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

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

                                   FORM 10-Q

(Mark one)

    [X]  Quarterly report pursuant to Section 13 or 15(d) of the Securities
                             Exchange Act of 1934
                                        
                   FOR THE QUARTER ENDED SEPTEMBER 30, 1998

                                      OR

    [ ]  Transition report pursuant to Section 13 or 15(d) of the Securities
                             Exchange Act of 1934
                                        
                       COMMISSION FILE NUMBER 000-24733
                                        
                         ----------------------------

                           ENTRUST TECHNOLOGIES INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
                                        


          MARYLAND                                          62-1670648
(STATE OR OTHER JURISDICTION OF                (IRS EMPLOYER IDENTIFICATION NO.)
 INCORPORATION OR ORGANIZATION)


                   2323 NORTH CENTRAL EXPRESSWAY, SUITE 360
                             RICHARDSON, TX 75080
              (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES & ZIP CODE)

      Registrant's telephone number, including area code: (972) 994-8000
                                        

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes  [X]   No  [ ]

     There were 42,488,181 shares of the registrant's $.01 par value Common
stock outstanding as of November 10, 1998.

--------------------------------------------------------------------------------
<PAGE>
 
                           ENTRUST TECHNOLOGIES INC.

                               TABLE OF CONTENTS
                                        
 

PART I. FINANCIAL INFORMATION                                               PAGE
                                                                            
  Item 1.  Financial Statements                                             
           Condensed Consolidated Balance Sheets..........................    3
           Condensed Consolidated Statements of Operations................    4
           Condensed Consolidated Statements of Cash Flows................    5
           Notes to Condensed Consolidated Financial Statements...........    6
  Item 2.  Management's Discussion and Analysis of Financial                
           Condition and Results of Operations............................   10

  Item 3.  Quantitative and Qualitative Disclosures about Market Risk.....   19

PART II. OTHER INFORMATION                                                  
                                                                            
  Item 2.  Changes in Securities and Use of Proceeds......................   20

  Item 4.  Submission of Matters to a Vote of Security Holders............   21

  Item 6.  Exhibits and Reports on Form 8-K...............................   23
                                                                            
SIGNATURES................................................................   24
                                                                               
INDEX TO EXHIBITS.........................................................   25

                                                                               2
<PAGE>
 
PART I.    FINANCIAL INFORMATION

Item 1.    Financial statements


                           ENTRUST TECHNOLOGIES INC.

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                        


 
                                                                   (UNAUDITED)
(In thousands)                                   DECEMBER 31,     SEPTEMBER 30,
                                                    1997              1998 
ASSETS                                           -----------      ------------
Current assets:                                                    
   Cash and cash equivalents....................    $ 4,025          $43,495
   Short-term investments.......................      8,613           39,309
   Accounts receivable, net.....................      7,152           12,357
   Prepaid expenses and other...................      2,544            2,733
                                                    -------          --------
         Total current assets...................     22,334           97,894
Property and equipment, net.....................      1,680            2,668
Other assets....................................        743            1,000
Goodwill........................................         --            3,388
                                                    -------          --------
         Total assets...........................    $24,757         $104,950
                                                    =======         ========
                                                                    
LIABILITIES AND SHAREHOLDERS' EQUITY                                
Current liabilities:                                                
   Accounts payable.............................    $ 1,236          $  4,857
   Accrued liabilities..........................      2,066             4,547
   Deferred income..............................      3,068             6,845
   Due to related party.........................      2,257               781
                                                    -------          --------
         Total current liabilities..............      8,627            17,030
Long-term liabilities...........................      1,468                35
                                                    -------          --------
         Total liabilities......................     10,095            17,065
                                                    -------          --------
Shareholders' equity:                                               
   Common and special voting stock                                  
   and additional paid-in capital...............     16,026           112,952
   Unearned deferred compensation and other.....        (15)             (695)
   Accumulated deficit..........................     (1,349)          (24,372)
                                                    -------          --------
         Total shareholders' equity.............     14,662            87,885
                                                    -------          --------
         Total liabilities and shareholders'                        
         equity.................................    $24,757          $104,950 
                                                    =======          ======== 
                                                                               

     See accompanying notes to condensed consolidated financial statements
                                        

                                                                               3
<PAGE>
 
                           ENTRUST TECHNOLOGIES INC.

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                        
<TABLE> 
<CAPTION> 
                                                    (UNAUDITED)                           (UNAUDITED)
                                                    THREE MONTHS                          NINE MONTHS
                                                 ENDED SEPTEMBER 30,                   ENDED SEPTEMBER 30,
                                                ----------------------               -----------------------
                                                  1997          1998                   1997           1998
                                                --------      --------               --------        -------               
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S>                                        <C>            <C>                    <C>              <C>
Revenues:
       License.............................     $ 4,949        $ 9,795               $10,626          $ 25,640
       Services and maintenance............       2,137          3,244                 6,351             8,337
                                                -------        -------               -------          --------
              Total revenues...............       7,086         13,039                16,977            33,977
                                                -------        -------               -------          --------
Cost of revenues:                                                                           
       License.............................         131            507                   360             1,319
       Services and maintenance............       1,174          2,100                 3,285             5,198
                                                -------        -------               -------          --------
              Total cost of revenues.......       1,305          2,607                 3,645             6,517
                                                -------        -------               -------          --------
Gross profit                                      5,781         10,432                13,332            27,460
                                                -------        -------               -------          --------
Operating expenses:                                                                         
       Sales and marketing.................       3,528          7,330                 7,527            18,338
       Research and development............       1,700          3,669                 3,777             9,026
       General and administrative..........       1,026          1,356                 2,505             3,627
       Acquired in-process research and                                                     
        development........................          --             --                    --            20,208
       Goodwill amortization...............          --            178                    --               178
                                                -------        -------               -------          --------
              Total operating expenses.....       6,254         12,533                13,809            51,377
                                                -------        -------               -------          --------
Loss from operations.......................        (473)        (2,101)                 (477)          (23,917)
Interest income............................         164            517                   579               734
                                                -------        -------               -------          --------
Income (loss) before benefit for income                                                     
 taxes.....................................        (309)        (1,584)                  102           (23,183)
                                                                                            
Benefit for income taxes...................         226             --                   211               160
                                                -------        -------               -------          --------
Net income (loss)..........................     $   (83)       $(1,584)              $   313          $(23,023)
                                                =======        =======               =======          ========
                                                                                            
Basic net income (loss) per share..........          --        $ (0.04)              $  0.01          $  (0.70)
Diluted net income (loss) per share........          --        $ (0.04)              $  0.01          $  (0.70)
Basic--Weighted average common shares                                                       
 outstanding...............................      30,700         36,830                30,700            32,843
                                                                                            
Diluted--Weighted average common shares                                                     
 outstanding...............................      41,869         49,589                41,332            47,169
</TABLE>


     See accompanying notes to condensed consolidated financial statements
                                        

                                                                               4
<PAGE>
 
                           ENTRUST TECHNOLOGIES INC
                                        
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                        

 
<TABLE>
<CAPTION>
                                                                                       (UNAUDITED)
                                                                                    NINE MONTHS ENDED
                                                                                       SEPTEMBER 30,
                                                                               ----------------------------
                                                                                  1997               1998
                                                                               -----------       ----------     
<S>                                                                           <C>                <C>
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)...................................................           $   313          $(23,023)
  Adjustments to reconcile net income (loss) to net cash used in
   operating activities:
       Depreciation and amortization..................................               260               843
       Acquired in-process research and development...................                --            20,208
       Deferred income taxes..........................................              (405)             (257)
       Other non-cash charges (credits), net..........................               (36)              104
  Changes in assets and liabilities:
       Increase in accounts receivable................................            (6,757)           (4,556)
       Increase in prepaid expenses and other.........................              (564)             (153)
       Increase in accounts payable...................................               512             2,425
       Increase in accrued liabilities................................             1,107             1,553
       Increase in deferred income....................................             2,055             3,627
       Increase (decrease) due to related party.......................             1,246            (2,576)
                                                                                 -------          --------
        Net cash used in operating activities.........................            (2,269)           (1,805)
                                                                                 -------          --------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchases of property and equipment...............................              (792)           (1,345)
    Purchases of short-term investments...............................            (8,217)          (52,227)
    Dispositions of short-term investments............................                --            21,531
    Payment on purchase of r3 Security Engineering AB.................                --            (4,391)
                                                                                 -------          --------
        Net cash used in investing activities.........................            (9,009)          (36,432)
                                                                                 -------          --------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Repayment of  long-term debt......................................                --            (1,422)
    Transfers to shareholder..........................................            (1,803)               --
    Proceeds from exercise of stock options...........................                --                31
    Proceeds from issuance of common stock , net of issuance costs....                --            79,098
    Proceeds from issuance of common and special voting stock, net of
    issuance costs....................................................            16,026                --  
                                                                                 -------          --------
        Net cash provided by financing activities.....................            14,223            77,707
                                                                                 -------          --------
NET INCREASE IN CASH AND CASH EQUIVALENTS.............................             2,945            39,470
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......................                --             4,025
                                                                                 -------          --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................           $ 2,945          $ 43,495
                                                                                 =======          ========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
     Issuance of redeemable Series A common stock                                                 
     (and subsequent conversion into common stock)
     related to the acquisition of r3 Security Engineering AG.........                --            17,013
                                                                                 =======          ======== 
</TABLE>
                                                                                
     See accompanying notes to condensed consolidated financial statements

                                                                               5
<PAGE>
 
                           ENTRUST TECHNOLOGIES INC.

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

NOTE 1. BASIS OF PRESENTATION

     The accompanying unaudited condensed consolidated financial statements have
been prepared on the same basis as the audited annual consolidated financial
statements and, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position, results of operations and cash flows.
The results of operations for the three and nine months ended September 30,
1998, are not necessarily indicative of the results to be expected for the full
year. Certain information and footnote disclosures normally contained in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. These condensed consolidated
financial statements should be read in conjunction with the Notes to
Consolidated Financial Statements for the six months ended June 30, 1998 and
year ended December 31, 1997 contained in Entrust Technologies Inc.'s
Prospectus, dated August 17, 1998, filed as part of a Registration Statement on
Form S-1 (No. 333-57275) in connection with the Company's initial public
offering ("IPO").

NOTE 2.  CAPITAL STOCK

     On August 21, 1998, the Company closed its IPO, issuing 5,400,000 shares of
its Common stock at an initial public offering price of $16 per share. The net
proceeds to the Company from the offering, after deducting underwriting
discounts and commissions and offering expenses incurred by the Company, were
approximately $79.1 million. Concurrent with the closing of the initial public
offering, each of the 20,314,346 outstanding shares of the Company's Series A
Common stock and each of the 1,167,288 outstanding shares of the Company's
Redeemable Series A Common stock were automatically converted into one share of
Common stock. Also, the 260,000 outstanding shares of the Company's Series B
(including non-voting) Common stock were automatically converted into 13,063,836
shares of Common stock.  Furthermore, the majority shareholder of the Company
exercised its option to convert 2,542,711 shares of the Company's Special Voting
stock into the equivalent number of shares of Common stock.  After this
conversion, the remaining number of issued and outstanding Special Voting shares
was 5,157,289.

NOTE 3.  STOCK SPLITS

     On June 18, 1998, the Board of Directors approved an increase in the
authorized number of shares of Series A Common stock from 15,000,000 to
100,000,000, Preferred stock from 500,000 to 5,000,000 and Special Voting stock
from 2,500,000 to 15,000,000.  The Board of Directors also approved on June 18,
1998 a 4-for-1 stock split effected in the form of a stock dividend, payable to
the shareholders of Series A Common stock and Special Voting stock. In addition,
the Board of Directors approved an amendment to the Company's Articles of
Incorporation, which redesignated the Series A Common stock as Common stock
effective upon the closing of a public offering of the Company's Common stock.
Upon the closing of the Company's IPO on August 21, 1998, the Series A Common
stock was converted to Common stock. All share and per share data in this Form
10-Q have been adjusted to give effect to these stock splits.

                                                                               6
<PAGE>
 
NOTE 4.  EMPLOYEE STOCK OPTION PLAN

     In May 1998, the Company's shareholders increased the authorized shares of
Common stock available for issuance under the Company's 1996 Stock Incentive
Plan to 7,630,920. On June 18, 1998, the Company's Board of Directors approved
an increase of 2,369,080 in the number of shares available under the Plan,
subject to shareholder approval. The options under the Plan are granted at the
then-current fair market value of the Common stock of the Company and expire on
the tenth anniversary or upon termination of employment. Options granted prior
to January 1, 1998 generally may be exercised in equal proportions during the
years following the first and second anniversary of the date of grant. Options
granted after January 1, 1998, generally may be exercised in equal proportions
over four years after the first anniversary of the date of grant. With respect
to options granted to the key management team, 20% of the options become
exercisable upon grant date, with an additional 20% of the options exercisable
at each successive anniversary of the grant date until the fourth anniversary of
the grant date.

NOTE 5.  EMPLOYEE STOCK PURCHASE PLAN

     The Company's 1998 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in July 1998 and approved by the stockholders
of the Company in August 1998.  The Purchase Plan authorizes the issuance of up
to a total of 400,000 shares of Common stock to participating employees.

NOTE 6.  ACQUISITION OF R3 SECURITY ENGINEERING AG AND ACQUIRED IN-PROCESS
         RESEARCH AND DEVELOPMENT

     On June 8, 1998, the Company completed the acquisition of r3 Security
Engineering AG ("r3"), a company based in Zurich, Switzerland which provides
consulting, applied research and product development services related to
commercial security and encryption solutions. Pursuant to the Share Purchase
Agreements dated May 30, 1998, entered into between the Company and the
shareholders of r3, the Company agreed to acquire all the outstanding shares of
r3 in exchange for approximately 1,167,288 shares of the Company's Series A
Common stock (subsequently converted into Common stock upon the closing of the
Company's IPO), valued at $14.58 per share and cash consideration of $4.4
million.

     This acquisition has been accounted for under the purchase method of
accounting. Accordingly, the Company's condensed consolidated financial
statements include the accounts of r3 as a wholly-owned subsidiary since the
date of acquisition. The aggregate purchase price was $23.8 million, which
included approximately $4.4 million in cash, $17 million representing 1,167,288
shares of Redeemable Series A Common stock (subsequently converted into Common
stock upon the closing of the Company's IPO), approximately $1 million in
assumed liabilities and acquisition expenses, and approximately $1.4 million of
adjustments to the June 8, 1998 opening balance sheet of r3 to record the
acquired assets and liabilities at fair value. In connection with the purchase
price allocation, the Company obtained an independent appraisal of the
intangible assets which indicated approximately $20.2 million of the acquired
intangible assets consisted of in-process product development. The development
of these projects had not reached technological feasibility and the technology
has no alternative future use and, accordingly, the $20.2 million was included
as an expense in the condensed consolidated statements of operations for the
nine months ended September 30, 1998. $3.6 million of goodwill was recorded as a
result of this acquisition.

     The accounts of the Company's subsidiaries have been translated into U.S.
dollars.  Assets and liabilities have been translated at the exchange rates in
effect at the balance sheet date.  Revenues, expenses and cash flow amounts are
translated at average rates for the period.  The resultant translation
adjustments are included in comprehensive income as a separate component of
shareholders' equity.  Gains and losses from foreign currency transactions are
included in the determination of net income and are not material.

                                                                               7
<PAGE>
 
     The following unaudited pro forma data summarize the combined results of
operations of Entrust Technologies Inc. and r3 as if the acquisition had taken
place as of the beginning of the periods presented.


<TABLE>
<CAPTION>
                                                           (UNAUDITED)                  (UNAUDITED)
                                                         NINE MONTHS ENDED           NINE MONTHS ENDED
                 (IN THOUSANDS)                          SEPTEMBER 30, 1997          SEPTEMBER 30, 1998
                 --------------                          ------------------          ------------------
<S>                                                      <C>                         <C>
Revenues.........................................               19,699                      35,578
                                                                ======                      ======
Net loss.........................................                 (601)                     (4,118)
                                                                ======                      ======
Basic and diluted net loss per share.............                (0.01)                      (0.12)
                                                                ======                      ======
</TABLE>
                                        
NOTE 7. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In June 1997, the Financial Accounting Standards Board (the "FASB"), issued
SFAS No. 130 "Reporting Comprehensive Income" ("SFAS No. 130"), which
establishes standards for reporting and displaying comprehensive income, as
defined, and its components in financial statements. The Company's adoption of
SFAS No. 130 had no impact on the consolidated financial statements.

     Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS No. 131").  SFAS No.
131 redefines how operating segments are determined and requires disclosure of
certain financial and descriptive information regarding those segments.
Management believes that the adoption of SFAS No. 131 will not have a material
impact on the financial statements.

     In March 1998, the American Institute of Certified Public Accountants
issued SOP No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP No. 98-1"). SOP No. 98-1 requires that certain
costs related to the development or purchase of internal-use software be
capitalized and amortized over the estimated useful life of the software. SOP
No. 98-1 is effective for financial statements issued for fiscal years beginning
after December 15, 1998. The Company does not expect the adoption of SOP No. 98-
1 to have a material impact on its results of operations.

     In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities", which established accounting and reporting
standards for derivative instruments.  The Company currently does not use
hedging or derivatives and, as a result, does not anticipate any impact on the
financial statements.

NOTE 8.  NET INCOME (LOSS) PER SHARE

          Basic net income (loss) per share is computed by dividing the net
income (loss) by the weighted average number of shares of Common stock of all
classes outstanding during the period. Diluted net income (loss) per share is
computed by dividing the net income (loss) by the weighted average number of
shares of Common stock and potential Common stock outstanding, and when
dilutive, exchangeable Special Voting stock on an as-if converted basis, and
options to purchase Common stock using the treasury stock method. The dilutive
effect of the exchangeable Special Voting stock and the options to purchase
Common stock are excluded from the computation of diluted net income (loss) per
share if their effect is antidilutive. For the three and nine months ended
September 30, 1998, the antidilutive effect excluded from the diluted net income
(loss) per share computation due to the exchangeable Special voting stock
outstanding, on a weighted average basis, was 6,513,000 and 7,304,000 shares,
respectively, while the antidilutive effect excluded due to options to purchase
Common stock was 5,829,000 and 5,157,000 shares, respectively.

                                                                               8
<PAGE>
 
NOTE 9.  SHORT-TERM INVESTMENTS

          At September 30, 1998, the Company's investments consisted of
investments in a strategic cash management account.  This account is invested
primarily in securities guaranteed by the U.S. government or its agencies and
highly rated municipal and corporate bonds with a remaining maturity of not more
than 12 months.

          The Company has the intent and ability to hold all investments until
maturity.  Therefore, all such investments are classified as "held to maturity"
investments and carried at amortized cost.  At September 30, 1998, the amortized
cost of the Company's investments approximated fair value.

     The Company's investments consisted of the following:

<TABLE>
<CAPTION>
                                                            (UNAUDITED)
                                                        SEPTEMBER 30, 1998
                                           ---------------------------------------------
                                           AMORTIZED COST         MATURITY OF SECURITIES
                                                BASIS                 WITHIN ONE YEAR
                                           --------------         ----------------------
<S>                                        <C>                   <C>
                                         
           Corporate debt securities.....        39,309                    39,309
                                                 ======                    ======
</TABLE>
                                                                                

                                                                               9
<PAGE>
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

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

OVERVIEW

     The Company develops, markets and sells products and services that allow
enterprises to manage trusted, secure electronic communications and transactions
over today's advanced networks, including the Internet, extranets and intranets.
The Entrust solution automates the management of digital certificates, which are
similar to electronic passports, through public key infrastructure ("PKI")
technology designed to assure the privacy and authenticity of internal and
external electronic communications. The Entrust PKI is an integrated, open and
scaleable software framework that operates across multiple platforms, network
devices and applications, including e-mail, browsers, electronic commerce,
electronic forms, remote access and other product offerings from leading
vendors.

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

                                                                              10
<PAGE>
 
RESULTS OF OPERATIONS

     The following table sets forth for the periods indicated certain condensed
consolidated statement of operations data expressed as a percentage of total
revenues:
<TABLE>
<CAPTION>
                                      (UNAUDITED)         (UNAUDITED)
                                   THREE MONTHS ENDED  NINE MONTHS ENDED
                                      SEPTEMBER 30,      SEPTEMBER 30,
                                   ------------------  ----------------- 
                                      1997     1998       1997    1998
                                      ----     ----       ----    ----
<S>                                  <C>      <C>        <C>     <C>
Revenues:                                              
  License..........................   69.8%    75.1%      62.6%   75.5%
  Services and maintenance.........   30.2     24.9       37.4    24.5
                                     -----    -----      -----   -----

    Total revenues.................  100.0    100.0      100.0   100.0
                                     -----    -----      -----   -----
                                                       
Cost of revenues:                                      
  License..........................    1.8      3.9        2.1     3.9
  Services and maintenance.........   16.6     16.1       19.4    15.3
                                     -----    -----      -----   -----

    Total cost of revenues.........   18.4     20.0       21.5    19.2
                                     -----    -----      -----   -----
                                                       
Gross profit.......................   81.6     80.0       78.5    80.8
                                     -----    -----      -----   -----
                                                       
Operating expenses:                                    
  Sales and marketing..............   49.8     56.2       44.3    54.0
  Research and development.........   24.0     28.1       22.2    26.6
  General and administrative.......   14.5     10.4       14.8    10.6
  Acquired in-process research
    and development................     --       --         --    59.5
  Goodwill amortization............     --      1.4         --     0.5
                                     -----    -----      -----   -----
                                                       
    Total operating expenses.......   88.3     96.1       81.3   151.2
                                     -----    -----      -----   -----
                                                       
Loss from operations...............   (6.7)   (16.1)      (2.8)  (70.4)
Interest income....................    2.3      4.0        3.4     2.2
                                     -----    -----      -----   -----
                                                       
Income (loss) before benefit for
  income taxes.....................   (4.4)   (12.1)       0.6   (68.2)
Benefit for income taxes...........    3.2       --        1.2     0.5
                                     -----    -----      -----   -----
                                                       
Net income (loss)..................   (1.2%)  (12.1%)      1.8%  (67.7%)
                                     =====    =====      =====   =====
</TABLE>

REVENUES

     The Company recognizes revenue in accordance with the provisions of
Statement of Position 97-2 "Software Revenue Recognition." The Company generates
revenues primarily from licensing the rights to its software products to end-
users and, to a lesser extent, from sublicense fees from resellers. The Company
also generates revenues from consulting, training and post-contract support
("maintenance") performed for customers who license its products.  Prior to
1998, the Company's revenue recognition policy was in accordance with the
provisions of the previous authoritative guidance provided by SOP 91-1,
"Software Revenue Recognition."

                                                                              11
<PAGE>
 
     Revenues from perpetual software license agreements are recognized as
revenue upon receipt of an executed license agreement, or an unconditional
purchase order under an existing license agreement, and shipment of the
software, if there are no significant remaining vendor obligations and
collection of the receivable is probable.

     Revenues from maintenance service are recognized ratably over the term of
the maintenance period, which is typically one year. If maintenance services are
included free of charge or discounted in a license agreement, such amounts are
unbundled from the license fee at their fair market value based upon the value
established by independent sales of such maintenance services to customers.

     The Company uses the percentage of completion method to account for large
custom development contracts. Under this method, the Company recognizes revenues
and profit as the work on the contract progresses. Revenues are recognized by
applying the percentage of the total cost incurred to date divided by the total
estimated contract cost to the total contract value, and any projected loss is
recognized immediately. The total project cost estimates are reviewed on a
regular basis.

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

Total Revenues

     Total revenues increased 84% from $7.1 million for the three months ended
September 30, 1997 to $13.0 million for the three months ended September 30,
1998.  Total revenues increased 100% from $17.0 million for the nine months
ended September 30, 1997 to $34.0 million for the nine months ended September
30, 1998.  Geographically, revenues derived from sales outside North America
accounted for 4% and 21% of total revenues for the nine months ended September
30, 1997 and 1998, respectively. The Company plans to expand its international
operations by hiring additional personnel, recruiting international resellers
and establishing additional operations abroad, and accordingly, the Company
anticipates that international revenues will increase in absolute dollars and as
a percentage of total revenues during 1998 and 1999.

     In any period, a significant portion of the Company's revenues may be 
derived from large sales to a limited number of customers.  The Company improved
the mix of revenue for the three months ended September 30, 1998, with the four 
largest customers during the quarter accounting for approximately $4.4 million 
or 34% of revenue, the largest of which was $1.2 million.  This represents 
significant improvement compared to last year when the revenue from the four 
largest customers accounted for 52% of revenue for the three months ended
September 30, 1997. In addition, two of the four largest customers this quarter
entered into contracts which include purchase commitments that will be recorded
as revenue in future periods. Throughout 1998, the Company has made significant
improvement in customer concentration percentages. This is reflected in the fact
that year to date revenue from the largest four customers represented less than
30% of revenue in 1998 compared to over 60% for the same nine month period in
1997. See "Certain Factors That May Affect Our Business".

License Revenues

     License revenues increased 98% from $4.9 million for the three months ended
September 30, 1997 to $9.8 million for the three months ended September 30,
1998, representing 70% and 75% of total revenues in the respective periods.
License revenues increased 142% from $10.6 million for the nine months ended
September 30, 1997 to $25.6 million for the nine months ended September 30,
1998, representing 63% and 76% of total revenues in the respective periods.  The
increase in license revenues in absolute dollars was primarily due to increasing
market awareness and acceptance of the Company's product offerings, continued
enhancement and increasing breadth of the Company's product offerings, expansion
of the Company's sales and marketing organization and sales to new industry
segments. The increase in license revenues as a percentage of total revenues
reflected the Company's continued focus on the product side of its business and
the increased use of third-party consulting firms and systems integrators to
provide implementation services to its customers.

Services and Maintenance Revenues

     Services and maintenance revenues increased 52% from $2.1 million for the
three months ended September 30, 1997 to $3.2 million for the three months ended
September 30, 1998, representing 30% and 25% of total revenues in the respective
periods.  Services and maintenance revenues increased 30% from $6.4 million for
the nine months ended September 30, 1997 to $8.3 million for the nine months
ended 

                                                                              12
<PAGE>
 
September 30, 1998, representing 37% and 25% of total revenues in the respective
periods. The increase in services and maintenance revenues was primarily the
result of an increase in demand for consulting services and customer support and
increases in maintenance revenues from a larger installed product base. The
decrease in services and maintenance revenues as a percentage of total revenues
was primarily due to the Company's focus on building the product side of the
business and building successful partnering relationships with third-party
service providers to provide services.

COST OF REVENUES

Cost of License Revenues

     Cost of license revenues consists primarily of costs associated with
product media, documentation, packaging and royalties to third-party software
vendors.  Cost of license revenues increased from $131,000 for the three months
ended September 30, 1997 to $507,000 for the three months ended September 30,
1998, representing 2% and 4% of total revenues for the respective periods.  Cost
of license revenues increased from $360,000 for the nine months ended September
30, 1997 to $1.3 million for the nine months ended September 30, 1998,
representing 2% and 4% of total revenues for the respective periods.  The
increase in cost of license revenues in absolute dollars for the three and nine
months ended September 30, 1998 was primarily a result of higher royalty fees
paid to third-party software vendors because of a higher level of sales of
third-party software incorporated in the solutions sold by the Company as
compared to the similar period in the prior year. Although the Company does not
expect revenues and costs from the distribution of third-party software to be
significant in future periods, period-to-period fluctuations in the level of
such revenues may occur and the Company's gross margins and results of
operations could be materially adversely affected.

Cost of Services and Maintenance Revenues

     Cost of services and maintenance revenues consists primarily of personnel
costs associated with customer support, training and consulting services, as
well as costs paid to third party consulting firms for those services.  Cost of
services and maintenance revenues increased 75% from $1.2 million for the three
months ended September 30, 1997 to $2.1 million for the three months ended
September 30, 1998, representing 17% and 16% of total revenues for the
respective periods. Cost of services and maintenance revenues increased 58% from
$3.3 million for the nine months ended September 30, 1997 to $5.2 million for
the nine months ended September 30, 1998, representing 19% and 15% of total
revenues for the respective periods.  The increase in absolute dollars reflected
the increased costs associated with the higher levels of services and
maintenance revenues during the three months and nine months ended September 30,
1998.  The decrease as a percentage of total revenues, for the three months
ended September 30, 1998, was primarily a result of the fact that license
revenues were growing more rapidly than service and maintenance revenues.  The
higher percentage of cost of services and maintenance revenues as a percentage
of total revenues for the nine months ended September 30, 1997 reflected the
cost of hardware components related to system integration arrangements during
that period.  The Company did not have a significant hardware component in the
nine months ended September 30, 1998.

     The gross margin on services and maintenance revenues was 45% and 35% for
the three months ended September 30, 1997 and 1998, respectively.  The services
and maintenance gross margin was 48% and 38% for the nine months ended September
30, 1997 and 1998, respectively.  This decrease in the services and maintenance
margin reflected the investment made during the respective periods in expanding
the Company's customer support organization to support the growing customer base
and the impact on productivity related to the integration of the r3 consulting
organization during the third quarter.

                                                                              13
<PAGE>
 
OPERATING EXPENSES

Sales and Marketing

     Sales and marketing expenses increased from $3.5 million and $7.5 million
for the three and nine months ended September 30, 1997 to $7.3 million and $18.3
million for the comparable periods in 1998.  Sales and marketing expenses
represented 50% and 44% of total revenues for the three and nine months ended
September 30, 1997, compared to 56% and 54% for the comparable periods in the
current fiscal year.

     These increases in absolute dollars and as a percentage of total revenues
were primarily the result of costs associated with the expansion of the
Company's sales and marketing organization, both domestically and
internationally.  The Company has continued its strategy of investing in hiring
and training its direct sales organization in anticipation of future market
growth, and investing in marketing efforts in support of new products launches.

Research and Development

     Research and development expenses increased from $1.7 million and $3.8
million for the three and nine months ended September 30, 1997 to $3.7 million
and $9.0 million for the comparable periods in 1998.  Research and development
expenses represented 24% and 22% of total revenues for the three and nine months
ended September 30, 1997, compared to 28% and 27% for the comparable periods in
1998.

     The increased investment in research and development expenses in absolute
dollars and as a percentage of total revenues primarily reflected higher
expenses related to increased staffing of software engineers and contractors.
These employees were added in connection with the continuing expansion and
enhancement of the Company's product offerings and commitment to quality
assurance and testing.  In addition, the Company's acquisition of r3 in June
1998 increased the size of the Company's research and development team.  The
Company believes that it must continue to invest in research and development in
order to maintain its technological leadership position and, thus, expects
research and development expenses to continue to increase in absolute dollars as
it hires additional experienced security experts and software engineers.

General and Administrative

     General and administrative expenses increased from $1.0 million and $2.5
million for the three and nine months ended September 30, 1997 to $1.4 million
and $3.6 million for the comparable periods in 1998. General and administrative
expenses represented 15% of total revenues for each of the three and nine months
ended September 30, 1997, compared to 10% and 11% for the comparable periods in
1998.  The increase in general and administrative expenses in absolute dollars
reflected the Company's continued investment in increased staffing and related
expenses for the enhancement of the infrastructure required to support the
Company's growth.

Acquired In-process Research and Development and Goodwill Amortization

     On June 8, 1998, the Company completed the acquisition of r3, a company
based in Zurich, Switzerland, which  provides consulting, applied research and
product development services related to commercial security and encryption
solutions.  In connection with the acquisition, the Company obtained an
appraisal of the intangible assets.  This appraisal resulted in $20.2 million of
the purchase price being allocated to in-process research and development that
has not yet reached technological feasibility and has no alternative future use.
This amount was expensed in the nine months ended September 30, 1998.  The
Company has also recorded $178,000 of amortization with respect to the goodwill
that arose as a result of this acquisition in the three months and nine months
ended September 30, 1998.

                                                                              14
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES

     The Company utilized cash of $1.8 million for operating activities during
the nine months ended September 30, 1998.  This cash outflow was primarily a
result of the net loss (after adjusting for the non-cash write-off of the
acquired in-process research and development), an increase in accounts
receivable, and a decrease in the amounts due to the related party.  These
outflows were partially offset by the increases in accounts payable, accrued
liabilities, and deferred income. The average days sales outstanding increased
from 80 days at December 31, 1997 to 85 days at September 30, 1998. For purposes
of calculating average days sales outstanding, the Company divides ending
accounts receivable by the current quarter's revenues and multiplies this amount
by 90 days. The increase in days sales outstanding was primarily attributable to
an increase in the number of license transactions closing at quarter end. The
level of accounts receivable at each quarter end will be affected by the
concentration of revenues in the final weeks of each quarter and may be
negatively affected by the expanded international revenues in relation to total
revenues as licenses to international customers often have longer payment terms.

     During the nine months ended September 30, 1998, the Company invested $30.7
million in short-term investments (net of $21.5 million of dispositions of
short-term investments), invested $4.4 million in the acquisition of r3, and
invested $1.3 million in property and equipment.  The property and equipment
investments were primarily computer hardware and leasehold improvements to
support the growing organization.

     Cash provided by financing activities for the nine months ended September
30, 1998, was primarily the net proceeds from the issuance of Common stock as a
result of the Company's initial public offering of $79.1 million.  This was
partly offset by cash used in the repayment of long-term debt in the amount of
$1.4 million.

     As of September 30, 1998, the Company's principal sources of liquidity were
its cash and short-term investments of  $82.8 million.  The Company believes
that cash flows from operations, existing cash and cash equivalents and short-
term investments will be sufficient to meet its needs for at least the next
twelve months.

CERTAIN FACTORS THAT MAY AFFECT OUR BUSINESS

POTENTIAL FLUCTUATION AND UNCERTAINTY OF QUARTERLY OPERATING RESULTS

     The Company's quarterly revenues and operating results have varied
substantially and may continue to fluctuate due to a number of factors,
including the timing, size and nature of the Company's licensing transactions;
the market acceptance of new products or product enhancements by the Company or
its competitors; product and price competition; the relative proportions of
revenues derived from licenses and services and maintenance; changes in the
Company's operating expenses; personnel changes; foreign currency exchange
rates; and fluctuations in economic and financial market conditions. The timing,
size and nature of individual licensing transactions are important factors in
the Company's quarterly results of operations. Transactions for the Company's
PKI solution often involve large expenditures, and the sales cycles for these
transactions are often lengthy and unpredictable. In addition, the sales cycle
associated with these transactions is subject to a number of uncertainties,
including customers' budgetary constraints, the timing of customers' budget
cycles and customers' internal approval processes. There can be no assurance
that the Company will be successful in closing such large transactions on a
timely basis or at all.

     Estimating future revenues is difficult because the Company ships its
products soon after an order is received and as such does not have a significant
backlog. Thus, quarterly license revenues are heavily dependent upon orders
received and shipped within the same quarter. Moreover, the Company historically
has recorded 60% to 80% of its total quarterly revenues in the third month of
the quarter, with a concentration of revenues in the second half of that month.
The Company expects that this concentration of revenues which is, in part,
attributable to the tendency of certain customers to make significant capital

                                                                              15
<PAGE>
 
expenditures at the end of a fiscal quarter and to sales patterns within the
software industry, will continue for the foreseeable future.

     The Company's expense levels are based, in significant part, on its
expectations as to future revenues and are largely fixed in the short term. As a
result, the Company may be unable to adjust spending in a timely manner to
compensate for any unexpected shortfall in revenues. Accordingly, any
significant shortfall of revenues in relation to the Company's expectations
would have an immediate and material adverse effect on the Company's financial
condition and results of operations for that quarter. In addition, the Company
plans to increase operating expenses to expand its research and development,
managerial, finance, sales and marketing and service and support organizations.
The timing of such expansion and the rate at which new personnel become
productive could cause material fluctuations in quarterly and annual results of
operations.

     Due to all of the foregoing factors, the Company believes that period-to-
period comparisons of its results of operations are not necessarily meaningful
and that results in any particular quarter are not necessarily indicative of
future performance. Future revenues and results of operations may vary
substantially from quarter to quarter. In future quarters, the Company's results
of operations may be below the expectations of public market analysts and
investors. In either case, the price of the Company's Common stock could be
materially adversely affected. 

RISKS ASSOCIATED WITH THE INFORMATION SECURITY MARKET

     The market for the Company's PKI solution is at an early stage of
development. A decline in demand for the Company's products, whether as a result
of competition, technology change, the public's perception of the need for
security products, developments in the hardware and software environments in
which these products operate, general economic conditions or other factors,
could have a material adverse effect on the Company's business, financial
condition or results of operations. Continued growth of this market will depend,
in large part, upon the continued expansion of Internet usage and in the number
of organizations adopting or expanding intranets and extranets, the ability of
their respective infrastructures to support an increasing number of users and
services, the public recognition of the potential threat posed by computer
hackers and other unauthorized users and the continued development of new and
improved services for implementation across private and public networks.

     In addition, a well-publicized actual or perceived breach of network or
computer security at one of the Company's customers, regardless of whether such
breach is attributable to the Company's products, or any significant advance in
techniques for decoding or "cracking" encrypted information could adversely
affect the market's perception of the Company and the Company's products, and
could have an adverse effect on the Company's business, financial condition or
results of operations.

COMPETITION

     The Company's products are targeted at the new and rapidly evolving market
for PKI solutions. Although the competitive environment in this market has yet
to develop fully, the Company anticipates that it will be intensely competitive,
subject to rapid change and significantly affected by new product and service
introductions and other market activities of industry participants.

     Because of the broad functionality of its PKI solution, the Company
competes with vendors offering a wide range of security products and services.
The Company competes with companies offering commercial certification authority
products and services, such as VeriSign, GTE Cybertrust Solutions, Baltimore
Technologies and IBM in the market for issuing and maintaining digital
certificates for use on public and private networks. In addition, the Company
expects to compete with established companies, such as Security Dynamics and
Network Associates, which have each announced their intention to introduce PKI
products that would be integrated with their other security offerings, as well
as Microsoft, 

                                                                              16
<PAGE>
 
which has announced its intention to offer a certificate server product building
on its existing security framework in the near future. In addition, other major
networking vendors could, in the future, bundle digital certificates with their
product offerings. The Company expects that competition from established and
emerging companies in the financial and telecommunications industries will also
increase in the near term, and that certain of the Company's primary long-term
competitors may not yet have entered the market. Increased competition could
result in pricing pressures, reduced margins or the failure of the Company's
products and services to achieve or maintain market acceptance, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations.

RAPID TECHNOLOGICAL CHANGE; NEW PRODUCT AND SERVICE INTRODUCTIONS

     The emerging market for network security products and related services is
characterized by rapid technological developments, frequent new product
introductions and evolving industry standards. The emerging nature of this
market and its rapid evolution will require the Company to improve the
performance, features and reliability of its products and services, particularly
in response to competitive offerings, and to be first to market with new
products and services or enhancements to existing products and services.  The
failure of the Company to develop and introduce new products and  services
successfully on a timely basis and to achieve market acceptance for such
products and services could have a material adverse effect on the Company's
business, financial condition and results of operations.

INDUSTRY REGULATION

     Certain of the Company's products are subject to export controls under laws
of the U.S., Canada and other countries, and the Company believes that it has
obtained all necessary export approvals. There can be no assurance, however,
that the list of products and countries for which exports are restricted, and
the regulatory policies with respect thereto, will not be revised from time to
time. The inability of the Company to obtain required government approvals under
these regulations could materially adversely affect the ability of the Company
to sell products abroad or make products available for sale via international
computer networks such as the Internet. Furthermore, U.S. governmental controls
on the exportation of encryption products and technology may in the future
restrict the ability of the Company to freely export some of its products with
the most powerful information security encryption technology. The Company is
currently authorized under exemptions contained in an interim U.S. export
procedure to export products with encryption technology that is more powerful
than would be permitted in the absence of such authorization or interim
procedure. There can be no assurance that the interim procedure, which expires
on December 31, 1998, will be extended or that, if extended, the Company will
continue to meet the qualifications for exemption thereunder. Furthermore, there
can be no assurance that export versions of the Company's products will be
sought by foreign customers. As a result, foreign competitors subject to less
stringent export controls on their products may be able to compete more
effectively than the Company in the global information security market. There
can be no assurance that these factors will not have a material adverse effect
on the Company's business, financial condition or results of operations.

MANAGEMENT OF GROWTH

     The Company is currently experiencing rapid growth that is placing a
significant strain on its management and other resources. The Company's business
has grown significantly in size and complexity over the past three years.  The
growth in the size and complexity of the Company's business as well as its
customer base has placed, and is expected to continue to place, a significant
strain on the Company's management and operations. In addition, certain of the
Company's senior management have had limited experience in managing publicly
traded companies. The Company anticipates that continued growth, if any, will
require it to recruit and hire a substantial number of new development,
managerial, finance, sales and marketing and support personnel. The Company may
not be successful at hiring or retaining such personnel. The Company's ability
to compete effectively and to manage future growth, if any, will depend on its
ability to continue to implement and improve operational, financial and
management information 

                                                                              17
<PAGE>
 
systems on a timely basis and to expand, train, motivate and manage its work
force. The Company's personnel, systems, procedures and controls may not be
adequate to support its operations. The geographic dispersal of the Company's
operations, including the separation of its headquarters in Richardson, Texas,
from its research and development facility in Ottawa, Canada, may make it more
difficult to manage the Company's growth.

YEAR 2000 COMPLIANCE

     The "Year 2000 Issue" refers generally to the problems that some software
may have in determining the correct century for a given year. For example,
software with date-sensitive functions that is not Year 2000 compliant may not
be able to distinguish whether "00" means 1900 or 2000, which may result in
failures or the creation of erroneous results

     The Company has developed a phased Year 2000 readiness plan for the current
versions of its products. The plan includes development of corporate awareness,
assessment, implementation (including remediation, upgrading and replacement of
certain product versions), validation testing, and contingency planning. The
Company is assessing the capability of its products sold to customers to handle
the Year 2000 and has a plan in place to address product issues during 1998.
The costs of this effort are not material and are included in operating costs.
The Company believes that its products and systems are Year 2000 Compliant, and
thus, the likelihood of a material impact due to problems is remote and expects
that the cost of these projects over the next fifteen months will not have a
material effect on the Company's business, results of operations or financial
condition.  The Company  continues to respond to customer concerns about prior
versions of its products on a case-by-case basis.

     The Company has defined "Year 2000 Compliant" to mean the ability to
perform date and time dependent operations between December 31, 1999, and
January 1, 2000, without any material, service affecting non-conformances to the
accompanying user documentation.  This does not, however, mean that the software
will be free of all defects, errors or inaccuracies.  The definition of Year
2000 Compliant assumes that the Company products receive accurate and correctly
formatted date and time information from the underlying operating system,
firmware, hardware and any other software with which the Company's products
interact.  Year 2000 Compliance also assumes that the Company's customers
continue to contract for maintenance and support in respect of the Company's
products. The Company has not specifically tested software obtained from third
parties (licensed software, shareware, and freeware) that is incorporated into
its products, but is seeking assurances from its vendors that licensed software
is Year 2000 Compliant.  The Company believes that due to the relatively small
third-party component, the likelihood of a material impact is remote.  The
Company has not tested its products on all platforms or all versions of
operating systems that it currently supports and has advised its customers to
verify that their platforms and operating systems support the transition to the
year 2000.

     The Company's internal systems include both its information technology
("IT") and non-IT systems. The Company has initiated an assessment of its
material internal IT systems and expects to complete that assessment and testing
in 1998. To the extent that the Company is not able to test the technology
provided by third-party vendors, the Company is seeking assurances from such
vendors that their systems are Year 2000 Compliant. The Company is obtaining
these assurances in writing from published vendor materials and expects this
activity to be completed in 1998. Although the Company is not currently aware of
any material operational issues or costs associated with preparing its internal
IT and non-IT systems for the Year 2000, the Company may experience material
unanticipated problems and costs caused by undetected errors or defects in the
technology used in its internal IT and non-IT systems (such as the failure of
infrastructure service, electricity, phone service, water support, etc.). The
Company is preparing a contingency plan for addressing its most reasonably
likely worst case scenario and any unanticipated system failures which it
anticipates completing by mid-1999.

     The Company does not currently have any information concerning the Year
2000 Compliance status of its customers. As is the case with other similarly
situated software companies, if the Company's current or future customers fail
to achieve Year 2000 Compliance, its business, results of operations, or

                                                                              18
<PAGE>
 
financial condition could be materially adversely affected.  Furthermore, the
purchasing patterns of customers or potential customers may be affected by Year
2000 issues as companies expend significant resources to correct their current
systems for Year 2000 Compliance. These expenditures may result in reduced funds
being available to implement the infrastructure needed to conduct trusted and
secure communications and commerce over public and private networks or to
purchase products and services such as those offered by the Company, which could
have a material adverse effect on the Company's business, financial condition
and results of operations.

POSSIBLE VOLATILITY OF STOCK PRICE

     The trading price of the Common stock has been, and is expected  to
continue to be, highly volatile and may be significantly and adversely affected
by factors such as actual or anticipated fluctuations in the Company's operating
results, announcements of technological innovations, new products or new
contracts by the Company or its competitors, developments with respect to
patents, copyrights or propriety rights, conditions and trends in the software
industry, changes in financial estimates by securities analysts, general market
conditions and other factors. The public equity markets have from time to time
experienced significant price and volume fluctuations that have particularly
affected the market prices for the stock of technology companies as a group but
have been unrelated to the performance of particular companies. These broad
market fluctuations, as well as shortfalls in sales or earnings as compared with
securities analysts' expectations, changes in such analysts' recommendations or
projections and general economic and market conditions, may materially and
adversely affect the market price of the Common stock.

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Not applicable.

                                                                              19
<PAGE>
 
PART II. OTHER INFORMATION

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

(d)  Use of Proceeds.

     On August 21, 1998, the Company closed an initial public offering of its
Common Stock, $.01 par value (the "Offering"). The managing underwriters in the
Offering were Goldman, Sachs & Co., Donaldson, Lufkin & Jenrette Securities
Corporation, NationsBanc Montgomery Securities LLC, UBS AG, acting through its
subsidiary,  Warburg Dillon Read LLC, and their respective foreign affiliates
(the "Underwriters"). The shares of Common stock sold in the Offering were
registered under the Securities Act of 1933, as amended, on a Registration
Statement on Form S-1 (No. 333-57275) (the "Registration Statement"). The
Registration Statement was declared effective by the Securities and Exchange
Commission (the "SEC") on August 17, 1998.

     On August 17, 1998, the Company commenced the Offering. The Offering
terminated on August 17, 1998 after the sale of all securities registered
pursuant to the Registration Statement.  For the account of the Company (a)
5,400,000 shares of Common stock were registered pursuant to the Registration
Statement; (b) the aggregate offering price of the amount registered was
$86,400,000; (c) the amount sold pursuant to the Offering was 5,400,000 shares
of Common stock; and (d) the aggregate offering price of the amount sold was
$86,400,000, at $16 per share.  For the account of the Selling Shareholders in
the Offering (a) 3,531,667shares of Common stock (including 1,165,000 shares
sold pursuant to the exercise of the Underwriters' over-allotment option) were
registered pursuant to the Registration Statement; (b) the aggregate Offering
price of the amount registered was $56,506,672; (c) the amount sold pursuant
to the Offering was 3,531,667 shares of Common stock; and (d) the aggregate
Offering price of the amount sold was $56,506,672, at $16 per share.

     The Company paid an aggregate of $6,048,000 in underwriting discounts and
commissions. In addition, the following table sets forth the expenses incurred
in connection with the Offering, other than underwriting discounts and
commissions. None of the amounts shown were paid directly or indirectly to any
director, officer, general partner of the Company or their associates, persons
owning 10 percent or more of any class of equity securities of the Company, or
an affiliate of the Company.
<TABLE>
<S>                                                        <C>
                Registration, Filing & Application Fees   $  168,808
                Legal Fees and Expenses..................    538,802
                Accounting Fees and Expenses.............    282,768
                Road Show Expenses.......................    263,046
                Miscellaneous............................      1,061
                                                          ----------
                                                          $1,254,485
                                                          ==========
</TABLE>

     After deducting the underwriting discounts and commissions and the Offering
expenses described above, the net proceeds to the Company from the Offering were
approximately $79,097,515.

     As of September 30, 1998, approximately $300,000 of the net proceeds of the
Offering had been used to fund working capital, with the remainder having been
invested in short-term, interest-bearing, investment grade securities. The
entire amount of the net proceeds has been allocated for general corporate
purposes and working capital including product development and the possible
acquisition of additional businesses and technologies that are complementary to
the current or future business of the Company.  None of the proceed amounts were
paid directly or indirectly to any director, officer, general partner of the 
Company or their associates, persons owning 10 percent or more of any class of 
equity securities of the Company, or an affiliate of the Company.

                                                                              20
<PAGE>
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     On July 7, 1998, the Company held a Special Meeting of Stockholders.  The
meeting involved the re-election of the Company's then current directors:  David
D. Archibald; F. William Conner, Frank A. Dunn; Robert S. Morris and John A.
Ryan.

     The following sets forth a description of each matter voted on and the
votes cast:

     1) A proposal to amend the Company's Articles of Incorporation, to (i)
        increase the number of authorized shares of the Company's Series A
        Common stock, $.01 par value per share ("Series A Common stock"), from
        15,000,000 to 100,000,000, (ii) increase the number of authorized shares
        of the Company's Preferred stock, $.01 par value per share, from 500,000
        to 5,000,000, (iii) increase the number of authorized shares of the
        Company's Special Voting stock, $.01 par value per share, from 2,500,000
        to 15,000,000, and (iv) take certain actions with respect to the
        Maryland Business Combination Act and the "control share acquisition"
        statute.
 
     2) A proposal to amend and restate the Company's Bylaws.
     
        For the above-referenced matters (1) and (2), the votes were cast as
        follows:

        (i)   Series A Common stock 5,366,879 For 0 withheld 1,240 abstentions
              and 0 broker non-votes
        (ii)  Series B Common stock 220,052 For 0 withheld 0 abstentions and 0
              broker non-votes
        (iii) Series B Non-Voting Common stock 38,948 For 0 withheld 0
              abstentions and 0 broker non-votes
        (iv)  Special Voting stock 1,925,000 For 0 withheld 0 abstentions and 0
              broker non-votes

     3) A proposal to further amend and restate the Company's Articles of
        Incorporation, as to (i) reclassify the Series A Common stock as Common
        stock, $.01 par value per share ("Common stock"), (ii) amend the
        provisions relating to the indemnification of, and limitation on
        liability of, officers and directors of the Company and (iii) provide
        that, upon the closing of the Company's initial public offering of
        Common stock, the Company will have a staggered Board of Directors.

        For the above-referenced matter (3), the votes were cast as follows:

        (i)   Series A Common stock 5,367,736 For 0 withheld 383 abstentions and
              0 broker non-votes
        (ii)  Series B Common stock 220,052 For 0 withheld 0 abstentions and 0
              broker non-votes
        (iii) Series B Non-Voting Common stock 38,948 For 0 withheld 0
              abstentions and 0 broker non-votes
        (iv)  Special Voting stock 1,925,000 For 0 withheld 0 abstentions and 0
              broker non-votes

     4) A proposal to adopt and approve the Company's Amended and Restated 1996
        Stock Incentive Plan.

        For the above-referenced matter (4), the votes were cast as follows:

        (i)  Aggregate of shares present, represented, and entitled to vote at
             the meeting, 16,090,532 For 0 withheld 4,667 abstentions and 0
             broker non-votes

     5) A proposal to ratify the selection of Deloitte & Touche Chartered
        Accountants as the Company's auditors for fiscal 1998.

        For the above-referenced matter (5), the votes were cast as follows:

        (i)  Aggregate of shares present, represented, and entitled to vote at
             the meeting, 15,904,536 For 0 withheld 190,663 abstentions and 0
             broker non-votes

                                                                              21
<PAGE>
 
     6) A proposal to adopt a resolution ratifying and approving all prior
        actions of incorporators, stockholders, directors and officers of the
        Company.

        For the above-referenced matter (6), the votes were cast as follows:

        (i)  Aggregate of shares present, represented, and entitled to vote at
             the meeting, 15,890,275 For 0 withheld 204,924 abstentions and 0
             broker non-votes

     7) A proposal to re-elect the current Directors of the Company.

        (i)   David D. Archibald
        (ii)  F. William Conner
        (iii) Frank A. Dunn
        (iv)  Robert S. Morris
        (v)   John A. Ryan

        For each of the above-referenced individuals (i) through (v), the votes
        were cast as follows:

        (i)  Aggregate of shares present, represented and entitled to vote
             15,693,959 For 1,240 withheld 0 abstentions and 0 broker 
             non-votes

     On August 4, 1998, the Company held a Special Meeting of Stockholders. The
following sets forth a description of each matter voted on and the votes cast:

        (1)   A proposal to adopt and approve the Company's 1998 Employee Stock
              Purchase Plan.

        For the above-referenced matter (1), the votes were cast as follows:

        (i)   Series A Common stock 21,441,640 For 0 withheld 3,428 abstentions
              and 0 broker non-votes
        (ii)  Series B Common stock 151,052 For 0 withheld 0 abstentions and 0
              broker non-votes
        (iii) Special Voting stock 7,700,000 For 0 withheld 0 abstentions and 0
              broker non-votes

        2)    A proposal to adopt and confirm an amendment to the Company's
              Amended and Restated 1996 Stock Incentive Plan.

        For the above-referenced matter (2), the votes were cast as follows:

        (i)   Series A Common stock 21,429,600 For 0 withheld 15,468 abstentions
              and 0 broker non-votes
        (ii)  Series B Common stock 151,052 For 0 withheld 0 abstentions and 0
              broker non-votes
        (iii) Special Voting stock 7,700,000 For 0 withheld 0 abstentions and 0
              broker non-votes

                                                                              22
<PAGE>
 
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

LIST OF EXHIBITS

     27  Financial Data Schedule


REPORTS ON FORM 8-K:

None

                                                                              23
<PAGE>
 
                                   SIGNATURES
                                        
     Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

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

Dated: November 13, 1998


 
                                          /s/ Michele L. Axelson
                                          ------------------------------------- 
                                          Michele L. Axelson
                                          Senior Vice President
                                          and Chief Financial Officer (Principal
                                          Financial and Accounting Officer)

                                                                              24
<PAGE>
 
                           ENTRUST TECHNOLOGIES INC.

                               INDEX TO EXHIBITS
                                        


EXHIBIT       DESCRIPTION                                                   PAGE
-------       -----------                                                  -----

27            Financial Data Schedule (available in EDGAR format only)

                                                                              25