<PAGE>

================================================================================

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

                                   ----------

                                    FORM 10-Q
(Mark one)

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

                      FOR THE QUARTER ENDED MARCH 31, 2002

                                       OR

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

                        COMMISSION FILE NUMBER 000-24733

                                   ----------

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

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

                           ONE HANOVER PARK, SUITE 800
                              16633 DALLAS PARKWAY
                                ADDISON, TX 75001
               (Address of principal executive offices & zip code)

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

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

     There were 65,081,936 shares of the registrant's $.01 par value Common
stock outstanding as of May 3, 2002.

================================================================================

<PAGE>


                                  ENTRUST, INC.

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                Page
                                                                                ----
<S>                                                                              <C>
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............................................   11

   Item 3.   Quantitative and Qualitative Disclosures about Market Risk.......   26

PART II. OTHER INFORMATION

   Item 1.   Legal Proceedings................................................   28
   Item 6.   Exhibits and Reports on Form 8-K.................................   28

SIGNATURES....................................................................   29
</TABLE>

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

                                       2

<PAGE>

                          PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                                  ENTRUST, INC.

                      CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                                                (Unaudited)
                                                                                 DECEMBER 31,     MARCH 31,
                                                                                     2001           2002
                                                                                 ------------   -----------
(In thousands, except share data)

<S>                                                                               <C>            <C>
ASSETS
Current assets:
  Cash and cash equivalents ..................................................    $  45,267      $  41,295
  Short-term marketable investments ..........................................      108,288        101,368
  Accounts receivable (net of allowance for doubtful
    accounts of $3,909 at December 31, 2001 and
    $3,270 at March 31, 2002) ................................................       23,732         25,123
  Prepaid expenses and other .................................................        5,202          6,581
                                                                                  ---------      ---------
       Total current assets ..................................................      182,489        174,367
Long-term marketable investments .............................................        9,038          7,910
Property and equipment, net ..................................................       17,390         16,141
Purchased product rights, net ................................................        2,838          2,554
Goodwill, net ................................................................        6,436          6,436
Other purchased intangibles, net .............................................        4,750          4,750
Long-term strategic investments ..............................................        5,076          5,076
Other long-term assets, net ..................................................        1,421          1,371
                                                                                  ---------      ---------
       Total assets ..........................................................    $ 229,438      $ 218,605
                                                                                  =========      =========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Accounts payable .........................................................    $  13,815      $  13,368
    Accrued liabilities ......................................................       15,121         13,816
    Accrued restructuring charges ............................................       46,988         40,664
    Deferred revenue .........................................................       17,553         15,487
                                                                                  ---------      ---------
       Total current liabilities .............................................       93,477         83,335
Long-term liabilities ........................................................          116            737
                                                                                  ---------      ---------
       Total liabilities .....................................................       93,593         84,072
                                                                                  ---------      ---------
Shareholders' equity:
    Common stock, par value $0.01 per share; 64,432,052 and 65,092,279 issued
      and outstanding shares at December 31, 2001 and March 31, 2002,
      respectively ...........................................................          645            652
    Additional paid-in capital ...............................................      781,879        783,621
    Unearned compensation ....................................................         (100)           (45)
    Accumulated deficit ......................................................     (645,190)      (648,534)
    Accumulated other comprehensive loss .....................................       (1,389)        (1,161)
                                                                                  ---------      ---------
       Total shareholders' equity ............................................      135,845        134,533
                                                                                  ---------      ---------
       Total liabilities and shareholders' equity ............................    $ 229,438      $ 218,605
                                                                                  =========      =========
</TABLE>

            See notes to condensed consolidated financial statements

                                        3

<PAGE>

                                  ENTRUST, INC.

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                   (Unaudited)
                                                                                THREE MONTHS ENDED
                                                                                     MARCH 31,
                                                                               -------------------
                                                                                 2001        2002
                                                                               --------    -------
(In thousands, except per share data)

<S>                                                                            <C>         <C>
Revenues:
   License..................................................................   $ 10,559    $12,089
   Services and maintenance.................................................     20,946     15,434
                                                                               --------    -------
      Total  revenues.......................................................     31,505     27,523
                                                                               --------    -------
Cost of revenues:
   License..................................................................        901        942
   Services and maintenance.................................................     13,346      8,494
                                                                               --------    -------
      Total cost of revenues................................................     14,247      9,436
                                                                               --------    -------
Gross profit................................................................     17,258     18,087
                                                                               --------    -------
Operating expenses:
   Sales and marketing......................................................     26,580     12,145
   Research and development.................................................      9,487      6,033
   General and administrative...............................................      4,687      3,506
   Amortization of purchased product rights.................................      1,377        284
   Amortization of goodwill and other purchased intangibles.................     28,900         --
                                                                               --------    -------
      Total operating expenses..............................................     71,031     21,968
                                                                               --------    -------
Loss from operations........................................................    (53,773)    (3,881)
Interest income.............................................................      3,244        932
                                                                               --------    -------
Loss before provision for income taxes......................................    (50,529)    (2,949)
Provision for income taxes..................................................        350        395
                                                                               --------    -------
Net loss   .................................................................   $(50,879)   $(3,344)
                                                                               ========    =======

Net loss per share:
      Basic ................................................................   $  (0.81)   $ (0.05)
      Diluted ..............................................................   $  (0.81)   $ (0.05)
Weighted average common shares used in per share computations:
      Basic ................................................................     62,911     64,762
      Diluted ..............................................................     62,911     64,762
</TABLE>

            See notes to condensed consolidated financial statements

                                       4

<PAGE>

                                  ENTRUST, INC.

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                        (Unaudited)
                                                                    THREE MONTHS ENDED
                                                                         MARCH 31,
                                                                   --------------------
                                                                     2001        2002
                                                                   --------    --------
(In thousands)

<S>                                                                <C>         <C>
OPERATING ACTIVITIES:
   Net loss ..................................................     $(50,879)   $ (3,344)
   Non-cash items in net loss:
      Depreciation and amortization ..........................       32,503       2,219
      Unearned compensation amortized ........................           56          55
      Revenue from non-monetary transaction ..................         (353)         --
   Changes in operating assets and liabilities:
      (Increase) decrease in accounts receivable .............        4,295      (1,322)
      Increase in prepaid expenses and other .................         (764)     (1,379)
      Increase (decrease) in accounts payable ................          260        (444)
      Decrease in accrued liabilities ........................      (12,873)     (1,038)
      Decrease in accrued restructuring charges ..............           --      (6,324)
      Increase (decrease) in deferred revenue ................          950      (2,027)
                                                                   --------    --------
         Net cash used in operating activities ...............      (26,805)    (13,604)
                                                                   --------    --------
INVESTING ACTIVITIES:
      Purchases of marketable investments ....................      (47,623)    (41,400)
      Dispositions of marketable investments .................       72,778      49,448
      Purchases of property and equipment ....................       (5,073)       (530)
      Increase in long-term investments ......................       (1,496)         --
      Increase in other long-term assets .....................       (1,016)        (54)
                                                                   --------    --------
         Net cash provided by investing activities............       17,570       7,464
                                                                   --------    --------
FINANCING ACTIVITIES:
      Repayment of long-term liabilities .....................          (72)        (58)
      Increase in long-term deposits .........................           --         474
      Proceeds from exercise of stock options and employee
         stock purchase plan .................................        1,924       1,734
                                                                   --------    --------
         Net cash provided by financing activities ...........        1,852       2,150
                                                                   --------    --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH ......................          342          18
                                                                   --------    --------
NET DECREASE IN CASH AND CASH EQUIVALENTS ....................       (7,041)     (3,972)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .............       24,241      45,267
                                                                   --------    --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ...................     $ 17,200    $ 41,295
                                                                   ========    ========
</TABLE>

            See notes to condensed consolidated financial statements

                                       5

<PAGE>

                                  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.
The results of operations for the three months ended March 31, 2002 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 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, 2001 contained
in the Company's Annual Report on Form 10-K.

NOTE 2. EQUITY INVESTMENT IN ENTRUST JAPAN CO., LTD. ("Entrust Japan")

          On April 12, 2002, the Company increased its investment in the voting
capital of Entrust Japan from an ownership share of less than 10% to
approximately 37% by exchanging cash of approximately $1.5 million, Entrust
software product and distribution rights for certain Entrust products for the
Japanese market, for additional shares in Entrust Japan. The Company's increased
investment follows additional investments in Entrust Japan made by Toyota and
SECOM in the fourth quarter of 2001. The Company has concluded that because, as
of the second quarter of 2002, it has the ability to exercise significant
influence over the operations of Entrust Japan, that beginning in the same
period of 2002, it will account for its 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, the Company will include its
share of post-acquisition losses of Entrust Japan on the step-by-step
acquisition method in its consolidated losses for the current fiscal year. In
addition, the Company will record an adjustment to consolidated accumulated
deficit to pick up the post-acquisition losses of Entrust Japan of prior years,
attributable to the less than 10% ownership block previously acquired. As a
result, the Company's previous investment in Entrust Japan of $0.4 million, at
March 31, 2002, will be written down to zero in the second quarter of 2002 and
the Company will begin including its share of current year losses in its
operating results in that same quarter.

NOTE 3. AMORTIZATION OF GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS

          Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" ("SFAS No. 142"), which revises the accounting for
purchased goodwill and intangible assets, became effective for the Company
beginning January 1, 2002. Under SFAS No. 142, goodwill and intangible assets,
with balances of $6.4 million and $4.8 million, respectively, at March 31, 2002,
with indefinite lives will no longer be amortized, but will be tested for
impairment annually and also in the event of an impairment indicator.

          The Company assessed the carrying value of its goodwill and intangible
assets in the first quarter of 2002 to determine the complete impact of the
adoption of SFAS No. 142. No further impairment was required at March 31, 2002.

          The Company's net loss, on a pro forma basis, assuming the cessation
of goodwill amortization as required under SFAS No. 142 had been in effect from
January 1, 2001, is as follows:

                                       6

<PAGE>

                                                              (Unaudited)
                                                           Three Months Ended
                                                               March 31,
                                                           ------------------
                                                             2001       2002
                                                           --------   -------

Reported net loss ......................................   $(50,879)  $(3,344)
SFAS No. 142 adjustment ................................     28,900        --
                                                           --------   -------
Pro forma net loss .....................................   $(21,979)  $(3,344)
                                                           ========   =======
Pro forma net loss per share ...........................   $  (0.35)  $(0.05)
                                                           ========   =======

NOTE 4. RESTRUCTURING AND OTHER SPECIAL NON-RECURRING CHARGES

          On June 4, 2001, the Company announced a Board-approved restructuring
program 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 program
included a workforce reduction, consolidation of excess facilities, and
discontinuance of non-core products and programs.

          The workforce portion of the restructuring 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, CA. These costs are payable contractually over a period
up to 10 years, which is the lease term of the Santa Clara facility, reduced by
estimated sublease recoveries. The Company continues to evaluate ongoing
possibilities to settle this obligation in the most economic manner and,
therefore, it has been classified as current in nature. The discontinuance of
non-core products and programs was primarily related to the discontinuance of
certain of the Company's services business initiatives and certain desktop
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 is expected to be substantially completed by the end of
the second quarter of 2002, while estimated minimum royalty obligations related
to certain discontinued products of $4.2 million are payable contractually over
the next three years. No adjustments were made during the first quarter of 2002.

Summary of accrued restructuring charges

     The following table is a summary of the accrued restructuring charges as at
March 31, 2002 (table in millions):

<TABLE>
<CAPTION>
                                                   Accrued                    Accrued
                                                Restructuring              Restructuring
                                                  Charges at                Charges at
                                                 December 31,     Cash       March  31,
                                                    2001        Payments       2002
                                                -------------   --------   -------------
<S>                                                 <C>           <C>          <C>
Workforce reduction and other personnel costs...    $ 2.3         $1.0         $ 1.3

Consolidation of excess facilities..............     34.6          1.8          32.8

Discontinuance of non-core products and
   programs.....................................     10.1          3.5           6.6
                                                    -----         ----         -----
Total...........................................    $47.0         $6.3         $40.7
                                                    =====         ====         =====
</TABLE>

NOTE 5. NET INCOME (LOSS) PER SHARE AND SHARES OUTSTANDING

                                       7

<PAGE>

          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 their effect is
antidilutive. For the three months ended March 31, 2002, the antidilutive effect
excluded from the diluted net loss per share computation due to the options to
purchase Common stock was 1,789,392 shares.

          In the three months ended March 31, 2002, the Company issued 642,924
shares of Common stock related to the exercise of employee stock options and the
sale of shares under the employee stock purchase plan.

NOTE 6. STOCK OPTION EXCHANGE PROGRAM

          On June 19, 2001, the Company announced a voluntary stock option
exchange program for its eligible employees. Under the program, the Company's
employees were offered the opportunity to cancel, as of July 30, 2001, certain
outstanding stock options to purchase shares of Common stock previously granted
to them. In exchange, these employees received new options granted under the
1999 Non-Officer Employee Stock Incentive Plan. New options issued have terms
and conditions that are substantially the same as those of the cancelled
options. The Company believes that this voluntary exchange program complied with
FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation" and related FASB EITF guidance and, accordingly, is not expected
to result in any variable accounting compensation charges. Members of the
Company's Board of Directors and executive officers were not eligible to
participate in this program.

          Pursuant to the terms and conditions of the Offer to Exchange, a total
of 592 eligible optionees participated in the option exchange program. The
Company accepted for cancellation options to purchase 5,480,261 shares of its
Common stock. Subject to the terms and conditions of the Offer to Exchange, the
Company granted new options to purchase 5,033,822 shares of its Common stock on
January 31, 2002, at an exercise price of $6.75 per share, which was the current
market value, in exchange for the options surrendered and accepted under the
program.

          Additionally, certain 16B Officers who were not eligible to
participate in the option exchange program were offered the opportunity to
receive a nominal cash or stock award to cancel a portion of their out of the
money options. Three officers elected to participate in this program and, in
total, 334,000 options were canceled with strike prices of between $19.25 and
$50.00 for 15,220 shares of stock and $4,338.95 of cash. The expense for the
fair value of the shares and the cash was recorded in operating expense in the
first quarter of 2002. The Company has provided no promise to compensate the
employees for any increases in the price of the stock after the cancellation
date. Further, the Company does not intend to issue additional options to these
employees within 6 months and one day of the date of cancellation.

NOTE 7. 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 12 months. The Company has the intent and ability to hold all
of these investments until maturity. Therefore, all such investments are
classified as held to maturity investments and are stated at amortized cost. At
March 31, 2002, 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.

          In addition, the Company had invested in an equity instrument of a
publicly traded technology company. This investment had been classified as
available for sale, in current assets, and was carried at fair value based on
quoted market prices. This instrument was considered to be short-term in nature
as it was management's intention to dispose of this investment within the year.
Realized gains and losses on disposition of available for sale marketable
investments are included in 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 income during the period of the hedge. The Company disposed of this
investment during its first quarter of 2002, at approximately its carrying
value.

          The Company has a policy that allows for the use of hedges on equity
investments in publicly traded companies. However, the Company presently is not
engaged in any such hedges.

                                       8

<PAGE>

          The Company holds equity securities stated at cost, which represent
long-term investments in private companies made for business and strategic
alliance purposes, including Entrust Japan (Note 2). The Company's ownership
share in these companies ranges from 1% to 10% of voting share capital at March
31, 2002. 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
Strategic Investment Committee of the Board of Directors monitors and assesses
the ongoing operating performance of the underlying companies for evidence of
impairment. To date, the Company has recorded impairments totaling $10.8 million
with respect to these investments. No loss from impairment was recorded in the
quarter ended March 31, 2002.

          The Company recorded revenues representing 2% of total revenue for the
three months ended March 31, 2002, with respect to arm's-length transactions
with companies in which it has made strategic equity investments recorded at
cost.

NOTE 8. SEGMENT AND GEOGRAPHIC INFORMATION

Segment information

          The Company conducts business in one operating segment: the design,
production and sale of software products and related services for Internet
security. The nature of the Company's products and services is similar and, in
general, the type of customers for those products and services is not
distinguishable. The Company does, however, prepare information for internal use
by the Chief Operating Decision Maker ("CODM"), the President and Chief
Executive Officer, on a geographic basis. Accordingly, the Company has included
a summary of the segment financial information reported to the CODM as follows
in the next section regarding geographic information.

Geographic information

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

          The Company operates in three main geographic areas as follows:

                                                           (Unaudited)
                                                        Three Months Ended
                                                             March 31,
                                                        -------------------

                                                          2001       2002
                                                        --------   --------

Revenues:
   United States ....................................   $ 14,212    $10,863
   Canada ...........................................      5,895      8,953
   Europe, Asia and Other ...........................     11,398      7,707
                                                        --------    -------

      Total revenues ................................   $ 31,505    $27,523
                                                        ========    =======

Income (loss) before income taxes:
   United States ....................................   $(41,903)   $  (153)
   Canada ...........................................    (10,020)    (3,195)
   Europe, Asia and Other ...........................      1,394        399
                                                        --------    -------

      Total income (loss) before income taxes .......   $(50,529)   $(2,949)
                                                        ========    =======

                                       9

<PAGE>

                                                               (Unaudited)
                                                December 31,    March 31,
                                                    2001          2002
                                                ------------   -----------

Total assets:
   United States ............................     $191,886      $182,027
   Canada ...................................       32,916        32,419
   Europe, Asia and Other ...................        4,636         4,159
                                                  --------      --------

      Total .................................     $229,438      $218,605
                                                  ========      ========

NOTE 9. COMPREHENSIVE INCOME (LOSS)

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

<TABLE>
<CAPTION>
                                                                    (Unaudited)
                                                                    Three Months
                                                                   Ended March 31,
                                                                 ------------------
                                                                   2001      2002
                                                                 --------   -------
<S>                                                              <C>        <C>
Net loss......................................................   $(50,879)  $(3,344)
Reversal of unrealized loss on investments upon disposition...         --       220
Translation adjustments.......................................     (1,643)        8
                                                                 --------   -------
Comprehensive loss............................................   $(52,522)  $(3,116)
                                                                 ========   =======
</TABLE>

NOTE 10. LEGAL PROCEEDINGS

          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 filed in
the same court. All of these actions have been consolidated. On January 22,
2001, a consolidated amended complaint was filed. The consolidated amended
complaint purports to be a class action lawsuit brought on behalf of persons who
purchased or otherwise acquired the Company's Common stock during the period
from October 19, 1999 through July 3, 2000. The complaint alleges that the
defendants misrepresented and failed to disclose certain information about its
business and prospects. The complaint asserts claims under the Securities
Exchange Act of 1934. The complaint does not specify the amount of damages
sought.

          The Company moved to dismiss the consolidated complaint. On July 31,
2001, the Court granted the motion to dismiss. The Court granted plaintiffs 30
days leave to file an amended complaint. On August 30, 2001, plaintiffs filed an
amended complaint. On September 21, 2001, the Company moved to dismiss the
amended complaint. The Court has not yet ruled on the Company's motion to
dismiss. There has been no discovery to date, and no trial date has been
established.

          The Company believes this class action is without merit and intends to
deny all material allegations and to defend itself vigorously. 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.

                                       10

<PAGE>

          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.

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

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

OVERVIEW

Background

          We are a leading global provider of Internet security solutions and
services that make it safe to do business, communicate and complete transactions
over the Internet. We have a broad set of identification, entitlements,
verification, privacy and security management capabilities. Major businesses,
service providers, financial institutions and government agencies in more than
40 countries rely on the privacy, security and trust provided through our
portfolio of award-winning technologies.

          We were incorporated in December 1996 with nominal share capital, all
of which was contributed by Nortel Networks Corporation and its subsidiary
Nortel Networks Inc. At the close of business on December 31, 1996, Nortel
Networks transferred to us certain of their assets and liabilities, intellectual
property, rights, licenses and contracts. In exchange, Nortel Networks received
Series A common stock, Special Voting stock, and cash consideration. At the
close of business on December 31, 1996, we issued Series B common stock in a
private placement. After the completion of the private placement, Nortel
Networks owned approximately 73% of the outstanding shares of our voting stock
assuming conversion of the Series B common stock and Series B Non-Voting common
stock.

          On August 21, 1998, we closed our initial public offering, issuing
5,400,000 shares of our Common stock at an initial public offering price of $16
per share. The net proceeds from the offering, after deducting underwriting
discounts and commissions and offering expenses incurred, were approximately
$79.1 million.

          On February 29, 2000 and March 2, 2000, we closed our follow-on
offering, which included an over-allotment option closing, issuing an aggregate
of 2,074,260 shares of our Common stock at an offering price $82 per share. The
net proceeds from the offering, after deducting underwriting discounts and
commissions and offering expenses incurred, were approximately $161.5 million.

          On June 4, 2001, we changed our name to Entrust, Inc.

          At March 31, 2002, Nortel Networks owned approximately 19.5% of our
Common stock.

          Business Overview

                                       11

<PAGE>

          During the first quarter of 2002, Entrust continued its strategy of
focusing on core vertical and geographic markets. We were also successful in
expanding the sales of our Secure Web Portal product solution. Revenues from the
Secure Web Portal solution, which is the combination of our TruePass and
getAccess products, increased 36% from the fourth quarter of 2001 and over 100%
from the first quarter a year ago. Other highlights from the quarter included:

     .    Key customer wins in core vertical markets. The five largest sales of
          the quarter were to: the Government of Canada Secure Project; a new
          customer that is a large pharmaceutical provider based in Europe; a
          large chip manufacturer; a large governmental health care agency; and
          the China Financial Certificate Authority, CFCA.

     .    Major financial services customers in the first quarter included:
          SWIFT, CFCA and two new customers that are utilizing Entrust's Secure
          Web Portal solution for their online banking portal.

     .    Entrust announced key deployment successes with Egg, an online
          financial services provider, which now has deployed over 2 million
          users of Entrust GetAccess (TM) products, and the California Highway
          Patrol, whose internal affairs division is using Entrust Entelligence
          (TM) products to provide e-mail and file encryption department-wide;
          and

     .    Entrust was also selected to provide the Southampton City Council with
          a Secure Web Portal solution using Entrust GetAccess(TM) software for
          the first phase of its 'SmartPath' project in the UK. The Entrust
          Secure Web Portal solution was selected to allow up to 6,000 users to
          make secure transactions with the council. The project could
          potentially grow to 250,000 users.

     From a technology perspective, key accomplishments for the quarter
     included:

     .    The release of Entrust TruePass software v.6.0. This is the latest
          version of Entrust's zero-footprint enhanced identification solution.
          The new release offers enhanced capabilities including support for
          devices like smart cards, mobile phones and PDA's;

     .    Penetration of Entrust's Secure Web Portal solution continued this
          quarter as evidenced by the strong demand for Entrust TruePass and
          Entrust GetAccess software. The two products combined to represent
          over one-third of the Company's software revenue in the quarter; and

     .    Entrust launched a marketing program around its Secure E-Forms
          solution. This solution helps governments and enterprises move
          paper-based processes to the Internet with the added functionality of
          an auditable transaction record with digital signatures, access
          control for the form content and easy integration with top e-forms
          providers including Adobe, Accelio and Shana.

          We remain focused on our core markets, both vertical and geographic,
and our core technology strengths in enhanced Internet security. Our success
continues to be dependant on our ability to design, develop, market and sell our
Internet security solutions to our global customers.

Critical Accounting Policies

          The nature of our business is not highly complex, as we operate in one
primary business. We develop, market and sell Internet security software
solutions. We also perform professional services to install, support and
integrate our Internet security software solutions with other applications. We
operate globally in a functional organization. We do not have any off-balance
sheet financing, other than operating leases entered into in the normal course
of business, and we do not actively engage in hedging transactions.

          In the first quarter of 2002, our most complex accounting judgments
were made in the areas of software revenue recognition, goodwill impairment,
restructuring and other special non-recurring charges, impairment of long-term
strategic investments and allowance for doubtful accounts. The goodwill
impairment, and restructuring and other special non-recurring charges are not
anticipated to be recurring in nature. However, the restructuring and

                                       12

<PAGE>

other special non-recurring charges will continue to require judgment until such
time as the corresponding accruals are fully paid out and/or no longer required.
Software revenue recognition, impairment of long-term strategic investments, and
allowance for doubtful accounts are expected to continue to be an on-going
element of our 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" and
SOP No. 98-9, "Modifications of SOP No. 97-2, Software Revenue Recognition, with
Respect to Certain Transactions".

          Revenues from perpetual software license agreements are recognized
upon receipt of an executed license agreement, or an unconditional order under
an existing license agreement, and shipment of the software, if there are no
significant remaining vendor obligations, collection of the receivable is
probable and payment is due within twelve months. Revenues from 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.

          Due to the complexity of some software license agreements, we
routinely apply judgment to the application of software revenue recognition
accounting principles to specific agreements and transactions. Different
judgments and/or different contract structures could have led to different
accounting conclusions, which could have had a material effect on our reported
quarterly earnings.

     Goodwill Impairment

          We assess the impairment of identifiable intangibles, long-lived
assets and related goodwill and enterprise-level goodwill on a periodic basis or
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. In 2001, we performed our valuation of these assets based on
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of",
APB Opinion No. 17, "Intangible Assets", and the relevant provisions of the
SEC's SAB No. 100, "Restructuring and Impairment Charges".

          During the second quarter of 2001, we recorded an impairment of
goodwill of $327.0 million. $325.4 million of this amount was the result of the
acquisition of enCommerce, Inc., "enCommerce", in 2000 and $1.6 million from the
acquisition of r3 Security Engineering AG, "r3", in 1998. In performing this
impairment assessment, management made judgments regarding the anticipated
future cash flows from these acquisitions. Different assumptions in this
assessment could have led to a different impairment amount, which could have had
a material effect on our reported earnings.

          As of March 31, 2002, goodwill, other intangible assets and purchased
product rights, net of accumulated amortization, amounted to $13.7 million.

          SFAS No. 142, "Goodwill and Other Intangible Assets" became effective
for us on January 1, 2002 and, as a result, we ceased to amortize approximately
$11.2 million of goodwill and other purchased intangibles. We will continue to
amortize $2.5 million of purchased product rights. We had recorded approximately
$62.1 million of amortization on these amounts during 2001, including $28.9
million in the first quarter of 2001, and would have recorded approximately $8.7
million of amortization during 2002. In lieu of amortization, we are required to
perform an initial impairment review of our goodwill in 2002 and an annual
impairment review thereafter. We completed our initial review during the first
quarter of 2002 and concluded that no further impairment was required at March
31, 2002.

          We currently do not expect to record further impairment charges upon
completion of the annual impairment review. However, there can be no assurance
that, at the time of future reviews, a material impairment charge will not be
required.

     Restructuring and Other Special Non-recurring Charges

                                       13

<PAGE>

          On June 4, 2001, we announced that our board of directors had approved
a restructuring program 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
program included a workforce reduction, consolidation of excess facilities, and
discontinuance of non-core products and programs.

          As a result of the restructuring and other related special
non-recurring charges and the impact of the macroeconomic conditions on us and
our global base of customers, we recorded restructuring and special
non-recurring charges, excluding goodwill impairment, of $106.6 million in the
second fiscal quarter of 2001, with subsequent adjustments in the third and
fourth quarters totaling $1.4 million.

          We conducted our assessment of the accounting effects of the
restructuring program 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 on 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 of $40.7 million
at March 31, 2002, could have a material effect on our reported results. To
date, no material adjustments have been required. In addition, actual results
could vary from these assumptions, resulting in an adjustment that could have a
material effect on our future financial results.

     Impairment of Long-term Strategic Investments

          We assess the recoverability of the carrying value of strategic
investments on a regular basis. Factors that we consider important and that we
believe could trigger impairment include, but are not limited to, the likelihood
that the company in which we invested would have insufficient cash flows to
operate for the next twelve months, significant changes in the company's
operating performance or business model and changes in overall market
conditions. These investments are in private companies of which we typically own
less than 10% of the outstanding stock. Because there is not a liquid market for
these securities, we often must make estimates of the value of our investments.
We recorded charges related to other than temporary declines in the value of
certain strategic investments of $10.8 million in 2001. We also recorded a gain
on the disposition of a long-term strategic investment of $1.6 million in 2001.
It was determined that no further adjustment to the carrying value of the
investments was necessary during the first quarter of 2002.

          As of March 31, 2002, long-term strategic investments, net of
valuation allowances, amounted to $5.1 million.

     Allowance for Doubtful Accounts

          We maintain allowances for doubtful accounts 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 and whether collection is reasonably
assured.

          We assess whether the fee is fixed and determinable based on the
payment terms associated with the transaction and the creditworthiness of the
customer. 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 credit-worthiness of our
customers.

                                       14

<PAGE>

          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. Our accounts
receivable include material balances from a limited number of customers, with
five customers accounting for 59% of accounts receivable at March 31, 2002, as
discussed 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 could result in a different required allowance, which
could have a material impact on our reported quarterly earnings.

          As of March 31, 2002, accounts receivable totaled $25.1 million, net
of an allowance for doubtful accounts of $3.3 million.

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:

<TABLE>
<CAPTION>
                                                                    (Unaudited)
                                                                 THREE MONTHS ENDED
                                                                     MARCH 31,
                                                                 ------------------
                                                                   2001     2002
                                                                  ------    -----
<S>                                                                <C>      <C>
Revenues:
  License ....................................................      33.5%    43.9%
  Services and maintenance ...................................      66.5     56.1
                                                                  ------    -----

      Total revenues .........................................     100.0    100.0
                                                                  ------    -----

Cost of revenues:
  License ....................................................       2.8      3.4
  Services and maintenance ...................................      42.4     30.9
                                                                  ------    -----

      Total cost of revenues .................................      45.2     34.3
                                                                  ------    -----

Gross profit .................................................      54.8     65.7
                                                                  ------    -----

Operating expenses:
  Sales and marketing ........................................      84.4     44.1
  Research and development ...................................      30.1     21.9
  General and administrative .................................      14.9     12.8
  Amortization of purchased product rights ...................       4.4      1.0
  Amortization of goodwill and other purchased intangibles....      91.7       --
                                                                  ------    -----

      Total operating expenses ...............................     225.5     79.8
                                                                  ------    -----

Loss from operations .........................................    (170.7)   (14.1)
Interest income ..............................................      10.3      3.4
                                                                  ------    -----

Loss before provision for
   income taxes ..............................................    (160.4)   (10.7)
Provision for income taxes ...................................       1.1      1.4
                                                                  ------    -----

Net loss .....................................................    (161.5)%  (12.1)%
                                                                  ======    =====
</TABLE>

                                       15

<PAGE>

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" and SOP No. 98-9, "Modifications of SOP No. 97-2,
Software Revenue Recognition, with Respect to Certain Transactions".

          Revenues from perpetual software license agreements are recognized
upon receipt of an executed license agreement, or an unconditional order under
an existing license agreement, and shipment of the software, if there are no
significant remaining vendor obligations, collection of the receivable is
probable and payment is due within twelve months. Revenues from 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.

          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.

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

Total Revenues

          Total revenues decreased 13% from $31.5 million for the three months
ended March 31, 2001 to $27.5 million for the three months ended March 31, 2002.
Total revenues derived from North America decreased 1% from $20.1 million for
the three months ended March 31, 2001 to $19.8 million for the three months
ended March 31, 2002, while total revenues derived from outside of North America
decreased 32% from $11.4 million for the three months ended March 31, 2001 to
$7.7 million for the three months ended March 31, 2002. The majority of the
overall decline in total revenues in the first three months of 2002 was
experienced in Europe, Asia and other international locales, which is mainly due
to the continued softening of the economic climate internationally and to our
restructuring program from the second quarter of 2001, which resulted in fewer
sales resources being applied in all regions, particularly in Asia Pacific and
Latin America. The level of non-North American revenues has fluctuated from
period to period and this trend is expected to continue for the foreseeable
future. The relatively unchanged levels of North American revenues reflected the
prolonged economic downturn experienced in this region and throughout the
industry. The full effect of the economic downturn appears to have been felt
first, and for the longest time period, in the North American market. In the
three months ended March 31, 2002, one customer accounted for approximately 16%
of total revenues, while no other single customer accounted for 10% or more of
total revenues.

                                       16

<PAGE>

License Revenues

          License revenues increased 14% from $10.6 million for the three months
ended March 31, 2001 to $12.1 million for the three months ended March 31, 2002,
representing 34% and 44% of total revenues in the respective periods. The
increase in license revenues in absolute dollars was primarily driven by the
demand from both governments and enterprises for the Entrust Secure Web Portal
Solutions, as well as the continued focus of our sales and marketing
organization on core industries, such as government and financial. License
revenues as a percentage of total revenues increased for the three months ended
March 31, 2002 compared to the same period in 2001 due to decreasing demand for
services and maintenance from our customers. The decline in demand reflected the
timing of support renewals and professional services contracts and the delayed
effect on demand for these services of the reduced license revenues base
experienced in recent periods.

Services and Maintenance Revenues

          Services and maintenance revenues decreased 26% from $20.9 million for
the three months ended March 31, 2001 to $15.4 million for the three months
ended March 31, 2002, representing 66% and 56% of total revenues in the
respective periods. The decrease in services and maintenance revenues in
absolute dollars was primarily the result of a decrease in demand for consulting
services and customer support, resulting from the slowed growth of the license
revenue base of customers experienced over the last year and the timing of
support contract renewals on this license revenue base. Also, because our
customer base has not been growing as rapidly as in the past, the demand for
consulting services has declined as fewer customers have deployment and
integration requirements, particularly in Europe where several large integration
contracts ended in 2001. The decrease in services and maintenance revenues as a
percentage of total revenues was primarily the result of a shift in mix of
revenues from services and maintenance to license revenues during the first
quarter of 2002. This shift was largely due to an increase in demand for the
Entrust Secure Web Portal Solutions, and a decrease in customer demand for our
services and maintenance business.

COST OF REVENUES

Cost of License Revenues

          Cost of license revenues consists primarily of costs associated with
product media, documentation, packaging and royalties to third-party software
vendors. Amortization of purchased product rights, acquired as part of the
acquisition of enCommerce, has been excluded from cost of license revenues and
instead has been included in operating expenses. Cost of license revenues
increased slightly from $901,000 for the three months ended March 31, 2001 to
$942,000 for the three months ended March 31, 2002, representing 3% of total
revenues in each of the respective periods. The increase in cost of license
revenues in absolute dollars was primarily a result of higher royalty fees paid
to third-party software vendors, which reflects the increase in license revenues
in general for the first three months of 2002, compared to the same period of
2001. The mix of third-party products may vary from period to period and
consequently, our gross margins and our results of operations could be
adversely affected.

Cost of Services and Maintenance Revenues

          Cost of services and maintenance revenues consists primarily of
personnel costs associated with customer support, training and consulting
services, as well as amounts paid to third-party consulting firms for those
services. Cost of services and maintenance revenues decreased from $13.3 million
for the three months ended March 31, 2001 to $8.5 million for the three months
ended March 31, 2002, representing 42% and 31% of total revenues for the
respective periods. The decrease in absolute dollars during the three months
ended March 31, 2002 reflected the decreased costs associated with lower levels
of services and maintenance revenues experienced during the period. The decrease
in the cost of services and maintenance revenues as a percentage of total
revenues, especially in Europe, in the three months ended March 31, 2002
reflected higher productivity and utilization of available services resources
compared to the same period of the previous year due to utilization targets
being met on the additional investment made in new professional service
personnel in prior periods. Further, the decrease as a percentage of

                                       17

<PAGE>

total revenues was indicative of the fact that services and maintenance revenues
declined while license revenues increased in the first quarter of 2002, compared
to the same quarter of 2001.

          Services and maintenance gross profit as a percentage of services and
maintenance revenues was 36% and 45% for the three months ended March 31, 2001
and 2002, respectively. This increase in the services and maintenance gross
profit as a percentage of services and maintenance revenues for the three months
ended March 31, 2002, compared to the same period in 2001, reflected lower costs
associated in professional services, as well as a shift in the services revenue
mix from lower margin professional services revenues to higher margin support
and maintenance revenues. We also eliminated several unprofitable service lines
as part of our restructuring plan in the second quarter of 2001.

OPERATING EXPENSES

Sales and Marketing

          Sales and marketing expenses decreased from $26.6 million for the
three months ended March 31, 2001 to $12.1 million for the comparable period in
2002. Sales and marketing expenses represented 84% of total revenues for the
three months ended March 31, 2001, compared to 44% for the comparable period in
2002. The decrease in absolute dollars was due mainly to the cost reduction
strategies implemented through our restructuring program which took effect in
June 2001. In addition, until the implementation of our restructuring plan, we
continued to make significant investments in marketing to support the launch of
new products, services and marketing programs and we had continued our strategy
of (a) investing in hiring and training our direct sales organization in
anticipation of future market growth, and (b) investing in marketing efforts in
support of new product launches. The decrease in sales and marketing expenses as
a percentage of total revenues for the three months ended March 31, 2002,
compared to the same period in 2001, reflected the cost savings from the
restructuring plan, and the lower than expected revenues in the first three
months of 2001. We will continue to focus on improving the productivity of our
sales and marketing organizations and on gaining efficiencies in the related
processes in light of current economic conditions. Failure of these investments
in sales and marketing, as adjusted through our restructuring plan, to generate
future revenues will have a significant adverse effect on our operations.

          Due to the changes in the economic environment and the impact of the
restructuring program, particularly the curtailment of certain products and
presence in certain geographies, we had recorded bad debt write-offs and
additional provisions to the allowance for doubtful accounts totaling $7.7
million in the year ended December 31, 2001, which was recorded primarily in
sales and marketing expenses. During the first quarter of 2002, the allowance
for doubtful accounts decreased by $0.6 million as a result of better cash
collections during the quarter, and as such, an additional bad debt expense was
not required.

Research and Development

          Research and development expenses decreased from $9.5 million for the
three months ended March 31, 2001 to $6.0 million for the comparable period in
2002. Research and development expenses represented 30% of total revenues for
the three months ended March 31, 2001, compared to 22% for the comparable period
in 2002. The decreased investment in research and development expenses in
absolute dollars was due mainly to the cost reduction strategies implemented
through our restructuring program which took effect in June 2001. In addition,
employees were added during the first three months of 2001, primarily in
connection with the continuing expansion and enhancement of our product
offerings and our commitment to quality assurance and testing, globalization of
these product offerings, and due to the integration of enCommerce. However, we
believe that we must continue to maintain our investment in research and
development in order to maintain our technological leadership position and,
thus, expect research and development expenses to increase in absolute dollars
in the future as additional experienced security experts and software engineers
are required.

General and Administrative

                                       18

<PAGE>

          General and administrative expenses decreased from $4.7 million for
the three months ended March 31, 2001 to $3.5 million for the comparable period
in 2002. General and administrative expenses represented 15% of total revenues
for the three months ended March 31, 2001, compared to 13% for the comparable
period in 2002. The decrease in general and administrative expenses in absolute
dollars and in percentage was mainly due to the cost reduction strategies
implemented through our restructuring program which took effect in June 2001. We
continue to look for ways to gain efficiencies throughout our administrative
processes through the enhancements and improvements to our infrastructure.

Amortization of Goodwill, Purchased Product Rights and Other Purchased
Intangibles

          Amortization expense in connection with acquisition-related
intangibles decreased from the prior period, due to the impairment of goodwill,
purchased product rights and other purchased intangibles recorded in June 2001,
as well as the adoption of SFAS No. 142 as of the first quarter of 2002.

          In June 2001, the Financial Accounting Standards Board (FASB) approved
for issuance Statement of Financial Accounting Standards No. 142 (SFAS No. 142),
"Goodwill and Intangible Assets", which revises the accounting for purchased
goodwill and intangible assets. Under SFAS No. 142, goodwill and intangible
assets with indefinite lives will no longer be amortized, but will be tested for
impairment annually and also in the event of an impairment indicator. We have
adopted SFAS No. 142 as of January 1, 2002. This adoption has affected the
amortization of intangibles, resulting from the following past acquisitions:

          On March 14, 2000, we completed the acquisition of CygnaCom, a company
based in McLean, Virginia that delivers information technology products and
services, with expertise in public key infrastructure, cryptographic
technologies, security engineering and systems integration and development.
Pursuant to the stock purchase agreement dated March 14, 2000, entered into
between us, CygnaCom and the shareholders of CygnaCom, we agreed to acquire all
of the outstanding shares of CygnaCom for an aggregate purchase price of $16.6
million, which included cash consideration of $16.0 million. The acquisition was
recorded under the purchase method of accounting and, therefore, the results of
operations of CygnaCom are included in our financial statements from the
acquisition date. Upon consummation of the acquisition, CygnaCom became a wholly
owned subsidiary. In connection with this acquisition, we recorded goodwill of
$16.6 million, and goodwill amortization of $1.4 million was expensed for the
three months ended March 31, 2001. No goodwill amortization was recorded for the
three months ended March 31, 2002, due to the adoption of SFAS No. 142.

          On June 26, 2000, we completed the acquisition of enCommerce, a
company based in Santa Clara, California, that provides software and services
for managing global e-business relationships. The acquisition of enCommerce's
outstanding capital stock, options and warrants for a total consideration of
$505.5 million was accounted for under the purchase method of accounting, which
resulted in an allocation of $449.6 million to purchased product rights,
goodwill and other purchased intangibles. Also, in connection with this
acquisition, an appraisal was done of the intangible assets, resulting in $29.6
million of the purchase price being allocated to in-process research and
development that had not yet reached technological feasibility and had no
alternative future use. This in-process research and development was expensed in
2000. Amortization of goodwill and other purchased intangibles of $27.3 million
was expensed for the three months ended March 31, 2001. No amortization of
these assets was recorded for the same period in 2002, due to the adoption
of SFAS No. 142. Amortization of purchased product rights of $1.4 million and
$284,000 was expensed for the three months ended March 31, 2001 and 2002,
respectively.

          In addition, we recorded goodwill amortization of $235,000 for the
three months ended March 2001 with respect to goodwill recorded as a result of
the acquisition of r3 in 1998. No amortization of this asset was recorded
for the same period in 2002, due to the adoption of SFAS No. 142.

Interest Income

          Interest income decreased from $3.2 million for the three months ended
March 31, 2001 to $932,000 for the comparable period in 2002. Interest income
represented 10% of total revenues for the three months ended March 31,

                                       19

<PAGE>

2001, compared to 3% for the comparable period in 2002. The decrease in interest
income reflected the reduced balance of funds invested, as these amounts have
been drawn down to fund cash flow from operations and to acquire long-lived
assets and long-term strategic investments. In addition, the decrease was due to
the lower interest rates that were available during the first three months of
2002, as compared to the same period in 2001.

Provision for Income Taxes

          We recorded an income tax provision of $350,000 for the three months
ended March 31, 2001, compared with an income tax provision of $395,000 for the
same period of 2002. We account for income taxes in accordance with SFAS No.
109. The effective income tax rates differed from statutory rates primarily due
to the non-deductibility of the amortization of goodwill and other purchased
intangible assets, as well as an adjustment of the valuation allowance that has
offset substantially the tax benefits from the significant net operating loss
and tax credit carry-forwards available.

LIQUIDITY AND CAPITAL RESOURCES

          We used cash of $13.6 million in operating activities during the three
months ended March 31, 2002. This cash outflow was primarily a result of a net
loss before non-cash charges of $1.1 million, a decrease in accrued liabilities
and accounts payable of $1.5 million, a decrease in accrued restructuring
charges of $6.3 million, a decrease in deferred revenue of $2.0 million, and an
increase in accounts receivable and prepaid expenses of $2.7 million during the
period. Our average days sales outstanding at March 31, 2002 was 82 days, which
represents an increase over the 75 days that we reported at December 31, 2001.
The overall increase in days sales outstanding from December 31, 2001 reflects
an increase in the accrued unbilled receivable for the Government of Canada
"Secure Channel" project that will not be billed and collected until the second
quarter of 2002, and a decrease in the allowance for doubtful accounts. For
purposes of calculating average days sales outstanding, we divide accounts
receivable at period end by the current quarter's revenues and multiply this
amount by 90 days. The level of accounts receivable at each quarter end will be
affected by the concentration of revenues in the final weeks of each quarter and
may be negatively affected by increased international revenues in relation to
total revenues as licenses to international customers often have longer payment
terms.

          During the three months ended March 31, 2002, we provided $7.5 million
of cash in investing activities, primarily due to cash provided by reductions in
marketable investments in the amount of $8.0 million (net of $41.4 million of
marketable investment purchases). We also invested $530,000 in property and
equipment, primarily for computer hardware, furniture and leasehold improvements
required to complete the fit-up of our new Addison, Texas facility.

          Cash provided by financing activities for the three months ended March
31, 2002 was $2.1 million, primarily from the exercise of employee stock options
and the sale of shares under our employee stock purchase plan.

          For disclosure regarding our contractual obligations and commercial
commitments, please see notes 9 and 14 to our consolidated financial statements
for the year ended December 31, 2001 contained in our Annual Report on Form
10-K. We incurred no new significant contractual obligations or commitments
during the first quarter of 2002.

          As of March 31, 2002, our cash, cash equivalents and marketable
investments in the amount of $150.6 million provided our principal sources of
liquidity. Overall, we used $12.0 million from our cash, cash equivalents and
marketable investments in the three months ended March 31, 2002. Although we
expect improved profitability for the remainder of 2002 as we work towards
breakeven operating earnings, we estimate that we will continue to use cash
throughout 2002 to fund operating losses and to satisfy the obligations accrued
for under our restructuring program. While there can be no assurance as to the
extent of usage-of-liquid resources in the current fiscal year, 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.

                                       20

<PAGE>

Certain Factors That May Affect Our Business

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

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

     .    length of sales cycles associated with our product offerings;

     .    the timing, size and nature of our licensing transactions;

     .    market acceptance of new products or product enhancements by us or our
          competitors;

     .    the relative proportions of revenues derived from licenses and
          services and maintenance;

     .    the timing of new personnel hires and the rate at which new personnel
          become productive;

     .    changes in pricing policies by our competitors;

     .    changes in our operating expenses; and

     .    fluctuations in foreign currency exchange rates.

     In addition, in June 2001 we signed a $17.6 million contract with Bell
Nexxia for the Government of Canada project known as "Secure Channel". This
contract is being accounted for on a subscription basis over four fiscal
quarters, with software revenue recognition beginning in the second quarter of
2001 and ending during the first quarter of 2002. As a result of the completion
of the subscription period, we will have to increase new software license
revenues by a larger amount than achieved in the past four quarters in order to
maintain operating results at current levels. 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.

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

     Estimating future revenues is difficult because we ship our products soon
after an order is received and, as such, we do not have a significant backlog.
Thus, quarterly license revenues depend heavily upon orders received and shipped
within the same quarter. Moreover, we historically have recorded 50% to 80% of
our total quarterly revenues in the third month of the quarter, with a
concentration of revenues in the second half of that month. We expect that this
concentration of revenues, which is attributable in part to the tendency of some
customers to make significant capital expenditures at the end of a fiscal
quarter and to sales patterns within the software industry, will continue for
the foreseeable future.

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

Our restructuring of operations may not achieve the results we intend and may
harm our business.

     In June 2001, we announced a restructuring of our business, which included
a reduction in work force and the closure of three international locations, as
well as other steps we took to reduce expenses. The planning and implementation
of our restructuring has placed, and may continue to place, a significant strain
on our managerial, operational, financial and other resources. Additionally, the
restructuring may negatively affect our employee

                                       21

<PAGE>

turnover, recruiting and retention of important employees. If we are unable to
implement our restructuring effectively or if we experience difficulties in
effecting the restructuring, our expenses could increase more quickly than we
are expecting. If we find that our restructuring announced in June 2001 did not
sufficiently decrease the growth of our expenses, we may find it necessary to
implement further streamlining of our expenses, to perform another reduction in
our headcount or to undertake a further restructuring of our business.

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;

     .    the timing of customers' budget cycles; and

     .    customers' internal approval processes.

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

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

     Historically, a limited number of customers has accounted for a significant
percentage of our revenues. In 1999, our three largest customers accounted for
31% of revenues, with the largest customer accounting for 24% of revenues. In
2000, our three largest customers accounted for 12% of revenues. In 2001, our
three largest customers accounted for 18% of revenues. Our three largest
customers accounted for 28% of revenues for the three months ended March 31,
2002. We anticipate that our results of operations in any given period will
continue to depend to a significant extent upon revenues from a small number of
customers. In addition, we anticipate that such customers will continue to vary
over time, so that the achievement of our long-term goals will require us to
obtain additional significant customers on an ongoing basis. Our failure to
enter into a sufficient number of large licensing agreements during a particular
period could have a significant adverse effect on our revenues.

If the Internet security market does not continue to grow, demand for our
products and services will be adversely affected.

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

     .    the continued expansion of Internet usage and the number of
          organizations adopting or expanding intranets and extranets;

     .    the ability of network infrastructures to support an increasing number
          of users and services;

     .    the public recognition of the potential threat posed by computer
          hackers and other unauthorized users; and

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

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

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

     The processes used by computer hackers to access or sabotage networks and
intranets are rapidly evolving. A

                                       22

<PAGE>

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.

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.

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

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

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

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

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

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

     The growth in the size and complexity of our business over the past few
years has placed a significant strain on our managerial, operational and
financial resources. Our ability to manage future growth, if any, will depend
upon our ability to:

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

                                       23

<PAGE>

     .    expand, train, motivate and manage our work force.

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

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

     Our future success depends upon our ability to continue to attract and
retain highly qualified scientific, technical, sales and managerial personnel.
Competition for such personnel is intense, particularly in the field of
cryptography, and there can be no assurance that we can retain our key
scientific, technical, sales and managerial employees or that we can attract,
motivate or retain other highly qualified personnel in the future. 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.

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.

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

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

     .    difficulties in collecting international accounts receivable;

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

     .    potentially longer payment cycles for customer payments;

     .    increased costs associated with maintaining international marketing
          efforts;

     .    introduction of non-tariff barriers and higher duty rates;

     .    difficulties in enforcement of contractual obligations and
          intellectual property rights;

     .    difficulties managing personnel 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.

If the laws regarding exports of our products further limit or otherwise
restrict our business, we could be

                                       24

<PAGE>

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.

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.

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. We received notice from
one of our customers stating that we may be responsible for indemnifying that
customer under a product license agreement for infringement of patents assigned
to a third party. To date, the customer has not made a formal claim for
indemnification from us. 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.

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

                                       25

<PAGE>

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.

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

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

     .    actual or anticipated fluctuations in our operating results;

     .    announcements of technological innovations;

     .    new products or new contracts by us or our competitors;

     .    developments with respect to patents, copyrights or propriety rights;

     .    conditions and trends in the security industry;

     .    changes in financial estimates by securities analysts; and

     .    general market conditions and other factors.

Nortel Networks is able to exercise significant influence over all matters
requiring stockholder and board approval and could make decisions about our
business that conflict with the interests of other stockholders.

     As of April 30, 2002, Nortel Networks Limited, through its subsidiary,
Nortel Networks Inc., beneficially owned approximately 19.5% of our outstanding
voting stock, and one of our ten directors was a representative of Nortel
Networks. Accordingly, Nortel Networks has the ability to exert significant
influence over our affairs, including the election of directors and decisions
relating to our strategic and operating activities. This concentration of
ownership may have the effect of delaying or preventing a change in control that
other stockholders may find favorable.

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Risk Associated with Interest Rates

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

                                       26

<PAGE>

increases. We try to manage this risk by maintaining our cash, cash equivalents
and marketable investments with high quality financial institutions and
investment managers. We also restrict the investments to primarily securities
with short-term maturities, such that, at March 31, 2002, the majority of our
marketable investments had maturities of less than six months from that date. As
a result, we believe that our exposure to market risk related to interest rates
is minimal.

          The following table presents the cash, cash equivalents and marketable
investments that we held at March 31, 2002, that would have been subject to
interest rate risk, and the related ranges of maturities as of that date:

<TABLE>
<CAPTION>
                                                                                  MATURITY
                                                                               (in thousands)
                                                         Within 3 Months   3-6 Months   > 6 Months   > 12 Months
                                                         ---------------   ----------   ----------   -----------
<S>                                                          <C>            <C>          <C>           <C>
Investments classified as cash and cash equivalents...       $36,238        $    --      $    --       $   --
Investments classified as
   held to maturity marketable investments ...........        51,223         20,917       29,228        7,910
                                                             -------        -------      -------       ------
      Total amortized cost ...........................       $87,461        $20,917      $29,228       $7,910
                                                             =======        =======      =======       ======
Fair value ...........................................       $87,842        $20,972      $29,216       $7,891
                                                             =======        =======      =======       ======
</TABLE>

Risk Associated with Exchange Rates

          We are subject to foreign exchange risk as a result of exposures to
changes in currency exchange rates, specifically between the United States and
Canada, the United Kingdom, Germany, France, Japan and Switzerland. However,
this exposure is considered to be minimal due to the fact that the United
Kingdom, German, French, Japanese and Swiss operations are not significant, and
the Canadian operations are naturally hedged against exchange rate fluctuations
since both revenues and expenses are denominated in Canadian dollars. Therefore,
an unfavorable change in the exchange rate for the Canadian subsidiary would
result in lower revenues when translated into U.S. dollars, but the expenses
would be lowered in a corresponding fashion.

          As a result, we do not engage in formal hedging activities, but we do
periodically review the potential impact of this risk to ensure that the risk of
significant potential losses remains minimal.

Risk Associated with Equity 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 the relevant markets, we could lose all or substantially all of our
investments in these companies. To date, we have recorded losses of $10.8
million from impairments and a realized gain of $1.6 million from dispositions
in connection with these investments. No additional impairments were recorded in
the quarter ended March 31,2002.

          On April 12, 2002, we increased our investment in the voting capital
of Entrust Japan from an ownership share of less than 10% to approximately 37%
by exchanging cash of approximately $1.5 million, Entrust software product and
distribution rights for certain Entrust products for the Japanese market, for
additional shares in Entrust Japan. Our increased investment follows additional
investments in Entrust Japan made by Toyota and SECOM in the fourth quarter of
2001. We have concluded that because, as of the second quarter of 2002, we have
the ability to exercise significant influence over the operations of Entrust
Japan, that beginning in the same period of 2002, we will account for this
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,
we will include our share of post-acquisition losses of Entrust Japan on the
step-by-step acquisition method in our consolidated losses for the current
fiscal year. In addition, we will record an adjustment to consolidated
accumulated deficit to pick up the post-acquisition losses of Entrust Japan of
prior years, attributable to

                                       27

<PAGE>

the less than 10% ownership block previously acquired. As a result, our previous
investment in Entrust Japan of $0.4 million, at March 31, 2002, will be written
down to zero in the second quarter of 2002 and we will begin including our share
of current year losses in our operating results in that same quarter.

PART II. OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS

          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 filed in
the same court. All of these actions have been consolidated. On January 22,
2001, a consolidated amended complaint was filed. The consolidated amended
complaint purports to be a class action lawsuit brought on behalf of persons who
purchased or otherwise acquired our Common stock during the period from October
19, 1999 through July 3, 2000. The complaint alleges that the defendants
misrepresented and failed to disclose certain information about our business and
prospects. The complaint asserts claims under the Securities Exchange Act of
1934. The complaint does not specify the amount of damages sought.

          We moved to dismiss the consolidated complaint. On July 31, 2001, the
Court granted the motion to dismiss. The Court granted plaintiffs 30 days leave
to file an amended complaint. On August 30, 2001, plaintiffs filed an amended
complaint. On September 21, 2001, we moved to dismiss the amended complaint. The
Court has not yet ruled on our motion to dismiss. There has been no discovery to
date, and no trial date has been established.

          We believe this class action is without merit we intend to deny all
material allegations and to defend ourselves vigorously. An adverse judgment or
settlement in this lawsuit could have a significant adverse impact on our future
financial condition or results of operations.

          We are subject 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 currently believe that the outcome of any of these legal matters will have a
significant adverse effect on our consolidated results of operations or
consolidated financial position.

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

List of Exhibits

          The exhibits listed on the Index to Exhibits immediately preceding
such exhibits are filed as part of this report.

Reports on Form 8-K:

          No reports on Form 8-K were filed in the quarter ended March 31, 2002.

                                       28

<PAGE>

                                   SIGNATURES

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

                                              ENTRUST, INC.
                                              -------------
                                              (Registrant)

Dated: May 10, 2002


                                        /s/ David L. Thompson
                            --------------------------------------------
                                         David L. Thompson
                    Chief Financial Officer and Senior Vice President of Finance
                           (Principal Financial and Accounting Officer)

                                       29

<PAGE>

                                  ENTRUST, INC.

                                INDEX TO EXHIBITS

EXHIBIT                              DESCRIPTION
-------                              -----------

10.1      Stock Exchange Agreement dated February 21, 2002 between Entrust, Inc.
          and F. William Conner

10.2      Restricted Stock Agreement Granted Under Amended and Restated 1996
          Stock Incentive Plan, as amended, dated February 21, 2002 between
          Entrust, Inc. and David L. Thompson

10.3      Restricted Stock Agreement Granted Under Amended and Restated 1996
          Stock Incentive Plan, as amended, dated February 21, 2002 between
          Entrust, Inc. and William McGee

                                       30