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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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(Mark one)

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



For the quarterly period ended March 31, 2005



OR



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



For the transition period from              to



Commission File Number 000-24733



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ENTRUST, INC.

(Exact name of registrant as specified in its charter)



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



ONE HANOVER PARK,
SUITE 800

16633 DALLAS PARKWAY

ADDISON, TX 75001

(Address of principal executive offices & zip code)



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



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



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



There were 61,969,369 shares of the registrants Common stock, par value $0.01 per
share, outstanding as of May 6, 2005.



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##### Table of Contents

ENTRUST, INC.



TABLE OF CONTENTS



|                              |  |         |  |                                                                                       |  |     
|----------------------------- |  | ------- |  | ------------------------------------------------------------------------------------- |  | ----
|                              |  |         |  |                                                                                       |  | Page
|PART I. FINANCIAL INFORMATION |  |        
|                              |  |         | 
|                              |  | Item 1. |  | Financial Statements                                                                  |  |     
|                              |  |         | 
|                              |  |         |  | Condensed Consolidated Balance Sheets                                                 |  | 3   
|                              |  |         | 
|                              |  |         |  | Condensed Consolidated Statements of Operations                                       |  | 4   
|                              |  |         | 
|                              |  |         |  | Condensed Consolidated Statements of Cash Flows                                       |  | 5   
|                              |  |         | 
|                              |  |         |  | Notes to Condensed Consolidated Financial Statements                                  |  | 6   
|                              |  |         | 
|                              |  | Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 15  
|                              |  |         | 
|                              |  | Item 3. |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 36  
|                              |  |         | 
|                              |  | Item 4. |  | Controls and Procedures                                                               |  | 38  
|                              | 
|PART II. OTHER INFORMATION    |  |        
|                              |  |         | 
|                              |  | Item 2. |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 38  
|                              |  |         | 
|                              |  | Item 6. |  | Exhibits                                                                              |  | 38  
|                              | 
|SIGNATURES                    |  | 39     



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





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##### Table of Contents

PART I. FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



ENTRUST, INC.



CONDENSED
CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                                      |  |               |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | ---------------- | - | -------- | -
|(In thousands, except share and per share data)                                                                                                                                       |  | MARCH 31,2005 |          |   | DECEMBER 31,2004 |  
|ASSETS                                                                                                                                                                                |  |               |          |   |                  |   |          |  
|Current assets:                                                                                                                                                                       |  |               |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                                             |  | $             | 55,180   |   |                  | $ | 36,325   |  
|Short-term marketable investments                                                                                                                                                     |  |               | 45,029   |   |                  |   | 61,043   |  
|Accounts receivable (net of allowance for doubtful accounts of $1,101 at March 31, 2005 and $988 at December 31, 2004)                                                                |  |               | 19,129   |   |                  |   | 16,203   |  
|Other receivables                                                                                                                                                                     |  |               | 590      |   |                  |   | 461      |  
|Prepaid expenses                                                                                                                                                                      |  |               | 4,413    |   |                  |   | 3,371    |  
|                                                                                                                                                                                      |  |               |          |   |                  |   |          |  
|Total current assets                                                                                                                                                                  |  |               | 124,341  |   |                  |   | 117,403  |  
|Long-term marketable investments                                                                                                                                                      |  |               |         |   |                  |   | 1,951    |  
|Property and equipment, net                                                                                                                                                           |  |               | 4,358    |   |                  |   | 5,168    |  
|Purchased product rights and purchased non-contractual customer relationships, net                                                                                                    |  |               | 2,660    |   |                  |   | 2,887    |  
|Goodwill, net                                                                                                                                                                         |  |               | 12,713   |   |                  |   | 12,713   |  
|Long-term equity investments                                                                                                                                                          |  |               | 4,157    |   |                  |   | 4,028    |  
|Other long-term assets, net                                                                                                                                                           |  |               | 1,692    |   |                  |   | 1,733    |  
|                                                                                                                                                                                      |  |               |          |   |                  |   |          |  
|Total assets                                                                                                                                                                          |  | $             | 149,921  |   |                  | $ | 145,883  |  
|                                                                                                                                                                                      |  |               |          |   |                  |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                  |  |               |          |   |                  |   |          |  
|Current liabilities:                                                                                                                                                                  |  |               |          |   |                  |   |          |  
|Accounts payable                                                                                                                                                                      |  | $             | 8,627    |   |                  | $ | 7,544    |  
|Accrued liabilities                                                                                                                                                                   |  |               | 9,490    |   |                  |   | 7,850    |  
|Accrued restructuring charges, current portion                                                                                                                                        |  |               | 3,883    |   |                  |   | 3,870    |  
|Deferred revenue                                                                                                                                                                      |  |               | 25,529   |   |                  |   | 22,975   |  
|                                                                                                                                                                                      |  |               |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                                             |  |               | 47,529   |   |                  |   | 42,239   |  
|Accrued restructuring charges, long-term portion                                                                                                                                      |  |               | 25,173   |   |                  |   | 26,220   |  
|Other long-term liabilities                                                                                                                                                           |  |               | 1,426    |   |                  |   | 1,426    |  
|                                                                                                                                                                                      |  |               |          |   |                  |   |          |  
|Total liabilities                                                                                                                                                                     |  |               | 74,128   |   |                  |   | 69,885   |  
|                                                                                                                                                                                      |  |               |          |   |                  |   |          |  
|Minority interest in subsidiary                                                                                                                                                       |  |               | 4        |   |                  |   | 4        |  
|                                                                                                                                                                                      |  |               |          |   |                  |   |          |  
|Shareholders equity:                                                                                                                                                                 |  |               |          |   |                  |   |          |  
|Common stock, par value $0.01 per share; 250,000,000 authorized shares; 62,241,868 and 62,339,829 issued and outstanding shares at March 31, 2005 and December 31, 2004, respectively |  |               | 622      |   |                  |   | 623      |  
|Additional paid-in capital                                                                                                                                                            |  |               | 772,037  |   |                  |   | 773,027  |  
|Unearned compensation                                                                                                                                                                 |  |               | (73      | ) |                  |   | (84      | )
|Accumulated deficit                                                                                                                                                                   |  |               | (697,326 | ) |                  |   | (698,290 | )
|Accumulated other comprehensive income                                                                                                                                                |  |               | 529      |   |                  |   | 718      |  
|                                                                                                                                                                                      |  |               |          |   |                  |   |          |  
|Total shareholders equity                                                                                                                                                            |  |               | 75,789   |   |                  |   | 75,994   |  
|                                                                                                                                                                                      |  |               |          |   |                  |   |          |  
|Total liabilities and shareholders equity                                                                                                                                            |  | $             | 149,921  |   |                  | $ | 145,883  |  
|                                                                                                                                                                                      |  |               |          |   |                  |   |          |  



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



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ENTRUST, INC.



CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                               |      |                             |        |      |  |   |        |  
|-------------------------------------------------------------- | ---- | --------------------------- | ------ | ---- |  | - | ------ | -
|(In thousands, except per share data)                          |      | THREE MONTHS ENDEDMARCH 31, |       
|                                                               | 2005 |                             |        | 2004 | 
|Revenues:                                                      |      |                             |        |      |  |   |        |  
|Product                                                        |      | $                           | 8,067  |      |  | $ | 7,244  |  
|Services and maintenance                                       |      |                             | 16,839 |      |  |   | 15,765 |  
|                                                               |      |                             |        |      |  |   |        |  
|Total revenues                                                 |      |                             | 24,906 |      |  |   | 23,009 |  
|                                                               |      |                             |        |      |  |   |        |  
|Cost of revenues:                                              |      |                             |        |      |  |   |        |  
|Product                                                        |      |                             | 971    |      |  |   | 817    |  
|Services and maintenance                                       |      |                             | 8,711  |      |  |   | 7,653  |  
|Amortization of purchased product rights                       |      |                             | 195    |      |  |   |       |  
|                                                               |      |                             |        |      |  |   |        |  
|Total cost of revenues                                         |      |                             | 9,877  |      |  |   | 8,470  |  
|                                                               |      |                             |        |      |  |   |        |  
|Gross profit                                                   |      |                             | 15,029 |      |  |   | 14,539 |  
|                                                               |      |                             |        |      |  |   |        |  
|Operating expenses:                                            |      |                             |        |      |  |   |        |  
|Sales and marketing                                            |      |                             | 7,194  |      |  |   | 6,405  |  
|Research and development                                       |      |                             | 4,162  |      |  |   | 4,634  |  
|General and administrative                                     |      |                             | 2,922  |      |  |   | 3,332  |  
|                                                               |      |                             |        |      |  |   |        |  
|Total operating expenses                                       |      |                             | 14,278 |      |  |   | 14,371 |  
|                                                               |      |                             |        |      |  |   |        |  
|Income from operations                                         |      |                             | 751    |      |  |   | 168    |  
|                                                               |      |                             |        |      |  |   |        |  
|Other income (expense):                                        |      |                             |        |      |  |   |        |  
|Interest income                                                |      |                             | 528    |      |  |   | 264    |  
|Gain on sale of asset                                          |      |                             | 200    |      |  |   |       |  
|Foreign exchange gain                                          |      |                             | 89     |      |  |   | 425    |  
|Loss from equity investments                                   |      |                             | (230   | )    |  |   | (209   | )
|                                                               |      |                             |        |      |  |   |        |  
|Total other income                                             |      |                             | 587    |      |  |   | 480    |  
|                                                               |      |                             |        |      |  |   |        |  
|Income before income taxes                                     |      |                             | 1,338  |      |  |   | 648    |  
|Provision for income taxes                                     |      |                             | 374    |      |  |   | 129    |  
|                                                               |      |                             |        |      |  |   |        |  
|Net income                                                     |      | $                           | 964    |      |  | $ | 519    |  
|                                                               |      |                             |        |      |  |   |        |  
|Net income per share:                                          |      |                             |        |      |  |   |        |  
|Basic                                                          |      | $                           | 0.02   |      |  | $ | 0.01   |  
|Diluted                                                        |      | $                           | 0.02   |      |  | $ | 0.01   |  
|Weighted average common shares used in per share computations: |      |                             |        |      |  |   |        |  
|Basic                                                          |      |                             | 62,291 |      |  |   | 63,582 |  
|Diluted                                                        |      |                             | 63,318 |      |  |   | 65,695 |  



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



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ENTRUST, INC.



CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                             |      |                             |         |      |  |   |         |  
|------------------------------------------------------------ | ---- | --------------------------- | ------- | ---- |  | - | ------- | -
|(In thousands)                                               |      | THREE MONTHS ENDEDMARCH 31, |        
|                                                             | 2005 |                             |         | 2004 | 
|OPERATING ACTIVITIES:                                        |      |                             |         |      |  |   |         |  
|Net income                                                   |      | $                           | 964     |      |  | $ | 519     |  
|Non-cash items in net income:                                |      |                             |         |      |  |   |         |  
|Depreciation and amortization                                |      |                             | 1,557   |      |  |   | 1,287   |  
|Unearned compensation amortized                              |      |                             | 11      |      |  |   | 23      |  
|Loss from equity investments                                 |      |                             | 230     |      |  |   | 209     |  
|Intercompany profit elimination                              |      |                             | 44      |      |  |   |        |  
|Provision for (reduction in) allowance for doubtful accounts |      |                             | 150     |      |  |   | (1,181  | )
|Gain on sale of asset                                        |      |                             | (200    | )    |  |   |        |  
|Changes in operating assets and liabilities:                 |      |                             |         |      |  |   |         |  
|(Increase) decrease in accounts receivable                   |      |                             | (3,071  | )    |  |   | 1,663   |  
|Increase in prepaid expenses and other receivables           |      |                             | (1,170  | )    |  |   | (881    | )
|Increase in accounts payable                                 |      |                             | 1,084   |      |  |   | 462     |  
|Increase in accrued liabilities                              |      |                             | 1,642   |      |  |   | 1,143   |  
|Decrease in accrued restructuring charges                    |      |                             | (1,034  | )    |  |   | (1,524  | )
|Increase in deferred revenue                                 |      |                             | 2,561   |      |  |   | 3,211   |  
|                                                             |      |                             |         |      |  |   |         |  
|Net cash provided by operating activities                    |      |                             | 2,768   |      |  |   | 4,931   |  
|                                                             |      |                             |         |      |  |   |         |  
|INVESTING ACTIVITIES:                                        |      |                             |         |      |  |   |         |  
|Purchases of marketable investments                          |      |                             | (14,268 | )    |  |   | (16,883 | )
|Maturities of marketable investments                         |      |                             | 32,233  |      |  |   | 25,313  |  
|Purchases of property and equipment                          |      |                             | (390    | )    |  |   | (104    | )
|Proceeds on sale of asset                                    |      |                             | 200     |      |  |   |        |  
|Increase in long-term equity investments                     |      |                             | (403    | )    |  |   |        |  
|Increase in other long-term assets                           |      |                             | (119    | )    |  |   | (256    | )
|                                                             |      |                             |         |      |  |   |         |  
|Net cash provided by investing activities                    |      |                             | 17,253  |      |  |   | 8,070   |  
|                                                             |      |                             |         |      |  |   |         |  
|FINANCING ACTIVITIES:                                        |      |                             |         |      |  |   |         |  
|Repurchase of common stock                                   |      |                             | (1,750  | )    |  |   | (970    | )
|Proceeds from exercise of stock options                      |      |                             | 759     |      |  |   | 397     |  
|                                                             |      |                             |         |      |  |   |         |  
|Net cash used in financing activities                        |      |                             | (991    | )    |  |   | (573    | )
|                                                             |      |                             |         |      |  |   |         |  
|EFFECT OF EXCHANGE RATE CHANGES ON CASH                      |      |                             | (175    | )    |  |   | (130    | )
|                                                             |      |                             |         |      |  |   |         |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS                    |      |                             | 18,855  |      |  |   | 12,298  |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD             |      |                             | 36,325  |      |  |   | 37,903  |  
|                                                             |      |                             |         |      |  |   |         |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                   |      | $                           | 55,180  |      |  | $ | 50,201  |  
|                                                             |      |                             |         |      |  |   |         |  



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



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ENTRUST, INC.



NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS



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



NOTE 1. BASIS OF
PRESENTATION



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



NOTE 2. ACQUISITION OF BUSINESSES



AmikaNow!



On June 18, 2004, the Company completed the acquisition of intellectual property and certain other assets of AmikaNow! Corporation (AmikaNow!), a privately-held provider of advanced e-mail content scanning
and analysis technology, which is a development stage company with negligible revenue, in exchange for $2,676 in cash and $1,293 in guaranteed future payments payable over three years and other acquisition-related costs. In addition, the Company
offered employment to certain employees of AmikaNow!. The Company may be required to make additional payments of up to a maximum of $2,400, in the form of royalties calculated based on the sale of products that incorporate the technology acquired
from AmikaNow! for a period of three years following the date of acquisition, if and only if sufficient sale of products take place in this time frame. The acquisition was made in order to further strengthen and expand the Companys portfolio
of products to provide enterprise and government customers with comprehensive content analysis and risk mitigation tools for improved compliance with corporate email policies and regulatory guidelines.



The acquisition was accounted for under the purchase method of accounting and, accordingly,
the purchase price of approximately $3,969 was allocated to the fair value of the tangible and intangible assets and liabilities acquired, with the remainder allocated to goodwill. Amortization of $177 and $15 has been recorded for the three months
ended March 31, 2005, related to purchased product rights and non-contractual customer relationship assets, respectively, arising from this acquisition.



Entrust Japan



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



The acquisition was accounted for under the purchase method of accounting and, accordingly, the purchase price of approximately $1,669, which included the remaining
balance of the Companys equity investment in Entrust Japan immediately prior to the September 2004 purchase, was allocated to the fair value of the tangible and intangible assets and liabilities acquired, with the remainder allocated to
goodwill. In addition, the results of operations of Entrust Japan have been included in the Companys consolidated financial statements commencing from September 13, 2004, the effective date of the acquisition for accounting purposes.
Amortization of $19 has been recorded for the three months ended March 31, 2005, related to the non-contractual customer relationship asset purchased as part of this acquisition.



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The Company is presently in discussions to purchase the remaining minority interest shareholdings, equal to approximately
1% of the outstanding voting shares of Entrust Japan, for a nominal value. It is expected that these purchases will be concluded in the second quarter of 2005.



The following unaudited pro forma data summarize the combined results of operations of the Company, including the acquired business assets of AmikaNow! and operations
of Entrust Japan for the three months ended March 31, 2004, as if the acquisitions had taken place as of the beginning of the respective periods and, accordingly, include a full periods amortization of the assets related to purchased product
rights and non-contractual customer relationships in each period shown.



|                                              |  |                                  |        |  
|--------------------------------------------- |  | -------------------------------- | ------ | -
|                                              |  | Three Months EndedMarch 31, 2004 |       
|Revenues                                      |  | $                                | 23,504 |  
|Net income (loss)                             |  |                                  | (249   | )
|Basic and diluted net income (loss) per share |  |                                  | (0.00  | )



NOTE 3. ASIA DIGITAL MEDIA JOINT
VENTURE



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



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



After the closing, the Companys
total direct and indirect equity holdings in Asia Digital Media were approximately 25.3%. During the first quarter of 2005, the Company received additional shares of common stock of Asia Digital Media in reimbursement for legal costs incurred by the
Company on behalf of Asia Digital Media during its formation and for administrative services provided by the Company. These additional shares were valued at $403 and resulted in an increase of the Companys total direct and indirect equity
holdings in Asia Digital Media to 27.2% at March 31, 2005. However, this may change in the future for reasons that may include the exercise of the warrant received by the Company in connection with the Ohana Restructuring or as a result of an
anti-dilution option granted to certain investors in Asia Digital Media.



Beginning in December 2004, the Company has accounted for its investment in Asia Digital Media under the equity method. Accordingly, the Company has included its share of losses of Asia Digital Media, in the amount of $230, in its condensed
consolidated statement of operations for the three months ended March 31, 2005. The Company has recorded cumulative losses from its investment in Asia Digital Media of $597 since its investment in the fourth quarter of 2004.



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



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NOTE 4. STOCK-BASED COMPENSATION AND STOCK OPTION PLANS



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



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



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



|                                                                                                                            |  |                             |        |   |      |   |        |  
|--------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                                                            |  | Three Months EndedMarch 31, |       
|                                                                                                                            |  | 2005                        |        |   | 2004 |  
|Net income, as reported:                                                                                                    |  | $                           | 964    |   |      | $ | 519    |  
|Total stock-based employee compensation expense determined under fair value-based method for all awards, net of tax effects |  |                             | (1,511 | ) |      |   | (2,619 | )
|                                                                                                                            |  |                             |        |   |      |   |        |  
|Pro forma net loss                                                                                                          |  |                             | (547   | ) |      | $ | (2,100 | )
|                                                                                                                            |  |                             |        |   |      |   |        |  
|Net income (loss) per share:                                                                                                |  |                             |        |   |      |   |        |  
|Basicas reported                                                                                                           |  | $                           | 0.02   |   |      | $ | 0.01   |  
|Basicpro forma                                                                                                             |  | $                           | (0.01  | ) |      | $ | (0.03  | )
|Dilutedas reported                                                                                                         |  | $                           | 0.02   |   |      | $ | 0.01   |  
|Dilutedpro forma                                                                                                           |  | $                           | (0.01  | ) |      | $ | (0.03  | )



In the pro forma calculations above,
the weighted average fair value for stock options granted during the three months ended March 31, 2005 and March 31, 2004 was estimated at $1.87 and $3.86 per option, respectively. The fair values of options were estimated as of the date of grant
using the Black-Scholes option pricing model. The following weighted average assumptions were used in the calculations.



8



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##### Table of Contents

|                               |  |                             |   |  |      |  
|------------------------------ |  | --------------------------- | - |  | ---- | -
|                               |  | Three Months EndedMarch 31, |  
|                               |  | 2005                        |   |  | 2004 |  
|Expected option life, in years |  | 5                           |   |  | 5    |  
|Risk free interest rate        |  | 3.20                        | % |  | 3.02 | %
|                               |  |                            
|Dividend yield                 |  |                            |   |  |     |  
|Volatility                     |  | 58                          | % |  | 106  | %



The Company recorded amortization of
unearned compensation of $11 and $23 into compensation expense for the three months ended March 31, 2005 and 2004, respectively, related to options granted to non-employees and restricted stock issued in a prior period.



Stock Option Plans



The following tables summarize information concerning outstanding options and warrants as at
March 31, 2005:



|                         |  |                                           |  |                                            |  |                                |       |                                           |            |                                 |   |      
|------------------------ |  | ----------------------------------------- |  | ------------------------------------------ |  | ------------------------------ | ----- | ----------------------------------------- | ---------- | ------------------------------- | - | -----
|                         |  | Options and Warrants Outstanding          |  | Options and Warrants Exercisable          
|Range of Exercise Prices |  | Number of Options andWarrants Outstanding |  | Weighted Average RemainingContractual Life |  | Weighted AverageExercise Price |       | Number of Options andWarrants Exercisable |            | Weighted Average Exercise Price
|$0.12 to $2.44           |  | 310,042                                   |  | 2.9 years                                  |  | $                              | 2.09  |                                           | 289,738    |                                 | $ | 2.08 
|$2.46 to $4.99           |  | 6,366,566                                 |  | 8.1 years                                  |  |                                | 3.60  |                                           | 3,627,024  |                                 |   | 3.84 
|$5.01 to $6.72           |  | 598,742                                   |  | 5.7 years                                  |  |                                | 5.47  |                                           | 602,942    |                                 |   | 5.47 
|$6.75 to $6.86           |  | 2,547,287                                 |  | 6.7 years                                  |  |                                | 6.75  |                                           | 2,547,229  |                                 |   | 6.75 
|$6.87 to $10.00          |  | 4,060,150                                 |  | 6.1 years                                  |  |                                | 6.89  |                                           | 4,060,150  |                                 |   | 6.89 
|$10.01 to $50.00         |  | 547,632                                   |  | 5.0 years                                  |  |                                | 21.51 |                                           | 540,340    |                                 |   | 21.64
|$50.01 to $112.50        |  | 15,800                                    |  | 5.0 years                                  |  |                                | 74.72 |                                           | 15,800     |                                 |   | 74.72
|                         |  |                                           |  |                                            |  |                                |       |                                           |            |                                 |   |      
|Total:                   |  | 14,446,219                                |  |                                            |  | $                              | 5.88  |                                           | 11,683,223 |                                 | $ | 6.39 
|                         |  |                                           |  |                                            |  |                                |       |                                           |            |                                 |   |      



The following table sets forth a
comparison as of March 31, 2005, of the number of shares subject to options with exercise prices at or below the closing price per share of the Companys Common stock on March 31, 2005 (In-the-Money options) to the number of shares
of the Companys Common stock subject to options with exercise prices greater than the closing price per share of the Companys Common stock on such date (Out-of-the-Money options) (in actual shares):



In-the-Money and Out-of-the-Money Option Information as of March 31, 2005 (1)



|                          |  |             |  |               |  |            |  |                                       |  
|------------------------- |  | ----------- |  | ------------- |  | ---------- |  | ------------------------------------- | -
|                          |  | Exercisable |  | Unexercisable |  | Total      |  | Percentage ofTotal OptionsOutstanding |  
|In-the-Money              |  | 2,024,052   |  | 2,179,747     |  | 4,203,799  |  | 29                                    | %
|Out-of-the-Money          |  | 9,659,171   |  | 583,249       |  | 10,242,420 |  | 71                                    | %
|                          |  |             |  |               |  |            |  |                                       |  
|Total Options Outstanding |  | 11,683,223  |  | 2,762,996     |  | 14,446,219 |  | 100                                   | %
|                          |  |             |  |               |  |            |  |                                       |  

---

|(1) | The closing price of the Companys Common stock was $3.75 on March 31, 2005, as reported
by The NASDAQ National Market.
|--- | -----------------------------------------------------------------------------------------------------------------------



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



The Board of Directors decision to accelerate the vesting of affected stock options was primarily based upon the issuance of SFAS No.
123(R). In addition, because these options have exercise prices in excess of current market values and are not fully achieving their original objectives of incentive compensation and employee retention, the acceleration may have a positive effect on
employee morale and retention. By accelerating the vesting of the affected stock options now, the Company is not required to record any amount of compensation expense in the first fiscal quarter of 2005 for such accelerated stock options, as the
exercises prices exceed the market price at the date of acceleration. The Company believes that acceleration of the 2.8 million stock options, based on the Companys implementation date for SFAS No. 123(R) of January 1, 2006, will eliminate the
need for recognizing future compensation expense of approximately $2.7 million. The Company further believes that it will thereafter not be required to recognize any compensation expense in future periods associated with the affected options.
However, there can be no assurance that the acceleration of the options may not result in some future compensation expense.



NOTE 5. STOCK REPURCHASE PROGRAM



On July 29, 2002, the Company announced that its board of directors had authorized the Company to repurchase up to an aggregate of 7,000,000 shares of its Common stock.
On July 22, 2003, the Company announced that its board of directors had authorized an extension to this stock repurchase program. The Companys original stock repurchase program would have expired on July 28, 2003. The extended plan permits the
purchase of up to 7,000,000 shares of the Companys Common stock through September 1, 2004, in addition to the 2,229,200 shares already purchased prior to the extension. On August 2, 2004, the Company announced that its board of directors had
authorized an extension of this stock repurchase program to permit the purchase of up to 10,000,000 shares of the Companys Common Stock through September 15, 2005 in addition to the 3,412,940 shares already purchased prior to this extension.
For the three months ended March 31, 2005 the Company re-purchased 433,000 shares of its Common stock for a total cash outlay of $1,750, at an average price of $4.04 per share, including commissions paid to brokers. As of March 31, 2005, the Company
has repurchased 4,323,640 shares of its Common stock under this program, for a total cash outlay of $14,941, at an average price of $3.46 per share, including commissions paid to brokers.



Repurchases under the stock repurchase program may take place from time to time until September 15, 2005, or an earlier date determined by
the Companys board of directors, in open market, negotiated or block transactions, and may be suspended or discontinued at any time. The Companys management will determine the timing and amount of shares repurchased based on its
evaluation of market and business conditions. The repurchased shares will be considered authorized but unissued shares of the Company and will be available for issuance under the Companys stock incentive, employee stock purchase and other
stock benefit plans, and for general corporate purposes, including possible acquisitions. The stock repurchase program will be funded using the Companys working capital.



NOTE 6. ALLOWANCE FOR DOUBTFUL ACCOUNTS



The Company performs ongoing credit evaluations of its customers and, generally, does not require collateral from its customers to support accounts receivable. The
Company maintains an allowance for doubtful accounts due to credit risk, to provide adequate protection against estimated losses resulting from the inability of customers to make required payments. The Company bases its ongoing estimate of allowance
for doubtful accounts primarily on the aging of balances in its accounts receivable, historical collection patterns and changes in the creditworthiness of its customers. Based upon this analysis, the Company records an increase in the allowance for
doubtful accounts when the prospect of collecting a specific account receivable becomes doubtful. The allowance for doubtful accounts is established based on the best information available to the Company and is re-evaluated and adjusted as
additional information is received. The following table summarizes the changes in the allowance for doubtful accounts for the three months ended March 31, 2005:



|                                                                                              |  |                             |       |   |      |   |        |  
|--------------------------------------------------------------------------------------------- |  | --------------------------- | ----- | - | ---- | - | ------ | -
|                                                                                              |  | Three Months EndedMarch 31, |      
|                                                                                              |  | 2005                        |       |   | 2004 |  
|Allowance for doubtful accounts, beginning of period                                          |  | $                           | 988   |   |      | $ | 4,032  |  
|Provision for (reduction in) doubtful accounts, net                                           |  |                             | 150   |   |      |   | (1,181 | )
|Reallocation to accrued liabilities to provide for costs associated with settlement agreement |  |                             |      |   |      |   | (698   | )
|Amounts written-off, net of recoveries                                                        |  |                             | (37   | ) |      |   | (172   | )
|                                                                                              |  |                             |       |   |      |   |        |  
|Allowance for doubtful accounts, end of period                                                |  | $                           | 1,101 |   |      | $ | 1,981  |  
|                                                                                              |  |                             |       |   |      |   |        |  



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NOTE 7. ACCRUED RESTRUCTURING CHARGES



May 2003 Restructuring Plan



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



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



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



The Company has evaluated and pursued all reasonable possibilities to settle the lease
obligations associated with the May 2003 restructuring, but has been unable to find an acceptable outcome. Therefore, the Company has concluded that, at this time, it is appropriate to classify the portion of the outstanding liabilities that is not
payable within the next 12 months as long-term liabilities. However, in terms of long-term liquidity requirements, the current obligations would require the Company to fund $400 of its accrued restructuring charges for the May 2003 restructuring
before the end of fiscal 2005, with the remaining accrued restructuring charges for the May 2003 restructuring to be paid as follows: $100 in fiscal 2006, $100 in fiscal 2007, $200 in fiscal 2008 and $100 in fiscal 2009.



Summary of Accrued Restructuring Charges for May 2003 Restructuring



The following table is a summary of the accrued restructuring charges related to the May
2003 plan at March 31, 2005:



|                                   |  |                                           |     |              |   |                                               |  |   |    
|---------------------------------- |  | ----------------------------------------- | --- | ------------ | - | --------------------------------------------- |  | - | ---
|                                   |  | Total ChargesAccrued at Beginning of Year |     | CashPayments |   | AccruedRestructuring Charges atMarch 31, 2005
|                                   |  | (in millions)                            
|Consolidation of excess facilities |  | $                                         | 1.2 |              | $ | 0.3                                           |  | $ | 0.9
|                                   |  |                                           |     |              |   |                                               |  |   |    



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##### Table of Contents

June 2001 Restructuring Plan



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



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



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



The Company has evaluated and pursued
all reasonable possibilities to settle the lease obligations associated with the June 2001 restructuring, but has been unable to find an acceptable outcome. Therefore, the Company has concluded that, at this time, it is appropriate to classify the
portion of the outstanding liabilities that is not payable within the next 12 months to long-term liabilities. However, the current obligations would require the Company to fund $2,500 of its accrued restructuring charges for the June 2001
restructuring before the end of fiscal 2005, with the remaining accrued restructuring charges for the June 2001 restructuring to be paid as follows: $3,500 in fiscal 2006, $5,100 in fiscal 2007, $4,700 in fiscal 2008 and $12,400 in fiscal 2009 and
beyond.



Summary of Accrued Restructuring Charges for June 2001
Restructuring



The following table is a summary of the accrued
restructuring charges related to the June 2001 plan at March 31, 2005:



|                                                 |  |                                           |      |              |   |                                                |  |   |     
|------------------------------------------------ |  | ----------------------------------------- | ---- | ------------ | - | ---------------------------------------------- |  | - | ----
|                                                 |  | Total ChargesAccrued at Beginning of Year |      | CashPayments |   | AccruedRestructuring Charges at March 31, 2005
|                                                 |  | (in millions)                            
|Consolidation of excess facilities               |  | $                                         | 28.8 |              | $ | 0.6                                            |  | $ | 28.2
|Discontinuance of non-core products and programs |  |                                           | 0.1  |              |   | 0.1                                            |  |   |    
|                                                 |  |                                           |      |              |   |                                                |  |   |     
|Total                                            |  | $                                         | 28.9 |              | $ | 0.7                                            |  | $ | 28.2
|                                                 |  |                                           |      |              |   |                                                |  |   |     



As of March 31, 2005, the Company had
estimated a total of $21,000 of sublease recoveries in our restructuring accrual. Of this amount, $20,700 is related to the Santa Clara facility. In addition, $6,400 of the $21,000 is recoverable under existing sublease agreements and the remaining
$14,600 of rent recoveries is based on estimates that may be subject to adjustments based upon changes in the real estate sublet markets.



NOTE 8. NET INCOME PER SHARE AND SHARES OUTSTANDING



Basic net income per share is computed by dividing the net income by the weighted average number of shares of Common stock of all classes outstanding during the period.
Diluted net income per share is computed by dividing the net income by the weighted average number of shares of Common stock and potential Common stock outstanding, and when dilutive, options to purchase Common stock using the treasury stock method.
The options to purchase Common stock are excluded from the computation of diluted net income per share if their effect is antidilutive. The dilutive effect of options to purchase Common stock under the treasury stock method for the three months
ended March 31, 2005 and 2004 was 1,027,278 and 2,113,541, respectively, which increases the weighted average common shares outstanding used in the computation of diluted net income per share. However, 10,242,420 and 10,316,832 out-of-the-money
options that had exercise prices in excess of the average market price for the three months ended March 31, 2005 and 2004, respectively, were excluded from the computation of diluted net income per share in accordance with the treasury stock method.



In the three months ended March 31, 2005, the Company issued 335,399 shares of
Common stock related to the exercise of employee stock options.



12



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##### Table of Contents

NOTE 9. MARKETABLE AND OTHER INVESTMENTS



The Company maintains marketable investments mainly in a strategic cash management account. This account is invested primarily in highly
rated corporate securities, in securities guaranteed by the U.S. government or its agencies and highly rated municipal bonds, primarily with a remaining maturity of not more than 24 months. The Company has the intent and ability to hold all of these
investments until maturity. Therefore, all such investments are classified as held to maturity investments, and are stated at amortized cost. At March 31, 2005, the amortized cost of the Companys held to maturity investments approximated fair
value. Based on contractual maturities, these marketable investments were classified in either current assets or long-term assets.



Realized gains and losses on disposition of available for sale marketable investments are included in other investment income in the results of operations. Unrealized
gains and losses are included in other comprehensive income, except that the portion designated as being hedged in a fair value hedge is recognized in other investment income during the period of the hedge. As at March 31, 2005, the Company did not
hold any available for sale marketable investments.



The Company holds equity
securities stated at cost, which represent long-term investments in private companies made in 2000 and 2001 for business and strategic alliance purposes. The Companys ownership share in these companies ranges from 1% to 10% of the outstanding
voting share capital. These strategic investments had no net remaining carrying value at March 31, 2005. Consistent with the Companys policies for other long-lived assets, the carrying value of long-term strategic investments is periodically
reviewed for impairment based upon such quantitative measures as expected undiscounted cash flows, as well as qualitative factors. In addition, the Audit Committee of the Board of Directors monitors and assesses the ongoing operating performance of
the underlying companies for evidence of impairment. Since 2001, the Company has recorded impairments totaling $14,818 with respect to these investments, as a result of other than temporary declines in fair value.



In addition, the Company holds an equity interest in Asia Digital Media, which at March 31,
2005 represent approximately 27% of the voting share capital, through both direct and indirect investment in the joint venture, and is accounted for by the Company using the equity method of accounting for investments in common stock, in accordance
with the provisions of APB No. 18, The Equity Method of Accounting for Investments in Common Stock and ARB No. 51, Consolidated Financial Statements. See note 3 for additional discussion.



Revenues recorded by the Company from Asia Digital Media represented approximately 1% of
total revenues for the three months ended March 31, 2005.



The Company did not
generate any sales with companies in which it has made strategic equity investments recorded at cost in the three months ended March 31, 2005 and 2004.



NOTE 10. SEGMENT AND GEOGRAPHIC INFORMATION



Segment information



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



Geographic information



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



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##### Table of Contents

The Company operates in three main geographic areas as follows:



|                                   |  |                              |         |   |                  |   |        
|---------------------------------- |  | ---------------------------- | ------- | - | ---------------- | - | -------
|                                   |  | Three Months Ended March 31,
|                                   |  | 2005                         |         |   | 2004            
|Revenues:                          |  |                              |         |   |                  |   |        
|United States                      |  | $                            | 12,274  |   |                  | $ | 13,051 
|Canada                             |  |                              | 5,968   |   |                  |   | 4,544  
|Europe, Asia and Other             |  |                              | 6,664   |   |                  |   | 5,414  
|                                   |  |                              |         |   |                  |   |        
|Total revenues                     |  | $                            | 24,906  |   |                  | $ | 23,009 
|                                   |  |                              |         |   |                  |   |        
|Income (loss) before income taxes: |  |                              |         |   |                  |   |        
|United States                      |  | $                            | 457     |   |                  | $ | 90     
|Canada                             |  |                              | 1,035   |   |                  |   | 358    
|Europe, Asia and Other             |  |                              | (154    | ) |                  |   | 200    
|                                   |  |                              |         |   |                  |   |        
|Total income before income taxes   |  | $                            | 1,338   |   |                  | $ | 648    
|                                   |  |                              |         |   |                  |   |        
|                                   |  |                             
|                                   |  | March 31,2005                |         |   | December 31,2004
|Total assets:                      |  |                              |         |   |                  |   |        
|United States                      |  | $                            | 108,148 |   |                  | $ | 110,988
|Canada                             |  |                              | 38,405  |   |                  |   | 29,837 
|Europe, Asia and Other             |  |                              | 3,368   |   |                  |   | 5,058  
|                                   |  |                              |         |   |                  |   |        
|Total                              |  | $                            | 149,921 |   |                  | $ | 145,883
|                                   |  |                              |         |   |                  |   |        



NOTE 11. COMPREHENSIVE INCOME



The components of comprehensive income are as follows:



|                                         |  |                             |      |   |      |   |      |  
|---------------------------------------- |  | --------------------------- | ---- | - | ---- | - | ---- | -
|                                         |  | Three Months EndedMarch 31, |     
|                                         |  | 2005                        |      |   | 2004 |  
|Net income                               |  | $                           | 964  |   |      | $ | 519  |  
|Foreign currency translation adjustments |  |                             | (189 | ) |      |   | (146 | )
|                                         |  |                             |      |   |      |   |      |  
|Comprehensive income                     |  | $                           | 775  |   |      | $ | 373  |  
|                                         |  |                             |      |   |      |   |      |  



NOTE 12. LEGAL PROCEEDINGS



The Company is subject, from time to time, to various legal proceedings
and claims, either asserted or unasserted, which arise in the ordinary course of business. While the outcome of these claims cannot be predicted with certainty, management does not believe that the outcome of any of these other legal matters will
have a material adverse effect on the Companys consolidated results of operations or consolidated financial position. Certain legal proceedings in which we are involved are discussed in Part 1. Item 3. of our Annual Report on Form 10-K for the
year ended December 31, 2004. Unless otherwise indicated, all proceedings in that earlier Report remain outstanding.



NOTE 13. CONTINGENCIES



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



14



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##### Table of Contents

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



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



OVERVIEW



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



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



EXECUTIVE OVERVIEW



We are a global provider of software that helps our customers leverage networks to extend
their businesses while complying with information security and governance policies and regulations. Our solutions help enable customers to securely and efficiently manage a wide range of identities and policies across different platforms,
architectures and devices. We bring our customers value by delivering software and services for their secure digital identity and information needs.



Our products and services provide customers with solutions that help to meet their specific needs for secure messaging, secure identity management and secure data. Our
broad set of capabilities in these three areas gives us a strong portfolio to help customers meet compliance requirements through policy and access management. Customers can benefit from the ability to purchase one set of capabilities from us and
then extend that investment in our products and services across the requirements of their business. We believe this is a competitive advantage for us.



Our approach of blending best-in-class products and services, whether developed by us, or one of our partners, to deliver a comprehensive suite to the market space also
complements the trusted advisor role that we have taken with our customers. We have the capabilities to assist our customers across their wide range of needs. We look to continue to grow our market share via new products launched during 2004 and
through the development of new products, partnerships and acquisitions.



We
sell our products and services in both the enterprise and government market space. In Q1, 2005, 68% of our product sales were in our extended government vertical market, which includes healthcare. This was an increase from Q1 and Q4 of 2004 both in
dollars and percent of revenues. The increase in revenue in the quarter was driven by key global projects that have started to increase product purchases. In many of these projects, we have been providing services for several quarters and are now
realizing the product revenues associated with those projects. We are well positioned in both markets, and we see growth opportunities in each area. In the extended government vertical market, we have a strong penetration in the U.S. Federal
government, the governments of Canada, Singapore, Denmark, and the United Kingdom and across continental Europe. As governments continue to increase spending on e-government initiatives and information security projects, we are well positioned to
help them.



In Q1, 2005, 32% of our product sales were in our extended
enterprise vertical market. This is a decrease from 83% a year ago and represented an overall decrease of $2.3 million from Q1, 2004 and $5.2 million from Q4, 2004. The decrease in product revenues in the enterprise market in the quarter was driven
by seasonal product revenue patterns. Enterprises are being driven by legislation and regulation to increase data security and secure the identities of their employees, their suppliers, partners and customers. We continue to see demand from global
enterprises as they continue to respond to regulatory and governance compliance demands and extend their internal and external networks to more and more individuals inside and outside their domain. In the enterprise market, the need for a deeper
integration with partners, suppliers and customers, coupled with the need for security and lower costs, continue to be key drivers for our customers to purchase our offerings.



Budgets, timing and allocation of budget dollars continue to keep us guarded on our growth expectations in the remainder of the year. We
feel the market environment is better than it has been in the last two years, but this market could still cause quarterly fluctuations in our product revenue attainment.



We rely significantly on large deals in each quarter. Our software revenue from our top five customers in Q1, 2005 was approximately 15% of
our total revenue in that quarter. This was within our historical range, which is generally between 10% and 25%. We had two deals over $1 million in Q1, 2005, as opposed to three in Q4, 2004 and one in Q1, 2004. Although our revenue in the second
half of 2004 and Q1, 2005 allowed us to return to profitability, we continue to be impacted on our software revenue by the process that our customers are going through to complete a proof of concept, which sometimes has proven to produce a longer
sales cycle. We are also impacted by our customers recent buying behavior, which is to buy only for immediate need as opposed to making a larger purchase in order to get a better discount. Any of these factors may impact our revenue on a
quarterly basis.



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In order to take advantage of our market opportunities, we have a marketing organization focused on creating brand
awareness and new business opportunities for us. In early 2005, we launched a marketing campaign, Securing Your Digital Life that showcases how our solutions enable customers to solve key business issues such as identity theft, email
security, compliance and digital certificates for the ever-growing number of devices that require identities. Key branding initiatives include Web marketing (including search engine optimization for keyword searches and pay-per-click advertising),
public relations initiatives, tele-prospecting and sponsorships of key security and government events and forums.



Assisting us in our growth strategy in this market will be our ability to serve as the trusted advisor to our clients. In this capacity we will continue to expand our
offerings by building new products and solutions, partnering with technology providers and bringing it together for the customer with our services offerings. Our services group gives us the capabilities to help our customers deploy a total solution
that meets their demands for securing digital identities and information. In Q1, 2005, our services team achieved their highest quarterly revenue in over three years. Our services revenues increased 7% from Q1, 2004, and 4% from Q4, 2004. We believe
that the investment in services is paying off. We remain positive on our outlook for services in 2005. However, budgets, adoption of our software and our ability to leverage our services partners could all impact our ability to create services
revenue.



We earn revenue by providing both software and services to our
customers. We earn software revenue mainly on a per-user basis under a perpetual licensing agreement that we enter into with each customer. We earn services revenue by providing support and maintenance to our customers along with professional
services for the planning, architecture and deployment of our products and services. In Q1, 2005, 32% of our revenue was from product sales and 68% was from services and maintenance, compared to 40% from product and 60% from services and maintenance
in Q4, 2004, and 32% from product and 68% from services and maintenance in Q1, 2004. Over the last three years, we have become a more services-led company as we have been focused on helping our customers deploy our products. In 2005, we will
continue to focus on providing services to our customers, but we will also look to increase the percentage of software sales in relation to services, primarily through the introduction of new software products.



Over the past three years, we have focused on keeping our cost structure in line with our
current revenue opportunities. In the second quarter of 2003, we restructured the Company and established a goal of reaching breakeven by the end of 2003. In the fourth quarter of 2003, we met this goal and produced a $60 thousand net profit. We
followed that accomplishment up with net profits of $519 thousand, $493 thousand and $2.6 million in Q1, Q3, and Q4, 2004, respectively. In Q1, 2005 we achieved net income of $964 thousand which compares favorably to our net income for 2004 of
$1,078 thousand. This achievement was an important step in our strategy of returning the Company to a growth and leadership position.



We have a history of providing valued security solutions to our customers. In 2004, we released a number of new products that are beginning to be deployed in the market.
Evidence of new product deployment came in the second quarter of 2004 as each of our top five deals in the quarter contained at least one component of our newly released product offerings. Key in the third quarter of 2004 was the commercial release
of Entrust Entelligence Compliance Server. This product is a Linux-based appliance that helps enterprise and government customers enable real-time e-mail compliance. This content scanning technology, based on the technology we acquired in our asset
purchase from AmikaNow! Corporation (AmikaNow!), automatically enforces e-mail policy pertaining to individual privacy, intellectual property protection, anti-spam, vulgarity, and regulatory mandates such as HIPAA, the Sarbanes-Oxley Act
and the Gramm-Leach Bliley Act.



To assist customers in protecting e-mail
messages identified as private or sensitive, we also announced enhancements to our boundary and desktop e-mail security products, vastly increasing our secure messaging portfolio.



We also announced a new strategic technology, sales and marketing relationship with Pointsec Mobile Technologies in Q3, 2004. The
relationship with Pointsec enables us to address the growing need for protecting data on mobile devices. Bringing together their award-winning security capabilities, the two companies developed and are now jointly marketing data security products
designed to protect information in laptop, desktop, PDA, server and other mobile and wireless environments. Further, in the third quarter of 2004, we increased our investment in Entrust Japan to a majority ownership and in the fourth quarter we
joined the formation of the Asia Digital Media joint venture, which will also use technology from Ohana Wireless, Incorporated.



In the fourth quarter of 2004, we released a new solution, Entrust IdentityGuard, a new strong authentication product designed to reduce the impact of identity theft, a
fraudulent and criminal activity that has damaged confidence in on-line transactions. With the dramatic rise of attacks such as phishing, enterprises and their customers are seeking more cost-effective and flexible ways to protect
users identities. Entrust IdentityGuard provides an affordable, easy-to-implement and deployable second-factor authentication solution that makes users less vulnerable to fraud, while helping organizations reduce the financial losses
associated with identity theft. In the first quarter of 2005, we announced Entrust IdentityGuard for Microsoft Windows. Entrust IdentityGuard for Microsoft Windows enhances todays practice of protecting users desktops with simple
usernames and passwords by adding a second factor of authentication that can fit seamlessly into the Windows environment.



Our management uses the following metrics to measure performance:



| |  | Number of product revenue transactions;
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| |  | Average product revenue transaction size;
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| |  | Top-five product revenue transactions as a percentage of total revenues;
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| |  | Product revenue split between three key solutions areas: Secure Messaging, Secure Identity Management and Secure Data;
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| |  | Product and services revenues as a percentage of total revenues and services and maintenance;
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| |  | Gross profit as a percentage of services and maintenance revenues; and
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| |  | Deferred revenue and Cash and marketable investment balances.
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BUSINESS OVERVIEW



During the first quarter of 2005, we continued our strategy of focusing on core vertical and geographic markets. Revenues of $24.9 million represented an 8% increase over
the first quarter of 2004, and consisted of 32% product sales and 68% services and maintenance. Services and maintenance revenues increased 7% over the first quarter of 2004, due to improved demand for both consulting services and support and
maintenance services, while product revenues increased 11% from the first quarter of 2004, driven by an improved product transaction closure rate and higher average purchase value compared to the same quarter of 2004. Net income for the first three
months of 2005 was $1.0 million, or $0.02 per share, compared to a $0.5 million net income, or $0.01 per share for the same period of 2004, with total expenses increasing 6% to $24.2 million. In addition, we generated $2.8 million in cash flow from
operations in the first quarter of 2005, compared to a cash flow of $4.9 million in the same quarter of 2004. Entrust Secure Identity Management Solutions accounted for 77% of product revenue, which is an increase of 77% from Q1, 2004 and a decrease
of 19% from Q4, 2004. Entrust Certificate Services revenues, a component of our Secure Identity Management solutions suite, increased 40% over Q1, 2004 and 1% over Q4, 2004. Entrust Secure Messaging Solutions accounted for 14% of product revenue,
which is an increase of 194% from Q1, 2004 and a decrease of 52% from Q4, 2004. In the quarter, we had two new Entrust Compliance Server customers. Entrust Secure Data Solutions accounted for 9% of product revenue, which is a decrease of 79% from
Q1, 2004 and a decrease of 18% from Q4, 2004. Extended Government accounted for 68% and Extended Enterprise accounted for 32% of the product revenue in the quarter. Government product revenue exceeded Enterprise product revenue for the first time in
eight quarters and highlights the revenue diversity and vertical balance achieved over the last two years. The financial vertical accounted for approximately 6% of first quarter 2005 product revenues.



Other highlights from the first quarter of 2005 included:



| |  | The top five product transactions accounted for 15% of Q1, 2005 revenues. There were two product deals over $1 million. The average purchase size this quarter was $106,000, up from
$103,000 in Q1, 2004 and down from $127,000 in Q4, 2004. Total transactions in Q1, 2005 reached 64, which is up from 62 in Q1, 2004, and down from 75 in Q4, 2004. Over 10% of total transactions were from our key target product areas of
IdentityGuard, Secure Messaging and Certificates.
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| |  | Entrust services revenue was $16.8 million, an increase of 7% from Q1, 2004 and an increase of 4% from Q4, 2004. This was our highest services revenue attainment in three and a half
years. The increase was driven by our second highest ever support and maintenance revenue and increased third party hardware sales.
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| |  | This was Entrust Certificate Services 10thconsecutive quarterly increase in revenue. In the quarter, we had three new Entrust IdentityGuard customers.
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| |  | Deferred revenue was $25.5 million, which is an increase of 29% from Q1, 2004 and an increase of 11% from Q4, 2004.
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| |  | We announced that the Entrust IdentityGuard system, a consumer authentication product that delivers break through economics and simplicity for the mass market, has been selected by
Arbetsmarknadsverket (AMV), the Swedish National Labor Market Administration, to provide second factor authentication for its internal employees. This new, innovative product for countering on-line identity theft and phishing, provides the necessary
security to AMV while allowing AMV to rapidly integrate and deploy the solution at a lower cost than traditional hardware-based authentication products.
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Our key technology-related accomplishments during the first quarter of 2005 included the following:



| |  | We announced an easy-to-use strong authentication solution for securing Microsoft Windows environments. Entrust IdentityGuard for Microsoft Windows enhances todays practice of
protecting user desktops with simple usernames and passwords by adding a second factor of authentication that can fit seamlessly into the Windows environment. It will provide organizations around the globe working to address the risk of unauthorized
access with an affordable and easy to deploy option for increasing enterprise security and complying with regulatory requirements.
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| |  | We announced the planned addition of several new delivery methods to its secure e-mail gateway appliance, Entrust Entelligence Messaging Server. Building upon its current capabilities of industry-standard S/MIME
and secure web mail communications, we will be adding support for PGP, enhancing our Web mail capabilities, and integrating with the Adobe LiveCycle Policy Server. As a result, organizations will be able to centrally control how their email messages
will be protected, and can more flexibly adapt to the needs and capabilities of internal and external message recipients.
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| |  | We announced new digital certificate management solutions to help assist organizations in managing the increasing number of security-aware devices and applications within their
networks. The solutions focus on management capabilities to substantially reduce the administrative cost and effort associated with these identities, which now serve as a significant challenge as the number of devices and applications rapidly grow.
By leveraging these certificates, customers benefit by having network devices authenticate to each other, helping to enhance the security and integrity of their infrastructure at the network level. Such device management can help guard against
unauthorized access, infection from worms, and malicious code or applications. In most organizations, native certificate management capabilities of these devices has been limited, forcing them to engage in costly labor intensive processes to issue,
renew and revoke their certificates.
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| |  | We announced that we have become a sponsoring member of the Anti-Phishing Working Group (APWG). The APWG is an organization focused on eliminating identity theft and fraud that
result from the growing problem of phishing and e-mail spoofing. We will use our technological expertise and work with the organization to help educate consumers and businesses on ways to help combat these threats to increase trust in e-commerce.
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CRITICAL ACCOUNTING POLICIES



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



Software
Revenue Recognition



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



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



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



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



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



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



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



We also eliminate intercompany profits on revenue transactions with unconsolidated
subsidiaries that are accounted for under the equity method to the extent of our ownership interest in that related party, if the product and/or services have not been sold through to an unrelated third party end-user customer. During the first
quarter of 2005, we sold services to Asia Digital Media with a fair value of $0.3 million, which after intercompany profit eliminations related to our direct and indirect ownership at March 31, 2005 of approximately 27%, was recognized as $0.2
million of net revenues.



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



Allowance for Doubtful Accounts



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



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



We base our ongoing estimate of allowance for doubtful accounts primarily on the aging of the balances in the accounts receivable, our historical collection patterns and changes in the creditworthiness of our customers. Based upon the
analysis and estimates of the uncollectibility of our accounts receivable, we record an increase in the allowance for doubtful accounts when the prospect of not collecting a specific account receivable becomes probable. The allowance for doubtful
accounts is established based on the best information available to us and is re-evaluated and adjusted as additional information is received. We exhaust all avenues and methods of collection, including the use of third party collection agencies,
before writing-off a customer balance as uncollectible. While credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we
have in the past. Each circumstance in which we conclude that a provision for non-payment by a customer may be required must be carefully considered in order to determine the true factors leading to that potential non-payment to ensure that it is
proper for it to be categorized as an allowance for bad debts. Our accounts receivable include material balances from a limited number of customers, with five customers accounting for 37% of gross accounts receivable at March 31, 2005, compared to
39% of gross accounts receivable at March 31, 2004. One customer accounted for 11% of net accounts receivable at March 31, 2005. For more information on our customer concentration, see our related discussion in Certain Factors That May Affect
Our Business. Therefore, changes in the assumptions underlying this assessment or changes in the financial condition of our customers, resulting in an impairment of their ability to make payments, and the timing of information related to the
change in financial condition could result in a different assessment of the existing credit risk of our accounts receivable and thus, a different required allowance, which could have a material impact on our reported earnings.



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As of March 31, 2005, the total accounts receivable is $19.1 million, net of an allowance for doubtful accounts of $1.1
million, compared to $16.2 million, net of an allowance for doubtful accounts of $1.0 million, as of December 31, 2004.



Restructuring Charges and Adjustments



June 2001 Restructuring Plan



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



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



Our assessment required assumptions in estimating the original accrued restructuring charges of $65.5 million at June 30, 2001, including estimating future recoveries of
sublet income from excess facilities, liabilities from employee severances, and costs to exit business activities. Changes in these assessments with respect to the accrued restructuring charges for the June 2001 restructuring program, particularly
the estimation of sub lease income for restructured facilities, of $28.2 million at March 31, 2005, could have a material effect on our reported results, as actual results could vary from these assumptions and estimates. As at March 31, 2005, we
estimated a total of $21.0 million of sublease recoveries in our restructuring accrual. Of this amount, $20.7 million is related to the Santa Clara facility. In addition, $6.4 million of the $21.0 million is recoverable under existing sublease
agreements, and the remaining $14.6 million of rent recoveries is based on estimates which may be subject to adjustment based upon changes in the real estate sublet markets.



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



May 2003 Restructuring
Plan



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



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



Our
assessment required assumptions in estimating the restructuring charges of $8.9 million, including estimating liabilities related to employee severance, future recoveries of sublet income from excess facilities, and other costs to exit activities.
Changes in these assessments with respect to the accrued restructuring charges for the May 2003 restructuring plan of $1.2 million at March 31, 2005 could have a material effect on our reported results. In addition, actual results could vary from
these assumptions and estimates, in particular with regard to the sublet of excess facilities, resulting in an adjustment that could have a material effect on our future financial results. Our accrual related to the May 2003 restructuring at March
31, 2005 includes a total of $0.5 million of estimated sublease recoveries, which may be subject to adjustment based upon changes in the real estate sublet markets.



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



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Accounting for Long-term Strategic and Equity Investments



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



Since 2001, we have recorded a total of $14.8 million of impairment charges
with respect to our long-term strategic investments due to other than temporary declines in the value of these strategic investments. These impairments were related to our investments in several different companies. As a result, we have no other
strategic investments recorded as of March 31, 2005. However, we do have $4.2 million of investments as of March 31, 2005 that we account for under the equity basis of accounting, which represent our direct and indirect equity ownership in Asia
Digital Media and its subsidiaries. Asia Digital Media is a joint venture, involving us and several other investors, formed for the purpose of delivering secure technology solutions enabling HDTV satellite broadcasting, high-speed internet and
on-line transaction services to the Chinese market.



Our investment in Asia
Digital Media began as a loan to Ohana of $650 thousand in 2003, which was convertible into equity of Ohana. In the second quarter of 2004 this was increased to $950 thousand through two disbursements. In July 2004, this loan was further increased
to $1.225 million. This amount was further increased to $1.5 million through a final disbursement in the fourth quarter of 2004. We determined that the loan was unlikely to be repaid but rather expected it to be converted into equity in ADML
Holdings, Ltd. (ADML Holdco), once Ohana became a wholly owned subsidiary of ADML Holdco in connection with the Ohana Restructuring. On an as-converted basis at September 30, 2004, we would have held the equivalent of approximately 12%
ownership share of ADML Holdco (exclusive of the anticipated final disbursement in the fourth quarter of 2004). Beginning the third quarter of 2004, we had accounted for our investment in Ohana under the equity method, in accordance with the
provisions of APB No. 18, The Equity Method of Accounting for Investments in Common Stock and ARB No. 51, Consolidated Financial Statements. Accordingly, we included our share of post-acquisition losses of Ohana, prior to the
Ohana Restructuring, in the amount of $193 thousand in our consolidated net income for the 2004 fiscal year. The Ohana Restructuring closed on November 16, 2004 and we received approximately 14.3% of the issued common shares of ADML Holdco, together
with a warrant that may become exercisable for additional shares of ADML Holdco upon the happening of certain events. See note 3 to our condensed consolidated financial statements for additional information.



On September 16, 2004, we and certain other investors agreed to subscribe for shares in a
newly formed joint venture called Asia Digital Media pursuant to a subscription agreement that was subsequently amended, and then amended and restated (Subscription Agreement), which closed on December 17, 2004. We directly subscribed
for approximately 16.7% of the share capital of Asia Digital Media in exchange for a cash contribution of $2.0 million and in-kind contributions of software products and professional services totaling $1.3 million. Of this amount, $1.1 million was
recorded on account of the in-kind contributions as revenue in the fourth quarter of 2004, net of intercompany profit eliminations. Also, ADML Holdco, in which we hold an approximate 14.3% ownership interest for our $1.5 million investment, directly
subscribed for 60.6% of the share capital of Asia Digital Media in exchange for a contribution of the entire issued share capital of Ohana. The remaining capital stock of Asia Digital Media is owned by two investors and China Aerospace New World
Technology Limited, a company incorporated in Hong Kong. During the first quarter of 2005, we received additional shares of common stock of Asia Digital Media in reimbursement for legal costs incurred by us on behalf of Asia Digital Media during its
formation and for administrative services that we provided. These additional shares were valued at $403 thousand and resulted in an increase of our total direct and indirect equity holdings in Asia Digital Media to 27.2% at March 31, 2005. However,
this may change in the future for reasons that include the exercise of the warrant received by us in connection with the Ohana Restructuring or as a result of an anti-dilution option granted to certain investors in Asia Digital Media. Beginning the
fourth quarter of 2004, we have accounted for our investment in Asia Digital Media under the equity method. Accordingly, we have included our share of post-acquisition losses of Asia Digital Media, in the amount of $230 thousand in our consolidated
net income for the first quarter of 2005. See note 3 to our consolidated financial statements for additional information. We have recorded cumulative losses from our investment in Asia Digital Media of $597 thousand since the investment in the
fourth quarter of 2004.



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



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If the demand for the technologies and products offered by Asia Digital Media materializes slowly, to a minimum extent,
or not at all in the relevant market, we could lose all or substantially all of our investment in this company. To date, we have not recorded any impairment in connection with this investment or our investment in ADML Holdco.



Provision for Income Taxes



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



Significant management
judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against deferred tax assets. We recorded a valuation allowance of $128.5 million as of March 31, 2005,
which offsets deferred income tax assets relating to United States and foreign net operating loss (NOL) and tax credit carry-forwards in the amount of $104.0 million and $24.5 million of deferred tax assets resulting from temporary differences. This
valuation allowance represents the full value of our deferred tax assets, due to uncertainties related to our ability to utilize our deferred tax assets as a result of our recent history of financial losses. Therefore, our balance sheet includes no
net deferred tax benefits related to these deferred tax assets. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to adjust our valuation allowance, which could materially impact
our financial position and results of operations.



Stock-Based
Compensation



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



We recognize that stock options dilute existing shareholders and have attempted to control the number of options granted while remaining competitive with our compensation packages. At March 31, 2005, approximately 71%
of our outstanding stock options carried exercise prices in excess of the closing market price of our Common stock on that day. The Compensation Committee of the Board of Directors overseas the granting of all stock-based incentive awards.



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



If we had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based
compensation, the effect would have been to create a net loss for the three months ended March 31, 2005 of $547 thousand, compared to a net loss of $2.1 million for the three months ended March 31, 2004, and consequently, we would have reported a
net loss per share of $0.01 for the three months ended March 31, 2005, compared to a net loss per share of $0.03 for the three months ended March 31, 2004. However, we believe, that due to the volatility of our stock and the inherent limitations of
option valuation models, the expenses that would be recorded under SFAS No. 123 are not as meaningful as a careful consideration of the outstanding option data, which is disclosed in note 4 to our condensed consolidated financial statements,
included in this report. As an illustration, because of significant movement in the market value of our stock price, the percentage of total options outstanding that were considered to be In the Money (options with exercise prices at or
below the closing market price per share) went from 35% at June 30, 2004 down to 12% at September 30, 2004 and then back up to 31% by December 31, 2004.



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



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



The decision to accelerate
the vesting of affected stock options was primarily based upon the issuance of SFAS No. 123(R). In addition, because these options have exercise prices in excess of current market values and are not fully achieving their original objectives of
incentive compensation and employee retention, the acceleration may have a positive effect on employee morale and retention. By accelerating the vesting of the affected stock options now, we will not be required to record any amount of compensation
expense in the first fiscal quarter of 2005 for such accelerated stock options, as the exercise prices exceed the market price at the date of acceleration. We believe that acceleration of these 2.8 million stock options will eliminate the need for
recognizing future compensation expense of approximately $2.7 million associated with the affected options. However, there can be no assurance that the acceleration of the options may not result in some future compensation expense.



In addition, we are currently considering the use of restricted stock units and stock
appreciation rights in future incentive compensation plans for employees and members of the Board of Directors, in place of or in combination with stock options to purchase shares of our stock.



RESULTS OF OPERATIONS



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



|                                         |  |                             |   |  |       |  
|---------------------------------------- |  | --------------------------- | - |  | ----- | -
|                                         |  | THREE MONTHS ENDEDMARCH 31, |  
|                                         |  | 2005                        |   |  | 2004  |  
|Revenues:                                |  |                             |   |  |       |  
|                                         |  |                            
|Product                                  |  | 32.4                        | % |  | 31.5  | %
|Services and maintenance                 |  | 67.6                        |   |  | 68.5  |  
|                                         |  |                             |   |  |       |  
|Total revenues                           |  | 100.0                       |   |  | 100.0 |  
|                                         |  |                             |   |  |       |  
|Cost of revenues:                        |  |                             |   |  |       |  
|Product                                  |  | 3.9                         |   |  | 3.5   |  
|Services and maintenance                 |  | 35.0                        |   |  | 33.3  |  
|Amortization of purchased product rights |  | 0.8                         |   |  |      |  
|                                         |  |                             |   |  |       |  
|Total cost of revenues                   |  | 39.7                        |   |  | 36.8  |  
|                                         |  |                             |   |  |       |  
|Gross profit                             |  | 60.3                        |   |  | 63.2  |  
|                                         |  |                             |   |  |       |  
|Operating expenses:                      |  |                             |   |  |       |  
|Sales and marketing                      |  | 28.9                        |   |  | 27.8  |  
|Research and development                 |  | 16.7                        |   |  | 20.2  |  
|General and administrative               |  | 11.7                        |   |  | 14.5  |  
|                                         |  |                             |   |  |       |  
|Total operating expenses                 |  | 57.3                        |   |  | 62.5  |  
|                                         |  |                             |   |  |       |  
|Income from operations                   |  | 3.0                         |   |  | 0.7   |  
|                                         |  |                             |   |  |       |  
|Other income (expense):                  |  |                             |   |  |       |  
|Interest income                          |  | 2.1                         |   |  | 1.2   |  
|Gain on sale of asset                    |  | 0.8                         |   |  |      |  
|Foreign exchange gain                    |  | 0.4                         |   |  | 1.8   |  
|Loss from equity investments             |  | (0.9                        | ) |  | (0.9  | )
|                                         |  |                             |   |  |       |  
|Total other income                       |  | 2.4                         |   |  | 2.1   |  
|                                         |  |                             |   |  |       |  
|Income before income taxes               |  | 5.4                         |   |  | 2.8   |  
|Provision for income taxes               |  | 1.5                         |   |  | 0.5   |  
|                                         |  |                             |   |  |       |  
|Net income                               |  | 3.9                         | % |  | 2.3   | %
|                                         |  |                             |   |  |       |  



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REVENUES



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



Revenues from perpetual software license agreements are recognized as revenue when we have received a copy of an executed license agreement
or an unconditional order under an existing license agreement, the software has been shipped (if there are no significant remaining vendor obligations), collection of the receivable is reasonably assured, the fees are fixed and determinable and
payment is due within twelve months. Revenues from license agreements requiring the delivery of significant unspecified software products in the future are accounted for as subscriptions and, accordingly, are recognized ratably over the term of the
agreement from the first instance of product delivery. This policy is applicable to all sales transactions, including sales to resellers and end user customers. We are notified of a sale by a reseller to the end user customer in the same period that
the actual sale took place. We do not offer a right of return on sales of our software products.



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



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



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



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



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



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Total Revenues



Total revenues were $24.9 million for the three months ended March 31, 2005, which represented an increase of 8% from the $23.0 million of total revenues for the three
months ended March 31, 2004. Total revenues derived from North America of $18.2 million for the three months ended March 31, 2005 represented an increase of 3% from the $17.6 million for the three months ended March 31, 2004, while the total
revenues derived from outside of North America of $6.7 million for the three months ended March 31, 2005 represented a increase of 24% from the $5.4 million for the three months ended March 31, 2004. The overall increase in total revenues in the
first quarter of 2005, when compared to the same quarter of 2004, was driven primarily by an improved closure rate for product transactions in the first quarter of 2005, particularly in North America. The improvement in North America was experienced
mainly in the extended government market, the revenues from which grew in the United States to $6.4 million for the three months ended March 31, 2005, representing a 49% increase from $4.3 million of extended government revenues for the same period
of 2004. Services revenue continued to be strong in the first quarter as we were able to renew nearly 96% of the quarters support agreements, giving us our second highest support revenue quarter in the our history. The level of non-North
American revenues has fluctuated from period to period and this trend is expected to continue for the foreseeable future. The United States and Canadian governments represented 23% and 10% of total revenues in the first quarter of 2005,
respectively, when including revenues sold through resellers to the government end users. However, direct sales to the United States and Canadian governments represented only 7% and 8% of total revenues in the first quarter of 2005, respectively. No
other individual customer accounted for 10% or more of total revenues in the three months ended March 31, 2005.



Product Revenues



Product revenues of $8.1 million for the three months ended March 31, 2005 represented an increase of 13% from the $7.2 million for the three months ended March 31, 2004, representing 32% and 31% of total revenues in
the respective periods. The increase in the first quarter of 2005 when compared to the same quarter in 2004 is primarily due to the return of strong product revenue contribution from our Government vertical and continuing strength in our Secure
Identity Management and Secure Messaging solution areas. The revenues generated from government customers were particularly strong this quarter, representing 68% of product revenues. This was our highest government product revenue in nearly three
years and was driven mainly by US Federal Agencies need for strong authentication, secure email and secure data. However, new project purchases remain subject to governmental budgetary constraints, particularly in the United States, so that
these revenues will fluctuate from period to period. In addition, we experienced an improved product transaction closure rate. Highlighting this trend, we had 64 product revenue transactions (a product revenue transaction is defined as a product
sale in excess of $10 thousand) in the first quarter of 2005, up from 62 in the same quarter of 2004, or a 3% increase. More importantly, the impact on revenues was amplified by the fact that the average product revenue transaction size increased
from $103 thousand for the first three months of 2004 to $106 thousand for the same period of 2005, or an increase of 3%. In general, the top-five average quarterly product revenue transactions as a percentage of total revenues decreased from 17%
for the first quarter of 2004 to 15% for the same quarter of 2005. However, in the quarter we had two product deals over one million dollars, which is up from one such transaction in the first quarter last year. Product revenues as a percentage of
total revenues was consistent between the first quarter of 2005 and 2004, due to equally strong demand for product and services.



Services and Maintenance Revenues



Services and maintenance revenues of $16.8 million for the three months ended March 31, 2005 represented an increase of 6% from the $15.8 million for the three months
ended March 31, 2004, representing 68% and 69% of total revenues in the respective periods. The increase in services and maintenance revenues in the first quarter of 2005 compared to the same quarter of 2004 is due to strong demand for our
architecture and deployment services, as well as improved support and maintenance revenue. The improved revenues have been driven by increased professional services revenues of $0.8 million, primarily due to a $0.5 million growth in third party
hardware revenues, and support and maintenance revenues, and related support contract renewals, which grew $0.3 million for the first quarter of 2005 when compared to the same quarter of 2004 partly due to the acquisition of Entrust Japan during the
third quarter of 2004 and continue to be at the highest levels in our history. This was partially offset by a slight decline in revenues from our North American professional services team in the first quarter of 2005 compared to the same quarter of
2004. We believe this support revenue performance reflects the value our products provide to our customers globally, the increasing customer deployment of solutions and the level of service quality that our support and maintenance team delivers. In
addition, to a greater degree, we have been fulfilling our customers deployment needs in 2004 and 2005 in conjunction with partners, as our solutions are now easier to deploy and consequently, we have seen an increase in services revenue over
the past year driven by increased third party services and hardware revenue globally. Services and maintenance revenues as a percentage of total revenues in the first three months of 2005 was consistent when compared to the same period of 2004,
which reflected equal strength of demand for our services and maintenance business as well as our products in the first quarter of 2005 compared to the same quarter of 2004.



EXPENSES



Total Expenses



Total expenses consist of costs of revenues associated with products and services and maintenance, amortization of purchased products rights and operating expenses associated with sales and marketing, research and
development and general and administrative. Total expenses of $24.2 million for the three months ended March 31, 2005 represented an increase of 6% from $22.8 million for the three months ended March 31, 2004. The increase from the first quarter of
March 31, 2004 was due primarily to the impact of additional costs associated with third party professional services subcontractors, software and hardware incurred to generate revenues. As of March 31, 2005 we had 492 full-time employees globally,
compared to 503 full-time employees at March 31, 2004 and 491 full-time employees at December 31, 2004. No employees are covered by any collective bargaining agreements.



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Cost of Revenues



Cost of Product Revenues



Cost of product revenues consists primarily of costs associated with product media, documentation, packaging and royalties to third-party software vendors. Cost of
product revenues was $1.0 million for the three months ended March 31, 2005, which represented a 19% increase from $0.8 million for the three months ended March 31, 2004, representing 4% of total revenues in each of the respective periods. While the
cost of product revenues as a percentage of total revenues remained consistent between the first quarter of 2004 and the same quarter of 2005, the $0.2 million increase in third-party royalties was primarily due to a slight shift in the mix of
product sales in the first quarter of 2005 to products that incorporate third party technology. The mix of third-party products and the relative gross margins achieved with respect to these products may vary from period to period and from
transaction to transaction and, consequently, our gross margins and results of operations could be adversely affected.



Cost of Services and Maintenance Revenues



Cost of services and maintenance revenues consists primarily of personnel costs associated with customer support, training and consulting services, as well as amounts
paid to third-party consulting firms for those services. Cost of services and maintenance revenues was $8.7 million for the three months ended March 31, 2005, which represented a 13% increase from $7.7 million for the three months ended March 31,
2004, representing 35% and 33% of total revenues for the respective periods. The increase in the cost of services and maintenance revenues in absolute dollars in the first quarter of 2005 compared to the same quarter of 2004 was due to the effect of
increased costs associated with third party subcontractor and hardware costs, which resulted in a $0.8 million increase in the cost structure of our professional services team, despite improved revenue performance, and by increased investment in our
support and maintenance team of $0.2 million, through the addition of Entrust Japan resources in the third quarter of 2004. The increase in the cost of services and maintenance revenues as a percentage of total revenues in the first three months of
2005 compared to the same period of 2004 reflected the shift in the mix of services and maintenance revenues toward third party services and hardware which are lower margin revenues. Therefore, despite our ability to grow services and maintenance
revenues, the incremental cost of these revenues was higher because of the need to utilize third parties to service these revenues. We estimate that our professional services team is staffed to deliver approximately $15.5 million per quarter in
services and maintenance revenues. Our strategy is to fulfill demand beyond that capacity, whether it be services or hardware, through third parties. Naturally, these third party services carry a significantly lower margin than our in-house services
team. However, these third party costs are variable in nature, allowing us to more easily to adjust to meet changes in demand.



Services and maintenance gross profit as a percentage of services and maintenance revenues was 48% for the three months ended March 31, 2005 and 51% for the three months
ended March 31, 2004. The decrease in services and maintenance gross profit as a percentage of services and maintenance revenues in the first quarter of 2005, compared to the same quarter of 2004, was primarily due to the utilization of lower margin
third party services and hardware to service the improved demand for our professional services and the addition of support staff and resources in late 2004. The increases in professional services revenues that required the use of third party
resources with the accompanying lower margin attainment, accounted for a one-percentage point decrease in the services and maintenance gross profit as a percentage of services and maintenance revenues for the first three months of 2005 when compared
to the same period of 2004. Also, the addition of support resources resulted in a two-percentage point decrease in the services and maintenance gross profit as a percentage of services and maintenance revenues for the first three months of 2005. We
plan to continue to optimize the utilization of existing professional services resources, while addressing significant incremental customer opportunities that may arise in the near future with the help of partners and other sub-contractors, until
the investment in additional full-time resources is justifiable. This may have an adverse impact on the gross profit for services and maintenance, as the gross profit realized by using partners and sub-contractors is generally lower. The mix of
services and maintenance revenues may vary from period to period and from transaction to transaction and, consequently, our gross margins and results of operations could be adversely affected.



Operating Expenses



Operating ExpensesSales and Marketing



Sales and marketing expenses increased from $6.4 million for the three months ended March
31, 2004 to $7.2 million for the comparable period in 2005. Sales and marketing expenses represented 29% of total revenues for the three months ended March 31, 2005, compared to 28% for the comparable period in 2004. The increase in absolute dollars
was due mainly to reduced costs in the first quarter of 2004 as a result of the collection of a long outstanding receivable during the first quarter of 2004, which netted an approximate $1.3 million recovery, which was recorded as a reduction in
selling and marketing expenses in the first quarter of 2004. However, this increase was partially offset by savings achieved through the continued management discipline with respect to spending, which resulted in cost efficiencies within the sales
team of approximately $0.3 million in the first quarter of 2005. The slight increase in sales and marketing expenses as a percentage of total revenues for the first quarter of 2005, compared to the same quarter of 2004, reflected the net effect of
cost savings realized through reduced spending through efficiencies and cost discipline achieved in our sales processes, which decreased sales and marketing expenses as a percentage of total



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revenues by two-percentage points, offset by a five-percentage point increase due to the bad debt recovery that occurred
in the first quarter of 2004. In addition, these savings were complemented by a two-percentage point decrease in sales and marketing expenses as a percentage of total revenues for the first quarter of 2005, due to improved revenue achievement
compared to the same quarter of 2004. We intend to continue to focus on improving the productivity of these organizations with a view to gaining efficiencies in the related processes in light of current economic conditions. However, we believe it is
necessary for us to continue to make significant investments in sales and marketing to support the launch of new products, services and marketing programs by maintaining our strategy of (a) investing in hiring and training our direct and partner
sales organizations in anticipation of future market growth, and (b) investing in marketing efforts in support of new product launches. We feel it is necessary to invest in marketing programs that will improve the awareness and understanding of
information security governance, and we will continue to invest in marketing toward that goal. Failure to make such investments could have a significant adverse effect on our operations. While we are focused on marketing programs and
revenue-generating opportunities to increase software revenues, there can be no assurances that these initiatives will be successful.



During the first quarter of 2005, the allowance for doubtful accounts increased by $0.1 million to $1.1 million due primarily to the overall increase in the accounts
receivable balances when compared to December 31, 2004, which required the provision for additional general reserves.



Operating ExpensesResearch and Development



Research and development expenses decreased to $4.2 million for the three months ended March 31, 2005 from $4.6 million for the comparable period in 2004. Research and
development expenses represented 17% of total revenues for the three months ended March 31, 2005, compared to 20% for the comparable period in 2004. The decrease in research and development expenses in absolute dollars for the three months ended
March 31, 2005, compared to the same period in 2004, was due mainly to continued management discipline in spending and savings achieved, which reduced expenses in this area by approximately $0.7 million, despite an unfavorable shift in the exchange
rate between Canada and the U.S. that increased reported expenses by $0.3 million, since the majority of these research and development expenses are denominated in Canadian dollars. Research and development expenses as a percentage of total revenues
for the three months ended March 31, 2005 decreased compared to the same period in 2004, mainly due to a three-percentage point decrease as a result of reduced spending, offset by a one-percentage point increase due the shift in exchange rates. In
addition, the improved revenues during the first quarter of 2005 accounted for a one-percentage point decrease in these expenses as a percentage of total revenues. We believe that we must continue to maintain our investment in research and
development in order to protect our technological leadership position, software quality and security assurance leadership. We therefore expect that research and development expenses may have to increase in absolute dollars in the future if
additional experienced security experts and software engineers are required.



Operating ExpensesGeneral and Administrative



General and administrative expenses decreased to $2.9 million for the three months ended March 31, 2005 from $3.3 million for the comparable period in 2004. General and administrative expenses represented 12% of total revenues for the three
months ended March 31, 2005, compared to 14% for the comparable period in 2004. The decline in general and administrative expenses in absolute dollars in the first quarter of 2005 compared to the same quarter of 2004 was due to the effect of
continued management discipline in this area, with savings of $0.4 million. General and administrative expenses as a percentage of total revenues have decreased for the first three months of 2005 compared to the same period of 2004, due in large
part to the reduction in spending, which accounted for one-percentage point of the decrease, and improved revenue achievement during the first quarter of 2005, which resulted in an additional one-percentage point decrease, as these expenses include
a high degree of fixed costs. We continue to explore opportunities to gain additional efficiencies in our administrative processes and to contain expenses in these functional areas.



Amortization of Purchased Product Rights



Amortization of purchased product rights was $195 thousand for the first quarter of 2005, related to the acquisition of certain business
assets from AmikaNow! during the prior year. This expense was recorded as a component of cost of revenues. There was no amortization expense in connection with acquisition-related intangibles in the first quarter of 2004.



Interest Income



Interest income increased to $528 thousand for the three months ended March 31, 2005 from $264 thousand for the three months ended March 31,
2004, representing 2% and 1% of total revenues in the respective periods. The increase in investment income from the first quarter of 2004 to the same quarter of 2005 reflected improved interest rates on funds invested, despite the reduced balance
of funds invested as a result of amounts drawn down to fund cash flow from operations and stock repurchases and to acquire long-lived assets during the last year. The funds invested decreased to $100.2 million at March 31, 2005 from $108.5 million
at March 31, 2004. The rate of return on our marketable investments improved to approximately 3.0% in the first quarter of 2005 compared to a rate of return of just over 1.0% in the first quarter of 2004.



Gain on Sale of Asset



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



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Loss from Equity Investments



We recorded $230 thousand of losses, net of intercompany profit eliminations, related to our investment in Asia Digital Media for the three
months ended March 31, 2005. We began accounting for this investment under the equity method of accounting in the fourth quarter of 2004, since we had the potential to significantly influence its operations and management.



We recorded $209 thousand of losses related to our investment in Entrust Japan for the three
months ended March 31, 2004. This investment was accounted for under the equity method of accounting for investments in common stock until acquisition on September 13, 2004, since we had the potential to significantly influence the operations and
management of Entrust Japan. These losses represented our share of the operating losses of Entrust Japan on an equity accounting basis, based on an approximate 37% ownership interest in the voting capital of Entrust Japan up to the date of
acquisition.



Provision for Income Taxes



We recorded an income tax provision of $374 thousand for the three months ended March 31,
2005, compared to $129 thousand for the same period of 2004. These provisions represent primarily the taxes payable in certain foreign jurisdictions. The effective income tax rates differed from statutory rates primarily due to the adjustment of the
valuation allowance that has offset the tax benefits from the significant net operating loss and tax credit carry-forwards available.



LIQUIDITY AND CAPITAL RESOURCES



We generated cash of $2.8 million in operating activities during the three months ended March 31, 2005. This cash inflow was primarily a result of a net income before
non-cash charges of $2.8 million, an increase in deferred revenue of $2.6 million, and an increase in accounts payable and accrued liabilities of $2.7 million, partially offset by cash outflows resulting from a decrease in accrued restructuring
charges of $1.0 million, an increase in accounts receivable of $3.1 million and an increase in prepaid expenses and other receivables of $1.2 million. Our average days sales outstanding at March 31, 2005 was 69 days, which represents an increase
from the 54 days that we reported at December 31, 2004. The overall increase in days sales outstanding from December 31, 2004 was mainly due to lower in-quarter collections on the top product transactions compared to the fourth quarter of 2004, as a
result of less favorable linearity of revenues during the first quarter of 2005, such that 58% of revenues were recorded in the third month of the first quarter compared to 44% in the third month of the fourth quarter of 2004. This effect was
partially offset by strong collection efforts during the same period. For purposes of calculating average days sales outstanding, we divide ending accounts receivable by the applicable quarters revenues and multiply this amount by 90 days. The
level of accounts receivable at each quarter end is affected by the concentration of revenues in the final weeks of each quarter and may be negatively affected by expanded international revenues in relation to total revenues as licenses to
international customers often have longer payment terms.



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



During the three months ended March 31, 2005, we generated $17.3 million of cash from investing activities, primarily due to cash provided by reductions in our marketable
investments in the amount of $18.0 million (net of $14.3 million of marketable investment purchases) and from the proceeds on the sale of intellectual property assets of $0.2 million. This was partially offset by the investment of $0.4 million in
property and equipment, primarily for computer hardware upgrades throughout our organization, $0.4 million in the Asia Digital Media equity investment and $0.1 million in other long-term assets related to capitalized software development costs.



We used cash of $1.0 million in financing activities during the three months
ended March 31, 2005 primarily for the repurchase of our Common stock in the amount of $1.8 million, offset by $0.8 million of cash provided by the exercise of employee stock options.



As of March 31, 2005, our cash, cash equivalents and marketable investments in the amount of $100.2 million provided our principal sources
of liquidity. Overall, we generated $0.9 million in cash, cash equivalents and marketable investments in the first quarter of 2005. Although we continue to target operating profitability, based on sustaining current revenue and operating expense
structures, we estimate that we may continue to use cash in fiscal 2005 to satisfy the obligations provided for under our restructuring program. However, if operating losses do occur, then cash, cash equivalents and marketable investments will be
negatively affected.



In addition, we announced in the third quarter of 2002
that we intend to repurchase up to an aggregate of 7.0 million shares of our Common stock over the 12-month period ending July 28, 2003, or an earlier date determined by our Board of Directors, in open market, negotiated or



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block transactions. In July 2003, we announced that our Board of Directors had agreed to extend the expiry date of the
stock repurchase program to September 1, 2004 and to permit the purchase of up to 7,000,000 shares of our Common stock in addition to the 2,229,200 shares already purchased up to that time. In August 2004, we announced that our Board of Directors
had authorized an extension of this stock repurchase program to permit the purchase of up to 10,000,000 shares of our Common stock through September 15, 2005 in addition to the 3,412,940 shares already purchased prior to this extension. The timing
and amount of shares repurchased under this program will be determined by our management based on its evaluation of market and business conditions, and will be funded using available working capital. Since the announcement of the program in 2002, we
have repurchased 4,323,640 shares of Common stock for an aggregate purchase price of $14.9 million, of which 433,000 shares were repurchased during the first quarter of 2005, at an aggregate purchase price of $1.8 million.



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



In terms of long-term liquidity requirements, we will need to fund the $29.1 million of
accrued restructuring charges at March 31, 2005 through fiscal 2011, as detailed below. This amount is net of estimated sublet recoveries on restructured facilities of $21.5 million. The lease obligations included in these accrued restructuring
charges are disclosed in the table of contractual commitments below. In addition, we forecast a requirement to spend approximately $1.8 million per year into the foreseeable future on capital expenditures, primarily for computer equipment needed to
replace existing equipment that is coming to the end of its useful life.



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



We have commitments that will expire at various times through 2011. We lease administrative
and sales offices and certain property and equipment under non-cancelable operating leases that will expire in 2011 with certain renewal options. Other significant contractual obligations or commitments that were not recorded in our financial
statements are listed below. A summary of our contractual commitments at March 31, 2005 is as follows:



|                                                            |  |                       |        |                 |   |          |  |          |        |                  |   |        |  |   |      
|----------------------------------------------------------- |  | --------------------- | ------ | --------------- | - | -------- |  | -------- | ------ | ---------------- | - | ------ |  | - | -----
|                                                            |  | Payment Due by Period
|                                                            |  | Total                 |        | Less than1 Year |   | 1-3Years |  | 3-5Years |        | More than5 Years
|                                                            |  | (in thousands)       
|Operating lease obligations  currently utilized facilities |  | $                     | 22,797 |                 | $ | 4,340    |  | $        | 8,111  |                  | $ | 6,706  |  | $ | 3,640
|Operating lease obligations  restructured facilities       |  |                       | 36,842 |                 |   | 6,019    |  |          | 12,370 |                  |   | 12,780 |  |   | 5,673
|Guaranteed payments to AmikaNow!                            |  |                       | 1,352  |                 |   | 193      |  |          | 1,159  |                  |   |       |  |   |     
|Other contractual obligations                               |  |                       | 500    |                 |   | 500      |  |          |       |                  |   |       |  |   |     
|                                                            |  |                       |        |                 |   |          |  |          |        |                  |   |        |  |   |      
|Total                                                       |  | $                     | 61,491 |                 | $ | 11,052   |  | $        | 21,640 |                  | $ | 19,486 |  | $ | 9,313
|                                                            |  |                       |        |                 |   |          |  |          |        |                  |   |        |  |   |      



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



In August 2004, we signed a Distribution Agreement with Pointsec Mobile Technologies (Pointsec) to jointly develop and market data security products designed
to protect information in laptop, desktop, PDA and server environments. Under this agreement, we have committed to certain payments to Pointsec totaling $1.5 million, of which $500 thousand remains due and is expected to be paid in the second
quarter of 2005.



In the ordinary course of business, we enter into standard
indemnification agreements with our business partners and customers. Pursuant to these agreements, we agree to modify, repair or replace the product, pay royalties for a right to use, defend and reimburse the indemnified party for actual damages
awarded by a court against the indemnified party for an intellectual property infringement claim by a third party with respect to our products and services, and indemnify for property damage that may be caused in connection with consulting services
performed at a customer site by our employees or our subcontractors. The term of these indemnification agreements is generally perpetual. The maximum potential amount of future payments we could be required to make under these indemnification
agreements is unlimited. We have general and umbrella insurance policies that generally enable us to recover a portion of any amounts paid. We have never incurred costs to defend lawsuits or settle claims related to these indemnification agreements.
As a result, we believe the estimated fair value of these agreements is minimal. Accordingly, we have no liabilities recorded for these agreements as of March 31, 2005.



We generally warrant for ninety days from delivery to a customer that our software products will perform free from material errors that
prevent performance in accordance with user documentation. Additionally, we warrant that our consulting services will be performed consistent with generally accepted industry standards including other warranties. We have only incurred nominal
expense under our product or service warranties. As a result, we believe the estimated fair value of our obligations under these agreements is minimal. Accordingly, we have no liabilities recorded for these agreements as of March 31, 2005.



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



CERTAIN FACTORS THAT MAY
AFFECT OUR BUSINESS



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



Historically, a limited number of customers have accounted for a significant percentage of our revenues. In the first quarter of 2005, our three largest customers
accounted for 42% of revenues. In 2004, 2003 and 2002, our three largest customers accounted for 32%, 29% and 18% of revenues, respectively. We anticipate that our results of operations in any given period will continue to depend to a significant
extent upon revenues from a small number of large customers. In addition, we anticipate that such customers will continue to vary over time, so that the achievement of our long-term goals will require us to obtain additional significant customers on
an ongoing basis. Our failure to enter into a sufficient number of large licensing agreements during a particular period could have a material adverse effect on our revenues.



In addition, our accounts receivable include material balances from a limited number of customers, with five customers accounting for 34% of
gross accounts receivable at March 31, 2005, compared to 39% of gross accounts receivable at March 31, 2004. One customer accounted for 9% of net accounts receivable at March 31, 2005. As of March 31, 2005, the total accounts receivable is $19.2
million, net of an allowance for doubtful accounts of $1.1 million. Changes in the financial condition of these customers could result in a different assessment of the existing credit risk of our accounts receivable and thus, a different required
allowance, which could have a material impact on our reported earnings.



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



The extended government vertical (Governments, including Healthcare) accounted for 68% of
our product revenue in the first quarter of 2005 and 24% of product revenue in fiscal 2004. The U.S. and Canadian governments represented 23% and 10% of total revenues, respectively, in the first quarter of 2005, which includes revenues sold through
resellers to these government end users. Sustaining and growing revenues in the government market will depend, in large part, on the following:



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



Our personnel, systems, procedures and controls may not be adequate to support our operations. The geographic dispersal of our operations, including the separation of our
headquarters in Addison, Texas, from our research and development facilities in Ottawa, Canada, and Santa Clara, California, from our European headquarters in Reading, United Kingdom and from our operations in Tokyo, Japan, 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. These challenges are made more severe by our history of operating
losses, the employment reductions from our restructurings, and the fact that the exercise price of the substantial majority of outstanding stock options is below the current market price of our stock. If we cannot retain or are unable to hire such
key personnel, our business, financial condition and results of operations could be significantly adversely affected.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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In June 2004, we acquired intellectual property and certain other assets of AmikaNow for $4.0 million, plus potential
additional payments in the future of up to $1.5 million based on revenue generated from products that incorporate the intellectual property acquired. In addition, in September 2004, we acquired majority ownership of Entrust Japan for $1.7 million.
While management expects the integration of the acquired technology and people to go smoothly, each of the above risks apply to these acquisitions as well.



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



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



As a result of the June 2001 restructuring plan, we recorded restructuring and other special non-recurring charges, excluding goodwill impairment, of $106.6 million in
the second quarter of 2001. Our assessment of the accounting effects of the June 2001 restructuring plan required assumptions in estimating the original accrued restructuring charges, including estimating future recoveries of sublet income from
excess facilities, liabilities from employee severances, and costs to exit business activities. Changes in these assumptions, with respect to the accrued restructuring charges for the June 2001 restructuring plan of $28.2 million at March 31, 2005,
could have a material effect on our reported results.



As a result of the May
2003 restructuring plan, we recorded restructuring charges, excluding impairments, of $8.9 million. Our assessment of the accounting effect of the May 2003 restructuring plan required assumptions in estimating the original incurred and expected
restructuring charges of $8.9 million, including estimating liabilities from employee severances, future recoveries of sublet income from excess facilities, and other costs to exit activities. Changes in these assumptions, with respect to the
accrued restructuring charges for the May 2003 restructuring plan of $0.9 million at March 31, 2005, could have a material effect on our reported results.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



In total we have invested $3.9 million
in cash and $1.3 million in-kind in ADML Holdco and its affiliate, Asia Digital Media, including $1.5 million in loans to Ohana that converted into equity of ADML Holdco. Joint ventures have additional risks as a result of potentially conflicting
objectives between the owners including, but not limited to, agreement on business plans, budgets, and key staffing decisions. The success of Asia Digital Media depends in large part on conditions in the Chinese market and receipt of approvals
required to export into China and conduct business there.



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



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



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



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



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



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



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



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



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



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



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



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



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



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



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Risk Associated with Interest Rates



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



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The following table presents the cash, cash equivalents and marketable investments that we held at March 31, 2005, that
would have been subject to interest rate risk, and the related ranges of maturities as of those dates:



|                                                                  |  |                 |        |           |   |           |  |            |       |  |   |  
|----------------------------------------------------------------- |  | --------------- | ------ | --------- | - | --------- |  | ---------- | ----- |  | - | -
|                                                                  |  | MATURITY       
|                                                                  |  | (in thousands) 
|                                                                  |  | Within 3 Months |        | 3-6Months |   | > 6Months |  | > 12Months
|Investments classified as cash and cash equivalents               |  | $               | 29,011 |           | $ |          |  | $          |      |  | $ | 
|Investments classified as held to maturity marketable investments |  |                 | 26,814 |           |   | 12,438    |  |            | 5,777 |  |   | 
|                                                                  |  |                 |        |           |   |           |  |            |       |  |   |  
|Total amortized cost                                              |  | $               | 55,825 |           | $ | 12,438    |  | $          | 5,777 |  | $ | 
|                                                                  |  |                 |        |           |   |           |  |            |       |  |   |  
|Fair value                                                        |  | $               | 55,816 |           | $ | 12,416    |  | $          | 5,731 |  | $ | 
|                                                                  |  |                 |        |           |   |           |  |            |       |  |   |  



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



Risk Associated with Exchange Rates



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



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



During the first quarter of 2005, we engaged in
forward contracts to purchase Canadian dollars, covering exposures on approximately $8.7 million of our Canadian subsidiarys expenses denominated in Canadian dollars, in an attempt to reduce earnings volatility that might result from
fluctuations in the exchange rate between the Canadian and U.S. dollar. None of the related foreign exchange contracts extended past March 31, 2005. Similarly, we have engaged in forward contracts to purchase Canadian dollars covering exposures on
approximately $8.7 million of expenses denominated in Canadian dollars in the second quarter of 2005.



Risk Associated with Equity Investments



We have invested in several privately held companies, most of which are technology companies in the start-up or development stage, or are companies with technologies and products that are targeted at geographically distant markets. As a
result of other than temporary declines in the net realizable value, these investments were fully impaired over the period from 2001 to 2003. Accordingly, there is no net book value remaining for these strategic equity investments as of March 31,
2005.



In total we have invested $3.9 million cash and $1.3 million in-kind in
ADML Holdco and its affiliate, Asia Digital Media, including $1.5 million in loans to Ohana that converted into equity in ADML Holdco.



Asia Digital Media is a company in the start-up or development stage, and may lack the financial resources, licenses, technology and governmental approvals necessary to
develop any commercial product or service offerings. If no such offerings are developed, we could lose all or substantially all of our investment in these companies. Even if such offerings are developed, if the demand for these products and services
materializes slowly, to a minimum extent, or not at all in the relevant market, we could lose all or substantially all of our investment or the remaining balance of the equity investment of $4.2 million at March 31, 2005 may be expensed through our
operating earnings in future quarters as a result of our recognition of our equity share of losses in Asia Digital Media. We have included our share of losses of Asia Digital Media, in the amount of $230 thousand in our consolidated income for the
first quarter of 2005. We have recorded cumulative losses from our investment in Asia Digital Media of $597 thousand since the investment in the fourth quarter of 2004. To date, we have not recorded any impairment in connection with our investments
in ADML Holdco and Asia Digital Media.



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ITEM 4. CONTROLS AND PROCEDURES



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



PART II. OTHER INFORMATION



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



The table below sets forth the information with respect to purchases made by or on behalf of Entrust, Inc. or any affiliated purchaser (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of
1934), of our common stock during the three months ended March 31, 2005.



|                                                 |  |                                |  |                            |      |                                                                                   |         |                                                                                 |          
|------------------------------------------------ |  | ------------------------------ |  | -------------------------- | ---- | --------------------------------------------------------------------------------- | ------- | ------------------------------------------------------------------------------- | ---------
|Period                                           |  | Total Numberof SharesPurchased |  | AveragePrice Paidper Share |      | Total Number of SharesPurchased as Part ofPublicly AnnouncedPlans or Programs (1) |         | Maximum Number ofShares That May Yet Be Purchased Under thePlans or Programs(1)
|Month #1 (January 1, 2005 to January 31, 2005)   |  |                               |  | $                          |     |                                                                                   |        |                                                                                 | 9,522,300
|                                                 |  |                                |  |                           
|Month #2 (February 1, 2005 to February 28, 2005) |  | 44,404                         |  |                            | 3.93 |                                                                                   | 44,404  |                                                                                 | 9,477,896
|                                                 |  |                                |  |                           
|Month #3 (March 1, 2005 to March 31, 2005)       |  | 388,596                        |  |                            | 4.05 |                                                                                   | 388,596 |                                                                                 | 9,089,300
|                                                 |  |                                |  |                            |      |                                                                                   |         |                                                                                 |          
|Total                                            |  | 433,000                        |  | $                          | 4.04 |                                                                                   | 433,000 |                                                                                 | 9,089,300
|                                                 |  |                                |  |                            |      |                                                                                   |         |                                                                                 |          

---

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



ITEM 6. EXHIBITS



|              |  |                                                                     
|------------- |  | --------------------------------------------------------------------
|ExhibitNumber |  | Description                                                         
|10.1          |  | Form of Entrust, Inc. Officer Non-Statutory Stock Option Agreement. 
|              | 
|10.2          |  | Form of Entrust, Inc. Employee Non-Statutory Stock Option Agreement.
|              | 
|10.3          |  | Form of Entrust, Inc. Restricted Stock Unit Award Agreement.        
|              | 
|10.4          |  | Form of Entrust, Inc. Stock Appreciation Right Agreement.           
|              | 
|31.1          |  | Rule 13a-14(a) Certification of Chief Executive Officer.            
|              | 
|31.2          |  | Rule 13a-14(a) Certification of Chief Financial Officer.            
|              | 
|32.1          |  | Section 1350 Certification of Chief Executive Officer.              
|              | 
|32.2          |  | Section 1350 Certification of Chief Financial Officer.              



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SIGNATURES



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



|                   |  |                                                  
|------------------ |  | -------------------------------------------------
|                   |  | ENTRUST, INC.                                    
|                   |  | (Registrant)                                     
|                   | 
|Dated: May 9, 2005 |  | /s/ David J. Wagner                              
|                   |  | David J. Wagner                                  
|                   |  | Chief Financial Officer and Senior Vice President
|                   |  | (Principal Financial and Accounting Officer)     



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EXHIBIT INDEX



|              |  |                                                                     
|------------- |  | --------------------------------------------------------------------
|ExhibitNumber |  | Description                                                         
|10.1          |  | Form of Entrust, Inc. Officer Non-Statutory Stock Option Agreement. 
|              | 
|10.2          |  | Form of Entrust, Inc. Employee Non-Statutory Stock Option Agreement.
|              | 
|10.3          |  | Form of Entrust, Inc. Restricted Stock Unit Award Agreement.        
|              | 
|10.4          |  | Form of Entrust, Inc. Stock Appreciation Right Agreement.           
|              | 
|31.1          |  | Rule 13a-14(a) Certification of Chief Executive Officer.            
|              | 
|31.2          |  | Rule 13a-14(a) Certification of Chief Financial Officer.            
|              | 
|32.1          |  | Section 1350 Certification of Chief Executive Officer.              
|              | 
|32.2          |  | Section 1350 Certification of Chief Financial Officer.              





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