<PAGE>

--------------------------------------------------------------------------------

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

                      ----------------------------------

                                   FORM 10-Q
    (Mark one)

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

                      FOR THE QUARTER ENDED JUNE 30, 2001

                                      OR

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

                       COMMISSION FILE NUMBER 000-24733

                      ----------------------------------

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



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

                            ONE PRESTON PARK SOUTH
                       4975 PRESTON PARK BLVD, SUITE 400
                                PLANO, TX 75093
              (Address of principal executive offices & zip code)

      Registrant's telephone number, including area code: (972) 943-7300


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

     There were 63,431,110 shares of the registrant's $.01 par value Common
stock outstanding as of August 10, 2001.

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

                                 ENTRUST, INC.

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
PART I.   FINANCIAL INFORMATION                                                                         Page
                                                                                                        ----
<S>                                                                                                    <C>
  Item 1.  Financial Statements
           Condensed Consolidated Balance Sheets.....................................................      3
           Condensed Consolidated Statements of Operations...........................................      4
           Condensed Consolidated Statements of Cash Flows...........................................      5
           Notes to Condensed Consolidated Financial Statements......................................      6

  Item 2.  Management's Discussion and Analysis of Financial Condition and
           Results of Operations.....................................................................     12

  Item 3.  Quantitative and Qualitative Disclosures about Market Risk................................     29

PART II.  OTHER INFORMATION

  Item 1.  Legal Proceedings.........................................................................     30

  Item 2.  Changes in Securities and Use of Proceeds.................................................     30

  Item 4.  Submission of Matters to a Vote of Security Holders.......................................     30

  Item 6.  Exhibits and Reports on Form 8-K..........................................................     31

SIGNATURES...........................................................................................     33

EXHIBITS.............................................................................................     34
</TABLE>


  Entrust, getAccess and Entrust@YourService are registered trademarks of
Entrust, Inc. or a subsidiary of Entrust, Inc. in certain countries. Entrust.Net
is a trademark of Entrust, Inc. or a subsidiary of Entrust, Inc. in certain
countries. All other trademarks and service marks used in this quarterly report
are the property of their respective owners.

                                       2
<PAGE>

PART I.   FINANCIAL INFORMATION

Item 1.   Financial Statements

                                 ENTRUST, INC.

                     CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                               (Unaudited)
                                                DECEMBER 31,     JUNE 30,
                                                ------------   ----------
                                                    2000          2001
                                                ------------   ----------
<S>                                             <C>            <C>
(In thousands)

ASSETS
Current assets:
  Cash and cash equivalents.....................     $  24,241   $  31,380
  Short-term marketable investments.............       203,446     137,970
  Accounts receivable (net of allowance for
    doubtful accounts of $2,932 at December
    31, 2000 and $6,042 at June 30, 2001).......        46,301      28,255
  Prepaid expenses and other....................         9,603       6,192
                                                     ---------   ---------
    Total current assets........................       283,591     203,797
Property and equipment, net.....................        25,168      19,690
Purchased product rights, net...................        19,259       3,406
Goodwill, net...................................       365,127       9,195
Other purchased intangibles, net................        22,054       6,333
Long-term investments...........................        16,675      12,305
Other long-term assets, net.....................         2,232       1,152
                                                     ---------   ---------
    Total assets................................     $ 734,106   $ 255,878
                                                     =========   =========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
 Accounts payable...............................     $  16,989   $  13,801
 Accrued liabilities............................        22,311      13,604
 Accrued restructuring charges..................            --      60,814
 Deferred revenue...............................        19,466      21,110
 Due to related party...........................           799          --
                                                     ---------   ---------
    Total current liabilities...................        59,565     109,329
Long-term liabilities...........................           477         248
                                                     ---------   ---------
    Total liabilities...........................        60,042     109,577
                                                     ---------   ---------
Shareholders' equity:
 Common stock, par value $0.01 per share;
   62,753,738 and 63,343,030 issued and
   outstanding shares at December 31, 2000
   and June 30, 2001, respectively..............           628         634
 Additional paid-in capital.....................       775,604     777,871
 Unearned compensation..........................          (316)       (205)
 Accumulated deficit............................      (101,518)   (631,184)
 Accumulated other comprehensive loss...........          (334)       (815)
                                                     ---------   ---------
    Total shareholders' equity..................       674,064     146,301
                                                     ---------   ---------
    Total liabilities and shareholders' equity..     $ 734,106   $ 255,878
                                                     =========   =========
</TABLE>
     See accompanying notes to condensed consolidated financial statements

                                       3
<PAGE>

                                 ENTRUST, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                       (Unaudited)             (Unaudited)
                                                    THREE MONTHS ENDED       SIX MONTHS ENDED
                                                        JUNE 30,                 JUNE 30,
                                                  ---------------------    ---------------------
                                                    2000         2001        2000         2001
                                                  --------    ---------    --------    ---------
<S>                                               <C>         <C>          <C>         <C>
(In thousands, except per share data)

Revenues:
 License.......................................   $ 18,780    $  12,554    $ 39,669    $  23,113
 Services and maintenance......................     10,536       17,462      18,709       38,408
                                                  --------    ---------    --------    ---------
     Total revenues............................     29,316       30,016      58,378       61,521
                                                  --------    ---------    --------    ---------
Cost of revenues:
 License.......................................        953        1,207       1,890        2,108
 Services and maintenance......................      6,064       11,312      10,632       24,658
                                                  --------    ---------    --------    ---------
     Total cost of revenues....................      7,017       12,519      12,522       26,766
                                                  --------    ---------    --------    ---------
Gross profit...................................     22,299       17,497      45,856       34,755
                                                  --------    ---------    --------    ---------
Operating expenses:
 Sales and marketing...........................     14,905       38,219      27,762       64,799
 Research and development......................      5,825        8,345      10,818       17,832
 General and administrative....................      2,722        9,363       4,914       14,050
 Acquired in-process research and
   development.................................     29,614           --      29,614           --
 Amortization of purchased product rights......         --        1,377          --        2,754
 Amortization of goodwill and other
   purchased intangibles.......................      1,615       28,900       2,276       57,800
 Impairment of goodwill, purchased product
   rights and other purchased intangibles......         --      326,953          --      326,953
 Restructuring charges.........................         --       65,511          --       65,511
 Write-down of leaseholds and other
   long-lived assets...........................         --       13,519          --       13,519
                                                  --------    ---------    --------    ---------
     Total operating expenses..................     54,681      492,187      75,384      563,218
                                                  --------    ---------    --------    ---------
Loss from operations...........................    (32,382)    (474,690)    (29,528)    (528,463)
Interest income................................      3,727        2,399       5,613        5,643
Write-down of strategic long-term investments..         --       (6,100)         --       (6,100)
                                                  --------    ---------    --------    ---------
Loss before income taxes.......................    (28,655)    (478,391)    (23,915)    (528,920)
Provision for income taxes.....................        287          396       1,709          746
                                                  --------    ---------    --------    ---------
Net loss.......................................   $(28,942)   $(478,787)   $(25,624)   $(529,666)
                                                  ========    =========    ========    =========

Net loss per share:
     Basic.....................................     $(0.54)      $(7.58)     $(0.50)      $(8.40)
     Diluted...................................     $(0.54)      $(7.58)     $(0.50)      $(8.40)
Weighted average common shares used in per
  share computations:
     Basic.....................................     53,581       63,205      51,415       63,058
     Diluted...................................     53,581       63,205      51,415       63,058
</TABLE>

     See accompanying notes to condensed consolidated financial statements

                                       4
<PAGE>

                                 ENTRUST, INC.

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                         (Unaudited)
                                                                                       SIX MONTHS ENDED
                                                                                            JUNE 30,
                                                                                            --------
                                                                                        2000        2001
                                                                                        ----        ---
<S>                                                                                  <C>         <C>
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss........................................................................  $ (25,624)   $(529,666)
   Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities:
     Depreciation and amortization.................................................      3,978       65,016
     Acquired in-process research and development..................................     29,614           --
     Impairment of goodwill, purchased product rights and other
      purchased intangibles........................................................         --      326,953
     Non-cash other special non-recurring charges..................................         --        3,212
     Provision for doubtful accounts...............................................         --       10,986
     Write-down of leaseholds and other long-lived assets..........................         --       13,519
     Write-down of strategic long-term investments.................................         --        6,100
     Unearned compensation amortized...............................................        113          111
     Revenue from non-monetary transaction.........................................         --         (574)
   Changes in operating assets and liabilities, net of effects of acquisitions:
     (Increase) decrease in accounts receivable....................................     (4,924)       6,759
     Decrease in prepaid expenses and other........................................        328        2,481
     Increase (decrease) in accounts payable.......................................      2,394       (3,209)
     Increase (decrease) in accrued liabilities....................................      4,424       (8,853)
     Increase in accrued restructuring charges.....................................         --       60,814
     Increase in deferred revenue..................................................      1,348        1,712
     Decrease due to related party.................................................         --         (799)
                                                                                     ---------    ---------
       Net cash provided by (used in) operating activities.........................     11,651      (45,438)
                                                                                     ---------    ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
 Purchases of marketable investments...............................................   (133,745)    (139,599)
 Dispositions of marketable investments............................................     88,636      205,135
 Purchases of property and equipment...............................................     (1,979)     (12,295)
 Increase in long-term investments.................................................    (15,200)      (1,790)
 Increase in other long-term assets................................................       (469)      (1,226)
 Net cash acquired in purchase transactions........................................     12,644           --
                                                                                     ---------    ---------
       Net cash provided by (used in) investing activities.........................    (50,113)      50,225
                                                                                     ---------    ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Repayment of long-term liabilities................................................         --         (223)
 Proceeds from exercise of stock options and employee stock purchase plan..........      6,626        2,273
 Proceeds from issuance of common stock, net of issuance costs.....................    161,513           --
                                                                                     ---------    ---------
       Net cash provided by financing activities...................................    168,139        2,050
                                                                                     ---------    ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH............................................       (135)         302
                                                                                     ---------    ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS..........................................    129,542        7,139
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD...................................     21,877       24,241
                                                                                     ---------    ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.........................................  $ 151,419    $  31,380
                                                                                     =========    =========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
 Issuance of common stock, stock options and warrants related to the
  acquisition of enCommerce, Inc...................................................  $ 482,272   $       --
                                                                                     =========   ==========
</TABLE>
     See accompanying notes to condensed consolidated financial statements

                                       5
<PAGE>

                                 ENTRUST, INC.

             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)


NOTE 1.   BASIS OF PRESENTATION

     The accompanying unaudited condensed consolidated financial statements have
been prepared on the same basis as the audited annual consolidated financial
statements and, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position, results of operations and cash flows.
The results of operations for the six months ended June 30, 2001 are not
necessarily indicative of the results to be expected for the full year. Certain
information and footnote disclosures normally contained in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction with the Notes
to Consolidated Financial Statements for the year ended December 31, 2000
contained in the Company's Annual Report on Form 10-K.

NOTE 2.   RESTRUCTURING AND OTHER SPECIAL NON-RECURRING CHARGES

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

     As a result of the restructuring and other related special non-recurring
charges and the impact of the macroeconomic conditions on the Company and its
global base of customers, the Company recorded restructuring costs and special
non-recurring charges of $433.6 million in the second fiscal quarter of 2001.

     A summary of the restructuring and other special non-recurring charges
recorded in the second fiscal quarter is outlined below (in millions):

<TABLE>
<CAPTION>
                                                                       Other
                                                                      Special        Total
                                                  Restructuring    Non-recurring    Special
                                                     Charges          Charges       Charges
                                                  -------------    -------------    -------
<S>                                               <C>              <C>              <C>
Workforce reduction and other personnel costs         $13.5           $  4.1        $ 17.6

Consolidation of excess facilities                     38.2             13.5          51.4

Discontinuance of non-core
     products and programs                             13.8              6.4          20.5

Impairment of goodwill, purchased product rights
     and other purchased intangible assets                -            327.0         327.0

Impairment of strategic investments                       -              6.1           6.1

Expenses related to bad debt write-offs
     and additional provisions to the allowance
     for doubtful accounts                                -             11.0          11.0
                                                  -----------------------------------------
Total                                                 $65.5           $368.1        $433.6
                                                  =========================================
</TABLE>

                                       6
<PAGE>

     The following paragraphs provide detailed information relating to the
restructuring programs that resulted in total special charges of $433.6 million,
which was recorded in the second quarter of 2001.

Workforce reduction and other personnel costs

     The restructuring program resulted in the reduction of approximately 400
regular full-time employees across the Company, or 33% of the total workforce.
The reduction was across all major geographic locations, all business programs,
and all functions within the organization. The reductions were more heavily
weighted in sales and marketing, non-core business programs such as
Entrust.Net(TM) and Entrust@YourService(TM) and secondary geographies such as
Asia Pacific and Latin America. The majority of the affected employees were
notified of their termination in the second quarter and the workforce portion of
the restructuring is expected to be completed in the third quarter of 2001. The
Company recorded a workforce reduction charge of $13.5 million primarily related
to severance costs, fringe benefits due to severed employees and outplacement
services.

     Also, other special non-recurring charges include employee relocation
expenses, hiring fees and signing bonuses totaling $4.1 million.

Consolidation of excess facilities

     The Company recorded restructuring costs of $38.2 million relating to the
consolidation of excess facilities. The consolidation of excess facilities
includes a total of eight offices in seven cities throughout the world. The
majority (approximately 85%) of the costs are related to the 75,000 square foot
facility in Santa Clara, CA. The costs for consolidation of excess facilities
are related primarily to non-cancelable lease costs offset by estimated sublet
recoveries. These costs will be payable over up to 10 years, which is the lease
term of the Santa Clara facility.

     In addition to the $38.2 million of restructuring costs related to excess
facilities, an additional $13.5 million of facilities-related costs were
recorded as a special non-recurring charge as a result of impairment of
leasehold improvements and property and equipment that was disposed of or
removed from operations as a result of the consolidation of excess facilities,
and were included in the write-down of leaseholds and other long-lived assets in
accordance with the provisions of SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of". These assets
were identified as assets to be disposed of that would have no future benefit to
the Company. Therefore, these assets were reported at the lower of carrying
amount and fair value, less costs of disposition. The majority of these costs
are non-cash charges.

Discontinuance of non-core products and programs

     In support of the restructuring objective to reduce costs and focus the
Company on core technologies, the Company discontinued several non-core products
and programs. The discontinued products and programs, totaling $13.8 million,
are primarily related to the Company's services business initiatives and to
certain desktop applications for which the Company has not achieved the growth
and profitability targets in line with its core products and financial
objectives. The restructuring charge also includes costs related to the exit of
certain marketing events and programs that had been committed to prior to the
restructuring, but which are being canceled due to the change in corporate
focus. The cash outflow related to the majority of these items is expected to be
incurred by the end of the first quarter of fiscal 2002.

    The discontinuance of products and programs, and expenses related to
rebranding of the Company and its products resulted in $6.4 million of special
non-recurring charges.


                                       7
<PAGE>

     The following table is a summary of the status of the restructuring charges
as at June 30, 2001 (in millions):

<TABLE>
<CAPTION>
                                                                         Accrued
                                                                      Restructuring
                                             Total        Cash        Liabilities at
                                            Charges     Payments      June 30, 2001
                                            ----------------------------------------
<S>                                         <C>        <C>           <C>
Workforce reduction and other
     personnel costs                         $ 13.5       $4.4              $ 9.1

Consolidation of excess facilities             38.2        0.2               38.0

Discontinuance of non-core
     products and programs                     13.8        0.1               13.7
                                            ----------------------------------------
Total                                        $ 65.5       $4.7              $60.8
                                            ========================================
</TABLE>


Impairment of goodwill and other intangible purchased assets

     Due to the decline in the Company's market capitalization, the decline in
current overall business conditions within its target market segments and the
restructuring program, the Company completed an assessment of the recoverability
of goodwill on its balance sheet.  This impairment analysis indicated that the
carrying amount of the goodwill and purchased intangible assets of the
enCommerce and r3 acquisitions will not be recovered through the estimated
undiscounted future cash flows.  The Company then completed an analysis of the
discounted future cash flows from the enCommerce acquisition and the r3
acquisition.  The result of this analysis is a charge of $327 million related to
the impairment of goodwill and purchased intangible assets.  Goodwill and
purchased intangibles from the enCommerce acquisition account for $325.4 million
of the impairment.  This acquisition has failed to meet the financial planning
forecasts made at the time of the acquisition due largely to the change in the
economic conditions since the time of the acquisition and in part due to
additional product development and maintenance costs related to getAccess(TM)
that are now estimated to be required in the future and were not known at the
time of the acquisition. The remaining $1.6 million of goodwill impairment is
the result of the r3 acquisition, which was impacted primarily by the workforce
restructuring.

     Revenues from the enCommerce products and services are estimated to have
contributed approximately 20-25% to total revenues, but are estimated to have
generated operating losses since acquisition. The results of operations related
to the r3 acquisition were not significant.

Write-down of strategic long-term investments

     The Company assesses the recoverability of the carrying value of its
strategic investments on a regular basis. Factors that the Company considers
important that could trigger impairment include, but are not limited to, the
likelihood that the related company would have insufficient cash flows to
operate for the next twelve months, significant changes in the operating
performance or business model, and changes in overall market conditions. The
Company recorded charges related to other than temporary declines in the value
of certain strategic investments of $6.1 million in the three and six months
ended June 30, 2001.

Expenses related to bad debt write-offs and additional provisions to the
allowance for doubtful accounts.

      Due to the changes in the economic environment and the impact of the
restructuring program, particularly the curtailment of certain products and
presence in certain geographies, the Company recorded bad debt write-offs and
additional provisions to the allowance for doubtful accounts totaling $11.0
million.

NOTE 3.   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,
exchangeable Special Voting stock on an as-if exchanged basis, and options to
purchase Common stock using the treasury stock method.  The dilutive effect of
the exchangeable Special Voting stock and the options to purchase Common stock
are

                                       8
<PAGE>

excluded from the computation of diluted net income (loss) per share if their
effect is antidilutive. For the three and six months ended June 30, 2001, the
antidilutive effect excluded 1,805,512 and 2,347,319 shares, respectively, from
the diluted net loss per share computation due to options to purchase Common
stock.

     In the three and six months ended June 30, 2001, the Company issued 275,114
and 589,292 shares, respectively, of Common stock related to the exercise of
employee stock options and the sale of shares under the employee stock purchase
plan.

     On January 26, 2001, the Company's Board of Directors adopted, and
recommended to the stockholders to approve, articles of amendment to the
Company's charter to (i) increase the total number of authorized shares of
common stock, $0.01 par value per share, from 100,000,000 shares to 250,000,000
shares and (ii) eliminate the special voting stock from the Company's authorized
capital and delete all references to special voting stock contained in the
Company's charter. The stockholders adopted this proposal at their annual
meeting on April 27, 2001. On April 22, 2001, the Company issued a warrant to
purchase 258,333 shares of the Company's common stock, with an exercise price of
$6.87 per share and expiration date of April 22, 2004, to a consultant of the
Company.


NOTE 4.   STOCK OPTION EXCHANGE PROGRAM

     On June 19, 2001, the Company announced a voluntary stock option exchange
program for its eligible employees. Under the program, Company employees were
offered the opportunity, if they so choose, to cancel certain outstanding stock
options to purchase shares of common stock, previously granted to them. In
exchange these employees will receive new options that will be granted under the
1999 Non-Officer Employee Stock Incentive Plan. The number of shares subject to
the new options to be granted to each eligible employee will depend on the
exercise price of the options tendered by the eligible employee and accepted for
exchange. If the tendered options carry an exercise price of less than $50 per
share, then the number of shares subject to new options will be equal to the
number of shares subject to the options cancelled. If the tendered options carry
an exercise price of $50 per share or more, then the number of shares subject to
new options will be equal to one-half (1/2) the number of shares subject to the
options cancelled. The new options are to be granted at a future date, at least
six months and one day from the cancellation date, which was July 30, 2001. The
exercise price of these new options will be equal to the fair market value of
the Company's common stock on the date of grant, which is not expected to be
later than January 31, 2002. In addition, based on the July 30, 2001
cancellation date, those employees that choose to participate in the offer will
also be required to tender all options granted since January 30, 2001. New
options to be issued will have terms and conditions that are substantially the
same as those of the cancelled options. This voluntary exchange program complies
with FASB Interpretation Bulletin 44, "Accounting for Certain Transactions
Involving Stock Compensation" and, accordingly, is not expected to result in any
variable compensation charges. Members of the Company's Board of Directors and
executive officers are not eligible to participate in this program.


NOTE 5.   INVESTMENTS AND EQUITY HEDGING INSTRUMENT

      The Company maintains marketable investments mainly in a strategic cash
management account. This account is invested primarily in highly rated corporate
securities, in securities guaranteed by the U.S. government or its agencies and
highly rated municipal bonds, with a remaining maturity of not more than 12
months. The Company has the intent and ability to hold all investments until
maturity. Therefore, all such investments are classified as held to maturity
investments, in current assets, and are stated at amortized cost. At June 30,
2001, the amortized cost of the Company's held to maturity investments
approximated fair value.

      In addition, the Company has invested in an equity instrument of a
publicly traded technology company. This investment has been classified as
available for sale, in current assets, and is carried at fair value based on
quoted market prices. This instrument is considered to be short-term in nature
as it is management's intention to dispose of this investment within the year.
Realized gains and losses on disposition of available for sale marketable
investments are included in investment income in the results of operations.
Unrealized gains

                                       9
<PAGE>

and losses are included in other comprehensive income, except that the portion
designated as being hedged in a fair value hedge is recognized in investment
income during the period of the hedge.

     The Company has a policy that allows for the use of hedges on equity
investments in publicly traded companies.  The Company had entered into and
designated such a hedge on the investment classified as available for sale, in
the form of a call option hedge that enables the Company to receive, from the
investee, a combination of cash and additional in-kind equity securities equal
to any deficiency between the original cost basis of the equity securities and
the aggregate of the market values on the dates that the securities are made
available for sale on the applicable public equity market.  This option is
accounted for as a "fair value hedge" in accordance with SFAS No. 133.  As of
June 30, 2001, the fair value of the call option was $1.5 milion, which is equal
to the total of the realized and unrealized losses on the related investment.

     Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities", as amended by SFAS No. 137
and SFAS No. 138, which establishes accounting and reporting standards for
derivative financial instruments and hedging activities and requires the
recognition of all derivatives as either assets or liabilities on the balance
sheet and measurement at fair value.  The adoption of SFAS No. 133 did not have
a significant impact on the Company's financial position or results of
operations because the Company is engaged in limited derivatives use. In
implementing SFAS No. 133, the Company reclassified both the unrealized loss on
the investment and the offsetting unrealized gain on the related hedge of $1.5
million from accumulated other comprehensive income to results of operations
with zero net effect on earnings.

     The Company holds equity securities stated at cost, which represent long-
term investments in private companies made for business and strategic alliance
purposes.  The Company's ownership share in these companies ranges from 1% to
10% of voting share capital.  Consistent with the Company's policies for other
long-lived assets, the carrying value of these long-term investments is
periodically reviewed for impairment based upon such quantitative measures as
undiscounted cash flows as well as qualitative factors.  In addition, the
Strategic Investment Committee of the Board of Directors monitors and assesses
the ongoing operating performance of the underlying companies for evidence of
impairment.  The Company recorded impairments totaling $6.1 million with respect
to these investments in the three and six months ended June 30, 2001.

     The Company recorded revenues representing less than 7% of total revenues
for the three and six months ended June 30, 2001, respectively, with respect to
arm's-length transactions with companies in which it has made strategic equity
investments recorded at cost.


NOTE 6.   SEGMENT AND GEOGRAPHIC INFORMATION

Segment information

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

Geographic information

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

                                       10
<PAGE>

     The Company operates in three main geographic areas as follows:

<TABLE>
<CAPTION>
                                                        (Unaudited)                (Unaudited)
                                                     Three Months Ended          Six Months Ended
                                                   ----------------------     ----------------------
                                                          June 30,                   June 30,
                                                   ----------------------     ----------------------
                                                     2000          2001         2000          2001
                                                   --------     ---------     --------     ---------
                                                                    (in thousands)
<S>                                                <C>          <C>           <C>          <C>
Revenues:
      United States..............................  $ 11,390     $  13,109     $ 28,499     $  27,321
      Canada.....................................     5,819         7,849       12,421        13,744
      Europe, Asia and Other.....................    12,107         9,058       17,458        20,456
                                                   --------     ---------     --------     ---------

       Total revenues............................  $ 29,316     $  30,016     $ 58,378     $  61,521
                                                   ========     =========     ========     =========

Income (loss) before income taxes:
      United States..............................  $(29,770)    $(460,543)    $(27,707)    $(502,446)
      Canada.....................................       854       (18,680)       3,299       (28,700)
      Europe, Asia and Other.....................       261           832          493         2,226
                                                   --------     ---------     --------     ---------

       Total loss before income taxes............  $(28,655)    $(478,391)    $(23,915)    $(528,920)
                                                   ========     =========     ========     =========



                                                                                          (Unaudited)
                                                                            December 31,    June 30,
                                                                            ------------   ---------
                                                                                2000          2001
                                                                              --------     ---------
                                                                                 (in thousands)

Total assets:
      United States..............................                             $671,103     $ 209,190
      Canada.....................................                               45,628        37,084
      Europe, Asia and Other.....................                               17,375         9,604
                                                                              --------     ---------

          Total..................................                             $734,106     $ 255,878
                                                                              ========     =========
</TABLE>


NOTE 7.  COMPREHENSIVE INCOME (LOSS)

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

<TABLE>
<CAPTION>
                                                        (Unaudited)                (Unaudited)
                                                     Three Months Ended          Six Months Ended
                                                   ----------------------     ----------------------
                                                          June 30,                   June 30,
                                                   ----------------------     ----------------------
                                                     2000          2001         2000          2001
                                                   --------     ---------     --------     ---------
                                                                    (in thousands)
<S>                                                <C>          <C>           <C>          <C>
Net loss...............................            $(28,942)    $(478,787)    $(25,624)    $(529,666)
Translation adjustments................                 375         1,161          976          (482)
                                                   --------     ---------     --------     ---------
Comprehensive loss.....................            $(28,567)    $(477,626)    $(24,648)    $(530,148)
                                                   ========     =========     ========     =========
</TABLE>

NOTE 8.   LEGAL PROCEEDINGS

     On July 7, 2000, an action entitled Frankel v. Entrust Technologies, Inc.,
et al., No. 2-00-CV-119, was filed against the Company and certain of its
officers. The action was filed in the U.S. District Court for the Eastern
District of Texas. Subsequently, several similar actions were filed in the same
court. All of these actions have been consolidated. On January 22, 2001, a
consolidated amended complaint was filed. The consolidated amended complaint
purports to be a class action lawsuit brought on behalf of persons who purchased
or otherwise acquired the Company's common stock during the period from October
19, 1999 through July 3, 2000. The complaint alleges that the defendants
misrepresented and failed to disclose certain information about its business and
prospects. The complaint asserts claims under the Securities Exchange Act of
1934. The complaint does not specify the amount of damages sought.

     The Company moved to dismiss the consolidated complaint.  On July 31, 2001,
the Court granted the motion to dismiss.  The Court granted plaintiffs 30 days
leave to file an amended complaint.  There has been no discovery to date, and no
trial date has been established.

     The Company believe this class action is without merit and intend to deny
all material allegations and to defend itself vigorously.  An adverse judgment
or settlement in this lawsuit could have a significant adverse impact on the
Company's future financial condition or results of operations.

                                       11
<PAGE>

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

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

OVERVIEW

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

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

                                       12
<PAGE>

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                     (Unaudited)        (Unaudited)
                                                 THREE MONTHS ENDED   SIX MONTHS ENDED
                                                      JUNE 30,            JUNE 30,
                                                 ------------------   ----------------
                                                  2000       2001      2000      2001
                                                 ------   ---------   ------   -------
<S>                                              <C>      <C>         <C>      <C>
Revenues:
  License......................................    64.1%       41.8%    68.0%     37.6%
  Services and maintenance.....................    35.9        58.2     32.0      62.4
                                                 ------   ---------   ------   -------

    Total revenues.............................   100.0       100.0    100.0     100.0
                                                 ------   ---------   ------   -------
Cost of revenues:
  License......................................     3.3         4.0      3.2       3.4
  Services and maintenance.....................    20.7        37.7     18.2      40.1
                                                 ------   ---------   ------   -------

    Total cost of revenues.....................    24.0        41.7     21.4      43.5
                                                 ------   ---------   ------   -------

Gross profit...................................    76.0        58.3     78.6      56.5
                                                 ------   ---------   ------   -------
Operating expenses:
  Sales and marketing..........................    50.8       127.3     47.6     105.3
  Research and development.....................    19.9        27.8     18.5      29.0
  General and administrative...................     9.3        31.2      8.4      22.8
  Acquired in-process research and
       development.............................   101.0          --     50.7        --
  Amortization of purchased product rights.....      --         4.6       --       4.5
  Amortization of goodwill and other
       purchased intangibles...................     5.5        96.3      3.9      94.0
  Impairment of goodwill, purchased product
       rights and other purchased intangibles..      --     1,089.3       --     531.4
  Restructuring charges........................      --       218.3       --     106.5
  Write-down of leaseholds and other
       long-lived assets.......................      --        45.0       --      22.0
                                                 ------   ---------   ------   -------
         Total operating expenses..............   186.5     1,639.8    129.1     915.5
                                                 ------   ---------   ------   -------
Loss from operations...........................  (110.5)   (1,581.5)   (50.5)   (859.0)
Interest income................................    12.7         8.0      9.6       9.2
Write-down of strategic long-term investments..      --       (20.3)      --      (9.9)
                                                 ------   ---------   ------   -------
Loss before income taxes.......................   (97.8)   (1,593.8)   (40.9)   (859.7)
Provision for income taxes.....................     0.9         1.3      3.0       1.2
                                                 ------   ---------   ------   -------

Net loss.......................................  (98.7)%  (1,595.1)%  (43.9)%  (860.9)%
                                                 ======   =========   ======   =======
</TABLE>

REVENUES

     We generate revenues from licensing the rights to our software products to
end-users and, to a lesser extent, from sublicense fees from resellers. We also
generate revenues from consulting, training and post-contract support, or
maintenance, performed for customers who license our products.  We recognize
revenues in accordance with the provisions of the American Institute of
Certified Public Accountants' Statement of Position ("SOP") No. 97-2, "Software
Revenue Recognition" and SOP No. 98-9, "Modifications of SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions".

                                       13
<PAGE>

     Revenues from perpetual software license agreements are recognized as
revenue upon receipt of an executed license agreement, or an unconditional order
under an existing license agreement, and shipment of the software, if there are
no significant remaining vendor obligations, collection of the receivable is
probable and payment is due within twelve months. Revenues from license
agreements requiring the delivery of significant unspecified software products
in the future are accounted for as subscriptions and, accordingly, are
recognized ratably over the term of the agreement from the first instance of
product delivery.

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

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

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


Total Revenues

     Total revenues increased 2% from $29.3 million for the three months ended
June 30, 2000 to $30.0 million for the three months ended June 30, 2001. Total
revenues increased 5% from $58.4 million for the six months ended June 30, 2000
to $61.5 million for the six months ended June 30, 2001. Total revenues derived
from North America in the three months ended June 30, 2001 increased 3% to $21.0
million from $17.2 million in the same period in 2000, while total revenues
derived from outside of North America decreased 25% from $12.1 million for the
three months ended June 30, 2000 to $9.1 million for the three months ended June
30, 2001. Total revenues derived from North America in the six months ended June
30, 2001 were flat when compared with those of the same period in 2000, while
total revenues derived from outside of North America increased 17% from $17.5
million for the six months ended June 30, 2000 to $20.5 million for the six
months ended June 30, 2001. The level of North American revenues has remained
fairly consistent in the three and six-month periods ended June 30, 2001,
compared to the same periods in 2000. The majority of the overall growth in
total revenues in the first six months of 2001 was experienced outside of North
America, which is reflective of the resources invested to focus on those regions
in recent quarters prior to the second quarter of 2001. We focused on growing
our revenue base internationally, particularly in Europe, Asia and South
America, which resulted in an increase in non-North American revenues in the six
months ended June 30, 2001 compared to the same six-month period in 2000.
However, revenues generated outside of North America decreased in the second
quarter of 2001, compared to the same quarter of 2000, primarily due of our
restructuring, which resulted in fewer resources being applied to certain sales
regions outside of North America, especially in Asia Pacific and Latin America,
and due to the continued softening of the economic climate internationally. The
level of non-North American revenues has fluctuated from period to period and
this trend is expected to continue for the foreseeable future. In the three
months ended June 30, 2001, one customer accounted for 14% of total revenues. In
the first half of 2001, no single customer accounted for 10% or more of total
revenues.

License Revenues

     License revenues decreased 33% from $18.8 million for the three months
ended June 30, 2000 to $12.6 million for the three months ended June 30, 2001,
representing 64% and 42% of total revenues in the respective periods.  License
revenues decreased 42% from $39.7 million for the six months ended June 30, 2000
to $23.1 million for the six months ended June 30, 2001, representing 68% and
38% of total revenues in

                                       14
<PAGE>

the respective periods. The decrease in license revenues in absolute dollars was
primarily due to the slowing of the global economy, particularly the economic
downturn experienced in North America. The types of license transactions most
significantly impacted by the less favorable economic conditions were those
license transactions greater than $500,000 in value, which normally represent a
substantial deployment to a broad base of users or the addition of new
applications to customers' previously installed infrastructure. The rapid global
downturn has had a significant impact on information technology projects and, as
a result, customers could not make the commitments we were expecting at the end
of the first and second quarters of 2001. License revenues as a percentage of
total revenues decreased for the three and six months ended June 30, 2001
compared to the same periods in 2000, partly due to continued strong demand for
services and maintenance from our customers and increased professional services
revenues from the addition of CygnaCom Solutions, Inc. in March 2000, and
enCommerce, Inc. in June 2000, and partly due to decreased license revenues in
the first half of 200l.

Services and Maintenance Revenues

     Services and maintenance revenues increased 67% from $10.5 million for the
three months ended June 30, 2000 to $17.5 million for the three months ended
June 30, 2001, representing 36% and 58% of total revenues in the respective
periods. Services and maintenance revenues increased 105% from $18.7 million for
the six months ended June 30, 2000 to $38.4 million for the six months ended
June 30, 2001, representing 32% and 62% of total revenues in the respective
periods. The increase in services and maintenance revenues in absolute dollars
was primarily the result of an increase in demand for consulting services and
customer support, the acquisitions of CygnaCom and enCommerce, and increases in
maintenance revenues from a larger installed product base and strong customer
renewals of annual maintenance agreements. The growth in our customer base has
resulted in acceleration in the demand from customers to assist them in
deploying our solutions. We have invested heavily in additional professional
services resources in response to this increased demand from customers. In
addition, revenue from our Entrust.Net(TM) certification authority business,
which began operating in May 1999, started to contribute significantly to total
services and maintenance revenues in the latter part of 2000 and in the first
half of 2001. The increase in services and maintenance revenues as a percentage
of total revenues reflected a continuing shift in mix of revenues from license
to service and maintenance revenues in the first six months of 2001 compared to
the same period in 2000. This shift was largely due to the continued growth of
our services and maintenance business in response to customer demand, the impact
of the professional services revenues of CygnaCom and enCommerce since their
respective acquisitions, and the decrease in license revenues in the first half
of 2001. We continue to focus on developing new service offerings for our
customers that are core to our business and also on building our relationships
with third-party service providers so that we have adequate resources available
to meet the demand of our customers.


COST OF REVENUES

Cost of License Revenues

     Cost of license revenues consists primarily of costs associated with
product media, documentation, packaging and royalties to third-party software
vendors. Amortization of purchased product rights acquired as part of the
acquisition of enCommerce has been excluded from cost of license revenues and
instead has been included in operating expenses. Cost of license revenues
increased from $953,000 for the three months ended June 30, 2000 to $1.2 million
for the three months ended June 30, 2001, representing 4% and 3% of total
revenues for the respective periods. Cost of license revenues increased from
$1.9 million for the six months ended June 30, 2000 to $2.1 million for the six
months ended June 30, 2001, representing 3% of total revenues for each of the
respective periods. The increase in cost of license revenues in absolute dollars
was primarily a result of higher royalty fees paid to third-party software
vendors, as we have incorporated a higher level of third-party software in our
products sold in the first six months of 2001 despite lower license revenue
levels, compared to the same period of 2000. The mix of third-party products may
vary from period to period and, consequently, our gross margins and results of
operations could be adversely affected.

                                       15
<PAGE>

Cost of Services and Maintenance Revenues

     Cost of services and maintenance revenues consists primarily of personnel
costs associated with customer support, training and consulting services, as
well as amounts paid to third-party consulting firms for those services. Cost of
services and maintenance revenues increased from $6.1 million for the three
months ended June 30, 2000 to $11.3 million for the three months ended June 30,
2001, representing 21% and 38% of total revenues for the respective periods.
Cost of services and maintenance revenues increased from $10.6 million for the
six months ended June 30, 2000 to $24.7 million for the six months ended June
30, 2001, representing 18% and 40% of total revenues for the respective periods.
The increase in absolute dollars during the three and six months ended June 30,
2001 reflected the increased costs associated with the increased levels of
services and maintenance revenues experienced in this period and the increased
costs associated with the CygnaCom and enCommerce resources. The increase in the
cost of services and maintenance revenues as a percentage of total revenues in
the three and six months ended June 30, 2001 reflected the rapid growth of
services and maintenance revenues in comparison to license revenues, and
reflected the significant shift in the mix of revenues from license to services
and maintenance revenues in the first half of 2001 compared to the first half of
2000. As the services and maintenance revenues represented the larger proportion
of total revenues and grew faster than total revenues, the cost of generating
those services and maintenance revenues represented a much larger percentage
when compared against total revenues, because significant investment was
necessary in order to prepare for current and future growth in this business.
Also, we made significant investments in additional customer support personnel
to support the growing base of customers with previously installed products.


     Services and maintenance gross profit as a percentage of services and
maintenance revenues was 42% and 35 % for the three months ended June 30, 2000
and 2001, respectively. Services and maintenance gross profit as a percentage of
services and maintenance revenues was 43% and 36% for the six months ended June
30, 2000 and 2001, respectively. This decrease in the services and maintenance
gross profit as a percentage of services and maintenance revenues for the three
and six months ended June 30, 2001, compared to the same periods in 2000,
reflected the investment we made in the professional services team through the
acquisition of CygnaCom late in the first quarter of 2000 and enCommerce at the
end of the second quarter of 2000, which represented a shift in the mix of
overall services revenues toward the lower-margin professional services
revenues. Also, the decrease in the services and maintenance gross profit as a
percentage of services and maintenance revenues reflected the investment made in
additional customer support personnel since the first half of 2000, and the
continued development and rollout of our new service offerings.



OPERATING EXPENSES

Sales and Marketing

<TABLE>
<CAPTION>
                                                            (Unaudited)           (Unaudited)
                                                         ----------------      -----------------
                                                           Three Months           Six Months
                                                         ----------------      -----------------
                                                          Ended June 30,         Ended June 30,
                                                         ----------------      -----------------
                                                           2000      2001        2000      2001
                                                         -------   -------     -------   -------
<S>                                                      <C>       <C>         <C>       <C>
Per statement of operations...................           $14,905   $38,219     $27,762   $64,799
Less: Special non-recurring charges included..               ---    15,915         ---    15,915
                                                         -------   -------     -------   -------
Pro forma.....................................           $14,905   $22,304     $27,762   $48,884
                                                         =======   =======     =======   =======
Percentage of total revenues..................                51%       74%         48%       79%
                                                         =======   =======     =======   =======
</TABLE>

     Sales and marketing expenses, on a pro forma basis, increased from $14.9
million and $27.8 million for the three and six months ended June 30, 2000 to
$22.3 million and $48.9 million for the comparable periods in 2001.  Sales and
marketing expenses, on a pro forma basis, represented 51% and 48% of total
revenues for

                                       16
<PAGE>

the three and six months ended June 30, 2000, compared to 74% and 79% for the
same periods in 2001. The increase in absolute dollars in the first half of 2001
was primarily the result of costs associated with the expansion of our sales and
marketing organization, both domestically and internationally. In addition,
until the implementation of our restructuring plan, in June 2001, we continued
to make significant investments in marketing to support the launch of new
products, services and marketing programs. We had continued our strategy of
investing in (a) hiring and training the members of our direct sales
organization in anticipation of future market growth, and (b) marketing efforts
in support of new product launches. Further, failure of these investments, as
adjusted through our restructuring plan, to generate future revenues will have a
significant adverse effect on our operations. The increase in sales and
marketing expenses as a percentage of total revenues for the three and six
months ended June 30, 2001, compared to the same period in 2000, was mainly due
to the combination of lower than expected license revenues in the first half of
2001, and sales and marketing expenses that were largely fixed prior to the
beginning of each of the first two quarters of 2001 based on expected license
revenues for the periods. The increase in sales and marketing expenses as a
percentage of total revenues in the first half of 2001 also reflected the
increased expenses related to the impact of the enCommerce sales and marketing
organization. We will continue to focus on improving the productivity of our
sales and marketing organizations, in light of the current economic conditions.


Research and Development

<TABLE>
<CAPTION>
                                                        (Unaudited)           (Unaudited)
                                                     -----------------     ------------------
                                                        Three Months           Six Months
                                                     -----------------     ------------------
                                                       Ended June 30,        Ended June 30,
                                                     -----------------     ------------------
                                                      2000       2001        2000       2001
                                                     ------    -------     -------    -------
<S>                                                  <C>       <C>         <C>        <C>
Per statement of operations...................       $5,825     $8,345     $10,818    $17,832
Less: Special non-recurring charges included..          ---        ---         ---        ---
                                                     ------     ------     -------    -------
Pro forma.....................................       $5,825     $8,345     $10,818    $17,832
                                                     ======     ======     =======    =======
Percentage of total revenues..................           20%        28%         19%        29%
                                                     ======     ======     =======    =======
</TABLE>


     Research and development expenses, on a pro forma basis, increased from
$5.8 million and $10.8 million for the three and six months ended June 30, 2000
to $8.3 million and $17.8 million for the comparable periods in 2001.  Research
and development expenses, on a pro forma basis, represented 20% and 19% of total
revenues for the three and six months ended June 30, 2000, compared to 28% and
29% for the comparable periods in 2001.  The increase in research and
development expenses in absolute dollars in the first half of 2001 reflected
higher expenses related to increased staffing of software developers.  We hired
these employees primarily in connection with the continuing expansion,
enhancement and globalization of our product offerings, our commitment to
quality assurance and testing, and the addition of development employees in
connection with the acquisition of enCommerce.  Research and development
expenses as a percentage of total revenues increased for the three and six
months ended June 30, 2001, compared to the same periods in the previous year,
due primarily to the lower than expected license revenues, as these costs were
largely fixed prior to the start of the first two quarters of 2001, and due to
the acquisition of enCommerce and the corresponding addition of the
getAccess(TM) development team. The cost reduction impact of our restructuring
on research and development expenses did not come into effect until June 2001.
However, we believe that we must continue to invest in research and development
in order to maintain our technological leadership position and, thus, we expect
research and development expenses to continue to increase in absolute dollars as
additional experienced security experts and software engineers are required.

                                       17
<PAGE>

General and Administrative

<TABLE>
<CAPTION>
                                                        (Unaudited)           (Unaudited)
                                                     -----------------     ------------------
                                                        Three Months           Six Months
                                                     -----------------     ------------------
                                                       Ended June 30,        Ended June 30,
                                                     -----------------     ------------------
                                                      2000       2001        2000       2001
                                                     ------    -------     -------    -------
<S>                                                  <C>       <C>         <C>        <C>
Per statement of operations...................       $2,722    $ 9,363     $ 4,914    $14,050
Less: Special non-recurring charges included..          ---      5,596         ---      5,596
                                                     ------    -------     -------    -------
Pro forma.....................................       $2,722    $ 3,767     $ 4,914    $ 8,454
                                                     ======    =======     =======    =======
Percentage of total revenues..................            9%        13%          8%        14%
                                                     ======    =======     =======    =======
</TABLE>


     General and administrative expenses, on a pro forma basis, increased from
$2.7 million and $4.9 million for the three and six months ended June 30, 2000
to $3.8 million and $8.5 million for the comparable periods in 2001. General and
administrative expenses, on a pro forma basis, represented 9% and 8% of total
revenues for the three and six months ended June 30, 2000, compared to 13% and
14% for the comparable periods in 2001.  The increase in general and
administrative expenses in absolute dollars reflected our continued investment
in increased staffing and related expenses for the enhancement of the
infrastructure necessary to support our growing business, including investor
relations programs, improved management information systems and the increased
utilization of outside professional service firms. In addition, the increase in
general and administrative expenses compared to the first half of 2000 was
partly due to expenses we incurred in connection with the resignation of a
senior executive. General and administrative expenses as a percentage of total
revenues increased for the three and six months ended June 30, 2001, compared to
the same periods in the previous year, due primarily to the lower than expected
license revenues, as these costs were largely fixed prior to the start of the
quarter. The cost reduction impact of our restructuring on general and
administrative expenses did not come into effect until June 2001. We continue to
look for ways to gain additional efficiencies in our administrative processes.


Acquired In-process Research and Development and Amortization of Goodwill,
Purchased Product Rights and Other Purchased Intangibles

     On March 14, 2000, we completed the acquisition of CygnaCom, a company
based in McLean, Virginia that delivers information technology products and
services, with expertise in public key infrastructure, cryptographic
technologies, security engineering and systems integration and development.
Pursuant to the stock purchase agreement dated March 14, 2000, entered into
between us, CygnaCom and the shareholders of CygnaCom, we agreed to acquire all
of the outstanding shares of CygnaCom for an aggregate purchase price of $16.6
million, which included cash consideration of $16.0 million.  The acquisition
was recorded under the purchase method of accounting and, therefore, the results
of operations of CygnaCom are included in our financial statements from the
acquisition date.  Upon consummation of the acquisition, CygnaCom became a
wholly owned subsidiary of Entrust, Inc.  In connection with this acquisition,
we recorded goodwill of $16.6 million and goodwill amortization of $1.4 million
was expensed in each of the three-month periods ended June 30, 2000 and 2001,
with total amortization of $1.8 million and $2.8 million expensed in the six-
month periods ended June 30, 2000 and 2001, respectively.

     On June 26, 2000, we completed the acquisition of enCommerce, a company
based in Santa Clara, California that provides software and services for
managing global e-business relationships at business-to-business and business-
to-consumer portals. The acquisition of enCommerce's outstanding capital stock,
options and warrants for a total consideration of $505.5 million was accounted
for under the purchase method of accounting, which resulted in an allocation of
$449.6 million to purchased product rights, goodwill and other purchased
intangibles. Also, in connection with this acquisition, an appraisal was done of
the intangible assets, resulting in $29.6 million of the purchase price being
allocated to in-process research and development that had not yet reached
technological feasibility and had no alternative future use. This in-process
research and development
                                       18
<PAGE>

was expensed in June 2000. Amortization of purchased product rights of $1.4
million and amortization of goodwill and other purchased intangibles of $27.3
million were expensed in the three and six months ended June 30, 2000 and 2001,
respectively.

Restructuring and Other Special Non-recurring Charges

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

     As a result of the restructuring and other related special non-recurring
charges and the impact of the macroeconomic conditions on us and our global base
of customers, we recorded restructuring costs and special non-recurring charges
of $433.6 million in the second fiscal quarter of 2001.

     A summary of the restructuring and other special non-recurring charges
recorded in the second fiscal quarter is outlined below (in millions):

<TABLE>
<CAPTION>
                                                                           Other
                                                                          Special          Total
                                                    Restructuring      Non-recurring      Special
                                                       Charges            Charges         Charges
                                                    -------------      -------------      -------
<S>                                                 <C>                <C>                <C>
Workforce reduction and other personnel costs            $13.5              $  4.1         $ 17.6

Consolidation of excess facilities                        38.2                13.5           51.4

Discontinuance of non-core
     products and programs                                13.8                 6.4           20.5

Impairment of goodwill, purchased product rights
     and other purchased intangible assets                   -               327.0          327.0

Impairment of strategic investments                          -                 6.1            6.1

Expenses related to bad debt write-offs
     and additional provisions to the allowance
     for doubtful accounts                                   -                11.0           11.0
                                                    ---------------------------------------------
Total                                                    $65.5              $368.1         $433.6
                                                    =============================================
</TABLE>

     The following paragraphs provide detailed information relating to the
restructuring programs that resulted in total special charges of $433.6 million
which was recorded in the second quarter of 2001.

     Workforce reduction

     The restructuring program resulted in the reduction of approximately 400 of
our regular full-time employees, or 33% of the total workforce. The reduction
was across all major geographic locations, all business programs, and all
functions within the organization. The reductions were more heavily weighted in
sales and marketing, non-core business programs such as Entrust.Net(TM) and
Entrust@YourService(TM) and secondary geographies such as Asia Pacific and Latin
America. The majority of the affected employees were notified of their
termination in the second quarter and the workforce portion of the restructuring
is expected to be completed in the third quarter of 2001. We recorded a
workforce reduction charge of $13.5 million primarily related to severance
costs, fringe benefits due and outplacement services.

     Also, other special non-recurring charges include employee relocation
expenses, hiring fees and signing bonuses totaling $4.1 million.

                                       19
<PAGE>

     Consolidation of excess facilities

     We recorded restructuring costs of $38.2 million relating to the
consolidation of excess facilities. The consolidation of excess facilities
includes a total of eight offices in seven cities throughout the world. The
majority (approximately 85%) of the costs are related to the 75,000 square foot
facility in Santa Clara, CA. The costs for consolidation of excess facilities
are related primarily to non-cancelable lease costs offset by estimated sublet
recoveries. These costs will be incurred over up to 10 years, which is the lease
term of the Santa Clara facility.

     In addition to the $38.2 million of restructuring costs related to excess
facilities, an additional $13.5 million of facilities-related costs were
recorded as a special non-recurring charge as a result of impairment of
leasehold improvements and property and equipment that was disposed of or
removed from operations as a result of the consolidation of excess facilities,
and were included in the write-down of leaseholds and other long-lived assets in
accordance with the provisions of SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of". These assets
were identified as assets to be disposed of that would have no future benefit to
us. Therefore, these assets were reported at the lower of carrying amount and
fair value, less costs of disposition. The majority of these costs are non-cash
charges.

     Discontinuance of non-core products and programs

     In support of our restructuring objective to reduce costs and focus on core
technologies, we discontinued several non-core products and programs.  The
discontinued products and programs, totaling $13.8 million, are primarily
related to our services business initiatives and to certain desktop applications
for which we have not achieved the growth and profitability targets in line with
our core products and financial objectives.  The restructuring charge also
includes costs related to the exit of certain marketing events and programs that
had been committed prior to the restructuring, but which are being canceled due
to the change in corporate focus. The cash outflow related to the majority of
these items is expected to be incurred by the end of the first quarter of fiscal
2002.

     The discontinuance of products and programs, and expenses related to
rebranding of our identity and our products resulted in $6.4 million of special
non-recurring charges.

     The following table is a summary of the status of the restructuring charges
as at June 30, 2001 (in millions):

<TABLE>
<CAPTION>
                                                                                            Accrued
                                                                                         Restructuring
                                             Total        Non-cash         Cash         Liabilities at
                                            Charges       Charges        Payments        June 30, 2001
                                            -------       --------       --------       ---------------
<S>                                         <C>           <C>            <C>            <C>
Workforce reduction and other
     personnel costs                          $13.5       $      -         $4.4              $ 9.1

Consolidation of excess facilities             38.2              -          0.2               38.0

Discontinuance of non-core
     products and programs                     13.8              -          0.1               13.7
                                          -------------------------------------------------------------
Total                                         $65.5       $      -         $4.7              $60.8
                                          =============================================================
</TABLE>


     Impairment of goodwill and other purchased intangible assets

     Due to the decline in our market capitalization, the decline in current
overall business conditions within our target market segments and the
restructuring program, we completed an assessment of the recoverability of
goodwill on our balance sheet.  This impairment analysis indicated that the
carrying amount of the goodwill and purchased intangible assets of the
enCommerce and r3 acquisitions will not be recovered through the estimated
undiscounted future cash flows.  We then completed an analysis of the discounted
future cash flows from the enCommerce acquisition and the r3 acquisition.  The
result of this analysis is a charge of $327 million related to the impairment of
goodwill and purchased intangible assets.  Goodwill and purchased

                                       20
<PAGE>

intangibles from the enCommerce acquisition account for $325.4 million of the
impairment. This acquisition has failed to meet the financial planning forecasts
made at the time of the acquisition due largely to the change in the economic
conditions since the time of the acquisition and in part due to additional
product development and maintenance costs related to getAccess(TM) that are now
estimated to be required in the future and were not known at the time of the
acquisition. The remaining $1.6 million of goodwill impairment is the result of
the r3 acquisition, which was impacted primarily by the workforce restructuring.

     Revenues from the enCommerce products and services are estimated to have
contributed approximately 20-25% of total revenues, but are estimated to have
generated losses since acquisition. The results of operations related to the r3
acquisition were not significant.

     Write-down of strategic long-term investments

     We assess the recoverability of the carrying value of our strategic
investments on a regular basis. Factors that we consider important that could
trigger impairment include, but are not limited to, the likelihood that the
related company would have insufficient cash flows to operate for the next
twelve months, significant changes in the operating performance or business
model, and changes in overall market conditions. We recorded charges related to
other than temporary declines in the value of certain strategic investments of
$6.1 million in the three and six months ended June 30, 2001.

     Expenses related to bad debt write-offs and additional provisions to the
     allowance for doubtful accounts

     Due to changes in the economic environment and the impact of the
restructuring program, particularly the curtailment of certain products and
presence in certain geographies, we recorded bad debt write-offs and additional
provisions to the allowance for doubtful accounts totaling $11 million.

Interest Income

     Interest income decreased from $3.7 million for the three months ended June
30, 2000 to $2.4 million for the comparable period in 2001, while interest
income remained flat for the six months ended June 30, 2001, compared to the
same period in 2000, at $5.6 million.  Interest income represented 8% and 9% of
total revenues for the three and six months ended June 30, 2001, compared to 13%
and 10% for the comparable periods in 2000.  This decrease in investment income
in the second quarter of 2001 reflected the reduced balance of funds invested,
as these amounts have been drawn down to fund cash flow from operations and to
acquire long-lived assets and strategic long-term investments.


Provision for Income Taxes

     We recorded an income tax provision of $396,000 and $746,000 for the three
and six months ended June 30, 2001 compared with an income tax provision of
$287,000 and $1.7 million for the same periods of 2000.  We account for income
taxes in accordance with Statement of Financial Accounting Standards No. 109.
The effective income tax rates differed from statutory rates primarily due to
the non-deductible in-process research and development, write-down of strategic
long-term investments, leaseholds and other long-lived assets, amortization and
impairment of goodwill, purchased product rights, and other purchased intangible
assets, as well as an adjustment of the valuation allowance, that results in the
recognition of a portion of the tax benefits from the significant net operating
loss and tax credit carry-forwards available.


LIQUIDITY AND CAPITAL RESOURCES

     We used cash of $45.4 million from operating activities during the six
months ended June 30, 2001.  This cash outflow was primarily a result of a net
loss before non-cash charges of $104.3 million, and a decrease in accounts
payable and accrued liabilities of $12.1 million, partially offset by cash
inflows resulting in a decrease in accounts receivable of $6.8 million and
accrued restructuring charges of $60.8 million during the period. Our average
days sales outstanding at June 30, 2001 was 85 days, which represented a
decrease from the 118 days that we reported at March 31, 2001. The overall
decrease in days sales outstanding from March 31, 2001 reflected the bad debt
write-offs and change in estimate for the allowance for doubtful accounts
undertaken as part of the restructuring program, and better collection cycles
despite longer payment terms for international customers and the shift in
revenue mix towards a higher percentage of professional services revenues, which
generally remain in accounts receivable longer than license revenues. For
purposes of calculating average days sales outstanding, we divide ending
accounts receivable by the current quarter's revenues and multiply this amount
by 90 days. The level of accounts receivable at each quarter end will be
affected by the concentration of revenues in the final weeks of each quarter and
may be negatively affected by expanded international revenues in relation to
total revenues as licenses to international customers often have longer payment
terms.

                                       21
<PAGE>

     During the six months ended June 30, 2001, we generated $50.2 million of
cash from investing activities, primarily due to cash provided by reductions in
our marketable investments in the amount of $65.5 million (net of $139.6 million
of marketable investment purchases). This was partially offset by $12.3 million
invested in property and equipment, $1.8 million invested in long-term
investments and $1.2 million invested in other long-term assets. The property
and equipment investments were primarily computer hardware, furniture and
leasehold improvements to support our organization, largely costs related to the
fit-up of our facility in Santa Clara, California and completion of the fit-up
of our facility in Ottawa, Canada. The long-term investments funded were
strategic in nature, represented investments in less than 10% of the capital
stock of privately held electronic security and technology companies, and was
accounted for on a cost basis. Equity investments such as these give us better
access to various geographic and vertical markets, as well as access to emerging
technologies and products. The investment in other long-term assets relates
primarily to product localization work performed by third party contractors.

     Cash provided by financing activities for the six months ended June 30,
2001 was $2.1 million, primarily from the exercise of employee stock options and
the sale of shares under our employee stock purchase plan.

     As of June 30, 2001, our cash, cash equivalents and short-term investments
in the amount of $169.4 million provided our principal sources of liquidity.  We
believe that cash flows from operations and existing cash and cash equivalents
and short-term investments will be sufficient to meet our needs for at least the
next twelve months.


Certain Factors That May Affect Our Business

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

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

     .  length of sales cycles associated with our product offerings;

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

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

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

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

     .  changes in pricing policies by our competitors;

     .  changes in our operating expenses; and

     .  fluctuations in foreign currency exchange rates.

                                       22
<PAGE>

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

     Estimating future revenues is difficult because we ship our products soon
after an order is received and, as such, we do not have a significant backlog.
Thus, quarterly license revenues depend heavily upon orders received and shipped
within the same quarter. Moreover, we historically have recorded 60% to 80% of
our total quarterly revenues in the third month of the quarter, with a
concentration of revenues in the second half of that month. We expect that this
concentration of revenues, which is attributable in part to the tendency of some
customers to make significant capital expenditures at the end of a fiscal
quarter and to sales patterns within the software industry, will continue for
the foreseeable future.

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

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

     In June 2001, we announced a restructuring of our business, which included
a reduction in force and the closure of three international locations, as well
as other steps we took to reduce expenses. The planning and implementation of
our restructuring has placed, and may continue to place, a significant strain on
our managerial, operational, financial and other resources. Additionally, the
restructuring may negatively affect our employee turnover, recruiting and
retention of important employees. If we are unable to implement our
restructuring effectively, or if we experience difficulties in effecting the
restructuring, our expenses could increase more quickly than we expect. If we
find that our restructuring announced in June did not sufficiently decrease the
growth of our expenses, we may find it necessary to implement further
streamlining of our expenses, to perform another reduction in our headcount or
to undertake a restructuring of our business.

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

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

     .  customers' budgetary constraints;

     .  the timing of customers' budget cycles; and

     .  customers' internal approval processes.

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


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

     Historically, a limited number of customers has accounted for a significant
percentage of our revenues. In 1998, our three largest customers accounted for
23% of revenues. In 1999, our three largest customers accounted for 31% of
revenues, with the largest customer accounting for 24% of revenues.   In 2000,
our three largest customers accounted for 12% of revenues.  Our three largest
customers accounted for 17% of revenues for the six months ended June 30, 2001.
We anticipate that our results of operations in any given period will continue

                                       23
<PAGE>

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


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

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

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

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

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

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

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

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

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


If our products contain errors or bugs, sales of our products would likely
decline

     Our products may contain errors, failures or bugs that our existing testing
procedures have not detected. The errors may become evident at any time during
the life of our products. The discovery of any errors, failures or bugs in any
products may result in:

     .  adverse publicity;

     .  product returns;

     .  the loss or delay of market acceptance of our products; and

     .  third-party claims against us.

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

                                       24
<PAGE>

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

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

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

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

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

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

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

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

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

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


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

     Our future success depends upon our ability to continue to attract and
retain highly qualified scientific, technical, sales and managerial personnel.
Competition for such personnel is intense, particularly in the field of
cryptography, and there can be no assurance that we can retain our key
scientific, technical, sales and managerial employees or that we can attract,
motivate or retain other highly qualified personnel in the future. If we cannot
retain or are unable to hire such key personnel, our business, financial
condition and results of operations could be significantly adversely affected.

                                       25
<PAGE>

Our reliance on energy supplies could become costly

     As a result of our reliance on a continuous power supply to conduct our
operations, California's current energy crisis could disrupt our operations and
increase our expenses.

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

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


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

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

     .  difficulties in collecting international accounts receivable;

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

     .  potentially longer payment cycles for customer payments;

     .  increased costs associated with maintaining international marketing
        efforts;

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

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

     .  difficulties managing personnel and operations in remote locations; and

     .  increased complexity in global corporate tax structure.

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

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

     Some of our products are subject to export controls under laws of the U.S.,
Canada and other countries. The list of products and countries for which exports
are restricted, and the relevant regulatory policies, are

                                       26
<PAGE>

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

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

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

     .  copy aspects of our products;

     .  obtain and use information that we regard as proprietary; or

     .  infringe upon our patents.

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

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

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

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

     Our inability or failure to protect our proprietary rights could have a
significant adverse effect on our business, financial condition or results of
operations.

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

     As the number of security products in the industry increases and the
functionality of these products further overlaps, software developers and
publishers may increasingly become subject to claims of infringement or
misappropriation of the intellectual property or proprietary rights of others.
We received notice from one of our customers stating that we may be responsible
for indemnifying that customer under a product license agreement for
infringement of patents assigned to a third party.  To date, the customer has
not made a formal claim for indemnification from us.  In addition, third parties
may assert infringement or misappropriation claims against us in the future.
Defending or enforcing our intellectual property could be costly and could
result in a diversion of management's attention, which could have a significant
adverse effect on our business, financial condition or results of operations. A
successful claim against us could also have a significant adverse effect on our
results of operations for the period in which damages are paid.

                                       27
<PAGE>

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

     We rely on outside licensors for patent and/or software license rights in
technology that is incorporated into and is necessary for the operation of our
products. For example, our ability to provide Web server certificates is
currently dependent upon a licensing agreement we have with Thawte Consulting
(Pty.) of South Africa, which was acquired in January 2000 by Verisign, Inc.,
one of our primary competitors.  Our success will depend in part on our
continued ability to have access to such technologies that are or may become
important to the functionality of our products.  Any inability to continue to
procure or use such technology could have a significant adverse effect on our
ability to sell some of our products.


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

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

     .  actual or anticipated fluctuations in our operating results;

     .  announcements of technological innovations;

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

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

     .  conditions and trends in the security industry;

     .  changes in financial estimates by securities analysts; and

     .  general market conditions and other factors.


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

     Nortel Networks Corporation, through its subsidiary, Nortel Networks Inc.,
beneficially owned approximately 25.5% of our outstanding voting stock as of
August 10, 2001, and one of our eight directors is a representative of Nortel
Networks. Accordingly, Nortel Networks has the ability to exert significant
influence over our affairs, including the election of directors and decisions
relating to our strategic and operating activities. This concentration of
ownership and board representation may have the effect of delaying or preventing
a change in control that other stockholders may find favorable.

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

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

                                       28
<PAGE>

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Risk Associated with Interest Rates

     Our investment policy states that we will invest our cash reserves,
including cash, cash equivalents and marketable investments, in investments that
are designed to preserve principal, maintain liquidity and maximize return. We
actively manage our investments in accordance with these objectives. Some of
these investments are subject to interest rate risk, whereby a change in market
interest rates will cause the principal amount of the underlying investment to
fluctuate. Therefore, depreciation in principal value of an investment is
possible in situations where the investment is made at a fixed interest rate and
the market interest rate then subsequently increases. We try to manage this risk
by maintaining our cash, cash equivalents and marketable investments with high
quality financial institutions and investment managers. We also restrict the
investments to primarily securities with short-term maturities, such that, at
June 30, 2001, the majority of our marketable investments had maturities of less
than six months from that date. As a result, we believe that our exposure to
market risk related to interest rates is minimal.

     The following table presents the cash, cash equivalents and marketable
investments that we held at June 30, 2001, that would have been subject to
interest rate risk, and the related ranges of maturities as of that date:

<TABLE>
<CAPTION>
                                                                                      MATURITY
                                                                                   (in thousands)

                                                                                                       More than
                                                                Within 3 Months      3-6 Months         6 Months
                                                                ---------------      ----------       ----------
<S>                                                             <C>                  <C>              <C>
Investments classified as cash and cash equivalents...........      $26,330            $    --          $    --
Investments classified as marketable investments..............       47,395             35,469           48,123
                                                                    -------            -------          -------
  Total amortized cost........................................      $73,725            $35,469          $48,123
                                                                    =======            =======          =======
Fair value....................................................      $73,738            $35,469          $48,085
                                                                    =======            =======          =======
</TABLE>

Risk Associated with Exchange Rates

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

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


Risk Associated with Equity Investments

     We hold short-term equity securities of a publicly traded company.  It is
possible that the market value of these securities could decline significantly
in the near future.  For example, due to recent stock market volatility, we
recorded cumulative unrealized and realized losses of $1.5 million in this
investment based on its market value at June 30, 2001.  In connection with this
investment, we have engaged in a hedging transaction that provides us with the
right to receive an amount equal to the difference between the price we paid for
these securities and the aggregate of the fair market values on the dates that
the securities are made available for sale on the public market.  We recorded an
unrealized gain of $1.5 million as of June 30, 2001 as a result of this

                                       29
<PAGE>

hedging transaction. However, this hedging activity may not sufficiently cover
the value of this investment.

     In addition, we have invested in several privately held companies, most of
which are technology companies in the start-up or development stage, or are
companies with technologies and products that are targeted at geographically
distant markets.  If the demand for the technologies and products offered by
these privately held companies materializes slowly, to a minimum extent, or not
at all in the relevant markets, we could lose all or substantially all of our
investments in these companies.  To date, we have recorded losses of $6.1
million from impairments in connection with these investments.



PART II.  OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS

     On July 7, 2000, an action entitled Frankel v. Entrust Technologies Inc.,
et al., No. 2-00-CV-119, was filed against us and certain of our officers. The
action was filed in the U.S. District Court for the Eastern District of Texas.
Subsequently, several similar actions were filed in the same court. All of these
actions have been consolidated. On January 22, 2001, a consolidated amended
complaint was filed. The consolidated amended complaint purports to be a class
action lawsuit brought on behalf of persons who purchased or otherwise acquired
our common stock during the period from October 19, 1999 through July 3, 2000.
The complaint alleges that the defendants misrepresented and failed to disclose
certain information about our business and prospects. The complaint asserts
claims under the Securities Exchange Act of 1934. The complaint does not specify
the amount of damages sought.

     We moved to dismiss the consolidated complaint. On July 31, 2001, the Court
granted our motion to dismiss. The Court granted plaintiffs 30 days leave to
file an amended complaint. There has been no discovery to date, and no trial
date has been established.

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


ITEM 2.   CHANGES IN SECURITIES AND USE OF PROCEEDS

     On April 22, 2001, we issued a warrant to purchase 258,333 shares of our
common stock at an exercise price of $6.87 per share to a consultant. We issued
the warrant in consideration for $1.00 and other good and valuable
consideration, including the provision of executive search services by the
consultant. The warrant is immediately exercisable in full and terminates on
April 22, 2004. In the event of a recapitalization of our stock, the number of
shares subject to warrant and the exercise price of the warrant will be
proportionally adjusted.

     No underwriters were involved in the placement of the warrant.  The warrant
was issued to an "accredited investor" (as defined in the Securities Act of
1933) in reliance upon an exemption from the registration provisions of the
Securities Act set forth in Section 4(2) thereof relative to sales by an issuer
not involving any public offering.  Any shares of common stock issuable upon
exercise of the warrant will be "restricted securities" within the meaning of
the Securities Act.


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

          On April 27, 2001, we held our Annual Meeting of Stockholders. Shares
of stock with 48,071,642 votes were represented at the meeting out of a total of
63,058,738 shares entitled to vote. The following sets forth a description of
each matter voted on and the votes cast:

     1)   A proposal to elect Terrell B. Jones as a Class III Director of the
          Company for a 3-year term.

          For the above-referenced matter (1), 47,759,061 votes were cast in
          favor and 312,581 were withheld.


     2)   A proposal to elect Michael P. Ressner as a Class III Director of the
          Company for a 3-year term.

          For the above-referenced matter (2), 45,208,147 votes were cast in
          favor and 2,863,495 were withheld.


     3)   A proposal to elect Christopher M. Stone as a Class III Director of
          the Company for a 3-year term.

          For the above-referenced matter (3), 47,758,909 votes were cast in
          favor and 312,733 were withheld.

     Our other directors, whose terms of office as directors continued after the
     Annual Meeting, are Butler C. Derrick, Jr., Jawaid Ekram, James A. Thomson,
     F. William Conner and J. Alberto Yepez.

     4)   Approval of an amendment to our Amended and Restated Charter to
          increase the total number of authorized shares of Common Stock from
          100,000,000 shares to 250,000,000 shares and to eliminate the Special
          Voting Stock from our authorized capital and delete all references to
          Special Voting Stock contained in the Amended and Restated Charter.

          For the above-referenced matter (4), 43,081,142 votes were cast in
          favor, 4,734,535 were against, 64,678 abstained, and 191,287 were
          broker non-votes.


                                       30
<PAGE>

     5)   Approval of an amendment to our 1998 Employee Stock Purchase Plan, as
          amended, to increase the total number of shares of Common Stock
          authorized for issuance thereunder from 400,000 shares to 1,000,000
          shares.

          For the above-referenced matter (5), 47,314,143 votes were cast in
          favor, 698,207 were against, 54,262 abstained, and 5,030 were broker
          non-votes.

     6)   Ratification of the appointment of Deloitte & Touche LLP as our
          independent public accountants for the current year.

          For the above-referenced matter (6), 46,877,011 votes were cast in
          favor, 885,538 were against, and 309,093 abstained.


ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

List of Exhibits


  Exhibit No.                               Description
  -----------                               -----------
     3.1(1)    Amended and Restated Articles of Incorporation of the Registrant

     3.2       Articles of Amendment of Charter of the Registrant filed with the
               State Department of Assessments and Taxation of Maryland on
               April 27, 2001

     3.3       Articles of Amendment of Charter of the Registrant filed with the
               State Department of Assessments and Taxation of Maryland on
               June 4, 2001

     4.1       Specimen certificate for shares of Common Stock, $.01 par value,
               of the Registrant

     10.1      Employment Agreement dated as of April 22, 2001 by and between F.
               William Conner and the Registrant

     10.2      Special Nonstatutory Stock Option Agreement dated April 22, 2001
               between the Registrant and F. William Conner

     10.3      Nonstatutory Stock Option Agreement Granted Under the Amended and
               Restated 1996 Stock Incentive Plan dated April 22, 2001 between
               the Registrant and F. William Conner

     10.4      Common Stock Purchase Warrant of the Registrant dated April 22,
               2001 to Heidrick & Struggles, Inc.

     10.5      Separation and Release Agreement dated June 28, 2001 between the
               Registrant and J. Alberto Yepez

     10.6      Separation Agreement and Release dated May 30, 2001 between the
               Registrant and Paul Doscher

     10.7      Form of Nonstatutory Stock Option Agreement Granted Under the
               Amended and Restated 1996 Stock Incentive Plan to Non-Employee
               Directors of the Registrant
------------
(1) Incorporated herein by reference to the Registrant's Registration Statement
    on Form S-1 (File No. 333-57275]

Reports on Form 8-K:

                                       31
<PAGE>

     On May 30, 2001, the Registrant filed a Current Report on Form 8-K, dated
April 27, 2001, to report under Item 5 (Other Events) an updated description of
the securities of the Company. No financial statements were required to be filed
with this report.

     On June 4, 2001, the Registrant filed a Current Report on Form 8-K, dated
June 4, 2001, to report under Item 5 (Other Events) its undertaking of a
restructuring pursuant to which it was implementing a series of strategic
initiatives aimed at refocusing its resources on the most significant market
opportunities and on reducing costs; and under Item 7 (Financial Statements, Pro
Forma Financial Information and Exhibits) the Press Release dated June 4, 2001,
referenced as Exhibit 99. Also under Item 5 (Other Events), the Registrant
reported the changing of its corporate name from "Entrust Technologies Inc." to
"Entrust, Inc."

                                       32
<PAGE>

                                  SIGNATURES

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


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

Dated: August 14, 2000

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

                                       33
<PAGE>
                                 ENTRUST, INC.

                              INDEX TO EXHIBITS

   Exhbit No.                           Description
   ----------                           -----------
     3.1(1)    Amended and Restated Articles of Incorporation of the Registrant

     3.2       Articles of Amendment of Charter of the Registrant filed with the
               State Department of Assessments and Taxation of Maryland on
               April 27, 2001

     3.3       Articles of Amendment of Charter of the Registrant filed with the
               State Department of Assessments and Taxation of Maryland on
               June 4, 2001

     4.1       Specimen certificate for shares of Common Stock, $.01 par value,
               of the Registrant

     10.1      Employment Agreement dated as of April 22, 2001 by and between F.
               William Conner and the Registrant

     10.2      Special Nonstatutory Stock Option Agreement dated April 22, 2001
               between the Registrant and F. William Conner

     10.3      Nonstatutory Stock Option Agreement Granted Under the Amended and
               Restated 1996 Stock Incentive Plan dated April 22, 2001 between
               the Registrant and F. William Conner

     10.4      Common Stock Purchase Warrant of the Registrant dated April 22,
               2001 to Heidrick & Struggles, Inc.

     10.5      Separation and Release Agreement dated June 28, 2001 between the
               Registrant and J. Alberto Yepez

     10.6      Separation Agreement and Release dated May 30, 2001 between the
               Registrant and Paul Doscher

     10.7      Form of Nonstatutory Stock Option Agreement Granted Under the
               Amended and Restated 1996 Stock Incentive Plan to Non-Employee
               Directors of the Registrant
------------
(1) Incorporated herein by reference to the Registrant's Registration Statement
    on Form S-1 (File No. 333-57275]