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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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(Mark one)

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

For the quarterly period ended September 30, 2007

OR



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

For the transition period from  to

Commission File Number 000-24733



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ENTRUST, INC.

(Exact name of registrant as specified in its charter)



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

ONE HANOVER PARK, SUITE 800

16633 DALLAS PARKWAY

ADDISON, TX 75001

(Address of principal executive offices & zip code)

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



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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act.

Large accelerated filer ̈Accelerated filer  x    Non-accelerated filer ̈

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

There were 61,042,479 shares of the registrants Common stock, par value $0.01 per share, outstanding as of November 5, 2007.



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##### Table of Contents

ENTRUST, INC.

TABLE OF CONTENTS



|                              |  |                                                                                               |  |   
|----------------------------- |  | --------------------------------------------------------------------------------------------- |  | --
|PART I. FINANCIAL INFORMATION |  | 3                                                                                            
|                              |  |                                                                                              
|                              |  | ITEM 1. FINANCIAL STATEMENTS                                                                  |  | 3 
|                              |  | CONDENSED CONSOLIDATED BALANCE SHEETS                                                         |  | 3 
|                              |  | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS                                               |  | 4 
|                              |  | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS                                               |  | 5 
|                              |  | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                          |  | 6 
|                              |  | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 14
|                              |  | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |  | 38
|                              |  | ITEM 4. CONTROLS AND PROCEDURES                                                               |  | 39
|                              | 
|PART II. OTHER INFORMATION    |  | 39                                                                                           
|                              |  |                                                                                              
|                              |  | ITEM 1. LEGAL PROCEEDINGS                                                                     |  | 39
|                              |  | ITEM 1A. RISK FACTORS                                                                         |  | 39
|                              |  | ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                           |  | 40
|                              |  | ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                       |  | 40
|                              |  | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |  | 40
|                              |  | ITEM 5. OTHER INFORMATION                                                                     |  | 40
|                              |  | ITEM 6. EXHIBITS                                                                              |  | 40
|                              | 
|SIGNATURES                    |  | 41                                                                                           

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



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PART I. FINANCIAL INFORMATION



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

ENTRUST, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                          |  |                   |          |   |                   |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ----------------- | - | -------- | -
|(In thousands, except share and per share data)                                                                                                                                           |  | September 30,2007 |          |   | December 31, 2006 |  
|Assets                                                                                                                                                                                    |  |                   |          |   |                   |   |          |  
|Current assets:                                                                                                                                                                           |  |                   |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                                                                                                 |  | $                 | 21,470   |   |                   | $ | 19,888   |  
|Short-term marketable investments                                                                                                                                                         |  |                   |         |   |                   |   | 2,639    |  
|Accounts receivable (net of allowance for doubtful accounts of $1,906 at September 30, 2007 and $1,470 at December 31,
2006)                                                              |  |                   | 18,336   |   |                   |   | 21,117   |  
|Prepaid expenses and other receivables                                                                                                                                                    |  |                   | 3,831    |   |                   |   | 2,904    |  
|                                                                                                                                                                                          |  |                   |          |   |                   |   |          |  
|Total current assets                                                                                                                                                                      |  |                   | 43,637   |   |                   |   | 46,548   |  
|Property and equipment, net                                                                                                                                                               |  |                   | 1,786    |   |                   |   | 2,721    |  
|Purchased product rights and other purchased intangible assets, net                                                                                                                       |  |                   | 12,154   |   |                   |   | 13,843   |  
|Goodwill                                                                                                                                                                                  |  |                   | 60,214   |   |                   |   | 60,214   |  
|Long-term strategic and equity investments                                                                                                                                                |  |                   | 91       |   |                   |   | 169      |  
|Other long-term assets, net                                                                                                                                                               |  |                   | 3,780    |   |                   |   | 4,321    |  
|                                                                                                                                                                                          |  |                   |          |   |                   |   |          |  
|Total assets                                                                                                                                                                              |  | $                 | 121,662  |   |                   | $ | 127,816  |  
|                                                                                                                                                                                          |  |                   |          |   |                   |   |          |  
|Liabilities                                                                                                                                                                               |  |                   |          |   |                   |   |          |  
|Current liabilities:                                                                                                                                                                      |  |                   |          |   |                   |   |          |  
|Accounts payable                                                                                                                                                                          |  | $                 | 11,234   |   |                   | $ | 8,544    |  
|Accrued liabilities                                                                                                                                                                       |  |                   | 4,992    |   |                   |   | 11,724   |  
|Accrued restructuring charges, current portion                                                                                                                                            |  |                   | 5,366    |   |                   |   | 5,217    |  
|Deferred revenue                                                                                                                                                                          |  |                   | 28,152   |   |                   |   | 23,575   |  
|                                                                                                                                                                                          |  |                   |          |   |                   |   |          |  
|Total current liabilities                                                                                                                                                                 |  |                   | 49,744   |   |                   |   | 49,060   |  
|Accrued restructuring charges, long-term portion                                                                                                                                          |  |                   | 15,212   |   |                   |   | 19,301   |  
|Other long-term liabilities                                                                                                                                                               |  |                   | 218      |   |                   |   | 231      |  
|                                                                                                                                                                                          |  |                   |          |   |                   |   |          |  
|Total liabilities                                                                                                                                                                         |  |                   | 65,174   |   |                   |   | 68,592   |  
|                                                                                                                                                                                          |  |                   |          |   |                   |   |          |  
|Minority interest in subsidiary                                                                                                                                                           |  |                   | 4        |   |                   |   | 4        |  
|                                                                                                                                                                                          |  |                   |          |   |                   |   |          |  
|Shareholders equity                                                                                                                                                                      |  |                   |          |   |                   |   |          |  
|Common stock, par value $0.01 per share: 250,000,000 authorized shares: 61,033,008 and 60,161,720 issued and outstanding shares at
September 30, 2007 and December 31, 2006, respectively |  |                   | 610      |   |                   |   | 602      |  
|Additional paid-in-capital                                                                                                                                                                |  |                   | 770,300  |   |                   |   | 765,140  |  
|Accumulated deficit                                                                                                                                                                       |  |                   | (714,492 | ) |                   |   | (707,333 | )
|Accumulated other comprehensive income                                                                                                                                                    |  |                   | 66       |   |                   |   | 811      |  
|                                                                                                                                                                                          |  |                   |          |   |                   |   |          |  
|Total shareholders equity                                                                                                                                                                |  |                   | 56,484   |   |                   |   | 59,220   |  
|                                                                                                                                                                                          |  |                   |          |   |                   |   |          |  
|Total liabilities and shareholders equity                                                                                                                                                |  | $                 | 121,662  |   |                   | $ | 127,816  |  
|                                                                                                                                                                                          |  |                   |          |   |                   |   |          |  

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



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ENTRUST, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                               |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|-------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                                               |  | Three months endedSeptember 30, |        |   | Nine months endedSeptember 30, |  
|(In thousands, except share and per share data)                |  | 2007                            |        |   | 2006                           |   |        | 2007 |  |   | 2006   |  
|Revenues:                                                      |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Product                                                        |  | $                               | 8,170  |   |                                | $ | 8,788  |      |  | $ | 26,244 |   |  | $ | 22,754  |  
|Services and maintenance                                       |  |                                 | 15,773 |   |                                |   | 15,243 |      |  |   | 46,755 |   |  |   | 44,430  |  
|                                                               |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Total revenues                                                 |  |                                 | 23,943 |   |                                |   | 24,031 |      |  |   | 72,999 |   |  |   | 67,184  |  
|                                                               |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Cost of revenues:                                              |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Product                                                        |  |                                 | 1,815  |   |                                |   | 1,246  |      |  |   | 5,785  |   |  |   | 4,420   |  
|Services and maintenance                                       |  |                                 | 7,205  |   |                                |   | 7,252  |      |  |   | 22,412 |   |  |   | 21,700  |  
|Amortization of purchased product rights                       |  |                                 | 355    |   |                                |   | 319    |      |  |   | 1,032  |   |  |   | 738     |  
|                                                               |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Total cost of revenues                                         |  |                                 | 9,375  |   |                                |   | 8,817  |      |  |   | 29,229 |   |  |   | 26,858  |  
|                                                               |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Gross profit                                                   |  |                                 | 14,568 |   |                                |   | 15,214 |      |  |   | 43,770 |   |  |   | 40,326  |  
|                                                               |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Operating expenses:                                            |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Sales and marketing                                            |  |                                 | 8,207  |   |                                |   | 9,710  |      |  |   | 26,113 |   |  |   | 24,431  |  
|Research and development                                       |  |                                 | 4,929  |   |                                |   | 5,505  |      |  |   | 15,590 |   |  |   | 14,148  |  
|General and administrative                                     |  |                                 | 2,929  |   |                                |   | 3,426  |      |  |   | 9,447  |   |  |   | 10,654  |  
|Restructuring charges and adjustments                          |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   | 2,765   |  
|                                                               |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Total operating expenses                                       |  |                                 | 16,065 |   |                                |   | 18,641 |      |  |   | 51,150 |   |  |   | 51,998  |  
|                                                               |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Loss from operations                                           |  |                                 | (1,497 | ) |                                |   | (3,427 | )    |  |   | (7,380 | ) |  |   | (11,672 | )
|                                                               |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Other income (expense):                                        |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Interest income                                                |  |                                 | 188    |   |                                |   | 363    |      |  |   | 544    |   |  |   | 1,945   |  
|Foreign exchange gain (loss)                                   |  |                                 | (88    | ) |                                |   | (4     | )    |  |   | (18    | ) |  |   | (275    | )
|Write-down of long-term strategic and equity investments       |  |                                 |       |   |                                |   |       |      |  |   |       |   |  |   | (3,016  | )
|Loss from equity investments                                   |  |                                 |       |   |                                |   | (51    | )    |  |   | (77    | ) |  |   | (344    | )
|                                                               |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Total other income (expense)                                   |  |                                 | 100    |   |                                |   | 308    |      |  |   | 449    |   |  |   | (1,690  | )
|                                                               |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Loss before income taxes                                       |  |                                 | (1,397 | ) |                                |   | (3,119 | )    |  |   | (6,931 | ) |  |   | (13,362 | )
|Provision for income taxes                                     |  |                                 | 104    |   |                                |   | 120    |      |  |   | 228    |   |  |   | 309     |  
|                                                               |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Net loss                                                       |  | $                               | (1,501 | ) |                                | $ | (3,239 | )    |  | $ | (7,159 | ) |  | $ | (13,671 | )
|                                                               |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Net loss per share:                                            |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Basic                                                          |  | $                               | (0.02  | ) |                                | $ | (0.05  | )    |  | $ | (0.12  | ) |  | $ | (0.23   | )
|Diluted                                                        |  | $                               | (0.02  | ) |                                | $ | (0.05  | )    |  | $ | (0.12  | ) |  | $ | (0.23   | )
|Weighted average common shares used in per share computations: |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Basic                                                          |  |                                 | 60,986 |   |                                |   | 59,807 |      |  |   | 60,717 |   |  |   | 59,814  |  
|Diluted                                                        |  |                                 | 60,986 |   |                                |   | 59,807 |      |  |   | 60,717 |   |  |   | 59,814  |  

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, |       
|                                                              |  | 2007                           |        |   | 2006 |  
|                                                              |  | (In thousands)                 |       
|OPERATING ACTIVITIES:                                         |  |                                |        |   |      |   |         |  
|Net loss                                                      |  | $                              | (7,159 | ) |      | $ | (13,671 | )
|Non-cash items in net loss:                                   |  |                                |        |   |      |   |         |  
|Depreciation and amortization                                 |  |                                | 3,489  |   |      |   | 2,396   |  
|Non-cash compensation expense                                 |  |                                | 4,079  |   |      |   | 2,725   |  
|Loss from equity investments                                  |  |                                | 77     |   |      |   | 344     |  
|Provision for doubtful accounts                               |  |                                | 190    |   |      |   | 795     |  
|Write-down of strategic and equity investments                |  |                                |       |   |      |   | 3,016   |  
|Changes in operating assets and liabilities:                  |  |                                |        |   |      |   |         |  
|Decrease in accounts receivable                               |  |                                | 2,089  |   |      |   | 5,900   |  
|(Increase) decrease in prepaid expenses and other receivables |  |                                | (1,028 | ) |      |   | 1,437   |  
|Increase in accounts payable                                  |  |                                | 2,532  |   |      |   | 793     |  
|Increase (decrease) in accrued liabilities                    |  |                                | (7,011 | ) |      |   | 1,571   |  
|Decrease in accrued restructuring charges                     |  |                                | (3,940 | ) |      |   | (232    | )
|Increase in deferred revenue                                  |  |                                | 3,795  |   |      |   | 1,818   |  
|                                                              |  |                                |        |   |      |   |         |  
|Net cash provided by (used in) operating activities           |  |                                | (2,887 | ) |      |   | 6,892   |  
|                                                              |  |                                |        |   |      |   |         |  
|INVESTING ACTIVITIES:                                         |  |                                |        |   |      |   |         |  
|Purchases of marketable investments                           |  |                                |       |   |      |   | (12,735 | )
|Maturities of marketable investments                          |  |                                | 2,639  |   |      |   | 32,600  |  
|Purchases of property and equipment                           |  |                                | (321   | ) |      |   | (1,038  | )
|Proceeds on disposition of property and equipment             |  |                                | 372    |   |      |   |        |  
|Increase in other long-term assets                            |  |                                | (353   | ) |      |   | (87     | )
|Purchase of business, net of cash acquired                    |  |                                |       |   |      |   | (58,997 | )
|                                                              |  |                                |        |   |      |   |         |  
|Net cash provided by (used in) investing activities           |  |                                | 2,337  |   |      |   | (40,257 | )
|                                                              |  |                                |        |   |      |   |         |  
|FINANCING ACTIVITIES:                                         |  |                                |        |   |      |   |         |  
|Repayment of long-term liabilities                            |  |                                |       |   |      |   | (570    | )
|Repurchase of common stock                                    |  |                                |       |   |      |   | (2,519  | )
|Proceeds from issuance of common stock                        |  |                                |       |   |      |   | 675     |  
|Proceeds from exercise of stock options                       |  |                                | 1,089  |   |      |   | 1,045   |  
|                                                              |  |                                |        |   |      |   |         |  
|Net cash provided by (used in) financing activities           |  |                                | 1,089  |   |      |   | (1,369  | )
|                                                              |  |                                |        |   |      |   |         |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                       |  |                                | 1,043  |   |      |   | 585     |  
|                                                              |  |                                |        |   |      |   |         |  
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS          |  |                                | 1,582  |   |      |   | (34,149 | )
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD              |  |                                | 19,888 |   |      |   | 59,929  |  
|                                                              |  |                                |        |   |      |   |         |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                    |  | $                              | 21,470 |   |      | $ | 25,780  |  
|                                                              |  |                                |        |   |      |   |         |  

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, 2007
are not necessarily indicative of the results to be expected for the full year. Certain information and footnote disclosures normally contained in financial statements prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the Consolidated Financial Statements and related Notes contained in the Companys Annual Report on
Form 10-K for the year ended December 31, 2006.

NOTE 2. ACCOUNTING FOR UNCERTAIN TAX POSITIONS

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

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

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

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

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



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

NOTE 3. ACQUISITIONS

Orion Security Solutions, Inc. (Orion)

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

The acquisition was accounted for under the purchase method of accounting, and, accordingly, the purchase price of approximately $9,135 was allocated to the fair value
of the tangible and intangible assets and liabilities acquired, with the remainder allocated to goodwill. The results of operations of Orion have been included in the Companys consolidated financial statements commencing from June 1,
2006, the effective date of the acquisition. In the three and nine months ended September 30, 2007, the Company recorded amortization of $48 and $144, respectively, related to customer relationships and $38 and $115, respectively, related to
non-competition agreement assets, arising from this acquisition.

Business Signatures Corporation (Business Signatures)

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

The acquisition was accounted for under the purchase method of accounting, and,
accordingly, the purchase price of approximately $51,211 was allocated to the fair value of the tangible and intangible assets and liabilities acquired, with the remainder allocated to goodwill. In addition, the results of operations of Business
Signatures have been included in the Companys consolidated financial statements commencing from July 19, 2006, the effective date of the acquisition. In the three and nine months ended September 30, 2007, the Company recorded
amortization of $163 and $490, respectively, related to customer/partner relationships and $128 and $384, respectively, related to purchased product rights, arising from this acquisition.



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##### Table of Contents

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



|                                     |  |                                  |        |   |                                 |   |         |  
|------------------------------------ |  | -------------------------------- | ------ | - | ------------------------------- | - | ------- | -
|                                     |  | Three Months Ended September 30, |        |   | Nine Months Ended September 30, |  
|                                     |  | 2006                             |        |   | 2006                            |  
|Revenues                             |  | $                                | 24,087 |   |                                 | $ | 69,114  |  
|Net loss                             |  |                                  | (3,745 | ) |                                 |   | (20,613 | )
|Basic and diluted net loss per share |  |                                  | (0.06  | ) |                                 |   | (0.34   | )

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

NOTE 4. STOCK-BASED COMPENSATION

Compensation cost related to stock
options, stock appreciation rights (SARs) and restricted stock units (RSUs) recognized in operating results was $1,346 and $1,146 in the three months ended September 30, 2007 and 2006, respectively, and $4,079 and $2,725
in the nine months ended September 30, 2007 and 2006, respectively.

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



|                              |  |                                        |   |  |                                        |  
|----------------------------- |  | -------------------------------------- | - |  | -------------------------------------- | -
|                              |  | Three Months Ended, September 30, 2007 |   |  | Three Months Ended, September 30, 2006 |  
|Weighted average assumptions: |  |                                        |   |  |                                        |  
|Expected volatility           |  | 55                                     | % |  | 55                                     | %
|Risk free rate of return      |  | 4.50                                   | % |  | 4.84                                   | %
|Expected option term (years)  |  | 4.58                                   |   |  | 4.75                                   |  

Summary of activity for the three months ended September 30, 2007 under the Companys stock option plans
is set forth below:



|                              |  |                 |   |  |                   |   |  |                              |  |                         |  |                          |  |                                                
|----------------------------- |  | --------------- | - |  | ----------------- | - |  | ---------------------------- |  | ----------------------- |  | ------------------------ |  | -----------------------------------------------
|                              |  | SharesAvailable |   |  | AwardsOutstanding |   |  | WeightedAverageExercisePrice |  | AggregateIntrinsicValue |  | WeightedAverageFairValue |  | WeightedAverageRemainingContractualLife inYears
|Balance at June 30, 2007      |  | 1,783,005       |   |  | 15,759,069        |   |  | 5.40                         |  |                         |  |                          |  | 4.96                                           
|Vested                        |  |                 |   |  | 11,446,413        |   |  |                              |  |                         |  |                          |  |                                                
|Unvested                      |  |                 |   |  | 4,312,656         |   |  |                              |  |                         |  |                          |  |                                                
|                              |  |                 |   |  |                   |  
|Stock options:                |  |                 |   |  |                   |   |  |                              |  |                         |  |                          |  |                                                
|Granted                       |  | (105,000        | ) |  | 105,000           |   |  | 2.79                         |  | 69                      |  | 1.89                     |  |                                                
|Forfeited                     |  | 162,703         |   |  | (368,025          | ) |  | 4.86                         |  | 2,833                   |  | 1.45                     |  |                                                
|Vested                        |  |                 |   |  | (209,964          | ) |  |                              |  |                         |  |                          |  |                                                
|Unvested                      |  |                 |   |  | (158,061          | ) |  |                              |  |                         |  |                          |  |                                                
|Exercised                     |  |                 |   |  | (60,749           | ) |  | 2.16                         |  | 131                     |  | 2.87                     |  |                                                
|                              |  |                 |   |  |                   |  
|Restricted stock units:       |  |                 |   |  |                   |   |  |                              |  |                         |  |                          |  |                                                
|Granted                       |  |                |   |  |                  |   |  |                             |  |                        |  |                         |  |                                                
|Forfeited                     |  | 39,396          |   |  | (19,698           | ) |  |                             |  | 51                      |  | 3.52                     |  |                                                
|Matured                       |  |                 |   |  | (30,625           | ) |  |                             |  | 66                      |  | 3.36                     |  |                                                
|                              |  |                 |   |  |                   |  
|Stock appreciation rights:    |  |                 |   |  |                   |   |  |                              |  |                         |  |                          |  |                                                
|Granted                       |  |                |   |  |                  |   |  |                             |  |                        |  |                         |  |                                                
|Forfeited                     |  | 15,890          |   |  | (15,890           | ) |  | 4.82                         |  | 111                     |  | 2.84                     |  |                                                
|Exercised                     |  |                 |   |  |                  |   |  |                             |  |                        |  |                         |  |                                                
|                              |  |                 |   |  |                   |   |  |                              |  |                         |  |                          |  |                                                
|Balance at September 30, 2007 |  | 1,895,994       |   |  | 15,369,082        |   |  | 5.42                         |  |                         |  |                          |  | 4.86                                           
|Vested                        |  |                 |   |  | 11,444,819        |   |  |                              |  |                         |  |                          |  |                                                
|Unvested                      |  |                 |   |  | 3,924,263         |   |  |                              |  |                         |  |                          |  |                                                



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During the three and nine months ended September 30, 2007, the amount of cash received from the exercise of stock
options was $nil and $1,089, respectively.

As at September 30, 2007, there was $4,701 of total unrecognized compensation cost related to non-vested
stock option and SARs awards. Compensation expense related to stock options and SARs for the three and nine months ended September 30, 2007 was $1,033 and $3,093, respectively, and was $924 and $2,199 for the three and nine months ended
September 30, 2006, respectively.

As at September 30, 2007, there was approximately $1,500 of total unrecognized compensation cost related to
non-vested RSUs granted under our stock plans. Compensation expense related to RSUs for the three and nine months ended September 30, 2007 was $313 and $986, respectively, and was $222 and $526 for the three and nine months ended
September 30, 2006, respectively. During the first nine months of 2007, the Company granted 194,000 RSUs, the vesting of which is based upon the achievement of market conditions. Compensation cost for an RSU award with a market condition are
recognized ratably for each vesting tranche over the requisite service period in a similar manner as an award with a service condition, based on the grant date fair value of the award. However, unlike awards with a service or performance condition,
the compensation cost for an award with a market condition will not be reversed solely because the market condition is not satisfied.

NOTE 5.
ALLOWANCE FOR DOUBTFUL ACCOUNTS

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



|                                                     |  |                                 |       |      |   |      
|---------------------------------------------------- |  | ------------------------------- | ----- | ---- | - | -----
|                                                     |  | Nine Months Ended September 30,
|                                                     |  | 2007                            |       | 2006
|Allowance for doubtful accounts, beginning of period |  | $                               | 1,470 |      | $ | 467  
|Provision for doubtful accounts, net                 |  |                                 | 190   |      |   | 795  
|Amounts written-off, net of recoveries               |  |                                 | 246   |      |   | 10   
|                                                     |  |                                 |       |      |   |      
|Allowance for doubtful accounts, end of period       |  | $                               | 1,906 |      | $ | 1,272
|                                                     |  |                                 |       |      |   |      



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NOTE 6. ACCRUED RESTRUCTURING CHARGES

May 2003 Restructuring Plan

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

On May 27, 2003, the Company announced a restructuring plan aimed at lowering costs and better aligning its resources to customer
needs. The plan allowed the Company to have tighter integration between customer touch functions, which better positions the Company to take advantage of the market opportunities for its new products and solutions. The restructuring plan included
eliminating positions to lower operating costs, closing under-utilized office capacity, primarily from the excess space in the Companys Santa Clara, California and Addison, Texas facilities, and re-assessing the useful life of related excess
long-lived assets. The workforce portion of the restructuring plan had been significantly completed by December 31, 2003, while the facilities plan was executed by September 30, 2003. The Company also announced non-cash charges related to
the impairment of a long-term strategic investment and the impairment of purchased product rights acquired through the enCommerce acquisition of June 2000.

The Company has evaluated and pursued all reasonable possibilities to settle the lease obligations associated with the May 2003 restructuring, but has been unable to find an acceptable outcome. Therefore, the Company has concluded that it
is appropriate to classify the portion of the outstanding liabilities that is not payable within the next 12 months as long-term liabilities. However, in terms of long-term liquidity requirements, the current obligations would require the Company to
fund its remaining accrued restructuring charges for the May 2003 restructuring as follows: $15 in the remainder of fiscal 2007, $155 in fiscal 2008 and $20 in fiscal 2009.

Summary of Accrued Restructuring Charges for May 2003 Restructuring

The following table is a summary of the accrued
restructuring charges related to the May 2003 plan at September 30, 2007:



|                                   |  |                                           |     |              |     |                                                     |   |    
|---------------------------------- |  | ----------------------------------------- | --- | ------------ | --- | --------------------------------------------------- | - | ---
|(in millions)                      |  | Total Charges Accrued at Beginning ofYear |     | CashPayments |     | Accrued Restructuring Charges
at September 30, 2007
|Consolidation of excess facilities |  | $                                         | 0.3 |              | 0.1 |                                                     | $ | 0.2
|                                   |  |                                           |     |              |     |                                                     |   |    

June 2001 Restructuring Plan

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

The workforce portion of the restructuring plan was largely completed by the end of the fourth quarter of 2001 and primarily related to severance costs, fringe benefits
due to severed employees and outplacement services. The consolidation of excess facilities included the closure of eight offices throughout the world, but the majority of the costs related to the Companys facility in Santa Clara, California.
These costs are payable contractually over the remaining term of the Santa Clara facility lease, which runs through 2011, reduced by estimated sublease recoveries. The discontinuance of non-core products and programs was primarily related to the
discontinuance of certain of the Companys business program initiatives and certain applications that had not achieved their growth and profitability objectives. In addition, the Company 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



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

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

The Company has
evaluated and pursued all reasonable possibilities to settle the lease obligations associated with the June 2001 restructuring. Therefore, the Company has concluded that it is appropriate to classify the portion of the outstanding liabilities that
is not payable within the next 12 months as long-term liabilities. However, the current obligations would require the Company to fund $1,300 of its accrued restructuring charges for the June 2001 restructuring during the remainder of fiscal 2007,
with the remaining accrued restructuring charges for the June 2001 restructuring to be paid as follows: $5,300 in fiscal 2008, $5,500 in fiscal 2009, $5,700 in fiscal 2010 and $2,600 in fiscal 2011.

Summary of Accrued Restructuring Charges for June 2001 Restructuring

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



|                                   |  |                                            |      |              |   |             |  |                                                    |   |  |   |     
|---------------------------------- |  | ------------------------------------------ | ---- | ------------ | - | ----------- |  | -------------------------------------------------- | - |  | - | ----
|(in millions)                      |  | Total Charges Accrued at Beginning
of Year |      | CashPayments |   | Adjustments |  | Accrued Restructuring Charges
at September 30,2007
|Consolidation of excess facilities |  | $                                          | 24.2 |              | $ | 3.8         |  | $                                                  |  |  | $ | 20.4
|                                   |  |                                            |      |              |   |             |  |                                                    |   |  |   |     

As of September 30, 2007, the Company had estimated a total of $9,700 of sublease recoveries in its
restructuring accrual, related to the Santa Clara facility, recoverable under an existing sublease agreement, that lasts until March 2011.

NOTE 7. NET
INCOME (LOSS) PER SHARE AND SHARES OUTSTANDING

Basic net income (loss) per share is computed by dividing the net income (loss) by the weighted average
number of shares of Common stock of all classes outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) by the weighted average number of shares of Common stock and potential Common stock
outstanding, and when dilutive, options to purchase Common stock (including stock options, restricted stock units and stock appreciation rights) using the treasury stock method. The options to purchase Common stock are excluded from the computation
of diluted net income (loss) per share if their effect is antidilutive.

The antidilutive effect excluded from the diluted net loss per share computation
related to options to purchase Common stock, or Common stock to be issued under stock award agreements, under the treasury stock method for the three and nine months ended September 30, 2007 was 1,969,169 and 506,825 shares,
respectively, compared to 728,811 and 405,815 shares for the three and nine months ended September 30, 2006, respectively, which increased the weighted average shares of common stock outstanding used in the computation. In addition,
10,812,046 and 10,159,242 out-of-the-money exercisable options that had exercise prices in excess of the average market price for the three months ended September 30, 2007 and 2006, 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, 2007, the Company issued
91,374 and 871,288 shares of Common stock, respectively, related to the exercise of employee stock options and RSUs.



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NOTE 8. MARKETABLE AND OTHER INVESTMENTS

The Company maintains marketable investments mainly in a strategic cash management account. This account is used to invest primarily in highly rated corporate securities, in securities guaranteed by the U.S.
government or its agencies and highly rated municipal bonds, primarily with a remaining maturity of not more than 24 months. The Company did not hold any short term marketable investments as of September 30, 2007.

Historically, the Company has not engaged in formal hedging activities, but the Company does periodically review the potential impact of this foreign exchange risk to
ensure that the risk of significant potential losses is minimized. In the past, when advantageous, the Company has engaged in forward contracts to purchase Canadian dollars, to cover exposures on the Canadian subsidiarys expenses that are
denominated in Canadian dollars, in an attempt to reduce earnings volatility that might result from fluctuations in the exchange rate between the Canadian and U.S. dollar. During the third quarter of 2007, the Company engaged in forward contracts to
purchase Canadian dollars, covering exposures on approximately $5.0 million of its Canadian subsidiarys expenses denominated in Canadian dollars. None of these contracts extended past September 30, 2007 and no previously purchased foreign
exchange contracts had extended past June 30, 2007. Subsequent to September 30, 2007, the Company has engaged in forward contracts to purchase Canadian dollars covering exposures on approximately $5.0 million of expenses denominated in
Canadian dollars in the fourth quarter of 2007. The Company currently has not engaged in any forward contracts to purchase Canadian dollars to cover exposures on expenses denominated in Canadian dollars in future periods beyond the fourth quarter of
2007.

The Company holds equity securities stated at cost, which represent long-term investments in private companies made in 2000 and 2001 for business
and strategic alliance purposes. The Companys ownership share in these companies ranges from 1% to 10% of the outstanding voting share capital. The Company monitors and assesses the ongoing operating performance of the underlying companies for
evidence of impairment. Since 2001, the Company has recorded impairments totaling $14,818 with respect to these investments as a result of other than temporary declines in fair value. The strategic investments made in 2000 and 2001 had no net
remaining carrying value at September 30, 2007. In addition, the Company holds an investment recorded at cost in ADML Holdings, Ltd., and its affiliate, Ohana Wireless, Inc. (collectively, Ohana), which as of September 30, 2007
represented approximately 14% of the voting share capital of Ohana. The carrying value of the Companys investment in Ohana at September 30, 2007 was $91.

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

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

NOTE 9. SEGMENT AND GEOGRAPHIC INFORMATION

Segment information

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



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Geographic information

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

The Company
operates in three main geographic areas as follows:



|                                        |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|--------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                        |  | Three months endedSeptember 30, |        |   | Nine months endedSeptember 30, |  
|(In thousands)                          |  | 2007                            |        |   | 2006                           |   |        | 2007 |  |   | 2006   |  
|Revenues:                               |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|United States                           |  | $                               | 12,090 |   |                                | $ | 12,934 |      |  | $ | 35,854 |   |  | $ | 33,553  |  
|Canada                                  |  |                                 | 4,474  |   |                                |   | 3,872  |      |  |   | 15,734 |   |  |   | 13,886  |  
|Europe, Asia and Other                  |  |                                 | 7,379  |   |                                |   | 7,225  |      |  |   | 21,411 |   |  |   | 19,745  |  
|                                        |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Total revenues                          |  | $                               | 23,943 |   |                                | $ | 24,031 |      |  | $ | 72,999 |   |  | $ | 67,184  |  
|                                        |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Income (loss) before income taxes:      |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|United States                           |  | $                               | (435   | ) |                                | $ | (441   | )    |  | $ | (813   | ) |  | $ | (5,860  | )
|Canada                                  |  |                                 | (863   | ) |                                |   | (2,344 | )    |  |   | (5,852 | ) |  |   | (6,459  | )
|Europe, Asia and Other                  |  |                                 | (97    | ) |                                |   | (334   | )    |  |   | (266   | ) |  |   | (1,043  | )
|                                        |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Total income (loss) before income taxes |  | $                               | (1,395 | ) |                                | $ | (3,119 | )    |  | $ | (6,931 | ) |  | $ | (13,362 | )
|                                        |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  



|                       |  |                   |         |                  |   |        
|---------------------- |  | ----------------- | ------- | ---------------- | - | -------
|(In thousands)         |  | September 30,2007 |         | December 31,2006
|Total assets:          |  |                   |         |                  |   |        
|United States          |  | $                 | 97,103  |                  | $ | 105,831
|Canada                 |  |                   | 20,386  |                  |   | 18,655 
|Europe, Asia and Other |  |                   | 4,173   |                  |   | 3,330  
|                       |  |                   |         |                  |   |        
|Total                  |  | $                 | 121,662 |                  | $ | 127,816
|                       |  |                   |         |                  |   |        

NOTE 10. COMPREHENSIVE INCOME

The components of comprehensive income are as follows:



|                                         |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|---------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                         |  | Three months endedSeptember 30, |        |   | Nine months endedSeptember 30, |  
|(In thousands)                           |  | 2007                            |        |   | 2006                           |   |        | 2007 |  |   | 2006   |  
|Net loss                                 |  | $                               | (1,501 | ) |                                | $ | (3,239 | )    |  | $ | (7,159 | ) |  | $ | (13,671 | )
|Foreign currency translation adjustments |  |                                 | (174   | ) |                                |   | (166   | )    |  |   | (745   | ) |  |   | 690     |  
|                                         |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  
|Comprehensive loss                       |  | $                               | (1,675 | ) |                                | $ | (3,405 | )    |  | $ | (7,904 | ) |  | $ | (12,981 | )
|                                         |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |         |  

NOTE 11. LEGAL PROCEEDINGS

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



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NOTE 12. RECENTLY ISSUED ACCOUNTING STANDARDS

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

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

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



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

This report contains forward-looking statements that involve risks and uncertainties. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including without limitation statements regarding our expectations, beliefs, intentions or strategies regarding the future. You can find many
of these statements by looking for words such as approximates, believes, expects, anticipates, estimates, intends, plans, would, may or
similar expressions in this quarterly report on Form 10-Q. These forward-looking statements are subject to numerous assumptions, risks and uncertainties. All forward-looking statements included in this report are based on information available to
us, up to and including, the date of this document, and we assume no obligation to update any such forward-looking statements. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth below under Overview and Risk Factors and elsewhere in this report. The following discussion and analysis of our financial condition and results of operations should be read in
conjunction with our condensed consolidated financial statements and notes thereto appearing elsewhere in this report.

EXECUTIVE
OVERVIEW

As a trusted security expert, Entrust secures digital identities and information through layered security solutions that help provide
confidence for consumers, enterprises and governments, enabling them to complete transactions more securely. With more than 100 patents granted or pending, our solutions help enterprises secure channels of communication, which allows
information-sharing among stakeholders and enables increased compliance with applicable laws. More than 1,650 customers in 60 different countries across the globe leverage Entrusts world-class solutions.

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.



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

In 2006, we launched our Layered Consumer and Enterprise Security Architectures. These layered approaches to security help give our customers a
roadmap for building security across their enterprise and customer facing applications, and for governments and citizen facing applications. These layered approaches allows our customers to customize the level of security to the value of the data or
transaction. A layered security strategy from a single, trusted vendor affords security-conscious organizations a level of synergy, interoperability and cost-effectiveness unmatched by a collection of third-party products. Further, layered security
models foster environments of easy-to-use security solutions that increase end-user acceptance and reduce help-desk calls. Entrust has unique capabilities in the market to assist our customers with their growing identity and information protection
needs.

Our Layered Consumer Architecture approach consists of six layers:

1. Extended Validation (EV) SSL Certificates

2. Versatile Authentication & Single Sign-On (SSO)

3. Fraud Detection & Risk-based Authentication

4. Transaction
Signing & Encryption

5. Secure Web & E-mail

6. Open Fraud Intelligence Network

Our Layered Enterprise Architecture approach also consists of six layers:

1. Workstation & Network Authentication

2. File, Disk &
Removable Media Encryption

3. Remote Access Authentication

4.
Network Folder Encryption

5. Secure Boundary & End-to-End Messaging

6. Content Control & Policy-based Encryption

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

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

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

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



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

Product Category Financial Metrics:



| |  |  | Emerging growth products (IdentityGuard, Boundary Messaging, and Fraud Detection) accounted for $1.9 million, or 23% of product revenue, up 15% from $1.7 million in
Q2, 2007 and down 43% from $3.4 million in Q3, 2006.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | PKI products accounted for $6.2 million or 76% of product revenue, down 3% from $6.4 million in Q2, 2007, and up 50% from $4.1 million in Q3, 2006.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Single sign-on products accounted for $56 thousand, or 1% of product revenue, down 94% from $890 thousand in Q2, 2007 and down 96% from $1.3 million in Q3, 2006.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

We also provide support and maintenance services to our customers. In the third quarter, support and maintenance revenue accounted for
nearly two-thirds of our total services revenues, achieving record high levels in terms of customer retention rate and the dollar value of retention. The customer retention rate was 98%, and the associated dollar value renewal was 96%. We attribute
this to the world class support that our team provides customers and the value our customers receive from the upgrades and up-issues of our software as part of this service. We also provide professional services, including architecture,
installation, and integration services related to the products that we sell. Our support and maintenance, and our professional services have shown consistent steady growth and have achieved seven quarters of sequential quarter-over-quarter growth.
These services represent a significant portion of our revenues, but are closely related to the demand for our products. In addition, the margins on our products are significantly higher than margins on our services. As a result, we are primarily
focused on growing our product revenues. In Q3, 2007, deferred revenue increased $3.2 million to $28.2 million, driven by an increase in subscription product bookings and in professional services and support and maintenance renewals from Q3, 2006.
These numbers show the continued strength of our support and maintenance renewals and the growth in our subscription based software.

In the third quarter
of 2007, we incurred a net loss of $0.02 per share, which is an improvement of $0.03 per share from the net loss of $0.05 per share recorded in the third quarter of 2006, on roughly flat revenue. During 2007, we have significantly reduced our total
expenses through a combination of managed headcount reductions, lowering of contracting expenses and controlling variable operating costs. These overall expense reductions are even more impressive due to the higher costs we are reporting due to the
appreciation of the Canadian dollar from approximately $0.85 per U.S. dollar at the beginning of the year to over $1.00 per U.S. dollar at the end of September 2007.

We sell our 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 our 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 and the Middle East are regions where Entrusts products and solutions
continue to experience strong demand and we believe that these markets 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, 2007, 45% of
our product sales were in our extended government vertical market, which includes healthcare. This revenue has been driven by key global projects that have started to increase product



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purchases. In the extended government vertical market, we have a strong penetration in the U.S. Federal government, the governments of Canada, Singapore,
Denmark, the United Kingdom and across continental Europe. In fact, Entrust now counts 10 of the top 11 e-governments, as outlined by last years Accenture report, as customers.

A key change in the government space has been the movement from purely internal security solutions that our customers require to more external citizen facing applications. These projects include ePassports, national
ID programs, physical and logical access programs for government employees, and a growing number of citizen facing applications. Security is at the core of all these projects and our wide product set positions Entrust well in this space. We have
already announced three ePassport projects that Entrust has won, and we have been selected as the infrastructure for a number of national ID and Ministry of Defense programs. This quarter alone we won national PKI infrastructures in the Kingdom of
Saudi Arabia, Brunei and Slovenia. Specifically, our million dollar transaction in the quarter was the Saudi Arabia PKI infrastructure. Our largest deal in the second quarter was with a U.S Federal Government agency who selected Entrust for their
agency wide HSPD-12 rollout. Our success in HSPD-12 extended this quarter as we were awarded the contract as the primary PKI Shared Service Provider for the GSA Managed Service Offering. We also won an IdentityGuard strong authentication solution
for a key citizen facing application for the U.S. Federal government.

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

In Q3, 2007, 55% of our product sales were in our extended enterprise
vertical market. We continue to see demand from global enterprises as they continue to respond to regulatory and governance compliance demands and extend their internal and external networks to more and more individuals inside and outside their
domain. We have experienced a change in the shape of many enterprise deals. Specifically, enterprises are buying for their immediate need and then adding to their purchases as the projects begin to roll out.

Our largest vertical within the enterprise market is the financial services vertical. In the third quarter of 2007, financial services accounted for 27% or product
revenue. Financial institutions are focused on FFIEC and other global compliance regulations, which we believe drove demand for our Risk-Based Authentication and messaging solutions.

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

Entrust has been a leader in securing digital identities and information for
years. In the fourth quarter of 2004, we introduced IdentityGuard which is our easy-to-use second factor of authentication solution. In third quarter of 2007, IdentityGuard product revenue was $1.1 million - its highest level of the year.
Transactions across enterprise, consumer and government customers achieved success by adding 28 new customers and 66 total paid transactions in the third quarter. We also signed a distribution agreement with Open Solutions to provide further
distribution reach for IdentityGuard. Open Solutions provides information management product platforms to banks, thrifts, credit unions and financial services organizations globally. Open Solutions has now over 170,000 licensed users of
IdentityGuard at 70 financial institutions.

As of September 30, 2007 we have over 9.0 million licensed users and have gone over $10.0 million in
total sales. IdentityGuards low cost point, its simplicity for the mass market, and its effectiveness in countering online theft and phishing, are the key drivers for the increased revenue growth we are experiencing. Along with the revenue
growth for second factor authentication, we are also seeing



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customers increasingly interested in data protection and encryption. With a combination of Entrust IdentityGuard, GetAccess and TruePass, customers can
accomplish authentication and role based access control, digital signature, and encryption from one solution provider.

In the first quarter of 2007, we
built on the success of our Entrust IdentityGuard platform with the introduction of the industrys first $5 one-time-passcode (OTP) security token. In the second quarter, we made the product commercially available and delivered our tokens to
our first customers. In the third quarter of 2007, we had 18 customers of our IdentityGuard tokens, which included a number of financial institutions that are just starting their rollout. Our biggest win in the quarter was receipt of a purchase
order from a large Asian financial institution. At that customer, we beat out the competition for a 3-year 500,000 token and software deployment. The low price point of the Entrust IdentityGuard Token is produced in conjunction with partner
ActivIdentity. Expedia was our first customer for the Entrust IdentityGuard Token, which leverages Entrusts versatile authentication platform. In addition to the OTP token, Entrust IdentityGuard customers enjoy a range of authentication
methods from a single platform. This provides unprecedented flexibility and choice customers currently do not have with existing OTP token vendors.

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

Our managed service is not our first entrance
into the services business. We have been helping our customers for years design, deploy and manage our solutions. We have also been successful in growing our SSL certificate business, which increased over 35% in the third quarter over last year.
With the introduction of the new Extended Validation SSL Certificates and Unified Communications Certificates we should be able to grow this business into 2008.

Entrust in the past has relied significantly on large deals in each quarter. We have over the past few years reduced this dependence, but they remain a significant portion of our product revenue on a quarterly basis. Our software revenue
from our top five customers in Q3, 2007 was approximately 9% of our total revenue in that quarter and we did have a product deal over $1 million in the quarter. These numbers were slightly outside our historical range, which is generally between 10%
and 25% of revenue from the top five customers and zero to four transactions over $1 million. We continue to be impacted from time to time on our software revenue by the timing of our customers buying process, which may include proof of
concepts, senior management reviews and budget delays that sometimes results in longer than anticipated sales cycles. We are also impacted by our customers recent buying behavior, which is to buy only for immediate need as opposed to making a
larger purchase in order to get a better discount. Any of these factors may impact our revenue on a quarterly basis.

Our management uses the following
metrics to measure performance:



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



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



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



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



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



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



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



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



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

BUSINESS OVERVIEW

During the third quarter of 2007, we continued our strategy of focusing on
core vertical and geographic markets. Revenues of $23.9 million represented less than a 1% decrease from the third quarter of 2006, and consisted of 34% product sales and 66% services and maintenance. Services and maintenance revenues increased 3%
from the third quarter of 2006, due to increased demand for both consulting services and support and maintenance services, while product revenues decreased 7% from the third quarter of 2006, driven by a lower average purchase value for product
transactions, despite an improved closure rate, compared to the same quarter of 2006. Net loss for the third quarter of 2007 was $1.5 million, or $0.02 per share, compared to net loss of $3.2 million, or $0.05 per share for the same period of 2006,
with total expenses decreasing 8% to $25.4 million. We used $3.0 million in cash flow from operations in the third quarter of 2007, compared to net cash generated from operations of $3.5 million in the same quarter of 2006. Entrust Emerging Growth
Products (Entrust IdentityGuard, Boundary Messaging and Fraud Detection) accounted for 23% of product revenue, which is a decrease of 43% from Q3, 2006 and an increase of 15% from Q2, 2007. Entrust Public Key Infrastructure (PKI) Products accounted
for 76% of product revenue, which is an increase of 50% from Q3, 2006 and a decrease of 3% from Q2, 2007. Entrust SSL Certificate Services revenues, a component of our PKI Product solutions suite, increased 35% over Q3, 2006 and 5% over Q2, 2007.
Entrust Single Sign-On Products accounted for 1% of product revenue, which is a decrease of 96% from Q3, 2006 and a decrease of 94% from Q2, 2007. Extended Government accounted for 45% and Extended Enterprise accounted for 55% of the product revenue
in the quarter. The financial vertical accounted for approximately 27% of third quarter 2007 product revenues, a decrease of 49% from Q3, 2006 and a decrease of 27% from Q2, 2007.

Other highlights from the third quarter of 2007 included:



| |  |  | The top five product transactions accounted for 9% of Q3, 2007 revenues. The average purchase size this quarter was $51,000, down from $83,000 in Q3, 2006 and down
from $61,000 in Q2, 2007. Total transactions in Q3, 2007 were 115, which is up from 86 in Q3, 2006, and up from 106 in Q2, 2007. Thirty-seven (or 32%) of the transactions were from new customers, an increase of 68% from Q3, 2006.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Entrust IdentityGuard transactions increased to 66 this quarter, up from 23 in Q3, 2006 and 39 in Q2, 2007. Entrust IdentityGuard product revenue decreased 38% from
Q3, 2006, but increased 28% from Q2, 2007.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Deferred revenue was $28.2 million, which is an increase of 13% from Q3, 2006 and a decrease of 1% from Q2, 2007. The deferred revenue increase from Q3, 2006 was
primarily the result of subscription bookings of $2.2 million and increases in support and maintenance renewals of $1.0 million.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We ended Q3, 2007 with $21.5 million in cash and marketable securities, which is down from $24.2 million at the end of Q2, 2007, and no debt.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We had one product transaction over $1 million in the quarter. However, product revenue from deals under $500 thousand decreased 23% from Q3, 2006 and 15% from Q2,
2007.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We announced the development of public key infrastructure (PKI) for the next generation of e-passport security, also known as Extended Access Control (EAC). EAC
provides a higher level of security during the verification process of e-passports. These next-generation e-passports will be required by all member European Union (EU) nations by June 2009. As a leader in PKI deployment, we provide e-passport
security for a number of top e-governments in the world, including the U.S., U.K., Slovenia, Singapore and New Zealand.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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CRITICAL ACCOUNTING POLICIES

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

In the first three quarters of 2007, our most complex accounting judgments were made in the areas of software revenue recognition, allowance for doubtful accounts, the
provision for income taxes, accounting for uncertain tax positions, valuation of goodwill, purchased intangibles and other long-term assets, and stock-based compensation. These areas are expected to continue to be ongoing elements of our critical
accounting processes and judgments.

Software Revenue Recognition

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

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

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

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

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



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

For arrangements involving multiple elements, we allocate revenue to each component based on the vendor-specific objective evidence of the fair value of
the various elements. These elements may include two or more of the following: software licenses, maintenance and support, consulting services and training. For arrangements where vendor-specific objective evidence is not available for a delivered
element, we first allocate the arrangement fee to the undelivered elements based on the total fair value of those undelivered elements, as indicated by vendor-specific objective evidence. This portion of the arrangement fee is deferred. Then the
difference (residual) between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. We attribute the discount offered in a multiple-element arrangement entirely to
the delivered elements of the transaction, which are typically software licenses. Fair values for the future maintenance and support services are based upon substantially similar sales of renewals of maintenance and support contracts to other
customers. Fair value of future services, training or consulting services is based upon substantially similar sales of these services to other customers. In some instances, a group of contracts or agreements with the same customer may be so closely
related that they are, in effect, part of a single multiple-element arrangement, and therefore, we would undertake to allocate the corresponding revenues amongst the various components, as described above.

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

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

Allowance for Doubtful Accounts

We maintain doubtful accounts allowances for estimated losses resulting from the inability of our customers to make required payments. We assess collection based on a
number of factors, including previous transactions with the customer and the creditworthiness of the customer. We do not request collateral from our customers.

We base our ongoing estimate of allowance for doubtful accounts primarily on the aging of the balances in the accounts receivable, our historical collection patterns and changes in the creditworthiness of our customers. Based upon the
analysis and estimates of the uncollectibility of our accounts receivable, we record an increase in the allowance for doubtful accounts when the prospect of not collecting a specific account receivable becomes probable. The allowance for doubtful
accounts is established based on the best information available to us and is re-evaluated and adjusted as additional information is received. We exhaust all avenues and methods of collection, including the use of third party collection agencies,
before writing-off a customer balance as uncollectible. While credit losses have historically been within our



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expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past.
Each circumstance in which we conclude that a provision for non-payment by a customer may be required must be carefully considered in order to determine the true factors leading to that potential non-payment to ensure that it is proper for it to be
categorized as an allowance for bad debts.

However, a significant change in the financial condition of a major customer, such as the European distributor
discussed below, could have a material impact on our estimates regarding the sufficiency of our allowance. Our accounts receivable include material balances from a limited number of customers, with five customers accounting for 25% of gross accounts
receivable at September 30, 2007, compared to 23% of gross accounts receivable at September 30, 2006. One customer accounted for 10% of net accounts receivable at September 30, 2007. For more information on our customer concentration,
see our related discussion in Risk Factors. Therefore, changes in the assumptions underlying this assessment or changes in the financial condition of our customers, resulting in an impairment of their ability to make payments, and the
timing of information related to the change in financial condition could result in a different assessment of the existing credit risk of our accounts receivable and thus, a different required allowance, which could have a material impact on our
reported earnings.

During 2006, we became aware of financial concerns regarding one of our European distributors and, as a result, we concluded that it
was necessary to record an increase to our provision for doubtful accounts of $0.9 million, which accounted for the majority of the increase in this provision for that year. These balances remain outstanding and, as a result, the allowance for
doubtful accounts remains substantially unchanged from the end of 2006 for these items, other than to adjust for the effect of changes in foreign exchange rates. However, the allowance for doubtful accounts has increased by approximately $400
thousand in the first nine months of 2007 to provide for miscellaneous accounts that have continued to age from the end of 2006 and the earlier quarters of 2007.

Provision for Income Taxes

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

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and
liabilities and any valuation allowance recorded against deferred tax assets. We recorded a valuation allowance of $147.9 million as of December 31, 2006, which offsets deferred income tax assets relating to United States and foreign net
operating loss (NOL) and tax credit carry-forwards in the amount of $122.1 million and $25.8 million of deferred tax assets resulting from temporary differences. This valuation allowance represents the full value of our
deferred tax assets, due to uncertainties related to our ability to utilize our deferred tax assets as a result of our recent history of financial losses. Therefore, our balance sheet includes no net deferred tax benefits related to these deferred
tax assets. Valuation allowances are provided against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income and the timing of the temporary differences becoming deductible. We consider, among other available information, historical earnings, scheduled reversals of deferred tax
liabilities, projected future taxable income, prudent and feasible tax planning strategies and other matters in making this assessment. Until an appropriate level of profitability is sustained, we expect to continue to record a full valuation
allowance and will not record any benefit from the deferred tax assets.



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Accounting for Uncertain Tax Positions

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

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

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

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

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

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

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

Purchased product
rights, customer relationships, partner relationships and non-competition agreements of key personnel of acquired companies totaling $12.2 million at September 30, 2007 are amortized using the straight-line method over their estimated useful
lives, generally four to ten years. These assets are reviewed for impairment whenever events indicate that their carrying amount may not be recoverable. In such reviews, the related expected undiscounted cash flows are compared with their carrying
values to determine if a write-down to fair value is required. These reviews required significant judgment and estimation regarding the amount and timing of future revenues and related expenses associated with these acquired assets.



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

In addition, we have a net balance of $3.8 million from our
investment in other long-term assets at September 30, 2007, which consist primarily of capitalized software development costs, which includes costs to develop video based training, for both general security and Entrust specific solutions, for
sale to our customers. These capitalized costs are amortized ratably as the underlying revenues are recognized on sales of capitalized software or over a three year period. The economic useful life of these capitalized software development costs is
periodically re-assessed.

Stock-Based Compensation

Our stock award program is a broad-based, long-term retention program that is intended to contribute to our success by attracting, retaining and motivating talented employees and to align employee interests with the interests of our
existing shareholders. Stock based awards may be granted to employees when they first join us, when there is a significant change in an employees responsibilities and, occasionally, to achieve equity within a peer group. Stock based awards may
also be granted in specific circumstances for retention or reward purposes. The Compensation Committee of the Board of Directors may, however, grant additional awards to executive officers and key employees for other reasons. Under the stock based
award plans, the participants may be granted options to purchase shares of Common stock and substantially all of our employees and directors participate in at least one of our plans. Options issued under these plans generally are granted at fair
market value at the date of grant and become exercisable at varying rates, generally over three or four years. Options issued before April 29, 2005 generally expire ten years from the date of grant; awards issued on or after April 29, 2005
generally expire seven years from the date of grant.

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

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

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

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



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

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

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

For the three and nine months ended
September 30, 2007 compensation expense of $1.3 million and $4.1 million, respectively, was recognized for stock options, RSUs and SARs. Total remaining compensation estimated to be recognized over the remaining service periods for these awards
is $6.2 million. This compensation cost included estimation of expected forfeitures. Forfeiture estimations are based on analysis of historical forfeiture rates.

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

RECENTLY ISSUED ACCOUNTING STANDARDS

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

On February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities:
Including an amendment of FASB Statement No. 115, to reduce earnings volatility caused by related assets and liabilities measured differently under GAAP. SFAS No. 159 allows all entities to make an irrevocable
instrument-by-instrument election to measure eligible items at fair value in their entirety. In addition, unrealized gains and losses will be reported in earnings at each reporting date. SFAS No. 159 also establishes presentation and disclosure
requirements that focus on providing information



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about the impact of electing the fair value option. SFAS No. 159 is effective as of the beginning of the first fiscal year that begins after
November 15, 2007, concurrent with the adoption of SFAS No. 157. We do not anticipate that the adoption of SFAS No. 159 will have a significant impact on our consolidated financial position, results of operations or cash flows.

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

RESULTS OF OPERATIONS

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



|                                                         |  |                                 |    |  |                                |    |  |       |    |  |       |   
|-------------------------------------------------------- |  | ------------------------------- | -- |  | ------------------------------ | -- |  | ----- | -- |  | ----- | --
|                                                         |  | Three months endedSeptember 30, |    |  | Nine months endedSeptember 30, |   
|                                                         |  | 2007                            |    |  | 2006                           |    |  | 2007  |    |  | 2006  |   
|Revenues:                                                |  |                                 |    |  |                                |    |  |       |    |  |       |   
|Product                                                  |  | 34.1                            | %  |  | 36.6                           | %  |  | 36.0  | %  |  | 33.9  | % 
|Services and maintenance                                 |  | 65.9                            |    |  | 63.4                           |    |  | 64.0  |    |  | 66.1  |   
|                                                         |  |                                 |    |  |                                |    |  |       |    |  |       |   
|Total revenues                                           |  | 100.0                           |    |  | 100.0                          |    |  | 100.0 |    |  | 100.0 |   
|                                                         |  |                                 |    |  |                                |    |  |       |    |  |       |   
|Cost of revenues:                                        |  |                                 |    |  |                                |    |  |       |    |  |       |   
|Product                                                  |  | 7.6                             |    |  | 5.2                            |    |  | 7.9   |    |  | 6.6   |   
|Services and maintenance                                 |  | 30.1                            |    |  | 30.2                           |    |  | 30.7  |    |  | 32.3  |   
|Amortization of purchased product rights                 |  | 1.5                             |    |  | 1.3                            |    |  | 1.4   |    |  | 1.1   |   
|                                                         |  |                                 |    |  |                                |    |  |       |    |  |       |   
|Total cost of revenues                                   |  | 39.2                            |    |  | 36.7                           |    |  | 40.0  |    |  | 40.0  |   
|                                                         |  |                                 |    |  |                                |    |  |       |    |  |       |   
|Gross profit                                             |  | 60.8                            |    |  | 63.3                           |    |  | 60.0  |    |  | 60.0  |   
|                                                         |  |                                 |    |  |                                |    |  |       |    |  |       |   
|                                                         |  |                                 |    | 
|Operating expenses:                                      |  |                                 |    |  |                                |    |  |       |    |  |       |   
|Sales and marketing                                      |  | 34.3                            |    |  | 40.4                           |    |  | 35.8  |    |  | 36.4  |   
|Research and development                                 |  | 20.6                            |    |  | 22.9                           |    |  | 21.4  |    |  | 21.1  |   
|General and administrative                               |  | 12.2                            |    |  | 14.3                           |    |  | 12.9  |    |  | 15.8  |   
|Restructuring charges and adjustments                    |  |                                |    |  |                               |    |  |      |    |  | 4.1   |   
|                                                         |  |                                 |    |  |                                |    |  |       |    |  |       |   
|Total operating expenses                                 |  | 67.1                            |    |  | 77.6                           |    |  | 70.1  |    |  | 77.4  |   
|                                                         |  |                                 |    |  |                                |    |  |       |    |  |       |   
|Loss from operations                                     |  | (6.3                            | )  |  | (14.3                          | )  |  | (10.1 | )  |  | (17.4 | ) 
|                                                         |  |                                 |    |  |                                |    |  |       |    |  |       |   
|Other income (expense):                                  |  |                                 |    |  |                                |    |  |       |    |  |       |   
|Interest income                                          |  | 0.8                             |    |  | 1.5                            |    |  | 0.7   |    |  | 2.9   |   
|Foreign exchange gain (loss)                             |  | (0.4                            | )  |  |                               |    |  |      |    |  | (0.4  | ) 
|Loss from equity investments                             |  |                                |    |  | (0.2                           | )  |  | (0.1  | )  |  | (0.5  | ) 
|Write-down of long-term strategic and equity investments |  |                                |    |  |                               |    |  |      |    |  | (4.5  | ) 
|                                                         |  |                                 |    |  |                                |    |  |       |    |  |       |   
|Total other income (expense)                             |  | 0.4                             |    |  | 1.3                            |    |  | 0.6   |    |  | (2.5  | ) 
|                                                         |  |                                 |    |  |                                |    |  |       |    |  |       |   
|Loss before income taxes                                 |  | (5.9                            | )  |  | (13.0                          | )  |  | (9.5  | )  |  | (19.9 | ) 
|Provision for income taxes                               |  | 0.4                             |    |  | 0.5                            |    |  | 0.3   |    |  | 0.5   |   
|                                                         |  |                                 |    |  |                                |    |  |       |    |  |       |   
|Net loss                                                 |  | (6.3                            | )% |  | (13.5                          | )% |  | (9.8  | )% |  | (20.4 | )%
|                                                         |  |                                 |    |  |                                |    |  |       |    |  |       |   



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REVENUES



|                      |  |                                 |      |                                |   |                   |  |      |      |                                |   |      |                               |    |   |  |   |  
|--------------------- |  | ------------------------------- | ---- | ------------------------------ | - | ----------------- |  | ---- | ---- | ------------------------------ | - | ---- | ----------------------------- | -- | - |  | - | -
|                      |  | Three months endedSeptember 30, |      | Nine months endedSeptember 30, |   | Percentage change | 
|(millions)            |  | 2007                            |      | 2006                           |   | 2007              |  | 2006 |      | Three months endedSeptember 30 |   |      | Nine months endedSeptember 30 |   
|North America         |  | $                               | 16.5 |                                | $ | 16.8              |  | $    | 51.6 |                                | $ | 47.5 |                               | -2 | % |  | 9 | %
|Outside North America |  |                                 | 7.4  |                                |   | 7.2               |  |      | 21.4 |                                |   | 19.7 |                               | 3  | % |  | 9 | %
|                      |  |                                 |      |                                |   |                   |  |      |      |                                |   |      |                               |    |   |  |   |  
|Total                 |  | $                               | 23.9 |                                | $ | 24.0              |  | $    | 73.0 |                                | $ | 67.2 |                               |   | % |  | 9 | %
|                      |  |                                 |      |                                |   |                   |  |      |      |                                |   |      |                               |    |   |  |   |  

Our total revenues were $23.9 million for the three months ended September 30, 2007, which remained
effectively unchanged from the $24.0 million of total revenues for the three months ended September 30, 2006. Total revenues were $73.0 million for the nine months ended September 30, 2007, which represented an increase of 9% from the
$67.2 million of total revenues for the nine months ended September 30, 2006.

The overall increase in total revenues for the nine months ended
September 30, 2007, when compared to the same period of 2006, was driven primarily by product revenue, which was up 15% for the first nine months, with a 34% and 55% increase in customer transactions for the three and nine months ended
September 30, 2007, respectively. This growth was shared across all major geographic segments and related primarily to the Emerging growth and Public Key Infrastructure (PKI) product categories. Emerging growth products increased 5% in the
first nine months of 2007 compared to the same period last year, while PKI product revenue increased 26% in the first nine months of 2007 compared to the same period of 2006. In addition, our overall services and maintenance revenues continue to
improve, with these revenues increasing 5% in the first three quarters of 2007, compared to the same period last year. However, the pace of growth of revenues slowed in the third quarter, primarily due to a reduced average transaction value for
product deals when compared to the same quarter of last year. For the three and nine months ended September 30, 2007, extended government revenues in the United States were $4.7 million and $14.8 million, respectively, compared to $4.5 million
and $12.9 million for the same periods in 2006, representing a 4% increase and a 15% increase, respectively. The United States and Canadian governments represented 16% and 8% of total revenues in the third quarter of 2007, respectively, when
including revenues sold through resellers to the government end users. However, direct sales to the United States and Canadian governments represented 10% and 4% of total revenues in the third quarter of 2007, respectively. Overall, the United
States and Canadian governments represented 16% and 10% of total revenues for the first nine months of 2007, when including revenues sold through resellers to the government end users. However, direct sales to the United States and Canadian
governments represented 11% and 8% of total revenues for the first nine months of 2007. No other individual customer accounted for 10% or more of total revenues in the three and nine months ended September 30, 2007.

The level of non-North American revenues has fluctuated from period to period and this trend is expected to continue for the foreseeable future. We believe the improved
revenues for the nine months ended September 30, 2007, compared to the same period in 2006, reflects the strength of our evolving product portfolio, distribution network, strong customer relationships and the quality of our support and
services.

Product Revenues



|                             |  |                                 |     |   |                                |   |     |                   |  |   |      |   |  |                                |      |   |                               |     |   |  |    |  
|---------------------------- |  | ------------------------------- | --- | - | ------------------------------ | - | --- | ----------------- |  | - | ---- | - |  | ------------------------------ | ---- | - | ----------------------------- | --- | - |  | -- | -
|                             |  | Three months endedSeptember 30, |     |   | Nine months endedSeptember 30, |   |     | Percentage change | 
|(millions)                   |  | 2007                            |     |   | 2006                           |   |     | 2007              |  |   | 2006 |   |  | Three months endedSeptember 30 |      |   | Nine months endedSeptember 30 |    
|North America                |  | $                               | 5.0 |   |                                | $ | 5.7 |                   |  | $ | 17.6 |   |  | $                              | 15.8 |   |                               | -12 | % |  | 11 | %
|Outside North America        |  |                                 | 3.2 |   |                                |   | 3.1 |                   |  |   | 8.6  |   |  |                                | 7.0  |   |                               | 3   | % |  | 23 | %
|                             |  |                                 |     |   |                                |   |     |                   |  |   |      |   |  |                                |      |   |                               |     |   |  |    |  
|Total                        |  | $                               | 8.2 |   |                                | $ | 8.8 |                   |  | $ | 26.2 |   |  | $                              | 22.8 |   |                               | -7  | % |  | 15 | %
|                             |  |                                 |     |   |                                |   |     |                   |  |   |      |   |  |                                |      |   |                               |     |   |  |    |  
|Percentage of total revenues |  |                                 | 34  | % |                                |   | 37  | %                 |  |   | 36   | % |  |                                | 34   | % |                               |     |   |  |    |  
|                             |  |                                 |     |   |                                |   |     |                   |  |   |      |   |  |                                |      |   |                               |     |   |  |    |  



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Product revenues of $8.2 million for the three months ended September 30, 2007 represented a decrease of 7% from the
$8.8 million for the three months ended September 30, 2006, representing 34% and 37% of total revenues in the respective periods. Product revenues of $26.2 million for the nine months ended September 30, 2007 represented an increase of 15%
from the $22.8 million for the nine months ended September 30, 2006, representing 36% and 34% of total revenues in their respective periods.

The
increase in product revenues for the first nine months ended September 30, 2007, when compared to the same period in 2006 is due to growth in our PKI and Emerging growth (IdentityGuard, Boundary Messaging and Fraud Detection) product
categories. In particular, our PKI revenue, which represented 76% and 72% of product revenues in the three and nine months ended September 30, 2007, increased 26% year-to-date over the same period of last year. The key drivers of PKI growth
have been the growth of our SSL certificate business which was up 28% year-to-date and 35% over the third quarter of last year, while our core PKI product revenue is up 64% year-to-date and 171% over the third quarter of last year. PKI is
experiencing a resurgence of interest in digital certificates for authentication and the growing need to encrypt information both at rest and in transit, with strong authentication of secure messaging continuing to be the key revenue drivers. Also,
we experienced improved interest in our government solutions in the first nine months of 2007, with $9.2 million of product revenues from Extended Government organizations during the first three quarters of 2007, compared to $7.9 million for the
same period of 2006. We believe we are well positioned to address the global government opportunity in digital credentials for ePassports, eBorders, National ID cards, government employee credentials and PKI digital certificates and infrastructure.
However, we did experience a slow down of product revenues growth in the third quarter of 2007. This was primarily due to a reduction in the average value of product transactions in the third quarter compared to the same quarter of last year,
despite an increase in the total number of product revenue transactions.

We had 115 product revenue transactions (a product revenue transaction is defined
as an IdentityGuard product sale of any size plus all other product sales in excess of $10 thousand) in the third quarter of 2007, up from 86 in the same quarter of 2006, or a 34% increase, with 32% of the transactions in the third quarter of 2007
being from new customers. Overall, we had 334 product revenue transactions in the first nine months of 2007, up from 216 in the same period of 2006, or a 55% increase, with 27% of the transactions in the first nine months of 2007 being from new
customers. However, the average product revenue transaction size decreased from $83 thousand for the third quarter 2006 to $51 thousand for the same period of 2007, or a decrease of 39%, while the average product transaction size decreased 30% to
$58 thousand for the nine months ended September 30, 2007 from $83 thousand for the same period in 2006. This downward trend in transaction size is due to a shift in our product mix toward our lower cost emerging growth products. However,
growth in deals under $500 thousand is fueling our overall top line product revenue growth year-to-date. Revenue from deals under $500 thousand increased 18% over the first nine months of 2006, which we believe speaks well of the underlying strength
of our portfolio and the balance we are starting to see in product revenue performance. We would expect transaction levels to remain high going forward and the trend of lower average deal size to continue in the coming quarters. In general, the
top-five average quarterly product revenue transactions as a percentage of total revenues decreased from 13% for the first nine months of 2006 to 9% for the same period in 2007.

While product revenues as a percentage of total revenues decreased for the third quarter of 2007, compared to the same period in 2006, due to lighter demand for product solutions relative to the demand for our
services and maintenance in the quarter, the product revenues as a percentage of total revenues increased for the nine months ended September 30, 2007, compared to the same period in 2006, due to improved overall demand for products, relative
to the demand for services.



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Services and Maintenance Revenues



|                             |  |                                 |      |   |                                |   |      |                   |  |   |      |   |  |                                |      |   |                               |   |   |  |   |  
|---------------------------- |  | ------------------------------- | ---- | - | ------------------------------ | - | ---- | ----------------- |  | - | ---- | - |  | ------------------------------ | ---- | - | ----------------------------- | - | - |  | - | -
|                             |  | Three months endedSeptember 30, |      |   | Nine months endedSeptember 30, |   |      | Percentage change | 
|(millions)                   |  | 2007                            |      |   | 2006                           |   |      | 2007              |  |   | 2006 |   |  | Three months endedSeptember 30 |      |   | Nine months endedSeptember 30 |  
|North America                |  | $                               | 11.6 |   |                                | $ | 11.1 |                   |  | $ | 33.9 |   |  | $                              | 31.7 |   |                               | 5 | % |  | 7 | %
|Outside North America        |  |                                 | 4.2  |   |                                |   | 4.1  |                   |  |   | 12.9 |   |  |                                | 12.7 |   |                               | 2 | % |  | 2 | %
|                             |  |                                 |      |   |                                |   |      |                   |  |   |      |   |  |                                |      |   |                               |   |   |  |   |  
|Total                        |  | $                               | 15.8 |   |                                | $ | 15.2 |                   |  | $ | 46.8 |   |  | $                              | 44.4 |   |                               | 4 | % |  | 5 | %
|                             |  |                                 |      |   |                                |   |      |                   |  |   |      |   |  |                                |      |   |                               |   |   |  |   |  
|Percentage of total revenues |  |                                 | 66   | % |                                |   | 63   | %                 |  |   | 64   | % |  |                                | 66   | % |                               |   |   |  |   |  
|                             |  |                                 |      |   |                                |   |      |                   |  |   |      |   |  |                                |      |   |                               |   |   |  |   |  

Services and maintenance revenues of $15.8 million for the three months ended September 30, 2007 represented
an increase of 4% from the $15.2 million for the three months ended September 30, 2006, representing 66% and 63% of total revenues in the respective periods. Services and maintenance revenues of $46.8 million for the nine months ended
September 30, 2007 represented an increase of 5% from the $44.4 million for the nine months ended September 30, 2006, representing 64% and 66% of total revenues in the respective periods.

The increase in services and maintenance revenues for the three and nine months ended September 30, 2007 compared to the same periods in 2006 is due mainly to
improved support and maintenance revenues, which now accounts for nearly two-thirds of our services revenue. In addition, our professional services business was strong across the board geographically, while our customers continued to renew their
support agreements at a rate of 95% for the first nine months of 2007. While services and maintenance revenues as a percentage of total revenues for the third quarter of 2007 increased due to the slow down in product revenue demand compared to the
same quarter of last year, services and maintenance revenues as a percentage of total revenues for the first nine months of 2007 increased in comparison to the same period of 2006 primarily because of the overall stronger demand for our product
offerings, despite improved services and maintenance revenues.

EXPENSES

Total Expenses



|                             |  |                                 |      |   |                                |   |      |                   |  |   |      |   |  |                                |      |   |                               |    |   |  |   |  
|---------------------------- |  | ------------------------------- | ---- | - | ------------------------------ | - | ---- | ----------------- |  | - | ---- | - |  | ------------------------------ | ---- | - | ----------------------------- | -- | - |  | - | -
|                             |  | Three months endedSeptember 30, |      |   | Nine months endedSeptember 30, |   |      | Percentage change | 
|(millions)                   |  | 2007                            |      |   | 2006                           |   |      | 2007              |  |   | 2006 |   |  | Three months endedSeptember 30 |      |   | Nine months endedSeptember 30 |   
|Total expenses               |  | $                               | 25.4 |   |                                | $ | 27.5 |                   |  | $ | 80.4 |   |  | $                              | 78.9 |   |                               | -8 | % |  | 2 | %
|                             |  |                                 |      |   |                                |   |      |                   |  |   |      |   |  |                                |      |   |                               |    |   |  |   |  
|Percentage of total revenues |  |                                 | 106  | % |                                |   | 115  | %                 |  |   | 110  | % |  |                                | 117  | % |                               |    |   |  |   |  
|                             |  |                                 |      |   |                                |   |      |                   |  |   |      |   |  |                                |      |   |                               |    |   |  |   |  

Total expenses consist of costs of revenues associated with products and services and maintenance, amortization of
purchased products rights and operating expenses associated with sales and marketing, research and development, general and administrative and restructuring charges and adjustments. Total expenses of $25.4 million and $80.4 million for the three and
nine months ended September 30, 2007, respectively, represented a decrease of 8% and an increase of 2% in each of the respective periods. The decrease in the three months ended September 30, 2007, compared to the same period in 2006, was
primarily due to an overall headcount reduction of 11% combined with lower costs associated with marketing programs, despite higher reported expenses of $1.0 million due to an unfavorable shift in the exchange rates between Canada and the U.S. The
increase in total expenses for the nine months ended September 30, 2007, compared to 2006, was due primarily to the impact of additional costs associated with employee compensation, primarily in sales and research and development as a result of
acquisitions, increased non-cash expenses for stock based compensation and amortization of purchased intangibles, third-party royalties on product revenues and an unfavorable shift in the exchange rates between Canada and the U.S. of $1.5 million
for the year to date, offset by a $2.8 million restructuring charge in the first quarter of 2006 related to the sublease on our Santa Clara, California facility. As of September 30, 2007 we had 459 full-time employees globally, compared to 515
full-time employees at September 30, 2006 and 503 full-time employees at December 31, 2006.



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COST OF REVENUES

Cost of Product Revenues



|                               |  |                                 |     |   |                                |   |     |                   |  |   |      |   |  |                                |     |   |                               |    |   |  |    |  
|------------------------------ |  | ------------------------------- | --- | - | ------------------------------ | - | --- | ----------------- |  | - | ---- | - |  | ------------------------------ | --- | - | ----------------------------- | -- | - |  | -- | -
|                               |  | Three months endedSeptember 30, |     |   | Nine months endedSeptember 30, |   |     | Percentage change | 
|(millions)                     |  | 2007                            |     |   | 2006                           |   |     | 2007              |  |   | 2006 |   |  | Three months endedSeptember 30 |     |   | Nine months endedSeptember 30 |   
|Cost of product revenues       |  | $                               | 1.8 |   |                                | $ | 1.2 |                   |  | $ | 5.8  |   |  | $                              | 4.4 |   |                               | 50 | % |  | 32 | %
|                               |  |                                 |     |   |                                |   |     |                   |  |   |      |   |  |                                |     |   |                               |    |   |  |    |  
|Percentage of product revenues |  |                                 | 22  | % |                                |   | 14  | %                 |  |   | 22   | % |  |                                | 19  | % |                               |    |   |  |    |  
|                               |  |                                 |     |   |                                |   |     |                   |  |   |      |   |  |                                |     |   |                               |    |   |  |    |  

Cost of product revenues consists primarily of costs associated with our SSL and managed PKI businesses, product
media, documentation, packaging and royalties to third-party software vendors. Cost of product revenues was $1.8 million for the three months ended September 30, 2007, which represented a 50% increase from $1.2 million for the three months
ended September 30, 2006, representing 22% and 14% of product revenues in each of the respective periods. Cost of product revenues of $5.8 million for the nine months ended September 30, 2007 represented a 32% increase from $4.4 million
for the nine months ended September 30, 2006, which represented 22% and 19% of product revenues in their respective periods. The increase in the cost of product revenues in absolute dollars and as a percentage of total product revenues for the
three and nine months ended September 30, 2007, compared to the same periods in 2006, was primarily due to a shift in product sales mix towards products that incorporate third party technologies relative to the prior year. Also, we invested in
additional staffing for our SSL and managed PKI businesses. The mix of third-party products and the relative gross margins achieved with respect to these products may vary from period to period and from transaction to transaction and, consequently,
our gross margins and results of operations could be adversely affected.

Cost of Services and Maintenance Revenues



|                                                |  |                                 |     |   |                                |   |     |                   |  |   |      |   |  |                                |      |   |                               |    |   |  |   |  
|----------------------------------------------- |  | ------------------------------- | --- | - | ------------------------------ | - | --- | ----------------- |  | - | ---- | - |  | ------------------------------ | ---- | - | ----------------------------- | -- | - |  | - | -
|                                                |  | Three months endedSeptember 30, |     |   | Nine months endedSeptember 30, |   |     | Percentage change | 
|(millions)                                      |  | 2007                            |     |   | 2006                           |   |     | 2007              |  |   | 2006 |   |  | Three months endedSeptember 30 |      |   | Nine months endedSeptember 30 |   
|Cost of services and maintenance revenues       |  | $                               | 7.2 |   |                                | $ | 7.3 |                   |  | $ | 22.4 |   |  | $                              | 21.7 |   |                               | -1 | % |  | 3 | %
|                                                |  |                                 |     |   |                                |   |     |                   |  |   |      |   |  |                                |      |   |                               |    |   |  |   |  
|Percentage of services and maintenance revenues |  |                                 | 46  | % |                                |   | 48  | %                 |  |   | 48   | % |  |                                | 49   | % |                               |    |   |  |   |  
|                                                |  |                                 |     |   |                                |   |     |                   |  |   |      |   |  |                                |      |   |                               |    |   |  |   |  

Cost of services and maintenance revenues consists primarily of personnel costs associated with customer support,
training and consulting services, as well as amounts paid to third-party consulting firms for those services. Cost of services and maintenance revenues was $7.2 million for the three months ended September 30, 2007, which represented a 1%
decrease from $7.3 million for the three months ended September 30, 2006, representing 30% of total revenues for each of the respective periods. Cost of services and maintenance revenues was $22.4 million for the nine months ended
September 30, 2007, which represented a 3% increase from $21.7 million for the nine months ended September 30, 2006, representing 31% and 32% of total revenues for each of the respective periods.



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|                              |  |                                    |      |                               |   |     
|----------------------------- |  | ---------------------------------- | ---- | ----------------------------- | - | ----
|                              |  | Year over year change 2007 to 2006
|(millions)                    |  | Three months endedSeptember 30     |      | Nine months endedSeptember 30
|Third party hardware          |  | $                                  | 0.3  |                               | $ | 0.4 
|Outside professional services |  |                                    |     |                               |   | -0.5
|Staff related costs           |  |                                    | -0.4 |                               |   | 0.8 
|                              |  |                                    |      |                               |   |     
|                              |  | $                                  | -0.1 |                               | $ | 0.7 
|                              |  |                                    |      |                               |   |     

The decrease in the cost of services and maintenance revenues for the three months ended September 30, 2007,
compared to the same period in 2006, was the net result of increased third party hardware costs, offset by decreased staff related costs. The decreased staff related costs are due to a 4% headcount reduction achieved by way of the synergies gained
with the acquired companies of Orion and Business Signatures. The increase in the cost of services and maintenance revenues for the nine months ended September 30, 2007, compared to the same period in 2006, can be attributed primarily to the
increased staff related costs. This was due in large part to the professional services employee resources added as a result of the acquisition of Orion in June 2006 and Business Signatures in July 2006, as well as increased stock based compensation
expense. These additional internal staff resources also allowed for the reduced usage of outside subcontractors in the first nine months of 2007 compared to the prior year. In addition, we have experienced an unfavorable shift in the exchange rates
between Canada and the U.S., which had resulted in higher reported expenses of $0.2 million and $0.3 million in the three and nine months ended September 30, 2007, respectively. The decrease in services and maintenance expenses as a percentage
of total revenues for the nine months ended September 30, 2007 was the net result of higher total revenues, which accounted for a two-percentage point decrease, when compared to the same period in 2006, offset by increased overall services and
maintenance expenses, which resulted in a one-percentage point increase in the services and maintenance expenses as a percentage of total revenues.

Services and maintenance gross profit as a percentage of services and maintenance revenues was 54% and 52% for the three months ended September 30, 2007 and 2006, respectively. Services and maintenance gross profit as a percentage of
services and maintenance revenues was 52% and 51% for the nine months ended September 30, 2007 and 2006, respectively. The improvement in services and maintenance gross profit as a percentage of services and maintenance revenues in both the
three and nine months ended September 30, 2007, compared to the same periods in 2006, was primarily due to higher support and maintenance margins of 2% and 1%, respectively.

We plan to continue to optimize the utilization of existing professional services resources, while addressing incremental customer opportunities that may arise with the help of partners and other sub-contractors,
until an investment in additional full-time resources is justifiable. This plan may have an adverse impact on the gross profit for services and maintenance, as the gross profit realized by using partners and sub-contractors is generally lower. The
mix and volume of services and maintenance revenues may vary from period to period and from transaction to transaction, which will also affect our gross margins and results of operations.

OPERATING EXPENSES

Operating ExpensesSales and
Marketing



|                             |  |                                 |     |   |                                |   |     |                   |  |   |      |   |  |                                |      |   |                               |     |   |  |   |  
|---------------------------- |  | ------------------------------- | --- | - | ------------------------------ | - | --- | ----------------- |  | - | ---- | - |  | ------------------------------ | ---- | - | ----------------------------- | --- | - |  | - | -
|                             |  | Three months endedSeptember 30, |     |   | Nine months endedSeptember 30, |   |     | Percentage change | 
|(millions)                   |  | 2007                            |     |   | 2006                           |   |     | 2007              |  |   | 2006 |   |  | Three months endedSeptember 30 |      |   | Nine months endedSeptember 30 |    
|Sales and marketing expenses |  | $                               | 8.2 |   |                                | $ | 9.7 |                   |  | $ | 26.1 |   |  | $                              | 24.4 |   |                               | -15 | % |  | 7 | %
|                             |  |                                 |     |   |                                |   |     |                   |  |   |      |   |  |                                |      |   |                               |     |   |  |   |  
|Percentage of total revenues |  |                                 | 34  | % |                                |   | 40  | %                 |  |   | 36   | % |  |                                | 36   | % |                               |     |   |  |   |  
|                             |  |                                 |     |   |                                |   |     |                   |  |   |      |   |  |                                |      |   |                               |     |   |  |   |  

Sales and marketing expenses decreased 15% to $8.2 million for the three months ended September 30, 2007 from
$9.7 million for the comparable period in 2006. For the nine months ended September 30, 2007, sales and marketing expenses increased 7% to $26.1 million from $24.4 million for the comparable period



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in 2006. Sales and marketing expenses represented 34% and 36% of total revenues for the three and nine months ended September 30, 2007, respectively,
compared to 40% and 36 % for the three and nine months ended September 30, 2006, respectively.



|                                                 |  |                                    |      |                                |   |     
|------------------------------------------------ |  | ---------------------------------- | ---- | ------------------------------ | - | ----
|                                                 |  | Year over year change 2007 to 2006
|(millions)                                       |  | Three months ended September 30    |      | Nine months ended September 30
|Facilities related costs                         |  | $                                  |     |                                | $ | 0.3 
|Outside professional services                    |  |                                    |     |                                |   | 0.2 
|Staff related costs (includes travel and living) |  |                                    | -0.4 |                                |   | 2.7 
|Marketing programs                               |  |                                    | -1.0 |                                |   | -1.3
|Amortization of purchased intangibles            |  |                                    |     |                                |   | 0.4 
|Bad debt expense                                 |  |                                    | -0.1 |                                |   | -0.6
|                                                 |  |                                    |      |                                |   |     
|                                                 |  | $                                  | -1.5 |                                | $ | 1.7 
|                                                 |  |                                    |      |                                |   |     

The decrease in sales and marketing expenses for the three months ended September 30, 2007, compared to the
same period of 2006, primarily reflects the decreased activity in marketing programs related to advertising and an 11% headcount reduction between these two periods largely due to absorption of staff from acquired companies. The increase in sales
and marketing expenses for the nine months ended September 30, 2007, compared to the same period of 2006, was primarily due to higher staff related costs and purchased intangibles amortization associated with the Business Signatures acquisition
and investments made to grow the sales force to ensure we can handle the increased transaction load going forward. Sales and marketing headcount increased 12% overall year-to-date when compared to the same period one year ago, resulting in increased
salaries and benefits expense, including sales commissions, of $2.7 million for the nine months ended September 30, 2007 when compared to the same period of 2006 and increased facilities costs. Offsetting these increases were reductions in bad
debt expense and marketing programs spending in the nine months ended September 30, 2007. In addition, we have experienced an unfavorable shift in the exchange rates between Canada and the U.S., which resulted in higher reported sales and
marketing expenses of $0.3 million and $0.6 million in the three and nine months ended September 30, 2007, respectively. The decrease in sales and marketing expenses as a percentage of total revenues for the third quarter of 2007, compared to
the same period in 2006, reflected the lower expenses, which resulted in a six-percentage point decrease in sales and marketing expenses as a percentage of total revenues for the quarter. Sales and marketing expenses as a percentage of total
revenues remained consistent for the first nine months of 2007 compared to the same period in 2006, which was the net result of higher overall expenses, resulting in a three-percentage point increase for the nine months ended September 30,
2007, offset by a three-percentage point decrease in sales and marketing expenses as a percentage of total revenues due to higher total revenues when compared to the same period of 2006.

We intend to continue to focus on improving the productivity of the sales and marketing teams. As planned, we added additional sales coverage, which should allow us to better execute on the opportunities we are seeing
in both in the United States and abroad. We will continue to focus on our channels, with a view to providing the executive team time to focus on strategically growing the business. However, we believe it is necessary for us to continue to make
significant investments in sales and marketing to support the launch of new products, services and marketing programs by maintaining our strategy of (a) investing in hiring and training our sales force in anticipation of future market growth,
and (b) investing in marketing efforts in support of new product launches. We believe it is necessary to invest in marketing programs that will improve the awareness and understanding of information security governance, and we will continue to
invest in marketing toward that goal. Failure to make such investments could have a significant adverse effect on our operations. While we are focused on marketing programs and revenue-generating opportunities to increase software revenues, there
can be no assurances that these initiatives will be successful.



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For the first nine months 2007, the provision for doubtful accounts increased approximately $400 thousand to $1.9
million, of which $200 thousand related to changes in the exchange rates, with the remainder of the increase due to the aging of customer accounts.

Operating ExpensesResearch and Development



|                                  |  |                                 |     |   |                                |   |     |                   |  |   |      |   |  |                                |      |   |                               |     |   |  |    |  
|--------------------------------- |  | ------------------------------- | --- | - | ------------------------------ | - | --- | ----------------- |  | - | ---- | - |  | ------------------------------ | ---- | - | ----------------------------- | --- | - |  | -- | -
|                                  |  | Three months endedSeptember 30, |     |   | Nine months endedSeptember 30, |   |     | Percentage change | 
|(millions)                        |  | 2007                            |     |   | 2006                           |   |     | 2007              |  |   | 2006 |   |  | Three months endedSeptember 30 |      |   | Nine months endedSeptember 30 |    
|Research and development expenses |  | $                               | 4.9 |   |                                | $ | 5.5 |                   |  | $ | 15.6 |   |  | $                              | 14.1 |   |                               | -11 | % |  | 11 | %
|                                  |  |                                 |     |   |                                |   |     |                   |  |   |      |   |  |                                |      |   |                               |     |   |  |    |  
|Percentage of total revenues      |  |                                 | 21  | % |                                |   | 23  | %                 |  |   | 21   | % |  |                                | 21   | % |                               |     |   |  |    |  
|                                  |  |                                 |     |   |                                |   |     |                   |  |   |      |   |  |                                |      |   |                               |     |   |  |    |  

Research and development expenses decreased 11% to $4.9 million for the third quarter of 2007 compared to $5.5
million for the same period in 2006, while these expenses increased 11% to $15.6 million for the nine months ended September 30, 2007 compared to $14.1 million for the same period in 2006. Research and development expenses represented 21% of
total revenues for each of the three and nine months ended September 30, 2007, compared to 23% and 21% for the comparable periods in 2006.



|                              |  |                                    |      |                               |   |    
|----------------------------- |  | ---------------------------------- | ---- | ----------------------------- | - | ---
|                              |  | Year over year change 2007 to 2006
|(millions)                    |  | Three months endedSeptember 30     |      | Nine months endedSeptember 30
|Outside professional services |  | $                                  | -0.1 |                               | $ | 0.4
|Staff related costs           |  |                                    | -0.5 |                               |   | 1.1
|                              |  |                                    |      |                               |   |    
|                              |  | $                                  | -0.6 |                               | $ | 1.5
|                              |  |                                    |      |                               |   |    

The decrease in research and development expenses for the three months ended September 30, 2007 when compared
to the same period in 2006 was the result of lower staff related costs due to a headcount reductions primarily due to the absorption of staff from acquired companies.

The increase in research and development expenses for the nine months ended September 30, 2007, when compared to the same period in 2006, was primarily due to higher staff related costs and increased spending on
outside professional contractors as a result of the Business Signatures acquisition, as well as increased stock based compensation expense. In addition, we reported higher research and development expenses as a result of an unfavorable shift in the
exchange rates between Canada and the U.S. of $0.2 million and $0.3 million in the three and nine months ended September 30, 2007, respectively. The decrease in research and development expenses as a percentage of total revenues for the third
quarter of 2007, compared to the same period in 2006, reflected the lower expenses in 2007, which resulted in the two-percentage point decrease. There was no change in research and development expenses as a percentage of total revenues for the nine
months ended September 30, 2007, compared to the same period in 2006, as the increased expenses that resulted in a two-percentage point increase, were offset by a two-percentage point decrease in research and development expenses as a
percentage of total revenues due to higher total revenues for the nine months.

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.



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Operating ExpensesGeneral and Administrative



|                                    |  |                                 |     |   |                                |   |     |                   |  |   |      |   |  |                                |      |   |                               |     |   |  |     |  
|----------------------------------- |  | ------------------------------- | --- | - | ------------------------------ | - | --- | ----------------- |  | - | ---- | - |  | ------------------------------ | ---- | - | ----------------------------- | --- | - |  | --- | -
|                                    |  | Three months endedSeptember 30, |     |   | Nine months endedSeptember 30, |   |     | Percentage change | 
|(millions)                          |  | 2007                            |     |   | 2006                           |   |     | 2007              |  |   | 2006 |   |  | Three months endedSeptember 30 |      |   | Nine months endedSeptember 30 |    
|General and administrative expenses |  | $                               | 2.9 |   |                                | $ | 3.4 |                   |  | $ | 9.4  |   |  | $                              | 10.7 |   |                               | -15 | % |  | -12 | %
|                                    |  |                                 |     |   |                                |   |     |                   |  |   |      |   |  |                                |      |   |                               |     |   |  |     |  
|Percentage of total revenues        |  |                                 | 12  | % |                                |   | 14  | %                 |  |   | 13   | % |  |                                | 16   | % |                               |     |   |  |     |  
|                                    |  |                                 |     |   |                                |   |     |                   |  |   |      |   |  |                                |      |   |                               |     |   |  |     |  

General and administrative expenses decreased to $2.9 million and $9.4 million for the three and nine months ended
September 30, 2007, respectively, from $3.4 million and $10.7 million for the comparable periods in 2006. General and administrative expenses represented 12% and 13% of total revenues for the three and nine months ended September 30, 2007,
respectively, compared to 14% and 16% for each of the same periods in 2006.



|                              |  |                                    |      |                               |   |     
|----------------------------- |  | ---------------------------------- | ---- | ----------------------------- | - | ----
|                              |  | Year over year change 2007 to 2006
|(millions)                    |  | Three months endedSeptember 30     |      | Nine months endedSeptember 30
|Facilities related costs      |  | $                                  |     |                               | $ | 0.1 
|Outside professional services |  |                                    | -0.1 |                               |   | -0.5
|Staff related costs           |  |                                    | -0.4 |                               |   | -0.9
|                              |  |                                    |      |                               |   |     
|                              |  | $                                  | -0.5 |                               | $ | -1.3
|                              |  |                                    |      |                               |   |     

The decrease in general and administrative expenses in absolute dollars in the three and nine months ended
September 30, 2007 compared to the same periods of 2006 was due to the effect of continued management discipline in this area, with net savings of $0.5 million and $1.3 million, respectively, primarily as a result of headcount reductions and
reduced use of outside professional firms. General and administrative expenses as a percentage of total revenues decreased for the three and nine months ended September 30, 2007 compared to the same periods in 2006, due primarily to a decrease
in recorded expenses, which accounted for a two-percentage point decrease in each of the reported periods. This effect was magnified by a one-percentage point decrease in general and administrative expenses as a percentage of total revenues due to
higher total revenues for the first nine months of 2007 when compared to the same period in 2006.

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

Amortization of Purchased Product Rights and Other
Purchased Intangibles

Amortization of purchased product rights was $355 thousand and $1.0 million for the three and nine months ended
September 30, 2007, respectively, compared to $319 thousand and $738 thousand for the same periods in 2006. These costs are related to the developed technology purchased in connection with the acquisition of Business Signatures in 2006, as well
as the acquisition of certain business assets from AmikaNow! during 2004. This expense was recorded as a component of cost of revenues.

Amortization of
other purchased intangibles totaled $247 thousand and $780 thousand for the three and nine months ended September 30, 2007, respectively, compared to $268 thousand and $302 thousand for the same periods of 2006. These costs are related to the
customer/partner relationships and non-competition agreement assets purchased in connection with the acquisitions of Orion and Business Signatures in 2006, as well as the acquisition of certain business assets from AmikaNow! during 2004. Of this
expense, $209 thousand and $665 thousand was recorded as a component of sales and marketing expenses for the first three and nine months of 2007, respectively, compared to $217 thousand and $251 thousand for the same periods of 2006, while $38
thousand and $115 thousand was recorded as a component of cost of services and maintenance revenues for the first three and nine months of 2007, respectively, compared to $51 thousand for each of the same periods of 2006.



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##### Table of Contents

Restructuring Charges and Adjustments

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

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

Interest Income

Interest
income decreased to $188 thousand and $544 thousand for three and nine months ended September 30, 2007, respectively, from $363 thousand and $1.9 million for the same periods of 2006, representing 1% of total revenues for each of the three and
nine months ended September 30, 2007, compared to 2% and 3% of total revenues for the same periods in 2006. The decrease in investment income for the three and nine months ended September 30, 2007, compared to the same periods of 2006, was
due to the funds invested in the acquisition of Orion, Business Signatures and other long-term assets during 2006, in addition to the reduced balance of funds invested as a result of amounts drawn down to fund cash flow from operations and stock
repurchases during the last year. The funds invested decreased to $21.5 million as of September 30, 2007 from $28.4 million as of September 30, 2006.

Loss from Equity Investments

We recorded $77 thousand of losses, net of intercompany profit eliminations, related to our investments
in Asia Digital Media for the nine months ended September 30, 2007, compared to $51 thousand and $344 thousand for the three and nine months ended September 30, 2006, respectively. We began accounting for this investment under the equity
method of accounting in the fourth quarter of 2004, since we had the potential to significantly influence its operations and management.

Write-down
of Long-term Strategic and Equity Investments

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

Provision for Income Taxes

We recorded an income tax
provision of $104 thousand and $228 thousand for the three and nine months ended September 30, 2007, respectively, compared to $120 thousand and $309 thousand for the same periods of 2006. These provisions represented primarily the taxes
payable in certain foreign jurisdictions. The effective income tax rates differed from statutory rates primarily due to the impairment of long-term strategic investments, stock option expenses, purchased product rights, restructuring charges,
foreign research and development tax credits, as well as an adjustment of the valuation allowance that has offset the tax benefits from the significant net operating loss and tax credit carry-forwards available.



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LIQUIDITY AND CAPITAL RESOURCES

We used cash of $2.9 million in operating activities during the nine months ended September 30, 2007. This cash outflow was primarily a result of a decrease in accounts payable and accrued liabilities of $4.5
million, a decrease in accrued restructuring charges of $3.9 million and an increase in prepaid expenses and other receivables of $1.0 million, offset by cash inflows resulting from a decrease in accounts receivable of $2.1 million, an increase in
deferred revenue of $3.8 million, and a net income after adjusting for non-cash charges of $0.6 million. The reduction in accounts payable and accrued liabilities was the result of the pay down of accruals related to third party royalties and
acquisition costs, as well as the timing of accruals related employee compensation. Our average days sales outstanding at September 30, 2007 was 69 days, which represents an increase from the 62 days that we reported at June 30, 2007. The
overall increase in days sales outstanding from June 30, 2007 was mainly due to lower in-quarter collections due to less favorable sales linearity and timing of support renewals compared to the second quarter of 2007. For purposes of
calculating average days sales outstanding, we divide ending accounts receivable by the applicable quarters revenues and multiply this amount by 90 days. The level of accounts receivable at each quarter end is affected by the concentration of
revenues in the final weeks of each quarter and may be negatively affected by expanded international revenues in relation to total revenues as licenses to international customers often have longer payment terms.

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

During the first nine months of 2007, we generated $2.3 million of cash related to investing activities. Cash provided by reductions in our marketable investments in the amount of $2.6 million and proceeds from
disposition of property and equipment of $0.4 million was partially offset by the investment of $0.3 million in property and equipment, primarily for computer hardware upgrades throughout our organization and $0.4 million in other long-term assets
related to capitalized software development costs.

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

As of September 30, 2007, our cash and cash equivalents in the amount of $21.5 million provided our principal sources of liquidity. Overall, we used $2.8 million and $1.1 million in cash, cash equivalents and marketable investments
during the third quarter and first nine months of 2007, respectively. Although we continue to target operating profitability, based on sustainable revenue and operating expense structures, we estimate that we may continue to use cash in fiscal 2007
to satisfy the obligations provided for under our restructuring program. In addition, we expect to invest cash in working capital during the remainder of 2007.

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

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

In terms of long-term liquidity requirements, we will need to fund the $20.6 million of accrued restructuring charges at September 30, 2007 through
fiscal 2011, as detailed below. This amount is net of expected sublet recoveries on restructured facilities of $9.7 million. The lease obligations included in these accrued restructuring charges are disclosed in the table of contractual commitments
below. In addition, we expect to spend approximately $2.0 million per year on capital expenditures, primarily for computer equipment needed to replace existing equipment that is coming to the end of its useful life, a significant portion of which
are expected to be procured under operating leases.



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

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



|                                                                        |  |                       |        |                 |   |          |  |          |        |                  |   |        |  |   |      
|----------------------------------------------------------------------- |  | --------------------- | ------ | --------------- | - | -------- |  | -------- | ------ | ---------------- | - | ------ |  | - | -----
|                                                                        |  | Payment Due by Period
|                                                                        |  | Total                 |        | Less than1 Year |   | 1-3Years |  | 3-5Years |        | More than5 Years
|                                                                        |  | (in thousands)       
|Operating lease obligationscurrently utilized facilities and equipment |  | $                     | 24,393 |                 | $ | 4,920    |  | $        | 6,832  |                  | $ | 4,540  |  | $ | 8,101
|Operating lease obligationsrestructured facilities                     |  |                       | 26,021 |                 |   | 6,345    |  |          | 13,462 |                  |   | 6,214  |  |   |     
|2005 Entrust Deferred Incentive and Retention Bonus Plan                |  |                       | 350    |                 |   | 350      |  |          |       |                  |   |       |  |   |     
|Other commitments                                                       |  |                       | 499    |                 |   | 499      |  |          |       |                  |   |       |  |   |     
|                                                                        |  |                       |        |                 |   |          |  |          |        |                  |   |        |  |   |      
|Total                                                                   |  | $                     | 51,263 |                 | $ | 12,114   |  | $        | 20,294 |                  | $ | 10,754 |  | $ | 8,101
|                                                                        |  |                       |        |                 |   |          |  |          |        |                  |   |        |  |   |      

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

The 2005 Entrust Deferred Incentive and Retention Bonus Plan (the Deferred Plan)
was adopted by the Compensation Committee of the Board of Directors on November 7, 2005. The primary objective of the Deferred Plan is to attract and retain valued employees by remunerating selected executives and other key employees with cash
awards based on the contribution of the individual employee. During the first quarter of 2006, we granted awards to employees under the plan that potentially could result in payments of $1.6 million over the subsequent two years, assuming that all
employees receiving the awards remain employed with us for the entire two year vesting period of the awards. Of this amount, it was estimated that, as of September 30, 2007, $350 thousand was remaining to be paid out under this plan.

Other commitments include financing arrangements entered into for the purpose of funding annual insurance premiums, with a remaining balance as of
September 30, 2007 of $499 thousand, to be paid during fiscal 2007 and 2008.

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, 2007.

We generally warrant for ninety days from delivery to a customer that our products will perform free from material errors that prevent performance in accordance with user documentation. Additionally, we warrant that
our consulting services will be performed consistent with generally accepted industry standards including other warranties. We have only incurred nominal expense under our product or service warranties. As a result, we believe the estimated fair
value of our obligations under these agreements is minimal. Accordingly, we have no liabilities recorded for these agreements as of September 30, 2007.



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



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

Risk
Associated with Interest Rates

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

The following table presents the cash, cash equivalents and marketable investments that we held
as of September 30, 2007, that would have been subject to interest rate risk, and the related ranges of maturities as of those dates:



|                                                            |  |                         |       |              |   |            |  |             |   |  |   |  
|----------------------------------------------------------- |  | ----------------------- | ----- | ------------ | - | ---------- |  | ----------- | - |  | - | -
|                                                            |  | MATURITY (in thousands)
|                                                            |  | Within3 months          |       | 3 to 6months |   | > 6 months |  | > 12 months
|Investments classified as cash and cash equivalents         |  | $                       | 6,185 |              | $ |           |  | $           |   |  | $ | 
|Investments classified as short-term marketable investments |  |                         |      |              |   |           |  |             |  |  |   | 
|                                                            |  |                         |       |              |   |            |  |             |   |  |   |  
|Total amortized cost                                        |  | $                       | 6,185 |              | $ |           |  | $           |  |  | $ | 
|                                                            |  |                         |       |              |   |            |  |             |   |  |   |  
|Fair value                                                  |  | $                       | 6,185 |              | $ |           |  | $           |  |  | $ | 
|                                                            |  |                         |       |              |   |            |  |             |   |  |   |  

We try to manage this risk by maintaining our cash, cash equivalents and marketable investments with high quality
financial institutions and investment managers. As a result, we believe that our exposure to market risk related to interest rates is minimal. Our financial instrument holdings at period-end were analyzed to determine their sensitivity to interest
rate changes. The fair values of these instruments were determined by net present values. In this sensitivity analysis, we used the same change in interest rate for all maturities. All other factors were held constant. If there were an adverse
change in interest rates of 10%, the expected effect on net income related to our financial instruments would be less than $50 thousand.

Risk
Associated with Exchange Rates

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

Historically, we have not engaged in formal hedging activities, but
we do periodically review the potential impact of this foreign exchange risk to ensure that the risk of significant potential losses is minimized. However, as a significant portion of our expenses are incurred in Canadian dollars, our reported
expense base increased by $1.5 million for the first nine months of 2007, when compared to the same period of 2006, due to fluctuations in the exchange rate between the United States and Canadian dollars. Taking into account the effect of exchange
rate fluctuations on reported Canadian revenues, the net effect on reported earnings was $0.5 million for the first nine months of 2007, when compared to the same period of 2006.



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In the past, when advantageous, we have engaged in forward contracts to purchase Canadian dollars, to cover exposures on
the Canadian subsidiarys expenses that are denominated in Canadian dollars, in an attempt to reduce earnings volatility that might result from fluctuations in the exchange rate between the Canadian and U.S. dollar. During the third quarter of
2007, we engaged in forward contracts to purchase Canadian dollars, covering exposures on approximately $5.0 million of our Canadian subsidiarys expenses denominated in Canadian dollars. None of these contracts extended past September 30,
2007 and no previously purchased foreign exchange contracts had extended past June 30, 2007. Subsequent to quarter end, we have engaged in forward contracts to purchase Canadian dollars covering exposures on approximately $5.0 million of
expenses denominated in Canadian dollars in the fourth quarter of 2007. We currently have not engaged in any forward contracts to purchase Canadian dollars to cover exposures on expenses denominated in Canadian dollars in future periods beyond the
fourth quarter of 2007.

Risk Associated with Long-term Strategic Investments

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



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

Evaluation of Disclosure Controls and
Procedures

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

Changes in Internal Control Over Financial Reporting

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

PART II. OTHER INFORMATION



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

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



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

There were no material changes to the Risk Factors
disclosed in our annual report on Form 10-K for the year ended December 31, 2006.



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

None.



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

Not applicable.



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

None.



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

There were no transactions,
since the beginning of the Companys last fiscal year, or any currently proposed transactions, in which the Company was or is to be a participant that would be required to be disclosed under Item 13. Certain Relationships and Related
Transactions, and Director Independence of Form 10-K.



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



|              |  |                                                                                              
|------------- |  | ---------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                  
|10.1          |  | 2007 Sales Compensation Plan between the Registrant and Steve Holton, dated October 18, 2007*
|              | 
|31.1          |  | Rule 13a-14(a) Certification of Chief Executive Officer.                                     
|              | 
|31.2          |  | Rule 13a-14(a) Certification of Chief Financial Officer.                                     
|              | 
|32.1          |  | Section 1350 Certification of Chief Executive Officer.                                       
|              | 
|32.2          |  | Section 1350 Certification of Chief Financial Officer.                                       

---

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



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SIGNATURES

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



|                        |  |                                                  
|----------------------- |  | -------------------------------------------------
|                        |  | ENTRUST, INC.                                    
|                        |  | (Registrant)                                     
|                        | 
|Dated: November 7, 2007 |  | /s/ David J. Wagner                              
|                        |  | David J. Wagner                                  
|                        |  | Chief Financial Officer and Senior Vice President
|                        |  | (Principal Financial and Accounting Officer)     



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EXHIBIT INDEX



|              |  |                                                                                              
|------------- |  | ---------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                  
|10.1          |  | 2007 Sales Compensation Plan between the Registrant and Steve Holton, dated October 18, 2007*
|              | 
|31.1          |  | Rule 13a-14(a) Certification of Chief Executive Officer.                                     
|              | 
|31.2          |  | Rule 13a-14(a) Certification of Chief Financial Officer.                                     
|              | 
|32.1          |  | Section 1350 Certification of Chief Executive Officer.                                       
|              | 
|32.2          |  | Section 1350 Certification of Chief Financial Officer.                                       

---

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



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