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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 10-Q



(Mark one)

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



For the quarterly period ended September 30, 2005



OR



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



For the transition period from
                     to



Commission File Number 000-24733



ENTRUST, INC.

(Exact name of registrant as specified in its charter)



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



ONE HANOVER PARK,
SUITE 800

16633 DALLAS PARKWAY

ADDISON, TX 75001

(Address of principal executive offices & zip code)



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



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



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



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



There were 60,002,593 shares of the registrants $.01 par value Common stock outstanding as of November 2, 2005.



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##### Table of Contents



ENTRUST, INC.



TABLE OF CONTENTS



|                              |  |                                                                                       |  |     
|----------------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                       |  | Page
|PART I. FINANCIAL INFORMATION |  |                                                                                      
|Item 1.                       |  | Financial Statements                                                                  |  |     
|                              |  | Condensed Consolidated Balance Sheets                                                 |  | 3   
|                              |  | Condensed Consolidated Statements of Operations                                       |  | 4   
|                              |  | Condensed Consolidated Statements of Cash Flows                                       |  | 5   
|                              |  | Notes to Condensed Consolidated Financial Statements                                  |  | 6   
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 14  
|Item 3.                       |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 37  
|Item 4.                       |  | Controls and Procedures                                                               |  | 38  
|PART II. OTHER INFORMATION    |  |                                                                                      
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 38  
|Item 5.                       |  | Other Information                                                                     |  | 38  
|Item 6.                       |  | Exhibits                                                                              |  | 39  
|SIGNATURE                     |  | 40                                                                                   



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



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



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



ENTRUST, INC.



CONDENSED
CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                          |  |                                   |          |   |                   |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------- | -------- | - | ----------------- | - | -------- | -
|                                                                                                                                                                                          |  | SEPTEMBER 30, 2005 (unaudited)    |          |   | DECEMBER 31, 2004 |  
|                                                                                                                                                                                          |  | (in thousands, except share data) |         
|ASSETS                                                                                                                                                                                    |  |                                   |          |   |                   |   |          |  
|Current assets:                                                                                                                                                                           |  |                                   |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                                                                                                 |  | $                                 | 40,152   |   |                   | $ | 36,325   |  
|Short-term marketable investments                                                                                                                                                         |  |                                   | 43,815   |   |                   |   | 61,043   |  
|Accounts receivable (net of allowance for doubtful accounts of $479 at September 30, 2005 and $988 at December 31,
2004)                                                                  |  |                                   | 19,402   |   |                   |   | 16,203   |  
|Other receivables                                                                                                                                                                         |  |                                   | 315      |   |                   |   | 461      |  
|Prepaid expenses                                                                                                                                                                          |  |                                   | 4,151    |   |                   |   | 3,371    |  
|                                                                                                                                                                                          |  |                                   |          |   |                   |   |          |  
|Total current assets                                                                                                                                                                      |  |                                   | 107,835  |   |                   |   | 117,403  |  
|Long-term marketable investments                                                                                                                                                          |  |                                   |         |   |                   |   | 1,951    |  
|Property and equipment, net                                                                                                                                                               |  |                                   | 2,853    |   |                   |   | 5,168    |  
|Purchased product rights and purchased non-contractual customer relationships, net                                                                                                        |  |                                   | 2,317    |   |                   |   | 2,887    |  
|Goodwill, net                                                                                                                                                                             |  |                                   | 12,713   |   |                   |   | 12,713   |  
|Long-term equity investments                                                                                                                                                              |  |                                   | 3,729    |   |                   |   | 4,028    |  
|Other long-term assets, net                                                                                                                                                               |  |                                   | 1,900    |   |                   |   | 1,733    |  
|                                                                                                                                                                                          |  |                                   |          |   |                   |   |          |  
|Total assets                                                                                                                                                                              |  | $                                 | 131,347  |   |                   | $ | 145,883  |  
|                                                                                                                                                                                          |  |                                   |          |   |                   |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                      |  |                                   |          |   |                   |   |          |  
|Current liabilities:                                                                                                                                                                      |  |                                   |          |   |                   |   |          |  
|Accounts payable                                                                                                                                                                          |  | $                                 | 9,606    |   |                   | $ | 7,544    |  
|Accrued liabilities                                                                                                                                                                       |  |                                   | 6,108    |   |                   |   | 7,850    |  
|Accrued restructuring charges, current portion                                                                                                                                            |  |                                   | 3,433    |   |                   |   | 3,870    |  
|Deferred revenue                                                                                                                                                                          |  |                                   | 21,710   |   |                   |   | 22,975   |  
|                                                                                                                                                                                          |  |                                   |          |   |                   |   |          |  
|Total current liabilities                                                                                                                                                                 |  |                                   | 40,857   |   |                   |   | 42,239   |  
|Accrued restructuring charges, long term portion                                                                                                                                          |  |                                   | 23,564   |   |                   |   | 26,220   |  
|Other long-term liabilities                                                                                                                                                               |  |                                   | 861      |   |                   |   | 1,426    |  
|                                                                                                                                                                                          |  |                                   |          |   |                   |   |          |  
|Total liabilities                                                                                                                                                                         |  |                                   | 65,282   |   |                   |   | 69,885   |  
|                                                                                                                                                                                          |  |                                   |          |   |                   |   |          |  
|Minority interest in subsidiary                                                                                                                                                           |  |                                   | 4        |   |                   |   | 4        |  
|                                                                                                                                                                                          |  |                                   |          |   |                   |   |          |  
|Shareholders equity:                                                                                                                                                                     |  |                                   |          |   |                   |   |          |  
|Common stock, par value $0.01 per share; 250,000,000 authorized shares; 59,942,811 and 62,339,829 issued and outstanding shares at
September 30, 2005 and December 31, 2004, respectively |  |                                   | 599      |   |                   |   | 623      |  
|Additional paid-in capital                                                                                                                                                                |  |                                   | 762,046  |   |                   |   | 773,027  |  
|Unearned compensation                                                                                                                                                                     |  |                                   | (1,554   | ) |                   |   | (84      | )
|Accumulated deficit                                                                                                                                                                       |  |                                   | (695,272 | ) |                   |   | (698,290 | )
|Accumulated other comprehensive income                                                                                                                                                    |  |                                   | 242      |   |                   |   | 718      |  
|                                                                                                                                                                                          |  |                                   |          |   |                   |   |          |  
|Total shareholders equity                                                                                                                                                                |  |                                   | 66,061   |   |                   |   | 75,994   |  
|                                                                                                                                                                                          |  |                                   |          |   |                   |   |          |  
|Total liabilities and shareholders equity                                                                                                                                                |  | $                                 | 131,347  |   |                   | $ | 145,883  |  
|                                                                                                                                                                                          |  |                                   |          |   |                   |   |          |  



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



3



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ENTRUST, INC.



CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                               |  |                                       |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|-------------------------------------------------------------- |  | ------------------------------------- | ------ | - | ------------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                               |  | THREE MONTHS ENDEDSEPTEMBER 30,       |        |   | NINE MONTHS ENDED SEPTEMBER 30, |  
|                                                               |  | 2005                                  |        |   | 2004                            |   |        | 2005 |  |   | 2004   |  
|                                                               |  | (unaudited)                           |       
|                                                               |  | (in thousands, except per share data) |       
|Revenues:                                                      |  |                                       |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Product                                                        |  | $                                     | 7,668  |   |                                 | $ | 6,495  |      |  | $ | 25,135 |   |  | $ | 18,384 |  
|Services and maintenance                                       |  |                                       | 15,983 |   |                                 |   | 14,843 |      |  |   | 48,232 |   |  |   | 45,482 |  
|                                                               |  |                                       |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Total revenues                                                 |  |                                       | 23,651 |   |                                 |   | 21,338 |      |  |   | 73,367 |   |  |   | 63,866 |  
|                                                               |  |                                       |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Cost of revenues:                                              |  |                                       |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Product                                                        |  |                                       | 1,420  |   |                                 |   | 838    |      |  |   | 3,400  |   |  |   | 2,965  |  
|Services and maintenance                                       |  |                                       | 7,291  |   |                                 |   | 6,637  |      |  |   | 23,505 |   |  |   | 21,473 |  
|Amortization of purchased product rights                       |  |                                       | 215    |   |                                 |   | 164    |      |  |   | 600    |   |  |   | 187    |  
|                                                               |  |                                       |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Total cost of revenues                                         |  |                                       | 8,926  |   |                                 |   | 7,639  |      |  |   | 27,505 |   |  |   | 24,625 |  
|                                                               |  |                                       |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Gross profit                                                   |  |                                       | 14,725 |   |                                 |   | 13,699 |      |  |   | 45,862 |   |  |   | 39,241 |  
|                                                               |  |                                       |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Operating expenses:                                            |  |                                       |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Sales and marketing                                            |  |                                       | 6,709  |   |                                 |   | 5,757  |      |  |   | 21,480 |   |  |   | 18,592 |  
|Research and development                                       |  |                                       | 3,979  |   |                                 |   | 3,944  |      |  |   | 12,617 |   |  |   | 12,860 |  
|General and administrative                                     |  |                                       | 3,130  |   |                                 |   | 3,305  |      |  |   | 8,986  |   |  |   | 9,793  |  
|                                                               |  |                                       |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Total operating expenses                                       |  |                                       | 13,818 |   |                                 |   | 13,006 |      |  |   | 43,083 |   |  |   | 41,245 |  
|                                                               |  |                                       |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) from operations                                  |  |                                       | 907    |   |                                 |   | 693    |      |  |   | 2,779  |   |  |   | (2,004 | )
|                                                               |  |                                       |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Other income (expense):                                        |  |                                       |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Interest income                                                |  |                                       | 600    |   |                                 |   | 359    |      |  |   | 1,705  |   |  |   | 904    |  
|Gain on sale of asset                                          |  |                                       |       |   |                                 |   |       |      |  |   | 200    |   |  |   |       |  
|Foreign exchange gain (loss)                                   |  |                                       | (55    | ) |                                 |   | (120   | )    |  |   | (24    | ) |  |   | 438    |  
|Loss from equity investments                                   |  |                                       | (210   | ) |                                 |   | (296   | )    |  |   | (661   | ) |  |   | (673   | )
|                                                               |  |                                       |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Total other income (expense)                                   |  |                                       | 335    |   |                                 |   | (57    | )    |  |   | 1,220  |   |  |   | 669    |  
|                                                               |  |                                       |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) before income taxes                              |  |                                       | 1,242  |   |                                 |   | 636    |      |  |   | 3,999  |   |  |   | (1,335 | )
|Provision for income taxes                                     |  |                                       | 286    |   |                                 |   | 143    |      |  |   | 981    |   |  |   | 206    |  
|                                                               |  |                                       |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Net income (loss)                                              |  | $                                     | 956    |   |                                 | $ | 493    |      |  | $ | 3,018  |   |  | $ | (1,541 | )
|                                                               |  |                                       |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Net income (loss) per share:                                   |  |                                       |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Basic                                                          |  | $                                     | 0.02   |   |                                 | $ | 0.01   |      |  | $ | 0.05   |   |  | $ | (0.02  | )
|Diluted                                                        |  | $                                     | 0.02   |   |                                 | $ | 0.01   |      |  | $ | 0.05   |   |  | $ | (0.02  | )
|Weighted average common shares used in per share computations: |  |                                       |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Basic                                                          |  |                                       | 59,974 |   |                                 |   | 62,684 |      |  |   | 61,129 |   |  |   | 63,138 |  
|Diluted                                                        |  |                                       | 62,753 |   |                                 |   | 62,932 |      |  |   | 62,875 |   |  |   | 63,138 |  



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



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ENTRUST, INC.



CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                             |  |                                |         |   |      |   |         |  
|------------------------------------------------------------ |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                             |  | NINE MONTHS ENDEDSEPTEMBER 30, |        
|                                                             |  | 2005                           |         |   | 2004 |  
|                                                             |  | (unaudited)                    |        
|                                                             |  | (in thousands)                 |        
|OPERATING ACTIVITIES:                                        |  |                                |         |   |      |   |         |  
|Net income (loss)                                            |  | $                              | 3,018   |   |      | $ | (1,541  | )
|Non-cash items in net income (loss):                         |  |                                |         |   |      |   |         |  
|Depreciation and amortization                                |  |                                | 4,426   |   |      |   | 4,044   |  
|Unearned compensation amortized                              |  |                                | 208     |   |      |   | 45      |  
|Loss from equity investments                                 |  |                                | 661     |   |      |   | 673     |  
|Profit elimination from sales to equity investees            |  |                                | 96      |   |      |   |        |  
|Provision for (reduction in) allowance for doubtful accounts |  |                                | (339    | ) |      |   | (1,981  | )
|Gain on sale of asset                                        |  |                                | (200    | ) |      |   |        |  
|Changes in operating assets and liabilities:                 |  |                                |         |   |      |   |         |  
|(Increase) decrease in accounts receivable                   |  |                                | (3,111  | ) |      |   | 5,622   |  
|Increase in prepaid expenses and other receivables           |  |                                | (669    | ) |      |   | (39     | )
|Increase (decrease) in accounts payable                      |  |                                | 2,005   |   |      |   | 174     |  
|Decrease in accrued liabilities                              |  |                                | (2,257  | ) |      |   | (2,372  | )
|Decrease in accrued restructuring charges                    |  |                                | (3,093  | ) |      |   | (4,001  | )
|Increase (decrease) in deferred revenue                      |  |                                | (1,594  | ) |      |   | 5,669   |  
|                                                             |  |                                |         |   |      |   |         |  
|Net cash provided by (used in) operating activities          |  |                                | (849    | ) |      |   | 6,293   |  
|                                                             |  |                                |         |   |      |   |         |  
|INVESTING ACTIVITIES:                                        |  |                                |         |   |      |   |         |  
|Purchases of marketable investments                          |  |                                | (59,035 | ) |      |   | (61,394 | )
|Maturities of marketable investments                         |  |                                | 78,214  |   |      |   | 69,303  |  
|Purchases of property and equipment                          |  |                                | (1,098  | ) |      |   | (1,067  | )
|Proceeds on sale of asset                                    |  |                                | 200     |   |      |   |        |  
|Increase in long-term equity investments                     |  |                                | (458    | ) |      |   |        |  
|Increase in other long-term assets                           |  |                                | (684    | ) |      |   | (924    | )
|Purchase of business                                         |  |                                |        |   |      |   | (3,490  | )
|                                                             |  |                                |         |   |      |   |         |  
|Net cash provided by investing activities                    |  |                                | 17,139  |   |      |   | 2,438   |  
|                                                             |  |                                |         |   |      |   |         |  
|FINANCING ACTIVITIES:                                        |  |                                |         |   |      |   |         |  
|Repayment of long-term liabilities                           |  |                                | (180    | ) |      |   |        |  
|Repurchase of common stock                                   |  |                                | (16,902 | ) |      |   | (5,752  | )
|Proceeds from exercise of stock options                      |  |                                | 4,219   |   |      |   | 658     |  
|                                                             |  |                                |         |   |      |   |         |  
|Net cash used in financing activities                        |  |                                | (12,863 | ) |      |   | (5,094  | )
|                                                             |  |                                |         |   |      |   |         |  
|Effect of exchange rate changes on cash                      |  |                                | 400     |   |      |   | 227     |  
|                                                             |  |                                |         |   |      |   |         |  
|Net increase in cash and cash equivalents                    |  |                                | 3,827   |   |      |   | 3,864   |  
|Cash and cash equivalents at beginning of period             |  |                                | 36,325  |   |      |   | 37,903  |  
|                                                             |  |                                |         |   |      |   |         |  
|Cash and cash equivalents at end of period                   |  | $                              | 40,152  |   |      | $ | 41,767  |  
|                                                             |  |                                |         |   |      |   |         |  



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



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ENTRUST, INC.



NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS



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



NOTE 1. BASIS OF
PRESENTATION



The accompanying unaudited condensed consolidated financial
statements have been prepared on the same basis as the audited annual consolidated financial statements and, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of
the financial position, results of operations and cash flows of Entrust, Inc., a Maryland corporation, and its consolidated subsidiaries (collectively, the Company). The results of operations for the three and nine months ended
September 30, 2005 are not necessarily indicative of the results to be expected for the full year. Certain information and footnote disclosures normally contained in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the Notes to Consolidated Financial Statements for the year ended
December 31, 2004 contained in the Companys Annual Report on Form 10-K. Certain reclassifications have been made to prior years balances in order to conform to fiscal 2005 presentation.



NOTE 2. ACQUISITION OF BUSINESS



AmikaNow!



On June 18, 2004, the Company completed the acquisition of intellectual property and certain other assets of AmikaNow! Corporation
(AmikaNow!), a privately-held provider of advanced e-mail content scanning and analysis technology, which is a development stage company with negligible revenue, in exchange for $2,676 in cash and $1,428 in guaranteed future payments
payable over three years and other acquisition-related costs. In addition, the Company offered employment to certain employees of AmikaNow!. The Company may be required to make additional payments of up to a maximum of $2,400, in the form of
royalties calculated based on the sale of products that incorporate the technology acquired from AmikaNow!, for a period of three years following the date of acquisition if certain sale thresholds are met. The acquisition was made in order to
further strengthen and expand the Companys portfolio of products to provide enterprise and government customers with comprehensive content analysis and risk mitigation tools for improved compliance with corporate email policies and regulatory
guidelines.



The acquisition was accounted for under the purchase method of
accounting and, accordingly, the purchase price of approximately $3,969 was allocated to the fair value of the tangible and intangible assets and liabilities acquired, with the remainder of approximately $135 allocated to goodwill. Amortization of
$199 and $551 has been recorded for the three and nine months ended September 30, 2005, respectively, related to purchased product rights, while amortization of $16 and $49 has been recorded for the three and nine months ended
September 30, 2005, respectively, related to non-contractual customer relationship assets, in each case, arising from this acquisition. Amortization of $178 and $201 had been recorded in the three months and nine months ended September 30,
2004, related to purchased product rights and non-contractual customer relationship assets arising from this acquisition.



Entrust Japan



On September 13, 2004, the Company completed the acquisition, in exchange for $1,560 in cash, of 1,700,000 shares of voting common stock of Entrust Japan Co., Ltd. (Entrust Japan), a privately-held
company engaged in selling, servicing and supporting solutions that enable organizations to secure digital identities and information in the Japanese market, with an exclusive license to market and sell the Companys products in Japan. The
acquisition allows the Company to strengthen and expand its presence in Japan in order to improve its ability to service Japanese customers. This acquisition of shares increased the Companys ownership interest in Entrust Japan from 37% to 99%
of the outstanding voting stock. The Company made an original investment of $393 for approximately 10% of the common stock in 1998. In April 2002, the Company increased its investment to approximately 37% through the contribution of $1,481 of cash
and cash deposits and $385 of the Companys products and exclusivity rights, at which time the Company began accounting for its investment in Entrust Japan in accordance with the equity method. Prior to the September 2004 acquisition, the
Company had recorded cumulative losses from its investment in Entrust Japan of $1,757 since its increased investment in the second quarter of 2002.



The September 2004 acquisition was accounted for under the purchase method of accounting and, accordingly, the purchase price of approximately $1,669, which included the
remaining balance of the Companys equity investment in Entrust Japan immediately prior to the September 2004 acquisition, was allocated to the fair value of the tangible and intangible assets and liabilities acquired, with the remainder
allocated to goodwill. In addition, the results of operations of Entrust Japan have been included in the Companys consolidated financial statements commencing September 13, 2004, the effective date of the acquisition for accounting
purposes. Amortization of $19 and $56 has been recorded for the three and nine months ended September 30, 2005, respectively, related to the non-contractual customer relationship asset purchased as part of this acquisition. No amortization
related to this purchase had been recorded in the three and nine months ended September 30, 2004.



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The Company is presently in discussions to purchase the remaining minority interest shareholdings, equal to approximately
0.1% of the outstanding voting shares of Entrust Japan.



The following table
summarizes the combined results of operations of the Company, on a pro forma basis reflecting the acquired business assets of AmikaNow! and operations of Entrust Japan for the three and nine months ended September 30, 2004, as if the
acquisitions had taken place as of the beginning of the respective periods and, accordingly, include a full periods amortization of the assets related to purchased product rights and non-contractual customer relationships in each period shown:



|                                              |  |                                               |        |                                               |   |        |  
|--------------------------------------------- |  | --------------------------------------------- | ------ | --------------------------------------------- | - | ------ | -
|                                              |  | Three Months EndedSeptember 30, 2004Pro forma |        | Nine Months Ended September 30, 2004Pro forma |  
|Revenues                                      |  | $                                             | 21,723 |                                               | $ | 65,179 |  
|Net income (loss)                             |  |                                               | 145    |                                               |   | (3,394 | )
|Basic and diluted net income (loss) per share |  |                                               |       |                                               |   | (0.05  | )



NOTE 3. ASIA DIGITAL MEDIA JOINT
VENTURE



On September 16, 2004, the Company and certain other
investors agreed to subscribe for shares in a newly formed joint venture called Asia Digital Media pursuant to a subscription agreement (as amended, the Subscription Agreement). The investment closed on December 17, 2004.



The parties agreed that: (i) the Company would directly subscribe for
approximately 16.7% of the share capital of Asia Digital Media in exchange for a cash contribution of $2,000 and in-kind contribution of $1,300, both of which after intercompany profit eliminations aggregated to $3,088; (ii) ADML Holdings, Ltd.
(ADML Holdco), in which the Company held a 14.3% ownership interest, would directly subscribe for 60.6% of the share capital of Asia Digital Media in exchange for a contribution of the entire issued share capital of Ohana Wireless,
Incorporated (Ohana); (iii) the remaining capital stock of Asia Digital Media would be owned by two investors and China Aerospace New World Technology Limited, a company incorporated in Hong Kong (CANW), in exchange for
cash and/or in-kind contributions.



After the closing, the Companys total
direct and indirect equity holdings in Asia Digital Media were approximately 25.3%. During the first quarter of 2005, the Company received additional shares of common stock of Asia Digital Media in reimbursement for legal costs incurred by the
Company on behalf of Asia Digital Media during its formation and for administrative services provided by the Company. These additional shares were valued at $458 and resulted in an increase of the Companys total direct and indirect equity
holdings in Asia Digital Media to 27.4% at June 30, 2005.



The Company
accounts for its investment in Asia Digital Media under the equity method. Accordingly, the Company has included its share of losses of Asia Digital Media, in the amount of $210 and $661, in its condensed consolidated statement of operations for the
three and nine months ended September 30, 2005, respectively. The Company has recorded cumulative losses from its investment in Asia Digital Media of $1,028 since its investment in the fourth quarter of 2004. As of November 3, 2005, the
most recent date of assessment, the Company does not believe that there has been any impairment of its direct and indirect investments in Asia Digital Media.



Dr. Anthony E. Hwang, a director of the Company, and Mr. F. William Conner, Chairman, President and Chief Executive Officer of the Company, became
directors of Asia Digital Media on December 17, 2004.





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##### Table of Contents

NOTE 4. STOCK-BASED COMPENSATION AND STOCK OPTION PLANS



Stock-Based Compensation



In December 2004, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 123 (revised 2004), Share-Based Payment (SFAS No. 123(R)), which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). SFAS
No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the
approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement, over the service period, based on their
grant-date fair values. Pro forma disclosure will no longer be an alternative.



SFAS No. 123(R) is effective for the first annual period beginning after June 15, 2005 and, therefore, the Company will adopt SFAS No. 123(R) and begin recognizing compensation expense for employee stock options as of
January 1, 2006. The Company plans to adopt SFAS No. 123(R) using the modified-prospective transition method, in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS
No. 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on
the effective date.



As permitted by SFAS No. 123, the Company currently
accounts for share-based payments to employees using APB Opinion No. 25s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. For all options granted to employees in the periods
disclosed, the exercise price of each option granted was equal to the fair value of the underlying stock at the date of grant and therefore, no stock-based compensation costs are reflected in earnings for these options. Accordingly, the adoption of
SFAS No. 123(R)s fair value method will have a significant impact on the Companys result of operations, although it will have no material impact on the overall financial position. The impact of adoption of SFAS No. 123(R)
cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact
of SFAS No. 123, as described in the disclosure of pro forma net income (loss) and earnings per share in the following table.



|                                                                                                        |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                        |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                                                                                        |  | 2005                            |        |   | 2004                           |   |        | 2005 |  |   | 2004   |  
|Net income (loss), as reported:                                                                         |  | $                               | 956    |   |                                | $ | 493    |      |  | $ | 3,018  |   |  | $ | (1,541 | )
|Total stock-based employee compensation expense determined under fair value-based method for all awards |  |                                 | (1,447 | ) |                                |   | (2,221 | )    |  |   | (3,437 | ) |  |   | (7,842 | )
|                                                                                                        |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Pro forma net income (loss)                                                                             |  | $                               | (491   | ) |                                | $ | (1,728 | )    |  | $ | (419   | ) |  | $ | (9,383 | )
|                                                                                                        |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Net income (loss) per share:                                                                            |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Basicas reported                                                                                       |  | $                               | 0.02   |   |                                | $ | 0.01   |      |  | $ | 0.05   |   |  | $ | (0.02  | )
|Basicpro forma                                                                                         |  | $                               | (0.01  | ) |                                | $ | (0.03  | )    |  | $ | (0.01  | ) |  | $ | (0.15  | )
|Dilutedas reported                                                                                     |  | $                               | 0.02   |   |                                | $ | 0.01   |      |  | $ | 0.05   |   |  | $ | (0.02  | )
|Dilutedpro forma                                                                                       |  | $                               | (0.01  | ) |                                | $ | (0.03  | )    |  | $ | (0.01  | ) |  | $ | (0.15  | )



In the pro forma calculations above,
the weighted average fair value for stock options granted during the three and nine months ended September 30, 2005 was estimated at $3.02 and $1.97, compared to $2.20 and $3.68 per option for the three and nine months ended September 30,
2004, respectively. The fair values of options were estimated as of the date of grant using the Black-Scholes option pricing model. The following weighted average assumptions were used in the calculations.



|                               |  |                                 |   |  |                                |   |  |      |   |  |      |  
|------------------------------ |  | ------------------------------- | - |  | ------------------------------ | - |  | ---- | - |  | ---- | -
|                               |  | Three Months EndedSeptember 30, |   |  | Nine Months EndedSeptember 30, |  
|                               |  | 2005                            |   |  | 2004                           |   |  | 2005 |   |  | 2004 |  
|Expected option life, in years |  | 5                               |   |  | 5                              |   |  | 5    |   |  | 5    |  
|Risk free interest rate        |  | 3.97                            | % |  | 3.41                           | % |  | 3.97 | % |  | 3.16 | %
|Dividend yield                 |  |                                |   |  |                               |   |  |     |   |  |     |  
|Volatility                     |  | 55                              | % |  | 106                            | % |  | 55   | % |  | 104  | %



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##### Table of Contents

In Q2 2005, the Company authorized the grant of restricted stock units (RSUs) to employees totaling
approximately 406,690, which allow the employees to receive Common stock of the Company once the units vest. Since Q2 2005, an additional 3,625 RSUs have been issued and 15,825 were cancelled. The RSUs generally vest over four years. The
Company recorded unearned deferred compensation of $2,054 related to these grants in the second quarter of 2005. As a result, during the three and nine months ended September 30, 2005, the Company recorded expense of $92 and $185 for earned
compensation related to these RSUs.



Stock Option Plans



The following tables summarize information concerning outstanding
options as of September 30, 2005:



|                         |  |                             |  |                                         |  |                               |       |                             |            |                               |   |      
|------------------------ |  | --------------------------- |  | --------------------------------------- |  | ----------------------------- | ----- | --------------------------- | ---------- | ----------------------------- | - | -----
|                         |  | Options Outstanding         |  | Options Exercisable                    
|Range of Exercise Prices |  | Number ofOptionsOutstanding |  | WeightedAverageRemainingContractualLife |  | WeightedAverageExercise Price |       | Number ofOptionsExercisable |            | WeightedAverageExercise Price
|$0.00                    |  | 394,490                     |  | 3.6 years                               |  |                               | 0     |                             | 0          |                               |   | 0    
|$0.12 to $2.44           |  | 251,530                     |  | 2.2 years                               |  | $                             | 2.08  |                             | 239,362    |                               | $ | 2.06 
|$2.45 to $5.00           |  | 6,086,099                   |  | 7.3 years                               |  |                               | 3.65  |                             | 3,463,628  |                               |   | 3.88 
|$5.01 to $6.72           |  | 181,490                     |  | 3.9 years                               |  |                               | 6.15  |                             | 177,740    |                               |   | 6.16 
|$6.73 to $6.86           |  | 2,324,044                   |  | 4.7 years                               |  |                               | 6.75  |                             | 2,324,044  |                               |   | 6.75 
|$6.87 to $10.00          |  | 4,055,150                   |  | 5.5 years                               |  |                               | 6.88  |                             | 4,055,150  |                               |   | 6.88 
|$10.01 to $50.00         |  | 517,202                     |  | 4.1 years                               |  |                               | 21.80 |                             | 517,189    |                               |   | 21.80
|$50.01 to $130.25        |  | 15,050                      |  | 4.5 years                               |  |                               | 75.45 |                             | 15,050     |                               |   | 75.45
|                         |  |                             |  |                                         |  |                               |       |                             |            |                               |   |      
|Total:                   |  | 13,825,055                  |  |                                         |  |                               | 5.78  |                             | 10,792,163 |                               |   | 6.58 
|                         |  |                             |  |                                         |  |                               |       |                             |            |                               |   |      



The following table sets forth a
comparison as of September 30, 2005, of the number of shares subject to options with exercise prices at or below the closing price per share of the Companys Common stock on September 30, 2005 (In-the-Money options) to the
number of shares of the Companys Common stock subject to options with exercise prices greater than the closing price per share of the Companys Common stock on such date (Out-of-the-Money options) (in actual shares):



In-the-Money and Out-of-the-Money Option Information September 30,
2005 (1)



|                          |  |             |  |               |  |            |  |                                       |  
|------------------------- |  | ----------- |  | ------------- |  | ---------- |  | ------------------------------------- | -
|                          |  | Exercisable |  | Unexercisable |  | Total      |  | Percentage ofTotal OptionsOutstanding |  
|In-the-Money              |  | 3,720,040   |  | 3,029,129     |  | 6,753,169  |  | 49                                    | %
|Out-of-the-Money          |  | 7,068,123   |  | 3,763         |  | 7,071,886  |  | 51                                    | %
|                          |  |             |  |               |  |            |  |                                       |  
|Total Options Outstanding |  | 10,792,163  |  | 3,032,892     |  | 13,825,055 |  | 100                                   | %
|                          |  |             |  |               |  |            |  |                                       |  



|(1) | The average closing price of the Companys Common stock was $5.74 for the three months
ended September 30, 2005, as reported by the NASDAQ National Market.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

On January 28, 2005, the Board of Directors approved accelerating the vesting of all of the Companys
outstanding unvested stock options granted to directors, officers and employees of the Company under applicable stock incentive plans of the Company, with an exercise price greater than $4.79. The closing price of the Companys Common stock on
the Nasdaq National Market Quotation System to be used for measurement of compensation as of the date of acceleration was $3.57. As a result of the acceleration, options to acquire approximately 2.8 million shares of the Companys Common
stock, which otherwise would have vested from time to time over the next four years, became immediately exercisable upon finalization of administrative actions to be completed by the Companys stock plan administrator. All other terms and
conditions applicable to outstanding stock option grants remain in effect. The option plans under which accelerated grants were issued are the Companys 1996 Plan, 1999 Plan and Special Plan.



The Board of Directors decision to accelerate the vesting of affected stock options was
primarily based upon the issuance of SFAS No. 123(R). In addition, because these options have exercise prices in excess of current market values and are not fully achieving their original objectives of incentive compensation and employee
retention, the acceleration may have a positive effect on employee morale and retention. By accelerating the vesting of the affected stock options, the Company was not required to record any amount of compensation expense for such accelerated stock
options. The Company believes that acceleration of the 2.8 million stock options, based on the Companys implementation date for SFAS No. 123(R) of January 1, 2006, will eliminate the need for recognizing future compensation
expense of approximately $2.7 million. The Company further believes that it will thereafter not be required to recognize any compensation expense in future periods associated with the affected options. However, there can be no assurance that the
acceleration of the options may not result in some future compensation expense.



NOTE 5. STOCK REPURCHASE PROGRAM



On July 29, 2002, the
Company announced that its Board of Directors had authorized the Company to repurchase up to an aggregate of 7,000,000 shares of its Common stock. The program has subsequently been extended three times, most recently on July 22, 2005 when the
Board of Directors authorized a further extension of this stock repurchase program to permit the purchase of up to 10,000,000 shares of the Companys Common stock through December 15, 2006. This quantity of Common shares is in addition to
the 6,928,640 shares of the Companys Common stock already purchased under the Companys stock repurchase program through June 30, 2005.



During the three months ended September 30, 2005, the Company repurchased 685,500 shares of its Common stock for a total cash outlay of $4,067 at an average price of
$5.93, including commissions paid to brokers. During the nine months ended September 30, 2005, the Company repurchased 3,723,500 shares of its Common stock for a total cash outlay of $16,902 at an average price of $4.54, including commissions
paid to brokers. As of September 30, 2005, the Company has repurchased 7,614,140 shares of its Common stock under this program since its inception on July 29, 2002, for a total cash outlay of $30,093 at an average price of $3.95 per share,
including commissions paid to brokers.



NOTE 6. ALLOWANCE FOR DOUBTFUL
ACCOUNTS



The Company performs ongoing credit evaluations of its customers
and generally does not require collateral from its customers to support accounts receivable. The Company maintains an allowance for doubtful accounts due to credit risk, to provide adequate protection against estimated losses resulting from the
inability of customers to make required payments. The Company bases its ongoing estimate of allowance for doubtful accounts primarily on the aging of balances in its accounts receivable, historical collection patterns and changes in the
creditworthiness of its customers. Based upon this analysis, the Company records an increase in the allowance for doubtful accounts when the prospect of collecting a specific account receivable becomes doubtful. The allowance for doubtful accounts
is established based on the best information available to the Company and is re-evaluated and adjusted as additional information is received. The following table summarizes the changes in the allowance for doubtful accounts:



|                                                                                              |  |                                |      |   |      |   |        |  
|--------------------------------------------------------------------------------------------- |  | ------------------------------ | ---- | - | ---- | - | ------ | -
|                                                                                              |  | Nine Months EndedSeptember 30, |     
|                                                                                              |  | 2005                           |      |   | 2004 |  
|Allowance for doubtful accounts, beginning of period                                          |  | $                              | 988  |   |      | $ | 4,032  |  
|Reduction in provision for doubtful accounts, net                                             |  |                                | (409 | ) |      |   | (1,981 | )
|Reallocation to accrued liabilities to provide for costs associated with settlement agreement |  |                                |     |   |      |   | (698   | )
|Amounts written-off, net of recoveries                                                        |  |                                | (100 | ) |      |   | (285   | )
|                                                                                              |  |                                |      |   |      |   |        |  
|Allowance for doubtful accounts, end of period                                                |  | $                              | 479  |   |      | $ | 1,068  |  
|                                                                                              |  |                                |      |   |      |   |        |  



During the third quarter of 2005, the
Company collected $572 that had been outstanding over 365 days and had previously been fully reserved. The balance of $572 was reversed against sales and marketing expense as a recovery of bad debt during the third quarter. Although the Company has
recently benefited from recovery of old receivables, we do not currently anticipate any significant recoveries from the allowance for doubtful accounts in the near future.



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##### Table of Contents

NOTE 7. ACCRUED RESTRUCTURING CHARGES



May 2003 Restructuring Plan



Following the first quarter of 2003, when the Companys revenues fell short of its expectations and guidance, management began a re-assessment of the Companys
operations to ensure that expenses were optimally aligned to its customers and markets and structured such that costs would not exceed revenues by the fourth quarter of 2003.



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



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



The Company has evaluated and pursued all reasonable possibilities to
settle the lease obligations associated with the May 2003 restructuring, but has been unable to find an acceptable outcome. Therefore, the Company concluded that it was appropriate to classify the portion of the outstanding liabilities that were not
payable within the next 12 months as long-term liabilities. However, in terms of long-term liquidity requirements, the current obligations would require the Company to fund $100 of its accrued restructuring charges for the May 2003 restructuring
before the end of fiscal 2005, with the remaining accrued restructuring charges for the May 2003 restructuring to be paid as follows: $100 in fiscal 2006, $100 in fiscal 2007, $100 in fiscal 2008 and $100 in fiscal 2009.



Summary of Accrued Restructuring Charges for May 2003 Restructuring



The following table is a summary of the accrued restructuring charges related to the May
2003 restructuring plan at September 30, 2005:



|                                   |  |                                         |     |               |   |                                                 |  |   |    
|---------------------------------- |  | --------------------------------------- | --- | ------------- | - | ----------------------------------------------- |  | - | ---
|                                   |  | Total ChargesAccrued atBeginning ofYear |     | Cash Payments |   | AccruedRestructuringCharges atSeptember 30,2005
|                                   |  | (in millions)                          
|Consolidation of excess facilities |  | $                                       | 1.2 |               | $ | 0.7                                             |  | $ | 0.5
|                                   |  |                                         |     |               |   |                                                 |  |   |    



June 2001 Restructuring Plan



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



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



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



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##### Table of Contents

2002, while remaining marketing and distribution agreement obligations related to certain discontinued products were settled in the third quarter of 2003.
The Company had initiated all actions required by the restructuring plan by the end of the second quarter of 2002.



The Company has evaluated and pursued all reasonable possibilities to settle the lease obligations associated with the June 2001 restructuring, but has been unable to
find an acceptable outcome. Therefore, the Company concluded that it was appropriate to classify the portion of the outstanding liabilities that were not payable within the next 12 months to long-term liabilities. However, the current obligations
would require the Company to fund $800 of its accrued restructuring charges for the June 2001 restructuring before the end of fiscal 2005, with the remaining accrued restructuring charges for the June 2001 restructuring to be paid as follows: $3,500
in fiscal 2006, $5,100 in fiscal 2007, $4,700 in fiscal 2008 and $12,400 in fiscal 2009 and beyond.



Summary of Accrued Restructuring Charges for June 2001 Restructuring



The following table is a summary of the accrued restructuring charges related to the 2001 restructuring plan at September 30, 2005:



|                                                 |  |                                         |      |               |   |                                                 |  |   |     
|------------------------------------------------ |  | --------------------------------------- | ---- | ------------- | - | ----------------------------------------------- |  | - | ----
|                                                 |  | Total ChargesAccrued atBeginning ofYear |      | Cash Payments |   | AccruedRestructuringCharges atSeptember 30,2005
|                                                 |  | (in millions)                          
|Consolidation of excess facilities               |  | $                                       | 28.8 |               | $ | 2.3                                             |  | $ | 26.5
|Discontinuance of non-core products and programs |  |                                         | 0.1  |               |   | 0.1                                             |  |   |    
|                                                 |  |                                         |      |               |   |                                                 |  |   |     
|Total                                            |  | $                                       | 28.9 |               | $ | 2.4                                             |  | $ | 26.5
|                                                 |  |                                         |      |               |   |                                                 |  |   |     



As of September 30, 2005, the
Company had estimated a total of $19,400 of sublease recoveries in our restructuring accrual. Of this amount, $19,200 is related to the Santa Clara facility. In addition, $4,800 of the $19,400 is recoverable under existing sublease agreements and
the remaining $14,600 of rent recoveries is based on estimates that may be subject to adjustments based upon changes in the real estate sublet markets.



NOTE 8. NET INCOME (LOSS) PER SHARE AND SHARES OUTSTANDING



Basic net income (loss) per share is computed by dividing the net income (loss) by the weighted average number of shares of Common stock of all classes outstanding during
the period. Diluted net income (loss) per share is computed by dividing the net income (loss) by the weighted average number of shares of Common stock and potential Common stock outstanding, and when dilutive, options to purchase Common stock using
the treasury stock method. The options to purchase Common stock are excluded from the computation of diluted net income (loss) per share if their effect is antidilutive. The dilutive effect of options to purchase Common stock under the treasury
stock method for the three and nine months ended September 30, 2005 was 2,778,819 and 1,745,589, respectively, which increases the weighted average common shares outstanding used in the computation of diluted net income (loss) per share,
compared to a dilutive effect of 248,175 and 1,377,639 shares for the three and nine months ended September 30, 2004, respectively. However, 7,068,123 and 7,643,190 out-of-the-money options that had exercise prices in excess of the average
three-month market price ended September 30, 2005 and September 30, 2004, respectively, were excluded from the computation of diluted net income (loss) per share in accordance with the treasury stock method.



In the three and nine months ended September 30, 2005, the Company issued 623,367 and
1,327,232 shares of Common stock, respectively, related to the exercise of employee stock options.



NOTE 9. MARKETABLE AND OTHER INVESTMENTS



The Company maintains marketable investments mainly in a strategic cash management account. This account is invested primarily in highly rated corporate securities, in securities guaranteed by the U.S. government or its agencies, and highly
rated municipal bonds, primarily with a remaining maturity of not more than 24 months. The Company has the intent and ability to hold all of these investments until maturity. Therefore, all such investments are classified as held to maturity
investments, and are stated at amortized cost. At September 30, 2005, the amortized cost of the Companys held to maturity investments approximated fair value. Based on contractual maturities, these marketable investments were classified
in either current assets or long-term assets.



Realized gains and losses on
disposition of available for sale marketable investments are included in other investment income in the results of operations. Unrealized gains and losses are included in other comprehensive income, except that the portion designated as being hedged
in a fair value hedge is recognized in other investment income during the period of the hedge. At September 30, 2005, the Company did not hold any available for sale marketable investments.



12



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##### Table of Contents

The Company holds equity securities stated at cost, which represent long-term investments in private companies made in
2000 and 2001 for business and strategic alliance purposes. The Companys ownership share in these companies ranges from 1% to 10% of the outstanding voting share capital. These strategic investments had no net remaining carrying value at
September 30, 2005. Consistent with the Companys policies for other long-lived assets, the carrying value of long-term strategic investments is periodically reviewed for impairment based upon such quantitative measures as expected
undiscounted cash flows, as well as qualitative factors. In addition, the Audit Committee of the Board of Directors monitors and assesses the ongoing operating performance of the underlying companies for evidence of impairment. Since 2001, the
Company has recorded impairments totaling $14,818 with respect to these investments as a result of other than temporary declines in fair value.



In addition, the Company holds an equity interest in Asia Digital Media, which at September 30, 2005 represented approximately 27% of the voting share capital,
through both direct and indirect investment in the joint venture, and is accounted for by the Company using the equity method of accounting for investments in common stock, 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. As of November 3, 2005, the most recent date of assessment, the Company does not believe that there has been any
impairment of its direct and indirect investments in Asia Digital Media. See note 3 for additional discussion.



Revenues recorded by the Company from Asia Digital Media represented less than 1% of total revenues for the three and nine months ended September 30, 2005.



NOTE 10. SEGMENT AND GEOGRAPHIC INFORMATION



Segment information



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



Geographic information



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



The Company operates in three main geographic areas as follows:



|                                        |  |                                 |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|--------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                        |  | Three Months EndedSeptember 30, |        |   | Nine Months Ended September 30, |  
|                                        |  | 2005                            |        |   | 2004                            |   |        | 2005 |  |   | 2004   |  
|Revenues:                               |  |                                 |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|United States                           |  | $                               | 11,510 |   |                                 | $ | 12,534 |      |  | $ | 34,670 |   |  | $ | 35,973 |  
|Canada                                  |  |                                 | 5,205  |   |                                 |   | 3,503  |      |  |   | 15,381 |   |  |   | 11,474 |  
|Europe, Asia and Other                  |  |                                 | 6,936  |   |                                 |   | 5,301  |      |  |   | 23,316 |   |  |   | 16,419 |  
|                                        |  |                                 |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Total revenues                          |  | $                               | 23,651 |   |                                 | $ | 21,338 |      |  | $ | 73,367 |   |  | $ | 63,866 |  
|                                        |  |                                 |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) before income taxes:      |  |                                 |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|United States                           |  | $                               | 825    |   |                                 | $ | 320    |      |  | $ | 1,745  |   |  | $ | 216    |  
|Canada                                  |  |                                 | 572    |   |                                 |   | 855    |      |  |   | 2,803  |   |  |   | (1,312 | )
|Europe, Asia and Other                  |  |                                 | (155   | ) |                                 |   | (539   | )    |  |   | (549   | ) |  |   | (239   | )
|                                        |  |                                 |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Total income (loss) before income taxes |  | $                               | 1,242  |   |                                 | $ | 636    |      |  | $ | 3,999  |   |  | $ | (1,335 | )
|                                        |  |                                 |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  



|                       |  |                   |         |                  |   |        
|---------------------- |  | ----------------- | ------- | ---------------- | - | -------
|                       |  | September 30,2005 |         | December 31,2004
|Total assets:          |  |                   |         |                  |   |        
|United States          |  | $                 | 101,027 |                  | $ | 110,988
|Canada                 |  |                   | 27,066  |                  |   | 29,837 
|Europe, Asia and Other |  |                   | 3,254   |                  |   | 5,058  
|                       |  |                   |         |                  |   |        
|Total                  |  | $                 | 131,347 |                  | $ | 145,883
|                       |  |                   |         |                  |   |        



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NOTE 11. COMPREHENSIVE INCOME (LOSS)



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



|                                         |  |                                 |       |                                 |   |       |  |   |       |   |  |   |        |  
|---------------------------------------- |  | ------------------------------- | ----- | ------------------------------- | - | ----- |  | - | ----- | - |  | - | ------ | -
|                                         |  | Three Months EndedSeptember 30, |       | Nine Months Ended September 30, |  
|                                         |  | 2005                            |       | 2004                            |   | 2005  |  |   | 2004  |  
|Net income (loss)                        |  | $                               | 956   |                                 | $ | 493   |  | $ | 3,018 |   |  | $ | (1,541 | )
|Foreign currency translation adjustments |  |                                 | 203   |                                 |   | 542   |  |   | (476  | ) |  |   | 210    |  
|                                         |  |                                 |       |                                 |   |       |  |   |       |   |  |   |        |  
|Comprehensive income (loss)              |  | $                               | 1,159 |                                 | $ | 1,035 |  | $ | 2,542 |   |  | $ | (1,331 | )
|                                         |  |                                 |       |                                 |   |       |  |   |       |   |  |   |        |  



NOTE 12. LEGAL PROCEEDINGS



Certain legal proceedings in which we are involved are discussed in Part
1. Item 3. of our Annual Report on Form 10-K for the year ended December 31, 2004; Note 12 to the condensed financial statements included in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2005; and Note 12 to the
condensed financial statements included in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2005. All proceedings in those earlier Reports remain outstanding.



Other Legal Matters



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



NOTE 13. CONTINGENCIES



Entrust entered into a contract with the General Services Administration (GSA)
on March 31, 2000. It had come to the Companys attention that it might have a potential liability to the GSA under this contract, and the Company has advised the GSA of this matter. The Company conducted a self-assessment of its
compliance and internal processes with respect to the agreement, as well as the pricing requirements of the agreement, which was completed in September 2004. The Company estimated its probable minimum liability at $352 and accrued this estimated
amount in 2003. The results of the Companys self-assessment indicate that the liability is not significantly different from its estimate in 2003. Payment of the amount of this liability has now been made to the GSA, but is subject to audit.



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



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



EXECUTIVE
OVERVIEW



We are a global provider of software that secures digital
identities and information. Over 1,400 enterprises and government agencies in more than 50 countries use our solutions to help secure the digital lives of their citizens, customers, employees and partners. Our proven software and services can help
customers achieve regulatory and corporate compliance, while helping to turn security challenges such as identity theft and e-mail security into business opportunities.



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



As an innovator and pioneer in the Internet security field, Entrusts
market leadership and expertise in delivering award-winning policy and access management software solutions is demonstrated by the diversity of its products, geographic representation, and customer segments.



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We derive our revenues from our core products. In Q3, 2005, product revenues increased 18% from Q3, 2004, Entrusts
main solution areas include:



| |  |  | Entrust Secure Identity Management Solutions accounted for 80% ($6.1 million) of product revenue, an increase of 64% ($2.4 million) from Q3, 2004 and a decrease of 16% ($1.1
million) from Q2, 2005. Entrust Certificate Services revenues of $1.2 million represents an increase of 30% ($272 thousand) over Q3, 2004 and an increase of 10% over Q2, 2005. This is Entrust Certificate Services 12th consecutive quarterly increase
in revenue.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Entrust Secure Messaging Solutions accounted for 15% ($1.2 million) of product revenue, a decrease of 5% ($57 thousand) from Q2, 2005, and a decrease of 41% ($786 thousand) from Q3,
2004. However, Entrusts new Secure Gateway messaging solutions (Entrust Messaging Server, Webmail Center and Compliance Server) achieved their highest product revenue, increasing 231% from Q3, 2004 and 273% from Q2, 2005.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Entrust Secure Data Solutions accounted for 5% ($418 thousand) of product revenue, a decrease of 51% ($443 thousand) from Q3, 2004, and 57% ($549 thousand) from Q2, 2005.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We also provide support services and professional services,
including architecture, installation, and integration services related to the products that we sell. These services represent a significant portion of our revenues, but are closely related to the demand for our products. In addition, the margins on
our products are significantly higher than margins on our services. As a result, we are primarily focused on growing our product revenues.



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



We market and sell our products and services in both the enterprise and government market space. In Q3, 2005, 38% of our product sales were in our extended government vertical market, which includes healthcare. Year-to-date this is an
increase of 201% as compared with the same period in 2004. The increase in revenue has been driven by key global projects that have started to increase product purchases. In the extended government vertical market, we have a strong penetration in
the U.S. Federal government, the governments of Canada, Singapore, Denmark, the United Kingdom and across continental Europe. In Q2, 2005, the Spanish Government selected our digital certificate technology to incorporate into its National ID Card.
As governments continue to increase spending on e-government initiatives and information security projects, we are well positioned to help them.



In Q3, 2005, 62% of our product sales were in our extended enterprise vertical market. This is an increase of 9% over Q2, 2005 and represented the highest level of
revenue from the extended enterprise vertical this year. The increase in product revenues in the enterprise market in the quarter was driven by our new product traction, new customers, and continued growth in transactions under $500 thousand in
revenue. In the quarter, 27% of product transactions and 28% of product revenue came from new products. Our new product offerings continue to drive the acquisitions of new customers. Year-to-date, Entrust had 45 new customers, which is an increase
of 88% from the 24 new customers year-to-date in 2004. We continue to see demand from global enterprises as they continue to respond to regulatory and governance compliance demands and extend their internal and external networks to more and more
individuals inside and outside their domain.



A key driver of our product
growth has been the recent spotlight on identity theft due to breaches at companies like Choicepoint and LexisNexis. These breaches have proven that self-regulation over the past few years has been insufficient at addressing the underlying issues.
Recent legislation has addressed these concerns. California S.B. 1386 has cast more visibility on the issue for citizens, corporations, and the government. The law requires both corporations and the government to notify California residents if their
sensitive data has been breached unless encryption technology is deployed. Additionally, 20 other states have now passed breach notification requirements, with another 14 with legislation waiting to be enacted. On a national level, bills are being
written to protect citizens from identity theft and alert them if their information has been stolen.



Entrust for years has been a leader in secure digital identities and information. In the fourth quarter of 2004, we introduced IdentityGuard which is our easy-to-use second factor of authentication. We now have 55
pilots under way for IdentityGuard. In the quarter, IdentityGuard accounted for 11% of total product revenue, achieving its highest quarter ever. The breakthrough economics and simplicity for the mass market, while countering online theft and
phishing, are the key drivers for the increased traction we are experiencing. Along with the traction for second factor authentication, we are also seeing customers increasingly interested in data protection and encryption. With a combination of
Entrust IdentityGuard, GetAccess and TruePass, customers can accomplish both authentication and encryption from one solution provider.



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Entrust set as its goal to develop different channels to market. In the second quarter of 2005, our largest deal was
through our partnership with SIA, with whom we won the national ID card. Our largest IdentityGuard transaction in this quarter and the second quarter of 2005, were also with strategic regional distribution partners. We have been successful in
developing a number of these regional channels to market. In addition to our regional partners and JVs, our focus this year has been around developing a channel to market in the U.S. for our strong authentication, encryption and e-mail compliance
solutions. On July 26, 2005, Entrust announced a distribution agreement with Access Distribution, a General Electric Company, to become the first two-tier distributor to offer Entrusts industry-leading security solutions to authorized
value-added resellers in the U.S. and Canada.



Entrust relies significantly on
large deals in each quarter. Our software revenue from our top five customers in Q3, 2005 was approximately 11% of our total revenue in that quarter. This was within our historical range, which is generally between 10% and 25%. We had no product
deals over $1 million in Q3, 2005. Although our revenue in the second half of 2004 and first half of 2005 allowed us to return to profitability, we continue to be impacted on our software revenue by the process that our customers are going through
to complete a proof of concept, which sometimes has proven to produce a longer sales cycle. We are also impacted by our customers recent buying behavior, which is to buy only for immediate need as opposed to making a larger purchase in order
to get a better discount. Any of these factors may impact our revenue on a quarterly basis.



Our management uses the following metrics to measure performance:



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



| |  |  | Number of deals over $1 million;
| | - |  | --------------------------------



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



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



| |  |  | Product revenue split between three key solutions areas: Secure Messaging, Secure Identity Management, and Secure Data;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



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



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



| |  |  | Deferred revenue and Cash and marketable investment balances
| | - |  | ------------------------------------------------------------



BUSINESS OVERVIEW



During the third quarter of 2005, we continued our strategy of focusing on core vertical and geographic markets. Revenues of $23.7 million represented an 11% increase
over the third quarter of 2004, and consisted of 32% product sales and 68% services and maintenance. Services and maintenance revenues increased 8% over the third quarter of 2004, primarily due to improved demand for both consulting services and
support and maintenance services, while product revenues increased 18% from the third quarter of 2004, primarily driven by an improved product transaction closure rate compared to the same quarter of 2004. Net income for the three months ended
September 30, 2005 was $1.0 million, or $0.02 per share, compared to a $0.5 million net income, or $0.01 per share for the same period of 2004, with total expenses increasing 10% to $22.7 million. Net cash used in operating activities was $0.7
million in the third quarter of 2005, compared to net cash used in operating activities of $1.5 million in the third quarter of 2004. Entrust Secure Identity Management Solutions accounted for 80% of product revenue, which is an increase of 64% from
Q3, 2004 and a decrease of 16% from Q2, 2005. Entrust Certificate Services revenues, a component of our Secure Identity Management solutions suite, increased 30% over Q3, 2004 and 10% over Q2, 2005. Entrust Secure Messaging Solutions accounted for
15% of product revenue, which is a decrease of 41% from Q3, 2004 and 5% from Q2, 2005. Entrusts new Secure Gateway messaging solutions (Entrust Messaging Server, Webmail Center and Compliance Server) achieved their highest product revenue,
increasing 231% from Q3, 2004 and 273% from Q2, 2005. Entrust Secure Data Solutions accounted for 5% of product revenue, which is a decrease of 51% from Q3, 2004 and 57% from Q2, 2005. Extended Government accounted for 38% and Extended Enterprise
accounted for 62% of the product revenue in the quarter. Year-to-date Extended Government product revenue is 201% higher than it was for the same period of 2004. The financial services vertical increased to 28% of product revenue in the quarter,
achieving its highest level for any quarterly period this year.



Other
highlights from the third quarter of 2005 included:



| |  |  | The average purchase size in the third quarter was $93,000, unchanged from Q3, 2004 and a decrease from $104,000 in Q2, 2005. Total transactions in Q3, 2005 reached 67, which is up
from 56 in Q3, 2004 and is down from 77 in Q2, 2005. Fifteen of the transactions were from new customers, up 67% from 9 new customers in Q3, 2004. Year-to-date, Entrust had 45 new customers, which is an increase of 88% from the 24 new customers
for the same period in 2004.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our services revenues were $16.0 million, an increase of 8% ($1.1 million) from Q3, 2004 and an increase of 4% ($573 thousand) from Q2, 2005. Entrusts support and maintenance
continued to be strong, achieving its tenth quarter of year-over-year growth, out of the last eleven quarters. Due to expected seasonality of renewals, deferred revenue decreased by $2.2 million in Q3, 2005.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Entrust Certificate Services achieved its 12thconsecutive quarter of revenue growth.
| | - |  | ------------------------------------------------------------------------------------



| |  |  | The top five product transactions accounted for 11% of Q3, 2005, revenues, down from 14% in Q3, 2004 and 19% in Q2, 2005. There were no product transactions over $1 million in
the quarter.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Over 27% of total transactions (compared to 7% in Q2) were from our target product areas of Entrust IdentityGuard, Secure Messaging, Compliance, and device certificates. New product
revenues increased to 28% of total product revenues (compared to 7% in Q2).
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our key technology-related accomplishments during the third quarter of 2005 included the following:



| |  |  | Entrust and Access Distribution, a General Electric company and a leading value-added distributor of complex computing solutions, announced a distribution agreement under which
Access Distribution has become the first two-tier distributor to offer our industry-leading security solutions to authorized value-added resellers in the U.S. and Canada.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We announced the completion of Entrust Ready interoperability testing of the Entrust IdentityGuard solution and Citrix Systems, Inc.s market-leading Citrix Presentation
Server remote access solution, helping global organizations deploy industry-leading security to help protect critical enterprise resources. Interoperability between Entrust IdentityGuard and Citrix Presentation Server makes low-cost, strong
authentication available for use with one of the most widely used products for centrally deploying and managing applications.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We announced the availability of our email content monitoring solution for financial services institutions. Included as core functionality are email risk assessment, real-time
monitoring, flexible implementation, secure delivery, and archival and forensic support. Driving the need for this special offering are a myriad of corporate and regulatory requirements including the Sarbanes-Oxley Act, the Gramm-Leach-Bliley Act,
and the VISA Cardholder Information Security Program.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We announced the availability of Entrust Entelligence Messaging Server 8.0, a boundary email solution that offers broad support for secure email encryption protocols. Entrust
Entelligence Messaging Server (EMS) 8.0 is an appliance-based email security solution, allowing for faster implementation and greater ease of administration.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Secure Convergence Journal named the Entrust IdentityGuard solution Augusts Product of the Month. This distinction showcases Entrust IdentityGuard as an innovative
and flexible leading strong authentication solution for global enterprises and governments. Made commercially available in the fourth quarter of 2004, Entrust IdentityGuard is an easy-to-use strong authentication solution that can be leveraged
across the Web and throughout the enterprise to secure sensitive applications and data, without the need to deploy expensive hardware devices to end users. With a single product, organizations are able to deploy strong authentication for the Web,
Microsoft® Windows® desktops and remote access applications from leading VPN vendors.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



CRITICAL ACCOUNTING POLICIES



In the third quarter of 2005, our most complex accounting judgments were made in the areas
of software revenue recognition, allowance for doubtful accounts, restructuring charges and related adjustments, accounting for long-term strategic and equity investments, the provision for income taxes and stock-based compensation. The
restructuring and related charges are not anticipated to be recurring in nature. However, the financial reporting of restructuring and related charges will continue to require judgments until such time as the corresponding accruals are fully paid
out and/or no longer required. Software revenue recognition, allowance for doubtful accounts, accounting for long-term strategic and equity investments, provision for income taxes, and stock-based compensation are expected to continue to be ongoing
elements of our critical accounting processes and judgments.



Software
Revenue Recognition



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



Revenues from perpetual software license agreements are recognized when we have received an executed license agreement or an unconditional order under an existing license agreement, the software has been shipped (if there are no significant
remaining vendor obligations), collection of the receivable is reasonably assured, the fees are fixed and determinable and payment is due within twelve months. Revenues from license agreements requiring the delivery of significant unspecified
software products in the future are accounted for as subscriptions and, accordingly, are recognized ratably over the term of the agreement from the first instance of product delivery. This policy is applicable to all sales transactions, including
sales to resellers and end user customers. License revenues are generated both through direct sales



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to end users as well as through various partners, including system integrators, value-added resellers and distributors. License revenue is recognized when
the sale has occurred for an identified end user, provided all other revenue recognition criteria are met. We are notified of a sale by a reseller to the end user customer in the same period that the actual sale took place. We do not offer a right
of return on sales of our software products.



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



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



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



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



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



We also eliminate intercompany profits on revenue transactions with unconsolidated
subsidiaries that are accounted for under the equity method to the extent of our ownership interest in that related party, if the product and/or services have not been sold through to an unrelated third party end-user customer. During the three and
nine months ended September 30, 2005, we sold product and services to Asia Digital Media with a fair value of $116 thousand and $713 thousand, respectively, which after intercompany profit eliminations related to our direct and indirect
ownership at September 30, 2005 of approximately 27%, was recognized as $92 thousand and $617 thousand of net revenues, respectively.



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



Allowance for Doubtful Accounts



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



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.



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We base our ongoing estimate of allowance for doubtful accounts primarily on the aging of the balances in the accounts
receivable, our historical collection patterns and changes in the creditworthiness of our customers. Based upon the analysis and estimates of the uncollectibility of our accounts receivable, we record an increase in the allowance for doubtful
accounts when the prospect of not collecting a specific account receivable becomes probable. The allowance for doubtful accounts is established based on the best information available to us and is re-evaluated and adjusted as additional information
is received. We exhaust all avenues and methods of collection, including the use of third party collection agencies, before writing-off a customer balance as uncollectible. While credit losses have historically been within our expectations and the
provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Each circumstance in which we conclude that a provision for non-payment by a customer may be required must be
carefully considered in order to determine the true factors leading to that potential non-payment to ensure that it is proper for it to be categorized as an allowance for bad debts. Our accounts receivable include material balances from a limited
number of customers, with five customers accounting for 39% of gross accounts receivable at September 30, 2005, compared to 29% of gross accounts receivable at September 30, 2004. Two customers each individually accounted for 10% or more
of net accounts receivable at September 30, 2005, at 14% and 10%, respectively. For more information on our customer concentration, see our related discussion in Certain Factors That May Affect Our Business. Therefore, changes in
the assumptions underlying this assessment or changes in the financial condition of our customers, resulting in an impairment of their ability to make payments, and the timing of information related to the change in financial condition could result
in a different assessment of the existing credit risk of our accounts receivable and thus, a different required allowance, which could have a material impact on our reported earnings.



As of September 30, 2005, the total accounts receivable is $19.4 million, net of an allowance for doubtful accounts of $0.5 million,
compared to $16.2 million, net of an allowance for doubtful accounts of $1.0 million, as of December 31, 2004.



During the third quarter of 2005, the Company collected $572 thousand that had been outstanding over 365 days and had previously been fully reserved. The balance of $572
thousand was reversed against sales and marketing expense as a recovery of bad debt during the third quarter.



Restructuring and Adjustments



June 2001 Restructuring Plan



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



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



Our assessment required assumptions in estimating the
original accrued restructuring charges of $65.5 million at June 30, 2001, including estimating future recoveries of sublet income from excess facilities, liabilities from employee severances, and costs to exit business activities. Changes in
these assessments with respect to the accrued restructuring charges for the June 2001 restructuring program, particularly the estimation of sub lease income for restructured facilities, of $26.5 million at September 30, 2005, could have a
material effect on our reported results, as actual results could vary from these assumptions and estimates. As at September 30, 2005, we estimated a total of $19.4 million of sublease recoveries in our restructuring accrual. Of this amount,
$19.2 million is related to the Santa Clara facility. In addition, $4.8 million of the $19.4 million is recoverable under existing sublease agreements, and the remaining $14.6 million of rent recoveries is based on estimates which may be subject to
adjustment based upon changes in the real estate sublet markets.



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



May 2003 Restructuring Plan



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



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



Our assessment required
assumptions in estimating the restructuring charges of $8.9 million, including estimating liabilities related to employee severance, future recoveries of sublet income from excess facilities, and other costs to exit activities. Changes in these
assessments with respect to the accrued restructuring charges for the May 2003 restructuring plan of $0.5 million at September 30, 2005 could have a material effect on our reported results. In addition, actual results could vary from these
assumptions and estimates, in particular with regard to the sublet of excess facilities, resulting in an adjustment that could have a material effect on our future financial results. Our accrual related to the May 2003 restructuring at
September 30, 2005 includes a total of $0.4 million of estimated sublease recoveries, which may be subject to adjustment based upon changes in the real estate sublet markets.



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



Accounting for Long-term Strategic Investments



We
assess the recoverability of the carrying value of strategic investments on an on-going basis, but at least annually. Factors that we consider important in determining whether an assessment is warranted and could trigger impairment include, but are
not limited to, the likelihood that the company in which we invested would have insufficient cash flows to operate for the next twelve months, significant changes in the companys operating performance or business model and changes in overall
market conditions. These investments are in private companies, made in 2000 and 2001, of which we typically own less than 10% of the outstanding stock. We account for these investments under the cost method. Because there is not a liquid market for
these securities, we often must make estimates of the value of our investments. Since 2001, we have recorded a total of $14.8 million of impairment charges with respect to our long-term strategic investments due to other than temporary declines in
the value of these strategic investments. These impairments were related to our investments in several different companies. As a result, we have no other strategic investments recorded as of September 30, 2005.



Accounting for Equity Investments



We have $3.7 million of investments as of September 30, 2005 that we account for under
the equity basis of accounting, which represent our direct and indirect equity ownership in Asia Digital Media and its subsidiaries. Asia Digital Media is a joint venture, involving us and several other investors, formed for the purpose of
delivering secure technology solutions enabling HDTV satellite broadcasting, high-speed internet and on-line transaction services to the Chinese market.



Our investment in Asia Digital Media began as a loan to Ohana of $650 thousand in 2003, which was convertible into equity of Ohana. In the second quarter of 2004 this was
increased to $950 thousand. In July 2004, this loan was further increased to $1.225 million. This amount was further increased to $1.5 million in the fourth quarter of 2004. We determined that the loan was unlikely to be repaid but rather expected
it to be converted into equity in ADML Holdings, Ltd. (ADML Holdco), once Ohana became a wholly owned subsidiary of ADML Holdco in connection with the Ohana Restructuring. On an as-converted basis at September 30, 2004, we would
have owned approximately 12% of ADML Holdco (exclusive of the anticipated final disbursement in the fourth quarter of 2004). Beginning the third quarter of 2004, we had accounted for our investment in Ohana 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 included our share of post-acquisition losses of
Ohana, prior to the Ohana Restructuring, in the amount of $193 thousand in our consolidated net income for the 2004 fiscal year. The Ohana Restructuring closed on November 16, 2004 and we received approximately 14.3% of the issued common shares
of ADML Holdco, together with a warrant that may become exercisable for additional shares of ADML Holdco upon the happening of certain events.



On September 16, 2004, the Company and certain other investors agreed to subscribe for shares in a newly formed joint venture called Asia Digital Media pursuant to a
subscription agreement (as amended, the Subscription Agreement). The investment closed on December 17, 2004. We directly subscribed for approximately 16.7% of the share capital of Asia Digital Media in exchange for a cash
contribution of $2.0 million and in-kind contributions of software products and professional services totaling $1.3 million. Of this amount, $1.1 million was recorded on account of the in-kind contributions as revenue in the fourth quarter of 2004,
net of intercompany profit eliminations. Also, ADML Holdco, in which we held an approximate 14.3% ownership interest for our $1.5 million investment, directly subscribed for 60.6% of the share capital of Asia Digital Media in exchange for a
contribution of the entire issued share capital of Ohana. The remaining capital stock of Asia Digital Media is owned by two investors and China Aerospace New World Technology Limited, a company incorporated in Hong Kong. During the first quarter of
2005, we received additional shares of common stock of Asia Digital Media in reimbursement for legal costs incurred by us on behalf of Asia Digital Media during its formation and for administrative services that we provided. These additional shares
were valued at $458 thousand and resulted in an increase of our total direct and indirect equity holdings in Asia Digital Media to 27.4% as of September 30, 2005. However, this may change in the future for reasons that include the exercise of
the warrant received by us in connection with the Ohana Restructuring or as a result of an anti-dilution option granted to certain investors in Asia Digital Media. Beginning with the fourth quarter of 2004, we have accounted for our investment in
Asia Digital Media under the equity method.



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Accordingly, we have included our share of post-acquisition losses of Asia Digital Media, in the amount of $210 thousand and $661 thousand in our
consolidated net income for the three and nine months ended September 30, 2005. See note 3 to our consolidated financial statements for additional information. We have recorded cumulative losses from our investment in Asia Digital Media of $1.0
million since our investment in the fourth quarter of 2004.



Based on our
assessment and our understanding of the facts, we have concluded that Asia Digital Media does not meet the definition of a variable interest entity, as described in Financial Accounting Standards Board Interpretation No. 46, Consolidation
of Variable Interest Entities (FIN No. 46). As the company began initial operations in December 2004, engaging primarily in research and development, and having no revenue, we determined that Asia Digital Media is a
development stage enterprise. Furthermore, the capitalization of Asia Digital Media anticipates raising additional equity to fund the scaled production pilot and commercial roll-out. However, the cash invested in Asia Digital Media by investors of
$4.5 million, is expected to be sufficient equity to fund the initial development stage, which is defined as implementation of a pilot system with all specified functions in a limited commercial environment. In addition, we determined that each
shareholder of Asia Digital Media shares in the risk of loss and that the shareholders, as a group, share the returns. Finally, we concluded that Asia Digital Media does not operate substantively on behalf of one entity that receives a
disproportionately fewer voting rights to avoid consolidation.



As of
September 30, 2005, Asia Digital Media has built, integrated, tested and demonstrated the end-to-end solution within a lab environment. In October 2005, Asia Digital Media put its first real subscribers into a live network as part of the alpha
trial. Asia Digital Media is currently working directly with cable operators and end users to refine its products for the market. Asia Digital Media remains an important joint venture with an opportunity to address both the AIP opportunity for
secure distribution of digital content in China and to address the growing market for security software products in China. As of November 3, 2005, the most recent date of assessment, the Company does not believe that there has been any
impairment of its direct and indirect investments in Asia Digital Media.



Provision for Income Taxes



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



Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded
against deferred tax assets. We recorded a valuation allowance of $129.0 million as of September 30, 2005, which offsets deferred income tax assets relating to United States and foreign net operating loss (NOL) and tax credit carry-forwards in
the amount of $103.9 million and $25.1 million of deferred tax assets resulting from temporary differences. This valuation allowance represents the full value of our deferred tax assets, due to uncertainties related to our ability to utilize our
deferred tax assets as a result of our recent history of financial losses. Therefore, our balance sheet includes no net deferred tax benefits related to these deferred tax assets. In the event that actual results differ from these estimates or we
adjust these estimates in future periods, we may need to adjust our valuation allowance, which could materially impact our financial position and results of operations.



Stock-Based Compensation



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



We recognize that stock options dilute existing shareholders and have attempted to control
the number of options granted while remaining competitive with our compensation packages. At September 30, 2005, approximately 51% of our outstanding stock options carried exercise prices in excess of the closing market price of our Common
stock on that day. The Compensation Committee of the Board of Directors overseas the granting of all stock-based incentive awards.



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We account for our stock option plans under the recognition and intrinsic value measurement principles of APB Opinion
No. 25, Accounting for Stock Issued to Employees, and related accounting guidance. Accordingly, no stock-based compensation expense is reflected in net income (loss) for grants to employees under these plans, when the exercise price
for options granted under these plans is equal to the market value of the underlying Common stock on the date of grant. All of the options granted to employees in the periods after 1998 had exercise prices equal to the fair value of the underlying
stock on the date of grant and, therefore, no stock-based compensation costs are reflected in earnings for these options in these periods.



If we had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based compensation, the effect
would have been to create a net loss to $0.5 million and $0.4 million for the three and nine months ended September 30, 2005, respectively, compared to a net loss of $1.7 million and $9.4 million for the three and nine months ended
September 30, 2004, respectively, and consequently, we would have reported a net loss per share of $0.01 for each of the three and nine months ended September 30, 2005, respectively, compared to a net loss per share of $0.03 and $0.15 for
the three and nine months ended September 30, 2004, respectively. However, we believe, that due to the volatility of our stock and the inherent limitations of option valuation models, the expenses that would be recorded under SFAS No. 123
are not as meaningful as a careful consideration of the outstanding option data, which is disclosed in note 4 to our condensed consolidated financial statements, included in this report. As an illustration, because of significant movement in the
market value of our stock price since September 30, 2005, the percentage of total options outstanding that were considered to be In the Money (options with exercise prices at or below the closing market price per share) went from
49% at September 30, 2005 down to 36% at November 1, 2005.



In December
2004, the Financial Accounting Standards Board issued a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation (SFAS No. 123(R)). SFAS No. 123(R) supersedes APB Opinion No. 25 and
requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award, and recognize that cost over the service period. SFAS No. 123(R) is effective
for the first annual period beginning after June 15, 2005 and, therefore, we will begin recognizing compensation expense related to employee stock options as of January 1, 2006.



In January 2005, our Board of Directors approved accelerating the vesting of all of the outstanding unvested stock options granted to our
directors, officers and employees under applicable stock incentive plans, with an exercise price greater than $4.79. As a result of the acceleration, options to acquire approximately 2.8 million shares of our Common stock, which otherwise would
have vested from time to time over the next four years, became immediately exercisable upon finalization of administrative actions to be completed by our stock plan administrator. All other terms and conditions applicable to outstanding stock option
grants remain in effect.



The decision to accelerate the vesting of affected
stock options was primarily based upon the issuance of SFAS No. 123(R). In addition, because these options have exercise prices in excess of current market values and are not fully achieving their original objectives of incentive compensation
and employee retention, the acceleration may have a positive effect on employee morale and retention. By accelerating the vesting of the affected stock options, we were not required to record any amount of compensation expense for such accelerated
stock options. We believe that acceleration of these 2.8 million stock options will eliminate the need for recognizing future compensation expense of approximately $2.7 million associated with the affected options. However, there can be no
assurance that the acceleration of the options may not result in some future compensation expense.



In addition, we decided to use restricted stock units and stock appreciation rights in future incentive compensation plans for employees and members of the Board of Directors, in place of or in combination with stock
options to purchase shares of our stock. In Q2 2005, we granted restricted stock units (RSUs) to employees totaling approximately 406,690, which allow the employees to receive Common stock of the Company once the units vest. Since
Q2 2005, an additional 3,625 RSUs have been issued and 15,825 were cancelled. The RSUs generally vest over four years. The Company recorded unearned deferred compensation of $2.1 million related to these grants in the second quarter of
2005. Also, we granted a total of 132,668 stock appreciation rights to the members of our Board of Directors, valued at $3.97 per right on May 6, 2005, which was the date of grant.



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RESULTS OF OPERATIONS



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



|                                         |  |                                 |   |  |                                |   |  |       |   |  |       |   
|---------------------------------------- |  | ------------------------------- | - |  | ------------------------------ | - |  | ----- | - |  | ----- | --
|                                         |  | THREE MONTHS ENDEDSEPTEMBER 30, |   |  | NINE MONTHS ENDEDSEPTEMBER 30, |  
|                                         |  | 2005                            |   |  | 2004                           |   |  | 2005  |   |  | 2004  |   
|Revenues:                                |  |                                 |   |  |                                |   |  |       |   |  |       |   
|Product                                  |  | 32.4                            | % |  | 30.4                           | % |  | 34.3  | % |  | 28.8  | % 
|Services and maintenance                 |  | 67.6                            |   |  | 69.6                           |   |  | 65.7  |   |  | 71.2  |   
|                                         |  |                                 |   |  |                                |   |  |       |   |  |       |   
|Total revenues                           |  | 100.0                           |   |  | 100.0                          |   |  | 100.0 |   |  | 100.0 |   
|                                         |  |                                 |   |  |                                |   |  |       |   |  |       |   
|Cost of revenues:                        |  |                                 |   |  |                                |   |  |       |   |  |       |   
|Product                                  |  | 6.0                             |   |  | 3.9                            |   |  | 4.6   |   |  | 4.6   |   
|Services and maintenance                 |  | 30.8                            |   |  | 31.1                           |   |  | 32.1  |   |  | 33.6  |   
|Amortization of purchased product rights |  | 0.9                             |   |  | 0.8                            |   |  | 0.8   |   |  | 0.3   |   
|                                         |  |                                 |   |  |                                |   |  |       |   |  |       |   
|Total cost of revenues                   |  | 37.7                            |   |  | 35.8                           |   |  | 37.5  |   |  | 38.5  |   
|                                         |  |                                 |   |  |                                |   |  |       |   |  |       |   
|Gross profit                             |  | 62.3                            |   |  | 64.2                           |   |  | 62.5  |   |  | 61.5  |   
|                                         |  |                                 |   |  |                                |   |  |       |   |  |       |   
|Operating expenses:                      |  |                                 |   |  |                                |   |  |       |   |  |       |   
|Sales and marketing                      |  | 28.4                            |   |  | 27.0                           |   |  | 29.3  |   |  | 29.1  |   
|Research and development                 |  | 16.8                            |   |  | 18.5                           |   |  | 17.2  |   |  | 20.1  |   
|General and administrative               |  | 13.2                            |   |  | 15.5                           |   |  | 12.2  |   |  | 15.3  |   
|                                         |  |                                 |   |  |                                |   |  |       |   |  |       |   
|Total operating expenses                 |  | 58.4                            |   |  | 61.0                           |   |  | 58.7  |   |  | 64.5  |   
|                                         |  |                                 |   |  |                                |   |  |       |   |  |       |   
|Income (loss) from operations            |  | 3.9                             |   |  | 3.2                            |   |  | 3.8   |   |  | (3.0  | ) 
|                                         |  |                                 |   |  |                                |   |  |       |   |  |       |   
|Other income (expense):                  |  |                                 |   |  |                                |   |  |       |   |  |       |   
|Interest income                          |  | 2.5                             |   |  | 1.7                            |   |  | 2.3   |   |  | 1.4   |   
|Gain on sale of asset                    |  |                                |   |  |                               |   |  | 0.2   |   |  |      |   
|Foreign exchange gain (loss)             |  | (0.2                            | ) |  | (0.6                           | ) |  |      |   |  | 0.7   |   
|Loss from equity investments             |  | (0.9                            | ) |  | (1.4                           | ) |  | (0.9  | ) |  | (1.1  | ) 
|                                         |  |                                 |   |  |                                |   |  |       |   |  |       |   
|Total other income (expense)             |  | 1.4                             |   |  | (0.3                           | ) |  | 1.6   |   |  | 1.0   |   
|                                         |  |                                 |   |  |                                |   |  |       |   |  |       |   
|Income (loss) before income taxes        |  | 5.3                             |   |  | 2.9                            |   |  | 5.4   |   |  | (2.0  | ) 
|Provision for income taxes               |  | 1.3                             |   |  | 0.6                            |   |  | 1.3   |   |  | 0.4   |   
|                                         |  |                                 |   |  |                                |   |  |       |   |  |       |   
|Net income (loss)                        |  | 4.0                             | % |  | 2.3                            | % |  | 4.1   | % |  | (2.4  | )%
|                                         |  |                                 |   |  |                                |   |  |       |   |  |       |   



REVENUES



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



Revenues from perpetual software license agreements are
recognized as revenue when we have received a copy of an executed license agreement or an unconditional order under an existing license agreement, the software has been shipped (if there are no significant remaining vendor obligations), collection
of the receivable is reasonably assured, the fees are fixed and determinable and payment is due within twelve months. Revenues from license agreements requiring the delivery of significant unspecified software products in the future are accounted
for as subscriptions and, accordingly, are recognized ratably over the term of the agreement from the first instance of product delivery. This policy is



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applicable to all sales transactions, including sales to resellers and end user customers. We are notified of a sale by a reseller to the end user customer
in the same period that the actual sale took place. We do not offer a right of return on sales of our software products.



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



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



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



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



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



Total Revenues



Total revenues were $23.7 million for the three months ended September 30, 2005, which represented an increase of 11% from the $21.3 million of total revenues for the three months ended September 30, 2004.
Total revenues were $73.4 million for the nine months ended September 30, 2005, which represented an increase of 15% from the $63.9 million of total revenues for the nine months ended September 30, 2004. Total revenues derived from North
America of $16.7 million for the three months ended September 30, 2005 represented an increase of 4% from the $16.0 million for the three months ended September 30, 2004, while the total revenues derived from outside of North America of
$7.0 million for the three months ended September 30, 2005 represented an increase of 32% from the $5.3 million for the three months ended September 30, 2004. Total revenues derived from North America of $50.1 million for the nine months
ended September 30, 2005 represented an increase of 5% from the $47.5 million for the nine months ended September 30, 2004, while total revenues derived from outside of North America of $23.3 million for the nine months ended
September 30, 2005 represented an increase of 42% from the $16.4 million for the nine months ended September 30, 2004. The overall increase in total revenues in the first nine months of 2005, when compared to the same period of 2004, was
driven primarily by an improved closure rate and average transaction size for product transactions in the first three quarters of 2005, particularly in Europe. In North Americas extended government market, the revenues in the United States in
the three months ended September 30, 2005 were $4.6 million and $15.7 million for the nine months ended September 30, 2005, compared to $5.0 million and $13.7 million of extended government revenues for the corresponding periods of 2004,
representing a decrease of 8% and an increase of 15%, respectively. Services revenue continued to be strong in the first nine months as we were able to renew nearly 90% of the periods support agreements, contributing to one of our highest
support revenue quarters in the third quarter of 2005. 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 United States and Canadian governments
represented 18% and 11%, respectively, of total revenues in the third quarter of 2005, when including revenues sold through resellers to the government end users. However, direct sales to the United States and Canadian governments represented only
12% and 7%, respectively, of total revenues in the third quarter of 2005. Overall, the United States and Canadian governments represented 19% and 10%, respectively, of total revenues in the first nine months of 2005, when including revenues sold
through resellers to the government end users. However, direct sales to the United States and Canadian governments represented only 10% and 7%, respectively, of total revenues in the first nine months of 2005. No other individual customer accounted
for 10% or more of total revenues in the three and nine months ended September 30, 2005.



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Product Revenues



Product revenues of $7.7 million for the three months ended September 30, 2005 represented an increase of 18% from the $6.5 million for the three months ended
September 30, 2004, and represented 32% and 30% of total revenues in the respective periods. Product revenues of $25.1 million for the nine months ended September 30, 2005 represented an increase of 36% from the $18.4 million for the nine
months ended September 30, 2004, and represented 34% and 29% of total revenues in the respective periods. The increase in product revenues for the first nine months of 2005 when compared to the same period in 2004 is primarily due to the return
of strong product revenue from our Government vertical and continuing strength in our Secure Identity Management and Secure Messaging solution areas, as well as improved product demand in Europe. New products continued to gain traction in the third
quarter of 2005, with revenue from our target areas of IdentityGuard, Secure Gateway Messaging and device certificates accounting for over 28% of product revenue in the quarter. New customers increased 88% on a year-to-date basis. Also, our revenues
from Certificate Services sales continue to grow, with 30% year-over-year growth. The revenues generated from government customers remain strong for the first nine months representing 54% of total product revenue compared to 24% for the same time
period in 2004. However, new project purchases remain subject to governmental budgetary constraints, particularly in the United States, so that these revenues will fluctuate from period to period. In addition, we experienced an improved product
transaction closure rate. Highlighting this trend, we had 67 product revenue transactions (a product revenue transaction is defined as a product sale in excess of $10 thousand) in the third quarter of 2005, up from 56 in the same quarter of 2004, or
a 20% increase. Overall, we had 208 product revenue transactions in the first nine months of 2005, up from 157 for the same period in 2004, or a 32% increase. The average product revenue transaction size was $93 thousand for the third quarter of
2005, consistent with the same period of 2004. However, the average product revenue transaction size increased to $101 thousand for the first nine months of 2005 from $96 thousand for the same period of 2004, or an increase of 5%. In general, the
top-five average quarterly product revenue transactions as a percentage of total revenues increased from 14% for the first nine months of 2004 to 15% for the same period of 2005. In addition, third quarter product revenue growth was possible as a
result of a 70% year-over-year increase in product revenue from transactions under $1 million dollars.



Services and Maintenance Revenues



Services and maintenance revenues of $16.0 million for the three months ended September 30, 2005 represented an increase of 8% from the $14.8 million for the three months ended September 30, 2004, and represented 68% and 70% of
total revenues in the respective periods. Services and maintenance revenues of $48.2 million for the nine months ended September 30, 2005 represented an increase of 6% from the $45.5 million for the nine months ended September 30, 2004,
and represented 66% and 71% of total revenues in the respective periods. The increase in services and maintenance revenues in the first nine months of 2005 compared to the same period of 2004 is due to improved support and maintenance revenue, as
well as continued strong demand for our architecture and deployment services. The improved revenues for the three months ended September 30, 2005 compared to the same quarter of 2004, have been driven by support and maintenance revenues that
grew by $0.9 million. The improved revenues for the nine months ended September 30, 2005 was primarily due to a $2.2 million growth in support and maintenance revenues when compared to the same period of 2004. We believe this support revenue
performance reflects the value our products provide to our customers globally, the increasing customer deployment of solutions and the level of service quality that our support and maintenance team delivers. In addition, to a greater degree, we have
been fulfilling our customers deployment needs in 2004 and 2005 in conjunction with partners, as our solutions are now easier to deploy and consequently, we have seen an increase in services revenue over the past year driven by increased third
party services and hardware revenue globally. The decrease in services and maintenance revenues as a percentage of total revenues for the three and nine months ended September 30, 2005 compared to the same periods in 2004 reflected the shift in
the mix of revenues from services and maintenance revenues to product, largely due to the strength of demand for our products offerings relative to the demand for services and maintenance business.



EXPENSES



Total Expenses



Total expenses consist of costs of revenues associated with products and services and maintenance, amortization of purchased products rights and operating expenses
associated with sales and marketing, research and development and general and administrative. Total expenses increased to $22.7 million and $70.6 million for the three and nine months ended September 30, 2005, respectively, from $20.6 million
and $65.9 million for the three and nine months ended September 30, 2004, representing an increase of 10% and 7%, respectively. The increase from the three and nine months ended September 30, 2004 was due primarily to the impact of
software and hardware expenses incurred to generate revenues of $1.1 million and $2.0 million, respectively, and higher sales compensation expenses of $1.0 million and $2.2 million, respectively, associated with the improved revenue attainment,
which was partially offset by $1.1 million of net expense savings for the first nine months of 2005. In addition, the first nine months of 2004 benefited from the recovery of bad debts in the amount of $1.6 million related to the collection of a
long outstanding receivable. As of September 30, 2005 we had 484 full-time employees globally, compared to 511 full-time employees at September 30, 2004 and 491 full-time employees at December 31, 2004. No employees are covered by a
collective bargaining agreement.



Cost of Products



Cost of product revenues consists primarily of costs associated with product media,
documentation, packaging and royalties to third-party software vendors. Cost of product revenues was $1.4 million for the three months ended September 30, 2005, which represented a 75% increase from $0.8 million for the three months ended
September 30, 2004, and represented 6% and 4% of total revenues in the respective



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periods. Cost of product revenues of $3.4 million for the nine months ended September 30, 2005, which represented a 13% increase from the $3.0 million
for the nine months ended September 30, 2004, and represented 5% of total revenues in each of the respective periods. The increase in third-party royalties in the third quarter of 2005 was the result of a $0.3 million increase due to the
overall higher level of product revenues in the third quarter of 2005 compared to the same quarter of 2004, as well as a $0.3 million increase due to a large third party royalty associated with one product transaction. The last factor also accounted
for the increase in cost of product revenues as a percentage of total revenues in the third quarter of 2005 when compared to the same quarter of 2004. The mix of third-party technology embedded in our products and relative gross margins achieved,
may vary from period-to-period and from transaction-to-transaction and, consequently, our gross margins and results of operations could be adversely affected.



Cost of Services and Maintenance



Cost of services and maintenance revenues consists primarily of personnel costs associated with customer support, training and consulting services, as well as amounts
paid to third-party consulting firms for those services. Cost of services and maintenance revenues was $7.3 million for the three months ended September 30, 2005, which represented an 11% increase from $6.6 million for the three months ended
September 30, 2004, and represented 31% of total revenues in each of the respective periods. Cost of services and maintenance revenues was $23.5 million and $21.5 million for the nine months ended September 30, 2005 and 2004, respectively,
representing 32% and 34% of total revenues for the respective periods. The increase in the cost of services and maintenance revenues in absolute dollars in the three and nine months ended September 30, 2005 compared to the same periods of 2004
was due to the effect of increased costs associated with third party subcontractor and hardware costs, which resulted in a $0.2 and $1.3 million increase in the cost structure of our professional services team for the three and nine months ended
September 30, 2005, respectively. We also increased investment in our support and maintenance and team by $0.3 million and $0.7 million for the three and nine months ended September 30, 2005, respectively, and our professional services
team by $0.2 million for the three months ended September 30, 2005. The decrease in the cost of services and maintenance revenues as a percentage of total revenues in the three and nine months ended September 30, 2005 compared to the same
periods of 2004, is primarily due to improved overall revenue attainment, resulting in a three- and five-percentage point decrease in the cost of services and maintenance revenues as a percentage of total revenues. Offsetting this effect in the
three and nine months ended September 30, 2005 was the shift in the mix of services and maintenance revenues toward third party services and hardware, which are lower margin revenues, and increased investment in service teams, which resulted in
a three-percentage point decrease in the cost of services and maintenance revenues as a percentage of total revenues in each period. Therefore, despite our ability to grow services and maintenance revenues, the incremental cost of these revenues was
higher because of the need to make additional investment, including third parties, to service these revenues.



Services and maintenance gross profit as a percentage of services and maintenance revenues was 54% for the three months ended September 30, 2005 compared to 55% for the three months ended September 30, 2004.
Services and maintenance gross profit as a percentage of services and maintenance revenues was 51% and 53% for the nine months ended September 30, 2005 and 2004, respectively. The decrease in services and maintenance gross profit as a
percentage of services and maintenance revenues for the three and nine months ended September 30, 2005, compared to the same periods of 2004, was primarily due to the net impact of declined North American professional services margins as a
result of lower utilization of available professional services resources and a greater volume of lower margin third party services and hardware revenues, meaning higher relative costs associated with professional services in light of this revenue
performance, which resulted in lower margin attainment by our professional services team. This accounted for a two-percentage point decrease in the services and maintenance gross profit as a percentage of services and maintenance revenues for each
of the three and nine months ended September 30, 2005, when compared to the same periods of 2004. However, support and maintenance margins improved due to higher revenues from strong past renewals in the third quarter of 2005, which resulted in
an offsetting one-percentage point increase in the services and maintenance gross profit as a percentage of services and maintenance revenues for the three months ended September 30, 2005. We plan to continue to optimize the utilization of
existing professional services resources, while addressing significant incremental customer opportunities that may arise in the near future with the help of partners and other sub-contractors, until the investment in additional full-time resources
is justifiable. This may have an adverse impact on the gross profit for services and maintenance, as the gross profit realized by using partners and sub-contractors is generally lower. The mix of services and maintenance revenues may vary from
period-to-period and from transaction-to-transaction and, consequently, our gross margins and results of operations could be adversely affected.



Operating ExpensesSales and Marketing



Sales and marketing expenses increased to $6.7 million for the three months ended September 30, 2005 from $5.8 million for the comparable period in 2004. Sales and
marketing expenses increased to $21.5 million for the nine months ended September 30, 2005 from $18.6 million for the nine months ended September 30, 2004. Sales and marketing expenses represented 28% and 29% of total revenues for the
three and nine months ended September 30, 2005, compared to 27% and 29% for the comparable periods in 2004. The increase in absolute dollars for the nine months ended September 30, 2005, when compared to the same period of 2004, was due
mainly to reduced costs in the nine months ended September 30, 2004 as a result of the collection of a long outstanding receivable during the first quarter of 2004, which netted an approximate $1.3 million recovery and was recorded as a
reduction in selling and marketing expenses in the first quarter of 2004, and an additional reduction of the allowance for doubtful accounts by $0.3 million during the second quarter of 2004. Also, we recorded additional sales compensation and
severance costs of $1.0 million and $2.2 million in the three and nine months ended September 30, 2005. However, these increases were partially offset by savings achieved through continued management discipline with respect to spending, which
resulted in cost efficiencies within the sales team of approximately $0.1 million and $0.9 million in the three and nine months ended September 30, 2005 compared to the same periods of 2004. The change in sales and marketing expenses as a
percentage of total revenues for the three months ended September 30, 2005, compared to the same period of 2004, reflected the net effect of a four-percentage point increase resulting from the



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additional sales compensation and severance costs in the third quarter of 2005, offset by a three-percentage point decrease in sales and marketing expenses
as a percentage of total revenues for the three months ended September 30, 2005, due to improved revenue achievement compared to the same period of 2004. Sales and marketing expenses as a percentage of total revenues was flat for the nine
months ended September 30, 2005, compared to the same period of 2004. This was the net effect of cost savings realized as a result of reduced spending, through efficiencies and cost discipline achieved in our sales processes, which decreased
sales and marketing expenses as a percentage of total revenues by one-percentage point, complemented by a five-percentage point decrease due to improved revenue achievement compared to the same period of 2004, offset by a two-percentage point
increase in sales and marketing expenses as a percentage of total revenues, due to the bad debt recoveries that occurred in the nine months ended September 30, 2004 and a four-percentage point increase due to the additional sales compensation
and severance costs in the first nine months of 2005. We intend to continue to focus on improving the productivity of these sales and marketing teams. However, we believe it is necessary for us to continue to make significant investments in sales
and marketing to support the launch of new products, services and marketing programs by maintaining our strategy of (a) investing in hiring and training our sales force in anticipation of future market growth, and (b) investing in
marketing efforts in support of new product launches. We feel it is necessary to invest in marketing programs that will improve the awareness and understanding of information security governance, and we will continue to invest in marketing toward
that goal. Failure to make such investments could have a significant adverse effect on our operations. While we are focused on marketing programs and revenue-generating opportunities to increase software revenues, there can be no assurances that
these initiatives will be successful.



During the third quarter of 2005, the
allowance for doubtful accounts decreased $0.6 million to $0.5 million primarily as a result of a reduction in the allowance because of the significant improvement in our accounts receivable aging at September 30, 2005. This improvement was
primarily due to the settlement of a long outstanding receivable discussed above, which had been fully provided for in fiscal 2003. This amount was reversed against sales and marketing expense as a recovery of bad debt during the third quarter.
During the first quarter of 2005, the allowance for doubtful accounts increased by $0.1 million to due primarily to the overall increase in the accounts receivable balances when compared to December 31, 2004, which required the provision for
additional general reserves. The allowance for doubtful accounts did not require adjustment in the second quarter.



Operating ExpensesResearch and Development



Research and development expenses increased to $4.0 million for the third quarter of 2005 from $3.9 million for the same quarter of 2004, while these expenses decreased
to $12.6 million for the nine months ended September 30, 2005 from $12.9 million for the comparable period in 2004. Research and development expenses represented 17% of total revenues for the three and nine months ended September 30, 2005,
compared to 18% and 20% for the comparable periods in 2004. The increase in research and development expenses for the three months ended September 30, 2005, compared to the same period in 2004, was the result an unfavorable shift in the
exchange rate between Canada and the U.S. that increased reported expenses by $0.3 million, since the majority of these costs are denominated in Canadian dollars. The decrease in research and development expenses for the nine months ended
September 30, 2005, compared to the same period in 2004, was due mainly to continued management discipline in spending and savings achieved, which reduced expenses in this area for the first nine months of 2005 by approximately $1.3 million,
despite the unfavorable shift in the exchange rate between Canada and the U.S. for the period that increased reported expenses by $1.0 million. Research and development expenses as a percentage of total revenues for the three months ended
September 30, 2005 decreased compared to the same period in 2004, partly due to a one-percentage point decrease as a result of reduced spending, offset



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by a two-percentage point increase due the shift in exchange rates. Research and development expenses as a percentage of total revenues for the nine months
ended September 30, 2005 decreased compared to the same period in 2004, partly due to a two-percentage point decrease as a result of reduced spending, offset by a one-percentage point increase due the shift in exchange rates. In addition, the
improved revenues during the third quarter of 2005 accounted for a two-percentage point decrease in these expenses as a percentage of total revenues, while the improved revenues during the first nine months of 2005 accounted for a two-percentage
point decrease in these expenses as a percentage of total revenues. We believe that we must continue to maintain our investment in research and development in order to protect our technological leadership position, software quality and security
assurance leadership. We therefore expect that research and development expenses may have to increase in the future.



Operating ExpensesGeneral and Administrative



General and administrative expenses decreased to $3.1 million and $9.0 million for the three and nine months ended September 30, 2005 from $3.3 million and $9.8
million for the comparable periods in 2004. General and administrative expenses represented 13% and 12% of total revenues for the three and nine months ended September 30, 2005, compared to 15% for each of the comparable periods in 2004. The
decline in general and administrative expenses in absolute dollars for the three and nine months ended September 30, 2005 compared to the same periods of 2004 was due to the effect of continued management discipline in this area, with savings
of $0.2 million and $0.8 million, respectively. General and administrative expenses as a percentage of total revenues have decreased for the three and nine months ended September 30, 2005 compared to the same periods of 2004, due to a reduction
in spending and improved revenue achievement during the first nine months of 2005, which resulted in an additional one-percentage point decrease from the second quarter of 2004 to the same quarter in 2005 and a two-percentage point decrease from the
first nine months of 2004 to the same period in 2005, as these expenses include a high degree of fixed costs. We continue to explore opportunities to gain additional efficiencies in our administrative processes and to contain expenses in these
functional areas.



Amortization of Purchased Product Rights



Amortization of purchased product rights of $215 thousand and $600
thousand for the three and nine months ended September 30, 2005, respectively, was related to the acquisition of certain business assets from AmikaNow! during the prior year. This expense was recorded as a component of cost of revenues. We
recorded $164 thousand and $187 thousand of amortization expense in connection with these acquisition-related intangibles in the three and nine months ended September 30, 2004.



Interest Income



Interest income increased to $600 thousand and $1.7 million for the three and nine months ended September 30, 2005, respectively, from $359 thousand and $904
thousand for the three and nine months ended September 30, 2004, respectively, representing 3% and 2% of total revenues for the three and nine months ended September 30, 2005, respectively, compared to 2% and 1% of total revenues for the
three and nine months ended September 30, 2004. The increase in investment income from the first nine months of 2004 to the same period of 2005 reflected improved interest rates on funds invested, despite the reduced balance of funds invested
as a result of amounts drawn down to fund cash flow from operations and stock repurchases and to acquire long-lived assets during the last year. The funds invested decreased to $84.0 million at September 30, 2005 from $100.6 million at
September 30, 2004. However, the rate of return on our marketable investments improved to approximately 3.0% in the first nine months of 2005 compared to a rate of return of just over 1.0% in the same period of 2004.



Gain on Sale of Asset



We recorded a gain on the sale of unused intellectual property assets during the first
quarter of 2005 in the amount of $200 thousand. This type of sale is not expected to be a recurring event.



Loss from Equity Investments



We
recorded $210 thousand and $661 thousand of losses, net of intercompany profit eliminations, related to our investment in Asia Digital Media for the three and nine months ended September 30, 2005, respectively. We began accounting for this
investment under the equity method of accounting in the fourth quarter of 2004, since we had the potential to significantly influence its operations and management. In addition, we recorded $122 thousand of losses related to our investment in Ohana
for the three and nine months ended September 30, 2004, prior to the Ohana Restructuring.



We recorded $174 thousand and $551 thousand of losses related to our investment in Entrust Japan for the three and nine months ended September 30, 2004, respectively. These losses represented our share of the
operating losses of Entrust Japan on an equity accounting basis. Our investment in Entrust Japan was accounted for under the equity method of accounting for investments in common stock until the acquisition on September 13, 2004 when we
increased our investment from 37% to 99% of the outstanding voting stock in Entrust Japan. Since September 13, 2004, we have consolidated the financial results of Entrust Japan in our financial statements.



Provision for Income Taxes



We recorded income tax provisions of $286 thousand and $981 thousand for the three and nine
months ended September 30, 2005,



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respectively, compared to income taxes provisions of $143 thousand and $206 thousand for the three and nine months ended September 30, 2004. These
income tax provisions primarily represent taxes payable in certain foreign jurisdictions. The effective income tax rates differed from statutory rates primarily due to the adjustment of the valuation allowance that has offset the tax benefits from
the significant net operating loss and tax credit carry-forwards available.



LIQUIDITY AND CAPITAL RESOURCES



Net
cash used in operating activities during the nine months ended September 30, 2005 was $849 thousand. This cash outflow was primarily a result of an increase in accounts receivable of $3.1 million, a decrease in accrued restructuring charges of
$3.1 million, an increase in prepaid expenses and other receivables of $0.7 million a decrease in deferred revenue of $1.6 million and a decrease in accounts payable and accrued liabilities of $0.2 million, partially offset by cash inflows resulting
from a net income before non-cash charges of $7.9 million. Our average days sales outstanding at September 30, 2005 was 74 days, which represents an increase from the 63 days that we reported at June 30, 2005. The overall net increase in
days sales outstanding from June 30, 2005 was as a result of a large receivable related to a second quarter transaction that is not collectible until the fourth quarter of 2005. For purposes of calculating average days sales outstanding, we
divide accounts receivable at quarter end by the applicable quarters revenues and multiply this amount by 90 days. The level of accounts receivable at each quarter end is affected by the concentration of revenues in the final weeks of each
quarter and may be negatively affected by expanded international revenues in relation to total revenues as licenses to international customers often have longer payment terms.



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



During the nine months ended September 30, 2005, we generated $17.1 million of cash from
investing activities, primarily due to cash provided by net reductions in our marketable investments in the amount of $19.2 million and from the proceeds on the one-time sale of intellectual property assets of $0.2 million. This was partially offset
by the investment of $1.1 million in property and equipment, primarily for computer hardware upgrades throughout our organization, $0.5 million in the Asia Digital Media equity investment and $0.7 million in other long-term assets related to
capitalized software development costs.



Net cash used in financing activities
was $12.9 million for the nine months ended September 30, 2005. During that period, we used $16.9 million in cash for the repurchase of our Common stock and $0.2 million to repay long term liabilities, offset by $4.2 million in cash provided by
the exercise of employee stock options.



As of September 30, 2005, our
cash, cash equivalents and marketable investments in the amount of $84.0 million provided our principal sources of liquidity. Overall, we used $2.6 million in cash, cash equivalents and marketable investments in the third quarter of 2005. Although
we continue to target operating profitability, based on sustaining current revenue and operating expense structures, we estimate that we may continue to use cash in fiscal 2005 to satisfy the obligations provided for under our restructuring program.
However, if operating losses do occur, then cash, cash equivalents and marketable investments will be negatively affected.



On July 29, 2002, the Company announced that its Board of Directors had authorized the Company to repurchase up to an aggregate of 7,000,000 shares of its Common
stock. The program has subsequently been extended three times, most recently on July 22, 2005 when the Board of Directors authorized a further extension of this stock repurchase program to permit the purchase of up to 10,000,000 shares of the
Companys Common stock through December 15, 2006. This quantity of Common shares is in addition to the 6,928,640 shares of the Companys Common stock already purchased under the Companys stock repurchase program through
June 30, 2005.



During the three months ended September 30, 2005, the
Company repurchased 685,500 shares of its Common stock for a total cash outlay of $4.1 million at an average price of $5.93, including commissions paid to brokers. During the nine months ended September 30, 2005, the Company repurchased
3,723,500 shares of its Common stock for a total cash outlay of $16.9 million at an average price of $4.54, including commissions paid to brokers. As of September 30, 2005, the Company has repurchased 7,614,140 shares of its Common stock under
this program since its inception, for a total cash outlay of $30.1 million at an average price of $3.95 per share, including commissions paid to brokers.



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



In terms of long-term liquidity requirements, we will need to fund the $27.0 million of accrued restructuring charges at September 30, 2005 through fiscal 2011, as
detailed below. This amount is net of estimated sublet recoveries on restructured facilities of $19.8 million. The lease obligations included in these accrued restructuring charges are disclosed in the table of contractual commitments below. In
addition, we expect to spend approximately $1.8 million per year on capital expenditures, primarily for computer equipment needed to replace existing equipment that is coming to the end of its useful life.



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



We have commitments
that will expire at various times through 2011. We lease administrative and sales offices and certain property and equipment under non-cancelable operating leases that will expire in 2011 with certain renewal options. A summary of our contractual
commitments at September 30, 2005 is as follows:



|                                                            |  |                                                |        |                 |   |          |  |           |        |                   |   |        |  |   |      
|----------------------------------------------------------- |  | ---------------------------------------------- | ------ | --------------- | - | -------- |  | --------- | ------ | ----------------- | - | ------ |  | - | -----
|                                                            |  | As of September 30, 2005 Payment Due by Period
|                                                            |  | Total                                          |        | Less than1 Year |   | 1-3Years |  | 3-5 Years |        | More than 5 Years
|                                                            |  | (in thousands)                                
|Operating lease obligations  currently utilized facilities |  | $                                              | 13,798 |                 | $ | 3,076    |  | $         | 6,168  |                   | $ | 4,554  |  | $ |     
|Operating lease obligations  restructured facilities       |  |                                                | 38,636 |                 |   | 6,977    |  |           | 13,306 |                   |   | 13,618 |  |   | 4,735
|Other contractual obligations                               |  |                                                | 1,226  |                 |   | 621      |  |           | 605    |                   |   |       |  |   |     
|                                                            |  |                                                |        |                 |   |          |  |           |        |                   |   |        |  |   |      
|Total                                                       |  | $                                              | 53,660 |                 | $ | 10,674   |  | $         | 20,079 |                   | $ | 18,172 |  | $ | 4,735
|                                                            |  |                                                |        |                 |   |          |  |           |        |                   |   |        |  |   |      



In addition to the lease commitments
included above, we have provided letters of credit totaling $9.4 million as security deposits in connection with certain office leases.



In the ordinary course of business, we enter into standard indemnification agreements with our business partners and customers. Pursuant to these agreements, we agree to
modify, repair or replace the product, pay royalties for a right to use, defend and reimburse the indemnified party for actual damages awarded by a court against the indemnified party for an intellectual property infringement claim by a third party
with respect to our products and services, and indemnify for property damage that may be caused in connection with consulting services performed at a customer site by our employees or our subcontractors. The term of these indemnification agreements
is generally perpetual. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. We have general and umbrella insurance policies that generally enable us to recover a portion
of any amounts paid. We have never incurred costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, we believe the estimated fair value of these agreements is minimal. Accordingly, we have no liabilities
recorded for these agreements as of September 30, 2005.



We generally
warrant for ninety days from delivery to a customer that our software products will perform free from material errors that prevent performance in accordance with user documentation. Additionally, we warrant that our consulting services will be
performed consistent with generally accepted industry standards including other warranties. We have only incurred nominal expense under our product or service warranties. As a result, we believe the estimated fair value of our obligations under
these agreements is minimal. Accordingly, we have no liabilities recorded for these agreements as of September 30, 2005.



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



CERTAIN FACTORS THAT MAY AFFECT OUR BUSINESS



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



Historically, a limited number of customers have accounted for a significant percentage of our revenues. In the third quarter of 2005, our three largest customers
accounted in the aggregate for 31% of revenues. In 2004, 2003 and 2002, our three largest customers accounted in the aggregate for 32%, 29% and 18% of revenues, respectively. We anticipate that our results of operations in any given period will
continue to depend to a significant extent upon revenues from a small number of large customers. In addition, we anticipate that such customers will continue to vary over time, so that the achievement of our long-term goals will require us to obtain
additional significant customers on an ongoing basis. Our failure to enter into a sufficient number of large licensing agreements during a particular period could have a material adverse effect on our revenues.



In addition, our accounts receivable include material balances from a limited number of
customers, with five customers accounting in the aggregate for 39% of gross accounts receivable at September 30, 2005, compared to 29% of gross accounts receivable at September 30, 2004. Two customers each individually accounted for 10% or
more of net accounts receivable at September 30, 2005, at 14% and 10%, respectively. As of September 30, 2005, the total accounts receivable is $19.4 million, net of an allowance for doubtful accounts of $0.5 million. Changes in the
financial condition of these customers could result in a different assessment of the existing credit risk of our accounts receivable and thus, a different required allowance, which could have a material impact on our reported earnings.



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



The extended government vertical (Governments, including Healthcare) accounted for 55% of our product revenue in the first nine months of 2005 and 24% of product revenue in 2004. The U.S. and Canadian governments represented 19% and 10% of
total revenues, respectively, in the first nine months of 2005, which includes revenues sold through resellers to these government end users. Sustaining and growing revenues in the government market will depend, in large part, on the following:



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



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



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



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



A decline, or delay in the growth of this market could reduce
demand for our products, adversely affecting our revenues and results of operations. In addition, changes in Government officials as a result of elections could have an impact on our prospects in the Government market. Our ability to sell to the
Government may also be impacted by changes to, or termination of, the supply agreement(s) we have in place with the Government, which from time to time come up for renewal and renegotiation. Finally, failure to properly monitor pricing on government
contracts could result in liability for penalties to the government for non-compliance.



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



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



War, the significant threat of war, or a terrorist act could adversely
affect our business.



Historically, the economy has been adversely
affected by war, the significant threat of war and terrorist acts. Any of these factors could cause one or more of the following to occur:



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



Sales of our products may decline if some
of our products are found to contain bugs or errors.



Our existing testing
procedures may not detect errors, failures or bugs in our software products. Such 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 may have a significant adverse effect on the sales of our products and our results of operations.



We have invested in technology companies in the start-up or development stage whose
products and technology may not succeed, which may result in a loss of all or substantially all of our investment.



We have invested in several privately held companies, including Asia Digital Media. Most of these companies are technology companies in the start-up or development stage,
or are companies with technologies and products that are targeted at geographically distant markets. If the demand for the technologies and products offered by these privately held companies materializes slowly, to a minimum extent, or not at all in
relevant markets, we could lose all or substantially all of our investment in these companies, which would have an adverse effect on our business financial condition and results of operations.



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



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



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



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



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



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



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



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



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



Our personnel, systems, procedures and controls may not be adequate to support our operations. The geographic dispersal of our operations may make it more difficult to
manage our growth.



We depend on our key personnel for the success of our
business and the loss of one or more of our key personnel could have an adverse effect on our ability to manage our business or could be negatively perceived in the capital markets.



Our success and our ability to manage our business depend, in large part, upon the efforts and continued service of our senior management
team. The loss of one or more of our key personnel could have a material adverse effect on our business and operations. It could be difficult for us to find replacements for our key personnel, as competition for such personnel is intense. Further,
such a loss could be negatively perceived in the capital markets, which could reduce the market value of our securities.



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



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



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



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



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



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



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



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



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



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



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



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



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



As the number of security products in the industry and the functionality of these products further overlaps, software developers and publishers may increasingly become subject to claims of infringement or
misappropriation of the intellectual property or proprietary rights of others. From time to time, we have received notices from third parties either soliciting our interest in obtaining a license under one or more patents owned or licensed by these
third parties or suggesting that our products may be infringing one or more patents owned or licensed by these third parties.



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From time to time, we have received notices from various customers stating that we may be responsible for indemnifying such customers pursuant to
indemnification obligations in product license agreements with such customers for alleged infringement of patents assigned to third parties. To date, we are not aware that any customer has filed an action against us for indemnification. In addition,
third parties may assert infringement or misappropriation claims against us in the future. Defending or enforcing our intellectual property could be costly and could result in a diversion of managements attention, which could have a
significant adverse effect on our business, financial condition or results of operations. A successful claim against us could also have a significant adverse effect on our results of operations for the period in which damages are paid. Additionally,
as a result of a successful claim, we could potentially be enjoined from using technology that is required for our products to remain competitive, which could in turn have an adverse effect on our results of operations for subsequent periods.



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



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



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



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



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



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



For example, in June 2004, we acquired intellectual property and certain other assets of AmikaNow! in exchange for $2,676 in cash and $1,428 in guaranteed future payments
payable over three years and other acquisition-related costs. In addition, in September 2004, we acquired majority ownership of Entrust Japan for $1.7 million. While management expects to successfully integrate the newly acquired technology and
operations, each of the above risks apply to these acquisitions.



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



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



As a result
of the June 2001 restructuring plan, we recorded restructuring and other special non-recurring charges, excluding goodwill impairment, of $106.6 million in the second quarter of 2001. Our assessment of the accounting effects of the June 2001
restructuring plan required assumptions in estimating the original accrued restructuring charges, including estimating future recoveries of sublet income from excess facilities, liabilities from employee severances, and costs to exit business
activities. Changes in these assumptions, with respect to the accrued restructuring charges for the June 2001 restructuring plan of $26.5 million at September 30, 2005, could have a material effect on our reported results.



As a result of the May 2003 restructuring plan, we recorded restructuring charges, excluding
impairments, of $8.9 million. Our assessment of the accounting effect of the May 2003 restructuring plan required assumptions in estimating the original incurred and expected restructuring charges of $8.9 million, including estimating liabilities
from employee severances, future recoveries of sublet income from excess facilities, and other costs to exit activities. Changes in these assumptions, with respect to the accrued restructuring charges for the May 2003 restructuring plan of $0.5
million at September 30, 2005, could have a material effect on our reported results.



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



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



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



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



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



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



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



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



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



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



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



We face risks associated with our investment in Asia Digital Media.



In total we have invested $5.2 million in ADML Holdco and its affiliate, Asia Digital Media,
including $1.5 million in loans to Ohana that converted into equity in ADML Holdco. Asia Digital Media is a joint venture in the start-up or development stage, and may lack the financial resources, licenses, technology and governmental approvals
necessary to import, develop or offer for sale in China any commercial product or service. Joint ventures, such as Asia Digital Media, also carry risks as a result of potentially conflicting objectives between the joint venture owners including, but
not limited to, agreement on business plans, budgets, and key staffing decisions. The success of Asia Digital Media depends in large part on conditions in the Chinese market and receipt of government approvals required to export into China and
conduct business there. As such, Asia Digital Media faces several risks including technological risk, competitive risk, risks pertaining to governmental approvals, political risks, currency risks, funding risks and risks of end-user acceptance. For
example, if the demand for the technologies and products developed or offered by Asia Digital Media materializes slowly, if Asia Digital Media fails to achieve important technical development milestones, if Asia Digital Media fails to achieve
necessary governmental approvals and licensing requirements, or if Asia Digital Media fails to raise additional money to continue its development plan, we could lose all or substantially all of our investment in Asia Digital Media and ADML Holdco.



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



Some of our products are subject to export controls under the laws of the United States, 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, United States governmental controls on the export of encryption products and technology may in the future restrict our ability to export 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;
| | - |  | ------------------------------------------------------------



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



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



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



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



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



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



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



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



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------



Risk Associated with Interest Rates



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



The following table presents the cash, cash equivalents and
marketable investments that we held at September 30, 2005, that would have been subject to interest rate risk, and the related ranges of maturities as of those dates:



|                                                                  |  |                 |        |            |   |            |  |             |       |  |   |  
|----------------------------------------------------------------- |  | --------------- | ------ | ---------- | - | ---------- |  | ----------- | ----- |  | - | -
|                                                                  |  | MATURITY       
|                                                                  |  | (in thousands) 
|                                                                  |  | Within 3 Months |        | 3-6 Months |   | > 6 Months |  | > 12 Months
|Investments classified as cash and cash equivalents               |  | $               | 22,625 |            | $ |           |  | $           |      |  | $ | 
|Investments classified as held to maturity marketable investments |  |                 | 35,440 |            | $ | 3,997      |  |             | 4,378 |  |   | 
|                                                                  |  |                 |        |            |   |            |  |             |       |  |   |  
|Total amortized cost                                              |  | $               | 58,065 |            | $ | 3,997      |  | $           | 4,378 |  | $ | 
|                                                                  |  |                 |        |            |   |            |  |             |       |  |   |  
|Fair value                                                        |  | $               | 58,063 |            | $ | 3,988      |  | $           | 4,362 |  | $ | 
|                                                                  |  |                 |        |            |   |            |  |             |       |  |   |  



We try to manage this risk by
maintaining our cash, cash equivalents and marketable investments with high quality financial institutions and investment managers. As a result, we believe that our exposure to market risk related to interest rates is minimal. Our financial
instrument holdings at year-end were analyzed to determine their sensitivity to interest rate changes. The fair values of these instruments were determined by net present values. In this sensitivity analysis, we used the same change in interest rate
for all maturities. All other factors were held constant. If there were an adverse change in interest rates of 10%, the expected effect on net income related to our financial instruments would be immaterial.



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Risk Associated with Exchange Rates



We are subject to foreign exchange risk as a result of exposures to changes in currency exchange rates, specifically between the United
States, Canada, the United Kingdom, the European Union and Japan. This exposure is not considered to be material with respect to British, Japanese and European operations due to the fact that these operations are not significant. However, because a
disproportionate amount of our expenses are denominated in Canadian dollars, through the Companys Canadian operations, we are exposed to exchange rate fluctuations in the Canadian dollar, and in particular, fluctuations between the U.S. and
Canadian dollar. Therefore, a favorable change in the exchange rate for the Canadian subsidiary would result in higher revenues when translated into U.S. dollars, but the expenses would be higher in a corresponding fashion and to a greater degree.
As an illustration, because a significant portion of our expenses are incurred in Canadian dollars, our expense base increased by $3.3 million in 2004, when compared to 2003, due to fluctuations in the exchange rate between United States dollars and
Canadian dollars.



Historically, we have not engaged in formal hedging
activities, but we do periodically review the potential impact of this risk to ensure that the risk of significant potential losses is minimized.



During the third quarter of 2005, we engaged in forward contracts to purchase Canadian dollars, covering exposures on approximately $7.4 million of our Canadian
subsidiarys expenses denominated in Canadian dollars, in an attempt to reduce earnings volatility that might result from fluctuations in the exchange rate between the Canadian dollar and the United States dollar. Subsequent to quarter end, we
have engaged in forward contracts to purchase Canadian dollars covering exposures on approximately $9.0 million of expenses denominated in Canadian dollars in the fourth quarter of 2005.



Risk Associated with Long-term Strategic 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. As a result of other than temporary declines in the net realizable value, these investments were fully impaired over the period from 2001 to 2003.
Accordingly, there is no net book value remaining for these strategic investments as of September 30, 2005.



Risk Associated with Equity Investments



In total we have invested $5.2 million in ADML Holdco and its affiliate, Asia Digital Media, including $1.5 million in loans to Ohana that converted into equity in ADML
Holdco. Asia Digital Media is a company in the start-up or development stage, and may lack the financial resources, licenses, technology and governmental approvals necessary to develop any commercial product or service offerings. As of
September 30, 2005, Asia Digital Media has built, integrated, tested, and demonstrated the end-to-end solution within a lab environment. In October, Asia Digital Media put its first real subscribers into a live network as part of the alpha
trial. Asia Digital Media is currently working directly with cable operators and end users to refine its products for the market. If no such offerings are developed due to insufficient financial resources, inability to license required third party
intellectual property, technical problems, or a lack of necessary governmental approvals, we could lose all or substantially all of our investment. In addition, if the demand for its products and services materializes slowly, to a minimum extent, or
not at all in the relevant market, we could lose all or substantially all of our investment.



We have included our share of losses of Asia Digital Media, in the amount of $210 and $661 thousand in our consolidated income for the three and nine months ended September 30, 2005, respectively. We have
recorded cumulative losses from our investment in Asia Digital Media of $1.0 million since the investment in the fourth quarter of 2004. As of November 3, 2005, the most recent date of assessment, we do not believe that there has been any
impairment of its direct and indirect investments in Asia Digital Media.



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



As of the end of the period covered by this report, an evaluation was carried out by our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that these disclosure controls and procedures were effective as of the end of the period covered by this report. In addition, no change in our internal control over financial reporting (as defined in Rule13a-15(f) under the Securities Exchange Act
of 1934) occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



PART II. OTHER INFORMATION



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



The table below sets forth the information with respect to purchases made by or on behalf of Entrust, Inc. or any affiliated purchaser (as



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defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of our common stock during the three months ended September 30, 2005.



|                                                   |  |                                  |  |                            |      |                                                                                   |         |                                                                                |           
|-------------------------------------------------- |  | -------------------------------- |  | -------------------------- | ---- | --------------------------------------------------------------------------------- | ------- | ------------------------------------------------------------------------------ | ----------
|Period                                             |  | Total Number of Shares Purchased |  | AveragePrice Paidper Share |      | Total Number of SharesPurchased as Part ofPublicly AnnouncedPlans or Programs (1) |         | Maximum Number ofShares That May Yet BePurchased Under thePlans or Programs(1)
|As of July 22, 2005 program extension              |  |                                 |  | $                          |     |                                                                                   |        |                                                                                | 10,000,000
|Month #1 (July 1, 2005 to July 31, 2005)           |  | 110,000                          |  | $                          | 5.52 |                                                                                   | 110,000 |                                                                                | 9,890,000 
|Month #2 (August 1, 2005 to August 31, 2005)       |  | 381,000                          |  |                            | 6.07 |                                                                                   | 381,000 |                                                                                | 9,509,000 
|Month #3 (September 1, 2005 to September 30, 2005) |  | 194,500                          |  |                            | 5.91 |                                                                                   | 194,500 |                                                                                | 9,314,500 
|                                                   |  |                                  |  |                            |      |                                                                                   |         |                                                                                |           
|Total                                              |  | 685,500                          |  | $                          | 5.93 |                                                                                   | 685,500 |                                                                                | 9,314,500 
|                                                   |  |                                  |  |                            |      |                                                                                   |         |                                                                                |           



|(1) | On July 29, 2002, the Company announced that its Board of Directors had authorized the Company to repurchase up to an aggregate of 7,000,000 shares of its Common stock. The
program has subsequently been extended three times, most recently on July 22, 2005 when the Board of Directors authorized a further extension of this stock repurchase program to permit the purchase of up to 10,000,000 shares of the
Companys Common stock through December 15, 2006. This quantity of Common shares is in addition to the 6,928,640 shares of the Companys Common stock already purchased under the Companys stock repurchase program through
June 30, 2005.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



On October 31, 2005, the Company entered into an executive agreement with Hans Ydema, who on that day was appointed as Senior Vice President, Sales for
Europe, Middle East and Asia (EMEA). Hans Ydema, age 49, joined the Company in June 1999 as Country Manager for German language markets. In July 2002, he was promoted to Vice President, Sales for continental Europe. Mr. Ydema studied
building construction and business administration in Eindhoven, the Netherlands.



Mr. Ydemas annual base salary will be 175,000. He will also be eligible for annual sales incentive payments of 150,000 at 100% achievement of objectives and revenue targets that are annually set by
the Compensation Committee. Mr. Ydemas executive agreement also provides for a grant of (i) 7,500 restricted stock units and (ii) stock options to purchase 50,000 shares of Company Common stock. The strike price of the stock options is equal
to the fair market value of the Companys Common stock at the close of business on October 31, 2005.



Mr. Ydemas executive agreement provides that if he enters into the Companys then-standard release and severance agreement promptly after
termination of his position at the Company without cause, he will be entitled to continuance of his base salary and benefits for a further nine months. In addition, any stock options or restricted stock units will continue to vest during this nine
month period. However, no sales incentive payments will accrue for the period following termination of his position.



Mr. Ydemas executive agreement contains provisions relating to executive confidentiality, non-solicitation, intellectual property rights, and code
of conduct. Pursuant to these provisions, Mr. Ydema (i) will not disclose the Companys confidential information, (ii) assigns to the benefit of the Company all rights to intellectual property rights created by Mr. Ydema, (iii) agrees to
non-solicitation provisions which prohibit him for a period of nine months from the termination of his position from attempting to solicit any Company employees, or approaching or soliciting any customer/client, potential customer/client or maturing
business opportunity of the Company in order to attempt to direct any such customer/client, potential customer/client or maturing business opportunity away from the Company, among other related prohibitions, and (iv) will adhere to the
Companys Code of Conduct.



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



|               |  |                                                                                                                                                                                                                                                                                                                   
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                                       
|10.1           |  | 2005 Sales Compensation Plan with Sam Morcos, dated September 28, 2005                                                                                                                                                                                                                                            
|               | 
|10.2           |  | Executive Confidentiality, Non-solicitation, Non-competition, Intellectual Property Rights, and Code of Conduct Agreement with Sam Morcos, dated May 20, 2005                                                                                                                                                     
|               | 
|10.3           |  | Executive Agreement with Hans Ydema, dated October 31, 2005                                                                                                                                                                                                                                                       
|               | 
|10.4           |  | Second Supplement, dated September 2, 2005, to Lease for 1000 Innovation Drive, Ottawa, Canada, by and between Entrust Limited, Entrust, Inc. and 3559807 Canada Inc., dated December 29,
1999Incorporated by reference to Exhibit 10.2 to Entrust, Inc.s Current Report on Form 8-K, filed on September 2, 2005
|               | 
|31.1           |  | Rule 13a-14(a) Certification of Chief Executive Officer                                                                                                                                                                                                                                                           
|               | 
|31.2           |  | Rule 13a-14(a) Certification of Chief Financial Officer                                                                                                                                                                                                                                                           
|               | 
|32.1           |  | Section 1350 Certification of Chief Executive Officer                                                                                                                                                                                                                                                             
|               | 
|32.2           |  | Section 1350 Certification of Chief Financial Officer                                                                                                                                                                                                                                                             
|               | 
|99.1           |  | First Supplement, dated June 20, 2000, to Lease dated December 29, 1999 by and between 3559807 Canada Inc., Entrust Technologies Limited and Entrust Technologies
IncorporatedIncorporated by reference to Exhibit 99.1 to Entrust, Inc.s Current Report on Form 8-K, filed on September 2, 2005                



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SIGNATURE



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.
|                       |  |  | 
|Date: November 4, 2005 |  |  |  | By:           |  | /s/ David J. Wagner                                                       
|                       |  |  |  |               |  | David J. Wagner Senior Vice President,
Finance and Chief Financial Officer



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EXHIBIT INDEX



|               |  |                                                                                                                                                                                                                                                                                                                   
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                                                                                                                                                                                       
|10.1           |  | 2005 Sales Compensation Plan with Sam Morcos, dated September 28, 2005                                                                                                                                                                                                                                            
|               | 
|10.2           |  | Executive Confidentiality, Non-solicitation, Non-competition, Intellectual Property Rights, and Code of Conduct Agreement with Sam Morcos, dated May 20, 2005                                                                                                                                                     
|               | 
|10.3           |  | Executive Agreement with Hans Ydema, dated October 31, 2005                                                                                                                                                                                                                                                       
|               | 
|10.4           |  | Second Supplement, dated September 2, 2005, to Lease for 1000 Innovation Drive, Ottawa, Canada, by and between Entrust Limited, Entrust, Inc. and 3559807 Canada Inc., dated December 29,
1999Incorporated by reference to Exhibit 10.2 to Entrust, Inc.s Current Report on Form 8-K, filed on September 2, 2005
|               | 
|31.1           |  | Rule 13a-14(a) Certification of Chief Executive Officer                                                                                                                                                                                                                                                           
|               | 
|31.2           |  | Rule 13a-14(a) Certification of Chief Financial Officer                                                                                                                                                                                                                                                           
|               | 
|32.1           |  | Section 1350 Certification of Chief Executive Officer                                                                                                                                                                                                                                                             
|               | 
|32.2           |  | Section 1350 Certification of Chief Financial Officer                                                                                                                                                                                                                                                             
|               | 
|99.1           |  | First Supplement, dated June 20, 2000, to Lease dated December 29, 1999 by and between 3559807 Canada Inc., Entrust Technologies Limited and Entrust Technologies
IncorporatedIncorporated by reference to Exhibit 99.1 to Entrust, Inc.s Current Report on Form 8-K, filed on September 2, 2005                



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