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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 UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------



For the quarterly period ended June 30, 2004



OR



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



For the transition period from
             to



Commission File Number 000-24733



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ENTRUST, INC.

(Exact name of registrant as specified in its charter)



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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 an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act).    Yes  x    No ̈



There were 62,710,292 shares of the registrants $.01 par value Common stock outstanding
as of July 30, 2004.



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##### Table of Contents

ENTRUST, INC.



TABLE OF CONTENTS



|                              |  |                                                                                       |  |     
|----------------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                       |  | Page
|PART I.
FINANCIAL INFORMATION |  |                                                                                      
|                              |  |                                                                                      
|Item 1.                       |  | Financial Statements                                                                  |  |     
|                              |  |                                                                                      
|                              |  | Condensed Consolidated Balance Sheets                                                 |  | 3   
|                              |  |                                                                                      
|                              |  | Condensed Consolidated Statements of Operations                                       |  | 4   
|                              |  |                                                                                      
|                              |  | Condensed Consolidated Statements of Cash Flows                                       |  | 5   
|                              |  |                                                                                      
|                              |  | Notes to Condensed Consolidated Financial Statements                                  |  | 6   
|                              |  |                                                                                      
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 15  
|                              |  |                                                                                      
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 41  
|                              |  |                                                                                      
|Item 4.                       |  | Controls and Procedures                                                               |  | 42  
|                              | 
|PART II.
OTHER INFORMATION    |  |                                                                                      
|                              |  |                                                                                      
|Item 2.                       |  | Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities      |  | 43  
|                              |  |                                                                                      
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                   |  | 43  
|                              |  |                                                                                      
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                      |  | 44  
|                              | 
|SIGNATURES                    |  | 45                                                                                   



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



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



ENTRUST, INC.



CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                     |  |              |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                                     |  | (Unaudited)  |          |   |                  |  
|(In thousands, except share data)                                                                                                                                                    |  | JUNE 30,2004 |          |   | DECEMBER 31,2003 |  
|                                                                                                                                                                                     |  |             
|ASSETS                                                                                                                                                                               |  |              |          |   |                  |   |          |  
|Current assets:                                                                                                                                                                      |  |              |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                                            |  | $            | 44,389   |   |                  | $ | 37,903   |  
|Short-term marketable investments                                                                                                                                                    |  |              | 50,780   |   |                  |   | 54,386   |  
|Accounts receivable (net of allowance for doubtful accounts of $1,643 at June 30, 2004 and $4,032 at December 31, 2003)                                                              |  |              | 15,571   |   |                  |   | 18,771   |  
|Prepaid expenses and other receivables                                                                                                                                               |  |              | 4,423    |   |                  |   | 3,980    |  
|                                                                                                                                                                                     |  |              |          |   |                  |   |          |  
|                                                                                                                                                                                     |  |             
|Total current assets                                                                                                                                                                 |  |              | 115,163  |   |                  |   | 115,040  |  
|Long-term marketable investments                                                                                                                                                     |  |              | 8,072    |   |                  |   | 12,379   |  
|Property and equipment, net                                                                                                                                                          |  |              | 6,133    |   |                  |   | 7,678    |  
|Purchased product rights, net                                                                                                                                                        |  |              | 2,759    |   |                  |   |         |  
|Goodwill, net                                                                                                                                                                        |  |              | 12,364   |   |                  |   | 11,186   |  
|Long-term equity investment                                                                                                                                                          |  |              | 283      |   |                  |   | 660      |  
|Other long-term assets, net                                                                                                                                                          |  |              | 2,759    |   |                  |   | 1,809    |  
|                                                                                                                                                                                     |  |              |          |   |                  |   |          |  
|                                                                                                                                                                                     |  |             
|Total assets                                                                                                                                                                         |  | $            | 147,533  |   |                  | $ | 148,752  |  
|                                                                                                                                                                                     |  |              |          |   |                  |   |          |  
|                                                                                                                                                                                     |  |             
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                 |  |              |          |   |                  |   |          |  
|Current liabilities:                                                                                                                                                                 |  |              |          |   |                  |   |          |  
|Accounts payable                                                                                                                                                                     |  | $            | 7,494    |   |                  | $ | 6,192    |  
|Accrued liabilities                                                                                                                                                                  |  |              | 8,769    |   |                  |   | 9,619    |  
|Accrued restructuring charges, current portion                                                                                                                                       |  |              | 4,400    |   |                  |   | 35,426   |  
|Deferred revenue                                                                                                                                                                     |  |              | 23,880   |   |                  |   | 16,615   |  
|                                                                                                                                                                                     |  |              |          |   |                  |   |          |  
|                                                                                                                                                                                     |  |             
|Total current liabilities                                                                                                                                                            |  |              | 44,543   |   |                  |   | 67,852   |  
|Accrued restructuring charges, long term portion                                                                                                                                     |  |              | 28,296   |   |                  |   |         |  
|Other long-term liabilities                                                                                                                                                          |  |              | 1,250    |   |                  |   | 228      |  
|                                                                                                                                                                                     |  |              |          |   |                  |   |          |  
|                                                                                                                                                                                     |  |             
|Total liabilities                                                                                                                                                                    |  |              | 74,089   |   |                  |   | 68,080   |  
|                                                                                                                                                                                     |  |              |          |   |                  |   |          |  
|                                                                                                                                                                                     |  |             
|Shareholders equity:                                                                                                                                                                |  |              |          |   |                  |   |          |  
|Common stock, par value $0.01 per share; 250,000,000 authorized shares; 62,723,465 and 63,593,188 issued and outstanding shares at June 30,
2004 and December 31, 2003, respectively |  |              | 627      |   |                  |   | 636      |  
|Additional paid-in capital                                                                                                                                                           |  |              | 774,467  |   |                  |   | 779,339  |  
|Unearned compensation                                                                                                                                                                |  |              | (32      | ) |                  |   | (51      | )
|Accumulated deficit                                                                                                                                                                  |  |              | (701,402 | ) |                  |   | (699,368 | )
|Accumulated other comprehensive income (loss)                                                                                                                                        |  |              | (216     | ) |                  |   | 116      |  
|                                                                                                                                                                                     |  |              |          |   |                  |   |          |  
|                                                                                                                                                                                     |  |             
|Total shareholders equity                                                                                                                                                           |  |              | 73,444   |   |                  |   | 80,672   |  
|                                                                                                                                                                                     |  |              |          |   |                  |   |          |  
|                                                                                                                                                                                     |  |             
|Total liabilities and shareholders equity                                                                                                                                           |  | $            | 147,533  |   |                  | $ | 148,752  |  
|                                                                                                                                                                                     |  |              |          |   |                  |   |          |  



See notes to condensed
consolidated financial statements



3



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##### Table of Contents

ENTRUST, INC.



CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                               |  |                                       |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|-------------------------------------------------------------- |  | ------------------------------------- | ------ | - | ------------------------ | - | ------- | ---- |  | - | ------ | - |  | - | ------- | -
|                                                               |  | (Unaudited)                           |        |   | (Unaudited)              |  
|                                                               |  | Three Months EndedJune 30,            |        |   | Six Months EndedJune 30, |  
|                                                               |  | 2004                                  |        |   | 2003                     |   |         | 2004 |  |   | 2003   |  
|                                                               |  | (In thousands, except per share data) |       
|Revenues:                                                      |  |                                       |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Product                                                        |  | $                                     | 4,645  |   |                          | $ | 8,948   |      |  | $ | 11,889 |   |  | $ | 16,707  |  
|Services and maintenance                                       |  |                                       | 14,874 |   |                          |   | 13,492  |      |  |   | 30,639 |   |  |   | 27,437  |  
|                                                               |  |                                       |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|                                                               |  |                                       |        |  
|Total revenues                                                 |  |                                       | 19,519 |   |                          |   | 22,440  |      |  |   | 42,528 |   |  |   | 44,144  |  
|                                                               |  |                                       |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|                                                               |  |                                       |        |  
|Cost of revenues:                                              |  |                                       |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Product                                                        |  |                                       | 1,310  |   |                          |   | 1,369   |      |  |   | 2,127  |   |  |   | 2,537   |  
|Services and maintenance                                       |  |                                       | 7,183  |   |                          |   | 7,300   |      |  |   | 14,836 |   |  |   | 14,841  |  
|Amortization of purchased product rights                       |  |                                       | 23     |   |                          |   | 284     |      |  |   | 23     |   |  |   | 568     |  
|                                                               |  |                                       |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|                                                               |  |                                       |        |  
|Total cost of revenues                                         |  |                                       | 8,516  |   |                          |   | 8,953   |      |  |   | 16,986 |   |  |   | 17,946  |  
|                                                               |  |                                       |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|                                                               |  |                                       |        |  
|Gross profit                                                   |  |                                       | 11,003 |   |                          |   | 13,487  |      |  |   | 25,542 |   |  |   | 26,198  |  
|                                                               |  |                                       |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|                                                               |  |                                       |        |  
|Operating expenses:                                            |  |                                       |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Sales and marketing                                            |  |                                       | 6,430  |   |                          |   | 10,354  |      |  |   | 12,835 |   |  |   | 18,981  |  
|Research and development                                       |  |                                       | 4,282  |   |                          |   | 6,319   |      |  |   | 8,916  |   |  |   | 12,229  |  
|General and administrative                                     |  |                                       | 3,156  |   |                          |   | 3,436   |      |  |   | 6,488  |   |  |   | 6,850   |  
|Impairment of purchased product rights                         |  |                                       |       |   |                          |   | 1,134   |      |  |   |       |   |  |   | 1,134   |  
|Restructuring charges and adjustments                          |  |                                       |       |   |                          |   | 11,390  |      |  |   |       |   |  |   | 11,390  |  
|                                                               |  |                                       |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|                                                               |  |                                       |        |  
|Total operating expenses                                       |  |                                       | 13,868 |   |                          |   | 32,633  |      |  |   | 28,239 |   |  |   | 50,584  |  
|                                                               |  |                                       |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|                                                               |  |                                       |        |  
|Loss from operations                                           |  |                                       | (2,865 | ) |                          |   | (19,146 | )    |  |   | (2,697 | ) |  |   | (24,386 | )
|                                                               |  |                                       |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|                                                               |  |                                       |        |  
|Other income (expense):                                        |  |                                       |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Interest income                                                |  |                                       | 281    |   |                          |   | 502     |      |  |   | 545    |   |  |   | 1,032   |  
|Foreign exchange gain (loss)                                   |  |                                       | 133    |   |                          |   | (239    | )    |  |   | 558    |   |  |   | (280    | )
|Loss from equity investment                                    |  |                                       | (168   | ) |                          |   | (133    | )    |  |   | (377   | ) |  |   | (238    | )
|                                                               |  |                                       |        |  
|Write-down of long-term strategic investments                  |  |                                       |       |   |                          |   | (2,780  | )    |  |   |       |   |  |   | (2,780  | )
|                                                               |  |                                       |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|                                                               |  |                                       |        |  
|Total other income (expense)                                   |  |                                       | 246    |   |                          |   | (2,650  | )    |  |   | 726    |   |  |   | (2,266  | )
|                                                               |  |                                       |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|                                                               |  |                                       |        |  
|Loss before income taxes                                       |  |                                       | (2,619 | ) |                          |   | (21,796 | )    |  |   | (1,971 | ) |  |   | (26,652 | )
|                                                               |  |                                       |        |  
|Provision for (benefit from) income taxes                      |  |                                       | (66    | ) |                          |   | 146     |      |  |   | 63     |   |  |   | 320     |  
|                                                               |  |                                       |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|                                                               |  |                                       |        |  
|Net loss                                                       |  | $                                     | (2,553 | ) |                          | $ | (21,942 | )    |  | $ | (2,034 | ) |  | $ | (26,972 | )
|                                                               |  |                                       |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|                                                               |  |                                       |        |  
|Net loss per share:                                            |  |                                       |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Basic                                                          |  | $                                     | (0.04  | ) |                          | $ | (0.35   | )    |  | $ | (0.03  | ) |  | $ | (0.42   | )
|                                                               |  |                                       |        |  
|Diluted                                                        |  | $                                     | (0.04  | ) |                          | $ | (0.35   | )    |  | $ | (0.03  | ) |  | $ | (0.42   | )
|                                                               |  |                                       |        |  
|Weighted average common shares used in per share computations: |  |                                       |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Basic                                                          |  |                                       | 63,147 |   |                          |   | 63,401  |      |  |   | 63,364 |   |  |   | 63,697  |  
|Diluted                                                        |  |                                       | 63,147 |   |                          |   | 63,401  |      |  |   | 63,364 |   |  |   | 63,697  |  



See notes to condensed
consolidated financial statements



4



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##### Table of Contents

ENTRUST, INC.



CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                    |  |                          |         |   |      |   |          |  
|------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | -------- | -
|                                                                    |  | (Unaudited)              |        
|                                                                    |  | SIX MONTHS ENDEDJUNE 30, |        
|                                                                    |  | 2004                     |         |   | 2003 |  
|                                                                    |  | (In thousands)           |        
|OPERATING ACTIVITIES:                                               |  |                          |         |   |      |   |          |  
|Net loss                                                            |  | $                        | (2,034  | ) |      | $ | (26,972  | )
|Non-cash items in net loss:                                         |  |                          |         |   |      |   |          |  
|Depreciation and amortization                                       |  |                          | 2,631   |   |      |   | 4,076    |  
|Impairment of purchased product rights                              |  |                          |        |   |      |   | 1,134    |  
|Write-down of long-term strategic investments                       |  |                          |        |   |      |   | 2,780    |  
|Unearned compensation amortized                                     |  |                          | 36      |   |      |   | 14       |  
|Loss from equity investment                                         |  |                          | 377     |   |      |   | 238      |  
|Reduction in allowance for doubtful accounts                        |  |                          | (1,431  | ) |      |   |         |  
|Changes in operating assets and liabilities:                        |  |                          |         |   |      |   |          |  
|Decrease in accounts receivable                                     |  |                          | 4,629   |   |      |   | 5,716    |  
|Increase in prepaid expenses and other receivables                  |  |                          | (1,093  | ) |      |   | (6       | )
|Increase (decrease) in accounts payable                             |  |                          | 1,030   |   |      |   | (1,939   | )
|Decrease in accrued liabilities                                     |  |                          | (851    | ) |      |   | (2,732   | )
|Increase (decrease) in accrued restructuring charges                |  |                          | (2,730  | ) |      |   | 6,558    |  
|Increase in deferred revenue                                        |  |                          | 7,263   |   |      |   | 4,221    |  
|                                                                    |  |                          |         |   |      |   |          |  
|                                                                    |  |                         
|Net cash provided by (used in) operating activities                 |  |                          | 7,827   |   |      |   | (6,912   | )
|                                                                    |  |                          |         |   |      |   |          |  
|                                                                    |  |                         
|INVESTING ACTIVITIES:                                               |  |                          |         |   |      |   |          |  
|Purchases of marketable investments                                 |  |                          | (35,779 | ) |      |   | (195,881 | )
|Dispositions of marketable investments                              |  |                          | 43,692  |   |      |   | 211,565  |  
|Purchases of property and equipment                                 |  |                          | (789    | ) |      |   | (1,594   | )
|Increase in other long-term assets                                  |  |                          | (566    | ) |      |   | (191     | )
|Purchase of business                                                |  |                          | (2,676  | ) |      |   |         |  
|                                                                    |  |                          |         |   |      |   |          |  
|                                                                    |  |                         
|Net cash provided by investing activities                           |  |                          | 3,882   |   |      |   | 13,899   |  
|                                                                    |  |                          |         |   |      |   |          |  
|                                                                    |  |                         
|FINANCING ACTIVITIES:                                               |  |                          |         |   |      |   |          |  
|Repayment of long-term liabilities                                  |  |                          |        |   |      |   | (44      | )
|Repurchase of common stock                                          |  |                          | (5,558  | ) |      |   | (3,691   | )
|Decrease in long-term deposits                                      |  |                          |        |   |      |   | (2       | )
|Proceeds from exercise of stock options                             |  |                          | 660     |   |      |   | 301      |  
|Proceeds from sale of shares under employee stock purchase plan     |  |                          |        |   |      |   | 223      |  
|                                                                    |  |                          |         |   |      |   |          |  
|                                                                    |  |                         
|Net cash used in financing activities                               |  |                          | (4,898  | ) |      |   | (3,213   | )
|                                                                    |  |                          |         |   |      |   |          |  
|                                                                    |  |                         
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                             |  |                          | (325    | ) |      |   | (488     | )
|                                                                    |  |                          |         |   |      |   |          |  
|                                                                    |  |                         
|NET INCREASE IN CASH AND CASH EQUIVALENTS                           |  |                          | 6,486   |   |      |   | 3,286    |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                    |  |                          | 37,903  |   |      |   | 32,043   |  
|                                                                    |  |                          |         |   |      |   |          |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                          |  | $                        | 44,389  |   |      | $ | 35,329   |  
|                                                                    |  |                          |         |   |      |   |          |  
|                                                                    |  |                         
|NON-CASH INVESTING AND FINANCING ACTIVITIES:                        |  |                          |         |   |      |   |          |  
|Minimum future payment obligations relating to purchase transaction |  | $                        | 1,202   |   |      | $ |         |  
|                                                                    |  |                          |         |   |      |   |          |  



See notes to condensed
consolidated financial statements



5



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##### Table of Contents

ENTRUST, INC.



NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS



(Unaudited)



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



NOTE 1. BASIS OF PRESENTATION



The accompanying unaudited condensed consolidated financial statements have been prepared on
the same basis as the audited annual consolidated financial statements and, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position, results
of operations and cash flows of Entrust, Inc., a Maryland corporation, and its consolidated subsidiaries (collectively, the Company). The results of operations for the three and six months ended June 30, 2004 are not necessarily
indicative of the results to be expected for the full year. Certain information and footnote disclosures normally contained in financial statements prepared in accordance with accounting principles generally accepted in the United States of America
have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the Notes to Consolidated Financial Statements for the year ended December 31, 2003 contained in the Companys Annual Report on
Form 10-K. Certain reclassifications have been made to prior years balances in order to conform to fiscal 2004 presentation, namely, the classification of amortization of purchased product rights and the reclassification of revenues from the
sale of web server certificates from services and maintenance revenues to product revenues on the condensed consolidated statements of operations.



NOTE 2. ACQUISITION OF BUSINESS



On June 18, 2004, the Company completed the acquisition of intellectual property and certain other assets of AmikaNow! Corporation (AmikaNow), a
privately-held provider of advanced anti-spam, e-mail content scanning and analysis technology, which is a development stage company with negligible revenue, in exchange for $2,676 in cash and $1,293 in guaranteed future payments payable over three
years and other acquisition-related costs. In addition, the Company offered employment to certain employees of AmikaNow. Also, the Company may be required to make additional payments of up to a maximum of $2,400, in the form of royalties calculated
based on the sale of products that incorporate the technology acquired from AmikaNow for a period of three years following the date of acquisition, if and only if sufficient sale of products take place in this time frame.



The acquisition was accounted for under the purchase method of accounting, and, accordingly,
the purchase price of approximately $3,969 was allocated to the fair value of the tangible and intangible assets and liabilities acquired, with the remainder allocated to goodwill. Amortization of $23 has been recorded in the three months ended June
30, 2004, related to purchased product rights and non-contractual customer relationship assets arising from this acquisition. In connection with the purchase price allocation, the Company undertook an appraisal of the intangible assets, which
resulted in the purchase price of these assets being allocated, on a preliminary basis, as follows:



|                                       |  |                    |  |   |      
|-------------------------------------- |  | ------------------ |  | - | -----
|                                       |  | AmortizationPeriod |  |  
|Purchased product rights               |  | 4 years            |  | $ | 2,608
|Non-contractual customer relationships |  | 3 years            |  |   | 174  
|Property and equipment                 |  | 3 years            |  |   | 9    
|Goodwill                               |  |                   |  |   | 1,178
|                                       |  |                    |  |   |      
|                                       |  |                   
|Total                                  |  |                    |  | $ | 3,969
|                                       |  |                    |  |   |      



The following unaudited pro forma data
summarize the combined results of operations of Entrust, Inc., including the acquired business assets of AmikaNow for the three and six months ended June 30, 2004 and 2003, respectively, as if the acquisition had taken place as of the beginning of
the respective periods, and, accordingly, include a full periods amortization of the assets related to purchased product rights and non-contractual customer relationships in each period shown.



6



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##### Table of Contents

|                                     |  |                            |        |   |                           |   |         |      |  |   |        |   |  |   |         |  
|------------------------------------ |  | -------------------------- | ------ | - | ------------------------- | - | ------- | ---- |  | - | ------ | - |  | - | ------- | -
|                                     |  | (Unaudited)                |        |   | (Unaudited)               |  
|                                     |  | Three Months EndedJune 30, |        |   | Six Months Ended June 30, |  
|                                     |  | 2004                       |        |   | 2003                      |   |         | 2004 |  |   | 2003   |  
|Revenues                             |  | $                          | 19,519 |   |                           | $ | 22,440  |      |  | $ | 42,528 |   |  | $ | 44,144  |  
|                                     |  |                            |        |   |                           |   |         |      |  |   |        |   |  |   |         |  
|Net loss                             |  |                            | (2,704 | ) |                           |   | (22,116 | )    |  |   | (2,359 | ) |  |   | (27,320 | )
|                                     |  |                            |        |   |                           |   |         |      |  |   |        |   |  |   |         |  
|Basic and diluted net loss per share |  |                            | (0.04  | ) |                           |   | (0.35   | )    |  |   | (0.04  | ) |  |   | (0.43   | )
|                                     |  |                            |        |   |                           |   |         |      |  |   |        |   |  |   |         |  



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



NOTE 3. STOCK-BASED
COMPENSATION AND STOCK OPTION PLANS



Stock-Based Compensation



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



|                                                                                                        |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------- | ---- |  | - | ------ | - |  | - | ------- | -
|                                                                                                        |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                                                                                        |  | 2004                       |        |   | 2003                     |   |         | 2004 |  |   | 2003   |  
|Net loss, as reported:                                                                                  |  | $                          | (2,553 | ) |                          | $ | (21,942 | )    |  | $ | (2,034 | ) |  | $ | (26,792 | )
|Total stock-based employee compensation expense determined under fair value-based method for all awards |  |                            | (2,925 | ) |                          |   | (2,626  | )    |  |   | (5,544 | ) |  |   | (6,454  | )
|                                                                                                        |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Pro forma net loss                                                                                      |  | $                          | (5,478 | ) |                          | $ | (24,568 | )    |  | $ | (7,578 | ) |  | $ | (33,246 | )
|                                                                                                        |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Net loss per share:                                                                                     |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Basic and dilutedas reported                                                                           |  | $                          | (0.04  | ) |                          | $ | (0.35   | )    |  | $ | (0.03  | ) |  | $ | (0.42   | )
|                                                                                                        |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Basic and dilutedpro forma                                                                             |  | $                          | (0.09  | ) |                          | $ | (0.39   | )    |  | $ | (0.12  | ) |  | $ | (0.52   | )
|                                                                                                        |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  



In the pro forma calculations above,
the weighted average fair value for stock options granted during the three and six months ended June 30, 2004 was estimated at $3.57, $3.79, compared to $2.19 and $2.32 per option for the three and six months ended June 30, 2003, respectively. The
fair values of options were estimated as of the date of grant using the Black-Scholes option pricing model. The following weighted average assumptions were used in the calculations.



|                               |  |                            |   |  |                          |   |  |      |   |  |      |  
|------------------------------ |  | -------------------------- | - |  | ------------------------ | - |  | ---- | - |  | ---- | -
|                               |  | Three Months EndedJune 30, |   |  | Six Months EndedJune 30, |  
|                               |  | 2004                       |   |  | 2003                     |   |  | 2004 |   |  | 2003 |  
|Expected option life, in years |  | 5                          |   |  | 5                        |   |  | 5    |   |  | 5    |  
|Risk free interest rate        |  | 3.56                       | % |  | 2.55                     | % |  | 3.15 | % |  | 2.82 | %
|                               |  |                            |   | 
|Dividend yield                 |  |                           |   |  |                         |   |  |     |   |  |     |  
|Volatility                     |  | 106                        | % |  | 117                      | % |  | 104  | % |  | 120  | %



The Company recorded amortization of
unearned compensation of $23 and $36 into compensation expense for the three and six months ended June 30, 2004, respectively, related to options granted to non-employees and restricted stock issued to members of the board of directors in a prior
period, compared to $6 and $14 for the three and six months ended June 30, 2003, respectively.



Please see the Critical Accounting Policies in Managements Discussion and Analysis of Financial Condition and Results of Operations, elsewhere in this quarterly report, for additional
commentary regarding application of SFAS No. 123 to the Companys stock-based compensation.



7



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##### Table of Contents

Stock Option Plans



The following tables summarize information concerning outstanding options as of June 30, 2004:



|                         |  |                             |  |                                         |  |                              |       |                             |           |                               |   |      
|------------------------ |  | --------------------------- |  | --------------------------------------- |  | ---------------------------- | ----- | --------------------------- | --------- | ----------------------------- | - | -----
|                         |  | Options Outstanding         |  | Options Exercisable                    
|Range of Exercise Prices |  | Number ofOptionsOutstanding |  | WeightedAverageRemainingContractualLife |  | WeightedAverageExercisePrice |       | Number ofOptionsExercisable |           | WeightedAverageExercise Price
|                         |  |                             |  |                                         | 
|$0.12 to $2.44           |  | 583,662                     |  | 3.2 years                               |  | $                            | 2.11  |                             | 550,131   |                               | $ | 2.08 
|$2.45 to $5.00           |  | 6,702,882                   |  | 8.7 years                               |  |                              | 3.60  |                             | 664,047   |                               |   | 3.43 
|$5.01 to $6.72           |  | 666,426                     |  | 6.4 years                               |  |                              | 5.49  |                             | 546,337   |                               |   | 5.54 
|$6.75 to $6.86           |  | 2,851,203                   |  | 5.7 years                               |  |                              | 6.75  |                             | 2,618,700 |                               |   | 6.75 
|$6.87 to $10.00          |  | 4,074,850                   |  | 6.8 years                               |  |                              | 6.89  |                             | 2,557,935 |                               |   | 6.90 
|$10.00 to $50.00         |  | 682,616                     |  | 5.7 years                               |  |                              | 21.41 |                             | 634,095   |                               |   | 21.86
|$50.01 to $130.25        |  | 21,800                      |  | 4.2 years                               |  |                              | 79.99 |                             | 21,763    |                               |   | 79.99
|                         |  |                             |  |                                         |  |                              |       |                             |           |                               |   |      
|                         |  |                             |  |                                         | 
|Total:                   |  | 15,583,439                  |  |                                         |  |                              | 5.95  |                             | 7,593,008 |                               |   | 7.55 
|                         |  |                             |  |                                         |  |                              |       |                             |           |                               |   |      



The following table sets forth a
comparison as of June 30, 2004, of the number of shares subject to options with exercise prices at or below the closing price per share of the Companys Common stock on June 30, 2004 (In-the-Money options) to the number of shares of
the Companys Common stock subject to options with exercise prices greater than the closing price per share of the Companys Common stock on such date (Out-of-the-Money options) (in actual shares):



In-the-Money and Out-of-the-Money Option Information as of June 30, 2004 (1)



|                          |  |             |  |               |  |            |  |                                       |  
|------------------------- |  | ----------- |  | ------------- |  | ---------- |  | ------------------------------------- | -
|                          |  | Exercisable |  | Unexercisable |  | Total      |  | Percentage ofTotal OptionsOutstanding |  
|In-the-Money              |  | 1,078,702   |  | 4,322,167     |  | 5,400,869  |  | 35                                    | %
|                          |  |             |  |              
|Out-of-the-Money          |  | 6,514,306   |  | 3,668,264     |  | 10,182,570 |  | 65                                    | %
|                          |  |             |  |               |  |            |  |                                       |  
|                          |  |             |  |              
|Total Options Outstanding |  | 7,593,008   |  | 7,990,431     |  | 15,583,439 |  | 100                                   | %
|                          |  |             |  |               |  |            |  |                                       |  



As a result of the change in the
market price for the Companys Common Stock, only 13% of the total options outstanding at July 30, 2004 were considered to be In-the-Money.



---

|(1) | The closing price of the Companys Common stock was $4.50 on June 30, 2004, as reported
by the NASDAQ National Market.
|--- | ----------------------------------------------------------------------------------------------------------------------



NOTE 4. EQUITY INVESTMENT IN
ENTRUST JAPAN CO., LTD. (Entrust Japan)



The Company has
included its share of post-acquisition losses of Entrust Japan, in the amount of $168 and $377 for the three and six months ended June 30, 2004 in its consolidated losses for the current fiscal year. The Company has recorded cumulative losses from
its investment in Entrust Japan of $1,582, since its increased investment in the second quarter of 2002.



Financial Accounting Standards Board Interpretation No. 46, Consolidation of Variable Interest Entities (FIN No. 46), issued in January 2003 and revised in December 2003, requires a company to
consolidate a variable interest entity (VIE) if the company has variable interests that give it a majority of the expected losses or a majority of the expected residual returns of the entity. The Company has evaluated the applicability
of FIN No. 46 to its investment in Entrust Japan and the possible impact on its consolidated results of operations and consolidated balance sheet. Entrust Japan is a private Japanese corporation founded in June 1998. Entrust Japan is engaged in
selling, servicing and supporting solutions that enable organizations to secure digital identities and information in the Japanese market. Entrust Japan has an exclusive license to market and sell Entrust products in Japan. They also provide
professional services and support for the software solutions that they sell. Entrust Japan generates annual revenues of approximately $4,000, with total assets of



8



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##### Table of Contents

approximately $3,400 at June 30, 2004. Entrust made an original investment of $393 for approximately 10% of the common
stock. In April 2002, the Company increased its investment to the current approximately 37% through the contribution of $1,481 of cash and cash deposits, and $385 of Entrust products and exclusivity rights. The cash equity investment that the
Company has made totals $1,881 plus $385 of in-kind investment. The Company has concluded that the $1,881 amount represents its total equity at risk and would be the maximum exposure to loss as a result of its involvement with Entrust Japan. In
addition, we do not have any obligation to provide additional cash funding to them. The Company has concluded that Entrust Japan meets the definition of a VIE, as described in FIN No. 46, as it does not have an equity investment at risk that is
sufficient to permit Entrust Japan to finance its activities without additional subordinated financial support from other parties. Although the Company holds a significant variable interest, it has determined that it is not the primary beneficiary
of Entrust Japan because the Companys interests do not give it a majority of the expected losses and residual returns of the entity. Accordingly, there was no impact on the Companys consolidated results of operations and consolidated
balance sheet, as a result of the adoption of FIN No. 46.



NOTE 5. RELATED
PARTY TRANSACTIONS



On September 30, 2003, the Company loaned OHANA
Wireless, Incorporated, a California corporation (Ohana), $650 in the form of a convertible loan and additional advances of $300 were made in the second quarter of 2004 pursuant to the loan agreement. On July 19, 2004 the terms of this
agreement were replaced with a new convertible loan agreement pursuant to which Entrust extended an additional disbursement of $275, for a total loan of $1,225 plus applicable interest (Loan). This Loan will automatically convert into
Ohanas series A preferred stock if Ohana is successful in closing a round of equity financing by October 1, 2004, based on minimum terms set out in the Loan agreement. As security against such Loan, the Company has taken an exclusive license
to certain intellectual property from Ohana (such exclusivity subject to certain exclusions to enable Ohana to continue to conduct business in the ordinary course); however, the Companys exercise of such exclusive rights is subject to the
approval of certain shareholders in Ohana including Fil-Fibers, Inc., a British Virgin Islands company. The Company does not expect these loans to be repaid in the near term and therefore, has re-classified these amounts to other long-term assets in
recognition of their long-term nature.



Ohana was incorporated on July 10,
2003. It was formed to design, assemble and install high frequency wireless communication systems. The Company believes that its security solutions can be integrated with Ohanas products and anticipates that an investment in Ohana will assist
the Company in furthering the development of its distribution capability in Asia through technology and distribution partnerships.



Ohana is an entity in the development stage with minimal equity. As a result, the Company concluded that Ohana is a variable interest entity. Ohanas assets consist
primarily of cash and intellectual property. The Company is not the primary beneficiary of Ohana and, accordingly, the convertible loan is recorded in other long-term assets in the consolidated balance sheet. The Companys maximum exposure to
Ohana is the $1,225 balance of the existing convertible loan.



Anthony E.
Hwang, a director of Entrust, is an officer of the A&E Group which has a controlling interest in Fil-Fibers, a shareholder in Ohana and, therefore, indirectly controls approximately 15% of the outstanding voting share capital of Ohana.



NOTE 6. STOCK REPURCHASE PROGRAM



On July 29, 2002, the Company announced that its board of directors had authorized the
Company to repurchase up to an aggregate of 7,000,000 shares of its Common stock. On July 22, 2003, the Company announced that its board of directors had authorized an extension to this stock repurchase program. Entrusts original stock
repurchase program would have expired on July 28, 2003. The extended plan permits the purchase of up to 7,000,000 shares of the Companys Common stock through September 1, 2004, in addition to the 2,229,200 shares already purchased prior to the
extension. On August 2, 2004, the Company announced that its board of directors had authorized an extension of this stock repurchase program to permit the purchase of up to 10,000,000 shares of the Companys Common Stock through September 15,
2005 in addition to the 3,412,940 shares already purchased prior to this extension. During the three and six months ended June 30, 2004, the Company repurchased 992,090 and 1,183,740 shares, respectively, of its Common stock for a total cash outlay
of $4,588 and $5,558, respectively, at an average price of $4.62 and $4.70 per share, respectively, including commissions paid to brokers. As of June 30, 2004, the Company has repurchased 3,412,940 shares of its Common stock under this program, for
a total cash outlay of $11,495, at an average price of $3.36 per share, including commissions paid to brokers.



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



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##### Table of Contents

NOTE 7. RECOVERY OF ACCOUNT RECEIVABLE UNDER SETTLEMENT AGREEMENT



During the first quarter of 2004, the Company reached a settlement agreement on a
significant and long outstanding receivable related to a license agreement executed in June 2000. This receivable had been completely provided for in fiscal 2001, because it had been determined that the likelihood of full payment was less than
probable, despite the fact that the Company had undertaken all avenues of collection available to it, including litigation. As part of the process of pursuing collection through the court system, the Company entered into settlement discussions with
the customer. As a result of these discussions, a settlement was reached under which full payment of the original invoiced amount of approximately $2,000 was assured upon execution of a new agreement, half of which was received prior to March 31,
2004, while the other half remained in accounts receivable at that date and was collected in April 2004. In total, the Company reduced its allowance for doubtful accounts by approximately $2,000 due to the settlement. As part of this settlement
agreement, we also agreed to provide this customer with additional software products and professional services, the related costs of which were provided for from the allowance for bad debts that had previously been set up against this receivable.
These costs were estimated to be approximately $700 and were accrued upon the execution of the settlement agreement. The remaining allowance in the amount of $1,300 was reversed against sales and marketing expenses as a recovery of this bad debt.



NOTE 8. 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, 2004:



|                                                                                              |  |                             |        |  
|--------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | -
|                                                                                              |  | Six MonthsEndedJune 30,2004 |       
|Allowance for doubtful accounts, beginning of period                                          |  | $                           | 4,032  |  
|Reduction in provision for doubtful accounts, net                                             |  |                             | (1,431 | )
|                                                                                              | 
|Reallocation to accrued liabilities to provide for costs associated with settlement agreement |  |                             | (698   | )
|Amounts written-off, net of recoveries                                                        |  |                             | (260   | )
|                                                                                              |  |                             |        |  
|                                                                                              | 
|Allowance for doubtful accounts, end of period                                                |  | $                           | 1,643  |  
|                                                                                              |  |                             |        |  



NOTE 9. ACCRUED RESTRUCTURING
CHARGES



May 2003 Restructuring Plan



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



On May 27, 2003, the Company announced
a restructuring plan aimed at lowering costs and better aligning its resources to customer needs. The plan allows the Company to have tighter integration between customer touch functions, which better positions the Company to take advantage of the
market opportunities for its new products, and solutions. The restructuring plan included eliminating positions to lower operating costs, closing under-utilized office capacity, and re-assessing the useful life of related excess long-lived assets.
The Company also announced non-cash charges related to the impairment of a long-term strategic investment and the impairment of purchased product rights acquired through the enCommerce acquisition of June 2000.



10



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##### Table of Contents

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



The workforce portion of the restructuring plan included severance and related costs of $4,813 for 151 positions from all functional areas of the Company and had been significantly completed by December 31, 2003, of
which $4,289 was incurred in the second quarter of 2003, with the remaining costs of $524 incurred in the third quarter of 2003. The consolidation of under-utilized facilities included costs relating to lease obligations through the first quarter of
2009, primarily from the excess space in the Companys Santa Clara, California and Addison, Texas facilities, and accelerated amortization of related leaseholds and equipment. The facilities plan was executed by September 30, 2003 and, as a
result, the Company recorded $3,759 of charges during the third quarter of 2003 relating to these facilities, including $953 for accelerated amortization on leaseholds and equipment whose estimated useful lives had been impacted by the plan to cease
using the related excess capacity in the Companys facilities and $2,806 for lease obligations related to excess capacity at Company locations for which the cease-use date occurred during the third quarter of 2003. However, the Company recorded
$357 in the second quarter of 2003 related to accelerated amortization on the impacted leaseholds and equipment. The total amount of the workforce and facilities charges was $8,929. Of this amount, $4,646 had been incurred by June 30, 2003 and
charged to the restructuring charges line in the condensed consolidated statement of operations for the second quarter of 2003, while the remaining $4,283 was recorded in the third quarter of 2003.



The Company 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, at this time, it is appropriate to re-classify the portion of the outstanding liabilities that is
not payable within the next 12 months to long-term liabilities. However, in terms of long-term liquidity requirements, the current obligations would require the Company to fund $800 of its accrued restructuring charges for the May 2003 restructuring
before the end of fiscal 2004, with the remaining accrued restructuring charges for the May 2003 restructuring to be paid as follows: $900 in fiscal 2005, $100 in fiscal 2006, $100 in fiscal 2007 and $300 in fiscal 2008 and beyond.



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##### Table of Contents

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 restructuring plan at June 30, 2004:



|                                              |  |                                          |     |              |   |                                               |  |   |    
|--------------------------------------------- |  | ---------------------------------------- | --- | ------------ | - | --------------------------------------------- |  | - | ---
|                                              |  | Total ChargesAccrued atBeginning of Year |     | CashPayments |   | AccruedRestructuring Charges at June 30, 2004
|                                              |  | (in millions)                           
|Workforce reduction and other personnel costs |  | $                                        | 0.9 |              | $ | 0.5                                           |  | $ | 0.4
|Consolidation of excess facilities            |  |                                          | 2.2 |              |   | 0.4                                           |  |   | 1.8
|                                              |  |                                          |     |              |   |                                               |  |   |    
|                                              |  |                                          |    
|Total                                         |  | $                                        | 3.1 |              | $ | 0.9                                           |  | $ | 2.2
|                                              |  |                                          |     |              |   |                                               |  |   |    



In July 2003, the Company signed a
settlement and general release agreement with Zix Corporation, which resulted in the remaining contractual obligation under the Companys marketing and distribution agreement with Zix Corporation being settled at a value significantly less than
the accrued $2,800 obligation at June 30, 2003. Under the settlement agreement, the Company paid Zix Corporation $700 in July 2003 in fulfillment of all remaining obligations. This settlement resulted in the reversal of an accrual by the Company of
$2,100, which was recorded through the restructuring charges line in the condensed consolidated statement of operations for the third quarter of 2003.



In connection with the May 2003 restructuring plan, which included a further reduction in space utilized at the Companys Santa Clara, California facility, the
Company reviewed market sublease rates in that region. Based on information supplied to the Company, it was concluded that the sublease market would not recover in the timeframe that had originally been estimated due to the continued softening of
sublease rates in that market, requiring an adjustment to increase the facility related accrual recorded in June 2001, by $6,743. This adjustment was charged to the restructuring charges line in the condensed consolidated statement of operations for
the second quarter of 2003.



June 2001 Restructuring Plan



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



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



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



The Company has
evaluated and pursued all reasonable possibilities to settle the lease obligations associated with the June 2001 restructuring, but has been unable to find an acceptable outcome. Therefore, the Company has concluded that, at this time, it is
appropriate to re-classify the portion of the outstanding liabilities that is not payable within the next 12 months to long-term liabilities. However, the current obligations would require the Company to fund $1,900 of its accrued restructuring
charges for the June 2001 restructuring before the end of fiscal 2004, with the remaining accrued restructuring charges for the June 2001 restructuring to be paid as follows: $3,000 in fiscal 2005, $3,400 in fiscal 2006, $5,000 in fiscal 2007 and
$17,200 in fiscal 2007 and beyond.



12



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##### Table of Contents

Summary of Accrued Restructuring Charges for June 2001 Restructuring



The following table is a summary of the accrued restructuring charges related to the 2001
restructuring plan at June 30, 2004:



|                                                 |  |                                           |      |              |   |                                               |  |   |     
|------------------------------------------------ |  | ----------------------------------------- | ---- | ------------ | - | --------------------------------------------- |  | - | ----
|                                                 |  | Total ChargesAccrued at Beginning of Year |      | CashPayments |   | AccruedRestructuring Charges at June 30, 2004
|                                                 |  | (in millions)                            
|Consolidation of excess facilities               |  | $                                         | 32.1 |              | $ | 1.7                                           |  | $ | 30.4
|Discontinuance of non-core products and programs |  |                                           | 0.2  |              |   | 0.1                                           |  |   | 0.1 
|                                                 |  |                                           |      |              |   |                                               |  |   |     
|                                                 |  |                                           |     
|Total                                            |  | $                                         | 32.3 |              | $ | 1.8                                           |  | $ | 30.5
|                                                 |  |                                           |      |              |   |                                               |  |   |     



As of June 30, 2004, the Company had
estimated a total of $22,900 of sublease recoveries in our restructuring accrual. Of this amount, $22,700 is related to the Santa Clara facility. In addition, $8,300 of the $22,900 is recoverable under existing sublease agreements and the remaining
$14,600 of rent recoveries is based on estimates that may be subject to adjustments based upon changes in the real estate sublet markets.



NOTE 10. NET INCOME (LOSS) PER SHARE AND SHARES OUTSTANDING



Basic net income (loss) per share is computed by dividing the net income (loss) by the weighted average number of shares of Common stock of all classes outstanding during
the period. Diluted net income (loss) per share is computed by dividing the net income (loss) by the weighted average number of shares of Common stock and potential Common stock outstanding, and when dilutive, options to purchase Common stock using
the treasury stock method. The dilutive effect of the options to purchase Common stock are excluded from the computation of diluted net income (loss) per share if the effect is antidilutive. For the three and six months ended June 30, 2004, the
antidilutive effect excluded from the diluted net loss per share computation due to options to purchase Common stock under the treasury stock method was 2,113,541 and 1,942,371 shares, respectively, compared to an antidilutive effect of 401,368 and
537,502 shares for the three and six months ended June 30, 2003, respectively. In addition, options which had exercise prices in excess of the average market price during those periods were also excluded from the computation of diluted net loss per
share.



In the three and six months ended June 30, 2004, the Company issued
145,418 and 314,017 shares of Common stock related to the exercise of employee stock options.



NOTE 11. MARKETABLE AND OTHER INVESTMENTS



The Company maintains marketable investments mainly in a strategic cash management account. This account is invested primarily in highly rated corporate securities, in securities guaranteed by the U.S. government or its agencies and highly
rated municipal bonds, primarily with a remaining maturity of not more than 24 months. The Company has the intent and ability to hold all of these investments until maturity. Therefore, all such investments are classified as held to maturity
investments, and are stated at amortized cost. At June 30, 2004, the amortized cost of the Companys held to maturity investments approximated fair value. Based on contractual maturities, these marketable investments were classified in either
current assets or long-term assets.



Realized gains and losses on disposition
of available for sale marketable investments are included in other investment income in the results of operations. Unrealized gains and losses are included in other comprehensive income, except that the portion designated as being hedged in a fair
value hedge is recognized in other investment income during the period of the hedge. As at June 30, 2004, the Company does not hold any available for sale marketable investments.



The Company holds equity securities stated at cost, which represent long-term investments in private companies made 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 at June 30, 2004. Consistent with the Companys policies for other long-lived assets,
the carrying value of these long-term strategic investments is periodically reviewed for impairment based upon such quantitative measures as expected undiscounted cash flows, as well as qualitative factors. In addition, the Audit Committee of the
Board of Directors monitors and assesses the ongoing operating performance of the underlying companies for evidence of impairment. Since 2001, the Company has recorded impairments totalling $14,818 with respect to these investments, as a result of
other than temporary declines in fair value.



These strategic investments had
no net remaining carrying value at June 30, 2004 and 2003, respectively.



In
addition, the Company holds an equity interest in Entrust Japan, which represents approximately 37% of the voting share capital of Entrust Japan that is accounted for by the Company using the equity method of accounting for investments in common
stock. See Note 4 for additional discussion.



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The Company recorded revenues representing less than 1% of total revenues in each of the three and six months ended June
30, 2004 and 2003, with respect to arms-length transactions with companies in which it has made strategic equity investments recorded at cost.



In addition, sales to Entrust Japan represented 2% of total revenues for each of the three and six months ended June 30, 2004, compared to 3% of total revenues for each
of the three and six months ended June 30, 2003.



NOTE 12. SEGMENT AND
GEOGRAPHIC INFORMATION



Segment information



The Company conducts business in one operating segment: namely, the design, production and
sale of software products and related services for securing digital identities and information. The nature of the Companys different products and services is similar and, in general, the type of customers for those products and services is not
distinguishable. The Company does, however, prepare information for internal use by the Chairman and Chief Executive Officer on a geographic basis. Accordingly, the Company has included a summary of the segment financial information, on a geographic
basis, as reported to the Chairman and Chief Executive Officer.



Geographic information



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



The Company operates in three main geographic areas as follows:



|                                      |  |                            |        |   |                           |   |         |      |  |   |        |   |  |   |         |  
|------------------------------------- |  | -------------------------- | ------ | - | ------------------------- | - | ------- | ---- |  | - | ------ | - |  | - | ------- | -
|                                      |  | (Unaudited)                |        |   | (Unaudited)               |  
|                                      |  | Three Months EndedJune 30, |        |   | Six Months Ended June 30, |  
|                                      |  | 2004                       |        |   | 2003                      |   |         | 2004 |  |   | 2003   |  
|Revenues:                             |  |                            |        |   |                           |   |         |      |  |   |        |   |  |   |         |  
|United States                         |  | $                          | 10,388 |   |                           | $ | 10,339  |      |  | $ | 23,439 |   |  | $ | 21,804  |  
|Canada                                |  |                            | 3,427  |   |                           |   | 4,131   |      |  |   | 7,971  |   |  |   | 7,901   |  
|Europe, Asia and Other                |  |                            | 5,704  |   |                           |   | 7,970   |      |  |   | 11,118 |   |  |   | 14,439  |  
|                                      |  |                            |        |   |                           |   |         |      |  |   |        |   |  |   |         |  
|                                      |  |                            |        |  
|Total revenues                        |  | $                          | 19,519 |   |                           | $ | 22,440  |      |  | $ | 42,528 |   |  | $ | 44,144  |  
|                                      |  |                            |        |   |                           |   |         |      |  |   |        |   |  |   |         |  
|                                      |  |                            |        |  
|Income (loss) before income taxes:    |  |                            |        |   |                           |   |         |      |  |   |        |   |  |   |         |  
|United States                         |  | $                          | (122   | ) |                           | $ | (18,817 | )    |  | $ | (104   | ) |  | $ | (19,978 | )
|Canada                                |  |                            | (2,596 | ) |                           |   | (2,956  | )    |  |   | (2,166 | ) |  |   | (6,639  | )
|Europe, Asia and Other                |  |                            | 99     |   |                           |   | (23     | )    |  |   | 299    |   |  |   | (35     | )
|                                      |  |                            |        |   |                           |   |         |      |  |   |        |   |  |   |         |  
|                                      |  |                            |        |  
|10dr Total (loss) before income taxes |  | $                          | (2,619 | ) |                           | $ | (21,796 | )    |  | $ | (1,971 | ) |  | $ | (26,652 | )
|                                      |  |                            |        |   |                           |   |         |      |  |   |        |   |  |   |         |  



|                       |  |              |         |                  |   |        
|---------------------- |  | ------------ | ------- | ---------------- | - | -------
|                       |  | (Unaudited) 
|                       |  | June 30,2004 |         | December 31,2003
|Total assets:          |  |              |         |                  |   |        
|United States          |  | $            | 114,159 |                  | $ | 121,348
|Canada                 |  |              | 31,632  |                  |   | 25,194 
|Europe, Asia and Other |  |              | 1,742   |                  |   | 2,210  
|                       |  |              |         |                  |   |        
|                       |  |             
|Total                  |  | $            | 147,533 |                  | $ | 148,752
|                       |  |              |         |                  |   |        



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NOTE 13. COMPREHENSIVE INCOME (LOSS)



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



|                                         |  |                                        |        |   |                                      |   |         |      |  |   |        |   |  |   |         |  
|---------------------------------------- |  | -------------------------------------- | ------ | - | ------------------------------------ | - | ------- | ---- |  | - | ------ | - |  | - | ------- | -
|                                         |  | (Unaudited) Three Months EndedJune 30, |        |   | (Unaudited) Six Months EndedJune 30, |  
|                                         |  | 2004                                   |        |   | 2003                                 |   |         | 2004 |  |   | 2003   |  
|Net loss                                 |  | $                                      | (2,553 | ) |                                      | $ | (21,942 | )    |  | $ | (2,034 | ) |  | $ | (26,972 | )
|                                         |  |                                        |        |  
|Foreign currency translation adjustments |  |                                        | (186   | ) |                                      |   | 353     |      |  |   | (332   | ) |  |   | 935     |  
|                                         |  |                                        |        |   |                                      |   |         |      |  |   |        |   |  |   |         |  
|Comprehensive loss                       |  | $                                      | (2,739 | ) |                                      | $ | (21,589 | )    |  | $ | (2,366 | ) |  | $ | (26,037 | )
|                                         |  |                                        |        |   |                                      |   |         |      |  |   |        |   |  |   |         |  



NOTE 14. LEGAL PROCEEDINGS



Frankel v. Entrust Technologies Inc.



On July 7, 2000, an action entitled Frankel v. Entrust Technologies Inc., et al., No.
2-00-CV-119, was filed in the U.S. District Court for the Eastern District of Texas. Subsequently, several similar actions were also filed. These actions were consolidated and on January 22, 2001, a consolidated complaint was filed. The consolidated
complaint purported to be a class action lawsuit brought on behalf of persons who purchased or otherwise acquired Common stock of the Company during the period from October 19, 1999 through July 3, 2000. The consolidated complaint alleged that the
defendants misrepresented and failed to disclose certain information about the Companys business and prospects, as required by the Securities Exchange Act of 1934. It did not specify the amount of damages sought. On September 30, 2002, Judge
T. John Ward of the U.S. District Court for the Eastern District of Texas issued an order dismissing this purported securities class action lawsuit pending against the Company with prejudice; however, the order is subject to the possibility of an
appeal. As of the date of the filing of this report, the Company has not learned of any appeal being filed. If an appeal is granted, an adverse judgment or settlement in this lawsuit could have a significant adverse impact on the Companys
future financial condition or results of operations.



Other Legal Matters



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



NOTE 15. CONTINGENCIES



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



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



This report contains forward-looking statements that involve risks and uncertainties. The statements contained in this report that are



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not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934, including without limitation statements regarding our expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this report are based on
information available to us, up to and including, the date of this document, and we assume no obligation to update any such forward-looking statements. Our actual results could differ significantly from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth below under Overview and Certain Factors that May Affect Our Business and elsewhere in this report. The following discussion and analysis of our financial
condition and results of operations should be read in conjunction with our condensed consolidated financial statements and notes thereto appearing elsewhere in this report.



OVERVIEW



Background



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



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



EXECUTIVE OVERVIEW



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



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



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



We sell our products and services in both the enterprise and government market space. In Q2,
2004, 37% of our product sales were in our extended government vertical market, which includes healthcare. This was up from 17% in Q1, 2004. The increase was driven by key global projects, which have started to increase product purchases. In many of
these projects we have been providing services for several quarters and are now realizing the product revenues that are associated with those projects. We are well positioned in both markets, and we see growth opportunities in each area. In the
extended government vertical market, we have a strong penetration in the U.S. Federal government market space, the government of Canada, Singapore, Denmark, United Kingdom and across continental Europe. As governments continue to increase spending
on e-government initiatives and security projects, we are well positioned to help them in their I&AM needs. In the enterprise market, the need for a deeper integration with partners, suppliers and customers, coupled with the need for security
and lower costs, continues to be key drivers for our customers to purchase our offerings. Budgets, timing, and allocation of budget dollars continue to keep us guarded on our growth expectations in the remainder of the year. We do feel the spending
environment is better than it has been in the last two years, but this market could still cause quarterly fluctuations in our product revenue attainment.



We rely significantly on large deals in each quarter. Our software revenue from our top five customers in Q2, 2004 was approximately 10% of our total software revenue in
that quarter. This was at the low end of our historical range, which is generally between 10% and 25%. The low percentage we achieved in the 2ndquarter of 2004 had a significant impact on our total revenue, our earnings and earnings per share. Also impacting software revenue has been the process that our customers are going through to
complete a proof of concept, which sometimes has proven to produce a longer sales cycle. We are also impacted by our customers recent buying behavior, which is to buy only for immediate need as opposed to making a larger purchase in order to
get a better discount. All of these factors can come into play in impacting our revenue on a quarterly basis.



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In order to support our market opportunities, we have a marketing organization focused on creating brand awareness and
new business opportunities for the Company. Key branding initiatives include Web advertising, search engine optimization for key word searches, public relations initiatives and sponsorships of key security and government events and forums. One of
these key initiatives that has carried over from 2003 to 2004 is our focus on positioning ourselves as a thought leader in information security governance (ISG). In 2003 we co-chaired a task force for the Business Software Alliance to
focus on this issue. The task force launched an in-depth framework for enterprise ISG. Also in 2003, we were selected to co-chair the Department of Homeland Securities Task Force on Cybersecurity. This task force is also looking at the ISG issue,
but from a homeland security standpoint. In April of this year, the task force released its findings and is currently working to gain industry and government support for the recommendations. We are hopeful that our work on ISG will position us to be
a key component of the quality process that companies adopt to secure their most critical digital resources.



Assisting us in our growth strategy in this market will be our ability to serve as the trusted advisor to our clients. In this capacity we will continue to expand our offerings by building new products and solutions,
partnering with technology providers and bringing it all together for the customer with our services offerings. Our services group gives us the capabilities to help our customers deploy a total solution that meets their demands for securing digital
identities and information. In Q1, 2004, our services organization achieved their highest quarterly revenue in over two and a half years as they helped support customers in the architecture and deployment of our products and services. Our services
revenue declined from its Q1, 2004 record levels, however it did still show meaning full increase of $1.4 million or 11% from the 2ndquarter of 2004. We believe that the investment in services is paying off. We remain positive on our outlook for services in 2004. However, budgets, adoption of our software and our leveraging of our services partners are all
factors that could impact our ability to create services revenue.



We earn
revenue by providing both software and services to our customers. We earn software revenue mainly on a per user basis under a perpetual licensing agreement. We earn services revenue by providing support and maintenance to our customers along with
professional services for the planning, architecture and deployment of our products and services. In Q2, 2004, 24% of our revenue was from software sales and 76% was from services, compared to 40% from software and 60% from services in Q2, 2003.
Over the last three years, we have become a more services-led company as we have been focused on helping our customers deploy our products. In 2004, we will continue to focus on providing services to our customers, but we will also look to increase
the percentage of software sales in relation to services, primarily through the introduction of new software products.



Over the past three years, we have focused on keeping our cost structure in line with our current revenue opportunity. In the second quarter of 2003, we restructured the
Company and established a goal of reaching breakeven by the end of 2003. In the fourth quarter of 2003 we met this goal and produced a $60 thousand net profit. We followed that accomplishment up with a net profit of $519 thousand in Q1, 2004. This
achievement was an important step in our strategy of returning the Company to a growth and leadership position in the I&AM market space. In the second quarter of 2004, our product revenues declined $2.6 million from the first quarter, falling
short of expectations. While we are disappointed, we remain optimistic about the opportunities we have in the second half of 2004.



We have a history of providing valued security solutions to our customers. In 2003, we released a number of new products that are beginning to be deployed in the market.
Evidence of new product deployment came in the second quarter as all five of our top five deals in the quarter contained at least one component of our newly released product offerings. Also key in the second quarter was our acquisition of compliance
and anti-spam provider AmikaNow!. The AmikaNow! acquisition allows Entrust to sell products into the corporate and regulated compliance markets and provide a full line of solutions and services that meet growing customer needs in the Identity and
Access Management market space.



Our management uses the following metrics to
measure performance:



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



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



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



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



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



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BUSINESS OVERVIEW



During the second quarter of 2004, we continued our strategy of focusing on core vertical and geographic markets. Product license revenues
decreased 48% from the second quarter of 2003 and 36% from the first quarter of 2004, driven by our lower software transaction closure rate and lower average purchase value in the second quarter of 2004. Services and maintenance revenues improved
10% from the second quarter of 2003, due to higher professional services and support revenues. However, services and maintenance revenues declined 6% from the first quarter of 2004. The breakout by solutions group for product revenues in the quarter
was 72% Secure Identity Management, 14% Secure Data and 14% Secure Messaging. Provisioning and Web Strong Authentication played key roles in second quarter product deals. Entrust Certificate Services continued to gain traction in the SSL Web Server
certificate market with their seventh consecutive quarter of revenue growth and highest revenue achievement since entering this market in 1999. Extended Enterprises accounted for 63%, while Extended Government accounted for 37% of the product
revenue in the quarter. Extended Government at 37% of product revenue represents an increase of 27% over the first quarter of 2004. The finance vertical accounted for approximately 28% of second quarter product revenue.



Other highlights from the second quarter of 2004 included:



| | Deferred revenue increased by $4.1 million to a balance of $23.9 million, which is the highest level in company history.
|- | ------------------------------------------------------------------------------------------------------------------------



| | Services and Maintenance comprised $14.9 million of total revenue. Support and maintenance, the largest component of services and maintenance revenue, continued to experience strong
renewals, adding $3.3 million to deferred revenue in the quarter.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Entrust Cygnacom, a business unit focused on providing security services to the U.S. Federal government, achieved their highest revenue levels in company history.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Entrust Certificate Services achieved its 7thconsecutive quarter of revenue growth.
|- | -----------------------------------------------------------------------------------



| | We produced cash from operations of approximately $2.9 million for the quarter, representing the second consecutive quarter of positive cash flow from operations.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | The top five transactions accounted for 10% of Q2, 2004 revenues. The average purchase size this quarter was $90 thousand, down from $103 thousand in Q1, 2004.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| | We completed the acquisition of certain assets of anti-spam and e-mail compliance company, AmikaNow!. The addition of the capabilities of the AmikaNow! assets will further
strengthen and expand the portfolio of products within the Entrust Secure Messaging and Secure Data Solutions to provide enterprise and government customers with comprehensive content analysis and risk mitigation tools for improved compliance with
corporate e-mail policies and regulatory guidelines.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Bell Canada, Canadas leading telecommunications company, and Entrust announced our intention to team up to offer a joint suite of comprehensive secure identity and access
management services that will enable Enterprise customers to reap the full benefits of an integrated, end-to-end security solution offering. Under this strategic agreement, Bell Canada is planning to commence offering a managed
authentication/authorization service enabling solutions  including secure messaging, security for web portals, identity and access management and secure wireless services -- based on and using our products licensed to Bell Canada.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | We announced that our newly upgraded desktop security platform, Entrust® Desktop Solutions, was the first to be validated by the U.S. National Institute of Standards and Technologys (NIST) Federal Bridge Enabled Path
Validation Module. It also passed rigorous testing against the Public Key Interoperability Test Suite (PKITS) developed by NIST in conjunction with DigitalNet and the National Security Agency (NSA).
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Entrust TruePass, an integral part of the Entrust® Secure Identity Management Solution, was awarded the Canadian Advanced Technology Association Alliance Innovation Award for Outstanding Product Achievement. We received this award for the role that Entrust TruePass software plays in securing online data
flow for a first-of-its-kind Statistics Canada project. Entrust TruePass is designed to help meet the strong authentication requirements of customers deploying sensitive applications through the Web, without requiring the deployment of client
software.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | The Entrust® Secure Identity Management Solution achieved OPSEC (Open Platform for Security) certification from Check Point Software Technologies Ltd., the worldwide leader in securing the Internet. OPSEC certification attests that the certified Entrust products have passed rigorous interoperability
testing to provide strong authentication for Check Points market-leading VPN-1® software.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | We announced that the Entrust® Secure Identity Management Solution provides customers with a versatile suite of Web and Web services-based security capabilities, including strong authentication and policy-based
authorization, through integration with BEA WebLogic Portal 8.1 and BEA WebLogic Server 8.1. These capabilities can help enable customers to expand the deployment and use of business applications by protecting sensitive information and transactions from unauthorized access.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



CRITICAL ACCOUNTING POLICIES



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



Software
Revenue Recognition



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



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



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



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



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



We are sometimes subject to fiscal funding clauses in our software licensing transactions with the United States government and its agencies. Such clauses generally
provide that the license is cancellable if the legislature or funding authority does not appropriate the funds necessary for the governmental unit to fulfill its obligations under the licensing arrangement. In these circumstances, software



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licensing arrangements with governmental organizations containing a fiscal funding clause are evaluated to determine
whether the uncertainty of a possible license arrangement cancellation is a remote contingency. If the likelihood of cancellation is assessed as remote, then the software licensing arrangement is considered non-cancellable and the related software
licensing revenue is recognized when all other revenue recognition criteria have been met.



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



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



Allowance for Doubtful Accounts



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



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



We base our ongoing estimate of allowance for doubtful accounts primarily on the aging of the balances in the accounts receivable, our historical collection patterns and
changes in the creditworthiness of our customers. Based upon the analysis and estimates of the uncollectibility of our accounts receivable, we record an increase in the allowance for doubtful accounts when the prospect of collecting a specific
account receivable becomes doubtful. The allowance for doubtful accounts is established based on the best information available to us and is re-evaluated and adjusted as additional information is received. We exhaust all avenues and methods of
collection, including the use of third party collection agencies, before writing-off a customer balance as uncollectible. While credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we
will continue to experience the same credit loss rates that we have in the past. Each circumstance in which we conclude that a provision for non-payment by a customer may be required must be carefully considered in order to determine the true
factors leading to that potential non-payment to ensure that it is proper for it to be categorized as an allowance for bad debts. We have focused on improving our accounts receivable aging and, as a result, have been able to reduce our corresponding
allowance for doubtful accounts in the first half of 2004 in the process. Our accounts receivable include material balances from a limited number of customers, with five customers accounting for 38% of gross accounts receivable at June 30, 2004,
compared to 43% of gross accounts receivable at June 30, 2003. Two customers accounted for 11% each of net accounts receivable at June 30, 2004. For more information on our customer concentration, see our related discussion in Certain Factors
That May Affect Our Business. Therefore, changes in the assumptions underlying this assessment or changes in the financial condition of our customers, resulting in an impairment of their ability to make payments, and the timing of information
related to the change in financial condition could result in a different assessment of the existing credit risk of our accounts receivable and thus, a different required allowance, which could have a material impact on our reported earnings.



As of June 30, 2004, the total accounts receivable is $15.6 million, net of an
allowance for doubtful accounts of $1.6 million compared to $18.8 million, net of an allowance for doubtful accounts of 4.0 million as of December 31, 2003.



During the first quarter of 2004, we reached a settlement agreement on a significant and long outstanding receivable related to a license agreement executed in June 2000.
This receivable had been completely provided for in fiscal 2001, because it was our determination then that the likelihood of full payment was less than probable, despite the fact that we had undertaken all avenues of collection available to us,
including litigation. As part of the process of pursuing collection through the court system, we entered into



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settlement discussions with the customer. As a result of these discussions, a settlement was reached under which full
payment of the original invoiced amount of $2.0 million was assured upon execution of a new agreement, half of which was received prior to March 31, 2004, while the other half remained in accounts receivable at that date and was collected in April
2004. In total, we reduced our allowance for doubtful accounts by approximately $2.0 million due to the settlement. As part of this settlement agreement, we also agreed to provide this customer with additional software products and professional
services, the related costs of which were provided for from the allowance that had previously been set up against the receivable. The remaining allowance in the amount of $1.3 million was reversed against sales and marketing expenses as a recovery
of this bad debt.



Restructuring and Adjustments



June 2001 Restructuring Plan



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



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



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



Our assessment required assumptions in estimating the original accrued restructuring charges of $65.5 million at June 30, 2001, including estimating future recoveries of
sublet income from excess facilities, liabilities from employee severances, and costs to exit business activities. Changes in these assessments with respect to the accrued restructuring charges for the June 2001 restructuring program, particularly
the estimation of sub lease income for restructured facilities, of $30.5 million at June 30, 2004, could have a material effect on our reported results, as actual results could vary from these assumptions and estimates. As of June 30, 2004, we
estimated a total of $22.9 million of sublease recoveries in our restructuring accrual. Of this amount, $22.7 million is related to the Santa Clara facility. In addition, $8.3 million of the $22.9 million is recoverable under existing sublease
agreements, and the remaining $14.6 million of rent recoveries is based on estimates which may be subject to adjustment based upon changes in the real estate sublet markets.



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



May 2003 Restructuring
Plan



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



The workforce portion of the restructuring plan included severance and related costs of $4.8
million for 151 positions from all functional areas of the company and had been completed by December 31, 2003. The consolidation of under-utilized facilities included costs relating to lease obligations through the first quarter of 2009 (primarily
from excess space in the Companys Santa



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Clara, California and Addison, Texas facilities) and accelerated amortization on related leaseholds and equipment. The
facilities plan was executed by September 30, 2003 and, as a result, the Company recorded $4.1 million of charges during 2003 related to these facilities, including $1.3 million for accelerated amortization on leaseholds and equipment whose
estimated useful lives had been impacted by the plan to cease using the related excess space in the Companys facilities. The total amount of the workforce and facilities charges was $8.9 million. Of this amount, $4.6 million had been incurred
by June 30, 2003 and charged to the restructuring charges line in the consolidated statement of operations for the second quarter of 2003, while the remaining $4.3 million was recorded in the third quarter of 2003.



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



Our assessment required assumptions in estimating the restructuring charges of $8.9 million, including estimating liabilities related to employee severance, future
recoveries of sublet income from excess facilities, and other costs to exit activities. Changes in these assessments with respect to the accrued restructuring charges for the May 2003 restructuring plan of $2.2 million at June 30, 2004 could have a
material effect on our reported results. In addition, actual results could vary from these assumptions and estimates, in particular with regard to the sublet of excess facilities, resulting in an adjustment that could have a material effect on our
future financial results. Our accrual related to the May 2003 restructuring at June 30, 2004 includes a total of $0.8 million of estimated sublease recoveries, which may be subject to adjustment based upon changes in the real estate sublet markets.



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



Accounting for Long-term Strategic and Equity Investments



We assess the recoverability of the carrying value of strategic investments on an on-going basis, but at least annually. Factors that we consider important in determining
whether an assessment is warranted and could trigger impairment include, but are not limited to, the likelihood that the company in which we invested would have insufficient cash flows to operate for the next twelve months, significant changes in
the companys operating performance or business model and changes in overall market conditions. These investments are in private companies, made in 2000 and 2001, of which we typically own less than 10% of the outstanding stock. We account for
these investments under the cost method. Because there is not a liquid market for these securities, we often must make estimates of the value of our investments.



Since 2001, we have recorded a total of $14.8 million of impairment charges with respect to our long-term strategic investments due to other
than temporary declines in the value of these strategic investments. These impairments were related to our investments in several different companies. We have no other strategic investments recorded as of June 30, 2004.



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



In addition, we recorded our share of
post-acquisition losses of Entrust Japan, in the amount of $168 thousand and $377 thousand in our consolidated losses for the three and six months ended June 30, 2004, respectively, compared to $133 thousand and $238 thousand for the three and six
months ended June 30, 2003, respectively. These losses are attributable to our pro rata share of Entrust Japans losses while we have had an equity ownership of approximately 37% of its voting stock and, to date, have totalled $1.6 million
since the second quarter of 2002.



During 2002, Entrust Japan exceeded the
performance targets established at the date of our increased investment. However, during 2003 and the first half of 2004, the actual growth of Entrust Japan was less than the original projections. It is possible that future growth will also fall
short of projections, and due to Entrust Japans history of operating losses, it is possible that all or substantially all of the remaining $283 thousand equity investment in Entrust Japan at June 30, 2004 may be expensed through our operating
results in future quarters as a result of our recognition of our equity share of losses in Entrust Japan. However, we do not have any obligation to provide additional cash funding to them. As of June 30, 2004, we believe that there has not been any
additional impairment of our investment in Entrust Japan beyond the equity share of losses recorded to date.



In addition, we have concluded, based on our understanding of the facts, that Entrust Japan meets the definition of a variable interest



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



On September 30, 2003, the Company loaned Ohana
$650 thousand in the form of a convertible loan and additional advances of $300 thousand were made in the second quarter of 2004 pursuant to the loan agreement. On July 19, 2004 the terms of this agreement were replaced with a new convertible loan
agreement pursuant to which Entrust extended an additional disbursement of $275 thousand, for a total loan of $1.225 million plus applicable interest (Loan). This Loan will automatically convert into Ohanas series A preferred stock
if Ohana is successful in closing a round of equity financing by October 1, 2004, based on minimum terms set out in the Loan agreement. As security against such Loan, the Company has taken an exclusive license to certain intellectual property from
Ohana (such exclusivity subject to certain exclusions to enable Ohana to continue to conduct business in the ordinary course); however, the Companys exercise of such exclusive rights is subject to the approval of certain shareholders in Ohana
including Fil-Fibers, Inc., a British Virgin Islands company. We presently do not expect these loans to be repaid in the near term and therefore, we have classified these amounts as long-term in nature. If the demand for the technologies and
products offered by this company 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 this company. To date, we have not recorded any impairment in connection
with this investment.



Provision for Income Taxes



The preparation of our consolidated financial statements requires us to estimate our income
taxes in each of the jurisdictions in which we operate, including those outside the United States. In addition, we have based the calculation of our income taxes in each jurisdiction upon inter-company agreements, which could be challenged by tax
authorities in these jurisdictions. The income tax accounting process involves our estimating our actual current exposure in each jurisdiction together with assessing temporary differences resulting from differing treatment of items, such as
deferred revenue 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 have a valuation allowance of $131.1 million as of June 30, 2004, which
offsets deferred income tax assets relating to United States and foreign net operating loss (NOL) and tax credit carry-forwards in the amount of $104.5 million and $26.6 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. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to adjust our valuation allowance, which could materially impact
our financial position and results of operations.



Stock-Based
Compensation



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



We recognize that stock options dilute existing
shareholders and have attempted to control the number of options granted while remaining competitive with our compensation packages. At June 30, 2004, approximately 65% of our outstanding stock options carried exercise prices in excess of the
closing market price of our Common stock on that day. The Compensation Committee of the Board of Directors oversees the granting of all stock-based incentive awards.



We account for our stock option plans under the recognition and intrinsic value measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related accounting guidance. Accordingly, no stock-based compensation expense is reflected in net earnings for grants to employees under these plans, when the exercise price for options
granted under these plans is equal to the market value of the underlying Common stock on the date of grant. All of the options granted to employees in the periods



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after 1998 had exercise prices equal to the fair value of the underlying stock on the date of grant and therefore, no
stock-based compensation costs are reflected in earnings for these options in these periods. Compensation expense was recognized for our stock based compensation plans in 1998 because the exercise price of some options granted in that period were
determined, for accounting purposes, to be below the fair value of the underlying stock as of the grant date for such stock options.



If we had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based compensation, the effect
would have been to increase our net loss to $5.5 million and $7.6 million in the three and six months ended June 30, 2004, respectively, compared to $24.6 million and $33.2 million in the three and six months ended June 30, 2003, respectively, and
consequently, increase our net loss per share to $0.09 and $0.12 for the three and six months ended June 30, 2004, respectively, compared to a net loss per share of $0.39 and $0.52 for the three and six months ended June 30, 2003, respectively.
However, we believe, that due to the volatility of our stock and the inherent limitations of option valuation models, the expenses that would be recorded under SFAS No. 123 are not as meaningful as a careful consideration of the outstanding option
data, which is disclosed in note 3 to our condensed consolidated financial statements, included in this report. As an illustration, because of significant movement in the market value of our stock price since June 30, 2004, the percentage of total
options outstanding that were considered to be In the Money (options with exercise prices at or below the closing market price per share) went from 35% at June 30, 2004 to 13% at July 31, 2004.



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RESULTS OF OPERATIONS



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



|                                              |  |                                         |    |  |                                       |    |  |       |    |  |       |   
|--------------------------------------------- |  | --------------------------------------- | -- |  | ------------------------------------- | -- |  | ----- | -- |  | ----- | --
|                                              |  | (Unaudited) THREE MONTHS ENDED JUNE 30, |    |  | (Unaudited) SIX MONTHS ENDED JUNE 30, |   
|                                              |  | 2004                                    |    |  | 2003                                  |    |  | 2004  |    |  | 2003  |   
|Revenues:                                     |  |                                         |    |  |                                       |    |  |       |    |  |       |   
|Product                                       |  | 23.8                                    | %  |  | 39.9                                  | %  |  | 28.0  | %  |  | 37.8  | % 
|Services and maintenance                      |  | 76.2                                    |    |  | 60.1                                  |    |  | 72.0  |    |  | 62.2  |   
|                                              |  |                                         |    |  |                                       |    |  |       |    |  |       |   
|                                              |  |                                         |    | 
|Total revenues                                |  | 100.0                                   |    |  | 100.0                                 |    |  | 100.0 |    |  | 100.0 |   
|                                              |  |                                         |    |  |                                       |    |  |       |    |  |       |   
|                                              |  |                                         |    | 
|Cost of revenues:                             |  |                                         |    |  |                                       |    |  |       |    |  |       |   
|Product                                       |  | 6.7                                     |    |  | 6.1                                   |    |  | 5.0   |    |  | 5.7   |   
|Services and maintenance                      |  | 36.8                                    |    |  | 32.5                                  |    |  | 34.9  |    |  | 33.7  |   
|Amortization of purchased product rights      |  | 0.1                                     |    |  | 1.3                                   |    |  |      |    |  | 1.3   |   
|                                              |  |                                         |    |  |                                       |    |  |       |    |  |       |   
|                                              |  |                                         |    | 
|Total cost of revenues                        |  | 43.6                                    |    |  | 39.9                                  |    |  | 39.9  |    |  | 40.7  |   
|                                              |  |                                         |    |  |                                       |    |  |       |    |  |       |   
|                                              |  |                                         |    | 
|Gross profit                                  |  | 56.4                                    |    |  | 60.1                                  |    |  | 60.1  |    |  | 59.3  |   
|                                              |  |                                         |    |  |                                       |    |  |       |    |  |       |   
|Operating expenses:                           |  |                                         |    |  |                                       |    |  |       |    |  |       |   
|Sales and marketing                           |  | 33.0                                    |    |  | 46.1                                  |    |  | 30.2  |    |  | 43.0  |   
|Research and development                      |  | 21.9                                    |    |  | 28.2                                  |    |  | 21.0  |    |  | 27.7  |   
|General and administrative                    |  | 16.2                                    |    |  | 15.3                                  |    |  | 15.2  |    |  | 15.5  |   
|Impairment of purchased product rights        |  |                                        |    |  | 5.1                                   |    |  |      |    |  | 2.6   |   
|Restructuring charges and adjustments         |  |                                        |    |  | 50.7                                  |    |  |      |    |  | 25.8  |   
|                                              |  |                                         |    |  |                                       |    |  |       |    |  |       |   
|                                              |  |                                         |    | 
|Total operating expenses                      |  | 71.1                                    |    |  | 145.4                                 |    |  | 66.4  |    |  | 114.6 |   
|                                              |  |                                         |    |  |                                       |    |  |       |    |  |       |   
|                                              |  |                                         |    | 
|Loss from operations                          |  | (14.7                                   | )  |  | (85.3                                 | )  |  | (6.3  | )  |  | (55.3 | ) 
|                                              |  |                                         |    |  |                                       |    |  |       |    |  |       |   
|                                              |  |                                         |    | 
|Other income (expense):                       |  |                                         |    |  |                                       |    |  |       |    |  |       |   
|Interest income                               |  | 1.4                                     |    |  | 2.2                                   |    |  | 1.3   |    |  | 2.3   |   
|Foreign exchange gain (loss)                  |  | 0.7                                     |    |  | (1.0                                  | )  |  | 1.3   |    |  | (0.6  | ) 
|Loss from equity investment                   |  | (0.8                                    | )  |  | (0.6                                  | )  |  | (0.9  | )  |  | (0.5  | ) 
|Write-down of long-term strategic investments |  |                                        |    |  | (12.4                                 | )  |  |      |    |  | (6.3  | ) 
|                                              |  |                                         |    |  |                                       |    |  |       |    |  |       |   
|                                              |  |                                         |    | 
|Total other income (expense)                  |  | 1.3                                     |    |  | (11.8                                 | )  |  | 1.7   |    |  | (5.1  | ) 
|                                              |  |                                         |    |  |                                       |    |  |       |    |  |       |   
|                                              |  |                                         |    | 
|Loss before income taxes                      |  | (13.4                                   | )  |  | (97.1                                 | )  |  | (4.6  | )  |  | (60.4 | ) 
|Provision for (benefit from) income taxes     |  | (0.3                                    | )  |  | 0.7                                   |    |  | 0.2   |    |  | 0.7   |   
|                                              |  |                                         |    |  |                                       |    |  |       |    |  |       |   
|                                              |  |                                         |    | 
|Net loss                                      |  | (13.1                                   | )% |  | (97.8                                 | )% |  | (4.8  | )% |  | (61.1 | )%
|                                              |  |                                         |    |  |                                       |    |  |       |    |  |       |   



REVENUES



We generate revenues from licensing the rights to our software products to
end-users and, to a lesser extent, from sublicense fees from resellers. We also generate revenues from consulting, training and post-contract support, or maintenance, performed for customers who license our products. We recognize revenues in
accordance with the provisions of the SOP No. 97-2, Software Revenue Recognition, SOP No. 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions and related accounting guidance and
pronouncements.



Revenues from perpetual software license agreements are
recognized as revenue when we have received a copy of an executed license agreement or an unconditional order under an existing license agreement, the software has been shipped (if there are no significant remaining vendor obligations), collection
of the receivable is probable and payment is due within twelve months. Revenues from



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license agreements requiring the delivery of significant unspecified software products in the future are accounted for as
subscriptions and, accordingly, are recognized ratably over the term of the agreement from the first instance of product delivery. This policy is applicable to all sales transactions, including sales to resellers and end user customers. We are
notified of a sale by a reseller to the end user customer in the same period that the actual sale took place. We do not offer a right of return on sales of our software products.



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



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



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



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



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



Total Revenues



Total revenues were $19.5 million for the three months ended June 30, 2004, which represented a decrease of 13% from the $22.4 million of total revenues for the three months ended June 30, 2003. Total revenues were
$42.5 million for the six months ended June 30, 2004, which represented a decrease of 4% from the $44.1 million of total revenues for the six months ended June 30, 2003. Total revenues derived from North America of $13.8 million for the three months
ended June 30, 2004 represented a decrease of 4% from the $14.4 million for the three months ended June 30, 2003, while the total revenues derived from outside of North America of $5.7 million for the three months ended June 30, 2004 represented an
decrease of 29% from the $8.0 million for the three months ended June 30, 2003. Total revenues derived from North America of $31.4 million for the six months ended June 30, 2004 represented an increase of 6% from the $29.7 million for the six months
ended June 30, 2003, while total revenues derived from outside of North America of $11.1 million for the six months ended June 30, 2004 represented a decrease of 23% from the $14.4 million for the six months ended June 30, 2003. The overall decline
in total revenues in the three and six months ended June 30, 2004 was driven by a reduced closure rate for software transactions, particularly in the second quarter of 2004. The effect of the decline in license revenues was felt most strongly in
Europe, Asia and other international locales, due to the continued soft economic climate internationally. The level of non-North American revenues has fluctuated from period to period and this trend is expected to continue for the foreseeable
future. In addition, extended government revenues, which includes healthcare, generated in the United States decreased from $5.6



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million and $11.1 million in the three and six months ended June 30, 2003, respectively, to $4.4 million and $8.6 million
in the three and six months ended June 30, 2004, respectively, or a decrease of 21% and 23%, respectively. The United States and Canadian governments represented 19% and 10% of total revenues in the second quarter of 2004, when including revenues
sold through resellers to the government end users. However, direct sales to the United States and Canadian governments represented only 15% and 7% of total revenues in the second quarter of 2004. Overall, the United States and Canadian governments
represented 17% and 10% of total revenues in the first half of 2004, when including revenues sold through resellers to the government end users. However, direct sales to the United States and Canadian governments represented only 12% and 6% of total
revenues in the first half of 2004. No other individual customer accounted for 10% or more of total revenues in the three and six months ended June 30, 2004 and 2003, respectively.



Product Revenues



Product revenues of $4.6 million for the three months ended June 30, 2004 represented a decrease of 48% from the $8.9 million for the three months ended June 30, 2003,
representing 24% and 40% of total revenues in the respective periods. Product revenues of $11.9 million for the six months ended June 30, 2004 represented a decrease of 29% from the $16.7 million for the six months ended June 30, 2003, representing
28% and 38% of total revenues in the respective periods. The decrease in product revenues in absolute dollars is primarily due to reduced U.S. government spending resulting from continued delays in budget approvals, the soft economic climate
internationally and concerns over the war in Iraq. New project purchases remained subject to governmental budgetary constraints, particularly in the United States. In addition, the global downturn experienced from 2001 through 2003 continues to have
a significant impact on information technology projects and the commitments that customers have made to expenditures in this area, with customers buying for their immediate needs, as opposed to buying total project or enterprise wide. Highlighting
this trend, we had 101 product revenue transactions (a product revenue transaction is defined as a product sale in excess of $10 thousand) in the first half of 2004, down from 145 in the first half of 2003, or a 30% decrease. Product revenue
transactions in the second quarter of 2004 were 39, compared to 71 in the same quarter last year, representing a 45% decline. In addition, the average license revenue transaction size decreased from $103 thousand in the first half of 2003 to $98
thousand in the first half of 2004, or a decrease of 5%. The top-five license revenue transactions as a percentage of total revenues declined from 23% and 20% for the three and six months ended June 30, 2003, respectively, to 10% and 14% for the
three and six months ended June 30, 2004. This decline reflects a lower volume of software license transactions representing greater than $1.0 million in product revenue in the first half of 2004. Product revenues as a percentage of total revenues
also decreased for the three and six months ended June 30, 2004 compared to the same period in 2003 due to a stronger demand for services, primarily maintenance and support services, relative to the demand for software.



Services and Maintenance Revenues



Services and maintenance revenues of $14.9 million for the three months ended June 30, 2004
represented an increase of 10% from the $13.5 million for the three months ended June 30, 2003, representing 76% and 60% of total revenues in the respective periods. Services and maintenance revenues of $30.6 million for the six months ended June
30, 2004 represented an increase of 12% from the $27.4 million for the six months ended June 30, 2003, representing 72% and 62% of total revenues in the respective periods. The increase in services and maintenance revenues is due to strong demand
for Entrusts architecture and deployment services, as well as significantly improved support and maintenance revenue. The increase in services revenue in the three and six months ended June 30, 2004 when compared to the same periods of 2003
has been driven by increased professional services revenue in the United States, including record revenue from our Entrust CygnaCom division, and support and maintenance revenues, and related support contract renewals, which continue to be at the
highest levels in our history. We believe this support revenue performance reflects the value our products provide to our customers globally, the increasing customer deployment of solutions and the level of service quality that our support and
maintenance team delivers. Support and maintenance revenues grew $0.7 million for the first six months of 2004 when compared to the same period of 2003, while professional services revenues increased $2.5 million primarily due to a $1.7 million
growth in revenues in our Entrust CygnaCom division. The increase in services and maintenance revenues as a percentage of total revenues for the three and six months ended June 30, 2004 compared to the same periods in 2003 reflected the shift in the
mix of revenues from product to services and maintenance revenues, largely due to the strength of demand for our services and maintenance business relative to the demand for software.



EXPENSES



Total Expenses



Total expenses consist of costs of revenues 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, impairment of purchased products rights and restructuring charges. Total expenses of $22.4 million for the three months ended June 30, 2004 represented a decrease of 46% from $41.6 million for the three
months ended June 30, 2003. Total expenses of $45.2 million for the six months ended June 30, 2004 represented a decrease of 34% from $68.5 million for the six months ended June 30, 2003. The decrease from the first half of 2003 was due primarily to
costs of $12.5 million associated with our May 2003 restructuring that we incurred in the second quarter of 2003, as well



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as the impact of cost savings associated with our May 2003 restructuring plan of approximately $10.8 million and the
collection of a long outstanding receivable for which bad debt expense had been recorded in a previous year, which netted approximately $1.3 million reduction in selling and marketing expenses in the first quarter of 2004. These savings were
partially offset by increased costs in the first quarter of 2004 of $1.3 million related to our corporate bonus plan. As of June 30, 2004, we had 512 full-time employees globally, compared to 560 full-time employees at June 30, 2003. No employees
are covered by any collective bargaining agreements.



Cost of Product
Revenues



Cost of product revenues consists primarily of costs
associated with product media, documentation, packaging and royalties to third-party software vendors. Cost of product revenues was $1.3 million for the three months ended June 30, 2004, which represented a 7% decrease from $1.4 million for the
three months ended June 30, 2003, representing 7% and 6% of total revenues in each of the respective periods. Cost of product revenues of $2.1 million for the six months ended June 30, 2004 represented a 16% decrease from $2.5 million for the six
months ended June 30, 2003, representing 5% and 6% of total revenues in each of the respective periods. The net decrease in third-party royalties in the second quarter of 2004 was the result of a $0.3 million decline due to the overall lower level
of product revenues in the second quarter of 2004 compared to the same quarter of 2003, offset by a $0.2 million increase due to a large third party royalty associated with one product transaction. This also accounted for the increase in cost of
product revenues as a percentage of total revenues for the second quarter of 2004. For the six months ended June 30, 2004, cost of product revenues decreased, both in absolute dollars and as a percentage of total revenues, due to a general shift in
the mix of product sales away from products that incorporate third party technology, which resulted in additional savings of $0.3 million over and above the savings associated with the overall lower level of product revenues in the first half of
2004 compared to the same period of 2003. The mix of third-party products and the relative gross margins achieved with respect to these products may vary from period to period and from transaction to transaction and, consequently, our gross margins
and results of operations could be adversely affected.



Cost of Services
and Maintenance Revenues



Cost of services and maintenance revenues
consists primarily of personnel costs associated with customer support, training and consulting services, as well as amounts paid to third-party consulting firms for those services. Cost of services and maintenance revenues was $7.2 million for the
three months ended June 30, 2004, which represented a 1% decrease from $7.3 million for the three months ended June 30, 2003, representing 37% and 33% of total revenues for the respective periods. Cost of services and maintenance revenues was $14.8
million for each of the six months ended June 30, 2004 and 2003, representing 35% and 34% of total revenues for the respective periods. The slight decrease in the cost of services and maintenance revenues in absolute dollars in the second quarter of
2004 compared to the same quarter of 2003 was due to the net effect of decreased costs associated with our May 2003 restructuring, which resulted in a $0.5 million reduction in the cost structure of our professional services team, despite improved
revenue performance for services and maintenance, offset by increased investment in our support and maintenance team and our Entrust CygnaCom services team of $0.4 million in the second quarter of 2004. Cost of services and maintenance revenues in
absolute dollars in the first half of 2004 remained unchanged compared to the same period of 2003, due to the net effect of decreased costs associated with our May 2003 restructuring, which resulted in a $0.7 million reduction in the cost structure
of our professional services team, despite improved revenue performance, offset by increased investment in our support and maintenance team and our Entrust CygnaCom services team of $0.7 million in the first half of 2004. The increase in the cost of
services and maintenance revenues as a percentage of total revenues in the three and six months ended June 30, 2004 compared to the same periods of 2003 was primarily due to the lower product revenue performance, particularly as a result of the
reduced closure rate for software transactions, and the shift in the mix of revenues from license to services and maintenance revenues compared to the same period of 2003, whereby services and maintenance revenues as a percentage of total revenues
increased to 72% in the first half of 2004 from 62% in the first half of 2003. As the services and maintenance revenues represented the larger proportion of total revenues and declined less than total revenues, the cost of generating those services
and maintenance revenues represented a much larger percentage when compared against total revenues. Without this effect, services and maintenance expenses would have decreased 8% and 5% in relation to total revenues for the three and six months
ended June 30, 2004 compared to the same periods of the previous year. However, this effect was partially offset by the fact that we were able to grow services and maintenance revenues while not increasing our overall services and maintenance cost
in the first half of 2004 and, in fact, decreasing these expenses in the second quarter of 2004 when compared to the same period in the prior year, through improved utilization of existing resources. The resulting decrease in the cost of services
and maintenance revenues as a percentage of total revenues in the three and six months ended June 30, 2004 was 4-percentage points in each of these periods, due to this effect, compared to the same periods of the previous year.



Services and maintenance gross profit as a percentage of services and maintenance revenues
was 52% for the three months ended June 30, 2004 compared to 46% for the three months ended June 30, 2003. Services and maintenance gross profit as a percentage of services and maintenance revenues was 52% and 46% for the six months ended June 30,
2004 and 2003, respectively. The increase in services and maintenance gross profit as a percentage of services and maintenance revenues for the three and six months ended June 30, 2004, compared to the same periods of 2003, was primarily due to
improved professional services revenues and operating efficiencies achieved in the form of higher productivity and utilization of available professional services resources, particularly in North America, meaning lower relative costs associated with
professional services in light of these improved revenues, which resulted in higher margin attainment by our professional services team. These increases in professional services revenues accounted



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for a twelve- and ten-percentage point increase in the services and maintenance gross profit as a percentage of services
and maintenance revenues for the three and six months ended June 30, 2004, respectively, when compared to the same periods of 2003. However, support and maintenance margins declined due to the significant investment made in this team to ensure
continued quality of service, which resulted in an offsetting six- and four-percentage point decrease in the services and maintenance gross profit as a percentage of services and maintenance revenues, respectively. We plan to continue to optimize
the utilization of existing professional services resources, while addressing significant incremental customer opportunities that may arise in the near future with the help of partners and other sub-contractors, until the investment in additional
full-time resources is justifiable. This may have an adverse impact on the gross profit for services and maintenance, as the gross profit realized by using partners and sub-contractors is generally lower. The mix of services and maintenance revenues
may vary from period to period and from transaction to transaction and, consequently, our gross margins and results of operations could be adversely affected.



Operating ExpensesSales and Marketing



Sales and marketing expenses decreased to $6.4 million for the three months ended June 30, 2004 from $10.4 million for the comparable period in 2003. Sales and marketing
expenses decreased to $12.8 million for the six months ended June 30, 2004 from $19.0 million for the six months ended June 30, 2003. Sales and marketing expenses represented 33% and 30% of total revenues for the three and six months ended June 30,
2004, compared to 46% and 43% for the comparable periods in 2003. The decrease in sales and marketing expenses in absolute dollars was mainly due to the continued management discipline with respect to spending, savings achieved as a result of our
May 2003 restructuring and corresponding reduction in headcount, and the collection of a long outstanding receivable, which netted an approximate $1.3 million reduction in selling and marketing expenses in the first quarter of 2004. In addition, we
realized a savings of $0.6 million related to reduced sales commissions due to the lower product revenue achievement in the three and six months ended June 30, 2004. However, these savings were partially offset by an additional provision of $0.2
million for aged receivables in the first half of 2004. The decrease in sales and marketing expenses as a percentage of total revenues for the three and six months ended June 30, 2004, compared to the same periods of 2003, reflected the effect of
cost savings realized through our May 2003 restructuring and reduced spending through efficiencies and discipline implemented in our sales processes, which decreased sales and marketing expenses as a percentage of total revenues by
thirteen-percentage points (9% in the first half of 2004), a three-percentage point (1% in the first half of 2004)) decrease due to lower sales commission costs, and a one-percentage point (4% in the first half of 2004) decrease due to the bad debt
recovery. These savings were partly offset by a four-percentage (1% in the first half of 2004) point increase in sales and marketing expenses as a percentage of total revenues for the three months ended June 30, 2004, due to lower revenue
achievement compared to the same period of 2003. We intend to continue to focus on improving the productivity of these organizations with a view to gaining efficiencies in the related processes in light of current economic conditions. However, we
believe it is necessary for us to continue to make significant investments in sales and marketing to support the launch of new products, services and marketing programs by maintaining our strategy of (a) investing in hiring and training our direct
and partner sales organizations in anticipation of future market growth, and (b) investing in marketing efforts in support of new product launches. We feel it is necessary to invest in marketing programs that will improve the awareness and
understanding of information security governance, and will work with and support the Business Software Alliance Information Security Governance Task Force toward that goal. Failure to make such investments could have a significant adverse effect on
our operations. While we are focused on marketing programs and revenue-generating opportunities to increase software revenues, there can be no assurances that these initiatives will be successful.



During the second quarter of 2004, the allowance for doubtful accounts decreased $0.4 million
to $1.6 million primarily as a result of a reduction in the allowance because of the significant improvement in our accounts receivable aging at June 30, 2004. During the first quarter of 2004, the allowance for doubtful accounts decreased to $2.0
million primarily due to the settlement of a long outstanding receivable discussed above, which had been fully provided for in fiscal 2001, and also due to effective cash collections during the period. As a result, we recorded a net bad debt
recovery of $1.2 million in the first quarter of 2004, after providing for the settlement costs related to the recovered bad debt and recording a provision for other aged receivables.



Operating ExpensesResearch and Development



Research and development expenses decreased to $4.3 million and $8.9 million for the three and six months ended June 30, 2004 from $6.3
million and $12.2 million for the comparable periods in 2003. Research and development expenses represented 22% and 21% of total revenues for the three and six months ended June 30, 2004, compared to 28% for each of the comparable periods in 2003.
The decrease in research and development expenses in absolute dollars for the three and six months ended June 30, 2004, compared to the same periods in 2003, was mainly due to the continued management discipline in spending and savings achieved as a
result of our May 2003 restructuring, which reduced expenses in this area by approximately $2.0 million and $3.6 million in the three and six months ended June 30, 2004. This decrease for the first half of 2004 was partially offset by increased
compensation costs associated with our corporate bonus plan of approximately $0.3 million recorded in the first quarter of 2004. Research and development expenses as a percentage of total revenues for the three and six months ended June 30, 2004
decreased compared to the same periods in 2003, mainly due to a six- and eight-percentage point decrease in spending in this area, respectively, as a result of the May 2003 restructuring. This effect was partly offset by the lower revenue
achievement during the first half of 2004, which accounted



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for a three- and one-percentage point decrease in these expenses as a percentage of total revenues in the three and six
months ended June 30, 2004, respectively. We believe that we must continue to maintain our investment in research and development in order to protect our technological leadership position, software quality and security assurance leadership. We
therefore expect that research and development expenses may have to increase in absolute dollars in the future if additional experienced security experts and software engineers are required.



Operating ExpensesGeneral and Administrative



General and administrative expenses decreased to $3.2 million and $6.5 million for the three
and six months ended June 30, 2004 from $3.4 million and $6.9 million for the comparable periods in 2003. General and administrative expenses represented 16% and 15% of total revenues for the three and six months ended June 30, 2004, compared to 15%
and 16% for the comparable periods in 2003. The decline in general and administrative expenses in absolute dollars for the three and six months ended June 30, 2004 compared to the same periods in 2003 was due to net effect of continued management
discipline in these areas, with savings of $0.2 million in the second quarter ($0.4 million in the first half of 2004), and the implementation of our restructuring plan in May 2003, which resulted in reduced spending of $0.1 million for the second
quarter of 2004 ($0.7 million for the first half of 2004), offset by increased compensation costs associated with the corporate bonus plan of $0.7 million recorded in the first quarter of 2004. General and administrative expenses as a percentage of
total revenues increased for the second quarter of 2004 compared to the same period of 2003, due in large part to the lower revenue achievement during the second quarter, as these expenses include a high degree of fixed costs, which resulted in a
two-percentage point increase, offset by the reduction in spending, which accounted for a one-percentage point decrease in general and administrative expenses as a percentage of revenue. General and administrative expenses as a percentage of total
revenues decreased for the first half of 2004 compared to the same period of 2003, largely due to the reduced spending that resulted from our May 2003 restructuring, which translated into a three-percentage point decrease. However, the increased
costs related to the bonus plan in the first quarter of 2004 resulted in an offsetting two-percentage point increase in general and administrative expenses as a percentage of total revenues for the first half of 2004, compared to the same period of
the prior year. 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 Impairment of Purchased Product Rights



Amortization of purchased product rights was $23 thousand for the three and six months ended
June 30, 2004, related to the acquisition of certain business assets from AmikaNow. This expense was recorded as a component of cost of revenues. No amortization expense was recorded with respect to the purchased product rights in the first quarter
of 2004, as this asset had been fully amortized or impaired by the end of 2003.



As a result of actions undertaken in the restructuring in the second quarter of 2003, coupled with the commercial release of a next generation software product, we reviewed the estimated future cash flows from the developed technology
acquired from enCommerce, Inc. (enCommerce). Based on these events, the net present value of the estimated future cash flows from the purchased product rights is negative. Therefore, we recorded an impairment charge in the second quarter
of 2003 related to this asset in the amount of the remaining carrying value of $1.1 million, as we determined the asset had minimal fair value. Amortization of purchased product rights in connection with the enCommerce acquisition of $284 thousand
and $568 thousand was expensed for the three and six months ended June 30, 2003. This expense was recorded as a component of cost of revenues in those periods.



Restructuring and Adjustments



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



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



The workforce portion included severance and related costs of
$4.8 million for 151 positions from all functional areas and had been completed by December 31, 2003. The consolidation of under-utilized facilities included costs relating to lease obligations through the first quarter of 2009 (primarily from
excess space in our Santa Clara, California and Addison, Texas facilities), and accelerated



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amortization of related leaseholds and equipment. The facilities plan was executed by September 30, 2003 and, as a
result, we recorded $4.1 million of charges during 2003 relating to these facilities, including $1.3 million for accelerated amortization on leaseholds and equipment whose estimated useful lives had been impacted by the plan to cease using the
related excess space in our facilities. The total amount of the workforce and facilities charges was $8.9 million. Of this amount, $4.6 million had been incurred by June 30, 2003 and charged to the restructuring charges line in the consolidated
statement of operations for the second quarter of 2003, while the remaining $4.3 million was recorded in the third quarter of 2003.



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



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



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



In July 2003, we signed a settlement
and general release agreement with Zix Corporation, that resulted in the remaining contractual obligation under the Companys marketing and distribution agreement with Zix Corporation being settled at a value significantly less than the accrued
$2.8 million obligation at June 30, 2003. Under the settlement agreement, we paid Zix Corporation $700 thousand in July in fulfillment of all remaining obligations. This settlement resulted in the reversal of an accrual by us of $2.1 million, which
was recorded through the restructuring charges line in our condensed consolidated statement of operations for the third quarter of 2003.



In connection with the May 2003 restructuring plan, which included a further reduction in space utilized at our Santa Clara, California facility, we reviewed market
sublease rates in that region. Based on information supplied to us by our external real estate advisors, we concluded that the sublease market would not recover in the timeframe that we had originally estimated due to the continued softening of
sublease rates in that market, requiring an adjustment to increase the facility related accrual recorded in June 2001 by $6.7 million. This adjustment was charged to the restructuring charges line in the condensed consolidated statement of
operations for the second quarter of 2003.



Write-down of Long-term
Strategic Investments



We recorded a non-cash charge in the second
quarter of 2003 related to the impairment of a long-term strategic investment made in Brazil in fiscal 2000. Due to a decline in market conditions and a restructuring of the investee by its management, we concluded that the investment had suffered
an other than temporary decline in fair value as determined by third party market transactions, and as such, we recorded an impairment in the second quarter of 2003 of $2.8 million. As a result, we have no remaining balance on this long-term
strategic investment.



Interest Income



Interest income decreased to $281,000 and $545,000 for the three and six months ended June
30, 2004, respectively, from $502,000 and $1.0 million for the three and six months ended June 30, 2003, respectively, representing 1% of total revenues for each of the three and six months ended June 30, 2004, compared to 2% of total revenues for
each of the three and six months ended June 30, 2003. The decrease in investment income reflected the reduced balance of funds invested, as these amounts have been drawn down to fund cash flow from operations, stock repurchases and cash used in the
acquisition of certain assets from AmikaNow. The funds invested decreased to $103.2 million at June 30, 2004 from $119.0 million at June 30, 2003. In addition, the decrease was due to lower interest rates that have been available for the first half
of 2004, compared to the same period in 2003. The rate of return on our marketable investments dropped to approximately 1.1% in the first half of 2004 compared to a rate of return of approximately 1.3% in the first half of 2003.



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Loss from Equity Investment



We recorded $168,000 and $377,000 of losses related to our investment in Entrust Japan for the three and six months ended June 30, 2004,
respectively, compared to $133,000 and $238,000 for the three and six months ended June 30, 2003. This investment is accounted for under the equity method of accounting for investments in common stock, since we have the potential to significantly
influence the operations and management of Entrust Japan. These losses represent our share of the operating losses of Entrust Japan for the three and six months ended June 30, 2004 on an equity accounting basis, based on an approximate 37% ownership
interest in the voting capital of Entrust Japan.



Provision for Income
Taxes



We recorded a recovery of income taxes of $66 thousand for the
second quarter of 2004 and a net income tax provision of $63 thousand for the six months ended June 30, 2004, compared to income tax provisions of $146 thousand and $320 thousand for the three and six months ended June 30, 2003. These provisions
represent primarily the taxes payable in certain foreign jurisdictions. The effective income tax rates differed from statutory rates in these periods primarily due to the amortization of purchased product rights and the impairment of long-term
strategic investments and purchased product rights, as well as an adjustment of the valuation allowance that has offset the tax benefits from the significant net operating loss and tax credit carry-forwards available.



LIQUIDITY AND CAPITAL RESOURCES



We generated cash of $7.8 million in operating activities during the six months ended June
30, 2004. This cash inflow was primarily a result of a decrease in accounts receivable of $4.6 million, an increase in deferred revenue of $7.3 million, and an increase in accounts payable and accrued liabilities of $0.1 million, partially offset by
cash outflows resulting from a net loss before non-cash charges of $0.4 million, a decrease in accrued restructuring charges of $2.7 million and an increase in prepaid expenses and other receivables of $1.1 million. Our average days sales
outstanding at June 30, 2004 was 72 days, which represents no change from the 72 days that we reported at March 31, 2004. The overall net zero change in days sales outstanding from March 31, 2004 was the net effect of lower revenues, which resulted
in less in-quarter collections during the second quarter of 2004, offset by strong overall collection efforts during the same period. For purposes of calculating average days sales outstanding, we divide ending accounts receivable by the applicable
quarters revenues and multiply this amount by 90 days. The level of accounts receivable at each quarter end is affected by the concentration of revenues in the final weeks of each quarter and may be negatively affected by expanded
international revenues in relation to total revenues as licenses to international customers often have longer payment terms.



During the six months ended June 30, 2004, we generated $3.9 million of cash from investing activities, primarily due to cash provided by reductions in our marketable
investments in the amount of $7.9 million (net of $35.8 million of marketable investment purchases). This was partially offset by $0.8 million invested in property and equipment, primarily for computer hardware upgrades throughout our organization,
and $0.5 in other long-term assets. In addition, we invested $2.7 million of cash in the acquisition of intellectual property and certain other assets from AmikaNow.



We used cash of $4.9 million in financing activities during the three months ended June 30, 2004 primarily for the repurchase of our Common
stock in the amount of $5.6 million, offset by $0.7 million of cash provided by the exercise of employee stock options.



As of June 30, 2004, our cash, cash equivalents and marketable investments in the amount of $103.2 million provided our principal sources of liquidity. Overall, we
generated $6.5 million of cash, cash equivalents and marketable investments during the first half of 2004. Although we continue to target operating breakeven, based on sustaining current revenue and operating expense structures, we estimate that we
will continue to use cash in fiscal 2004 to satisfy the obligations provided for under our restructuring program. However, if operating losses do occur, then cash, cash equivalents and marketable investments will be negatively affected.



In addition, we announced in the third quarter of 2002 that we intend to repurchase up to
an aggregate of 7.0 million shares of our Common stock over the 12-month period ending July 28, 2003, or an earlier date determined by our Board of Directors, in open market, negotiated or block transactions. In July 2003, we announced that our
Board of Directors had agreed to extend the expiry date of the stock repurchase program to September 1, 2004 and to permit the purchase of up to 7,000,000 shares of the Companys common stock in addition to the 2,229,200 shares already
purchased up to that time. In August 2004, we announced that our Board of Directors had authorized an extension of this stock repurchase program to permit the purchase of up to 10,000,000 shares of our common stock through September 15, 2005 in
addition to the 3,412,940 shares already purchased prior to this extension. The timing and amount of shares repurchased under this program will be determined by our management based on its evaluation of market and business conditions, and will be
funded using available working capital. Since the announcement of the program in 2002, we have repurchased 3,412,940 shares of Common stock for an aggregate purchase price of $11.5 million, of which 992,090 and 1,183,740 shares were repurchased
during the three and six months ended June 30, 2004, respectively, at an aggregate purchase price of $4.6 million and $5.6 million, respectively.



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



In terms of long-term liquidity requirements, we will need to fund the $32.7 million of accrued restructuring charges at June 30, 2004



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through fiscal 2011, as detailed below. This amount is net of estimated sublet recoveries on restructured facilities of
$23.7 million. The lease obligations included in these accrued restructuring charges are disclosed in the table of contractual commitments below. In addition, we forecast a requirement to spend approximately $1.8 million per year into the
foreseeable future on capital expenditures, primarily for computer equipment needed to replace existing equipment that is coming to the end of its useful life.



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



We have commitments that will expire at various
times through 2011. We lease administrative and sales offices and certain property and equipment under non-cancellable operating leases that will expire in 2011 with certain renewal options. Otherwise, we had no other significant contractual
obligations or commitments that were not recorded in our financial statements. A summary of our contractual commitments at June 30, 2004 is as follows:



|                                                            |  |                                           |        |                 |   |          |  |          |        |                  |   |        |  |   |       
|----------------------------------------------------------- |  | ----------------------------------------- | ------ | --------------- | - | -------- |  | -------- | ------ | ---------------- | - | ------ |  | - | ------
|                                                            |  | As of June 30, 2004 Payment Due by Period
|                                                            |  | Total                                     |        | Less than1 Year |   | 1-3Years |  | 3-5Years |        | More than5 Years
|                                                            |  | (in thousands)                           
|Operating lease obligations  currently utilized facilities |  | $                                         | 20,760 |                 | $ | 3,752    |  | $        | 6,409  |                  | $ | 6,687  |  | $ | 3,912 
|Operating lease obligations  restructured facilities       |  |                                           | 41,728 |                 |   | 6,018    |  |          | 12,316 |                  |   | 12,806 |  |   | 10,588
|Other contractual obligations                               |  |                                           |       |                 |   |         |  |          |       |                  |   |       |  |   |      
|                                                            |  |                                           |        |                 |   |          |  |          |        |                  |   |        |  |   |       
|                                                            |  |                                           |        |                 |  
|Total                                                       |  | $                                         | 62,488 |                 | $ | 9,770    |  | $        | 18,725 |                  | $ | 19,493 |  | $ | 14,500
|                                                            |  |                                           |        |                 |   |          |  |          |        |                  |   |        |  |   |       



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



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, 2004.



We generally warrant for
ninety days from delivery to a customer that our software products will perform free from material errors which prevent performance in accordance with user documentation. Additionally, we warrant that our consulting services will be performed
consistent with generally accepted industry standards including other warranties. We have only incurred nominal expense under our product or service warranties. As a result, we believe the estimated fair value of our obligations under these
agreements is minimal. Accordingly, we have no liabilities recorded for these agreements as of June 30, 2004.



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



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CERTAIN FACTORS THAT MAY AFFECT OUR BUSINESS



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



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



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



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



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



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



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



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



| | the relative proportions of revenues derived from licenses and services and maintenance;
|- | ----------------------------------------------------------------------------------------



| | the timing of new personnel hires and the rate at which new personnel become productive;
|- | ----------------------------------------------------------------------------------------



| | changes in pricing policies by our competitors;
|- | -----------------------------------------------



| | changes in our operating expenses;
|- | ----------------------------------



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



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



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



Estimating future revenues is difficult because we ship our products soon
after an order is received and, as such, we do not have a significant order backlog. Thus, quarterly license revenues depend heavily upon orders received and shipped within the same quarter. Moreover, we historically have recorded 50% to 70% of our
total quarterly revenues in the third month of the quarter, with a concentration of revenues in the second half of that month. We expect that this concentration of revenues, which is attributable in part to the tendency of some customers to make
significant capital expenditures at the end of a fiscal quarter and to sales patterns within the software industry, will continue.



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



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



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



| | customers budgetary constraints, particularly in a soft economic environment where technology spending is often deferred;
|- | --------------------------------------------------------------------------------------------------------------------------



| | the timing of customers budget cycles; and
|- | -------------------------------------------



| | customers internal approval processes.
|- | ---------------------------------------



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



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



Historically, a limited number of customers have accounted for a significant percentage of our revenues. In 2003, 2002 and 2001, our three largest customers accounted for
29%, 18% and 18% of revenues, respectively. In the three months ended June 30, 2004 and 2003, our three largest customers accounted for 17% and 22% of revenues, respectively.



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



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



The extended government vertical (Governments,
including Healthcare) accounted for 37% of our software revenue in the second quarter of 2004 and 45% of software revenue in fiscal 2003. The U.S. and Canadian governments represented 19% and 10% of total revenues, respectively, in the second
quarter of 2004, which includes revenues sold through resellers to these government end users. Sustaining and growing revenues in the government market will depend, in large part, on the following:



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



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



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



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



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



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



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



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



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



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



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



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



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



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



If the enterprise information technology budgets and the digital identity security market
do not continue to grow, demand for our products and services will be adversely affected.



The market for digital identity and information security solutions is at an early stage of development. Continued growth of the digital identity security market will depend, in large part, on the following:



| | the continued expansion of Internet usage and the number of organizations adopting or expanding intranets and extranets;
|- | ------------------------------------------------------------------------------------------------------------------------



| | the rate of adoption of Internet-based business applications such as Web Services;
|- | ----------------------------------------------------------------------------------



| | the ability of network infrastructures to support an increasing number of users and services;
|- | ---------------------------------------------------------------------------------------------



| | the public recognition of the potential threat posed by computer hackers and other unauthorized users; and
|- | ----------------------------------------------------------------------------------------------------------



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



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



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



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



In addition, the security level of our products is dependent upon the processes and procedures used to install and operate our products.
Failure on the part of our customers to properly install and operate our products, could cause a security breach, which could adversely affect the markets perception of us and our products, and could have an adverse effect on our reputation
and the demand for our products.



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



Like virtually all software systems, our products contain errors, failures or bugs that our existing testing procedures have not detected. The errors may become evident at any time during the life of our products. The
discovery of any errors, failures or bugs in any products, including third-party technology incorporated into our products, may result in:



| | adverse publicity;
|- | ------------------



| | product returns;
|- | ----------------



| | the loss or delay of market acceptance of our products; and
|- | -----------------------------------------------------------



| | third-party claims against us.
|- | ------------------------------



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



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



We have invested in several privately held companies, most of which are technology companies in the start-up or development stage, or are companies with technologies and products that are targeted at geographically distant markets. If the
demand for the technologies and products offered by these privately held companies materializes slowly, to a minimum extent, or not at all in relevant markets, we could lose all or substantially all of our investments in these companies.



On September 30, 2003, the Company loaned OHANA Wireless, Incorporated, a California
corporation (Ohana), $650 thousand in the form of a convertible loan and additional advances of $300 thousand were made in the second quarter of 2004 pursuant to the loan agreement. On July 19, 2004 the terms of this agreement were
replaced with a new convertible loan agreement pursuant to which Entrust extended an additional disbursement of $275 thousand, for a total loan of $1.225 million plus applicable interest (Loan). This Loan will automatically convert into
Ohanas series A preferred stock if Ohana is successful in closing a round of equity financing by October 1, 2004, based on minimum terms set out in the Loan agreement. As security against such Loan, the Company has taken an exclusive license
to certain intellectual property from Ohana (such exclusivity subject to certain exclusions to enable Ohana to continue to conduct business in the ordinary course); however, the Companys exercise of such exclusive rights is subject to the
approval of certain shareholders in Ohana including Fil-Fibers, Inc., a British Virgin Islands company. We presently do not expect these loans to be repaid in the near term and therefore, we have classified these amounts as long-term in nature. If
the demand for the technologies and products offered by this company 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 this company. To date, we have not
recorded any impairment in connection with this investment.



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



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



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



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



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



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



Our ability to
manage future growth, if any, will depend upon our ability to:



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



| | expand, train, motivate and manage our work force.
|- | --------------------------------------------------



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



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



Our future success depends upon our ability to continue to attract and retain highly
qualified scientific, technical, sales and managerial personnel. Competition for such personnel is intense, particularly in the field of cryptography, and there can be no assurance that we can retain our key scientific, technical, sales and
managerial employees or that we can attract, motivate or retain other highly qualified personnel in the future. These challenges are made more severe by our history of operating losses, the employment reductions from our restructurings, and the fact
that the exercise price of the substantial majority of outstanding stock options is below the current market price of our stock. If we cannot retain or are unable to hire such key personnel, our business, financial condition and results of
operations could be significantly adversely affected.



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



Our future success will depend, in part, upon our intellectual property rights and our ability to protect these rights. We rely on a combination of patent, copyright,
trademark and trade secret laws, nondisclosure agreements, shrink-wrap licenses and other contractual provisions to establish, maintain and protect our proprietary rights. Despite our efforts to protect our proprietary rights, unauthorized third
parties may:



| | copy aspects of our products;
|- | -----------------------------



| | obtain and use information that we regard as proprietary; or
|- | ------------------------------------------------------------



| | infringe upon our patents.
|- | --------------------------



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



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



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



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



Our inability or failure to protect our proprietary rights could
have a significant adverse effect on our business, financial condition or results of operations, while actions taken to enforce our intellectual property rights could substantially increase our quarterly expenses.



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



As the number of security products in the industry and the functionality of these products further overlaps, software developers and publishers may increasingly become subject to claims of infringement or
misappropriation of the intellectual property or proprietary rights of others. From time to time, we have received notices from third parties either soliciting our interest in obtaining a license under one or more patents owned or licensed by these
third parties or suggesting that our products may be infringing one or more patents owned or licensed by these third parties. From time to time, we have received notices from various customers stating that we may be responsible for indemnifying such
customers pursuant to indemnification obligations in product license agreements with such customers for alleged infringement of patents assigned to third parties. To date, we are not aware that any customer has filed an action against us for
indemnification. In addition, third parties may assert infringement or misappropriation claims against us in the future. Defending or enforcing our intellectual property could be costly and could result in a diversion of managements attention,
which could have a significant adverse effect on our business, financial condition or results of operations. A successful claim against us could also have a significant adverse effect on our results of operations for the period in which damages are
paid. Additionally, as a result of a successful claim, we could potentially be enjoined from using technology that is required for our products to remain competitive which could in turn have an adverse effect on our results of operations for
subsequent periods.



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



We rely on outside licensors for patent and/or software license rights in technology that is incorporated into and is necessary for the operation of our products. For example, our ability to provide Web server
certificates in the future is dependent upon a licensing agreement we have with Baltimore Technologies, one of our primary competitors. Our success will depend in part on our continued ability to have access to such technologies that are or may
become important to the functionality of our products. Any inability to continue to procure or use such technology could have a significant adverse effect on our ability to sell some of our products.



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



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



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



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



In June 2004, we acquired intellectual property and certain other assets of AmikaNow for $4.0 million, plus potential additional payments in the future of up to $1.5
million based on revenue generated from products that incorporate the intellectual property acquired. While management expects the integration of the acquired technology and people to go smoothly, each of the above risks apply to this acquisition as
well.



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



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



As a result of the June 2001 restructuring plan, we recorded
restructuring and other special non-recurring charges, excluding goodwill impairment, of $106.6 million in the second quarter of 2001. Our assessment of the accounting effects of the June 2001 restructuring plan required assumptions in estimating
the original accrued restructuring charges, including estimating future recoveries of sublet income from excess facilities, liabilities from employee severances, and costs to exit business activities. Changes in these assumptions, with respect to
the accrued restructuring charges for the June 2001 restructuring plan of $30.5 million at June 30, 2004, could have a material effect on our reported results.



As a result of the May 2003 restructuring plan, we recorded restructuring charges, excluding impairments, of $8.9 million. Our assessment of the accounting effect of
the May 2003 restructuring plan required assumptions in estimating the original incurred and expected restructuring charges of $8.9 million, including estimating liabilities from employee severances, future recoveries of sublet income from excess
facilities, and other costs to exit activities. Changes in these assumptions, with respect to the accrued restructuring charges for the May 2003 restructuring plan of $2.2 million at June 30, 2004, could have a material effect on our reported
results.



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



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



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



In the future, we may establish
additional foreign operations, hire additional personnel and establish relationships with additional



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



| | difficulties in collecting international accounts receivable;
|- | -------------------------------------------------------------



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



| | potentially longer payment cycles for customer payments;
|- | --------------------------------------------------------



| | increased costs associated with maintaining international marketing efforts;
|- | ----------------------------------------------------------------------------



| | introduction of non-tariff barriers and higher duty rates;
|- | ----------------------------------------------------------



| | difficulties in enforcement of contractual obligations and intellectual property rights;
|- | ----------------------------------------------------------------------------------------



| | difficulties managing personnel, partners and operations in remote locations; and
|- | ---------------------------------------------------------------------------------



| | increased complexity in global corporate tax structure.
|- | -------------------------------------------------------



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



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



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



Also, another outbreak of SARS in the region could have an impact on our ability to travel to, and work with, customers in the region. These
restrictions could affect our ability to transact business in the region.



Our
$1.225 million investment in Ohana is also subject to these risks.



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



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



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



The trading price of our Common stock has been, and is expected to continue to be, highly volatile and may be significantly and adversely
affected by factors such as:



| | actual or anticipated fluctuations in our operating results;
|- | ------------------------------------------------------------



| | announcements of technological innovations;
|- | -------------------------------------------



| | new products introduced by, or new contracts entered into by, us or our competitors;
|- | ------------------------------------------------------------------------------------



| | developments with respect to patents, copyrights or propriety rights;
|- | ---------------------------------------------------------------------



| | conditions and trends in the security industry;
|- | -----------------------------------------------



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| | changes in financial estimates by securities analysts; and
|- | ----------------------------------------------------------



| | general market conditions and other factors.
|- | --------------------------------------------



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



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



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Risk Associated with Interest Rates



Our investment policy states that we will invest our cash reserves, including cash, cash equivalents and marketable investments, in investments that are designed to preserve principal, maintain liquidity and maximize return. We actively
manage our investments in accordance with these objectives. Some of these investments are subject to interest rate risk, whereby a change in market interest rates will cause the principal amount of the underlying investment to fluctuate. Therefore,
depreciation in principal value of an investment is possible in situations where the investment is made at a fixed interest rate and the market interest rate then subsequently increases. We try to manage this risk by maintaining our cash, cash
equivalents and marketable investments with high quality financial institutions and investment managers. As a result, we believe that our exposure to market risk related to interest rates is minimal.



The following table presents the cash, cash equivalents and marketable investments that we
held at June 30, 2004, that would have been subject to interest rate risk, and the related ranges of maturities as of those dates:



|                                                                  |  |                         |        |            |   |            |  |             |        |  |   |      
|----------------------------------------------------------------- |  | ----------------------- | ------ | ---------- | - | ---------- |  | ----------- | ------ |  | - | -----
|                                                                  |  | MATURITY (in thousands)
|                                                                  |  | Within 3 Months         |        | 3-6 Months |   | > 6 Months |  | > 12 Months
|Investments classified as cash and cash equivalents               |  | $                       | 24,068 |            | $ |           |  | $           |       |  | $ |     
|Investments classified as held to maturity marketable investments |  |                         | 9,873  |            |   | 14,936     |  |             | 25,971 |  |   | 8,072
|                                                                  |  |                         |        |            |   |            |  |             |        |  |   |      
|                                                                  |  |                         |        |           
|Total amortized cost                                              |  | $                       | 33,941 |            | $ | 14,936     |  | $           | 25,971 |  | $ | 8,072
|                                                                  |  |                         |        |            |   |            |  |             |        |  |   |      
|                                                                  |  |                         |        |           
|Fair value                                                        |  | $                       | 33,941 |            | $ | 14,947     |  | $           | 25,924 |  | $ | 8,049
|                                                                  |  |                         |        |            |   |            |  |             |        |  |   |      



Risk Associated with Exchange Rates



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



Historically, we have not engaged in formal hedging activities, but we do periodically review the potential impact of this risk to ensure that the risk of significant
potential losses is minimized. However, as a significant portion of our expenses are incurred in Canadian



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dollars, our expense base increased by $4.9 million in 2003, when compared to 2002, due to fluctuations in the exchange
rate between the United States and Canadian dollars. During the second quarter of 2004, we engaged in forward contracts to purchase Canadian dollars, covering exposures on approximately $5.1 million of our Canadian subsidiarys expenses
denominated in Canadian dollars, in an attempt to reduce earnings volatility that might result from fluctuations in the exchange rate between the Canadian and U.S. dollar. None of the related foreign exchange contracts extended past June 30, 2004.
We currently have not engaged in any forward contracts to purchase Canadian dollars to cover exposures on expenses denominated in Canadian dollars in the third quarter of 2004 or future periods.



Risk Associated with Equity Investments



We have a long-term investment in Entrust Japan, which is accounted for in accordance with
the equity method. We recorded our share of post-acquisition losses of Entrust Japan, in the amount of $168 thousand and $377 thousand in our consolidated losses for the three and six months ended June 30, 2004 and $133 thousand, respectively, and
$238 thousand for the three and six months ended June 30, 2003, respectively, resulting in cumulative losses recorded to date of $1.6 million. These losses are attributable to our pro rata share of Entrust Japans losses in the first and second
quarters of 2004 and 2003, while we had an equity ownership of approximately 37% of their voting stock. During 2002, Entrust Japan exceeded the performance targets established at the date of our increased investment. However, in 2003 and the first
half of 2004, the actual growth of Entrust Japan was less than the original projections. It is possible that future growth will also fall short of projections, and due to Entrust Japans history of operating losses, it is possible that all or
substantially all of the remaining $283 thousand equity investment in Entrust Japan at June 30, 2004 may be expensed through our operating earnings in future quarters as a result of our recognition of our equity share of losses in Entrust Japan.
However, we do not have any obligation to provide additional cash funding to them. As of June 30, 2004, we believe that there had not been any additional impairment of our investment in Entrust Japan beyond our equity share of losses recorded to
date. However, there are risks associated with joint venture investments, including: failure to agree on budgets, market plans, staffing decisions and changes in strategic direction by one of the partners. If any one of these were to occur, the
value of our investment in Entrust Japan could be further adversely affected.



We have also invested in Ohana, a company in the start-up or development stage, in the form of a convertible loan totaling $1.225 million. The Company does not expect this loan to be repaid in the near term and therefore, has classified the
amount as long-term in nature. If the demand for the technologies and products offered by this company 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 this
company. To date, we have not recorded any impairment in connection with this investment.



ITEM 4. CONTROLS AND PROCEDURES



As required by
Rule 13a-15(b), Entrust management, with the participation of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of June 30, 2004 (the end of the period covered by this quarterly report), of the effectiveness of the
Companys disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures were
effective in all material respects as of June 30, 2004.



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PART II. OTHER INFORMATION



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



The table below sets forth the information with respect to purchases made by or on behalf of Entrust, Inc. or any affiliated purchaser (as defined in Rule
10b-18(a)(3) under the Securities Exchange Act of 1934), of our common stock during the three months ended June 30, 2004.



|                                           |  |                                |  |                            |      |                                                                                    |         |                                                                                  |          
|------------------------------------------ |  | ------------------------------ |  | -------------------------- | ---- | ---------------------------------------------------------------------------------- | ------- | -------------------------------------------------------------------------------- | ---------
|Period                                     |  | Total Numberof SharesPurchased |  | AveragePrice Paidper Share |      | Total Number of SharesPurchased as Part ofPublicly Announced Plans or Programs (1) |         | Maximum Number of Shares That May Yet Be Purchased Under thePlans or
Programs(1)
|Month #1 (April 1, 2004 to April 30, 2004) |  | 689,490                        |  | $                          | 4.64 |                                                                                    | 689,490 |                                                                                  | 6,118,860
|Month #2 (May 1, 2004 to May 31, 2004)     |  | 302,600                        |  |                            | 4.62 |                                                                                    | 302,600 |                                                                                  | 5,816,260
|Month #3 (June 1, 2004 to June 30, 2004)   |  |                               |  |                            |     |                                                                                    |        |                                                                                  | 5,816,260
|                                           |  |                                |  |                            |      |                                                                                    |         |                                                                                  |          
|Total                                      |  | 992,090                        |  | $                          | 4.63 |                                                                                    | 992,090 |                                                                                  |          
|                                           |  |                                |  |                            |      |                                                                                    |         |                                                                                  |          

---

|(1) | On July 29, 2002, the Company announced that its board of directors had authorized the Company to repurchase up to an aggregate of 7,000,000 shares of its Common stock. On July 22,
2003, the Company announced that its board of directors had authorized an extension to this stock repurchase program. Entrusts original stock repurchase program would have expired on July 28, 2003. The extended plan permits the purchase of up
to 7,000,000 shares of the Companys Common stock through September 1, 2004, in addition to the 2,229,200 shares already purchased prior to the extension. On August 2, 2004, the Company announced that its board of directors had authorized an
extension of this stock repurchase program to permit the purchase of up to 10,000,000 shares of the Companys Common Stock through September 15, 2005 in addition to the 3,412,940 shares already purchased prior to this extension. Repurchases
under the stock repurchase program may take place from time to time until September 15, 2005, or an earlier date determined by the Companys board of directors, in open market, negotiated or block transactions, and may be suspended or
discontinued at any time. The Companys management will determine the timing and amount of shares repurchased based on its evaluation of market and business conditions.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



On May 7, 2004, we held our Annual Meeting of Stockholders at which the stockholders voted upon the election of two Class III directors to our Board of Directors for three-year terms. The number of votes cast for,
against or withheld with respect to the matter voted upon is set forth below:



|                   |  |                |  |                               
|------------------ |  | -------------- |  | ------------------------------
|Director           |  | Votes Cast for |  | Votes Cast Against or Withheld
|Michael P. Ressner |  | 46,224,828     |  | 2,093,869                     
|Edward O. Vetter   |  | 46,224,828     |  | 2,093,869                     



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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



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



|              |  |                                                                                        
|------------- |  | ---------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                            
|10.1          |  | Letter Regarding Transition and Release Agreement with Ed Pillman, dated June 25, 2004.
|              | 
|10.2          |  | Employment Agreement with David Carey, dated April 30, 2004.                           
|              | 
|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.                                 



(b) Reports on Form 8-K:



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



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



We furnished a Current Report on Form 8-K under Items 7(c) and 12 on July 6, 2004, announcing preliminary financial results for the second quarter ended June 30, 2004.



We furnished a Current Report on Form 8-K under Items 7(c) and 12 on July 26,
2004, announcing financial results for the second quarter ended June 30, 2004.



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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 4, 2004



/s/ David J. WagnerDavid J. WagnerChief Financial Officer and Senior Vice President (Principal Financial and Accounting Officer)




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EXHIBIT INDEX



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



|              |  |                                                                                        
|------------- |  | ---------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                            
|10.1          |  | Letter Regarding Transition and Release Agreement with Ed Pillman, dated June 25, 2004.
|              | 
|10.2          |  | Employment Agreement with David Carey, dated April 30, 2004.                           
|              | 
|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.                                 



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