenses and other receivables of $0.9 million. Our average days sales outstanding at March 31, 2004 was
72 days, which represents an increase from the 71 days that we reported at December 31, 2003. The overall increase in days sales outstanding from December 31, 2003 was mainly due to worse linearity of revenues during the first quarter of 2004, such
that 56% of revenues were recorded in the third month of the first quarter compared to 52% in the third month of the fourth quarter of 2003. This effect was largely offset by strong collection efforts during the same period. For purposes of
calculating average days sales outstanding, we divide ending accounts receivable by the applicable quarters revenues and multiply this amount by 90 days. The level of accounts receivable at each quarter end is 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, 2004, we generated $8.1 million of cash from
investing activities, primarily due to cash provided by reductions in our marketable investments in the amount of $8.4 million (net of $16.9 million of marketable investment purchases). This was partially offset by $0.4 million invested in property
and equipment, primarily for computer hardware upgrades throughout our organization, and other long-term assets.



We used cash of $0.6 million in financing activities during the three months ended March 31, 2004 primarily for the repurchase of our Common stock in the amount of $1.0
million, offset by $0.4 million of cash provided by the exercise of employee stock options.



As of March 31, 2004, our cash, cash equivalents and marketable investments in the amount of $108.5 million provided our principal sources of liquidity. Overall, we generated $3.9 million of cash, cash equivalents and
marketable investments during the first quarter of 2004. Although we continue to target operating breakeven, based on sustaining current revenue and operating expense structures, we estimate that we will continue to use cash in fiscal 2004 to
satisfy the obligations accrued for under our restructuring program. However, if operating losses do occur, then cash, cash equivalents and marketable investments will be negatively affected.



In addition, we announced in the third quarter of 2002 that we intend to repurchase up to an
aggregate of 7.0 million shares of our Common stock over the 12-month period ending July 28, 2003, or an earlier date determined by our Board of Directors, in open market, negotiated or block transactions. In July 2003, we announced that our Board
of Directors had agreed to extend the expiry date of the stock repurchase program to September 1, 2004 and to permit the new purchase of up to 7,000,000 shares of the Companys common stock in addition to the 2,229,200 shares already purchased
up to that time. The timing and amount of shares repurchased under this program will be determined by our management based on its evaluation of market and business conditions, and will be funded using available working capital. Since the
announcement of the program, we have repurchased 2,420,850 shares of Common stock for an aggregate purchase price of $6.9 million, of which 191,650 shares were repurchased during the first quarter of 2004 at an aggregate purchase price of $1.0
million.



While there can be no assurance as to the extent of usage of liquid
resources in future periods, we believe that our cash flows from operations and existing cash, cash equivalents and marketable investments will be sufficient to meet our needs for at least the next twelve months



In terms of long-term liquidity requirements, we will need to fund the $33.9 million of
accrued restructuring charges at March 31, 2004 through fiscal 2011, as detailed below. This amount is net of estimated sublet recoveries on restructured facilities of $24.5 million. The lease obligations included in these accrued restructuring
charges are disclosed in the table of contractual commitments below. In addition, they are classified as short-term in nature on the financial statements because the Company is continuing to evaluate possibilities to settle this obligation in the
most economic manner. In addition, we forecast a requirement to spend approximately $1.8 million per year into the foreseeable future on capital expenditures, primarily for computer equipment needed to replace existing equipment that is coming to
the end of its useful life.



We believe that our existing cash, cash
equivalents and marketable investments, as well as future operating cash flows, will be sufficient capital resources to fund these long-term requirements.



We have commitments that will expire at various times through 2011. We lease administrative and sales offices and certain property and equipment under non-cancelable
operating leases that will expire in 2011 with certain renewal options. Otherwise, we had no other significant contractual obligations or commitments that were not recorded in our financial statements. A summary of our contractual commitments at
March 31, 2004 is as follows:



|                                                            |  |                                            |        |                  |   |           |  |           |        |                   |   |        |  |   |       
|----------------------------------------------------------- |  | ------------------------------------------ | ------ | ---------------- | - | --------- |  | --------- | ------ | ----------------- | - | ------ |  | - | ------
|                                                            |  | As of March 31, 2004 Payment Due by Period
|                                                            |  | Total                                      |        | Less than 1 Year |   | 1-3 Years |  | 3-5 Years |        | More than 5 Years
|                                                            |  | (in thousands)                            
|Operating lease obligations  currently utilized facilities |  | $                                          | 23,578 |                  | $ | 3,412     |  | $         | 5,951  |                   | $ | 9,990  |  | $ | 4,226 
|Operating lease obligations  restructured facilities       |  |                                            | 43,166 |                  |   | 6,009     |  |           | 12,249 |                   |   | 12,724 |  |   | 12,185
|Other contractual obligations                               |  |                                            |       |                  |   |          |  |           |       |                   |   |       |  |   |      
|                                                            |  |                                            |        |                  |   |           |  |           |        |                   |   |        |  |   |       
|                                                            |  |                                            |        |                  |  
|Total                                                       |  | $                                          | 66,746 |                  | $ | 9,421     |  | $         | 18,200 |                   | $ | 22,714 |  | $ | 16,411
|                                                            |  |                                            |        |                  |   |           |  |           |        |                   |   |        |  |   |       



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In addition to the lease commitments included above, we have provided letters of credit totaling $10.7 million as
security deposits in connection with certain office leases.



On September 30,
2003, we entered into an agreement with OHANA Wireless, Incorporated, a California corporation (Ohana), whereby we advanced Ohana $0.7 million in the form of a zero interest convertible loan. Ohana was formed in July 2003 to design,
assemble and install high frequency wireless communication systems. We believe that out security solutions can be integrated with Ohanas products and we anticipate that an investment in Ohana will assist us in furthering the development of our
distribution capability in Asia through technology and distribution partnerships. Ohana intends to close on a Series A Preferred Stock financing by July 31, 2004. Upon the closing of that financing, the loan will automatically convert to Series A
Preferred Stock. If the closing does not occur on or before July 31, 2004, the convertible loan will be payable to us on July 31, 2004. On April 15, 2004, we amended the agreement whereby we advanced an additional $0.2 million in the form of an
interest bearing loan, which is convertible under the same terms as the original advance in September 2003. This agreement also includes an obligation to enter into good faith negotiations to invest up to an additional $0.9 million in Ohana if, as a
result of negotiations with China Aerospace International Holdings, Inc., we enter into a resale or distribution arrangement in China and other investors invest an additional $0.3 million or more on a pari passu basis.



In the ordinary course of business, we enter into standard indemnification agreements with
our business partners and customers. Pursuant to these agreements, we agree to modify, repair or replace the product, pay royalties for a right to use, defend and reimburse the indemnified party for actual damages awarded by a court against the
indemnified party for an intellectual property infringement claim by a third party with respect to our products and services, and indemnify for property damage that may be caused in connection with consulting services performed at a customer site by
our employees or our subcontractors. The term of these indemnification agreements is generally perpetual. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. We have
general and umbrella insurance policies that generally enable us to recover a portion of any amounts paid. We have never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the
estimated fair value of these agreements is minimal. Accordingly, we have no liabilities recorded for these agreements as of March 31, 2004.



We generally warrant for ninety days from delivery to a customer that our software products will perform free from material errors which prevent performance in accordance
with user documentation. Additionally, we warrant that our consulting services will be performed consistent with generally accepted industry standards including other warranties. We have only incurred nominal expense under our product or service
warranties. As a result, we believe the estimated fair value of our obligations under these agreements is minimal. Accordingly, we have no liabilities recorded for these agreements as of March 31, 2004.



We have entered into employment and executive retention agreements with certain employees and
executive officers, which, among other things, include certain severance and change of control provisions. We have also entered into agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or
director is, or was, serving at our request in such capacity.



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



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of securities analysts and investors, or the guidance that we provide, 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:



| | reduced capital expenditures for software;
|- | ------------------------------------------



| | length of sales cycles associated with our product offerings;
|- | -------------------------------------------------------------



| | the timing, size and nature of our licensing transactions;
|- | ----------------------------------------------------------



| | the increased dependency on partners for end user fulfillment;
|- | --------------------------------------------------------------



| | market acceptance of new products or product enhancements by us;
|- | ----------------------------------------------------------------



| | market acceptance of new products or product enhancements by 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;
|- | ----------------------------------



| | fluctuations in foreign currency exchange rates; and
|- | ----------------------------------------------------



| | reduced spending by critical vertical markets.
|- | ----------------------------------------------



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 order backlog. Thus, quarterly license revenues depend heavily upon orders received and shipped within the same quarter. Moreover, we historically have recorded 50% to 70% 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.



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 software 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 solutions 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, particularly in a soft economic environment where technology spending is often deferred;
|- | --------------------------------------------------------------------------------------------------------------------------



| | 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, or below the targeted guidance range that we have provided, 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 maintain or replace these customer relationships.



Historically, a limited number of customers have accounted for a significant percentage of our revenues. In 2003, 2002 and 2001, our



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three largest customers accounted for 29%, 18% and 18% of revenues, respectively. In the three months ended March 31,
2004 and 2003, our three largest customers accounted for 39% and 32% of revenues, respectively.



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 large 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 material adverse effect on our revenues.



The
U.S. and Canadian Federal Governments account for a significant percentage of our revenues, which may decline or be subject to delays, which would adversely affect our operating results.



The extended government vertical (Governments, including Healthcare) accounted for 17% of
our software revenue in the first quarter of 2004 and 45% of software revenue in fiscal 2003. The U.S. and Canadian governments represented 15% and 9% of total revenues, respectively, in the first quarter of 2004, which includes revenues sold
through resellers to these government end users. Sustaining and growing revenues in the government market will depend, in large part, on the following:



| | the adoption rate of our products within government departments and agencies;
|- | -----------------------------------------------------------------------------



| | the timing and amount of budget appropriations for information technology and specifically information security;
|- | ----------------------------------------------------------------------------------------------------------------



| | the timing of adoption of information security policies and regulations, including, but not limited to the Health Insurance Portability and Accountability Act of 1996 (HIPAA), the
Gramm-Leach-Bliley Act and the California Breach Disclosure Law (SB1386); and
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | our ability to develop and maintain the appropriate business relationships with partners with whom the government contracts for information security projects.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------



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



In addition, failure to properly monitor pricing on government contracts could result in liability for penalties to the government for non-compliance.



We sometimes enter into complex contracts, which require ongoing monitoring and administration. Failure to monitor and administer these contracts properly could
result in liability or damages.



We sometimes enter into complex contracts
with our Government customers that contain clauses that provide that if a customer who falls within a specific category (known as a Relevant Customer) is offered better terms on the Companys software products and related services that had been
offered to the Government customer, then the Government customer will be able to buy additional quantities of those software products and services for the same length of time, from the same effective date and on the better terms that were offered to
the Relevant Customer. The Company monitors compliance with these contracts on a continuous basis. The Company also conducts periodic self-assessments to ensure that the contracts are being properly administered and that there are no accruing
liabilities for non-compliance. If these contracts are not properly monitored and administered, they may be breached and could result in damages payable by us which, depending on their magnitude, could have a material adverse effect on our business,
financial condition and results of operations.



The outbreak of war,
significant threat of war, or a terrorist act could adversely affect our business.



Historically, the outbreak of war has had an adverse affect upon the economy. In the event of war or significant terrorist act, any of the following may occur:



| | government spending could be reprioritized to wartime activities;
|- | -----------------------------------------------------------------



| | global enterprise spending budgets could be cut or delayed resulting in lower demand for our products; or
|- | ---------------------------------------------------------------------------------------------------------



| | widespread and unprecedented acts of cyber-terrorism could cause disruption of communications and technology infrastructures, which could impact our customers of products and could
have unforeseen economic impacts.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



A decline or delay in economic
spending due to the outbreak of war, significant threat of war or a terrorist act could reduce demand for our products, materially adversely affecting our revenues and results of operations.



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If the enterprise information technology budgets and the digital identity security market do not continue to grow,
demand for

our products and services will be adversely affected.



The market for digital identity and information security solutions is at an early stage of development. Continued growth of the digital
identity 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 rate of adoption of Internet-based business applications such as Web Services;
|- | ----------------------------------------------------------------------------------



| | 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, third-party technology used within 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.



In addition, the security level of our products is dependent upon the processes and procedures used to install and operate our products.
Failure on the part of our customers to properly install and operate our products, could cause a security breach, which 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.



As our products contain errors or bugs,
sales of our products would likely decline if some of these bugs or the number of bugs were significant.



Like virtually all software systems, our products 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, including third-party technology incorporated into our 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 and our results of operations.



We have invested in technology companies in the start-up or development stage whose
products and technology may not succeed with the result that we lose all or substantially all of our investments.



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 relevant markets, we could lose all or
substantially all of our investments in these companies.



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





We target our products at the rapidly evolving market for digital identity and information security solutions. Many of our current and potential competitors have
longer operating histories, greater name recognition, larger installed bases and significantly greater



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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 and increased market volatility in our industry 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 digital identity and information
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 operations, which could adversely affect our ability
to successfully grow our business.



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 Addison, Texas, from our research and development facilities in Ottawa, Canada, and Santa Clara, California and from our European headquarters in Reading, United Kingdom, 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. These challenges are made more severe by our history of operating losses, the employment reductions from our
restructurings, and the fact that the exercise price of the substantial majority of outstanding stock options is below the current market price of our stock. 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.



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 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
|- | -----------------------------------------------------------------------------------------------------------------------------------





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| | 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, while actions taken to enforce our intellectual property rights could substantially increase our quarterly expenses.



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 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. From time to time, we have received notices from third parties either soliciting our interest in obtaining a license under one or more patents owned or licensed by these
third parties or suggesting that our products may be infringing one or more patents owned or licensed by these third parties. From time to time, we have received notices from various customers stating that we may be responsible for indemnifying such
customers pursuant to indemnification obligations in product license agreements with such customers for alleged infringement of patents assigned to third parties. To date, we are not aware that any customer has filed an action against us for
indemnification. 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. Additionally, as a result of a successful claim, we could potentially be enjoined from using technology that is required for our products to remain competitive which could in turn have an adverse effect on our results of operations for
subsequent periods.



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 in the future is dependent upon a licensing agreement we have with Baltimore Technologies, 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.



We rely on partners to integrate our products with their products and to resell our
products. Changes in these relationships could adversely affect our ability to sell our products.



We rely on partners to integrate our products with their products or to maintain adherence to industry standards so that our products will be able to work with them to provide enhanced security attributes. For
example, our ability to provide digital signatures on Adobe forms is dependent upon Adobe continuing to allow Entrust to have access to their private Application Programming Interfaces in future releases. In addition, we have resale relationships
with companies such as Critical Path and Waveset. Inability to maintain these relationships could have a material adverse effect on our results of operations.



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 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.



As a result of our June 2001 and May 2003 restructuring plans, we have made certain assumptions in estimating the accrued restructuring charges. If these assumptions
change, they could have a material effect on our reported results.



In
recent periods, we announced two major restructuring plans in June 2001 and in May 2003 as a result of the slowdown in the global electronics industry and the worldwide economy. The restructuring plans included a workforce reduction, the
consolidation of excess facilities, the reassessment of the value of related excess long-lived assets and discontinuance of non-core products and programs.



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As a result of the June 2001 restructuring plan, we recorded restructuring and other special non-recurring charges,
excluding

goodwill impairment, of $106.6 million in the second quarter of 2001. Our assessment of the accounting effects of the June 2001 restructuring
plan required assumptions in estimating the original accrued restructuring charges, including estimating future recoveries of sublet income from excess facilities, liabilities from employee severances, and costs to exit business activities. Changes
in these assumptions, with respect to the accrued restructuring charges for the June 2001 restructuring plan of $31.5 million at March 31, 2004, could have a material effect on our reported results.



As a result of the May 2003 restructuring plan, we recorded restructuring charges, excluding
impairments, of $8.9 million. Our assessment of the accounting effect of the May 2003 restructuring plan required assumptions in estimating the original incurred and expected restructuring charges of $8.9 million, including estimating liabilities
from employee severances, future recoveries of sublet income from excess facilities, and other costs to exit activities. Changes in these assumptions, with respect to the accrued restructuring charges for the May 2003 restructuring plan of $2.4
million at March 31, 2004, could have a material effect on our reported results.



If our business does not improve or declines, we may further restructure our operations, which may adversely affect our financial condition and operating results.



We may need to take additional restructuring charges in the future if our business does not improve or declines or if the expected benefits
of the restructuring plans do not materialize. These benefits may not materialize if we incur unanticipated costs in closing facilities or transitioning operations from closed facilities to other facilities or if customers cancel orders as a result
of facility closures. If we are unsuccessful in implementing our restructuring plans, we may experience disruptions in our operations and higher ongoing costs, which may adversely affect our operating results.



We face risks associated with our international operations, 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, partners 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.



We face additional risks in the Asia Pacific market due to our reliance on joint ventures.



In Japan, we have an exclusive distribution arrangement with Secom and
others called Entrust Japan Co., Ltd. This entity is a joint venture of which we own 37%, SECOM, a Japanese Security Company, owns 38%, and a group of other investors own the remaining 25%. Joint ventures have additional risks as a result of
potentially conflicting objectives between the owners including, but not limited to, agreement on business plans, budgets, and key staffing decisions.



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.



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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 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 introduced by, or new contracts entered into 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.
|- | ------------------------------------------------



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. We think these measures enable us to review offers for our shares of Common stock to determine if they are in the best interests of our stockholders. 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. 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, 2004, that would have been subject to interest rate risk, and the related ranges of maturities as of those dates:



|                                                                  |  |                |        |           |   |           |  |            |        |  |   |      
|----------------------------------------------------------------- |  | -------------- | ------ | --------- | - | --------- |  | ---------- | ------ |  | - | -----
|                                                                  |  | MATURITY      
|                                                                  |  | (in thousands)
|                                                                  |  | Within3 Months |        | 3-6Months |   | > 6Months |  | > 12Months
|Investments classified as cash and cash equivalents               |  | $              | 30,364 |           | $ |          |  | $          |       |  | $ |     
|Investments classified as held to maturity marketable investments |  |                | 10,184 |           |   | 16,715    |  |            | 22,431 |  |   | 9,005
|                                                                  |  |                |        |           |   |           |  |            |        |  |   |      
|Total amortized cost                                              |  | $              | 40,548 |           | $ | 16,715    |  | $          | 22,431 |  | $ | 9,005
|                                                                  |  |                |        |           |   |           |  |            |        |  |   |      
|Fair value                                                        |  | $              | 40,709 |           | $ | 16,727    |  | $          | 22,489 |  | $ | 9,011
|                                                                  |  |                |        |           |   |           |  |            |        |  |   |      



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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, and the European Union. This exposure is not considered to be material with respect to the United Kingdom and European operations due to the fact that these operations are not significant. However, because a
disproportionate amount of our expenses are denominated in Canadian dollars, through the Companys Canadian operations, while our Canadian denominated revenue streams are cyclical, we are exposed to exchange rate fluctuations in the Canadian
dollar, and in particular, fluctuations between the U.S. and Canadian dollar. Therefore, a favorable change in the exchange rate for the Canadian subsidiary would result in higher revenues when translated into U.S. dollars, but the expenses would be
higher in a corresponding fashion and to a greater degree.



Historically, we
have not engaged in formal hedging activities, but we do periodically review the potential impact of this risk to ensure that the risk of significant potential losses is minimized. However, as a significant portion of our expenses are incurred in
Canadian dollars, our expense base increased by $4.9 million in 2003, when compared to 2002, due to fluctuations in the exchange rate between the United States and Canadian dollars. During the first quarter of 2004, we engaged in forward contracts
to purchase Canadian dollars, covering exposures on approximately $6.9 million of our Canadian subsidiarys expenses denominated in Canadian dollars, in an attempt to reduce earnings volatility that might result from fluctuations in the
exchange rate between the Canadian and U.S. dollar. None of the related foreign exchange contracts extended past March 31, 2004. We do not intend to engage in any forward contracts to purchase Canadian dollars to cover exposures on expenses
denominated in Canadian dollars in the second quarter of 2004.



Risk
Associated with Equity Investments



We have a long-term investment in
Entrust Japan, which is accounted for in accordance with the equity method. We recorded our share of post-acquisition losses of Entrust Japan, in the amount of $209 thousand and $105 thousand in our consolidated losses for the three months ended
March 31, 2004 and 2003, respectively, resulting in cumulative losses recorded to date of $1.4 million. These losses are attributable to our pro rata share of Entrust Japans losses in the first quarter of 2004 and 2003, while we had an equity
ownership of approximately 37% of their voting stock. During 2002, Entrust Japan exceeded the performance targets established at the date of our increased investment. However, in 2003 and the first quarter of 2004, the actual growth of Entrust Japan
was less than the original projections. It is possible that future growth will also fall short of projections, and due to Entrust Japans history of operating losses, it is possible that all or substantially all of the remaining $451 thousand
equity investment in Entrust Japan at March 31, 2004 may be expensed through our operating earnings in future quarters as a result of our recognition of our equity share of losses in Entrust Japan. However, we do not have any obligation to provide
additional cash funding to them. As of March 31, 2004, we believe that there had not been any additional impairment of our investment in Entrust Japan beyond our equity share of losses recorded to date. However, there are risks associated with joint
venture investments, including: failure to agree on budgets, market plans, staffing decisions and changes in strategic direction by one of the partners. If any one of these were to occur, the value of our investment in Entrust Japan could be further
adversely affected.



ITEM 4. CONTROLS AND PROCEDURES



As required by
Rule 13a-15(b), Entrust management, with the participation of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of March 31, 2004 (the end of the period covered by this quarterly report), of the effectiveness of the
Companys disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures were
effective in all material respects as of March 31, 2004.



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PART II. OTHER INFORMATION



ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES



The table below sets forth the information with respect to purchases made by or on behalf of Entrust, Inc. or any affiliated purchaser (as defined in Rule
10b-18(a)(3) under the Securities Exchange Act of 1934), of our common stock during the three months ended March 31, 2004.



|                                                 |  |                                 |  |                             |      |                                                                                      |         |                                                                                   | 
|------------------------------------------------ |  | ------------------------------- |  | --------------------------- | ---- | ------------------------------------------------------------------------------------ | ------- | --------------------------------------------------------------------------------- | 
|Period                                           |  | Total Number of SharesPurchased |  | AveragePrice Paid per Share |      | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) |         | Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs(1)
|                                                 |  |                                 |  |                            
|Month #1 (January 1, 2004 to January 31, 2004)   |  |                                |  | $                           |     |                                                                                      |        |                                                                                   | 
|                                                 |  |                                 |  |                            
|Month #2 (February 1, 2004 to February 29, 2004) |  | 191,650                         |  |                             | 5.06 |                                                                                      | 191,650 |                                                                                   | 
|                                                 |  |                                 |  |                            
|Month #3 (March 1, 2004 to March 31, 2004)       |  |                                |  |                             |     |                                                                                      |        |                                                                                   | 
|                                                 |  |                                 |  |                             |      |                                                                                      |         |                                                                                   | 
|                                                 |  |                                 |  |                            
|Total                                            |  | 191,650                         |  | $                           | 5.06 |                                                                                      | 191,650 |                                                                                   | 
|                                                 |  |                                 |  |                             |      |                                                                                      |         |                                                                                   | 

---



|(1) | On July 29, 2002, the Company announced that its board of directors had authorized the Company to repurchase up to an aggregate of 7,000,000 shares of its Common stock. On July 22,
2003, the Company announced that its board of directors had authorized an extension to this stock repurchase program. Entrusts original stock repurchase program would have expired on July 28, 2003. The extended plan permits the new purchase of
up to 7,000,000 shares of the Companys Common stock through September 1, 2004, in addition to the 2,229,200 shares already purchased prior to the extension. Repurchases under the stock repurchase program may take place from time to time until
September 1, 2004, or an earlier date determined by the Companys board of directors, in open market, negotiated or block transactions, and may be suspended or discontinued at any time. The Companys management will determine the timing
and amount of shares repurchased based on its evaluation of market and business conditions.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



(a)
Exhibits required to be filed by Item 601 of Regulation S-K



|               |  |                                                         
|-------------- |  | --------------------------------------------------------
|Exhibit Number |  | Description                                             
|31.1           |  | Rule 13a-14(a) Certification of Chief Executive Officer.
|               | 
|31.2           |  | Rule 13a-14(a) Certification of Chief Financial Officer.
|               | 
|32.1           |  | Section 1350 Certification of Chief Executive Officer.  
|               | 
|32.2           |  | Section 1350 Certification of Chief Financial Officer.  



Reports on Form 8-K:



We furnished a Current Report on Form 8-K/A under Items 7(c) and 12 on
January 20, 2004, amending our Current Report on Form 8-K that was previously furnished on October 29, 2003 announcing financial results for the third quarter ended September 30, 2003.



We furnished a Current Report on Form 8-K under Items 7(c) and 12 on January 27, 2004, announcing financial results for the fourth quarter
ended December 31, 2003.



We furnished a Current Report on Form 8-K under Items
7(c) and 12 on April 21, 2004, announcing financial results for the first quarter ended March 31, 2004.



We filed a Current Report on Form 8-K under Items 4 and 7(c) on May 6, 2004, announcing a change in our certifying accountant.



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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, INC.





(Registrant)



Dated: May 6, 2004



/s/ David J. Wagner

David J. Wagner



Chief Financial Officer and Senior Vice President



(Principal Financial and Accounting Officer)



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EXHIBIT INDEX



Exhibits required to be filed by Item 601 of Regulation S-K



|               |  |                                                         
|-------------- |  | --------------------------------------------------------
|Exhibit Number |  | Description                                             
|31.1           |  | Rule 13a-14(a) Certification of Chief Executive Officer.
|               | 
|31.2           |  | Rule 13a-14(a) Certification of Chief Financial Officer.
|               | 
|32.1           |  | Section 1350 Certification of Chief Executive Officer.  
|               | 
|32.2           |  | Section 1350 Certification of Chief Financial Officer.  



39