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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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(Mark one)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended June 30, 2007

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)



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



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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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act.

Large accelerated filer ̈Accelerated filer  x    Non-accelerated filer ̈

Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act.):    Yes ̈No  x

There were 60,941,634 shares of the registrants Common stock, par value $0.01 per share, outstanding as of August 3, 2007.



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##### Table of Contents

ENTRUST, INC.

TABLE OF CONTENTS



|                                                                                              |  |   
|--------------------------------------------------------------------------------------------- |  | --
|PART I. FINANCIAL INFORMATION                                                                 |  | 3 
|                                                                                              | 
|ITEM 1. FINANCIAL STATEMENTS                                                                  |  | 3 
|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 |  | 14
|ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |  | 36
|ITEM 4. CONTROLS AND PROCEDURES                                                               |  | 38
|                                                                                              | 
|PART II. OTHER INFORMATION                                                                    |  | 38
|                                                                                              | 
|ITEM 1. LEGAL PROCEEDINGS                                                                     |  | 38
|ITEM 1A. RISK FACTORS                                                                         |  | 38
|ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                           |  | 38
|ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                       |  | 38
|ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |  | 38
|ITEM 5. OTHER INFORMATION                                                                     |  | 39
|ITEM 6. EXHIBITS                                                                              |  | 39
|                                                                                              | 
|SIGNATURES                                                                                    |  | 40

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.



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PART I. FINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS
|------- | --------------------

ENTRUST, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                     |  |              |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | -------- | - | ---------------- | - | -------- | -
|(In thousands, except share and per share data)                                                                                                                                      |  | June 30,2007 |          |   | December 31,2006 |  
|Assets                                                                                                                                                                               |  |              |          |   |                  |   |          |  
|Current assets:                                                                                                                                                                      |  |              |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                                            |  | $            | 24,235   |   |                  | $ | 19,888   |  
|Short-term marketable investments                                                                                                                                                    |  |              |         |   |                  |   | 2,639    |  
|Accounts receivable (net of allowance for doubtful accounts of $1,640 at June 30, 2007 and $1,470 at December 31,
2006)                                                              |  |              | 17,011   |   |                  |   | 21,117   |  
|Prepaid expenses and other receivables                                                                                                                                               |  |              | 3,382    |   |                  |   | 2,904    |  
|                                                                                                                                                                                     |  |              |          |   |                  |   |          |  
|Total current assets                                                                                                                                                                 |  |              | 44,628   |   |                  |   | 46,548   |  
|Property and equipment, net                                                                                                                                                          |  |              | 1,912    |   |                  |   | 2,721    |  
|Purchased product rights and other purchased intangible assets, net                                                                                                                  |  |              | 12,713   |   |                  |   | 13,843   |  
|Goodwill                                                                                                                                                                             |  |              | 60,214   |   |                  |   | 60,214   |  
|Long-term strategic and equity investments                                                                                                                                           |  |              | 91       |   |                  |   | 169      |  
|Other long-term assets, net                                                                                                                                                          |  |              | 4,102    |   |                  |   | 4,321    |  
|                                                                                                                                                                                     |  |              |          |   |                  |   |          |  
|Total assets                                                                                                                                                                         |  | $            | 123,660  |   |                  | $ | 127,816  |  
|                                                                                                                                                                                     |  |              |          |   |                  |   |          |  
|Liabilities                                                                                                                                                                          |  |              |          |   |                  |   |          |  
|Current liabilities:                                                                                                                                                                 |  |              |          |   |                  |   |          |  
|Accounts payable                                                                                                                                                                     |  | $            | 9,997    |   |                  | $ | 8,544    |  
|Accrued liabilities                                                                                                                                                                  |  |              | 6,201    |   |                  |   | 11,724   |  
|Accrued restructuring charges, current portion                                                                                                                                       |  |              | 5,314    |   |                  |   | 5,217    |  
|Deferred revenue                                                                                                                                                                     |  |              | 28,507   |   |                  |   | 23,575   |  
|                                                                                                                                                                                     |  |              |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                                            |  |              | 50,019   |   |                  |   | 49,060   |  
|Accrued restructuring charges, long-term portion                                                                                                                                     |  |              | 16,591   |   |                  |   | 19,301   |  
|Other long-term liabilities                                                                                                                                                          |  |              | 218      |   |                  |   | 231      |  
|                                                                                                                                                                                     |  |              |          |   |                  |   |          |  
|Total liabilities                                                                                                                                                                    |  |              | 66,828   |   |                  |   | 68,592   |  
|                                                                                                                                                                                     |  |              |          |   |                  |   |          |  
|Minority interest in subsidiary                                                                                                                                                      |  |              | 4        |   |                  |   | 4        |  
|                                                                                                                                                                                     |  |              |          |   |                  |   |          |  
|Shareholders equity                                                                                                                                                                 |  |              |          |   |                  |   |          |  
|Common stock, par value $0.01 per share: 250,000,000 authorized shares: 60,941,634 and 60,161,720 issued and outstanding shares at
June 30, 2007 and December 31, 2006, respectively |  |              | 609      |   |                  |   | 602      |  
|Additional paid-in-capital                                                                                                                                                           |  |              | 768,970  |   |                  |   | 765,140  |  
|Accumulated deficit                                                                                                                                                                  |  |              | (712,991 | ) |                  |   | (707,333 | )
|Accumulated other comprehensive income                                                                                                                                               |  |              | 240      |   |                  |   | 811      |  
|                                                                                                                                                                                     |  |              |          |   |                  |   |          |  
|Total shareholders equity                                                                                                                                                           |  |              | 56,828   |   |                  |   | 59,220   |  
|                                                                                                                                                                                     |  |              |          |   |                  |   |          |  
|Total liabilities and shareholders equity                                                                                                                                           |  | $            | 123,660  |   |                  | $ | 127,816  |  
|                                                                                                                                                                                     |  |              |          |   |                  |   |          |  

The accompanying notes are an integral part of these financial statements.



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ENTRUST, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|-------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                                               |  | Three months endedJune 30, |        |   | Six months endedJune 30, |  
|(In thousands, except share and per share data)                |  | 2007                       |        |   | 2006                     |   |        | 2007 |  |   | 2006   |  
|Revenues:                                                      |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Product                                                        |  | $                          | 8,930  |   |                          | $ | 7,388  |      |  | $ | 18,074 |   |  | $ | 13,966  |  
|Services and maintenance                                       |  |                            | 15,563 |   |                          |   | 14,666 |      |  |   | 30,982 |   |  |   | 29,187  |  
|                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|                                                               |  |                            |        |  
|Total revenues                                                 |  |                            | 24,493 |   |                          |   | 22,054 |      |  |   | 49,056 |   |  |   | 43,153  |  
|                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Cost of revenues:                                              |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Product                                                        |  |                            | 2,162  |   |                          |   | 1,230  |      |  |   | 3,970  |   |  |   | 3,174   |  
|Services and maintenance                                       |  |                            | 7,759  |   |                          |   | 7,407  |      |  |   | 15,207 |   |  |   | 14,448  |  
|Amortization of purchased product rights                       |  |                            | 345    |   |                          |   | 212    |      |  |   | 677    |   |  |   | 419     |  
|                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|                                                               |  |                            |        |  
|Total cost of revenues                                         |  |                            | 10,266 |   |                          |   | 8,849  |      |  |   | 19,854 |   |  |   | 18,041  |  
|                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Gross profit                                                   |  |                            | 14,227 |   |                          |   | 13,205 |      |  |   | 29,202 |   |  |   | 25,112  |  
|                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Operating expenses:                                            |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Sales and marketing                                            |  |                            | 8,813  |   |                          |   | 7,208  |      |  |   | 17,906 |   |  |   | 14,721  |  
|Research and development                                       |  |                            | 5,312  |   |                          |   | 4,403  |      |  |   | 10,661 |   |  |   | 8,643   |  
|General and administrative                                     |  |                            | 3,258  |   |                          |   | 3,553  |      |  |   | 6,518  |   |  |   | 7,228   |  
|Restructuring charges and adjustments                          |  |                            |       |   |                          |   | (130   | )    |  |   |       |   |  |   | 2,765   |  
|                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|                                                               |  |                            |        |  
|Total operating expenses                                       |  |                            | 17,383 |   |                          |   | 15,034 |      |  |   | 35,085 |   |  |   | 33,357  |  
|                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Loss from operations                                           |  |                            | (3,156 | ) |                          |   | (1,829 | )    |  |   | (5,883 | ) |  |   | (8,245  | )
|                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Other income (expense):                                        |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Interest income                                                |  |                            | 176    |   |                          |   | 840    |      |  |   | 356    |   |  |   | 1,582   |  
|Foreign exchange gain (loss)                                   |  |                            | (177   | ) |                          |   | (63    | )    |  |   | 70     |   |  |   | (271    | )
|Write-down of long-term strategic and equity investments       |  |                            |       |   |                          |   |       |      |  |   |       |   |  |   | (3,016  | )
|Loss from equity investments                                   |  |                            |       |   |                          |   | (122   | )    |  |   | (77    | ) |  |   | (293    | )
|                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|                                                               |  |                            |        |  
|Total other income (expense)                                   |  |                            | (1     | ) |                          |   | 655    |      |  |   | 349    |   |  |   | (1,998  | )
|                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Loss before income taxes                                       |  |                            | (3,157 | ) |                          |   | (1,174 | )    |  |   | (5,534 | ) |  |   | (10,243 | )
|Provision for income taxes                                     |  |                            | 72     |   |                          |   | 90     |      |  |   | 124    |   |  |   | 189     |  
|                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Net loss                                                       |  | $                          | (3,229 | ) |                          | $ | (1,264 | )    |  | $ | (5,658 | ) |  | $ | (10,432 | )
|                                                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Net loss per share:                                            |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Basic                                                          |  | $                          | (0.05  | ) |                          | $ | (0.02  | )    |  | $ | (0.09  | ) |  | $ | (0.17   | )
|Diluted                                                        |  | $                          | (0.05  | ) |                          | $ | (0.02  | )    |  | $ | (0.09  | ) |  | $ | (0.17   | )
|Weighted average common shares used in per share computations: |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Basic                                                          |  |                            | 60,777 |   |                          |   | 59,741 |      |  |   | 60,582 |   |  |   | 59,818  |  
|Diluted                                                        |  |                            | 60,777 |   |                          |   | 59,741 |      |  |   | 60,582 |   |  |   | 59,818  |  

The accompanying notes are an integral part of these financial statements.



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ENTRUST, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                              |  |                          |        |   |      |   |         |  
|------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------- | -
|                                                              |  | Six months endedJune 30, |       
|                                                              |  | 2007                     |        |   | 2006 |  
|                                                              |  | (In thousands)           |       
|OPERATING ACTIVITIES:                                         |  |                          |        |   |      |   |         |  
|Net loss                                                      |  | $                        | (5,658 | ) |      | $ | (10,432 | )
|Non-cash items in net loss:                                   |  |                          |        |   |      |   |         |  
|Depreciation and amortization                                 |  |                          | 2,281  |   |      |   | 1,308   |  
|Non-cash compensation expense                                 |  |                          | 2,733  |   |      |   | 1,579   |  
|Loss from equity investments                                  |  |                          | 77     |   |      |   | 293     |  
|Provision for (recovery of) doubtful accounts                 |  |                          | (10    | ) |      |   | 495     |  
|Write-down of strategic and equity investments                |  |                          |       |   |      |   | 3,016   |  
|Changes in operating assets and liabilities:                  |  |                          |        |   |      |   |         |  
|Decrease in accounts receivable                               |  |                          | 3,813  |   |      |   | 3,281   |  
|(Increase) decrease in prepaid expenses and other receivables |  |                          | (539   | ) |      |   | 1,359   |  
|Increase (decrease) in accounts payable                       |  |                          | 1,347  |   |      |   | (711    | )
|Increase (decrease) in accrued liabilities                    |  |                          | (5,708 | ) |      |   | 501     |  
|Increase (decrease) in accrued restructuring charges          |  |                          | (2,613 | ) |      |   | 846     |  
|Increase in deferred revenue                                  |  |                          | 4,399  |   |      |   | 1,840   |  
|                                                              |  |                          |        |   |      |   |         |  
|Net cash provided by operating activities                     |  |                          | 122    |   |      |   | 3,375   |  
|                                                              |  |                          |        |   |      |   |         |  
|INVESTING ACTIVITIES:                                         |  |                          |        |   |      |   |         |  
|Purchases of marketable investments                           |  |                          |       |   |      |   | (12,703 | )
|Maturities of marketable investments                          |  |                          | 2,639  |   |      |   | 22,957  |  
|Purchases of property and equipment                           |  |                          | (175   | ) |      |   | (1,355  | )
|Proceeds on disposition of property and equipment             |  |                          | 372    |   |      |   |        |  
|Increase in other long-term assets                            |  |                          | (305   | ) |      |   | (80     | )
|Purchase of business, net of cash acquired                    |  |                          |       |   |      |   | (8,819  | )
|                                                              |  |                          |        |   |      |   |         |  
|Net cash provided by investing activities                     |  |                          | 2,531  |   |      |   |        |  
|                                                              |  |                          |        |   |      |   |         |  
|FINANCING ACTIVITIES:                                         |  |                          |        |   |      |   |         |  
|Repurchase of common stock                                    |  |                          |       |   |      |   | (2,519  | )
|Proceeds from exercise of stock options                       |  |                          | 1,104  |   |      |   | 846     |  
|                                                              |  |                          |        |   |      |   |         |  
|Net cash provided by (used in) financing activities           |  |                          | 1,104  |   |      |   | (1,673  | )
|                                                              |  |                          |        |   |      |   |         |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                       |  |                          | 590    |   |      |   | 844     |  
|                                                              |  |                          |        |   |      |   |         |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS                     |  |                          | 4,347  |   |      |   | 2,546   |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD              |  |                          | 19,888 |   |      |   | 59,929  |  
|                                                              |  |                          |        |   |      |   |         |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                    |  | $                        | 24,235 |   |      | $ | 62,475  |  
|                                                              |  |                          |        |   |      |   |         |  

The accompanying notes are an integral part of these financial statements.



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ENTRUST, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(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 and six months ended June 30, 2007 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 Consolidated Financial Statements and related Notes contained in the Companys Annual Report on Form 10-K
for the year ended December 31, 2006.

NOTE 2. ACCOUNTING FOR UNCERTAIN TAX POSITIONS

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement
No. 109,(FIN No. 48), which clarifies the accounting for uncertainty in tax positions. FIN No. 48 requires that the Company recognize in its financial statements the impact of a tax position if that position is
more likely than not of not being sustained on audit, based on the technical merits of the position. FIN No. 48 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting
for income taxes.

The Company adopted the provisions of FIN No. 48 on January 1, 2007. As a result of the implementation of FIN No. 48, the
Company was not required to record an increase in the liability for unrecognized tax benefits, resulting in no adjustment to the January 1, 2007 accumulated deficit balance. Correspondingly, the amount of unrecognized tax benefits at
January 1, 2007 was immaterial and would not impact the Companys effective tax rate if recognized. The amount of unrecognized tax benefits did not materially change as of June 30, 2007.

It is not expected that the amount of unrecognized tax benefits will change in the next twelve months; however, the Company does not expect any change that does occur to
have a significant impact on its results of operations or the financial position.

The Company recognizes any interest accrued related to unrecognized tax
benefits in interest expense and penalties in income tax expense in the Consolidated Statements of Operations, which is consistent with the recognition of these items in prior reporting periods. As of January 1, 2007, the Company was not
required to record a liability for the payment of interest and penalties, respectively. The liability for the payment of interest and penalties did not materially change as of June 30, 2007.

All federal income tax returns of the Company and its subsidiaries are closed through 2003 in the U.S. and 2002 in Canada. The Internal Revenue Service (IRS)
examination of the years 1997 through 2001 for the Company is completed, with no outstanding issues pending. The Companys Canadian subsidiary is currently under examination by the Canadian Revenue Agency (CRA) for its transfer
pricing structure for the years 2003 and 2004. It is anticipated that the examination with the CRA will be completed within the next twelve months. Taxation years back to fiscal 1998 remain open to the extent that the Company has net operating loss
(NOLs) carry-forwards related to those years. Otherwise, the Companys federal income tax returns are generally subject to examination for a period of three years after filing of the respective return in the U.S. and four
years in Canada.

State income tax returns are generally subject to examination for a period of three to five years after filing of the
respective return. The state impact of any federal changes remains subject to examination by various states for a period of up to one year after formal notification to the states. The Company and its subsidiaries have various state income tax
returns in the process of examination or administrative appeals. The Company does not expect that these examinations will affect the amount of its unrecognized tax benefits.



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NOTE 3. ACQUISITIONS

Orion Security Solutions, Inc. (Orion)

On June 15, 2006, the Company completed the acquisition of all of the issued
and outstanding shares of common stock of Orion, a Virginia corporation, pursuant to a stock purchase agreement dated as of June 15, 2006 (Stock Purchase Agreement) among the Company, Orion, and the shareholders of Orion. The
Company acquired all of the common stock of Orion, a privately-held provider of public key infrastructure services to defense-related governmental agencies and other customers, such as the Department of Defense, the United States Marine Corps and
the National Security Agency and commercial companies in the healthcare industry, in exchange for $9,000 in cash and $135 in acquisition-related costs. The acquisition was made in order to extend the Companys overall leadership in the United
States government vertical, by further strengthening the Companys ability to provide identity and information security to the United States civilian government agencies, adding key defense agencies to the Companys customer base. Although
the Company intends to continue Orions business substantially in the manner conducted by Orion immediately prior to the acquisition, it has been implementing a plan to integrate Orions business into Entrust Cygnacom, a wholly-owned
subsidiary of the Company, located in McLean, Virginia.

The acquisition was accounted for under the purchase method of accounting, and, accordingly, the
purchase price of approximately $9,135 was allocated to the fair value of the tangible and intangible assets and liabilities acquired, with the remainder allocated to goodwill. The results of operations of Orion have been included in the
Companys consolidated financial statements commencing from June 1, 2006, the effective date of the acquisition. In the three and six months ended June 30, 2007, the Company recorded amortization of $48 and $96, respectively, related
to customer relationships and $38 and $77, respectively, related to non-competition agreement assets, arising from this acquisition.

Business
Signatures Corporation (Business Signatures)

On July 19, 2006, the Company completed the acquisition of all of the issued and
outstanding shares of capital stock and options of Business Signatures, a privately-held supplier of Zero Touch Fraud Detection solutions that provide non-invasive real time online fraud detection capability that require no change to business
applications, based in Redwood City, California, in exchange for approximately $48,024 in cash and vested options to purchase shares of the Companys Common stock with an aggregate fair value of approximately $722. The Company also incurred
approximately $2,465 in acquisition-related expenses. The acquisition enables the Company to combine Business Signatures zero touch capability with the Companys IdentityGuard authentication platform in order to offer customers strong
consumer authentication solutions, that are easy to implement, user-friendly and cost effective with the ability to evolve over time, to help meet the Federal Financial Institutions Examination Council (FFIEC) requirement to implement
stronger security measures for online customers, as well as other requirements for online transaction security and integrity.

The acquisition was
accounted for under the purchase method of accounting, and, accordingly, the purchase price of approximately $51,211 was allocated to the fair value of the tangible and intangible assets and liabilities acquired, with the remainder allocated to
goodwill. In addition, the results of operations of Business Signatures have been included in the Companys consolidated financial statements commencing from July 19, 2006, the effective date of the acquisition. In the three and six months
ended June 30, 2007, the Company recorded amortization of $163 and $326, respectively, related to customer/partner relationships and $128 and $256, respectively, related to purchased product rights, arising from this acquisition.

The following table summarizes, for comparative purposes, the combined results of operations, on a pro forma basis, of the Company, Orion and Business Signatures for the
three and six months ended June 30, 2006, as if the acquisitions had taken place as of the beginning of that period, and, accordingly, include a full periods amortization of the assets related to customer/partner relationships, purchased
product rights and non-competition agreements in each period shown below.



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|                                     |  |                           |        |   |                         |   |         |  
|------------------------------------ |  | ------------------------- | ------ | - | ----------------------- | - | ------- | -
|                                     |  | Three MonthsEndedJune 30, |        |   | Six MonthsEndedJune 30, |  
|                                     |  | 2006                      |        |   | 2006                    |  
|Revenues                             |  | $                         | 23,178 |   |                         | $ | 45,027  |  
|Net loss                             |  |                           | (4,128 | ) |                         |   | (16,343 | )
|Basic and diluted net loss per share |  |                           | (0.07  | ) |                         |   | (0.27   | )

These pro forma amounts are not necessarily indicative of future results of operations.

NOTE 4. STOCK-BASED COMPENSATION

Compensation cost related to stock
options, stock appreciation rights (SARs) and restricted stock units (RSUs) recognized in operating results was $1,428 and $877 in the three months ended June 30, 2007 and 2006, respectively, and $2,733 and $1,579 in the
six months ended June 30, 2007 and 2006, respectively.

The following table sets forth the related weighted-average assumptions, used to determine
compensation cost for stock options and SARs.



|                              |  |                                  |   |  |                                  |  
|----------------------------- |  | -------------------------------- | - |  | -------------------------------- | -
|                              |  | Three Months Ended,June 30, 2007 |   |  | Three Months Ended,June 30, 2006 |  
|Weighted average assumptions: |  |                                  |   |  |                                  |  
|Expected volatility           |  | 55                               | % |  | 55                               | %
|Risk free rate of return      |  | 4.58                             | % |  | 4.11                             | %
|Expected option term (years)  |  | 4.56                             |   |  | 4.75                             |  

Summary of activity for the three months ended June 30, 2007 under the 2006 Plan, the Business Signatures
2002 Plan, as assumed, and the prior plans is set forth below:



|                           |  |                 |   |  |                   |   |  |                              |  |                         |  |                          |  |                                                
|-------------------------- |  | --------------- | - |  | ----------------- | - |  | ---------------------------- |  | ----------------------- |  | ------------------------ |  | -----------------------------------------------
|                           |  | SharesAvailable |   |  | AwardsOutstanding |   |  | WeightedAverageExercisePrice |  | AggregateIntrinsicValue |  | WeightedAverageFairValue |  | WeightedAverageRemainingContractualLife inYears
|Balance at March 31, 2007  |  | 1,856,109       |   |  | 16,208,246        |   |  | 5.34                         |  |                         |  |                          |  |                                                
|Vested                     |  |                 |   |  | 11,471,482        |   |  |                              |  |                         |  |                          |  |                                                
|Unvested                   |  |                 |   |  | 4,736,764         |   |  |                              |  |                         |  |                          |  |                                                
|                           |  |                 |   |  |                   |  
|Stock options:             |  |                 |   |  |                   |   |  |                              |  |                         |  |                          |  |                                                
|Granted                    |  | (304,000        | ) |  | 304,000           |   |  | 3.73                         |  | 48                      |  | 1.80                     |  | 6.84                                           
|Forfeited                  |  | 237,795         |   |  | (414,420          | ) |  | 4.16                         |  | 398                     |  | 3.23                     |  | 5.48                                           
|Vested                     |  |                 |   |  | (172,046          | ) |  |                              |  |                         |  |                          |  |                                                
|Unvested                   |  |                 |   |  | (242,374          | ) |  |                              |  |                         |  |                          |  |                                                
|Exercised                  |  |                 |   |  | (241,928          | ) |  | 2.17                         |  | 9                       |  | 3.52                     |  | 5.80                                           
|                           |  |                 |   |  |                   |  
|Restricted stock units:    |  |                 |   |  |                   |   |  |                              |  |                         |  |                          |  |                                                
|Granted                    |  | (92,000         | ) |  | 46,000            |   |  |                             |  | 180                     |  | 2.06                     |  | 6.83                                           
|Forfeited                  |  | 58,546          |   |  | (29,273           | ) |  |                             |  | 115                     |  | 3.66                     |  | 5.65                                           
|Matured                    |  |                 |   |  | (81,252           | ) |  |                             |  | 15                      |  | 4.97                     |  | 7.89                                           
|                           |  |                 |   |  |                   |  
|Stock appreciation rights: |  |                 |   |  |                   |   |  |                              |  |                         |  |                          |  |                                                
|Granted                    |  |                |   |  |                  |   |  |                             |  |                        |  |                         |  |                                               
|Forfeited                  |  | 26,555          |   |  | (26,555           | ) |  | 3.83                         |  | 2                       |  | 1.32                     |  | 5.62                                           
|Exercised                  |  |                 |   |  | (5,749            | ) |  | 3.83                         |  |                        |  | 1.32                     |  | 5.62                                           
|                           |  |                 |   |  |                   |   |  |                              |  |                         |  |                          |  |                                                
|                           |  |                 |   |  |                   |  
|Balance at June 30, 2007   |  | 1,783,005       |   |  | 15,759,069        |   |  | 5.40                         |  |                         |  |                          |  |                                                
|Vested                     |  |                 |   |  | 11,446,413        |   |  |                              |  |                         |  |                          |  |                                                
|Unvested                   |  |                 |   |  | 4,312,656         |   |  |                              |  |                         |  |                          |  |                                                



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During the three and six months ended June 30, 2007, the amount of cash received from the exercise of stock options
was $547 and $1,104, respectively.

As at June 30, 2007, there was $5,539 of total unrecognized compensation cost related to non-vested stock option
and SARs awards. Compensation expense related to stock options and SARs for the three and six months ended June 30, 2007 was $1,135 and $2,129, respectively, and was $658 and $1,275 for the three and six months ended June 30, 2006,
respectively.

As at June 30, 2007, there was approximately $1,846 of total unrecognized compensation cost related to non-vested RSUs granted under
our stock plans. Compensation expense related to RSUs for the three and six months ended June 30, 2007 was $293 and $604, respectively, and was $219 and $304 for the three and six months ended June 30, 2006, respectively. During the first
six months of 2007, the Company granted 194,000 RSUs, the vesting of which is based upon the achievement of market conditions. Compensation cost for an RSU award with a market condition are recognized ratably for each vesting tranche over the
requisite service period in a similar manner as an award with a service condition, based on the grant date fair value of the award. However, unlike awards with a service or performance condition, the compensation cost for an award with a market
condition will not be reversed solely because the market condition is not satisfied.

NOTE 5. ALLOWANCE FOR DOUBTFUL ACCOUNTS

The Company performs ongoing credit evaluations of its customers and, generally, does not require collateral from its customers to support accounts receivable. The
Company maintains an allowance for doubtful accounts due to credit risk to provide adequate protection against estimated losses resulting from the inability of customers to make required payments. The Company bases its ongoing estimate of allowance
for doubtful accounts primarily on the aging of balances in its accounts receivable, historical collection patterns and changes in the creditworthiness of its customers. Based upon this analysis, the Company records 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 the Company and is re-evaluated and adjusted as
additional information is received. The following table summarizes the changes in the allowance for doubtful accounts for the six months ended June 30, 2007 and 2006:



|                                                     |  |                          |       |   |      |   |     |  
|---------------------------------------------------- |  | ------------------------ | ----- | - | ---- | - | --- | -
|                                                     |  | Six Months EndedJune 30, |      
|                                                     |  | 2007                     |       |   | 2006 |  
|Allowance for doubtful accounts, beginning of period |  | $                        | 1,470 |   |      | $ | 467 |  
|Provision for doubtful accounts, net                 |  |                          | (10   | ) |      |   | 495 |  
|Amounts written-off, net of recoveries               |  |                          | 180   |   |      |   | (21 | )
|                                                     |  |                          |       |   |      |   |     |  
|Allowance for doubtful accounts, end of period       |  | $                        | 1,640 |   |      | $ | 941 |  
|                                                     |  |                          |       |   |      |   |     |  



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NOTE 6. ACCRUED RESTRUCTURING CHARGES

May 2003 Restructuring Plan

Following the first quarter of 2003, when the Companys revenues fell short
of its expectations and guidance, management began a re-assessment of the Companys operations to ensure that expenses were optimally aligned to its customers and markets, and structured such that costs would not exceed revenues by 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 allowed 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, primarily from the excess space in the Companys Santa Clara, California and Addison, Texas facilities, and re-assessing the useful life of related excess
long-lived assets. The workforce portion of the restructuring plan had been significantly completed by December 31, 2003, while the facilities plan was executed by September 30, 2003. 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 has evaluated and pursued all reasonable possibilities to settle the lease obligations associated with the May 2003 restructuring, but has been unable to find an acceptable outcome. Therefore, the Company has concluded that it
is appropriate to classify the portion of the outstanding liabilities that is not payable within the next 12 months as long-term liabilities. However, in terms of long-term liquidity requirements, the current obligations would require the Company to
fund its remaining accrued restructuring charges for the May 2003 restructuring as follows: $55 in the remainder of fiscal 2007, $155 in fiscal 2008 and $25 in fiscal 2009.

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 June 30, 2007:



|                                   |  |                                         |     |              |     |                                             |   |    
|---------------------------------- |  | --------------------------------------- | --- | ------------ | --- | ------------------------------------------- | - | ---
|(in millions)                      |  | Total ChargesAccrued atBeginning ofYear |     | CashPayments |     | AccruedRestructuringCharges atJune 30, 2007
|Consolidation of excess facilities |  | $                                       | 0.3 |              | 0.1 |                                             | $ | 0.2
|                                   |  |                                         |     |              |     |                                             |   |    

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



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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.

During 2006, the Company made further adjustments to the
restructuring charges that had previously been recorded related to the June 2001 restructuring plan with respect to our Santa Clara, California facility, resulting from the conclusion of an extension agreement with the current sublessee to sublease
the California facility through March 31, 2011, which represents substantially all of the remaining lease period on the building. As a result of the conclusion of the final sublease arrangement during 2006, the Company adjusted its accrual
related to the June 2001 restructuring to reflect the known sublet lease recoveries under the extension agreement.

The Company has evaluated and pursued
all reasonable possibilities to settle the lease obligations associated with the June 2001 restructuring. Therefore, the Company has concluded that it is appropriate to classify the portion of the outstanding liabilities that is not payable within
the next 12 months as long-term liabilities. However, the current obligations would require the Company to fund $2,600 of its accrued restructuring charges for the June 2001 restructuring during the remainder of fiscal 2007, with the remaining
accrued restructuring charges for the June 2001 restructuring to be paid as follows: $5,300 in fiscal 2008, $5,500 in fiscal 2009, $5,700 in fiscal 2010 and $2,600 in fiscal 2011.

Summary of Accrued Restructuring Charges for June 2001 Restructuring

The following table is a summary of the accrued
restructuring charges net of sublease recoveries related to the June 2001 plan at June 30, 2007:



|                                   |  |                                          |      |               |   |             |  |                                              |   |  |   |     
|---------------------------------- |  | ---------------------------------------- | ---- | ------------- | - | ----------- |  | -------------------------------------------- | - |  | - | ----
|(in millions)                      |  | Total Charges Accrued atBeginning ofYear |      | Cash Payments |   | Adjustments |  | Accrued RestructuringCharges atJune 30, 2007
|Consolidation of excess facilities |  | $                                        | 24.2 |               | $ | 2.5         |  | $                                            |  |  | $ | 21.7
|                                   |  |                                          |      |               |   |             |  |                                              |   |  |   |     

As of June 30, 2007, the Company had estimated a total of $10,300 of sublease recoveries in its restructuring
accrual, related to the Santa Clara facility, recoverable under an existing sublease agreement.

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 (including stock options, restricted stock units and stock appreciation rights) using the treasury stock method. The options to purchase Common stock are excluded from the computation of diluted net income (loss) per share
if their effect is antidilutive.

The antidilutive effect excluded from the diluted net loss per share computation related to options to purchase Common
stock, or Common stock to be issued under stock award agreements, under the treasury stock method for the three and six months ended June 30, 2007 was 39,525 and 182,903 shares, respectively, compared to a dilutive effect of 881,120 and 244,318
shares for the three and six months ended June 30, 2006, respectively, which increased the weighted average shares of common stock outstanding used in the computation. In addition, 8,038,796 and 8,657,847 out-of-the-money exercisable options
that had exercise prices in excess of the average market price for the three months ended June 30, 2007 and 2006, respectively, were excluded from the computation of diluted net income (loss) per share in accordance with the treasury stock
method.



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In the three and six months ended June 30, 2007, the Company issued 328,929 and 779,914 shares of Common stock,
respectively, related to the exercise of employee stock options and RSUs.

NOTE 8. MARKETABLE AND OTHER INVESTMENTS

The Company maintains marketable investments mainly in a strategic cash management account. This account is used to invest 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 did not hold any short term marketable investments as of June 30,
2007.

Historically, we have not engaged in formal hedging activities, but we do periodically review the potential impact of this foreign exchange risk to
ensure that the risk of significant potential losses is minimized. In the past, when advantageous, we have engaged in forward contracts to purchase Canadian dollars, to cover exposures on the Canadian subsidiarys expenses that are 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. We did not engage in any forward contracts to purchase Canadian dollars during the second
quarter of 2007, and no previously purchased foreign exchange contracts had extended past March 31, 2007. Subsequent to June 30, 2007, we have engaged in forward contracts to purchase Canadian dollars covering exposures on approximately
$5.0 million of expenses denominated in Canadian dollars in the third quarter of 2007. We currently have not engaged in any forward contracts to purchase Canadian dollars to cover exposures on expenses denominated in Canadian dollars in future
periods beyond the third quarter of 2007.

The Company holds equity securities stated at cost, which represent long-term investments in private companies
made in 2000 and 2001 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. The Company monitors and assesses the ongoing operating
performance of the underlying companies for evidence of impairment. Since 2001, the Company has recorded impairments totaling $14,818 with respect to these investments as a result of other than temporary declines in fair value. The strategic
investments made in 2000 and 2001 had no net remaining carrying value at June 30, 2007. In addition, the Company holds an investment recorded at cost in ADML Holdings, Ltd., and its affiliate, Ohana Wireless, Inc. (collectively,
Ohana), which as of June 30, 2007 represented approximately 14% of the voting share capital of Ohana. The carrying value of the Companys investment in Ohana at June 30, 2007 was $91.

The Company also holds an equity interest in Asia Digital Media, which at June 30, 2007 represented approximately 44% of the voting share capital of this company.
This investment is accounted for by the Company using the equity method of accounting for investments in common stock. There was no remaining carrying value of the Companys investment in Asia Digital Media at June 30, 2007.

The Company recorded no revenues from Asia Digital Media for the three and six months ended June 30, 2007 and 2006.

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, President and Chief Executive Officer on a geographic basis. Accordingly, the Company has included a summary of the financial information, on a geographic basis, as reported to the Chairman,
President and Chief Executive Officer.

Geographic information

Revenues are attributed to specific geographical areas based on where the sales orders originated. Income (loss) before income taxes is presented based on the allocation of earnings amongst statutory jurisdictions,
and is not necessarily indicative of the geographic distribution of revenues. Company assets are identified with operations in the respective geographic areas.



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The Company operates in three main geographic areas as follows:



|                                        |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|--------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                        |  | Three months endedJune 30, |        |   | Six months endedJune 30, |  
|(In thousands)                          |  | 2007                       |        |   | 2006                     |   |        | 2007 |  |   | 2006   |  
|Revenues:                               |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|United States                           |  | $                          | 12,217 |   |                          | $ | 12,170 |      |  | $ | 23,762 |   |  | $ | 20,618  |  
|Canada                                  |  |                            | 4,966  |   |                          |   | 3,856  |      |  |   | 11,261 |   |  |   | 10,015  |  
|Europe, Asia and Other                  |  |                            | 7,310  |   |                          |   | 6,028  |      |  |   | 14,033 |   |  |   | 12,520  |  
|                                        |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Total revenues                          |  | $                          | 24,493 |   |                          | $ | 22,054 |      |  | $ | 49,056 |   |  | $ | 43,153  |  
|                                        |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Income (loss) before income taxes:      |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|United States                           |  | $                          | (615   | ) |                          | $ | 1,129  |      |  | $ | (376   | ) |  | $ | (5,419  | )
|Canada                                  |  |                            | (2,690 | ) |                          |   | (1,846 | )    |  |   | (5,056 | ) |  |   | (4,115  | )
|Europe, Asia and Other                  |  |                            | 148    |   |                          |   | (457   | )    |  |   | (102   | ) |  |   | (709    | )
|                                        |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Total income (loss) before income taxes |  | $                          | (3,157 | ) |                          | $ | (1,174 | )    |  | $ | (5,534 | ) |  | $ | (10,243 | )
|                                        |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  



|                       |  |              |         |                  |   |        
|---------------------- |  | ------------ | ------- | ---------------- | - | -------
|(In thousands)         |  | June 30,2007 |         | December 31,2006
|Total assets:          |  |              |         |                  |   |        
|United States          |  | $            | 99,853  |                  | $ | 105,831
|Canada                 |  |              | 19,572  |                  |   | 18,655 
|Europe, Asia and Other |  |              | 4,235   |                  |   | 3,330  
|                       |  |              |         |                  |   |        
|Total                  |  |              | 123,660 |                  |   | 127,816
|                       |  |              |         |                  |   |        

NOTE 10. COMPREHENSIVE INCOME

The components of comprehensive income are as follows:



|                                         |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|---------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                         |  | Three months endedJune 30, |        |   | Six months endedJune 30, |  
|(In thousands)                           |  | 2007                       |        |   | 2006                     |   |        | 2007 |  |   | 2006   |  
|Net loss                                 |  | $                          | (3,229 | ) |                          | $ | (1,264 | )    |  | $ | (5,658 | ) |  | $ | (10,432 | )
|Foreign currency translation adjustments |  |                            | (483   | ) |                          |   | 938    |      |  |   | (571   | ) |  |   | 856     |  
|                                         |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Comprehensive loss                       |  | $                          | (3,712 | ) |                          | $ | (326   | )    |  | $ | (6,229 | ) |  | $ | (9,576  | )
|                                         |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  

NOTE 11. LEGAL PROCEEDINGS

The Company is subject, from time to time, to various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these claims cannot be predicted
with certainty, management does not believe that the outcome of any of these legal matters will have a material adverse effect on the Companys consolidated results of operations or consolidated financial position. Certain legal proceedings in
which we are involved are discussed in Part 1. Item 3. of our Annual Report on Form 10-K for the year ended December 31, 2006. Unless otherwise indicated, all proceedings in that earlier Report remain outstanding with no change in status.

NOTE 12. RECENTLY ISSUED ACCOUNTING STANDARDS

In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which establishes a framework for measuring fair value under other accounting pronouncements that require fair value



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measurements and expands disclosures about such measurements. SFAS No. 157 does not require any new fair value measurements, but rather it creates a
consistent method for calculating fair value measurements to address non-comparability of financial statements containing fair value measurements utilizing different definitions of fair value. SFAS No. 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007. The Company does not anticipate that the adoption of SFAS No. 157 will have a significant impact on its consolidated financial position, results of operations or cash flows.

On February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities: Including an
amendment of FASB Statement No. 115, to reduce earnings volatility caused by related assets and liabilities measured differently under GAAP. SFAS No. 159 allows all entities to make an irrevocable instrument-by-instrument
election to measure eligible items at fair value in their entirety. In addition, unrealized gains and losses will be reported in earnings at each reporting date. SFAS No. 159 also establishes presentation and disclosure requirements that focus
on providing information about the impact of electing the fair value option. SFAS No. 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007, concurrent with the adoption of SFAS No. 157. The
Company does not anticipate that the adoption of SFAS No. 159 will have a significant impact on its consolidated financial position, results of operations or cash flows.

From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the
Companys management believes that the impact of recently issued standards that are not yet effective will not have a material impact on its consolidated financial statements upon adoption.



|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 Risk Factors 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 condensed consolidated financial statements and notes thereto appearing elsewhere in this report.

EXECUTIVE OVERVIEW

We are a global provider of
software that secures digital identities and information. Over 1,650 enterprises and government agencies in more than 50 countries use our solutions to help secure the digital lives of their citizens, customers, employees and partners. Our proven
software and services can help customers achieve regulatory and corporate compliance, while helping to turn security challenges, such as identity theft and loss of intellectual property, into business opportunities.

We conduct business in one operating segment. We develop, market and sell software solutions that secure 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 our global organization.

As an innovator and pioneer in the Internet security field, Entrusts market leadership and expertise in delivering award-winning identity and data protection
management software solutions is demonstrated by the diversity of its products, geographic representation, and customer segments. We continue to drive revenue in our key products.



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In 2006, we launched our Layered Consumer and Enterprise Security Architectures. These layered approaches to security
help give our customers a roadmap for building security across their enterprise and customer facing applications, and for governments, citizens facing applications. The layered approach allows our customers to customize the level of security to the
value of the data or transaction. Entrust has unique capabilities in the market to assist our customers with their growing identity and information protection needs.

Entrust has three key platforms, Authentication, Transaction Monitoring and Information Protection, which support our layered security architectures. We have a unique end-to-end platform for securing digital
identities and information. This end-to-end software platform is easy to implement, user friendly and cost effective with the ability to evolve over time to grow with our customers needs.

Two of Entrusts platforms, Authentication and Transaction Monitoring, come together to provide a new level of assurance for both internal and external parties,
through Risk-Based Authentication.

As we all know, every transaction is not created equally. An online banking customer that only views their account
balances is performing at a very different level of transaction than someone that is transferring $10,000 out of their account, or adding new bill payees. In every transaction, the level of risk grows as the dollar value of the transaction grows.
Risk-Based Authentication allows for the proper level of security to be implemented based on the sensitivity of any given transaction. Entrust offers a range of authentication capabilities with its authentication platform so that specific methods
can be used with specific users and applications. First steps can be as simple as deploying SSL certificates or user name and password. Entrust has long played a key role in this space through our SSL and single sign-on products.

Risk-Based Authentication, however, goes much deeper than SSL and single sign-on. Risk-Based Authentication is having the ability to judge each individual transaction on
its own merits driven by policy level decisions on the level of risk associated with certain transactions. With Entrusts Risk-Based Authentication solution, transactions can be monitored in real time and then a determination can be made on the
level of security required for that transaction. This is done through the combination of Entrust IdentityGuard and Entrust TransactionGuard. This combined offering is a modern architecture for consumer authentication which has a layered approach of
non-invasive anomaly detection and selective intervention with minimal impact on the user experience.

As of December 31, 2006, financial institutions
in the United States must offer stronger security measures for online customers according to the Federal Financial Institutions Examination Councils (FFIEC) guidance. The financial institutions want the easiest and most cost
effective solution. We are well positioned with a wide portfolio that allows the financial institutions to start with an easy, cost effective solution to meet the initial requirements and then utilize our full Risk-Based Authentication platform to
provide additional layers of security in the coming years.

Product Category Financial Metrics:



| |  |  | Emerging products (IdentityGuard, Boundary Messaging, and Fraud Detection) accounted for $1.7 million, or 19% of product revenue, up 33% from $1.2 million in Q2,
2006.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | PKI products accounted for $6.4 million, or 71% of product revenue, up 10% from $5.8 million in Q2, 2006.
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | Single sign-on products accounted for $890 thousand, or 10% of product revenue, up 153% from $352 thousand in Q2, 2006.
| | - |  | -----------------------------------------------------------------------------------------------------------------------

We also provide support services and professional services, including architecture, installation, and integration services related to the products that we sell. These
services represent a significant portion of our revenues, but are closely related to the demand for our products. In addition, the margins on our products are significantly higher than margins on our services. As a result, we are primarily focused
on growing our product revenues. In Q2, 2007, deferred revenue increased $5.6 million to $28.5 million, a record high driven by an increase in subscription product bookings and in professional services and support and maintenance renewals from Q2,
2006. These numbers show the continued strength of our support and maintenance renewals and the growth in our subscription based software growth.



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Entrust sells its solutions globally, with an emphasis on North America, Europe and Asia. These primary areas have
demonstrated the most potential for early adoption of the broadest set of Entrust solutions. Entrust extends to other non-core geographies through strategic partner relationships, which increases the leverage of our direct sales channel worldwide.
In North America, Entrust is targeting a return to revenue growth in its software business by leveraging Entrusts historical strength in selling to key verticals such as government (Federal, State, Provincial), financial services and
healthcare organizations. Europe is a region where Entrusts products and solutions continue to experience strong demand and we believe that the European market will provide growth, with increased momentum from governments and enterprises
leveraging Entrusts solutions to transform their business processes and to leverage the Internet and networking applications.

We market and sell our
products and services in both the enterprise and government market space. In Q2, 2007, 32% of our product sales were in our extended government vertical market, which includes healthcare. This revenue has been driven by key global projects that have
started to increase product purchases. In the extended government vertical market, we have a strong penetration in the U.S. Federal government, the governments of Canada, Singapore, Denmark, the United Kingdom and across continental Europe. In fact,
Entrust now counts 10 of the top 11 e-governments, as outlined by last years Accenture report, as customers.

A key change in the government space
has been the movement from purely internal security solutions that our customers require to more external citizen facing applications. These projects include ePassports, national ID programs, physical and logical access programs for government
employees, and a growing number of citizen facing applications. Security is at the core of all these projects and our wide product set positions Entrust well in this space. We have already announced three ePassport projects that Entrust has won, we
have been selected as the infrastructure for a number of national ID and Ministry of Defense programs, and we are well positioned in a number of employee credentialing projects like the US HSPD-12 program. We also won an IdentityGuard strong
authentication solution for a key citizen facing application for the U.S. Federal government.

Large government projects involve government bureaucracies,
large system integrators and differing technical requirements. In order to help us better navigate through these opportunities, we have assembled a team of experts in this field. This global team will help lead our global government efforts on
projects such as the move to ePassports, national ID cards and securing citizen identities and information.

In Q2, 2007, 68% of our product sales were in
our extended enterprise vertical market. We continue to see demand from global enterprises as they continue to respond to regulatory and governance compliance demands and extend their internal and external networks to more and more individuals
inside and outside their domain. We have experienced a change in the shape of many enterprise deals. Specifically, enterprises are buying for their immediate need and then adding to their purchases as the projects begin roll out.

Our largest vertical within the enterprise market is the financial services vertical. In the second quarter of 2007, financial services revenue increased 48% from the
same quarter a year ago and accounted for 36% or product revenue. Financial institutions are focused on FFIEC and other global compliance regulations, which we believe drove demand for our Risk-Based Authentication and messaging solutions.

A key driver of our product growth has been the recent spotlight on identity theft due to breaches at companies like Choicepoint, LexisNexis and TJX.
These breaches have proven that self-regulation over the past few years has been insufficient at addressing the underlying issues. Recent legislation has addressed these concerns. California S.B. 1386 has cast more visibility on the issue for
citizens, corporations, and the government. The law requires both corporations and the government to notify California residents if their sensitive data has been breached unless encryption technology is deployed. Additionally, 35 other states have
now passed breach notification requirements. On a national level, bills are being written to protect citizens from identity theft and alert them if their information has been stolen.

Entrust for years has been a leader in securing digital identities and information. In the fourth quarter of 2004, we introduced IdentityGuard which is our easy-to-use second factor of authentication solution. As of
June 30, 2007 we have over 8.5 million licensed users. IdentityGuards low cost point, its simplicity for the



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mass market, and its effectiveness in countering online theft and phishing, are the key drivers for the increased revenue growth we are experiencing. Along
with the revenue growth for second factor authentication, we are also seeing customers increasingly interested in data protection and encryption. With a combination of Entrust IdentityGuard, GetAccess and TruePass, customers can accomplish
authentication and role based access control, digital signature, and encryption from one solution provider.

In the first quarter, we built on the success
of our Entrust IdentityGuard platform with the introduction of the industrys first $5 one-time-passcode (OTP) security token. In the second quarter, we made the product commercially available and delivered our tokens to our first customers.
The low price point of the Entrust IdentityGuard Token is produced in conjunction with partner ActivIdentity. Expedia was our first customer for the Entrust IdentityGuard Token, which leverages Entrusts versatile authentication platform. In
addition to the OTP token, Entrust IdentityGuard customers enjoy a range of authentication methods from a single platform. This provides unprecedented flexibility and choice customers currently do not have with existing OTP token vendors.

In April 2006, Entrust introduced a Managed Public Key Infrastructure (PKI) service. This service was launched in response to customer requests for
Entrust to offer a hosted service to give them a choice between a service offering for PKI certificates and our traditional PKI software purchase option. Our service offering is designed to help enterprises and government agencies grow and
accelerate their core business security, without having to develop PKI expertise internally. Our managed service offering will allow our customers the flexibility to now have our market leading technology delivered in an outsourced service model. In
December 2006, the Entrust managed PKI service made the General Services Administration (GSA) list of approved shared service providers. This status enables Entrust to help federal agencies reap the security benefits of PKI without
having to maintain the certification authority (CA) themselves. We now have our first commercial and government customers utilizing our managed service and we just recently became the primary supplier for the US Federal Governments
General Services Administration HSPD-12 directive. Our new Managed PKI Service offering will give us access to a new market of customers that can help us drive both additional license revenue, as well as new ratable services revenues.

Our managed service is not our first entrance into the services business. We have been helping our customers for years design, deploy and manage our solutions. We have
also been successful in growing our SSL certificate business, which increased over 29% in the second quarter over last year. With the introduction of the new Extended Validation SSL Certificates we should be able to grow this business at least that
same rate in 2007.

Entrust in the past has relied significantly on large deals in each quarter. We have over the past few years reduced this dependence,
but they remain a significant portion of our product revenue on a quarterly basis. Our software revenue from our top five customers in Q2, 2007 was approximately 8% of our total revenue in that quarter and we did not have a product deal over $1
million in the quarter. These numbers were slightly outside our historical range, which is generally between 10% and 25% of revenue from the top five customers and zero to four transactions over $1 million. We continue to be impacted from time to
time on our software revenue by the timing of our customers buying process, which may include proof of concepts, senior management reviews and budget delays that sometimes results in longer than anticipated sales cycles. 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. Any of these factors may impact our revenue on a quarterly basis.

Our management uses the following metrics to measure performance:



| |  |  | Number and average size of product revenue transactions;
| | - |  | --------------------------------------------------------



| |  |  | Number of revenue transactions over $1 million and < $500 thousand;
| | - |  | -------------------------------------------------------------------



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



| |  |  | Product revenue split between extended enterprise and extended government verticals;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | Product revenue split between three key product areas: Emerging Growth Products, Public Key Infrastructure and Single Sign-on;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Geographic revenue split;
| | - |  | -------------------------



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



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



| |  |  | Deferred revenue, cash and cash equivalents, and accounts receivable.
| | - |  | ---------------------------------------------------------------------

BUSINESS OVERVIEW

During the second quarter of 2007, we continued our strategy of focusing on
core vertical and geographic markets. Revenues of $24.5 million represented a 11% increase from the second quarter of 2006, and consisted of 36% product sales and 64% services and maintenance. Services and maintenance revenues increased 6% from the
second quarter of 2006, due to increased demand for both consulting services and support and maintenance services, while product revenues increased 21% from the second quarter of 2006, driven by an improved product transaction closure rate, despite
a lower average purchase value, compared to the same quarter of 2006. Net loss for the second quarter of 2007 was $3.2 million, or $0.05 per share, compared to net loss of $1.3 million, or $0.02 per share for the same period of 2006, with total
expenses increasing 16% to $27.6 million. We generated $2.7 million in cash flow from operations in the second quarter of 2007, compared to net cash generated from operations of $0.1 million in the same quarter of 2006. Entrust Emerging Growth
Products (Entrust IdentityGuard, Boundary Messaging and Fraud Detection) accounted for 19% of product revenue, which is an increase of 33% from Q2, 2006 and a decrease of 27% from Q1, 2007. Entrust Public Key Infrastructure (PKI) Products accounted
for 71% of product revenue, which is an increase of 10% from Q2, 2006 and consistent with Q1, 2007. Entrust SSL Certificate Services revenues, a component of our PKI Product solutions suite, increased 29% over Q2, 2006 and 14% over Q1, 2007. Entrust
Single Sign-On Products accounted for 10% of product revenue, which is an increase of 153% from Q2, 2006 and an increase of 84% from Q1, 2007. Extended Government accounted for 32% and Extended Enterprise accounted for 68% of the product revenue in
the quarter. The financial vertical accounted for approximately 36% of second quarter 2007 product revenues, an increase of 48% over Q2, 2006 and an increase of 80% from Q1, 2007. We have added 18 new financial institutions to our customer base in
2007, an increase of 157% over the first half of 2006.

Other highlights from the second quarter of 2007 included:



| |  |  | The top five product transactions accounted for 8% of Q2, 2007 revenues. Our largest transaction was a U.S federal government deal valued at approximately $1.0
million, and there were no product deals over $1.0 million in the quarter. The average purchase size this quarter was $61,000, down from $81,000 in Q2, 2006 and flat with Q1, 2007. Total transactions in Q2, 2007 were 106, which is up from 71 in Q2,
2006, and down from 113 in Q1, 2007. Twenty-nine (or 27%) of the transactions were from new customers, an increase of 61% from Q2, 2006.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Entrust IdentityGuard transactions increased to 39 this quarter, up from 16 in Q2, 2006 and 34 in Q1, 2007. Entrust IdentityGuard product revenue increased 40% over
Q2, 2006 and we achieved our first Entrust IdentityGuard Token shipments.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Deferred revenue was $28.5 million, which is an increase of 24% from Q2, 2006 and 1% from Q1, 2007. The deferred revenue increase from Q2, 2006 was primarily the
result of subscription bookings and increases in professional services and support and maintenance renewals.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We ended Q2, 2007 with $24.2 million in cash and marketable securities, which is up from $20.8 million at the end of Q1, 2007, and no debt.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Product revenue from deals under $500 thousand increased 39% over Q2, 2006 and 6% over Q1, 2007.
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | In May 2007, we became the first certification authority (CA) to successfully meet the WebTrust operational requirements for Extended Validation SSL certificates,
the frontline of protection in a layered security defense. That same month, we surpassed the 250 benchmark in sales of Extended Validation SSL certificates, which is the newest technology in thwarting phishing and man-in-the-middle attacks, helping
secure communication and transactions between a consumer and a Web browser.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Skanska, an $18.3 billion (USD) international construction services corporation, selected our versatile authentication platform, Entrust IdentityGuard. In an effort
to safeguard access, reduce cost and ease deployment logistics, Skanska replaced a competitors expensive hardware tokens for Entrust IdentityGuards convenient grid-based authentication option. In all, 5,000 Skanska end-users worldwide,
plus a possible 20,000 contractors, will make the switch to the easy-to-use authenticator.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We made commercially available the Entrust Open Fraud Intelligence Network (OFIN), a vendor-neutral network environment that facilitates the sharing of fraud data,
tactics and behavior as experienced by leading global organizations. Current-day networks are either proprietary to one security vendor or cater to a single vertical market. In contrast, the Entrust Open Fraud Intelligence Network gathers
information from all participating online enterprises  led by financial institutions, but certainly not limited to them  to amass a large database of fraud information.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Entrust® IdentityGuard, Entrusts award-winning versatile authentication platform, received another prestigious accolade. SC Magazine, a well-respected IT
security publication, named the solution as a Best Buy in their authentication group test, which featured side-by-side comparisons of the industrys leading authentication platforms. A key component of a strategic layered security
model, the Entrust IdentityGuard versatile authentication platform received a five-star overall rating  only one of two vendors to do so  and was hailed as a simple solution to a complex problem, providing a single interface to
manage two-factor authentication.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

CRITICAL ACCOUNTING POLICIES

The preparation of our financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect
the amounts reported in the consolidated financial statements and accompanying notes. We believe our estimates and assumptions are reasonable. However, actual results and the timing of the recognition of such amounts could differ from those
estimates.

In the first two quarters of 2007, our most complex accounting judgments were made in the areas of software revenue recognition, allowance for
doubtful accounts, the provision for income taxes, accounting for uncertain tax positions, valuation of goodwill, purchased intangibles and other long-term assets, and stock-based compensation. These areas 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 reasonably assured, the fees are fixed and determinable and payment is due within twelve months. Revenues
from license agreements requiring the delivery of significant unspecified software products in the future are



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accounted for as subscriptions and, accordingly, are recognized ratably over the term of the agreement from the first instance of product delivery. 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 product is delivered through to the end user customer. We do not offer a right of return on
sales of our software products.

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.

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 outset, we recognize revenue when the fee becomes fixed and determinable. We assess if collection is reasonably assured 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 reasonably assured, we do not record revenue until such time as collection becomes probable, which is generally upon the receipt of cash.

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 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 remote. 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 based on the vendor-specific objective evidence of the fair value of the various elements. These elements may include two or more of
the following: software licenses, maintenance and support, consulting services and training. For arrangements where vendor-specific objective evidence is not available for a delivered element, we first allocate the arrangement fee 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 (residual) 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 substantially similar sales of renewals of maintenance and support contracts to other customers. Fair value of future services, training or consulting
services is based upon substantially similar 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.

We also eliminate intercompany profits on revenue transactions with unconsolidated subsidiaries that are accounted for under the equity method to the extent of our ownership interest in that related party, if the product and/or services
have not been sold through to an unrelated third party end-user customer.



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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. 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.

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 not collecting a specific account receivable becomes probable. 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.

However, a significant change in the financial condition of a major customer, such as the European distributor discussed below, could have a material impact on our
estimates regarding the sufficiency of our allowance. Our accounts receivable include material balances from a limited number of customers, with five customers accounting for 23% of gross accounts receivable at June 30, 2007, compared to 23% of
gross accounts receivable at June 30, 2006. No customer accounted for 10% or more of net accounts receivable at June 30, 2007. For more information on our customer concentration, see our related discussion in Risk Factors.
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 2006, we became aware of financial concerns regarding one of our European distributors and, as a result, we concluded that it was necessary to record an increase
to our provision for doubtful accounts of $0.9 million, which accounted for the majority of the increase in this provision for that year, as a charge against sales and marketing expenses. These balances remain outstanding and, as a result, the
allowance for doubtful accounts remains substantially unchanged from the end of 2006 for these items. However, the allowance for doubtful accounts has increased by approximately $200 thousand for miscellaneous accounts that have continued to age
from the end of 2006.

Provision for Income Taxes

The preparation of our consolidated financial statements requires us to assess our income taxes in each of the jurisdictions in which 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 determining our actual current exposure in each jurisdiction
together with assessing temporary differences



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resulting from differing treatment of items, such as deferred revenue and accrued restructuring charges, 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 $147.9 million as of December 31, 2006, 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 $122.1 million and $25.8 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 deferred tax assets. Valuation allowances are provided against
net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future
taxable income and the timing of the temporary differences becoming deductible. We consider, among other available information, historical earnings, scheduled reversals of deferred tax liabilities, projected future taxable income, prudent and
feasible tax planning strategies and other matters in making this assessment. Until an appropriate level of profitability is sustained, we expect to continue to record a full valuation allowance and will not record any benefit from the deferred tax
assets.

Accounting for Uncertain Tax Positions

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109, (FIN No. 48), which clarifies the accounting for
uncertainty in tax positions. FIN No. 48 requires that we recognize in our financial statements, the impact of a tax position, if that position is more likely than not of not being sustained on audit, based on the technical merits of the
position. FIN No. 48 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes. The provisions of FIN No. 48 were effective for us as of the
beginning of our 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings.

The Company adopted the provisions of FIN No. 48 on January 1, 2007. The implementation of FIN No. 48 required us to use judgment in establishing the tax positions undertaken by us in our tax filings across the world, as well
as determining which of these positions are certain or uncertain. In making these determinations, we were required to make interpretations of tax legislation and administrative enforcement of this legislation in multiple jurisdictions, but primarily
in the United States and Canada. In addition, we used judgment to assess whether the identified uncertain tax positions were more likely than not of being sustained upon audit examination by the tax authority in the relevant jurisdictions. If
applicable, we are also required to make estimates of the value of unrecognized tax benefits and the significance of any change to our results of operations and financial position. Finally, we were required to estimate, if applicable, the financial
impact of interest and penalties of any position that would not likely be sustained on audit.

Valuation of Goodwill, Purchased Intangibles and Other
Long-term Assets

We have completed several acquisitions in recent years, from which we have acquired goodwill and other purchased intangible
assets, in the form of purchased product rights, customer relationships, partner relationships and non-competition agreement assets. We purchased CygnaCom Security Solutions, Inc. and enCommerce, Inc. in 2000, Entrust Japan Co. Limited and certain
assets of AmikaNow! Corporation in 2004, and Orion Security Solutions, Inc. and Business Signatures Corporation in 2006.

These acquisitions were accounted
for under the purchase method of accounting, and, accordingly, the purchase prices were allocated to the fair value of the tangible and intangible assets and liabilities acquired, with the remainder allocated to goodwill. In determining the fair
value of the intangible assets acquired, we are required to make significant assumptions and judgments regarding such things as the estimated future cash flows that we believe will be generated as a result of the acquisition of customer/partner
relationships, purchased product rights and workforce, and the estimated useful life of these acquired intangible assets. We believe that our assumptions and resulting conclusions are the most appropriate based on existing information and market
expectations. However, different assumptions and judgments as to future events could have resulted in different fair values being allocated to the intangible assets acquired.

We will review these assets for impairment in future, in accordance with the guidance in SFAS No. 142, Goodwill and Intangible Assets, which require goodwill to be reviewed for impairment at least annually
or whenever events indicate that their carrying amount may not be recoverable, and SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

Goodwill with a balance of $60.2 million at June 30, 2007 is tested for impairment annually and also in the event of an impairment indicator. This test requires us to make judgments regarding the appropriate business
unit with which to associate the individual components of goodwill for the purposes of determining whether the carrying value of the goodwill has exceeded the fair value or market value of the relevant business unit. In our judgment, we operate in
only one business segment. No impairment was required as a result of the annual impairment test as of December 31, 2006.

Purchased product rights,
customer relationships, partner relationships and non-competition agreements of key personnel of acquired companies totaling $12.7 million at June 30, 2007 are amortized using the straight-line method over their estimated useful lives, generally
four to ten years. These assets are reviewed for impairment whenever events indicate that their carrying amount may not be recoverable. In such reviews, the related expected undiscounted cash flows are compared with their carrying values to
determine if a write-down to fair value is required. These reviews required significant judgment and estimation regarding the amount and timing of future revenues and related expenses associated with these acquired assets.

We are not aware of any impairment events during the three and six months ended June 30, 2007. However, if the demand for the technologies, products and assets acquired
and developed materializes slowly, to a minimum extent, or not at all in the relevant market, we could lose all or substantially all of our investment in these assets, which would have a significant impact on our consolidated financial position and
results of operations.

In addition, we have a net balance of $4.1 million from our investment in other long-term assets, which consist primarily of
capitalized software development costs, which includes costs to develop video based training, for both general security and Entrust specific solutions, for sale to our customers. These capitalized costs are amortized ratably as the underlying
revenues are recognized on sales of capitalized software. The economic useful life of these capitalized software development costs is periodically re-assessed.

Stock-Based Compensation

Our stock award 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 shareholders. Stock based awards may be granted to employees when they first join us, when there is a significant
change in an employees responsibilities and, occasionally, to achieve equity within a peer group. Stock based awards may also be granted in specific circumstances for retention or reward purposes. The Compensation Committee of the Board of
Directors may, however, grant additional awards to executive officers and key employees for other reasons. Under the stock based award 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 and become exercisable at varying rates, generally over three or four years. Options
issued before April 29, 2005 generally expire ten years from the date of grant; awards issued on or after April 29, 2005 generally expire seven years from the date of grant.



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In addition, we use restricted stock units (RSUs) and stock appreciation rights (SARs) in
incentive compensation plans for employees and members of the Board of Directors, in place of, or in combination with stock options to purchase shares of our stock. RSUs allow the employees to receive our Common stock once the units vest. The RSUs
generally vest over two to four years.

Beginning in 2006, the Compensation Committee of the Board of Directors has issued performance stock units to
certain key employees. These performance grants are based on the achievement of certain pre-determined criteria such as budgeted level of revenue attainment or target stock price. The associated compensation expense for awards with performance
conditions is accrued at the time that the performance criteria are reasonably certain to be achieved. Compensation cost for an award with a market condition will be recognized ratably for each vesting tranche over the requisite service period in a
similar manner as an award with a service condition.

We recognize that stock options and other stock-based incentive awards dilute existing shareholders
and have attempted to control the number granted while remaining competitive with our compensation packages. Accordingly, from 2003 to 2005 we reduced our gross stock option grant rate, which contributed to a low net grant rate under our stock-based
incentive plans during that time. In 2006 the gross grant rate increased for a number of reasons including issuing employee equity pursuant to two acquisitions and hiring a key executive. The equity plan overhang also increased as a result of
assuming the equity plan of one acquired company. In 2007 we have returned to our practice from 2003 to 2005 of reducing our gross stock option grant rate and keeping a low net grant rate. The Compensation Committee of the Board of Directors
oversees the granting of all stock-based incentive awards.

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123(R) which
superseded APB Opinion No. 25 and required an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award, and recognize that cost over the service
period. We adopted SFAS No. 123(R) on January 1, 2006 and began recognizing compensation expense related to employee stock awards from and after January 1, 2006.

SFAS No. 123(R) requires us to measure compensation cost for stock awards at fair value and recognize compensation expense over the service period for awards expected to vest. The estimation of stock awards that
will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We consider many factors
when estimating awards expected to vest including type of awards, employee class, and our historical experience. Actual results, and future changes in estimates, may differ substantially from our current estimates.

We use the Black-Scholes option pricing model to determine the fair value of our stock options. The determination of the fair value of stock-based awards using an option
pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. Changes in the input assumptions can materially affect the fair value estimate of our stock options. Those assumptions
include estimating the expected volatility of the market price of our common stock over the expected term, the expected term of the award, the risk free interest rate expected during the option term and the expected dividends to be paid.

We have reviewed each of these assumptions carefully and determined our best estimate for these variables. Of these assumptions, the expected volatility of our common
stock is the most difficult to estimate since it is based on expected performance of our common stock. We use the implied volatility of historical market prices for our common stock on the public stock market to estimate expected volatility. An
increase in the expected volatility, expected term, and risk free interest rate, all will cause an increase in compensation expense. The dividend yield on our common stock is assumed to be zero since we do not pay dividends and have no current plans
to do so in the future.

For the three and six months ended June 30, 2007 compensation expense of $1.4 million and $2.7 million, respectively, was
recognized for stock options, RSUs and SARs. Total remaining compensation estimated



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to be recognized over the remaining service periods for these awards is $7.4 million. This compensation cost included estimation of expected
forfeitures. Forfeiture estimations are based on analysis of historical forfeiture rates.

Accordingly, the adoption of SFAS No. 123(R)s fair
value method has had, and will continue to have, a significant impact on our results of operations. The continued impact of SFAS No. 123(R) will depend on levels of stock-based awards granted in the future. In general, the annual stock-based
compensation expense is expected to decline in future years when compared to the expense reported in prior years, since we plan to reduce our gross stock based award grants. This decline is primarily the result of a change in stock-based
compensation strategy as determined by management.

RECENTLY ISSUED ACCOUNTING STANDARDS

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements, which establishes a framework for measuring fair value under other
accounting pronouncements that require fair value measurements and expands disclosures about such measurements. SFAS No. 157 does not require any new fair value measurements, but rather it creates a consistent method for calculating fair value
measurements to address non-comparability of financial statements containing fair value measurements utilizing different definitions of fair value. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after
November 15, 2007. We do not anticipated that the adoption of SFAS No. 157 will have a significant impact on our consolidated financial position, results of operations or cash flows.

On February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities: Including an amendment of
FASB Statement No. 115, to reduce earnings volatility caused by related assets and liabilities measured differently under GAAP. SFAS No. 159 allows all entities to make an irrevocable instrument-by-instrument election to measure
eligible items at fair value in their entirety. In addition, unrealized gains and losses will be reported in earnings at each reporting date. SFAS No. 159 also establishes presentation and disclosure requirements that focus on providing
information about the impact of electing the fair value option. SFAS No. 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007, concurrent with the adoption of SFAS No. 157. We do not
anticipate that the adoption of SFAS No. 159 will have a significant impact on our consolidated financial position, results of operations or cash flows.

From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that are adopted by us as of the specified effective date. Unless otherwise discussed, our management believes that the impact of
recently issued standards that are not yet effective will not have a material impact on our consolidated financial statements upon adoption.

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:



|                                         |  |                            |   |  |                          |   |  |       |   |  |       |  
|---------------------------------------- |  | -------------------------- | - |  | ------------------------ | - |  | ----- | - |  | ----- | -
|                                         |  | Three months endedJune 30, |   |  | Six months endedJune 30, |  
|                                         |  | 2007                       |   |  | 2006                     |   |  | 2007  |   |  | 2006  |  
|Revenues:                                |  |                            |   |  |                          |   |  |       |   |  |       |  
|Product                                  |  | 36.5                       | % |  | 33.5                     | % |  | 36.8  | % |  | 32.4  | %
|Services and maintenance                 |  | 63.5                       |   |  | 66.5                     |   |  | 63.2  |   |  | 67.6  |  
|                                         |  |                            |   |  |                          |   |  |       |   |  |       |  
|Total revenues                           |  | 100.0                      |   |  | 100.0                    |   |  | 100.0 |   |  | 100.0 |  
|                                         |  |                            |   |  |                          |   |  |       |   |  |       |  
|Cost of revenues:                        |  |                            |   |  |                          |   |  |       |   |  |       |  
|Product                                  |  | 8.8                        |   |  | 5.6                      |   |  | 8.1   |   |  | 7.4   |  
|Services and maintenance                 |  | 31.7                       |   |  | 33.5                     |   |  | 31.0  |   |  | 33.5  |  
|Amortization of purchased product rights |  | 1.4                        |   |  | 1.0                      |   |  | 1.4   |   |  | 1.0   |  
|                                         |  |                            |   |  |                          |   |  |       |   |  |       |  
|Total cost of revenues                   |  | 41.9                       |   |  | 40.1                     |   |  | 40.5  |   |  | 41.9  |  
|                                         |  |                            |   |  |                          |   |  |       |   |  |       |  
|Gross profit                             |  | 58.1                       |   |  | 59.9                     |   |  | 59.5  |   |  | 58.1  |  
|                                         |  |                            |   |  |                          |   |  |       |   |  |       |  



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|                                                         |  |       |    |  |      |    |  |       |    |  |       |   
|-------------------------------------------------------- |  | ----- | -- |  | ---- | -- |  | ----- | -- |  | ----- | --
|Operating expenses:                                      |  |       |    |  |      |    |  |       |    |  |       |   
|Sales and marketing                                      |  | 36.0  |    |  | 32.7 |    |  | 36.5  |    |  | 34.1  |   
|Research and development                                 |  | 21.7  |    |  | 20.0 |    |  | 21.7  |    |  | 20.0  |   
|General and administrative                               |  | 13.3  |    |  | 16.1 |    |  | 13.3  |    |  | 16.7  |   
|Restructuring charges and adjustments                    |  |      |    |  | (0.6 | )  |  |      |    |  | 6.4   |   
|                                                         |  |       |    |  |      |    |  |       |    |  |       |   
|Total operating expenses                                 |  | 71.0  |    |  | 68.2 |    |  | 71.5  |    |  | 77.2  |   
|                                                         |  |       |    |  |      |    |  |       |    |  |       |   
|Loss from operations                                     |  | (12.9 | )  |  | (8.3 | )  |  | (12.0 | )  |  | (19.1 | ) 
|                                                         |  |       |    |  |      |    |  |       |    |  |       |   
|Other income (expense):                                  |  |       |    |  |      |    |  |       |    |  |       |   
|Interest income                                          |  | 0.7   |    |  | 3.9  |    |  | 0.7   |    |  | 3.7   |   
|Foreign exchange gain (loss)                             |  | (0.7  | )  |  | (0.3 | )  |  | 0.1   |    |  | (0.6  | ) 
|Loss from equity investments                             |  |      |    |  | (0.6 | )  |  | (0.1  | )  |  | (0.7  | ) 
|Write-down of long-term strategic and equity investments |  |      |    |  |     |    |  |      |    |  | (7.0  | ) 
|                                                         |  |       |    |  |      |    |  |       |    |  |       |   
|Total other income (expense)                             |  |      |    |  | 3.0  |    |  | 0.7   |    |  | (4.6  | ) 
|                                                         |  |       |    |  |      |    |  |       |    |  |       |   
|Loss before income taxes                                 |  | (12.9 | )  |  | (5.3 | )  |  | (11.3 | )  |  | (23.7 | ) 
|Provision for income taxes                               |  | 0.3   |    |  | 0.4  |    |  | 0.2   |    |  | 0.4   |   
|                                                         |  |       |    |  |      |    |  |       |    |  |       |   
|Net loss                                                 |  | (13.2 | )% |  | (5.7 | )% |  | (11.5 | )% |  | (24.1 | )%
|                                                         |  |       |    |  |      |    |  |       |    |  |       |   

REVENUES



|                      |  |                            |  |                          |  |                   |  |      |  |                           |   |  |                         |  
|--------------------- |  | -------------------------- |  | ------------------------ |  | ----------------- |  | ---- |  | ------------------------- | - |  | ----------------------- | -
|                      |  | Three months endedJune 30, |  | Six months endedJune 30, |  | Percentage change | 
|(millions)            |  | 2007                       |  | 2006                     |  | 2007              |  | 2006 |  | Three months endedJune 30 |   |  | Six months endedJune 30 |  
|North America         |  | 17.2                       |  | 16.0                     |  | 35.0              |  | 30.7 |  | 8                         | % |  | 14                      | %
|Outside North America |  | 7.3                        |  | 6.1                      |  | 14.1              |  | 12.5 |  | 20                        | % |  | 13                      | %
|                      |  |                            |  |                          |  |                   |  |      |  |                           |   |  |                         |  
|Total                 |  | 24.5                       |  | 22.1                     |  | 49.1              |  | 43.2 |  | 11                        | % |  | 14                      | %
|                      |  |                            |  |                          |  |                   |  |      |  |                           |   |  |                         |  

Our total revenues were $24.5 million for the three months ended June 30, 2007, which represented an increase
of 11% from the $22.1 million of total revenues for the three months ended June 30, 2006. Total revenues were $49.1 million for the six months ended June 30, 2007, which represented an increase of 14% from the $43.2 million of total
revenues for the six months ended June 30, 2006.

The increase in total revenues for the three and six months ended June 30, 2007, compared to
the same periods in 2006, was driven primarily by product revenue, which increased 29% in the first half, with a 61%and 86% increase in customer transactions for the three and six months ended June 30, 2007, respectively. This growth was shared
across all major geographic segments and product categories. Emerging growth products increased 33% over the second quarter last year and for the first half of 2007 grew 78% over the first half of last year. Single Sign-on (SSO) product revenue
increased 153% over the second quarter of last year and grew 67% over the first half of 2006, while Public Key Infrastructure (PKI) product revenue continued its slower growth increasing 10% over the second quarter of last year and growing 17% over
the first half of 2006. For the three and six months ended June 30, 2007, extended government revenues in the United States were $5.4 million and $10.1 million, respectively, compared to $4.9 million and $8.4 million for the same periods in
2006, representing a 10% and 20% increase, respectively. The United States and Canadian governments represented 18% and 8% of total revenues in the second quarter of 2007, respectively, when including revenues sold through resellers to the
government end users. However, direct sales to the United States and Canadian governments represented 14% and 7% of total revenues in the second quarter of 2007, respectively. Overall, the United States and Canadian governments represented 16% and
11% of total revenues in the first half of 2007, when including revenues sold through resellers to the government end users. However, direct sales to the United States and Canadian governments represented 11% and 10% of total revenues in the first
half of 2007. No other individual customer accounted for 10% or more of total revenues in the three and six months ended June 30, 2007.



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The level of non-North American revenues has fluctuated from period to period and this trend is expected to continue for
the foreseeable future. We believe the improved revenues for the first six months of 2007, compared to the same period in 2006, reflects the strength of our evolving product portfolio, distribution network, strong customer relationships and the
quality of our support and services.

Product Revenues



|                             |  |                            |   |  |                          |   |  |                   |   |  |      |   |  |                           |   |  |                         |  
|---------------------------- |  | -------------------------- | - |  | ------------------------ | - |  | ----------------- | - |  | ---- | - |  | ------------------------- | - |  | ----------------------- | -
|                             |  | Three months endedJune 30, |   |  | Six months endedJune 30, |   |  | Percentage change |  
|(millions)                   |  | 2007                       |   |  | 2006                     |   |  | 2007              |   |  | 2006 |   |  | Three months endedJune 30 |   |  | Six months endedJune 30 |  
|North America                |  | 5.8                        |   |  | 5.6                      |   |  | 12.7              |   |  | 10.1 |   |  | 4                         | % |  | 26                      | %
|Outside North America        |  | 3.1                        |   |  | 1.8                      |   |  | 5.4               |   |  | 3.9  |   |  | 72                        | % |  | 38                      | %
|                             |  |                            |   |  |                          |   |  |                   |   |  |      |   |  |                           |   |  |                         |  
|Total                        |  | 8.9                        |   |  | 7.4                      |   |  | 18.1              |   |  | 14.0 |   |  | 20                        | % |  | 29                      | %
|                             |  |                            |   |  |                          |   |  |                   |   |  |      |   |  |                           |   |  |                         |  
|Percentage of total revenues |  | 36                         | % |  | 33                       | % |  | 37                | % |  | 32   | % |  |                           |   |  |                         |  
|                             |  |                            |   |  |                          |   |  |                   |   |  |      |   |  |                           |   |  |                         |  

Product revenues of $8.9 million for the three months ended June 30, 2007 represented an increase of 20% from
the $7.4 million for the three months ended June 30, 2006, representing 36% and 33% of total revenues in the respective periods. Product revenues of $18.1 million for the six months ended June 30, 2007 represented an increase of 29% from
the $14.0 million for the six months ended June 30, 2006, representing 37% and 32% of total revenues in the respective periods. The increase in the three and six months ended June 30, 2007 when compared to the same periods in 2006 is due
to growth in all of our product categories, primarily emerging growth products; namely IdentityGuard, Boundary Messaging and Fraud Detection, which represented 22% of product revenues in the first half of 2007, driven by revenues from the
IdentityGuard platform. The growth in Single Sign-on (SSO) product revenue, which represented 7% of product revenues in the first half of 2007, was fueled by our continued success in the secure government web portal market, while there has also been
interest in bundling SSO as part of a layered authentication approach with IdentityGuard. Also, our PKI revenue, which represented 71% of product revenues in the first half of 2007, increased 17% over the same period of last year, driven by our SSL
business. PKI is experiencing a resurgence of interest in digital certificates for authentication and the growing need to encrypt information both at rest and in transit, with strong authentication of secure messaging continuing to be the key
revenue drivers. Specifically, we grew our SSL business by 29% and 25% compared to the second quarter and first half of last year, respectively.

Highlighting this product growth trend, we had 106 product revenue transactions (a product revenue transaction is defined as an IdentityGuard product sale of any size plus all other product sales in excess of $10 thousand) in the second
quarter of 2007, up from 71 in the same quarter of 2006, or a 49% increase, with 27% of the transactions in the second quarter of 2007 being from new customers. Overall, we had 219 product revenue transactions in the first half of 2007, up from 130
in the first half of 2006, or a 68% increase, with 24% of the transactions in the first half of 2007 being from new customers. However, the average product revenue transaction size decreased from $81 thousand for the second quarter 2006 to $61
thousand for the same period of 2007, or a decrease of 25%, while the average product transaction size decreased 27% to $61 thousand for the first half of 2007 from $83 thousand for the first half of 2006. This downward trend in transaction size is
due to a shift in our product mix toward our lower cost emerging growth products. We had only one deal greater than $1 million in the first half of 2007, compared to two for the same period in 2006. However, growth in deals under $500 thousand is
fueling our overall top line product revenue growth. Revenue from deals under $500 thousand increased 39% from the same quarter a year ago and 51% from the first half of 2006, which we believe speaks well of the underlying strength of our portfolio
and the balance we are starting to see in product revenue performance. We would expect transaction levels to remain high going forward and the trend of lower average deal size to continue in the coming quarters. In general, the top-five average
quarterly product revenue transactions as a percentage of total revenues decreased from 14% for the first half of 2006 to 10% for the same period in 2007.



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Product revenues as a percentage of total revenues increased for the three and six months ended June 30, 2007,
compared to the same periods in 2006, due to improved demand for products, relative to the demand for services.

Services and Maintenance Revenues



|                             |  |                            |   |  |                          |   |  |                   |   |  |      |   |  |                           |   |  |                         |  
|---------------------------- |  | -------------------------- | - |  | ------------------------ | - |  | ----------------- | - |  | ---- | - |  | ------------------------- | - |  | ----------------------- | -
|                             |  | Three months endedJune 30, |   |  | Six months endedJune 30, |   |  | Percentage change |  
|(millions)                   |  | 2007                       |   |  | 2006                     |   |  | 2007              |   |  | 2006 |   |  | Three months endedJune 30 |   |  | Six months endedJune 30 |  
|North America                |  | 11.4                       |   |  | 10.4                     |   |  | 22.4              |   |  | 20.5 |   |  | 10                        | % |  | 9                       | %
|Outside North America        |  | 4.2                        |   |  | 4.3                      |   |  | 8.6               |   |  | 8.7  |   |  | -2                        | % |  | -1                      | %
|                             |  |                            |   |  |                          |   |  |                   |   |  |      |   |  |                           |   |  |                         |  
|Total                        |  | 15.6                       |   |  | 14.7                     |   |  | 31.0              |   |  | 29.2 |   |  | 6                         | % |  | 6                       | %
|                             |  |                            |   |  |                          |   |  |                   |   |  |      |   |  |                           |   |  |                         |  
|Percentage of total revenues |  | 64                         | % |  | 67                       | % |  | 63                | % |  | 68   | % |  |                           |   |  |                         |  
|                             |  |                            |   |  |                          |   |  |                   |   |  |      |   |  |                           |   |  |                         |  

Services and maintenance revenues of $15.6 million for the three months ended June 30, 2007 represented an
increase of 6% from the $14.7 million for the three months ended June 30, 2006, representing 64% and 67% of total revenues in the respective periods. Services and maintenance revenues of $31.0 million for the six months ended June 30, 2007
represented an increase of 6% from the $29.2 million for the six months ended June 30, 2006, representing 63% and 68% of total revenues in the respective periods. The increase in services and maintenance revenues for the three and six months
ended June 30, 2007 compared to the same periods in 2006 is due mainly to the acquisition of Orion in June 2006, as well as improved support and maintenance revenues. In addition, our professional services business was strong across the board
geographically, while our customers continued to renew their support agreements at a rate of over 95% in the first half of 2007. Services and maintenance revenues as a percentage of total revenues for the three and six months ended June 30,
2007 decreased primarily because of the strong demand for our product offerings, despite improved services and maintenance revenues.

EXPENSES

Total Expenses



|                             |  |                            |   |  |                          |   |  |                   |   |  |      |   |  |                           |   |  |                         |  
|---------------------------- |  | -------------------------- | - |  | ------------------------ | - |  | ----------------- | - |  | ---- | - |  | ------------------------- | - |  | ----------------------- | -
|                             |  | Three months endedJune 30, |   |  | Six months endedJune 30, |   |  | Percentage change |  
|(millions)                   |  | 2007                       |   |  | 2006                     |   |  | 2007              |   |  | 2006 |   |  | Three months endedJune 30 |   |  | Six months endedJune 30 |  
|Total expenses               |  | 27.6                       |   |  | 23.9                     |   |  | 54.9              |   |  | 51.4 |   |  | 15                        | % |  | 7                       | %
|                             |  |                            |   |  |                          |   |  |                   |   |  |      |   |  |                           |   |  |                         |  
|Percentage of total revenues |  | 113                        | % |  | 108                      | % |  | 112               | % |  | 119  | % |  |                           |   |  |                         |  
|                             |  |                            |   |  |                          |   |  |                   |   |  |      |   |  |                           |   |  |                         |  



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Total expenses consist of costs of revenues associated with products and services and maintenance, amortization of
purchased products rights and operating expenses associated with sales and marketing, research and development, general and administrative and restructuring charges and adjustments. Total expenses of $27.6 million and $54.9 million for the three and
six months ended June 30, 2007, respectively, represented an increase of 15% and 7% from the respective periods of 2006. The increase in each of the three and six months ended June 30, 2007 was due primarily to the impact of additional
costs associated employee compensation, primarily in sales and as a result of acquisitions, increased non-cash expenses for stock based compensation and amortization of purchased intangibles, and third-party royalties on product revenues, offset by
a $2.8 million restructuring charge in the first quarter of 2006 related to the sublease on our Santa Clara, California facility. As of June 30, 2007, we had 477 full-time employees globally, compared to 477 full-time employees as of
June 30, 2006 and 503 full-time employees as of December 31, 2006.

COST OF REVENUES

Cost of Product Revenues



|                               |  |                            |   |  |                          |   |  |                   |   |  |      |   |  |                           |   |  |                         |  
|------------------------------ |  | -------------------------- | - |  | ------------------------ | - |  | ----------------- | - |  | ---- | - |  | ------------------------- | - |  | ----------------------- | -
|                               |  | Three months endedJune 30, |   |  | Six months endedJune 30, |   |  | Percentage change |  
|(millions)                     |  | 2007                       |   |  | 2006                     |   |  | 2007              |   |  | 2006 |   |  | Three months endedJune 30 |   |  | Six months endedJune 30 |  
|Cost of product revenues       |  | 2.2                        |   |  | 1.2                      |   |  | 4.0               |   |  | 3.2  |   |  | 83                        | % |  | 25                      | %
|                               |  |                            |   |  |                          |   |  |                   |   |  |      |   |  |                           |   |  |                         |  
|Percentage of product revenues |  | 25                         | % |  | 16                       | % |  | 22                | % |  | 23   | % |  |                           |   |  |                         |  
|                               |  |                            |   |  |                          |   |  |                   |   |  |      |   |  |                           |   |  |                         |  

Cost of product revenues consists primarily of costs associated with our SSL and managed PKI businesses, product
media, documentation, packaging and royalties to third-party software vendors. Cost of product revenues was $2.2 million for the three months ended June 30, 2007, which represented an 83% increase from $1.2 million for the three months ended
June 30, 2006, representing 25% and 16% of product revenues in each of the respective periods. Cost of product revenues of $4.0 million for the six months ended June 30, 2007 represented a 25% increase from $3.2 million for the six months
ended June 30, 2006, which represented 22% and 23% of product revenues in their respective periods. The increase in the cost of product revenues in absolute dollars for the three and six months ended June 30, 2007 and as a percentage of
total product revenues for the second quarter of 2007, compared to the same periods in 2006, was primarily due to a shift in product sales mix towards products that incorporate third party technologies relative to the prior year. Also, we invested
in additional staffing for our SSL and managed PKI businesses. However, the slight decrease in the cost of product revenues as a percentage of total product revenues from the first half of 2006 to the same period of 2007 was driven by offsetting
cost improvements in the first three months of 2007, largely due to one large product revenue transaction that carried a third-party software royalty in the first quarter of 2006. 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 could be adversely affected.

Cost of Services and Maintenance Revenues



|                                                |  |                            |   |  |                          |   |  |                   |   |  |      |   |  |                           |   |  |                         |  
|----------------------------------------------- |  | -------------------------- | - |  | ------------------------ | - |  | ----------------- | - |  | ---- | - |  | ------------------------- | - |  | ----------------------- | -
|                                                |  | Three months endedJune 30, |   |  | Six months endedJune 30, |   |  | Percentage change |  
|(millions)                                      |  | 2007                       |   |  | 2006                     |   |  | 2007              |   |  | 2006 |   |  | Three months endedJune 30 |   |  | Six months endedJune 30 |  
|Cost of services and maintenance revenues       |  | 7.8                        |   |  | 7.4                      |   |  | 15.2              |   |  | 14.4 |   |  | 5                         | % |  | 6                       | %
|                                                |  |                            |   |  |                          |   |  |                   |   |  |      |   |  |                           |   |  |                         |  
|Percentage of services and maintenance revenues |  | 50                         | % |  | 50                       | % |  | 49                | % |  | 49   | % |  |                           |   |  |                         |  
|                                                |  |                            |   |  |                          |   |  |                   |   |  |      |   |  |                           |   |  |                         |  



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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 $7.8 million for the three months ended June 30, 2007, which represented a 5% increase
from $7.4 million for the three months ended June 30, 2006, representing 32% and 33% of total revenues for each of the respective periods. Cost of services and maintenance revenues was $15.2 million for the six months ended June 30, 2007,
which represented a 6% increase from $14.4 million for the six months ended June 30, 2006, representing 31% and 33 % of total revenues for each of the respective periods.



|                              |  |                                    |  |                        
|----------------------------- |  | ---------------------------------- |  | -----------------------
|                              |  | Year over year change 2007 to 2006
|(millions)                    |  | Three months endedJune 30          |  | Six months endedJune 30
|Third party hardware          |  | 0.1                                |  | 0.1                    
|Outside professional services |  | -0.3                               |  | -0.5                   
|Staff related costs           |  | 0.6                                |  | 1.2                    
|                              |  |                                    |  |                        
|                              |  | 0.4                                |  | 0.8                    
|                              |  |                                    |  |                        

The increase in the cost of services and maintenance revenues in the second quarter and first half of 2007,
compared to the same periods in 2006, can be attributed primarily to the increased staff related costs. This was due in large part to the professional services employee resources added as a result of the acquisition of Orion in June 2006 and
Business Signatures in July 2006, as well as increased stock based compensation expense. These additional internal staff resources also allowed for the reduced usage of outside subcontractors in the first half of 2007 compared to the prior year. The
decrease in services and maintenance expenses as a percentage of total revenues was the net result of higher total revenues for the three and six months ended June 30, 2007 which accounted for a three- and four-percentage point decrease,
respectively, when compared to the same periods in 2006, offset by increased overall services and maintenance expenses, which resulted in a two-percentage point increase in each respective period in the services and maintenance expenses as a
percentage of total revenues.

Services and maintenance gross profit as a percentage of services and maintenance revenues was 50% for each of the three
months ended June 30, 2007 and 2006, while services and maintenance gross profit as a percentage of services and maintenance revenues was 51% for each of the six months ended June 30, 2007 and 2006. This result for the second quarter of
2007 was the net effect of a slight improvement in services and maintenance gross profit as a percentage of services and maintenance revenues as a result of support and maintenance margins of 1%, offset by a corresponding 1% decline in professional
services 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 incremental customer opportunities that may arise with the help of partners and other sub-contractors, until an investment in additional full-time resources is justifiable. This plan may have an adverse impact on
the gross profit for services and maintenance, as the gross profit realized by using partners and sub-contractors



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is generally lower. The mix and volume of services and maintenance revenues may vary from period to period and from transaction to transaction, which will
also affect our gross margins and results of operations.

OPERATING EXPENSES

Operating ExpensesSales and Marketing



|                             |  |                            |   |  |                          |   |  |                   |   |  |      |   |  |                           |   |  |                         |  
|---------------------------- |  | -------------------------- | - |  | ------------------------ | - |  | ----------------- | - |  | ---- | - |  | ------------------------- | - |  | ----------------------- | -
|                             |  | Three months endedJune 30, |   |  | Six months endedJune 30, |   |  | Percentage change |  
|(millions)                   |  | 2007                       |   |  | 2006                     |   |  | 2007              |   |  | 2006 |   |  | Three months endedJune 30 |   |  | Six months endedJune 30 |  
|Sales and marketing expenses |  | 8.8                        |   |  | 7.2                      |   |  | 17.9              |   |  | 14.7 |   |  | 22                        | % |  | 22                      | %
|                             |  |                            |   |  |                          |   |  |                   |   |  |      |   |  |                           |   |  |                         |  
|Percentage of total revenues |  | 36                         | % |  | 33                       | % |  | 36                | % |  | 34   | % |  |                           |   |  |                         |  
|                             |  |                            |   |  |                          |   |  |                   |   |  |      |   |  |                           |   |  |                         |  

Sales and marketing expenses increased 22% to $8.8 million for the three months ended June 30, 2007 from $7.2
million for the comparable period in 2006. For the six months ended June 30, 2007, sales and marketing expenses increased to $17.9 million, an increase of 22% from $14.7 million for the comparable period in 2006. Sales and marketing expenses
represented 36% of total revenues for each of the three and six months ended June 30, 2007, compared to 33% and 34% for the three and six months ended June 30, 2006, respectively.



|                                                 |  |                                    |  |                        
|------------------------------------------------ |  | ---------------------------------- |  | -----------------------
|                                                 |  | Year over year change 2007 to 2006
|(millions)                                       |  | Three months endedJune 30          |  | Six months endedJune 30
|Facilities related costs                         |  | 0.1                                |  | 0.3                    
|Outside professional services                    |  | 0.1                                |  | 0.2                    
|Staff related costs (includes travel and living) |  | 1.5                                |  | 3.1                    
|Marketing programs                               |  | -0.2                               |  | -0.3                   
|Amortization of purchased intangibles            |  | 0.2                                |  | 0.4                    
|Bad debt expense                                 |  | -0.1                               |  | -0.5                   
|                                                 |  |                                    |  |                        
|                                                 |  | 1.6                                |  | 3.2                    
|                                                 |  |                                    |  |                        

The increase in sales and marketing expenses for the three and six months ended June 30, 2007, compared to
the same periods of 2006, was primarily due to higher staff related costs and purchased intangibles amortization associated with the Business Signatures acquisition and investments made to grow the sales force to ensure we can handle the increased
transaction load going forward. Sales and marketing headcount increased 20% overall when compared to one year ago, resulting in increased salaries and benefits expense, including sales commissions, of $1.5 million and $3.1 million for the three and
six months ended June 30, 2007 when compared to the same periods of 2006 and increased facilities costs. Offsetting these increases were reductions in bad debt expense and marketing programs spending in the three and six months ended
June 30, 2007. The increase in sales and marketing expenses as a percentage of total revenues for the three and six months ended June 30, 2007, compared to the same periods in 2006, reflected the higher expenses for the first six months of
2007, which resulted in a seven-percentage point increase for each of the three



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and six months ended June 30, 2007, offset by a four- and five-percentage point decrease in sales and marketing expenses as a percentage of total
revenues, respectively, due to higher total revenues when compared to the same periods of 2006.

We intend to continue to focus on improving the
productivity of the sales and marketing teams. As planned we added additional sales coverage, which should allow us to better execute on the opportunities we are seeing in both in the United States and abroad. We will continue to focus on our
channels, with a view to providing the executive team time to focus on strategically growing the business. 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 sales force in anticipation of future market growth, and (b) investing in marketing efforts in support of new product
launches. We believe it is necessary to invest in marketing programs that will improve the awareness and understanding of information security governance, and we will continue to invest in marketing 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.

For the first six months 2007, the provision for doubtful accounts remained substantially unchanged at $1.6 million.

Operating ExpensesResearch and Development



|                                  |  |                            |   |  |                          |   |  |                   |   |  |      |   |  |                           |   |  |                         |  
|--------------------------------- |  | -------------------------- | - |  | ------------------------ | - |  | ----------------- | - |  | ---- | - |  | ------------------------- | - |  | ----------------------- | -
|                                  |  | Three months endedJune 30, |   |  | Six months endedJune 30, |   |  | Percentage change |  
|(millions)                        |  | 2007                       |   |  | 2006                     |   |  | 2007              |   |  | 2006 |   |  | Three months endedJune 30 |   |  | Six months endedJune 30 |  
|Research and development expenses |  | 5.3                        |   |  | 4.4                      |   |  | 10.7              |   |  | 8.6  |   |  | 20                        | % |  | 24                      | %
|                                  |  |                            |   |  |                          |   |  |                   |   |  |      |   |  |                           |   |  |                         |  
|Percentage of total revenues      |  | 22                         | % |  | 20                       | % |  | 22                | % |  | 20   | % |  |                           |   |  |                         |  
|                                  |  |                            |   |  |                          |   |  |                   |   |  |      |   |  |                           |   |  |                         |  

Research and development expenses increased 20% to $5.3 million for the second quarter of 2007 compared to $4.4
million for the same period in 2006, while these expenses increased 24% to $10.7 million for the six months ended June 30, 2007 compared to $8.6 million for the same period in 2006. Research and development expenses represented 22% of total
revenues for each of the three and six months ended June 30, 2007, compared to 20% for each of the comparable periods in 2006.



|                              |  |                                    |  |                        
|----------------------------- |  | ---------------------------------- |  | -----------------------
|                              |  | Year over year change 2007 to 2006
|(millions)                    |  | Three months endedJune 30          |  | Six months endedJune 30
|Outside professional services |  | 0.1                                |  | 0.5                    
|Staff related costs           |  | 0.8                                |  | 1.6                    
|                              |  |                                    |  |                        
|                              |  | 0.9                                |  | 2.1                    
|                              |  |                                    |  |                        

The increase in research and development expenses for the three and six months ended June 30, 2007, when
compared to the same periods in 2006, was primarily due to higher staff related costs and increased



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spending on outside professional contractors as a result of the Business Signatures acquisition, as well as increased stock based compensation expense. In
addition, we reported higher research and development expenses as a result of an unfavorable shift in the exchange rates between Canada and the U.S. of $0.2 million in the three and six months ended June 30, 2007. The increase in research and
development expenses as a percentage of total revenues for the three and six months ended June 30, 2007, compared to the same periods in 2006, reflected the higher expenses in 2007, which resulted in a four- and five-percentage point increase
in 2007, respectively, offset by a two- and three-percentage point decrease in research and development expenses as a percentage of total revenues due to higher total revenues for the three and six months ended June 30, 2007, respectively, when
compared to the same periods of 2006.

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 the future.

Operating ExpensesGeneral and Administrative



|                                    |  |                            |   |  |                          |   |  |                   |   |  |      |   |  |                           |   |  |                         |  
|----------------------------------- |  | -------------------------- | - |  | ------------------------ | - |  | ----------------- | - |  | ---- | - |  | ------------------------- | - |  | ----------------------- | -
|                                    |  | Three months endedJune 30, |   |  | Six months endedJune 30, |   |  | Percentage change |  
|(millions)                          |  | 2007                       |   |  | 2006                     |   |  | 2007              |   |  | 2006 |   |  | Three months endedJune 30 |   |  | Six months endedJune 30 |  
|General and administrative expenses |  | 3.3                        |   |  | 3.6                      |   |  | 6.5               |   |  | 7.2  |   |  | -8                        | % |  | -10                     | %
|                                    |  |                            |   |  |                          |   |  |                   |   |  |      |   |  |                           |   |  |                         |  
|Percentage of total revenues        |  | 13                         | % |  | 16                       | % |  | 13                | % |  | 17   | % |  |                           |   |  |                         |  
|                                    |  |                            |   |  |                          |   |  |                   |   |  |      |   |  |                           |   |  |                         |  

General and administrative expenses decreased to $3.3 million and $6.5 million for the three and six months ended
June 30, 2007, respectively, from $3.6 million and $7.2 million for the comparable periods in 2006. General and administrative expenses represented 13% of total revenues for each of the three and six months ended June 30, 2007, compared to
16% and 17% for each of the comparable periods in 2006.



|                              |  |                                    |  |                        
|----------------------------- |  | ---------------------------------- |  | -----------------------
|                              |  | Year over year change 2007 to 2006
|(millions)                    |  | Three months endedJune 30          |  | Six months endedJune 30
|Facilities related costs      |  | -0.1                               |  | 0.1                    
|Outside professional services |  | -0.1                               |  | -0.3                   
|Staff related costs           |  | -0.1                               |  | -0.5                   
|                              |  |                                    |  |                        
|                              |  | -0.3                               |  | -0.7                   
|                              |  |                                    |  |                        

The decrease in general and administrative expenses in absolute dollars in the three and six months ended
June 30, 2007 compared to the same periods of 2006 was due to the effect of continued management discipline in this area, with net savings of $0.3 million and $0.7 million, respectively, primarily as a result of headcount reductions and reduced
use of outside professional firms. General and administrative expenses as a percentage of total revenues decreased for the three and six months ended June 30, 2007 compared to the same periods in 2006, due to a decrease in recorded expenses,
which accounted for a one- and two-percentage point decrease, respectively. This effect was magnified by a two-percentage point decrease in general and administrative expenses as a percentage of total revenues due to higher total revenues for each
of the first three and six months of 2007 when compared to the same periods in 2006



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We continue to explore opportunities to gain additional efficiencies in our administrative processes and to contain
expenses in these functional areas.

Amortization of Purchased Product Rights and Other Purchased Intangibles

Amortization of purchased product rights was $345 thousand and $677 thousand for the three and six months ended June 30, 2007, respectively, compared to $212
thousand and $419 thousand for the same periods in 2006. These costs are related to the developed technology purchased in connection with the acquisition of Business Signatures in 2006, as well as the acquisition of certain business assets from
AmikaNow! during 2004. This expense was recorded as a component of cost of revenues.

Amortization of other purchased intangibles totaled $267 thousand and
$533 thousand for the three and six months ended June 30, 2007, respectively, compared to $17 thousand and $34 thousand for the same periods of 2006. These costs are related to the customer/partner relationships and non-competition agreement
assets purchased in connection with the acquisitions of Orion and Business Signatures in 2006, as well as the acquisition of certain business assets from AmikaNow! during 2004. Of this expense, $229 thousand and $457 thousand was recorded as a
component of sales and marketing expenses for the first three and six months of 2007, respectively, compared to $17 thousand and $34 thousand for the same periods of 2006, while $38 thousand and $76 thousand was recorded as a component of cost of
services and maintenance revenues for the first three and six months of 2007, respectively.

Restructuring Charges and Adjustments

During the second quarter of 2006, we made a further adjustment to decrease the restructuring charges that we had previously recorded related to
the June 2001 restructuring plan with respect to our Santa Clara, California facility by $130 thousand, to reflect the fact that the building sublease was extended with the existing subtenant to March 31, 2011 and the corresponding expected
sublet lease recoveries. This adjustment was charged to the restructuring charges line in the condensed consolidated statement of operations for the second quarter of 2006.

During the first quarter of 2006, we made an adjustment to increase the restructuring charges that we had previously recorded related to the June 2001 restructuring plan with respect to our Santa Clara, California
facility. Although we had been monitoring the sublet market on an on-going basis, we received an extension offer and had begun preparations for placing the facility on the market. These events caused us to revisit our estimated sublease recoveries.
We concluded that we needed to increase the restructuring charges that we had previously recorded related to our June 2001 restructuring plan by a further $2.9 million in the first quarter of fiscal 2006 to reflect a change in our projected sublet
lease recoveries as evidenced by the market for leased facilities in that region. This adjustment was charged to the restructuring charges line in the condensed consolidated statement of operations for that first quarter. An extension to the sublet
agreement was subsequently concluded with the sublessee in the second quarter of 2006.

Interest Income

Interest income decreased to $176 thousand and $356 thousand for three and six months ended June 30, 2007, respectively, from $840 thousand and $1.6 million for the
same periods of 2006, representing 1% of total revenues for each of the three and six months ended June 30, 2007, compared to 4% of total revenues for each of the same periods in 2006. The decrease in investment income for the second quarter
and first half of 2007, compared to the same periods of 2006, was due to the funds invested in the acquisition of Orion, Business Signatures and other long-term assets during 2006, in addition to the reduced balance of funds invested as a result of
amounts drawn down to fund cash flow from operations and stock repurchases during the last year. The funds invested decreased to $24.2 million as of June 30, 2007 from $74.7 million as of June 30, 2006.



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Loss from Equity Investments

We recorded $77 thousand of losses, net of intercompany profit eliminations, related to our investments in Asia Digital Media for the six months ended June 30, 2007, compared to $122 thousand and $293 thousand
for the three and six months ended June 30, 2006, respectively. We began accounting for this investment under the equity method of accounting in the fourth quarter of 2004, since we had the potential to significantly influence its operations
and management.

Write-down of Long-term Strategic and Equity Investments

We recorded non-cash charges in the first quarter of 2006 related to the impairment of long-term investments in Asia Digital Media and Ohana of $2.4 million and $659 thousand, respectively, as it was concluded that
these investments had suffered an other than temporary decline in fair value.

Provision for Income Taxes

We recorded an income tax provision of $72 thousand and $124 thousand for the three and six months ended June 30, 2007, respectively, compared to $90 thousand and
$189 thousand for the same periods of 2006. These provisions represented primarily the taxes payable in certain foreign jurisdictions. The effective income tax rates differed from statutory rates primarily due to the impairment of long-term
strategic investments, stock option expenses, purchased product rights, restructuring charges, foreign research and development tax credits, 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 $0.1 million in operating activities during the six months ended June 30, 2007. This cash inflow was primarily a result of a decrease in
accounts receivable of $3.8 million and an increase in deferred revenue of $4.4 million, offset by cash outflows resulting from a decrease in accounts payable and accrued liabilities of $4.4 million, a decrease in accrued restructuring charges of
$2.6 million, an increase in prepaid expenses and other receivables of $0.5 million, and a net loss after adjusting for non-cash charges of $0.6 million. The reduction in accounts payable and accrued liabilities was the result of the pay down of
accruals related to third party royalties and acquisition costs, as well as the timing of accruals related employee compensation. Our average days sales outstanding at June 30, 2007 was 62 days, which represents a decrease from the 78 days that
we reported at March 31, 2007. The overall decrease in days sales outstanding from March 31, 2007 was mainly due to higher in-quarter collections due to improved sales linearity and timing of support renewals compared to the first quarter
of 2007. 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.

Any increase or decrease in our accounts receivable balance and days sales outstanding will affect our cash flow from operations and liquidity. Our accounts
receivable and days sales outstanding may increase due to changes in factors such as the timing of when sales are invoiced and the length of customers payment cycle. Generally, international and indirect customers pay at a slower rate than
domestic and direct customers, so that an increase in revenue generated from international and indirect customers may increase our days sales outstanding and accounts receivable balance. We have observed an increase in the length of our
customers payment cycles, which may result in higher accounts receivable balances, and could expose us to greater general credit risks with our customers and increased bad debt expense.

During the first six months of 2007, we generated $2.5 million of cash related to investing activities. Cash provided by reductions in our marketable investments in the
amount of $2.6 million and proceeds from disposition of property and equipment of $0.4 million was partially offset by the investment of $0.2 million in property and equipment, primarily for computer hardware upgrades throughout our organization and
$0.3 million in other long-term assets related to capitalized software development costs.



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We generated cash of $1.1 million in financing activities during the six months ended June 30, 2007 as a result of
cash provided by the issuance of Common stock related to the exercise of employee stock options and restricted stock units.

As of June 30, 2007, our
cash and cash equivalents in the amount of $24.2 million provided our principal sources of liquidity. Overall, we generated $3.4 million and $1.7 million in cash and cash equivalents during the second quarter and first half of 2007, respectively.
Although we continue to target operating profitability, based on sustainable revenue and operating expense structures, we estimate that we may continue to use cash in fiscal 2007 to satisfy the obligations provided for under our restructuring
program. In addition, we expect to invest cash in working capital during the remainder of 2007.

However, if operating losses continue to occur, then cash,
cash equivalents and marketable investments will be negatively affected.

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 and cash equivalents 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 $21.9 million of accrued restructuring charges at June 30, 2007 through fiscal 2011, as detailed below. This amount is net of expected sublet
recoveries on restructured facilities of $10.3 million. The lease obligations included in these accrued restructuring charges are disclosed in the table of contractual commitments below. In addition, we expect to spend approximately $2.0 million per
year on capital expenditures, primarily for computer equipment needed to replace existing equipment that is coming to the end of its useful life, a significant portion of which are expected to be procured under operating leases.

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

We have commitments that will expire at various times through 2015. We lease administrative and sales offices and certain property and equipment under non-cancelable
operating leases that will expire at various dates to 2015. A summary of our contractual commitments at June 30, 2007 is as follows:



|                                                                        |  |                       |        |                 |   |          |  |          |        |                  |   |        |  |   |      
|----------------------------------------------------------------------- |  | --------------------- | ------ | --------------- | - | -------- |  | -------- | ------ | ---------------- | - | ------ |  | - | -----
|                                                                        |  | Payment Due by Period
|                                                                        |  | Total                 |        | Less than1 Year |   | 1-3Years |  | 3-5Years |        | More than5 Years
|                                                                        |  | (in thousands)       
|Operating lease obligationscurrently utilized facilities and equipment |  | $                     | 25,673 |                 | $ | 5,037    |  | $        | 7,308  |                  | $ | 4,634  |  | $ | 8,694
|Operating lease obligationsrestructured facilities                     |  |                       | 27,568 |                 |   | 6,283    |  |          | 13,330 |                  |   | 7,955  |  |   |     
|Guaranteed payments to AmikaNow!                                        |  |                       | 696    |                 |   | 696      |  |          |       |                  |   |       |  |   |     
|2005 Entrust Deferred Incentive and Retention Bonus Plan                |  |                       | 525    |                 |   | 525      |  |          |       |                  |   |       |  |   |     
|Other commitments                                                       |  |                       | 541    |                 |   | 541      |  |          |       |                  |   |       |  |   |     
|                                                                        |  |                       |        |                 |   |          |  |          |        |                  |   |        |  |   |      
|Total                                                                   |  | $                     | 55,003 |                 | $ | 13,082   |  | $        | 20,638 |                  | $ | 12,589 |  | $ | 8,694
|                                                                        |  |                       |        |                 |   |          |  |          |        |                  |   |        |  |   |      

In addition to the lease commitments included above, we have provided letters of credit totaling $3.3 million as
security deposits in connection with certain office leases.

The 2005 Entrust Deferred Incentive and Retention Bonus Plan (the Deferred Plan)
was adopted by the Compensation Committee of the Board of Directors on November 7, 2005. The primary objective of the Deferred Plan is to attract and retain valued employees by remunerating selected executives and other key employees with cash
awards based on the contribution of the individual employee. During the first quarter of 2006, we granted awards to employees under the plan that potentially could result in payments of $1.6 million over the subsequent two years, assuming that all
employees receiving the awards remain employed with us for the entire two year vesting period of the awards. Of this amount, it was estimated that, as of June 30, 2007, $525 thousand was remaining to be paid out under this plan.



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Other commitments include financing arrangements entered into for the purpose of funding annual insurance premiums, with
a remaining balance as of June 30, 2007 of $461 thousand, to be paid during fiscal 2007. In addition, we entered into a distribution agreement with a vendor agreeing to purchase a minimum of 100,000 security tokens prior to January 1, 2008
for resale to our customers. This represented a contractual commitment totaling $350 thousand, all of which remained unpaid at June 30, 2007. However, we had received, and recorded liability for, $270 thousand worth of these tokens and, as
such, the remaining commitment to order $80 thousand worth of tokens has been included in other commitments in the table above.

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 June 30, 2007.

We generally warrant for ninety days from delivery to a customer that our products will perform free from material errors that 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 June 30, 2007.

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.



|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.

The following table presents the cash, cash equivalents and marketable investments that we held
as of June 30, 2007, 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 to 6months |   | > 6 months |  | > 12 months
|Investments classified as cash and cash equivalents         |  | $                       | 6,152 |              | $ |           |  | $           |   |  | $ | 
|Investments classified as short-term marketable investments |  |                         |      |              |   |           |  |             |  |  |   | 
|                                                            |  |                         |       |              |   |            |  |             |   |  |   |  
|Total amortized cost                                        |  | $                       | 6,152 |              | $ |           |  | $           |  |  | $ | 
|                                                            |  |                         |       |              |   |            |  |             |   |  |   |  
|Fair value                                                  |  | $                       | 6,152 |              | $ |           |  | $           |  |  | $ | 
|                                                            |  |                         |       |              |   |            |  |             |   |  |   |  



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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. Our financial instrument holdings at period-end were analyzed to determine their sensitivity to interest
rate changes. The fair values of these instruments were determined by net present values. In this sensitivity analysis, we used the same change in interest rate for all maturities. All other factors were held constant. If there were an adverse
change in interest rates of 10%, the expected effect on net income related to our financial instruments would be less than $50 thousand.

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, the European Union and Japan. This exposure is not considered to be material with respect to the United Kingdom, European and Japanese 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 our 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 would
also mean 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 foreign exchange 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 $2.9 million in 2006, when compared to 2005, due to fluctuations in the exchange rate between the United States and Canadian dollars. Taking into account the effect of exchange rate fluctuations on reported Canadian revenues, the net
effect on earnings was $0.6 million for 2006, when compared to 2005.

In the past, when advantageous, we have engaged in forward contracts to purchase
Canadian dollars, to cover exposures on the Canadian subsidiarys expenses that are 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. We did not engage in any forward contracts to purchase Canadian dollars during the second quarter of 2007, and no previously purchased foreign exchange contracts had extended past March 31, 2007. Subsequent to quarter end, we have
engaged in forward contracts to purchase Canadian dollars covering exposures on approximately $5.0 million of expenses denominated in Canadian dollars in the third quarter of 2007. We currently have not engaged in any forward contracts to purchase
Canadian dollars to cover exposures on expenses denominated in Canadian dollars in future periods beyond the third quarter of 2007.

Risk Associated
with Long-term Strategic Investments

We hold an investment in Ohana, with a net carrying value at June 30, 2007 of $91 thousand, representing
approximately 14.3% of the issued common shares of Ohana. This investment is now accounted for under the cost method. Ohana is in the start-up or development stage, and may lack the financial resources, licenses, technology and governmental
approvals necessary to import, develop or offer for sale any commercial product or service. If the demand for Ohanas products and services materializes slowly, to a minimum extent, or not at all in the relevant market, we could lose all or
substantially all of our investment.



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|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Evaluation of Disclosure Controls and
Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our
disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934), as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the
reports that we file or submit under the Securities Exchange Act of 1934 and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There have not been any changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of
1934) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

The Company is subject, from time to time, to
various legal proceedings and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these
legal matters will have a material adverse effect on the Companys consolidated results of operations or consolidated financial position. Certain legal proceedings in which we are involved are discussed in Part 1. Item 3. of our Annual
Report on Form 10-K for the year ended December 31, 2006. Unless otherwise indicated, all proceedings in that earlier Report remain outstanding.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

Other than as set forth below, there were no material
changes to the Risk Factors disclosed in our annual report on Form 10-K for the year ended December 31, 2006.



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------------------------

None.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------

Not applicable.



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------

On May 4,
2007, we held our Annual Meeting of Shareholders. Shares of Common stock with 52,108,743 votes were represented at the meeting out of a total of 60,394,788 shares entitled to vote. The following sets forth a description of each matter voted on and
the votes cast:



|1) | A proposal to elect Michael P. Ressner and Terdema Ussery II as Class II Directors for three-year terms. The results of the voting were as follows:
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------



|                   |  |            |  |                |  |                 |  |                  
|------------------ |  | ---------- |  | -------------- |  | --------------- |  | -----------------
|Director           |  | Votes For: |  | Votes Against: |  | Votes Withheld: |  | Broker non-votes:
|Michael P. Ressner |  | 51,520,170 |  |               |  | 588,453         |  |                 
|Terdema Ussery II  |  | 51,517,454 |  |               |  | 591,169         |  |                 



|2) | Ratification of the appointment of Grant Thornton LLP as our independent public accountants for the year ending December 31, 2007. The results of the voting were as follows:
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|           |  |                |  |                 |  |                  
|---------- |  | -------------- |  | --------------- |  | -----------------
|Votes For: |  | Votes Against: |  | Votes Withheld: |  | Broker non-votes:
|51,916,306 |  |               |  | 192,317         |  |                 



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Directors who were not elected at the meeting but whose term of office continued after the meeting are F. William Conner,
Douglas Schloss, Butler C. Derrick, Jr., Jerry C. Jones, Michael E. McGrath and Ray W. Washburne.



|ITEM 5. | OTHER INFORMATION
|------- | -----------------

Not applicable.



|ITEM 6. | EXHIBITS
|------- | --------



|              |  |                                                                                                                                                
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                    
|10.1          |  | Employee Agreement between the Registrant and Steve Holton, dated April 6, 2007*                                                               
|              | 
|10.2          |  | Executive Severance Agreement between the Registrant and Steve Holton, dated April 7, 2007*                                                    
|              | 
|10.3          |  | Confidentiality, Non-Solicitation, Non-Competition, and Code of Conduct Agreement between the Registrant and Steve Holton, dated April 6, 2007*
|              | 
|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.                                                                                         

---

|* | Management contract or compensatory agreement.
|- | ----------------------------------------------



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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: August 8, 2007 |  | /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



|              |  |                                                                                                                                                
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                    
|10.1          |  | Employee Agreement between the Registrant and Steve Holton, dated April 6, 2007*                                                               
|              | 
|10.2          |  | Executive Severance Agreement between the Registrant and Steve Holton, dated April 6, 2007*                                                    
|              | 
|10.3          |  | Confidentiality, Non-Solicitation, Non-Competition, and Code of Conduct Agreement between the Registrant and Steve Holton, dated April 6, 2007*
|              | 
|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.                                                                                         

---

|* | Management contract or compensatory agreement.
|- | ----------------------------------------------



41