<PAGE>
 
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                       _________________________________

                                   FORM 10-K

                          FOR ANNUAL AND TRANSITION 
                 REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF 
                      THE SECURITIES EXCHANGE ACT OF 1934

     (Mark one)

               [X]  Annual report pursuant to Section 13 or 15(d) of the 
                        Securities Exchange Act of 1934
                                        
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

                                      OR

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

                       COMMISSION FILE NUMBER 000-24733
                       _________________________________
                                        
                           ENTRUST TECHNOLOGIES INC.
            (Exact name of registrant as specified in its charter)
                                        
         MARYLAND                                          62-1670648
(State or other jurisdiction of                (IRS employer identification no.)
incorporation or organization)

                       ONE PRESTON PARK SOUTH, SUITE 400
                            4975 PRESTON PARK BLVD.
                                PLANO, TX 75093
              (Address of principal executive offices & zip code)
      Registrant's telephone number, including area code: (972) 943-7300
                                        
  Securities registered pursuant to Section 12(b) of the Act:  none

  Securities registered pursuant to Section 12(g) of the Act:  Common Stock, 
                                                               $.01 par value

     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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  [X]

     The aggregate market value of the common equity held by non-affiliates of
the registrant, computed using the closing sale price of common stock on March
23, 1999, as reported on the Nasdaq National Market, was approximately
$390,000,000 (affiliates included for this computation only: directors,
executive officers and holders of more than 5% of the registrant's common
stock).

     The number of shares outstanding of the registrant's common stock as of
     March 23, 1999 was 43,327,156.  The number of shares outstanding of the
     registrant's special voting stock as of March 23, 1999 was 5,157,289.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the definitive Proxy Statement to be delivered with the Notice
of Annual Meeting of Stockholders to be held  May 5, 1999 are incorporated by
reference into Part III of this Form 10-K.
<PAGE>
 
                           ENTRUST TECHNOLOGIES INC.

                               TABLE OF CONTENTS
                                        
<TABLE>
<CAPTION>
 
 
PART I.                                                                                             Page
                                                                                                    ----
<S>         <C>                                                                                   <C>
Item 1.     Business............................................................................       3
Item 2.     Properties..........................................................................      14
Item 3.     Legal Proceedings...................................................................      14
Item 4.     Submission of Matters to a Vote of Security Holders.................................      15
            Executive Officers and Directors of the Registrant..................................      15

<CAPTION> 
<S>         <C>                                                                                   <C>
PART II.                                                                                            Page
                                                                                                    ----
Item 5.     Market for Registrant's Common Stock and Related Stockholder Matters................      16
Item 6.     Selected Financial Data.............................................................      16
Item 7.     Management's Discussion and Analysis of Financial Condition and Results of
            Operations..........................................................................      17
Item 7A.    Quantitative and Qualitative Disclosures About Market Risk..........................      29
Item 8.     Financial Statements and Supplementary Data.........................................      30
Item 9.     Changes in and Disagreements with Accountants on Accounting and Financial 
            Disclosure..........................................................................      30

<CAPTION>
  PART III.                                                                                         Page
                                                                                                    ----
Item 10.    Directors and Executive Officers of the Registrant..................................      31
Item 11.    Executive Compensation..............................................................      31
Item 12.    Security Ownership of Certain Beneficial Owners and Management......................      31
Item 13.    Certain Relationships and Related Transactions......................................      31

<CAPTION> 
  PART IV.                                                                                          Page
                                                                                                    ----
Item 14.    Exhibits, Financial Statements and Reports on Form 8-K..............................      32

SIGNATURES......................................................................................      33
</TABLE>
<PAGE>
 
     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, among other things, 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 "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Overview", and "-- Certain Factors that May Affect Our Business" and elsewhere
in this report.  You should also carefully review the risks outlined in other
documents that we file from time-to-time with the Securities and Exchange
Commission, including our Quarterly Reports on Form 10-Q that we will file in
1999.

     Entrust is a registered trademark, and Entrust-Ready, the Entrust design
(Elmer), Entrust/Authority, Entrust/Admin,  Entrust/Directory,
Entrust/Entelligence, Entrust/Web Connector, Entrust/Commerce CA, Entrust
Commerce Connector, Entrust/VPN Connector, Entrust/Lite, Entrust/Solo,
Entrust/ICE, Entrust/Express, Entrust/Direct, Entrust/Client,  Entrust/Engine,
Entrust/TrueDelete, Entrust/Unity, Entrust/Timestamp, Entrust/Toolkit,
Entrust/PKI, Entrust InSource, Entrust Worldwide, Entrust Partner and Entrust
SecureSummit are trademarks or service marks, of Entrust Technologies Limited, a
majority-owned subsidiary of Entrust Technologies Inc.  Other trademarks and
service marks used in this Form 10-K are the property of their respective
owners.


                                    PART I.

ITEM 1.    BUSINESS

     Entrust Technologies' public-key infrastructure (PKI) solutions provide
enterprises with the ability to more effectively manage trusted, secure
electronic communications and transactions over today's advanced networks,
including the Internet, extranets and intranets.  Since its initial release in
1994, Entrust software has been licensed for use in more than 700 global
enterprises, government entities and financial institutions.
 
Industry Background

     The widespread adoption in recent years of public and private networks has
revolutionized the manner in which organizations communicate and conduct
business. These advanced networks provide an attractive medium for
communications and commerce because of their global reach, accessibility, use of
open standards and ability to permit interactions on a real-time basis.
Proliferation of these networks has facilitated the storage, analysis and
communication of critical information within and between organizations. At the
same time, they have afforded businesses a user-friendly, low-cost way to
conduct a wide variety of commercial functions electronically. Today,
organizations are increasingly utilizing these networks to access new markets,
improve customer service and streamline business processes through applications
such as e-mail, e-forms, Web browsing, remote access, virtual private networks,
intranet-based applications, on-line customer support, and supply-chain
management applications.

     Need For Secure Transactions

     The very openness and accessibility that have stimulated the adoption and
growth of public and private networks create threats to the privacy and
integrity of information that is transmitted across or stored on them.
According to a 1997 industry survey, 70% of consumers and businesses surveyed
cited security concerns as the principal impediments to a broader use of the
Internet for commercial applications. Key consumer security concerns include
merchant impersonation, fraud and the risk that third parties may intercept and
use personal information such as credit card numbers, all of which may inhibit
the broader adoption of electronic commerce. Businesses relying on public and
private networks for internal communications risk the theft, loss, alteration or
dissemination of confidential data, loss of reputation and economic loss through
fraud. Threats to corporate data security arise both from external sources such
as competitors and computer hackers, as well as internal sources, such as
curious or disgruntled employees and contractors. According to a recent FBI
report, among U.S. enterprises reporting that they had experienced computer
security breaches, the average financial losses from internal breaches were
significantly higher than the losses sustained from external breaches. These
business risks have driven the demand for effective and robust network and
information security products.

                                                                               3
<PAGE>
 
     The security risks associated with communications and commerce over public
and private networks have accentuated the need for information security
solutions that address the five critical network security needs:

Access Control--Only authorized users should access, view or modify certain data

Confidentiality--Data in transit over the network or in storage should not be
disclosed to unauthorized persons

Integrity--Data should not be altered or compromised by unauthorized
manipulation

Authentication--The identity of the data sender should be verified

Non-Repudiation--The sender of a transmission should not be able to deny or
repudiate the transmission

     A wide range of products and services has been introduced to address one or
more of these five critical network security needs. For example, access control
is provided by products such as firewalls and password tokens, which limit
network access only to users having recognized addresses or entering recognized
passwords, but are limited in their flexibility and do not address such
requirements as confidentiality, integrity, authentication and non-repudiation.
Encryption devices and programs provide confidentiality, but are device-
dependent and do not address issues of access control, integrity, authentication
and non-repudiation. The lack of flexibility and scalability inherent in these
solutions has led to the development of public-key encryption and digital
certification systems combined in a public-key infrastructure, which can address
all five critical network security needs.

     Public-Key Security

     A public-key infrastructure uses encryption algorithms in combination with
authentication and verification technology offered by digital certificates to
provide the user with a secure and reliable means of communicating and effecting
transactions over public and private networks.

     Public-Key Encryption. Digital messages are encrypted and decrypted using a
     ---------------------
cipher or key. Public-key encryption systems assign each user a pair of linked
keys: a "public" key, which the user provides to others, and a "private" key,
which the user keeps secret. A user wishing to send a secure transmission
encrypts the transmission using the recipient's public key. To decode the
transmission, the recipient uses a private key that is uniquely able to decode
messages encoded with his or her corresponding public key. Thus, the successful
exchange of encrypted messages using a public key system requires that message
senders have the public keys for all recipients to whom they desire to send
messages, and that the recipients decode messages with their own private keys.
Public-key encryption provides a high level of data security, and thus addresses
an enterprise's need for confidentiality of electronic transmissions. However,
because encryption alone does not give the recipient of a message any
information about the sender or ensure that a message is not altered en route,
the requirements for access control, integrity, authentication and non-
repudiation are not satisfied.

     Digital Certification. The ability to ensure access control, authentication
     ---------------------
and non-repudiation of digital transmissions can be achieved with digital
certification systems, which enable a recipient to verify that a message
originates from the expected sender. These systems use public and private keys
to create digital signatures. These signatures are encoded using the sender's
private key. Upon receipt of the message, the recipient obtains a copy of the
sender's public key, which verifies that the message originated from the
expected sender. Digital certificates thus function as electronic passports that
not only authenticate their owners' identities and verify their owners'
membership in certain organizations, but also establish their owners' authority
to engage in a given transaction. Digital signature and certification technology
also ensures the integrity of a message by enclosing an encrypted summary or
"hash" of the message with the sender's digital signature. When the signature
and hash are decrypted using the sender's public key , the system can
automatically detect whether the message was altered since it was signed.

     Market Acceptance of Digital Certification. Because of its security
     ------------------------------------------
benefits, digital certification has gained significant market acceptance,
particularly in sectors in which information security is critical, such as
government, finance, health care and telecommunications. Industry sources
believe that by 2000 digital certificates will be nearly as widely adopted by
the general public as e-mail is today. At least 40 U.S. states, as well as the
U.S. and Canadian governments and the European Union, have adopted or are
considering digital signature statutes that recognize the legal validity of
digitally signed documents. In addition, the banking industry's Secure
Electronic Transaction (SET) standard for Internet credit card purchases, as
well as the Internet secure packet transmission standard (IPsec) adopted by most
firewall, routing and access vendors, depend on digital certification.

                                                                               4
<PAGE>
 
     Need For a Public-Key Infrastructure

     The increasing acceptance of digital certificates has given rise to
numerous products and services that issue digital certificates or that are able
to work with digital certificates. However, the mere issuance of digital
certificates does not ensure that a user's access is properly monitored, that
privileges associated with access are accurately and currently defined, or that
the certificates in question have not been withdrawn or replaced. Indeed, the
proliferation of users and certificates greatly complicates management of these
issues, which are critical to maintaining an effective security environment
across and between enterprises. To address these needs, enterprises must have a
robust public-key infrastructure that supplements certificate issuance functions
with full life cycle management of public and private keys, including issuance,
authentication, storage, retrieval, backup, recovery, updating and revocation,
in an easy-to-use, cost-effective manner.

     Moreover, unless digital certificates and private keys can be easily
utilized on a consistent and reliable basis across multiple applications (such
as e-mail, browser, electronic commerce, electronic forms and remote access),
organizations will face the challenge and cost of maintaining a separate
security infrastructure for each application, requiring separate keys and
certificates, multiple passwords and inconsistent or incomplete security
implementations.  Furthermore, any PKI must be able to support an enterprise's
security requirements as the enterprise grows, business functions are altered
and underlying IT technologies evolve. To be effective, a public-key
infrastructure must be able to accommodate a large number of users and integrate
diverse computing resources into a consolidated, reliable and secure computing
environment that meets the five critical network security needs of access
control, confidentiality, authentication, integrity and non- repudiation.
Achievement of these goals requires a highly functional and flexible public-key
infrastructure for the management of network security features across an
enterprise and between organizations.

The Entrust Solution

     Entrust Technologies develops, markets and distributes a comprehensive
public-key infrastructure solution that enables enterprises to effectively
manage secure communications and transactions across a wide range of
applications. The Entrust PKI solution addresses the five critical network
security needs of enterprises and allows for consistent enterprise-wide security
policy management, enabling any enterprise to establish its own flexible, highly
reliable PKI. Entrust also offers users encryption functionality and full
digital signature and certification management in a single, easy-to-use,
integrated and automated solution. Among the benefits offered by Entrust's PKI
solution are:

     Comprehensive Functionality. We believe that we are the only provider of a
     ---------------------------
comprehensive PKI solution offering the functionality necessary for the full
life cycle management of  keys and digital certificates including: certificate
issuance, certificate authentication, key storage and backup, key retrieval and
recovery, certificate updating, certificate revocation and cross-certification
of  PKIs.

     Multiple Certificate Types. The Entrust PKI supports multiple certificate
     --------------------------
types and configurations, including enterprise certificates that can be used
across multiple applications, Web certificates for secure Web transactions,
electronic commerce certificates supporting secure credit card transactions
using the SET standard and certificates for communications technologies such as
VPNs.

     Open, Versatile Platform. The Entrust PKI enables secure transmissions
     ------------------------
across a wide range of computing platforms (including Windows NT and UNIX
servers and Windows, UNIX, Macintosh and JAVA clients), enterprise applications
(including e-mail, browser, electronic commerce, electronic forms and remote
access), network infrastructure (including firewalls, network operating systems
and directories), and open industry standards  (such as the lightweight
directory access protocol ("LDAP"), PKIX, and PKCS 11).

     Highly-Scalable Architecture. Entrust products employ a distributed
     ----------------------------
computing architecture and directory management techniques that make them highly
scalable. We believe that our PKI solution can be configured to handle millions
of simultaneous users.

     Ease Of Use.  Entrust products automatically enable complex certification
     -----------
and key recovery functions without user interaction; most functions are
initiated using simple point and click graphical interfaces and are accessed via
a single user login.

     Reduced Cost Of Ownership.  Because the Entrust PKI's comprehensive
     -------------------------
functionality reduces duplication of personnel, its ease of use simplifies
training, and its ability to interact with a wide variety of platforms and

                                                                               5
<PAGE>
 
applications avoids the need to purchase multiple security systems, the Entrust
PKI enables enterprises to significantly reduce overall costs for addressing
security requirements.

Strategy

     Our objective is to maintain and enhance our position as the leading
provider of comprehensive PKI solutions.  Key elements of our strategy to
achieve this objective include the following:

     Maintain Product Leadership. Entrust's PKI solution has been deployed
     ---------------------------
commercially through multiple versions for over four years. Our technological
leadership is attributable in large part to our research and development team,
which includes researchers with international reputations in their fields. We
intend to maintain and enhance our technological leadership in the PKI solutions
market by continuing to invest in product research and development, to extend
the functionality and interoperability of our products, and to participate
actively in industry standards-setting organizations.

     Target Large Customers. We target our sales and marketing activities at
     ----------------------
Global 2000 organizations and large governmental entities having significant
requirements for comprehensive PKI solutions and the  resources to deploy them
broadly. To address this market, we maintain an experienced direct sales force
and an active marketing program targeted at large organizations. We are
expanding our sales force to address our target market more fully, and we are
supplementing our sales force with a services capability to facilitate
implementation and deployment of products by large organizations.

     Target Vertical Markets Offering Broad Deployment Opportunities. We target
     ---------------------------------------------------------------
organizations in the government, finance, health care, telecommunications and
large manufacturing sectors, which have thousands of customers, subscribers and
service recipients who will, directly or indirectly, benefit from the secure
communications and transactions enabled by Entrust's PKI solution. We believe
that the successful implementation of our PKI solution within these selected
vertical markets will enable us to leverage the adoption of our products by such
organizations to include their customers, subscribers and service recipients.

     Promote Brand Awareness. Our goal is to equate our brand name with trusted
     -----------------------
enterprise security. We undertake a variety of activities to promote the
recognition of our brand identity and products, including the promotion and
sponsorship of industry groups and conferences such as the Entrust Secure Summit
in June 1999. We also promote our product standards and architecture by
participating actively in numerous industry standards-setting bodies.

     Expand Strategic Relationships.  In order to encourage widespread
     ------------------------------
acceptance of our PKI solution, we have established an Entrust Partner Program
which currently includes:

 .  VAR and OEM partners, such as Compaq, Check Point Software, Hewlett-Packard,
   and IBM, which resell our products with their hardware and networking
   solutions, as well as Check Point Software, Novell, and TimeStep, which
   bundle our PKI solution with their own software products;

 .  consultant and system integration partners, such as PricewaterhouseCoopers,
   Ernst & Young, and KPMG, which recommend and implement Entrust-Ready
   solutions as part of their overall service offerings;

 .  development partners, which have introduced more than 90 off-the-shelf
   Entrust-Ready products and applications (e.g., SAP, PeopleSoft, Oracle,
   Sybase, Nortel Networks, Novell GroupWise, Novell Netware, Axent, Jetform,
   Shana, etc); and

 .  interoperability partners such as Cisco, Shiva (a wholly-owned subsidiary of
   Intel Corporation), Netscape, Lotus Development, Microsoft and Network
   Associates, which offer products that utilize the security features of the
   Entrust PKI solution.

     We intend to continue to invest in and enhance the Entrust Partner Program
both to offer complete end-to-end security  solutions to our customers and to
broaden adoption of our PKI solution across markets and geographic areas.

     Expand Global Presence. We intend to expand our global operations and
     ----------------------
currently have more than 65 employees based in Europe. With our acquisition of
r3 Security Engineering AG ("r3") in June 1998, we obtained substantial European
research and development expertise for the development of our PKI solution
targeted at the European market. We have supplemented our established direct
sales and distribution channels through the addition of distribution partners in
central and eastern Europe and Japan.

                                                                               6
<PAGE>
 
Products and Product Development

     The Entrust PKI solution provides an integrated, open and scalable security
framework that addresses an enterprise's data security needs across multiple
platforms and applications, including e-mail, browsers, electronic forms, remote
access and other product offerings from leading vendors. It also includes robust
features (such as support of dual key pairs) that make it well suited for secure
electronic commerce applications. The Entrust solution includes:

 .  a core PKI solution, which centrally manages and administers an enterprise's
   security infrastructure;

 .  desktop applications that tightly integrate features with Entrust's core PKI
   and common third-party desktop applications; and

 .  application developer toolkits that provide open application programming
   interfaces (APIs) for the rapid development of Entrust-Ready applications.

     The Entrust core PKI solution comprises software that manages and
administers life cycles of keys and digital certificates throughout an
enterprise, an LDAP-compliant directory for the storage and retrieval of keys,
and application software that enables users to utilize the functions provided by
the PKI. The core PKI solution is a powerful and flexible platform for the
generation and management of keys and digital certificates, for enterprise users
across multiple applications within an organization. Web certificates are
available for browsers and servers for transaction authentication. Electronic
commerce certificates for secure credit card transactions (using the SET
standard) are also available. The core solution is also configured to support
the generation of certificates for evolving communications technologies, such as
VPNs, and multiple hardware devices, such as smart cards, PC cards, biometric
devices and third-party key storage systems.

     Entrust Core PKI Solution

     Our core PKI solution is designed with an open and flexible software
architecture that operates on a wide range of client/server enterprise operating
system platforms, including Windows NT, HP-UX, Solaris and AIX servers, and
Windows, HP-UX, Solaris, AIX, JAVA and Macintosh clients. Our security kernel
supports a wide variety of encryption algorithms, including RSA, as well as
symmetric and hashing algorithms, allowing customers to select those algorithms
best suited for their requirements. The core system uses the industry LDAP
standard to interoperate with most other major directory systems, allowing
customers to utilize existing directory systems and facilitating access to other
directories as required. The system architecture enables us to add functionality
as customer needs evolve and grow and allows the core system to support the
generation and maintenance of new certificate types easily, responding to
technology developments and market pressures. The system's distributed computing
architecture and directory management techniques also enable the PKI to be
scaled as an enterprise's public-key security needs increase or as users are
added to existing infrastructures. We believe that our core PKI solution will be
able to handle millions of simultaneous users.

     The initial version of the Entrust PKI was released in 1994, with major
upgrades in 1996, 1997, and 1998; historically, the core solution has generated
a major portion of our revenues. The next major release of the core PKI, version
5.0, is expected to occur in 1999. The following table lists the products that
constitute Entrust's core PKI solution, as well as a brief description and the
introduction date of each product.

                                                                               7
<PAGE>
 
<TABLE>
<CAPTION>
               PRODUCT NAME                                         DESCRIPTION
               ------------                                         ------------
<S>                                         <C>
ENTRUST/AUTHORITY.........................  Provides comprehensive certification authority and key recovery
                                            capabilities, among numerous other functions.
ENTRUST/ADMIN.............................  Performs PKI administrative tasks.
ENTRUST ELECTRONIC IDENTITIES.............  Enterprise user "accounts" that authorize use of different types of
                                            certificates, including:
  Entrust/Client and Entrust/Engine.......  Enables use of enterprise certificates with multiple enterprise
                                            applications.
  Entrust/Web Connector...................  Enables use of digital certificates with popular browsers, such as
                                            those offered by Microsoft and Netscape.
  Entrust/Commerce Connector..............  Enables use of digital certificates with standards-based SET wallets,
                                            merchant servers and payment gateways.
  Entrust/VPN Connector...................  Enables use of digital certificates in standards-based VPN devices.
  Entrust/Timestamp.......................  Securely establishes the time at which data was digitally signed.
</TABLE>
 
     We license our Entrust/Authority and Entrust/Admin products at a combined
list price of $25,000 per server. Entrust offers an LDAP-compliant directory
product (from ICL) to enterprises for a list price of $3,000 for installations
of up to 1,000 users and $3,000 plus a per-user fee for installations of more
than 1,000 users. Enterprise Electronic Identities have a list price of $159 per
licensed user, which allows the management of multiple keys and certificates
across all Entrust-Ready applications in the enterprise. As a part of our core
PKI solution, the enterprise Electronic Identities are offered on a registered-
user basis. If an enterprise solution is not required, we also offer customers
with specialized security needs the ability to issue Web and electronic commerce
certificates at a charge of $2 per certificate. The actual license fees paid by
customers vary widely, based on the number of products licensed, registered
users, enabled platforms and volume discounts, if any.

     Entrust/Authority. Entrust/Authority is the central component of the
     -----------------
Entrust PKI solution. Entrust/Authority provides the Certification Authority
(CA) function for the Entrust core PKI, and enables an enterprise to create,
issue, manage, back-up, update and revoke electronic identities.
Entrust/Authority also provides a secure enterprise key recovery system, issues
certificate revocation information, and establishes cross-certification
relationships with other trusted certification authorities. Key update
operations are performed automatically and transparently, minimizing the need
for on-going user involvement. A sophisticated audit reporting system monitors
all security aspects of Entrust/Authority operations.

     Entrust/Admin. Entrust/Admin provides administrative capabilities to three
     -------------
types of personnel: security officers, Entrust administrators and directory
administrators. Through an easy-to-use graphical interface, security officers
can define the high-level security policies governing the operation of an
Entrust system, such as default lifetimes for encryption and signature key pairs
and the frequency with which certificate revocation lists (CRLs) are
automatically distributed. Entrust administrators perform the system's day-to-
day administrative duties, including creating and deleting user identities,
changing users' names, helping users recover lost keys and forgotten passwords,
and revoking users' certificates when necessary. Entrust/Admin also allows
directory administrators to perform administrative tasks associated with the
directory on an automated, high-volume basis.

     Entrust Electronic Identities.  An Entrust Electronic Identity is an
     -----------------------------
individual user's "account" or profile within the PKI. Entrust offers Electronic
Identities for full enterprise use, or for more limited Web or electronic
commerce use. Each enterprise Electronic Identity can support numerous key pairs
and certificates over its lifetime, which may be utilized across multiple
Entrust-Ready and other third party applications. Updating of key pairs and
certificates is performed automatically and transparently and, therefore,
administrative overhead is reduced.   Entrust's Electronic Identities are
implemented on client-side software that provides an easy-to-use interface
enabling users within an Entrust PKI to secure and unsecure files.  This
software also allows users to specify options (such as file compression) and
select cryptographic algorithms while making the complexities of key and
certificate management transparent.  A Web Electronic Identity enables a user to
use certificates with popular Web browsers and Web servers, such as those
offered by Netscape and Microsoft. These Web certificates can have lifetimes
that span multiple years and do not require renewal on a yearly basis.
Electronic Commerce Identities enable secure electronic commerce through the
issuance and management of certificates for SET wallets, merchant servers and
payment gateways.

                                                                               8
<PAGE>
 
     In addition to our enterprise core PKI solution, we also offer an
introductory PKI product, Entrust/Solo, which provides individual users with
public-key encryption and digital certificate capabilities. Entrust/Solo, which
may be downloaded from the Internet, is licensed for $49 for commercial use and
for free for non- commercial use.

     Entrust Applications

     Our core PKI solution has been configured to support a wide variety of
applications from multiple vendors to enhance our flexibility and usefulness. We
have also developed a number of applications in order to meet specific customer
demands and facilitate the implementation of the Entrust core PKI solution.
These products both complement and interact with the core PKI to offer the user
enhanced functionality and increased interoperability with third-party
applications, or operate as independent products, offering distinct
functionality.

     The following table lists applications that we offer, including a brief
description, product pricing and the introduction date for the product.

<TABLE>
<CAPTION>                                                                                       
                                                                                                               INTRODUCTION 
       PRODUCT NAME                             DESCRIPTION                                 PRICING                DATE     
       ------------                             -----------                                 -------                ----      
<S>                         <C>                                                           <C>                 <C>
Entrust/ICE                 Provides security for files and  folders                      $39 per user        March 1997
Entrust/Express             Provides security for popular e-mail applications, such       $39 per user        June 1997
                            as Microsoft's exchange and Outlook products and
                            Qualcomm's Eudora
Entrust/Direct              Provides Entrust's automated key and certificate              $15 per user        September 1997
                            management features to secure Web sessions
Entrust/Unity               Provides Entrust's automated key and certificate              $15 per user        February 1999
                            management features to Netscape and Microsoft
                            products (Microsoft version expected to be released in
                            Q2 1999)
Entrust/TrueDelete          Securely deletes files                                        Bundled with        April 1998
                                                                                          other Entrust
                                                                                          applications
Entrust for SAP R/3         Provides PKI security for SAP systems and applications.                           January 1999
                            Certified by SAP
Entrust for PeopleSoft      Provides PKI security for PeopleSoft systems and                                  January 1999
                            applications.  Certified by PeopleSoft
</TABLE>

     Application Developer Toolkit

     Because key and certificate management represents the most difficult aspect
of adding security to an application, we have provided the Entrust/Toolkit to
enable application developers to make third-party applications Entrust-Ready
while keeping the complexities of key and certificate management transparent.
The Entrust/Toolkit is a family of open, easy-to-integrate security APIs that
provide security services, including full key life cycle management, to a broad
range of applications.

     New Product Development

     Entrust devotes significant resources to the development of new and
enhanced product functionality to maintain its technology and product
leadership. We employ a number of different methods for identifying product
extension opportunities and new product candidates, including user group
meetings and direct feedback, an active program of partnership and cooperation
with companies developing complementary technologies, and continued
participation and leadership in industry standards-setting bodies such as the
Internet Engineering Task Force (IETF), the North American Clearinghouse
Association (NACHA), the American National Standards Institute (ANSI) and
others.

     Some of our current and planned product development efforts include the use
of certificate distribution with new devices (such as cellular telephones,
pagers and personal digital assistants), attribute certificates for privilege
management, electronic notary services, and monitoring and assessment systems.
We are also continuing to increase the number of third-party applications and
services that our PKI solution can manage, including VPN devices and routers and
other popular user applications. Entrust scientists are also actively engaged in
the development and improvement of the advanced cryptographic algorithms for use
in Entrust products, including exploration of the use of highly efficient
algorithms such as elliptic-curve encryption.

                                                                               9
<PAGE>
 
Professional Services and Support

     We believe that a high level of service and support is critical to our
success, and that a close and active service and support relationship is
important to facilitate rapid implementation of our solutions, assure customer
satisfaction and provide us with important information regarding evolving
customer requirements. Toward that end, we have made a significant investment in
expanding our professional services and support organization, which, as of
December 31, 1998, consisted of 79 employees. Our professional services
providers have a broad range of experience in network security and include
mathematicians, cryptographers and system designers.

     Our professional services organization provides consulting and systems
integration services to support customers in designing, implementing and running
our PKI solutions. Activities of the professional services organization are
supplemented with a professional services partner program that includes
PricewaterhouseCoopers, Ernst & Young, and KPMG. To facilitate the integration
of PKI management into the customer's business operations, we also offer our
Entrust InSource service, in which we provide on-site PKI management for
customers on a long-term basis, or while the customer implements and trains
personnel.

     Our support offerings also include direct telephone consulting support by
experienced technical account representatives, toll-free telephone customer
support, 24-hour pager access, e-mail and fax support, Internet access to our
knowledge repository, and discussion group access. Payment of an annual
maintenance fee also entitles customers to receive software enhancements to
their licensed versions of our solution.

Research and Development

     Our research and development efforts are focused on developing new
products, core technologies and enhancements to existing product lines to
maintain and extend our technology and product leadership position. We spent
approximately $2.9 million, $5.7 million and $12.8 million on research and
development in 1996, 1997 and 1998, respectively.

     As of December 31, 1998, our research and development staff consisted of
160 employees, several of whom have international reputations in their
respective disciplines. With the addition of r3, we have added significant
research and development capabilities in Europe, including an internationally
recognized cryptographic team.

     Our research and development staff is active in several prominent
standards-setting bodies, including IETF, ANSI, the Internet PKIX group and ISO,
and has contributed to a number of standards in the Internet and data security
areas. We believe that we are well situated to respond to changes in relevant
industry standards and to continue to participate in the development of these
standards as the requirements of enterprises and users become increasingly
complex.

Customers

     Our customers are generally domestic and foreign government entities and
Global 2000 companies, including financial, health care, telecommunications and
large manufacturing organizations. As of December 31, 1998, we had licensed our
software to more than 500 customers. The following is a representative list of
our current customers that have accounted for more than $200,000 of revenues
each:

<TABLE>
<S>                                        <C>                                   <C> 
Banco Nationale di Lavorno                 Government of Ontario                 Royal Canadian Mounted Police
Bell Emergis                               Industry Canada                       SECOM
Canadian Dept. of National Defense         Interpay                              S.W.I.F.T.
Citibank                                   J.P. Morgan                           Schlumberger
Columbia/HCA Healthcare Corporation        Kansas Bureau of Investigation        Science Applications International
Digital Medical Systems                    Lucent Technologies                   United Kingdom Post Office
FDIC                                       Nortel                                U.S. Coast Guard
Federal Express                            Royal Bank of Scotland                U.S. Postal Service
</TABLE>
 
     Historically, a limited number of customers have accounted for a
significant percentage of our revenues. In 1995, two customers accounted for 53%
and 18% of revenues, respectively. In 1996, three customers accounted for an
aggregate of 64% of revenues, and 29%, 20% and 15% of revenues, respectively. In
1997, the three largest customers accounted for 19%, 12% and 11% of revenues,
respectively. In 1998, the three largest customers accounted for 23% of total
revenues for the year, with no individual customer accounting for 10% or more of
revenues.  Although our 

                                                                              10
<PAGE>
 
largest customers have varied from period to period, we anticipate that our
results of operations in any given period will continue to depend to a
significant extent upon revenues from a small number of customers.

Sales, Marketing and Business Development

     We offer our products and services through a multi-tiered approach
reflecting the characteristics and buying behavior of the markets we cover. As
of December 31, 1998, we had 158 employees in sales, marketing and business
development.

     Direct Sales

     To address our target market of Global 2000 organizations, we sell our
products and services in North America, the United Kingdom and Germany primarily
through a direct sales force. We believe that direct coverage by our sales force
is necessary in light of the early stage of PKI adoption and the sophisticated
requirements of our targeted customer base. We also believe that a direct sales
force gives us a competitive advantage in responding to customer needs as they
evolve. Our direct sales force is divided into five North American regions, the
United Kingdom and Germany. Within each region, teams are assigned specific
accounts as their exclusive responsibility. We have also focused our sales
efforts on key vertical markets that have a critical need for security and
understand the value it creates for their businesses. These markets include
government, finance, health care, telecommunications and large manufacturing.

     We have established a General Markets Sales Group responsible for pursuing
identified customer opportunities outside the defined responsibilities of the
regional sales teams and accelerating the sales cycle. The direct sales
organization is also supplemented by targeted direct mail and telemarketing
campaigns developed by our marketing organization.

     Indirect Sales

     To supplement our direct sales force, we have established an Entrust
Partner Program involving a range of technology, marketing and sales
relationships including:

 .  VAR and OEM partners that focus on creating bundled solutions to permit
   customers to purchase total desktop applications incorporating Entrust
   functionality. These partners include Compaq, Hewlett-Packard, IBM and
   Tandem, which resell our products with their hardware and networking
   solutions, as well as Check Point Software and Symantec, which plan to bundle
   the Company's PKI solutions with their own software products.

 .  Interoperability partners such as Cisco, Shiva, Netscape and Lotus
   Development, which offer products that utilize the security features of the
   Entrust PKI solution.

 .  Consultant and systems integration partners that recommend and implement
   Entrust-Ready security solutions as part of their overall service offerings
   to customers, thereby differentiating their offerings through the inclusion
   of PKI functionality. These partners include PricewaterhouseCoopers, Ernst &
   Young and KPMG.

 .  Referral partners that refer their consulting and integration customers in
   designated markets to the Entrust PKI solution.

 .  Distributors and agents that promote and sell our products in defined
   geographic markets.

     Marketing

     To support our sales force, we have a marketing group whose goals are to
create a consistent, focused communication strategy that increases awareness of
our PKI solution and brand name, and to leverage that awareness in the
identification of new sales opportunities. The marketing group conducts
marketing programs that include direct mail, trade shows, annual seminar series,
executive breakfasts and ongoing customer communication programs. We have
organized a number of major trade shows, including the Entrust SecureSummit '99
to be held in Orlando in June 1999. We also provide frequent Web updates, search
engine registration, online advertising and product downloads. Our marketing
personnel are dedicated to maximizing brand success and periodically evaluating
our brand recognition.

                                                                              11
<PAGE>
 
     Business Development

     To identify and develop strategic relationships with targeted industry
partners more effectively, we have a business development organization of 26
persons that pursues selected business development activities, including the
administration and promotion of our Entrust Partner Program. These activities
permit us to strengthen our relationships with existing strategic partners and
identify and encourage new providers of software, network, computing and
communications products to make their products Entrust-Ready.

Competition

     Our products are targeted at the new and rapidly evolving market for PKI
solutions. Although the competitive environment in this market has yet to
develop fully, we anticipate that it will be intensely competitive, subject to
rapid change and significantly affected by new product and service introductions
and other market activities by industry participants.

     Because of the broad functionality of our PKI solution, we compete with
vendors offering a wide range of security products and services. We compete with
companies offering commercial certification authority products and services such
as VeriSign, GTE Cybertrust Solutions, XCert and IBM in the market for issuing
and maintaining digital certificates for use on public and private networks.
Certain of these companies, such as IBM and XCert, provide a product-based
solution, while others, such as VeriSign and GTE Cybertrust Solutions, are
primarily service providers. We also compete with companies, such as Baltimore
Technologies of Ireland, which offer PKI product solutions for enterprises. In
addition, we are competing with established companies developing new PKI
offerings, such as Security Dynamics and Network Associates, which have each
announced their intention to introduce PKI products that would be integrated
with their other security product offerings, as well as Microsoft Corporation,
which has announced a certificate server product based on its existing security
framework in the near future. We expect that there will be additional entrants
to this marketplace. In addition, other major networking vendors could, in the
future, bundle digital certificates with their product offerings. We typically
compete with these vendors and service providers on the basis of our ability to
provide a centrally managed, real-time, comprehensive infrastructure with the
features and functionality to support enterprise applications. In addition, we
compete in the emerging market for providing security across VPNs with most
major networking device companies, such as Ascend and Cisco, as well as firewall
vendors such as AXENT (Raptor) and Check Point Software.

     We believe that the principal competitive factors affecting the market for
PKI technology include technical features, ease of use, quality/reliability,
level of security, scalability, customer service and support and price. Although
we believe that our products currently compete favorably with respect to such
factors, there can be no assurance that we can maintain our competitive position
against current and potential competitors. See "Certain Factors That May Affect
Our Business". 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
Entrust. 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 than us. 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. We may
also compete in the future for sales of Entrust products against its OEM
licensees, who resell the Entrust solution under their own brand names.

Regulatory Matters

     Our products are subject to special export restrictions administered by the
governments of the United States, Canada and other countries. Our products are
also subject to import restrictions and/or use restrictions imposed by countries
such as France. Consequently, our ability to export our products to destinations
outside of the U.S. and Canada is subject to a variety of government approvals
or licensing requirements. These export controls may also restrict our ability
to make some products available for sale via international computer networks
such as the Internet. Re-export of the products between countries other than the
U.S. and Canada may be subject to the export control laws of those countries in
addition to those provisions of the U.S. and/or Canadian export control laws
which apply to re-exports. In light of these restrictions, depending on the
country of destination, industry sector, and/or end-user, some of our products
made available abroad may contain significantly weaker encryption capabilities
than those available to customers in the U.S. and Canada, and there can be no
assurance that we will continue to be able to export our products to any
destinations outside of the U.S. and Canada. Such restrictions could potentially
have an adverse effect on our business, financial condition or results of
operations. See "Certain Factors That May Affect Our Business."

                                                                              12
<PAGE>
 
     Under an interim rule published December 31, 1998, the U.S. Government
revamped export regulations that apply to products that contain or use
cryptography.  All software products that use 56-bit or less key length for
symmetric encryption are allowed to be exported to any country other than Cuba,
Iran, Iraq, Libya, North Korea, Sudan and Syria (T7 countries) after a technical
review.  Products that use keys of greater than 56-bit strength and comply with
a Key Management Infrastructure exemption and with a key recoverable product
definition can obtain more favorable export consideration and an agreement to
export to any country other than the T7.  The U.S. Government has also defined
four sectors that allow for the exportation of greater than 56-bit strength
products which are not key recoverable under a License Exception:  U.S.
subsidiaries in any country except the T7, banks, financial institutions and
insurance companies, health and medical companies, and on-line merchants in 46
countries (Supplement 3 countries).  A one-time technical review or prior
licensing is required to utilize the License Exception.  Entrust has obtained an
Export Licensing Arrangement which will allow the export of the PKI
Infrastructure, Direct, and ICE to the four sectors under the License Exception
and an application has been submitted for the rest of our products which, if
approved, will allow them to also be exported under the License Exception.  If a
broad category for export licensing does not apply to a specific situation, a
case by case export permit is required.

     Under the current U.S. government policy, U.S. encryption export controls
do not apply to encryption products which meet all of the following criteria:
(i) are produced and exported from outside of the U.S.; (ii) do not contain
U.S.-origin encryption technologies, unless such technologies are "publicly
available"; (iii) do not contain U.S.-origin encryption source code, unless such
source code is publicly available and obtained in printed (i.e., "hard copy")
form; (iv) are developed and produced without technical assistance from any U.S.
person or entity; and (v) contain no more than a de minimis amount of U.S.-
origin non-encryption software or technology. We believe, and have informed the
U.S. government, that certain of our products are exempt from U.S. encryption
export restrictions under these criteria. However, we have not obtained any
formal U.S. government ruling that any of our products produced and shipped from
outside the U.S. may be exempt from U.S. encryption export controls, and there
can be no assurance that the U.S. government will refrain from asserting
jurisdiction over one or more of our products. Such a decision by the U.S.
government to assert jurisdiction could result in penalties for past shipments
and could restrict future sales of our products outside the U.S. and Canada,
having a potentially significant adverse effect on our business, financial
condition and results of operations.

Intellectual Property

     We rely on a combination of patent, copyright, trademark and trade secret
laws, nondisclosure agreements and other contractual provisions to establish,
maintain and protect our proprietary rights. We own eight issued U.S. patents
(along with corresponding, pending foreign patent applications) and 40 pending
U.S. patent applications relating to the Entrust products. These patents are and
will continue to be subject to certain license grants to others, including
Northern Telecom and its cross licensees, under patent cross license agreements.
We have copyright and trade secret rights for our products, consisting mainly of
source code and product documentation. We use a printed "shrink-wrap" license
for users of our products in order to protect certain of our copyrights and
trade secrets. We attempt to protect our trade secrets and other proprietary
information through agreements with suppliers, non-disclosure and non-
competition agreements with employees and consultants and other security
measures.

     There can be no assurance that we will seek patents on our technology or
products, that any such patents will be issued or that any such additional
patents will be sufficiently broad to protect our technology or products. The
status of computer-related patents involves complex legal and factual questions
and the breadth of claims allowed is uncertain. Accordingly, there can be no
assurance that patent applications which we file will result in patents being
issued or that our existing patents, and any patents that may be issued to us in
the future, will afford protection against competitors with similar technology,
nor can there by any assurance that patents issued to us will not be infringed
upon or designed around by others or that others will not obtain patents that we
would need to license or design around. If existing or future patents containing
broad claims are upheld by the courts, the holders of such patents might be in a
position to require companies to obtain licenses. There can be no assurance that
licenses that might be required for our products would be available on
reasonable terms, if at all.

     We rely on outside licensors, including RSA, for patent and/or software
license rights in encryption technology that is incorporated into and is
necessary for the operation of our products. 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
business, financial condition and results of operations.

                                                                              13
<PAGE>
 
     Despite our efforts to protect our proprietary rights, unauthorized parties
may attempt to copy aspects of our products or to obtain and use information
that we regard as proprietary.  Policing unauthorized use of our products is
difficult, and while we are unable to determine the extent to which piracy of
our software products exists, such piracy can be expected to be a persistent
problem, particularly in international markets and as a result of the growing
use of the Internet. Some courts have held that shrink-wrap licenses, because
they are not signed by the licensee, are not enforceable. There can also be no
assurance that our trade secrets or confidentiality agreements will provide
meaningful protection of our proprietary information. Furthermore, there can be
no assurance that others will not independently develop similar technologies or
duplicate any technology developed by us or that our technology will not
infringe upon patents of other rights owned by others. Our inability to protect
our proprietary rights could have a significant adverse effect on our business,
financial condition or results of operations.

     As the number of information security products in the industry increases
and the functionality of these products further overlaps, software developers
and publishers may increasingly become subject to claims of infringement or
misappropriation of the intellectual property or proprietary right of others.
There can be no assurance that third parties will not assert infringement or
misappropriation claims against us in the future with respect to current or
future products. Further, we may be subject to additional risk as we enter into
transactions in countries where intellectual property laws are not well
developed or are poorly enforced. Legal protections of our rights may be
ineffective in such countries, and technology developed in such countries may
not be protectable in jurisdictions where protection is ordinarily available.

     Any claims or litigation, with or without merit, to defend or enforce 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. Adverse determinations
in such claims or litigation could also have a significant adverse effect on our
business, financial condition or results of operations.

Employees

     As of December 31, 1998, Entrust had 456 full-time employees, 324 of whom
were employed by Entrust Technologies Limited,  our Canadian subsidiary. Of our
employees, 160 were involved in research and development, 158 in sales,
marketing and business development, 79 in professional and customer support
services and 59 in administration and finance. No employees are covered by any
collective bargaining agreements, and we believe that our relationship with our
employees is good. The future success of Entrust, however, will depend upon our
ability to attract and retain qualified personnel. Competition for such
personnel is often intense, and there can be no assurance that we will be able
to attract and retain adequate numbers of qualified personnel in the future.

CORPORATE INFORMATION

     STOCKHOLDER INFORMATION
     American Securities Transfer and Trust Inc.
     1825 Lawrence Street, Suite 444
     Denver, CO 80202-1817
     Phone: 303-298-5370
     Fax: 303-298-5380

     LEGAL COUNSEL
     Hale & Dorr LLP
     60 State Street
     Boston, Massachusetts 02109

     INDEPENDENT AUDITORS
     Deloitte & Touche LLP
     2200 Ross Avenue
     Suite 1600
     Dallas, Texas 75201

     FOR MORE INFORMATION
     Please contact Entrust Technologies' Investor Relations Department at:
     Phone: 613-248-3200
     E-mail: investor@entrust.com
             --------------------  

ITEM 2.  PROPERTIES

     Entrust's U.S. headquarters, including its executive offices and
administrative facilities, is located in Plano, Texas, where it leases
approximately 8,716 square feet of office space.  We also lease approximately
69,000 square feet of office space at our Canadian headquarters in Ottawa,
Ontario, Canada, with an additional 29,149 square feet of office space in the
Ottawa area to accommodate expected growth in administrative, sales and
marketing, research and development and operations personnel. Entrust also has
offices located in London, England and Zurich, Switzerland.

     We also have sales offices in Chicago, Illinois, McLean, Virginia, New
York, New York and St. Louis, Missouri, a sales and business development office
in Menlo Park, California and a sales and professional services office in
Raleigh, North Carolina. Entrust leases a sales and support office in Bad
Homburg, Germany.

ITEM 3.   LEGAL PROCEEDINGS

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

     On February 19, 1999, Surety Technologies Inc. and Bell Communications
Research, Inc. filed a complaint against Entrust Technologies Inc. in the United
States District Court for the Eastern District of Virginia alleging that the
Entrust/Timestamp product and services infringe U.S. Patent No. 5,136,647
(reissued as Re 34,954).  The plaintiffs have requested that Entrust be enjoined
from further infringement and pay damages for infringement, treble 

                                                                14
<PAGE>
 
damages for willful infringement and costs. We believe that the allegations are
without merit and intend to vigorously defend the lawsuit.

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

     No matter was submitted to a vote of our shareholders during the fourth
quarter of 1998.

          EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT

     The executive officers and directors of Entrust, their ages and positions
are as follows:

<TABLE>
<CAPTION>
                NAME                   AGE                    POSITION
                ----                   ---                    --------
<S>                                    <C>         <C>
John A. Ryan                            42         President, Chief Executive Officer and Director
Brian O'Higgins                         42         Executive Vice President and Chief Technology Officer
Bradley N. Ross                         39         President of European Operations
Michele L. Axelson                      49         Senior Vice President, Finance and Chief Financial Officer
Richard D. Spurr                        45         Senior Vice President, Sales And Marketing
Hansen Downer                           47         Vice President, Professional Services
F. William Conner                       40         Director, Chairman of the Board
Frank A. Dunn                           44         Director 
Robert S. Morris                        43         Director 
Terrell B. Jones                        50         Director 
</TABLE>

     John A. Ryan has served as President and Chief Executive Officer and as a
director of Entrust since its founding in December 1996. From October 1995 until
December 1996 he served as the Vice President and General Manager for the
Multimedia and Internet Solutions business unit of Northern Telecom (together
with its subsidiaries and affiliates, "Nortel").  Prior to that time, from
August 1992 until October 1995, he served as Assistant Vice President, Marketing
for the Enterprise Network group of Nortel.  Since joining Nortel in 1981, he
has also served in various senior positions in marketing, customer service and
finance.

     Brian O'Higgins has served as Executive Vice President and Chief Technology
Officer of Entrust since its founding in December 1996. Mr. O'Higgins co-
founded the Nortel Secure Networks ("NSN") business unit in 1994, which became
Entrust Technologies Inc. in December 1996. Previously, he was employed by Bell
Northern Research Ltd. ("BNR"), the research and development subsidiary of
Northern Telecom Limited, which he joined in 1979.

     Bradley N. Ross has served as President of European Operations since March
1998. From December 1996 until March 1998, he served as Entrust's Executive Vice
President Marketing and Product Line Management. Mr. Ross co- founded NSN in
1994 with Mr. O'Higgins, which became Entrust Technologies Inc. in December
1996. Previously, he was employed by BNR, which he joined in 1982 and held
various positions in software design and program management for Nortel's
switching products.

     Michele L. Axelson has served as Senior Vice President, Finance and Chief
Financial Officer since joining Entrust in May 1998. From June 1996 until May
1998, she served as the Senior Vice President and Chief Financial Officer for
Scopus Technologies Inc., an enterprise customer care software company. Prior to
that time, from 1979 until June 1996, Ms. Axelson held various positions at
Arthur Andersen LLP, an international public accounting firm, and was a partner
of that firm from 1989 until June 1996.

     Richard D. Spurr has served as Senior Vice President, Sales and Marketing
of Entrust since March 1998. Prior to that time, he served as Senior Vice
President of Global Sales since joining Entrust in June 1997. Prior to joining
Entrust, from December 1990 to March 1997, he held numerous executive positions
for SEER Technologies, Inc., a developer of component-based software
applications, including Vice President of Strategic Alliances from January 1994
to November 1996 and Vice President of Major Accounts from December 1996 to
March 1997. From June 1974 until December 1990, Mr. Spurr served in various
sales and sales management positions with IBM.

     Hansen Downer has served as Vice President, Professional Services since he
joined Entrust in December 1997. From February 1997 to November 1997, Mr. Downer
served as Vice President of Sales, Marketing and New Product Development at
Interpath Communications, Inc., an Internet service provider. From March 1996
until August 1996, Mr. Downer served as Vice President of Customer Service and
Telecom Network Design for the Physician's Desktop Company, a network
development company and a subsidiary of Imonics Corporation. From May 1995 until
March 1996, Mr. Downer served as Vice President of Business Development at
Imonics Corporation, a client server systems integration company focused on the
health care industry. Prior to that time, from 1979 to December 1994, he worked
for Nortel in a number of roles.

                                                                              15
<PAGE>
 
     Each executive officer serves at the discretion of the Board of Directors
and holds office until his or her successor is elected and qualified or until
his or her earlier resignation or removal. There are no family relationships
among any of the directors or executive officers of Entrust.

     F. William Conner has been a director of Entrust since July 1997 and 
Chairman of the Board since October 1998.  He has served as Executive Vice 
President of Nortel Network Corporate Marketing and Communications since 
September 1998.  Mr Conner served as Senior Vice President and President of 
Nortel's Enterprise Data Networks line of business from February 1998 until 
September 1998. From August 1995 until February 1998, Mr Conner served as 
Executive Vice President, Sales and Marketing for the Enterprise Networks line 
of business of Nortel.  Prior to that time, from 1992 until July 1995, Mr.  
Conner held a variety of sales and marketing executive positions in Nortel's 
voice and data enterprise lines of businesses.

     Frank A. Dunn has been a director of Entrust since July 1997. He has served
as Chief Financial Officer of Nortel Networks since January 1999. Mr Dunn served
as the Senior Vice President of Finance and Planning of Nortel from March 1996
to January 1999. From January 1994 until March 1996, Mr Dunn served as Vice
President of Finance for Nortel's North American lines of business, a management
division within Northern Telecom Limited ("NTL"). Prior to that time, from March
1993 until January 1994, Mr Dunn served as NTL's Corporate Controller.

     Robert S. Morris has been a director of Entrust since January 1997.  Mr 
Morris founded Olympus Partners, a private investment firm, in 1989 and serves 
as Managing Partner of Olympus Private Placement Fund L.P., Olympus Growth Fund 
II, L.P., Olympus Executive Fund. L.P. and Olympus Growth Fund III, L.P. Mr 
Morris serves on the boards of directors of TriNet Corporate Realty Trust, Inc. 
and Candlewood Hotel Company. Inc.

     Terrell B. Jones has been a director of Entrust since November 1998. He has
served as Chief Information Officer and Senior Vice President of the SABRE Group
Holdings, Inc., an information technology company, as well as President of SABRE
Interactive since July 1996. He previously served as President of SABRE computer
Services for American Airlines from 1993 to 1996.

                                    PART II
                                        
ITEM 5.   MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

     Entrust's common stock is traded on the Nasdaq National Market under the
symbol "ENTU".  Prior to August 17, 1998, the date of our initial public
offering, there was no public market for our common stock.  Following the
initial public offering , the following high and low sales prices were reported
by the Nasdaq National Market in each quarter:

<TABLE>
<CAPTION>

Year Ended December 31, 1998                          High              Low
----------------------------                          ----              ---
<S>                                                   <C>              <C>
Third Quarter (beginning August 18, 1998).........    $20.00           $13.25
Fourth Quarter....................................    $28.19           $ 9.00
</TABLE>

     As of March 23, 1999, Entrust had approximately  131 holders of record of
common stock.  Because many of these shares are held by brokers and other
institutions on behalf of stockholders, we are unable to estimate the total
number of stockholders represented by these holders of record.

     Entrust has never declared or paid any cash dividends on its capital stock
and does not expect to pay any such dividends in the foreseeable future.

Use of Proceeds

     On August 21, 1998, Entrust completed an initial public offering of its
Common stock, $.01 par value (the "Offering").  The Registration Statement on
Form S-1 (File No. 333-57275) was declared effective by the Securities and
Exchange Commission (the "SEC") on August 17, 1998 and we commenced the offering
on that date.

     After deducting the underwriting discounts and commissions and the Offering
expenses, the net proceeds to Entrust from the Offering were approximately
$79,097,515.

     As of December 31, 1998, approximately $2,000,000 of the net proceeds of
the Offering had been used to fund working capital and expansion of Entrust's
facilities, with the remainder having been invested in short-term, interest-
bearing, investment grade securities. The entire amount of the net proceeds has
been allocated for general corporate purposes and working capital, including
product development and the possible acquisition of additional businesses and
technologies that are complementary to our current or future business.  None of
the proceed amounts were paid directly or indirectly to any director, officer,
or general partner of Entrust or their associates, persons owning 10 percent or
more of any class of equity securities of Entrust, or an affiliate of Entrust.

ITEM 6.   SELECTED FINANCIAL DATA

     The data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Result of Operations" and
Entrust's Consolidated Financial Statements and Notes thereto included elsewhere
in this Form 10-K.

                                                                              16
<PAGE>
 
<TABLE>
<CAPTION>

                                                                                YEAR ENDED DECEMBER 31,
                                                                   ----------------------------------------------
                                                                    1994     1995     1996      1997      1998
                                                                   ------  --------  -------  --------  ---------
                                                                        (in thousands, except per share data)
                                                                     (1)      (1)      (1)
<S>                                                                <C>     <C>       <C>      <C>       <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
 License.........................................................  $1,194  $ 1,845   $ 8,689  $16,486   $ 36,773
 Services and maintenance........................................   2,687    2,128     4,113    8,520     12,215
                                                                   ------  -------   -------  -------   --------
       Total revenues............................................   3,881    3,973    12,802   25,006     48,988
                                                                   ------  -------   -------  -------   --------
Cost of revenues:
 License.........................................................       6       34       393      502      1,985
 Services and maintenance........................................   1,179      950     3,157    4,414      7,546
                                                                   ------  -------   -------  -------   --------
      Total cost of revenues.....................................   1,185      984     3,550    4,916      9,531
                                                                   ------  -------   -------  -------   --------
Gross profit.....................................................   2,696    2,989     9,252   20,090     39,457
                                                                   ------  -------   -------  -------   --------
Operating expenses:
 Sales and marketing.............................................   1,083    1,914     3,858   11,193     26,802
 Research and development........................................     898    2,287     2,874    5,692     12,840
 General and administrative......................................     688    1,212     2,464    3,695      5,046
 Acquired in-process R&D and goodwill amortization...............      --       --        --       --     20,564
                                                                   ------  -------   -------  -------   --------
       Total operating expenses..................................   2,669    5,413     9,196   20,580     65,252
                                                                   ------  -------   -------  -------   --------
Income (loss) from operations....................................      27   (2,424)       56     (490)   (25,795)
Interest income..................................................      --       --        --      723      1,807
                                                                   ------  -------   -------  -------   --------
Income (loss) before
 benefit for income taxes........................................      27   (2,424)       56      233    (23,988)
Benefit for income taxes.........................................     111      301       331      281        160
                                                                   ------  -------   -------  -------   --------
Net income (loss)................................................  $  138  $(2,123)  $   387  $   514   $(23,828)
                                                                   ======  =======   =======  =======   ========
Net income (loss) per basic share(2).............................                               $0.02     $(0.68)
Net income (loss) per diluted share(2)...........................                               $0.01     $(0.68)
Shares used in basic per share computation(2)....................                              30,700     35,255
Shares used in diluted per share computation(2)..................                              41,743     35,255

<CAPTION>
                                                                                     DECEMBER 31,   
                                                                   ----------------------------------------------
                                                                    1994     1995     1996      1997      1998
                                                                   ------  --------  -------  --------  ---------
                                                                                   (in thousands)
BALANCE SHEET DATA:
<S>                                                                <C>     <C>       <C>      <C>       <C>
Cash, cash equivalents and short-term
 investments.....................................................  $   --  $    --   $    --  $12,638   $ 81,067
Working capital (deficit)........................................   1,831    1,016    (1,186)  13,707     77,438
Total assets.....................................................   2,231    2,190     3,687   24,757    107,829
Shareholders' equity (deficit)...................................   2,095    1,672       (60)  14,662     87,059
</TABLE>

(1)  Represents the operations of the Secure Networks group, a division of
     Northern Telecom Limited.  See Note 1 of Notes to Entrust's Consolidated
     Financial Statements.
(2)  See Note 2 of Notes to Entrust's Consolidated Financial Statements for the
     calculation of basic and diluted net income per share.


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

Overview

     Entrust develops, markets and sells products and services that allow
enterprises to manage trusted, secure electronic communications and transactions
over today's advanced networks, including the Internet, extranets and intranets.
Our solution automates the management of digital certificates, which are similar
to electronic passports, through public key infrastructure ("PKI") technology
designed to assure the privacy and authenticity of internal and external
electronic communications.  The Entrust PKI is an integrated, open and scalable
software framework that operates across multiple platforms, network devices and
applications, including e-mail, browsers, electronic commerce, electronic forms,
remote access and other product offerings from leading vendors.

     We were originally established in January 1994 as the Secure Networks
group of Nortel to pursue the development and sale of PKI products.  During
December 1996, Nortel restructured its Secure Networks group by incorporating
Entrust Technologies Inc. in Maryland and Entrust Technologies Limited in
Ontario, Canada.  As a result of the restructuring and concurrent private
placement, the assets and business of the Secure Networks group were transferred
to the newly incorporated companies, and Entrust Technologies Inc. became a
majority-owned subsidiary of Nortel and Entrust Technologies Limited became a
majority-owned subsidiary of Entrust Technologies Inc.  In 1998, Entrust
Technologies (UK) Limited was incorporated in the United Kingdom as a wholly-


                                                                              17
<PAGE>
 
owned subsidiary of Entrust Technologies Inc. In June 1998, Entrust Technologies
Inc. acquired 100% ownership of r3 Security Engineering AG, a professional
services organization specializing in electronic security consulting, located in
Switzerland. Entrust Technologies Inc. completed an initial public offering of
Common stock in August 1998.

Results of Operations


     The following table sets forth certain consolidated statement of
operations data expressed as a percentage of total revenues for the years
indicated:
<TABLE>
<CAPTION>
 
                                                                          Year Ended December 31,
                                                                        -------------------------------
                                                                          1996       1997       1998
                                                                        ---------  ---------  ---------
<S>                                                                     <C>        <C>        <C>
Revenues:
  License............................................................        67.9%      65.9%      75.1%
  Services and maintenance...........................................        32.1       34.1       24.9
                                                                        ---------  ---------  ---------
         Total revenues..............................................       100.0      100.0      100.0
                                                                        ---------  ---------  ---------
Cost of revenues:
  License............................................................         3.0        2.0        4.1
  Services and maintenance...........................................        24.7       17.7       15.4
                                                                        ---------  ---------  ---------
         Total cost of revenues......................................        27.7       19.7       19.5
                                                                        ---------  ---------  ---------
Gross profit.........................................................        72.3       80.3       80.5 
                                                                        ---------  ---------  ---------
Operating expenses:
  Sales and marketing................................................        30.1       44.8       54.7
  Research and development...........................................        22.4       22.7       26.2
  General and administrative.........................................        19.3       14.7       10.3
  Acquired in-process R&D and goodwill amortization..................           -          -       42.0
                                                                        ---------  ---------  ---------
         Total operating expenses....................................        71.8       82.2      133.2
                                                                        ---------  ---------  ---------
Income (loss) from operations........................................         0.5       (1.9)     (52.7)
Interest income......................................................           -        2.9        3.7
                                                                        ---------  ---------  ---------
Income (loss) before benefit for income taxes........................         0.5        1.0      (49.0)
Benefit for income taxes.............................................         2.5        1.1        0.3
                                                                        ---------  ---------  ---------
Net income (loss)....................................................         3.0%       2.1%     (48.7)%
                                                                        ---------  ---------  ---------
</TABLE>

Revenues

     We recognize revenues in accordance with the provisions of the American
Institute of Certified Public Accountants' Statement of Position  ("SOP") 97-2
"Software Revenue Recognition." Our revenues are generated primarily from
licensing the rights to our software products to end-users and, to a lesser
extent, from sublicense fees charged to resellers. We also generate revenues
from consulting, training and post-contract support ("maintenance") performed
for customers who license our products.  Prior to 1998, our revenue recognition
policy was in accordance with the provisions of the previous authoritative
guidance provided by SOP 91-1, "Software Revenue Recognition."

     Accordingly, revenues from perpetual software license agreements are
recognized as revenues upon receipt of an executed license agreement, or an
unconditional order under an existing license agreement, and shipment of the
software, if there are no significant remaining vendor obligations and
collection of the receivable is probable.

     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 customers.

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

     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.

                                                                              18
<PAGE>
 
Total Revenues

     Total revenues increased 95% from $12.8 million in 1996 to $25.0 million in
1997 and increased 96% to $49.0 million in 1998.  Geographically, revenues
derived from sales outside North America accounted for 4%, 5% and 23% of total
revenues for the years ended December 31, 1996, 1997 and 1998, respectively.  We
have invested significantly in expanding our international operations in 1998
through the acquisition of r3 Security Engineering AG ("r3"), the formation of
Entrust Japan, and the hiring of additional sales and marketing personnel. In
1996, three customers accounted for an aggregate of 64% of revenues for that
year, and individually these customers accounted for 29%, 20% and 15% of
revenues, respectively.  In 1997, three customers individually accounted for
19%, 12% and 11% of revenues, respectively.  In 1998, no single customer
accounted for 10% or more of total revenues.

     There can be no assurance that total revenues will continue to grow at the
rate experienced in prior periods.

License Revenues

     License revenues increased 90% from $8.7 million in 1996 to $16.5 million
in 1997 and increased 123% to $36.8 million in 1998, representing 68%, 66% and
75% of total revenues in the respective years.  The increase in license revenues
in absolute dollars was primarily due to increasing market awareness and
acceptance of our product offerings.  During 1998, we continued our strategy of
expanding our direct sales and marketing organization while focusing on targeted
customers and vertical market segments.  This strategy was successful in
increasing sales in the Financial, Telecom, Manufacturing and Healthcare market
segments.  Sales to the Government market segment remained strong despite
decreasing as a percentage of total license revenues.  The increase in license
revenues as a percentage of total revenues reflected our continued focus on the
product side of the business and the increased use of third-party consulting
firms and systems integrators to provide implementation services to our
customers.

Services and Maintenance Revenues

     Services and maintenance revenues increased 107% from $4.1 million in 1996
to $8.5 million in 1997 and increased 44% to $12.2 million in 1998, representing
32%, 34% and 25% of total revenues in the respective periods. The increase in
services and maintenance revenues was primarily the result of an increase in
demand for consulting services and customer support, and increases in
maintenance revenues from a larger installed product base.  The decrease in
services and maintenance revenues as a percentage of total revenues was largely
due to our focus on building the product side of the business and building
successful partnering relationships with third-party service providers to
provide services to customers.

Cost of Revenues

Cost of License Revenues

     Cost of license revenues consists primarily of costs associated with
product media, documentation, packaging and royalties to third-party software
vendors.  Cost of license revenues was $393,000 in 1996, $502,000 in 1997, and
$2.0 million in 1998, representing 3%, 2% and 4% of total revenues for the
respective years.  The increase in cost of license revenues in absolute dollars
for 1998 and 1997 was primarily a result of higher royalty fees paid to third-
party software vendors.  We have  incorporated a higher level of third-party
software in our products, primarily in the Enterprise Desktop Suite applications
introduced in 1998.

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 costs paid to third party consulting firms for their services.  Cost of
services and maintenance revenues was $3.2 million in 1996, $4.4 million in 1997
and $7.5 million in 1998, representing 25%, 18% and 15% of total revenues for
the respective years. The increase in absolute dollars reflects the increased
costs associated with the higher levels of services and maintenance revenues
during 1998 and 1997.  The decrease as a percentage of total revenues was
primarily a result of license revenues growing more rapidly than service and
maintenance revenues.  The higher percentage of cost of services and maintenance
revenues as a percentage of total cost of revenues in 1997 and 1996 (79% in 1998
compared to 90% in 1997 and 89% in 1996) reflected the cost of hardware
components related to system integration arrangements during those years.  We
did not have a significant hardware component of our system integration
arrangements in 1998.

                                                                              19
<PAGE>
 
     Services and maintenance gross profit as a percentage of services and
maintenance revenues was 48% in 1997 and 38% for 1998. This decrease in the
services and maintenance margin reflected the investment made during 1998 in
expanding our customer support organization to support the growing customer base
and the impact on productivity related to the integration of the r3 consulting
organization during the third and fourth quarters of 1998.  Also, investments
were made in building our consulting organization in order to prepare for
expected future increases in demand for these services.  Therefore, utilization
rates experienced in 1998 were not comparable to previous years and not
necessarily indicative of future years.

Operating Expenses

Sales and Marketing

     Sales and marketing expenses increased from $3.9 million in 1996 to $11.2
million in 1997 and $26.8 million in 1998, representing 30%, 45% and 55% of
total revenues in the respective periods.  These increases in absolute dollars
and as a percentage of total revenues were primarily the result of costs
associated with the expansion of our sales and marketing organization to support
increased revenue targets, both domestically and internationally.  We have
continued our strategy of investing in hiring and training our direct sales
organization in anticipation of future market growth, and investing in marketing
efforts in support of new products launches.  Failure of these investments to
generate future revenues could have a significant adverse effect on our
operations.

Research and Development

     Research and development expenses increased from $2.9 million in 1996 to
$5.7 million in 1997 and $12.8 million in 1998, representing 22%, 23% and 26% of
total revenues in the respective periods.  The increased investment in research
and development expenses in absolute dollars and as a percentage of total
revenues in 1997 and 1998 primarily reflected higher expenses related to
increased staffing of software engineers and contractors.  These employees were
added in connection with the continuing expansion and enhancement of our product
offerings and our commitment to quality assurance and testing.  In addition, the
acquisition of r3 in June 1998 increased the size of our global  research and
development team.  We believe we must continue to invest in research and
development in order to maintain our technological leadership position and,
thus, we expect research and development expenses to continue to increase in
absolute dollars as we hire additional experienced security experts and software
engineers.

     In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed", we have evaluated the establishment of technological feasibility of
our various products during the development phase.  The time period during which
costs could be capitalized from the point of reaching technological feasibility,
which has been defined as development of a beta model, until the time of general
product release is very short and, consequently, the amounts that could be
capitalized are not material to our financial position or results of operations.
Therefore, we charged all product development expenses to operations in the
period incurred.

General and Administrative

     General and administrative expenses increased from $2.5 million in 1996 to
$3.7 million in 1997 and $5.0 million in 1998, representing 19%, 15% and 10% of
total revenues in the respective periods.  The increase in general and
administrative expenses in absolute dollars reflected our continued investment
in increased staffing and related expenses to enhance the infrastructure
required to support our growth, including investor relation programs, improved
management information systems and support and outside professional service
firms.

Acquired In-process Research and Development and Goodwill Amortization

     On June 8, 1998, we completed the acquisition of r3, a company based in
Zurich, Switzerland that provides consulting, applied research and product
development services related to commercial security and encryption solutions.
Pursuant to the Share Purchase Agreements dated May 30, 1998, entered into
between us and the shareholders of r3, we agreed to acquire all the outstanding
shares of r3 in exchange for an aggregate of 1,167,288 shares of our Common
stock and cash consideration of approximately $4.4 million.  This acquisition
was recorded under the purchase method of accounting, and, therefore, the
results of operations of r3 and the fair value of the acquired assets and
liabilities are included in our financial statements beginning on the
acquisition date. Upon consummation of the acquisition, r3 became a wholly owned
subsidiary of Entrust Technologies Inc.

                                                                              20
<PAGE>
 
     In connection with the acquisition, we obtained an appraisal of the
intangible assets, which resulted in $20.2 million of the purchase price being
allocated to in-process research and development that has not yet reached
technological feasibility and has no alternative future use, which was expensed
in the year ended December 31, 1998. In addition, $356,000 of amortization has
been recorded with respect to the goodwill that arose as a result of this
acquisition in 1998.

     The value assigned to purchased in-process technology was determined by
identifying research and development projects in areas for which technological
feasibility has not yet been established. This relates primarily to the
completion of a suite of encryption and security applications (the "r3 Suite").
The value was determined by estimating the costs to develop the purchased in-
process technology into commercially viable products, estimating the resulting
net cash flows from such projects and discounting the net cash flows back to
their present value.

     The nature of the efforts to develop the purchased in-process technology
into commercially viable products relate to the completion of all planning,
designing, prototyping, security testing and verification activities that are
necessary to ensure that the r3 Suite is produced to meet design specifications,
including functions, features and technical performance requirements. The
efforts to develop the purchased in-process technology also include verifying
the technology's compatibility and interoperability with other applications. The
estimated cost for completion of this activity is approximately $2.3 million in
1998, $3.2 million in 1999, $3.7 million in 2000 and $2.9 million in 2001.
However, these estimates are subject to change, given the uncertainties of the
development process, and no assurance can be given that deviations from these
estimates will not occur.

     The revenue forecasts used to value the in-process research and development
are based on our estimates of market size and growth, expected trends in
technology (such as new encryption and security algorithms) and the nature and
expected timing of new product introductions by us and our competitors.
Historically, r3 has generated revenues from consulting engagements and future
revenue growth is almost entirely dependent upon the in-process projects. The
estimated revenues for the in-process projects peak in 2002 and then decline
rapidly as other new products are expected to enter the market. If these
projects are not successfully developed, the sales and profitability of the
combined company may be adversely affected in future periods.

     The estimated cost of sales as a percentage of revenues used in the
valuation decrease over time primarily due to the strategic shift from
consulting revenues to product revenues and r3's expected ability to achieve
efficiencies due to economies of scale. As a result of the shift in strategy,
the estimated cost of sales as a percentage of revenues is expected to decrease
from 80% in 1998 to 20% in 2002, once we have successfully introduced the in-
process products.

     The estimated selling, general and administrative expenses are expected to
increase as r3's business model shifts from consulting to product-based
revenues. Selling, general and administrative expenses are expected to
significantly increase between 1998 and 2000 as we must create the necessary
sales infrastructure to successfully accomplish our strategic shift.

     r3's margins for earnings before interest and taxes ("EBIT") are projected
to increase as we introduce our in-process products and as revenues increase,
EBIT margins were negative in 1998, due primarily to significant investment in
the research and developmental projects. As revenues grow, we are expecting to
achieve efficiencies due to economies of scale, and EBIT margins are projected
to increase.


     The rates utilized to discount the net cash flows back to their present
value are based on several studies of venture capital rates of return. Because
of the nature of the forecast and the risks associated with the developmental
projects, a discount rate of 40% was appropriate for the business enterprise and
the in-process projects. This discount rate is commensurate with r3's stage of
development; the uncertainties in the economic estimates described above; the
inherent uncertainty surrounding the successful development of the purchased in-
process technology; the useful life of such technology; the profitability levels
of such technology and the uncertainty of technological advances that are
unknown at this time.

     The combined company is expected to benefit from the favorable reputations
of Entrust in the North American encryption and securities market and r3's
favorable reputation in the European market. Additionally, the combined company
is expected to benefit from the utilization and integration of Entrust's
technology, marketing and financial resources.

                                                                              21
<PAGE>
 
     The forecasts we used in valuing in-process research and development were
based upon assumptions we believe to be reasonable but which are inherently
uncertain and unpredictable. Our assumptions may be incomplete or inaccurate,
and unanticipated events and circumstances are likely to occur. For these
reasons, actual results may vary from the results forecasted.

Interest Income

     Interest income increased to $723,000 in 1997 and $1.8 million in 1998,
representing 3% and 4% of total revenues in the respective periods. Interest
income was not significant in 1996. The increase in interest income in 1998
reflected the interest earned on the net proceeds of the initial public offering
in August 1998, while the increase in interest income in 1997 represented
interest earned on the net proceeds of the private placement of shares in
January 1997.

Provision for Income Taxes

     We have recorded income tax benefits of $331,000, $281,000 and $160,000 in
1996, 1997 and 1998, respectively.  Income taxes are accounted for in accordance
with Statement of Accounting Standards No. 109.  The effective income tax rates
differed from the statutory rates primarily due to the impact of the Canadian
research and development tax credits claimed.

Quarterly Results of Operations

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


     The following tables set forth certain unaudited consolidated quarterly
statement of operations data for the eight quarters ended December 31, 1998, as
well as such data expressed as a percentage of our total revenue for the periods
indicated.  This data has been derived from unaudited consolidated financial
statements that, in our opinion, include all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of such
information when read in conjunction with our consolidated financial statements
and related notes appearing elsewhere in this Form 10-K.  The operating results
for any quarter are not necessarily indicative of results for any future period.

                                                                              22
<PAGE>
<TABLE>
<CAPTION>
                                                                              QUARTER ENDED
                                          Mar 31,   June 30,   Sept 30,   Dec 31,   Mar 31,   June 30,   Sept 30,   Dec 31,
                                            1997      1997       1997       1997      1998      1998       1998       1998
                                          --------  ---------  ---------  --------  --------  ---------  ---------  --------
                                                                   (in thousands, except per share data)
<S>                                       <C>       <C>        <C>        <C>       <C>       <C>        <C>        <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
 License................................  $ 2,632    $ 3,045    $ 4,949   $ 5,860   $ 7,681   $  8,164    $ 9,795   $11,133
 Servies and maintenance................    1,471      2,743      2,137     2,169     2,243      2,850      3,244     3,878
                                          -------    -------    -------   -------   -------   --------    -------   -------
      Total revenues....................    4,103      5,788      7,086     8,029     9,924     11,014     13,039    15,011
                                          -------    -------    -------   -------   -------   --------    -------   -------
Cost of revenues:
 License................................      104        125        131       142       342        470        507       666
 Services and maintenance...............      628      1,483      1,174     1,129     1,478      1,620      2,100     2,348
                                          -------    -------    -------   -------   -------   --------    -------   -------
      Total cost of revenues............      732      1,608      1,305     1,271     1,820      2,090      2,607     3,014
                                          -------    -------    -------   -------   -------   --------    -------   -------
Gross profit............................    3,371      4,180      5,781     6,758     8,104      8,924     10,432    11,997
                                          -------    -------    -------   -------   -------   --------    -------   -------
Operating expenses:
 Sales and marketing....................    1,698      2,301      3,528     3,666     4,936      6,072      7,330     8,464
 Research and development...............      952      1,125      1,700     1,915     2,285      3,072      3,669     3,814
 General and administrative.............      686        793      1,026     1,190     1,064      1,207      1,356     1,419
 Acquired in-process R&D
    and goodwill amortization...........       --         --         --        --        --     20,208        178       178
                                          -------    -------    -------   -------   -------   --------    -------   -------
      Total operating expenses..........    3,336      4,219      6,254     6,771     8,285     30,559     12,533    13,875
                                          -------    -------    -------   -------   -------   --------    -------   -------
Income (loss) from operations...........       35        (39)      (473)      (13)     (181)   (21,635)    (2,101)   (1,878)
Interest income.........................      209        206        164       144       146         71        517     1,073
                                          -------    -------    -------   -------   -------   --------    -------   -------
Income (loss) before (provision)        
 benefit for income taxes...............      244        167       (309)      131       (35)   (21,564)    (1,584)     (805)
(Provision) benefit for income
    taxes...............................      (20)         5        226        70       160         --         --        --
                                          -------    -------    -------   -------   -------   --------    -------   -------
Net income (loss).......................  $   224    $   172    $   (83)  $   201   $   125   $(21,564)   $(1,584)  $  (805)
                                          =======    =======    =======   =======   =======   ========    =======   =======
Net income (loss) per share
  Basic.................................    $0.01      $0.01    $    --     $0.01   $   ---     $(0.70)    $(0.04)   $(0.02)
                                          =======    =======    =======   =======   =======   ========    =======   =======
  Diluted...............................    $0.01    $    --    $    --   $    --   $   ---     $(0.70)    $(0.04)   $(0.02)
                                          =======    =======    =======   =======   =======   ========    =======   =======
Shares used in per share computation....
  Basic.................................   30,700     30,700     30,700    30,700    30,700     30,997     36,830    42,491
                                          =======    =======    =======   =======   =======   ========    =======   =======
  Diluted...............................   41,064     41,064     41,869    41,908    45,231     30,997     36,830    42,491
                                          =======    =======    =======   =======   =======   ========    =======   =======
<CAPTION>
                                                                              QUARTER  ENDED
                                                                              --------------
                                         Mar 31,   June 30,   Sept 30,   Dec 31,   Mar 31,   June 30,   Sept 30,   Dec 31,
                                           1997      1997       1997       1997      1998      1998       1998       1998
                                         --------  ---------  ---------  --------  --------  ---------  ---------  --------
<S>                                      <C>       <C>        <C>        <C>       <C>       <C>        <C>        <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
 License...............................     64.1%      52.6%      69.8%     73.0%     77.4%      74.1%      75.1%     74.1%
 Services and maintenance..............     35.9       47.4       30.2      27.0      22.6       25.9       24.9      25.9
                                           -----      -----      -----     -----     -----      -----     ------     -----
     Total revenues....................    100.0      100.0      100.0     100.0     100.0      100.0      100.0     100.0
                                           -----      -----      -----     -----     -----      -----     ------     -----
Cost of revenues:
 License...............................      2.5        2.2        1.8       1.8       3.4        4.3        3.9       4.4
 Services and maintenance..............     15.3       25.6       16.6      14.0      14.9       14.7       16.1      15.6
                                           -----      -----      -----     -----     -----      -----     ------     -----
     Total cost of revenues............     17.8       27.8       18.4      15.8      18.3       19.0       20.0      20.0
                                           -----      -----      -----     -----     -----      -----     ------     -----
Gross profit...........................     82.2       72.2       81.6      84.2      81.7       81.0       80.0      80.0
                                           -----      -----      -----     -----     -----      -----     ------     -----
Operating expenses:
 Sales and marketing...................     41.4       39.8       49.8      45.7      49.8       55.1       56.2      56.4
 Research and development..............     23.2       19.4       24.0      23.9      23.0       27.9       28.1      25.4
 General and administrative............     16.7       13.7       14.5      14.8      10.7       11.0       10.4       9.5
 Acquired in-process R&D
   and goodwill amortization...........       --         --         --        --        --      183.5        1.4       1.2
                                           -----      -----      -----     -----     -----      -----     ------     -----
     Total operating expenses..........     81.3       72.9       88.3      84.4      83.5      277.5       96.1      92.5
                                           -----      -----      -----     -----     -----      -----     ------     -----
Income (loss) from operations..........      0.9       (0.7)      (6.7)     (0.2)     (1.8)         *      (16.1)    (12.5)
Interest income........................      5.1        3.6        2.3       1.8       1.5        0.6        4.0       7.1
                                           -----      -----      -----     -----     -----      -----     ------     -----
Income (loss) before (provision)
 benefit for income taxes..............      6.0        2.9       (4.4)      1.6      (0.3)         *      (12.1)     (5.4)
(Provision) benefit for income
     taxes.............................     (0.5)       0.1        3.2       0.9       1.6         --         --        --
                                           -----      -----      -----     -----     -----      -----     ------     -----
Net income (loss)......................      5.5%       3.0%      (1.2)%     2.5%      1.3%         *      (12.1)%    (5.4)%
                                           =====      =====      =====     =====     =====      =====     ======     =====
</TABLE>

*Not meaningful

                                                                              23
<PAGE>
 
Liquidity and Capital Resources



     We utilized cash of $0.7 million for operating activities during 1998.
This use of cash was primarily a result of the net loss (after adjusting for the
non-cash write-off of the acquired in-process research and development), an
increase in accounts receivable, and a decrease in the amounts due to the
related party.  These uses were partially offset by the increases in accounts
payable, accrued liabilities, and deferred income. The average days sales
outstanding for accounts receivable increased from 80 days at December 31, 1997
to 84 days at December 31, 1998. For purposes of calculating average days sales
outstanding, we divide ending accounts receivable by the current quarter's
revenues and multiply this amount by 90 days. The level of accounts receivable
at each year end will be affected by the concentration of revenues in the final
weeks of each year and may be negatively affected by the expanded international
revenues in relation to total revenues as licenses to international customers
often have longer payment terms.

     During 1998, we invested $68.7 million in short-term investments (net of
$76.4 million of dispositions of short-term investments), invested $4.4 million
in the acquisition of r3, invested $0.4 million for a 10% interest in Entrust
Japan, and invested $3.8 million in property and equipment.  The property and
equipment investments were primarily computer hardware and leasehold
improvements to support the growing organization.

     Cash provided by financing activities during 1998 was primarily the net
proceeds from the issuance of Common stock as a result of our initial public
offering of $79.1 million.  This was partly offset by cash used in the repayment
of long-term debt in the amount of $1.4 million.

     As of December 31, 1998, our principal sources of liquidity were our cash
and short-term investments of  $81.1 million.  It is our belief that cash flows
from operations, existing cash and cash equivalents and short-term investments
will be sufficient to meet our needs for at least the next twelve months.

Certain Factors That May Affect Our Business

We Have a Limited Operating History

     We have only a limited operating history on which to base an evaluation of
our business and prospects.  Our quarterly revenues and operating results have
varied substantially and may continue to fluctuate due to a number of factors,
including, but not limited to, the following:

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

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

     .    Product and price competition;

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

     .    Changes in our operating expenses;

     .    Personnel changes;

     .    Foreign currency exchange rates; and

     .    Fluctuations in economic and financial market conditions.

     To address these risks we must, among other things:

     .    Successfully market our products to our new and existing customers;

     .    Attract, integrate, train, retain and motivate qualified personnel;

     .    Respond to competitive developments;

     .    Successfully introduce new products; and

     .    Successfully introduce enhancements to our product line to address new
          technologies and standards.

     We cannot be certain that we will successfully address any of these risks.

Certain of Our PKI Solution Transactions Have Lengthy Sales and Implementation
Cycles

     The timing, size and nature of individual licensing transactions are
important factors in our quarterly results of operations. Transactions for the
Entrust PKI solution often involve large expenditures, and the sales cycles for

                                                                              24
<PAGE>
 
these transactions are often lengthy and unpredictable. In addition, the sales
cycle associated with these transactions is subject to a number of
uncertainties, including, but not limited to:

     .    customers' budgetary constraints;

     .    the timing of customers' budget cycles; and

     .    customers' internal approval processes.

     There can be no assurance that we will be successful in closing such large
transactions on a timely basis or at all.

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

     Our expense levels are based, in significant part, on our expectations as
to future revenues and are largely fixed in the short term.   Therefore, the
following uncertainties exist:

     .    we may be unable to adjust spending in a timely manner to compensate
          for any unexpected shortfall in revenues;

     .    any significant shortfall of revenues in relation to our expectations
          would have an immediate and significantly adverse effect on our
          financial condition and results of operations for that quarter;

     .    we plan to increase operating expenses to expand our research and
          development, managerial, finance, sales and marketing and service and
          support organization; and

     .    the timing of such expansion and the rate at which new personnel
          become productive could cause significant fluctuations in quarterly
          and annual results of operations.

     Due to all of the foregoing factors, we believe that:

     .    period-to-period comparisons of our results or operations are not
          necessarily meaningful;

     .    results in any particular quarter are not necessarily indicative of
          future performance;

     .    future revenues and results of operations may vary substantially from
          quarter to quarter; and

     .    in future quarter, our results of operations may be below the
          expectations of public market analysts and investors

     In any case, the price of our common stock could be adversely affected in a
serious manner. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

Our Business Success Depends on Risks Associated with the Information Security
Market

     The market for Entrust's PKI solution is at an early stage of development.
A decline in demand for our products could result from:

     .    competition;

     .    technology change;

     .    the public's perception of the need for security products;

     .    developments in the hardware and software environments in which these
          products operate; and

     .    general economic conditions,

     Any such decline could have a significant adverse effect on our business,
financial condition or results of operations.

                                                                              25
<PAGE>
 
     Continued growth of this market will depend, in large part, on the
following:

     .  the continued expansion of Internet usage and in the number of
        organizations adopting or expanding intranets and extranets;
     .  the ability of their respective 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 private and public networks.

     In addition, a well-publicized actual or perceived breach of network or
computer security at one of our customers, regardless of whether such breach is
attributable to our products, or any significant advance in techniques for
decoding or "cracking" encrypted information could adversely affect the market's
perception of us and our products, and could have an adverse effect on our
business, financial condition or results of operations.

We Face Intense Competition in Our Market

     Our products are targeted at the new and rapidly evolving market for PKI
solutions. Although the competitive environment in this market has yet to
develop fully, we anticipate that it will be intensely competitive, subject to
rapid change and significantly affected by new product and service introductions
and other market activities of industry participants.

     Because of the broad functionality of our PKI solution, we compete with
vendors offering a wide range of security products and services, as follows:

     .  we compete with companies offering commercial certification authority
        products and services, such as VeriSign, GTE Cybertrust Solutions,
        Baltimore Technologies and IBM;
     .  we are competing with established companies, such as Security Dynamics
        and Network Associates, which have each announced their intention to
        introduce PKI products that would be integrated with their other
        security offerings, as well as Microsoft, which has announced its
        intention to offer a certificate server product building on its existing
        security framework in the near future;
     .  other major networking vendors could, in the future, bundle digital
        certificates with their product offerings;
     .  we expect that competition from established and emerging companies in
        the financial and telecommunications industries will also increase in
        the near term; and
     .  certain of our primary long-term competitors may not yet have entered
        the market.

     Increased competition could result in pricing pressures, 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.  A more detailed discussion
regarding our competition appears in Item 1 of Part I of this Form 10-K.

Our Industry is Subject to Rapid Technological Change

     The emerging market for network security products and related services is
characterized by rapid technological developments, frequent new product
introductions and evolving industry standards.

     The emerging nature of this market and its rapid evolution will require us
to improve the performance, features and reliability of our products and
services, particularly in response to competitive offerings, and to 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.

Our Industry Faces Strict Regulation

     Certain of our products are subject to export controls under laws of the
U.S., Canada and other countries, and we believe that we have obtained all
necessary export approvals. There can be no assurance, however, that the list of

                                                                              26
<PAGE>
 
products and countries for which exports are restricted, and the regulatory
policies with respect thereto, will not be revised from time to time. Our
inability to obtain required government approvals under these regulations could
adversely affect our ability to sell products abroad or make products available
for sale via international computer networks such as the Internet. Furthermore,
U.S. governmental controls on the exportation of encryption products and
technology may in the future restrict our ability to freely export some of our
products with the most powerful information security encryption technology. We
are currently authorized under exemptions contained in an interim U.S. export
procedure to export products with encryption technology that is more powerful
than would be permitted in the absence of such authorization. There can be no
assurance that the interim regulations will not be modified, and that we will
continue to meet the qualifications for exemption thereunder. Furthermore, there
can be no assurance that foreign customers will seek export versions of our
products. As a result, foreign competitors subject to less stringent export
controls on their products may be able to compete more effectively than us in
the global information security market. There can be no assurance that these
factors will not have a material adverse effect on our business, financial
condition or results of operations.  A more detailed discussion regarding
industry regulation appears in Item 1 of Part I of this Form 10-K.

We Must Manage Our Growth

     We are currently experiencing rapid growth that places a significant strain
on our management and other resources. Our business has grown significantly in
size and complexity over the past three years.  The growth in the size and
complexity of our business as well as its customer base has placed, and is
expected to continue to place, a significant strain on our management and
operations. In addition, certain of our senior management have had limited
experience in managing publicly traded companies. We anticipate that continued
growth, if any, will require us to recruit and hire a substantial number of new
development, managerial, finance, sales and marketing and support personnel. We
may not be successful at hiring or retaining such personnel. Our ability to
compete effectively and to manage future growth, if any, will depend on, among
other things:

     .  our ability to continue to implement and improve operational, financial
        and management information systems on a timely basis; and
     .  to expand, train, motivate and manage our work force.

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

Possible Future Acquisitions could Impact Our Expected Results

     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 their personnel and
operations with our present business, and the problems of retaining and
motivating key personnel from acquired businesses.  In addition, these
acquisitions may disrupt ongoing operations, divert management from day-to-day
business, and adversely impact our results of operations.  Certainly, these
types of transactions often result in charges to earnings for such things as
amortization of goodwill, that might arise under purchase accounting, or in-
process research and development expenses.

We are a Global Company

     Entrust has experienced a degree of success in expanding sales outside of
the U.S. and Canada.  In 1998, 23% of our sales were derived from outside North
America compared to 5% in 1997, and we expect to continue to increase our sales
in international markets.  In order to continue to expand international sales,
we must establish additional foreign operations, hire additional personnel and
establish relationships with additional partners.  This expansion will require
significant management attention and financial resources and could have an
adverse effect on our business, financial condition and results of operations.
In addition, there can be no assurance that we will be able to maintain or
increase international market demand for our products and services.  Although
our international sales are primarily denominated in U.S. dollars, we may
increasingly denominate sales in local foreign currencies in the future.  Also,
we expect to incur an increasing amount of payroll and other obligations in
foreign currencies.  A change in the value of the U.S. dollar relative to
foreign currencies could make our products more expensive and, therefore,
potentially less competitive in those markets and could otherwise impact on our
ability to meet our foreign currency denominated obligations.  In addition, our
international business may be subject to a variety of other risks, including:

                                                                              27
<PAGE>
 
     .  difficulties in collecting international accounts receivable;
     .  difficulties in obtaining U.S. export licenses, especially for products
        containing encryption technology;
     .  potentially longer payment cycles for customer payments;
     .  increased costs associated with maintaining international marketing
        efforts;
     .  introduction of non-tariff barriers and higher duty rates;
     .  difficulties in enforcement of contractual obligations and intellectual
        property rights;
     .  difficulties managing personnel and operations in remote locations;
     .  increase complexity in corporate tax structure globally; and
     .  potential adverse impact resulting from introduction of Euro dollar
        currency.

     There can be no assurance that we will be able to resolve all these risks
without adverse effects on our future international sales and, consequently, on
our business, financial condition or results of operations.

Our Stock Price May be Volatile in Future

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

     .  actual or anticipated fluctuations in our operating results;
     .  announcements of technological innovations;
     .  new products or new contracts by us or our competitors;
     .  developments with respect to patents, copyrights or propriety rights;
     .  conditions and trends in the software industry;
     .  changes in financial estimates by securities analysts; and
     .  general market conditions and other factors.

     The public equity markets have from time to time experienced significant
price and volume fluctuations that have particularly affected the market prices
for the stock of technology companies as a group but have been unrelated to the
performance of particular companies. The market price of our Common stock may be
adversely affected by these broad market fluctuations, as well as:

     .  shortfalls in sales or earnings as compared with securities analysts'
        expectations;
     .  changes in such analysts' recommendations or projections;  and
     .  general economic and market conditions.

Year 2000 Compliance

     The "Year 2000 Issue" refers generally to the problems that some software
may have in determining the correct century for a given year. For example,
software with date-sensitive functions that is not Year 2000 Compliant may not
be able to distinguish whether "00" means 1900 or 2000, which may result in
failures or the creation of erroneous results

     We have developed a Year 2000 readiness plan for the current versions of
its products. The plan includes assessment, implementation, validation testing,
and contingency planning.  We have assessed the capability of the current
versions of our products sold to handle the Year 2000 and have identified the
code changes (if any) required to make each of these products Year 2000
Compliant.  We have a plan in place, with resources assigned, to complete any
necessary code changes and testing by April 1999.  The costs of this effort are
not significant and are included in our operating costs.  We believe that, upon
completion of the updates mentioned above, our products and systems will be Year
2000 Compliant and, therefore, that the likelihood of a significant impact due
to problems is remote.  In addition, we expect that the cost of these projects
over the next twelve months will not have a significant effect on our business,
results of operations or financial condition.  We continue to maintain an up-to-
date listing of the Year 2000 readiness of our various products on our Web site
and we plan to respond to customer concerns about prior versions of our products
on a case-by-case basis.

     We have defined "Year 2000 Compliant" to mean the ability to perform date
and time dependent operations between December 31, 1999, and January 1, 2000,
without any significant, service affecting non-conformances to the accompanying
user documentation.  This does not, however, mean that the software will be free
of all defects, errors

                                                                              28
<PAGE>
 
or inaccuracies. The definition of Year 2000 Compliant assumes that our software
products receive accurate and correctly formatted date and time information from
the underlying operating system, firmware, hardware and any other software with
which our products interact. Year 2000 Compliance also assumes that our
customers continue to contract for maintenance and support of our products. We
have not specifically tested software obtained from third parties (licensed
software, shareware, and freeware) that is incorporated into our products, but
we are seeking assurances from our vendors that licensed software is Year 2000
Compliant. We believe that due to the relatively small third-party component,
the likelihood of a significant impact is remote. We also have not tested our
products on all platforms or all versions of operating systems that we currently
support and have advised our customers to verify that their platforms and
operating systems support the transition to the year 2000. We are preparing a
contingency plan for unanticipated product failures which we anticipate
completing by mid-1999.

        Our internal systems include both its information technology ("IT") and
non-IT systems. We completed an assessment of our material internal IT systems
during 1998 and expect to complete an assessment of our non-IT systems in the
first half of 1999. With respect to the IT systems, we have applied available
software updates and "patches" as required by our vendors to make their software
Year 2000 Compliant.  Certain vendors have yet to provide such updates to their
software.  However, these updates will be made as the software is available or
an alternate source will be found for the required functionality.  In addition,
we plan to test our internal computing environment for Year 2000 Compliance in
the third quarter of 1999.  To the extent that we are not able to test certain
technology provided by third-party vendors, we are seeking assurances from our
vendors that their systems are Year 2000 Compliant.  We are obtaining these
assurances in writing from published vendor materials and expect this activity
to be completed in the first half of 1999.  Although we are not currently aware
of any significant operational issues or costs associated with preparing our
internal IT and non-IT systems for the Year 2000, we may experience
unanticipated problems and costs caused by undetected errors or defects in the
technology used in our internal IT and non-IT systems.  We are preparing a
contingency plan for unanticipated system failures which we anticipate
completing by mid-1999.

     We do not have any information concerning the Year 2000 Compliance status
of our customers. As is the case with other similarly situated software
companies, if our current or future customers fail to achieve Year 2000
Compliance, our business, results of operations or financial condition could be
significantly adversely affected.  Furthermore, the purchasing patterns of our
customers or potential customers may be affected by Year 2000 issues as
companies expend significant resources to correct their current systems for Year
2000 Compliance. These expenditures may result in reduced funds being available
to our customers to implement or to purchase our products.  This would have a
significant adverse effect on our business, financial condition and results of
operations.

ITEM 7A.  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 short-term investments, in investments that
are designed to preserve principal, maintain liquidity and maximize return.   We
actively manage our investments in accordance with the objectives above.
Accordingly, some of these investments are subject to market risk; whereby a
change in market interest rates will cause the principal amount of the
underlying investment to fluctuate.  Therefore, a depreciation in principal
value of an investment is possible in situations where the investment is made at
a fixed interest rate and the market interest rate then subsequently increases.
We try to manage this risk by maintaining our cash and cash equivalents, and
short-term investments with high quality financial institutions and investment
managers.  We also restrict the investments to securities with short-term
maturities, such that, at December 31, 1998, all of our short-term investments
had maturities of less than one year from that date.

     The following table presents the cash and cash equivalents and short-term
investments that we held at December 31, 1998,  that would have been subject to
market risk, and the related ranges of maturities as of that date:

<TABLE>
<CAPTION>
                                                                                                MATURITY
                                                                                             (in thousands)
                                                                            Within 3 Months    3-6 Months    6-12 Months
                                                                            ---------------   ------------  --------------
<S>                                                                               <C>           <C>              <C>
Investments classified as cash and cash equivalents.......................           $109             -                -
Investments classified a short-term investments...........................        $27,800       $45,191           $4,364
                                                                                  -------       -------          -------
  Total...................................................................        $27,909       $45,191           $4,364
                                                                                  =======       =======          =======
Fair Value................................................................        $27,909       $45,191           $4,364
                                                                                  =======       =======          =======
</TABLE>
                                                                                

                                                                              29
<PAGE>
 
Risk Associated with Exchange Rates

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

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

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Our consolidated financial statements together with the related notes and
the report of Deloitte & Touche LLP, independent auditors, are set forth in the
index to Consolidated Financial Statements at  Item 14 and incorporated herein
by this reference.

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE

None.

                                                                              30
<PAGE>
 
                                    PART III

Certain information required by Part III is omitted from this Annual Report on
Form 10-K as we intend to file our definitive Proxy Statement for its Annual
Meeting of Stockholders to be held on May 5, 1999, pursuant to Regulation 14A of
the Securities Exchange Act of 1934, as amended (the "Proxy Statement"), not
later than 120 days after the end of the fiscal year covered by this Report, and
certain information included in the Proxy Statement is incorporated herein by
reference.

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

(a)  Executive Officers and Directors -- The information in the section entitled
     "Executive Officers and Directors of the Registrant" in Part I hereof is
     incorporated herein by reference.

(b)  Directors  --  The information in the section entitled "Directors and
     Nominees for Director" in the Proxy Statement is incorporated herein by
     reference.

     The disclosure required by Item 405 of Regulation S-K is incorporated by
reference to the section entitled "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement.

ITEM 11.  EXECUTIVE COMPENSATION

     The information in the sections entitled "Compensation of Executive
Officers," "Director Compensation" and "Compensation Committee Interlocks and
Insider Participation" in the Proxy Statement is incorporated herein by
reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information in the section entitled "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement is incorporated herein
by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information in the section entitled "Certain Transactions" in the Proxy
Statement is incorporated herein by reference.

                                                                              31
<PAGE>
 
                                    PART IV


ITEM 14.    EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K

(a)  The following documents are filed as part of this Form 10-K:

     1. Consolidated Financial Statements. The following consolidated financial
        statements of Entrust Technologies Inc. are filed as part of this Form
        10-K on the pages indicated:
 
<TABLE>
<CAPTION>
ENTRUST TECHNOLOGIES INC.                                                                                   Page
                                                                                                           -------
<S>                                                                                                        <C>
Independent Auditors' Report.............................................................................       34
Consolidated Balance Sheets as of December 31, 1997 and 1998.............................................       35
Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998...............       36
Consolidated Statements of Shareholders' Equity and Comprehensive Income 
   for the years ended December 31, 1996, 1997 and 1998..................................................       37
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998...............       39
Notes to Consolidated Financial Statements...............................................................       40
</TABLE>

     2. Schedules other than the ones listed above are omitted as the required
        information is inapplicable or the information is presented in the
        consolidated financial statements or related notes.

     3. Exhibits. The exhibits listed in the Exhibit Index immediately preceding
        such Exhibits are filed as part of this Annual Report on Form 10-K.

(b)  Reports on Form 8-K

     No reports on Form 8-K were filed in the quarter ended December 31, 1998.

                                                                              32
<PAGE>
 
                                   SIGNATURES
                                        
     Pursuant to the requirements of Section 13 or 15(d) 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, on the 26th day of
March, 1999.

                                      ENTRUST TECHNOLOGIES INC.
                                      -------------------------
                                            (Registrant)

                                        By: /s/ John A. Ryan
                                        --------------------
                                             John A. Ryan
                                 President and Chief Executive Officer


          Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 26th day of March, 1999.

            Signature                                  Title
            ---------                                  -----

 
/s/ John A. Ryan             President, Chief Executive Officer and Director
----------------             (Principal Executive Officer)
John A. Ryan
 
/s/ Michele L. Axelson       Senior Vice President and Chief Financial Officer
----------------------       (Principal Financial and Accounting Officer)
Michele L. Axelson
 
/s/ F. William Conner        Chairman of the Board
---------------------
F. William Conner
 
/s/ Frank A. Dunn            Director
-----------------
Frank A. Dunn
 
/s/ Robert S. Morris         Director
--------------------
Robert S. Morris
 
/s/ Terrell B. Jones         Director
--------------------
Terrell B. Jones

                                                                              33
<PAGE>
 
                          INDEPENDENT AUDITORS' REPORT


To the Directors and Shareholders of Entrust Technologies Inc:

     We have audited the consolidated balance sheets of Entrust Technologies
Inc. as of December 31, 1997 and 1998, and the related consolidated statements
of operations, shareholders' equity and comprehensive income, and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Entrust Technologies Inc. at
December 31, 1997 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.



/s/   DELOITTE & TOUCHE LLP
--------------------------- 
Dallas, Texas

February 5, 1999
(February 19, 1999 as to Note 11, second paragraph)

                                                                              34
<PAGE>
 
                           ENTRUST TECHNOLOGIES INC.
                                        
                          CONSOLIDATED BALANCE SHEETS
                  (in thousands of dollars, except share data)
<TABLE>
<CAPTION>
 
                                                                                              December 31,
                                                                                           -------------------
                                                                                             1997       1998     
                                                                                           --------   --------

                                ASSETS
<S>                                                                                        <C>       <C>
Current assets:
 Cash and cash equivalents...............................................................  $ 4,025   $  3,712
 Short-term investments..................................................................    8,613     77,355
 Accounts receivable (net of allowance for doubtful accounts of $416 in 1997 and
   $753 in 1998).........................................................................    7,152     14,013
 Other receivables.......................................................................    2,089      2,102
 Prepaid expenses........................................................................      455        994
                                                                                           -------   --------
   Total current assets..................................................................   22,334     98,176
Goodwill, net............................................................................        -      3,210
Property and equipment, net..............................................................    1,680      4,874
Other long-term assets...................................................................      743      1,569
                                                                                           -------   --------
   Total assets..........................................................................  $24,757   $107,829
                                                                                           =======   ========
 
                      LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
 Accounts payable........................................................................  $ 1,236   $  7,187
 Accrued liabilities.....................................................................    2,066      4,992
 Deferred income.........................................................................    3,068      7,791
 Due to related party....................................................................    2,257        768
                                                                                           -------   --------
   Total current liabilities.............................................................    8,627     20,738
Long-term debt and other long-term liabilities...........................................    1,468         32
                                                                                           -------   --------
   Total liabilities.....................................................................   10,095     20,770
                                                                                           -------   --------
Shareholders' equity:
 Preferred stock, par value $0.01 per share; 5,000,000 authorized; none issued and
   outstanding...........................................................................        -          -
 Common stock:
   Common, par value $0.01 per share; 100,000,000 authorized; none and 42,492,681
     issued and outstanding shares at December 31, 1997 and 1998, respectively...........        -        425
   Series A common, par value $0.01 per share; 100,000,000 authorized;
     20,300,000 and none issued and outstanding shares at December 31, 1997 and 1998,
     respectively........................................................................      203          -
   Series B common, par value $0.01 per share; convertible and exchangeable;
     260,000 authorized; 221,052 and none issued and  outstanding shares at December 31,
     1997 and 1998, respectively.........................................................        2          -
   Series B, non-voting common, par value $0.01 per share; exchangeable;
     260,000 authorized; 38,948 and none issued and outstanding shares at
     December 31, 1997 and 1998, respectively............................................        -          -
 Special voting stock, par value $0.01 per share; exchangeable; 15,000,000 authorized;
   7,700,000 and 5,157,289 issued and outstanding shares at December 31, 1997 and 1998,
   respectively..........................................................................       77         52
 Additional paid-in capital..............................................................    15,744    112,483
 Unearned deferred compensation..........................................................         -       (635)
 Accumulated other comprehensive loss....................................................       (15)       (89)
 Accumulated deficit.....................................................................    (1,349)   (25,177)
                                                                                           -------   --------
   Total shareholders' equity............................................................   14,662     87,059
                                                                                           -------   --------
   Total liabilities and shareholders' equity............................................  $24,757   $107,829
                                                                                           =======   ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                                                              35
<PAGE>
 
                           ENTRUST TECHNOLOGIES INC.
                                        
                     CONSOLIDATED STATEMENTS OF OPERATIONS
           (in thousands of dollars, except share and per share data)
                                        
                                        
<TABLE>
<CAPTION>
                                                                       Year Ended December 31,
                                                                       -----------------------
                                                                   1996        1997          1998
                                                                  -------  ------------  ------------
<S>                                                               <C>      <C>           <C>
Revenues:
  License.......................................................  $ 8,689  $    16,486   $    36,773
  Services and maintenance......................................    4,113        8,520        12,215
                                                                  -------  -----------   -----------
           Total revenues.......................................   12,802       25,006        48,988
                                                                  -------  -----------   -----------
Cost of revenues:
  License.......................................................      393          502         1,985
  Services and maintenance......................................    3,157        4,414         7,546
                                                                  -------  -----------   -----------
           Total cost of revenues...............................    3,550        4,916         9,531
                                                                  -------  -----------   -----------
Gross profit....................................................    9,252       20,090        39,457
                                                                  -------  -----------   -----------
Operating expenses:
  Sales and marketing...........................................    3,858       11,193        26,802
  Research and development......................................    2,874        5,692        12,840
  General and administrative....................................    2,464        3,695         5,046
  Acquired in-process research and development
     and goodwill amortization..................................        -            -        20,564
                                                                  -------  -----------   -----------
           Total operating expenses.............................    9,196       20,580        65,252
                                                                  -------  -----------   -----------
Income (loss) from operations...................................       56         (490)      (25,795)
Interest income.................................................        -          723         1,807
                                                                  -------  -----------   -----------
Income (loss) before benefit for income taxes...................       56          233       (23,988)
Benefit for income taxes........................................      331          281           160
                                                                  -------  -----------   -----------
Net income (loss)...............................................  $   387  $       514   $   (23,828)
                                                                  =======  ===========   ===========
Net income (loss) per share:
  Basic.........................................................        -        $0.02        $(0.68)
  Diluted.......................................................        -        $0.01        $(0.68)
Weighted average common shares used in per share computations:
  Basic.........................................................        -   30,700,000    35,254,735
  Diluted.......................................................        -   41,742,972    35,254,735

</TABLE>


          See accompanying notes to consolidated financial statements.

                                                                              36
<PAGE>
 
                           ENTRUST TECHNOLOGIES INC.

               CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 
                           AND COMPREHENSIVE INCOME

              for the years ended December 31, 1996, 1997 and 1998
                  (in thousands of dollars, except share data)


<TABLE>
<CAPTION>
                                                                                                                      Series B
                                                                     Series A                 Series B               Non-Voting    
                                            Common                    Common                   Common                  Common      
                                            Stock                     Stock                    Stock                   Stock       
                                    ----------------------   -----------------------    --------------------   ------------------- 
                                      Shares       Amount       Shares      Amount        Shares     Amount     Shares     Amount 
                                    ----------  ----------   -----------  ----------    ----------  --------   ---------  -------- 
<S>                                 <C>         <C>          <C>          <C>           <C>         <C>        <C>        <C>      
Balances at December 31, 1995.....         --   $      --            --   $      --            --   $     --         --   $    --   
 Change in shareholder's net                                                                                         
  investment......................         --          --            --          --            --         --         --        --   
 Comprehensive income:                                                                                              
  Net income and total                                                                                              
   comprehensive income...........         --          --            --          --            --         --         --        --
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                    
Balances at December 31,  1996....         --          --            --          --            --         --        --         -- 
 Series A common shares issued....         --          --    20,300,000         203            --         --        --         -- 
 Special Voting shares issued.....         --          --            --          --            --         --        --         -- 
 Series B common shares issued....         --          --            --          --       221,052          2        --         -- 
 Series B Non-Voting common shares      
     issues.......................         --          --            --          --            --         --    38,948         -- 
 Share capital issuance costs.....         --          --            --          --            --         --        --         -- 
 Change in shareholder's net              
  investment......................         --          --            --          --            --         --        --         -- 
 Comprehensive income (loss):                                                                                       
  Net income......................         --          --            --          --            --         --        --         -- 
  Translation adjustment..........         --          --            --          --            --         --        --         -- 
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                    
Balances at December 31, 1997.....         --          --    20,300,000         203       221,052          2    38,948         -- 
 Series A common shares issued on.                                                                                  
     option exercise..............         --          --        14,346          --            --         --        --         -- 
 Unearned compensation related to                                                                                   
     stock options granted........         --          --            --          --            --         --        --         -- 
 Deferred compensation earned.....         --          --            --          --            --         --        --         -- 
 Series A common shares converted. 20,314,346         203   (20,314,346)       (203)           --         --        --         -- 
 Series B common shares converted. 13,063,836         131            --          --      (221,052)        (2)  (38,948)        -- 
 Special voting shares exchanged..  2,542,711          25            --          --            --         --        --         -- 
 Redeemable series A common shares                                                                                  
     issued and converted.........  1,167,288          12            --          --            --         --        --         -- 
 Common shares issued.............  5,400,000          54            --          --            --         --        --         -- 
 Common shares issuance costs.....         --          --            --          --            --         --        --         -- 
 Common shares issued on option                                                                                     
     exercise.....................       4,500         --            --          --            --         --        --         -- 
 Comprehensive income (loss):                                                                                       
  Net income......................         --          --            --          --            --         --        --         -- 
  Translation adjustment..........         --          --            --          --            --         --        --         -- 
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                                    
Balances at December 31, 1998..... 42,492,681        $425            --       $  --            --      $  --        --      $  --
                                   ==========      ======   ===========      ======      ========     ======   =======     ====== 
</TABLE>
                                                                                
<TABLE>
<CAPTION>
                                   
                                            Special         Additional
                                            Voting           Paid-In
                                            Stock            Capital
                                     --------------------  -----------
                                        Shares     Amount
                                     -----------  -------
<S>                                  <C>          <C>       <C>   
Balances at December 31, 1995.....           --   $   --       $   --                                            
                                                                                                                 
Change in shareholders' net                                                                                      
investment........................           --       --           --                                            
 Comprehensive income:                                                                                           
  Net income and total                                                                                            
   comprehensive income...........           --       --           --             
---------------------------------------------------------------------                                              
                                                                                                                   
Balances at December 31,  1996....           --       --           --                                               
 Series A common shares issued....           --       --         (173)                                              
 Special Voting shares issued.....    7,700,000       77          (66)                                              
 Series B common shares issued....           --       --       15,302                                               
 Series B Non-Voting common shares                                                                                  
     issues.......................           --       --        2,696                                               
 Share capital issuance costs.....           --       --       (2,015)                                              
 Change in shareholder's net                                                                                        
     investment...................           --       --           --                                               
 Comprehensive income (loss):                                                                                       
  Net income......................           --       --           --                                               
  Translation adjustment..........                                                                                  
---------------------------------------------------------------------                                 
                                                                                                                    
Balances at December 31, 1997.....    7,700,000       77       15,744                                  
 Series A common shares issued on.                                                                     
     option exercise..............           --       --           31                                  
 Unearned compensation related to                                                                      
     stock options granted........           --       --          784                                  
 Deferred compensation earned.....           --       --           --                                  
 Series A common shares converted.           --       --           --                                  
 Series B common shares converted.           --       --         (129)                                 
 Special voting shares exchanged..   (2,542,711)     (25)          --                             
 Redeemable series A common shares                                           
     issued and converted.........           --       --       17,001       
 Common shares issued.............           --       --       86,346       
 Common shares issuance costs.....           --       --       (7,302)      
 Common shares issued on option                                             
     exercise.....................           --       --            8       
 Comprehensive income (loss):                                               
  Net income......................           --       --           --       
  Translation adjustment..........           --       --           --       
---------------------------------------------------------------------       
                                                                             
Balances at December 31, 1998.....    5,157,289     $ 52     $112,483       
                                     ==========   ======     ========        

</TABLE> 

         See accompanying notes to consolidated financial statements.

                                                                              37
<PAGE>
 
                           ENTRUST TECHNOLOGIES INC.

               CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 
                     AND COMPREHENSIVE INCOME (Continued)

             for the years ended December 31, 1996, 1997 and 1998
                 (in thousands of dollars, except share data)

<TABLE> 
<CAPTION> 
                                                                Accumulated Other                      Comprehensive     Total
                                           Unearned Deferred      Comprehensive    Accumulated Income     Income      Shareholders' 
                                              Compensation            Loss            (Deficit)           (Loss)        Equity
                                              ------------            ----            ---------           ------        ------
<S>                                           <C>               <C>                  <C>            <C>             <C> 
Balances at December 31, 1995..............        $    --            $     --         $  1,672                      $  1,672 
  Change in shareholder's net investment...             --                  --           (2,119)                       (2,119)
  Comprehensive income:
      Net income and total comprehensive
      income...............................             --                 --               387      $    387             387 
                                                                                                     ========
-------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996..............             --                  --              (60)                          (60)
 Series A common shares issued.............             --                  --               --                            30
 Special Voting shares issued..............             --                  --               --                            11
 Series B common shares issues.............             --                  --               --                        15,304
 Series B Non-Voting common shares issues..             --                  --               --                         2,696
 Share capital issuance costs..............             --                  --               --                        (2,015)
 Change in shareholder's net investment....             --                  --           (1,803)                       (1,803)
 Comprehensive income (loss):
     Net income............................             --                  --              514      $    514             514 
     Translation adjustment................             --                 (15)              --           (15)            (15)
-------------------------------------------------------------------------------------------------------------------------------
     Total comprehensive income............                                                          $    499
                                                                                                     ========     
Balances at December 31, 1997..............             --                 (15)          (1,349)                       14,662
 Series A common shares issued on option
     exercise..............................             --                  --               --                            31
 Unearned compensation related to stock
     options granted.......................           (784)                 --               --                            --
 Deferred compensation earned..............            149                  --               --                           149
 Series A common shares converted..........             --                  --               --                            --
 Series B common shares converted..........             --                  --               --                            --
 Special voting shares exchanged...........             --                  --               --                            --
 Redeemable series A common shares                                                                                
     issued and converted..................             --                  --               --                        17,013
 Common shares issued......................             --                  --               --                        86,400
 Common shares issuance costs..............             --                  --               --                        (7,302)
 Common shares issued on option                                                                                   
     exercise..............................             --                  --               --                             8
 Comprehensive income (loss):                                                                                     
     Net income............................             --                  --          (23,828)     $(23,828)        (23,828)
     Translation adjustment................             --                (74)               --           (74)            (74)
-----------------------------------------------------------------------------------------------------------------------------
     Total comprehensive income............                                                          $(23,902)    
                                                                                                     ========     
Balances at December 31, 1998..............          $(635)           $   (89)         $(25,177)                     $ 87,059
                                             =============   =================         ========                      ========
</TABLE>


          See accompanying notes to consolidated financial statements.

                                                                              38
<PAGE>
 
                           ENTRUST TECHNOLOGIES INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (in thousands of dollars)

                                        
<TABLE>
<CAPTION>
 
                                                                                                Year Ended December 31,
                                                                                        --------------------------------------------

                                                                                             1996            1997           1998
                                                                                        --------------  -------------  -------------

<S>                                                                                     <C>             <C>            <C>   
Cash flows from operating activities:
 Net income (loss)...................................................                       $   387        $  514        $  (23,828)

Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
  Depreciation and amortization......................................                           204           360             1,261
  Adjustment to cumulative translation account.......................                            --           (15)              (74)
  Deferred income taxes..............................................                             4          (743)             (143)
  Deferred compensation earned.......................................                            --            --               149
  Acquired in-process research and
    development......................................................                            --            --            20,208
Changes in operating assets and liabilities:
    Increase in accounts receivable..................................                          (967)       (4,665)           (6,212)
    Increase in other receivables....................................                            --        (2,089)             (125)
    Increase in prepaid expenses.....................................                           (40)         (400)             (504)
    Increase in other assets.........................................                            --            --              (178)
    Increase in accounts payable.....................................                           647           335             4,755
    Increase in accrued liabilities..................................                           891         1,121             1,998
    Increase in deferred income......................................                         1,686         1,186             4,573
    Increase (decrease) due to related party.........................                            --         2,257            (2,588)

                                                                                           --------       -------        ----------
  Net cash provided by (used in) operating
    activities.......................................................                         2,812        (2,139)             (708)

                                                                                           --------       -------        ----------
Cash flows from investing activities:
 Purchases of property and equipment.................................                          (693)         (895)           (3,791)
 Purchases of short-term investments.................................                            --       (12,308)         (145,188)
 Dispositions of short-term investments..............................                            --         3,695            76,446
 Investment in Entrust Japan, at cost................................                            --            --              (393)
 Payment on purchase of r3 Security
  Engineering AG.....................................................                            --            --            (4,391)

                                                                                           --------       -------        ----------
  Net cash used in investing
    activities.......................................................                          (693)       (9,508)          (77,317)

                                                                                           --------       -------        ----------
Cash flows from financing activities:
 Proceeds from long-term debt........................................                            --         1,449                --
 Repayment of long-term debt.........................................                            --            --            (1,425)
 Transfers from Nortel...............................................                         9,716            --                --
 Transfers to Nortel.................................................                       (11,835)       (1,803)               --
 Proceeds from exercise of stock options.............................                            --            --                39
 Proceeds from issuance of 5,400,000 common shares,
  net of issuance costs of $7,302.............................                                   --            --            79,098
 Proceeds from issuance of common and special
  voting stock, net of issuance costs of $2,015......................                            --        16,026                --
                                                                                           --------       -------        ----------
  Net cash provided by (used in) financing
       activities....................................................                        (2,119)       15,672            77,712
                                                                                           --------       -------        ----------
Net change in cash and cash equivalents..............................                            --         4,025              (313)

Cash and cash equivalents at beginning of year.......................                            --            --             4,025
                                                                                           --------       -------        ----------
Cash and cash equivalents at end of year.............................                       $    --        $4,025         $   3,712
                                                                                           ========       =======        ==========
Non-cash investing and financing activities:
 Issuance of redeemable Series A common stock
  (and subsequent conversion into common stock)
  related to the acquisition of r3 Security                     
  Engineering AG.....................................................                       $    --        $   --         $  17,013
                                                                                           ========       =======        ==========
</TABLE> 

         See accompanying notes to consolidated financial statements.

                                                                              39
<PAGE>
 
                           ENTRUST TECHNOLOGIES INC.
                                        
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
           (in thousands of dollars, except share and per share data)

1. Background and Basis of Presentation

Background

  In January 1994, Northern Telecom Limited, and its subsidiary Northern Telecom
Inc. (collectively ''Nortel''), established the Secure Networks group (the
''Division'') to pursue the development and sales of public key infrastructure
(''PKI'') products. PKI products combine powerful public key data encryption
technology with transparent, life cycle digital certificate management to enable
users to communicate securely over public and private networks.

  During 1996, Nortel announced its intention to create a separate company,
Entrust Technologies Inc. (the ''Company'') consisting of the operations of the
Division (the ''Separation''). The Company was incorporated in December 1996
with nominal share capital, all of which was contributed by Nortel. At the close
of business on December 31, 1996, Nortel transferred to the Company certain of
the assets and liabilities, intellectual property, rights, licenses and
contracts of the Division of Nortel.

  In exchange, Nortel received 20,300,000 shares of the Company's Series A
Common stock, 7,700,000 shares of the Company's Special Voting stock, and cash
consideration. At the close of business on December 31, 1996, the Company issued
260,000 shares of its Series B common stock in a private placement for $100 per
share less underwriting costs and commissions of $7.75 per share. After the
completion of the private placement, Nortel owned approximately 73.0% of the
outstanding shares of the Company's common stock assuming conversion of the
Series B common stock and Series B Non-Voting common stock into an aggregate of
13,063,836 shares of Series A common stock.

  On August 21, 1998, the Company closed its initial public offering ("IPO"),
issuing 5,400,000 shares of its Common stock at an initial public offering price
of $16 per share.  The net proceeds to the Company from the offering, after
deducting underwriting discounts and commissions and offering expenses incurred
by the Company, were approximately $79.1 million.  See note 8 for further detail
regarding changes in the issued capital of the Company.  Immediately following
the IPO, Nortel owned approximately 55.3% of the Company's Common stock.

Basis of presentation

  The historical comparative year results, comprising the statements of
operations, shareholders' equity and cash flows for the year ended December 31,
1996, represent the operations of the Division transferred to the Company from
Nortel in the Separation (the ''Company Business''). These historical results of
the Division present the financial position of the Division as a separate
reporting entity independent of Nortel and its subsidiaries, as if the Division
was a stand-alone entity for that period. The 1996 consolidated financial
statements have been prepared using the historical basis in the assets and
liabilities and historical results of operations related to the Company
Business. Changes in shareholder's net investment in 1996 represent Nortel's
contribution of its net investment after giving effect to the net income (loss)
of the Division and net cash transfers to or from the Division. The
shareholder's net investment was not transferred to the Company as part of the
Separation.

  The 1996 consolidated financial statements, presented here for comparison
purposes, include certain Nortel corporate costs that were allocated to the
Division using procedures deemed appropriate for the nature of the expenses
involved. The procedures utilized various allocation bases such as invested net
assets, number of employees and related payroll costs, and direct effort
expended. Management believes that the allocations reflected in the 1996
consolidated financial statements are reasonable, but they were not necessarily
indicative of the costs that would have been incurred had the Division
functioned as a stand-alone company.   No Nortel corporate costs were allocated
to the Company, in this way, in the years ended December 31, 1997 and 1998.
After the Separation, Nortel continued to provide certain ''corporate'' services
to the Company. Fees charged for such services are based on Nortel's internal
usage-based fee structures where applicable or Nortel's direct cost of services,
including total compensation and out-of-pocket expenses.

                                                                              40
<PAGE>
 
2. Significant Accounting Policies

Consolidation

     The consolidated financial statements of the Company include the accounts
of its majority-owned Canadian subsidiary, Entrust Technologies Limited, its
wholly-owned U.K. subsidiary, Entrust Technologies (UK) Limited and, its wholly-
owned Swiss subsidiary, r3 Security Engineering AG.  The minority interest in
the Canadian subsidiary has been insignificant to date. All significant
intercompany transactions and accounts are eliminated in consolidation.

Translation of foreign currencies

     The accounts of the Company's subsidiaries have been translated into U.S.
dollars. Assets and liabilities have been translated at the exchange rates in
effect at the balance sheet date. Revenues, expenses and cash flow amounts are
translated at average rates for the period. The resulting translation
adjustments are included in comprehensive income as a separate component of
shareholders' equity. Gains and losses from foreign currency transactions are
included in the determination of net income and are not material.

     The Company does not use hedging or derivatives and, as a result, may be
exposed to currency translation adjustments in the future. However, the Company
transacts the majority of its international sales in U.S. dollars, except for
Canada where the Company has both significant costs and revenues, which the
Company believes mitigates the potential impact of currency fluctuations.

Revenue recognition

     The Company generates revenues primarily from licensing the rights to its
software products to end-users and from sublicense fees from resellers. The
Company also generates revenues from consulting, training and post-contract
support (''maintenance''). In October 1997, the AICPA issued Statement of
Position (''SOP'') No. 97-2, ''Software Revenue Recognition'', which the Company
adopted, effective January 1, 1998. Such adoption had no effect on the Company's
method of recognizing revenues. Prior to 1998, the Company's revenue recognition
policy was in accordance with the provisions of the preceding authoritative
guidance provided by SOP 91-1 ''Software Revenue Recognition''.

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

     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 the Company's products and do not include
significant customization or development of the underlying software code.

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

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

Cost of revenues

     Cost of licenses includes the cost of media, product packaging,
documentation and other production costs and third-party royalties.

                                                                              41
<PAGE>
 
     Cost of services and maintenance consists primarily of salaries, benefits
and allocated overhead costs related to consulting, training and customer
support personnel, including the cost of third-party consultants engaged by the
Company.

Research and development costs

     To date the Company has not capitalized any software development costs
under Statement of Financial Accounting Standards ("SFAS") No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased, or otherwise Marketed".
The Company has defined attainment of technological feasibility as completion of
a working model.  The period of time beginning with the establishment of a
working model and ending when a product is offered for sale is typically very
short.  Accordingly, costs that were eligible for capitalization were
insignificant.

Property and equipment

     Property and equipment is stated at cost. Depreciation is calculated
generally using the straight-line method over the estimated useful lives of the
assets. The expected useful lives of the furniture and fixtures, computer and
telecom equipment and software is three to five years and the remaining term of
the facility lease for leasehold improvements.

     When assets are sold or retired, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
included in operations. Maintenance and repairs are charged to operations as
incurred.

     Assets are reviewed for impairment on the basis of undiscounted cash flows.
If the cash flows are less than the asset's carrying value, the asset is written
down to its fair value.

Goodwill and other assets

     Goodwill is stated net of accumulated amortization of $356 at December 31,
1998.  Goodwill is being amortized on a straight-line basis over five years.
Included in other assets is an investment of $393, which represents a 10%
ownership interest in Entrust Japan.

Other receivables

     Other receivables include federal income tax and Canadian goods and
services tax refunds of $1,644 and $973 at December 31, 1997 and 1998,
respectively.  Other receivables also includes work-in-process relating to a
long-term percentage-of-completion contract of $432 and $826 at December 31,
1997 and 1998, respectively.

Cash and cash equivalents

     The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. The Company's cash
and cash equivalents are maintained with a bank and a brokerage institution.
Prior to January 1, 1997, the Company, as a division of Nortel, participated in
the Nortel cash management system and, accordingly, did not maintain cash
balances other than minimal amounts.

Short-term investments

     Short-term investments consist of investments in a strategic cash
management account.  This account is invested primarily in securities guaranteed
by the U.S. government or its agencies and highly rated municipal and corporate
bonds with a remaining maturity of not more than 12 months.  The Company has the
intent and ability to hold all investments until maturity. Therefore, all such
investments are classified as held to maturity investments and stated at
amortized cost.  At December 31, 1997 and 1998, the amortized cost of the
Company's investments approximated fair value.

                                                                              42
<PAGE>
 
     The Company's investments consist of the following:

<TABLE>
<CAPTION>
                                                           December 31, 1997                  December 31, 1998
                                                     ------------------------------  -----------------------------------
                                                                      Maturity of                         Maturity of
                                                       Amortized      Securities        Amortized         Securities      
                                                         Cost         Within One          Cost            Within One       
                                                         Basis           Year             Basis              Year          
                                                     -------------  ---------------  ----------------  -----------------   
<S>                                                  <C>            <C>              <C>               <C>
Foreign debt securities............................         $1,011           $1,011           $    --            $    --
Municipal debt securities..........................          3,686            3,686                --                 --
U.S. government agency debt securities.............          3,916            3,916             7,825              7,825
Corporate debt securities..........................             --               --            69,530             69,530
                                                            ------           ------           -------            -------
                                                            $8,613           $8,613           $77,355            $77,355
                                                            ======           ======           =======            =======
</TABLE>
Stock based compensation

     Stock based compensation arising from stock option grants is accounted for
by the intrinsic value method under Accounting Principles Board ("APB") Opinion
No. 25.  Statement of Financial Accounting Standards ("SFAS") No. 123 encourages
(but does not require) the cost of stock-based compensation arrangements with
employees to be measured based on the fair value of the equity instrument
awarded.  As permitted by SFAS No. 123, the Company applies APB Opinion No. 25
to its stock-based compensation awards to employees and discloses in Note 9 the
required pro forma effect on net income and earnings per share.
 
Income taxes

  The Company uses the asset and liability method to account for income taxes.
Deferred income tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the carrying amounts of
existing assets and liabilities for accounting purposes, and their respective
tax bases. Deferred income tax assets and liabilities are measured using
statutory tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred income tax assets and liabilities of a change in statutory tax rates
is recognized in net income in the year of change. A valuation allowance is
recorded for those deferred income tax assets whose recoverability is not
sufficiently likely.   As the Company operated as a division of Nortel in 1996,
it did not file separate income tax returns.  Income tax expense has been
estimated based upon an application of Nortel's effective tax rate for that
period.

Net income (loss) per share

  Basic net income (loss) per share is computed by dividing the net income
(loss) by the weighted average number of shares of Common stock of all classes
outstanding during 1997 and 1998.  Diluted net income (loss) per share is
computed by dividing the net income (loss) by the weighted average number of
shares of Common stock and potential Common stock outstanding, and when
dilutive, exchangeable Special Voting stock on an as-if exchanged basis, and
options to purchase Common stock using the treasury stock method.  The dilutive
effect of the exchangeable Special Voting stock and the options to purchase
Common stock are excluded from the computation of diluted net income (loss) per
share if their effect is antidilutive.  For the year ended December 31, 1998,
the antidilutive effect excluded from the diluted net loss per share computation
due to the exchangeable Special Voting stock outstanding was 6,767,673 shares,
conversion rights of Series B was 1,687,096 shares, and options to purchase
Common stock was 5,437,769 shares.

  Net income (loss) per share has been calculated as follows:
<TABLE>
<CAPTION>
                                                                                                          December 31,
                                                                                                  --------------------------
                                                                                                       1997          1998
                                                                                                    -----------  ------------
<S>                                                                                                 <C>          <C>
  Net income (loss) available to common shareholders (in thousands)...............................  $       514  $   (23,828)
                                                                                                    ===========  ===========
  Weighted average common shares outstanding:                                             
  Basic:                                                                                  
    Basic weighted average common shares outstanding..............................................   30,700,000   35,254,735
                                                                                                    -----------  -----------
    Basic net income (loss) per share.............................................................  $      0.02  $     (0.68)
                                                                                                    ===========  ===========
  Diluted:                                                                                
    Basic weighted average common shares outstanding..............................................   30,700,000   35,254,735
                                                                                                    -----------  -----------
    Exchange rights on Special Voting stock.......................................................    7,700,000          N/A
    Additional conversion rights of Series B Voting and Non-Voting common stock...................    2,663,836          N/A
    Net effect of dilutive options using the treasury stock method................................      679,136          N/A
                                                                                                    -----------  -----------
         Subtotal.................................................................................   11,042,972          N/A
                                                                                                    -----------  -----------
    Diluted weighted average common shares outstanding............................................   41,742,972   35,254,735
                                                                                                    ===========  ===========
    Diluted net income (loss) per share...........................................................  $      0.01  $     (0.68)
                                                                                                    ===========  ===========
</TABLE>

                                                                              43
<PAGE>
 
Concentration of credit risk

  Financial instruments that potentially subject the Company to market and
credit risk consist principally of cash equivalents, short-term investments and
accounts receivable. The Company has investment policies that limit the amount
of credit exposure to any one issuer and restrict placement of these investments
to issuers evaluated as credit worthy. The Company maintains its cash
equivalents, and short-term investments, with high quality financial
institutions and investment managers. The Company performs periodic reviews of
the credit standing of its investments and the financial institutions managing
those investments.

  The Company's customer base consists primarily of large, well-established
companies or government agencies. Five customers accounted for approximately 55%
and 45% of accounts receivable as of December 31, 1997 and 1998 respectively.
The Company performs ongoing credit evaluations of its customers, and generally,
does not require collateral from its customers to support accounts receivable.
Requests to extend significant credit to customers are reviewed and approved by
senior management. The Company maintains an allowance for potential losses due
to credit risk, but has not experienced significant write-offs. Management
believes that the reserves for losses are adequate. The following table
summarizes the changes in the allowance for doubtful accounts:

<TABLE>
<CAPTION>
                                                                                                  December 31,
                                                                                              ---------------------
                                                                                                 1997       1998
                                                                                              ----------  ---------
<S>                                                                                           <C>         <C>
Allowance for doubtful accounts, beginning of period........................................       $ 129      $ 416
Additional provision, net...................................................................         287        337
                                                                                                   -----      -----
Allowance for doubtful accounts, end of period..............................................       $ 416      $ 753
                                                                                                   =====      =====
</TABLE>
                                        
  The Company is subject to foreign currency exchange risk in the form of
exposures to changes in currency exchange rates between the United States and
Canada, Germany, Switzerland and the United Kingdom. Management periodically
reviews the potential financial impact of this risk and currently believes that
the Company is not subject to significant potential losses as a result.

Recent pronouncements

     In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued SOP No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP No. 98-1").  SOP No. 98-1 requires
that certain costs related to the development or purchase of internal use
software be capitalized and amortized over the estimated useful life of the
software.  SOP No. 98-1 is effective beginning in 1999.  The Company does not
expect the adoption of SOP No. 98-1 to have a material impact on its results of
operations.

     In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"), which establishes
accounting and reporting standards for derivative instruments.   SFAS No. 133 is
effective beginning in 2000.  The Company currently does not use hedging or
derivatives and, as a result, does not anticipate any impact on the financial
statements.

     In December 1998, the AICPA issued SOP No. 98-9, "Modifications of SOP 97-
2, Software Revenue Recognition, with Respect to Certain Transactions" ("SOP No.
98-9").  SOP No.  98-9 requires recognition of revenue using the "residual
method" in a multiple-element software arrangement, whereby the total fair value
of undelivered elements is deferred and recognized in accordance with the
provisions of SOP No. 97-2, "Software Revenue Recognition".  The Company will be
required to implement the provisions of SOP No. 98-9 beginning in 2000.  The
Company does not expect the adoption of SOP No. 98-9 to have a material impact
on its results of operations.

Use of estimates

     The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.

                                                                              44
<PAGE>
 
3.  ACQUISITION OF r3 SECURITY ENGINEERING AG AND ACQUIRED IN-PROCESS RESEARCH
    AND DEVELOPMENT

     On June 8, 1998, the Company completed the acquisition of r3 Security
Engineering AG (''r3''), a company based in Zurich, Switzerland which provides
consulting, applied research and product development services related to
commercial security and encryption solutions.   The Company acquired all the
outstanding shares of r3 for an aggregate purchase price of $23,774, which
included approximately $4,391 in cash, $17,013 representing 1,167,288 shares of
Redeemable Series A common stock (subsequently converted into Common stock upon
the closing of the Company's initial public offering), approximately $994 in
assumed net liabilities and acquisition expenses, and approximately $1,376 of
adjustments to the June 8, 1998 opening balance sheet of r3 to record the
acquired assets and liabilities at fair value.

     This acquisition has been accounted for under the purchase method of
accounting.  In connection with the purchase price allocation, the Company
obtained an independent appraisal of the intangible assets which indicated
approximately $20,208 of the acquired intangible assets consisted of in-process
product development. The development of these projects had not reached
technological feasibility and the technology has no alternative future use .
Further, management estimates that related development costs will continue to be
incurred and, accordingly, the $20,208 was included as an expense in the
consolidated statement of operations for the year ended December  31, 1998.
Goodwill of $3,566 was recorded as a result of this acquisition.

     The following unaudited pro forma data summarize the combined results of
operations of Entrust Technologies Inc. and r3 as if the acquisition had taken
place as of the beginning of the years presented, and accordingly, excludes the
$20,208 write-off of in-process research and development in 1998 as it would
have been a charge to beginning retained earnings, and  includes a full year of
goodwill amortization for each year presented.

<TABLE>
<CAPTION>
                                                                                                    Year ended December 31,
                                                                                                    -----------------------
                                                                                                       1997         1998
                                                                                                    ----------  -----------
<S>                                                                                                     <C>           <C>
    Revenues........................................................................................  $28,635      $50,589
                                                                                                      =======      =======
    Net loss........................................................................................     (705)      (4,923)
                                                                                                      =======      =======
    Basic and diluted net loss per share............................................................    (0.02)       (0.14)
                                                                                                      =======      =======
</TABLE>
                                        
4.  PROPERTY AND EQUIPMENT
 
    Property and equipment, at cost, consist of the following:

<TABLE>
<CAPTION>
                                                                                                        December 31,
                                                                                                    ------------------
                                                                                                       1997      1998
                                                                                                    --------  --------
<S>                                                                                                   <C>      <C>
   Computer and telecom equipment...................................................................  $1,491   $ 3,345
   Furniture and fixtures...........................................................................      86     1,180
   Leasehold improvements...........................................................................     639     1,504
   Internal-use software............................................................................     218       668
                                                                                                      ------   -------
                                                                                                       2,434     6,697
   Less:   accumulated depreciation and amortization................................................    (754)   (1,823)
                                                                                                      ------   -------
   Total property and equipment, net................................................................  $1,680   $ 4,874
                                                                                                      ======   =======
</TABLE>
                                                                                
 
5.  ACCRUED LIABILITIES

    Accrued liabilities consist of the following:
<TABLE> 
<CAPTION> 
                                                                                                        December 31,
                                                                                                    ------------------
                                                                                                       1997     1998
                                                                                                      -------  -------
<S>                                                                                                   <C>      <C>
   Payroll and related benefits.....................................................................   $1,532   $3,127
   Other............................................................................................      534    1,865
                                                                                                       ------   ------
                                                                                                       $2,066   $4,992
                                                                                                       ======   ======
</TABLE>
6.  LONG-TERM DEBT

    At December 31, 1997, the Company had an installment note with a financial
institution for $1,449. This obligation was unsecured with interest at an
effective rate of 6.9% per annum and was retired in 1998.

                                                                              45
<PAGE>
 
7.   INCOME TAXES

  The following table presents the U.S. and foreign components of income (loss)
before income taxes and the provision for income taxes. 1996 figures are
estimated on a pro forma basis for comparative purposes.

<TABLE>
<CAPTION>
                                                                                                   Year ended December 31,
                                                                                                ---------------------------
                                                                                                   1996     1997     1998
                                                                                                  -------  ------  ---------
<S>                                                                                               <C>      <C>     <C>
  Income (loss) before income taxes
     United States..............................................................................   $  (8)  $   2   $(22,108)
     Foreign....................................................................................      64     231     (1,880)
                                                                                                   -----   -----   --------
                                                                                                   $  56   $ 233   $(23,988)
                                                                                                   =====   =====   ========
  (Provision) benefit for income taxes
     Current:
        Federal.................................................................................   $  --   $(337)  $    140
        State and local.........................................................................      --     (76)        79
        Foreign.................................................................................     331     (49)      (202)
                                                                                                   -----   -----   --------
                                                                                                     331    (462)        17
                                                                                                   -----   -----   --------
     Deferred:
        Federal.................................................................................      --     119        (52)
        State and local.........................................................................      --      28          7
        Foreign.................................................................................             596        188
                                                                                                   -----   -----   --------
                                                                                                      --     743        143
                                                                                                   -----   -----   --------
  Total benefit for income taxes................................................................   $ 331   $ 281   $    160
                                                                                                   =====   =====   ========
</TABLE>
                                                                               
  A  reconciliation between income taxes computed at the federal statutory rate
and income tax benefit is shown below:
<TABLE>
<CAPTION>
                                                                                            Year ended December 31,
                                                                                    -------------------------------------
                                                                                         1996        1997         1998
                                                                                      ----------  -----------  -----------
<S>                                                                                   <C>         <C>          <C>
Income tax (provision) benefit at federal statutory rate............................      $ (19)       $ (79)     $ 8,156
State and local taxes, net of federal benefits......................................         --          (48)          57
Foreign earnings benefit (tax) at different rate....................................         (6)          15           80
Acquired in-process research and development and other expenses
    not deductible for tax purposes.................................................         --           --       (6,913)
Valuation allowances on benefit of tax losses.......................................         --           --       (1,220)
Foreign research and development tax credits utilized...............................        331          393           --
Utilization of tax loss carry-forwards..............................................         25           --           --
                                                                                          -----        -----      -------
Total benefit for income taxes......................................................      $ 331        $ 281      $   160
                                                                                          =====        =====      =======
</TABLE>
                                        

     Deferred income taxes represent the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes, and (b) net
operating loss (NOL) and tax credit carry-forwards.  The tax effects of
significant items comprising the Company's net deferred tax benefits
(liabilities) are as follows:

<TABLE>
<CAPTION>
                                                                                                      December 31,
                                                                                                  -----------------------
                                                                                                     1997         1998
                                                                                                  -----------  ----------
<S>                                                                                               <C>          <C>
Current asset:
      Accruals and valuation allowances not currently deductible...........................            $   -      $   157
      Deferred income currently taxable....................................................              347          426
                                                                                                       -----      -------
         Total.............................................................................              347          583
                                                                                                       -----      -------
Non-current asset (liability):
      Accelerated depreciation for tax purposes............................................               (7)         (34)
      United States and Foreign NOL carry-forwards.........................................                -        1,220
      Valuation allowance..................................................................                -       (1,220) 
      Foreign research and development tax credit carry-forwards...........................              384        1,307
      Valuation allowance..................................................................                -         (989)
                                                                                                       -----      -------
         Total.............................................................................              377          284
                                                                                                       -----      -------
      Net deferred tax asset...............................................................            $ 724      $   867
                                                                                                       =====      =======
</TABLE>
                                                                               


                                                                              46
<PAGE>

     As at December 31, 1998, the Company has available the following income tax
carry-forwards to reduce future income tax liabilities:
 
<TABLE>
<CAPTION>
                                                                                   Amount         Period Expiring
                                                                                 ----------       ---------------
<S>                                                                              <C>         <C>
Net operating losses (tax benefits):
        United States..........................................................      $  598              2018
        Foreign................................................................         622              2005
                                                                                     ------
                                                                                      1,220
Foreign research and development tax credits...................................       1,307            2007-2008
                                                                                     ------
                                                                                     $2,527
                                                                                     ======
</TABLE>
                                                                                
8. CAPITAL STOCK

     On January 24, 1997, the Board of Directors declared a 10-for-1 stock split
effected in the form of a stock dividend, payable to the shareholders of Series
A common stock and Special Voting stock. On June 18, 1998, the Board of
Directors approved an increase in the authorized number of shares of Series A
common stock from 15,000,000 to 100,000,000, Preferred stock from 500,000 to
5,000,000 and Special Voting stock from 2,500,000 to 15,000,000.

     The Board of Directors also approved on June 18, 1998 a 4-for-1 stock
split, effected in the form of a stock dividend payable to the shareholders of
Series A common stock and Special Voting stock. In addition, the Board of
Directors approved an amendment to the Company's Articles of Incorporation,
which redesignated the Series A common stock as Common stock effective upon the
completion of the Company's initial public offering. The consolidated financial
statements have been restated to reflect the increase in the number of
authorized shares and these stock splits.

     Concurrent with the closing of the initial public offering on August 21,
1998, each of the 20,314,346 outstanding shares of the Company's Series A common
stock and each of the 1,167,288 outstanding shares of the Company's Redeemable
Series A common stock were automatically converted into one share of Common
stock.  Also, the 260,000 outstanding shares of the Company's Series B
(including non-voting) common stock were automatically converted into 13,063,836
shares of Common stock.  Furthermore, the majority shareholder of the Company
exercised its option to exchange 2,542,711 shares of the Company's Special
Voting stock into the equivalent number of shares of Common stock.  After this
exchange, the remaining number of issued and outstanding Special Voting shares
was 5,157,289.

Common Stock

     The holders of Common stock are entitled to one vote per share and are
entitled to dividends when and if declared by the Board of Directors of the
Company.  The Company is authorized to issue up to 100,000,000 shares of Common
stock.

Series A and Series B Common Stock

     The holders of Series A and Series B common stock were entitled to one vote
per share and were entitled to dividends when and if declared by the Board of
Directors of the Company. The Series B Non-Voting common stock had the same
rights and privileges as the Series B common stock except for the non-voting
nature of the stock and it is exchangeable at the option of the holder into
Series B common stock. The Company's Series B common stock and Series B Non-
Voting common stock were automatically converted into 13,063,836 shares of
Common stock upon completion of the public offering of the Company's Common
stock. Also, the Company's Series A common stock was converted to Common stock
upon completion of the public offering. As of December 31, 1998, there were no
issued and outstanding shares of the Company's Series A and Series B common
stock.

Redeemable Series A Common Stock

     The holders of the Redeemable Series A common stock were entitled to the
same rights and privileges as the Series A common stock. The 1,167,288 of these
issued and outstanding shares were converted to an equivalent number of shares
of Common stock upon completion of the public offering of the Company's Common
stock.   As of December 31, 1998, there were no issued and outstanding shares of
the Company's Redeemable Series A common stock.

                                                                              47
<PAGE>
 
Special Voting Stock

     The holders of the Special Voting stock also hold an equivalent number of
Exchangeable shares in the Company's majority-owned subsidiary, Entrust
Technologies Limited. At any time prior to December 31, 2006, the holders of the
Special Voting stock have the right to exchange their shares of Special Voting
stock and their Exchangeable Shares in Entrust Technologies Limited into
5,157,289 shares of Common stock. The Company generally also has the right to
demand such exchange on or before December 31, 2006.

Preferred Stock

     The Company is authorized to issue up to 5,000,000 shares of Preferred
stock in one or more series. Each such series of Preferred stock shall have such
rights, preferences, privileges and restrictions, including voting rights,
dividend rights, conversion rights and liquidation preferences, as shall be
determined by the Board of Directors. As of December 31, 1998, the Company had
not issued any shares of Preferred stock.

9. STOCK OPTIONS

Employee Stock Option Plan

     During the year ended December 31, 1997, the Company's shareholders
approved the 1996 Stock Incentive Plan (the ''Plan'') applicable to the
Company's full-time employees, officers, directors, and consultants and
authorized 7,228,920 shares of Series A common stock (Common stock following the
Company's public offering) for issuance thereunder. In May 1998, the Company's
shareholders increased the authorized number of shares available for issuance
under this plan to 7,630,920. On June 18, 1998, the Company's Board of Directors
approved an increase of 2,369,080 in the number of shares available under the
Plan, subject to shareholder approval.  In July 1998, 400,000 of the shares
available for issuance under the Plan were transferred to the Employee Stock
Purchase Plan.  The options under the Plan are granted at the then-current fair
market value of the Series A common stock (Common stock following the Company's
public offering) of the Company and generally may be exercised in equal
proportions over the defined vesting period for each grant, generally two to
four years, and expire on the tenth anniversary or upon termination of
employment.

  A summary of the activity under the Plan is set forth below:
<TABLE>
<CAPTION>
                                                                                                            Options Outstanding
                                                                                                            ---------------------
                                                                                                Shares                 Weighted
                                                                                               Available   Number of    Average
                                                                                               for Grant     Shares  Exercise Price
                                                                                               ---------     ------  --------------
<S>                                                                                           <C>         <C>         <C>
Balance at December 31, 1996                                                                          --          --
  Authorized................................................................................   7,228,920          --
  Granted...................................................................................  (6,628,800)  6,628,800     $ 2.16
  Forfeited.................................................................................     140,720    (140,720)      2.13
                                                                                              ----------   ---------
Balance at December 31, 1997................................................................     740,840   6,488,080       2.16
  Authorized................................................................................   2,371,080          --
  Granted...................................................................................  (1,673,016)  1,673,016      11.79
  Forfeited.................................................................................     121,324    (121,324)      4.44
  Exercised.................................................................................          --     (18,846)      2.13
                                                                                              ----------   ---------
Balance at December 31, 1998................................................................   1,560,228   8,020,926       4.13
                                                                                              ==========   =========
</TABLE>

     The number of outstanding options exercisable into common stock was
2,887,097 at December 31, 1998.  The weighted average exercise price of these
exercisable outstanding options was $2.50.

     The following table summarizes information concerning currently outstanding
options as at December 31, 1998:
<TABLE>
<CAPTION>
                                                                 Options Outstanding               Options Exercisable
                                                       ----------------------------------------  ------------------------
                                                                        Weighted      Weighted                 Weighted
                                                        Number of       Average        Average    Number of     Average
                                                         Options       Remaining      Exercise     Options     Exercise
Range of Exercise Prices                               Outstanding  Contractual Life    Price     Exercisable    Price
------------------------                               -----------  ----------------  ---------   ----------- -----------
<S>                                                    <C>          <C>               <C>        <C>          <C>
$2.13 to $2.50.......................................    6,390,314     8.2 years         $ 2.17    2,801,097       $ 2.16
$6.25................................................      624,512     9.2 years         $ 6.25         ----          N/A
$12.08 to $17.63.....................................      863,600     9.6 years         $14.47       86,000       $13.45
$19.50 to $26.25.....................................      142,500     9.9 years         $20.75         ----          N/A
                                                         ---------                                 ---------
                                                         8,020,926                                 2,887,097
                                                         =========                                 =========
</TABLE>

                                                                              48
<PAGE>
 
Employee Stock Purchase Plan

     The Company's 1998 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in July 1998 and approved by the stockholders
of the Company in August 1998.  The Purchase Plan authorized the issuance of up
to a total of 400,000 shares of common stock to participating employees.

     All employees of the Company, including directors of the Company who are
employees, and all employees of any participating subsidiaries whose customary
employment is more than 20 hours per week and more than five months in any
calendar year are eligible to participate in the Purchase Plan.

     Under the terms of the Purchase Plan, the price per share paid by each
participant on the last day of the Offering Period is an amount equal to 90% of
the fair market value of the Common stock on either the first day or the last
day of the Offering Period, whichever is lower.

     The Purchase Plan terminates on July 21, 2000 or such earlier date as the
Board determines.  Upon termination of the Purchase Plan all amounts in the
accounts of participating employees will be promptly refunded.

Stock based compensation

     The Company applies APB Opinion No. 25 and related interpretations in
accounting for its employee stock-based compensation plans. Accordingly,
compensation expense has been recognized for its stock-based compensation plans
in the year ended December 31, 1998 because the exercise price of some options
granted in that period were determined, for accounting purposes, to be below the
fair value of the underlying stock as of the grant date for such stock options.
In connection with the granting of these options, the Company has recorded
unearned deferred compensation of $784 for the year ended December 31, 1998.
This amount is being amortized over the vesting period of four years from the
date of grant, with $149 amortized into compensation expense as of December 31,
1998. For all other periods disclosed, the exercise price of each option granted
was equal to the fair value of the underlying stock at the date of grant. Had
compensation costs for the Company's Stock Incentive Plan been determined based
on the fair value at the grant date for awards under the Plan, consistent with
the methodology prescribed under SFAS 123, the Company's net income (loss) and
net income (loss) per share would have been as follows, on a pro forma basis.

<TABLE>
<CAPTION>
                                                                                         Year ended December 31,
                                                                                 -------------------------------------
                                                                                      1996         1997        1998
                                                                                   -----------  ----------  -----------
<S>                                                                                <C>          <C>         <C>
Net income (loss), as reported...................................................        $ 387    $   514     $(23,828)
Estimated additional stock based compensation costs under SFAS 123...............           --     (1,535)      (2,687)
                                                                                         -----    -------     --------
Pro forma net income (loss)......................................................        $ 387    $(1,021)    $(26,515)
                                                                                         =====    =======     ========
Basic and diluted net income (loss) per share....................................           --    $ (0.03)    $  (0.75)
                                                                                         =====    =======     ========
</TABLE>

  The fair value of all options granted prior to the Company's initial public
offering on August 17, 1998 were estimated as of the date of grant using the
minimum value model. The fair value of all options granted subsequent to the
Company's initial public offering 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.
<TABLE>
<CAPTION>
                                                                                         Year ended December 31,
                                                                                 ------------------------------------
                                                                                      1996        1997         1998
                                                                                   ----------  -----------  ----------
<S>                                                                                <C>         <C>          <C>
Expected option life, in years...................................................        --             6           6
Risk free interest rate..........................................................        --          6.22%       5.37%
Dividend yield...................................................................        --            --          --
Volatility.......................................................................        --            --         108%
                                                                                         
</TABLE>
                                        
     The weighted average fair value for stock options granted during 1997 and
1998 was $0.66 and $5.47 per option, respectively.

10. RELATED PARTY TRANSACTIONS

     Significant related party transactions with the Company's parent, Nortel,
and affiliated companies, not otherwise disclosed in the financial statements,
include the following.

     The Company paid $3,656 and $273 in the years ended December 31, 1996 and
1997, respectively, for research and development services provided by Bell
Northern Research Ltd. (''BNR''), a subsidiary of Nortel. The

                                                                              49
<PAGE>
 
research and development services and other costs of revenue were purchased at
cost from BNR. Purchases from BNR are settled through the intercompany
accounting system of Nortel.
 
     Revenues include sales to Nortel for the years ended December 31, 1996,
1997, and 1998 of $300, $495, and $1,916, respectively.  Revenues for the years
ended December 31, 1997 and 1998 include sales to Nortel-affiliated companies
totaling $332 and $2,076, respectively.  Sales to Nortel-affiliated companies
were immaterial in 1996.

     During the years ended December 31, 1997 and 1998, the Company reimbursed
Nortel for expenses paid by Nortel on behalf of the Company, net of revenues
collected by Nortel on behalf of the Company. The net expenses reimbursed
amounted to $5,610 and $1,390 for the years ended December 31, 1997 and 1998,
respectively.  These amounts have been recorded in these financial statements at
the carrying amount of the transactions involved.

     Balances due to/from the related party, arising from the sales of product
and receipt of services referred to above, are typically payable net 30 days
from the date of the related intercompany invoice.  At December 31, 1998,
accounts receivable included $1,724 related to Nortel.
 
11. COMMITMENTS AND CONTINGENCIES

Lease commitments

     The Company leases administrative and sales offices and certain property
and equipment under noncancellable operating leases expiring through 2003 with
certain renewal options. Total rent expense under such leases for the years
ended December 31, 1996, 1997, and 1998 were $100, $956, and $3,083,
respectively. At December 31, 1998, the future minimum lease payments under
operating leases were as follows:

<TABLE>
<S>                                                                      <C>
1999...................................................................    3,480
2000...................................................................    3,113
2001...................................................................    2,196
2002...................................................................    1,127
Thereafter.............................................................      262
                                                                         -------
Total future minimum lease payments....................................  $10,178
                                                                         =======
</TABLE>
                                                                                
Legal proceedings

     From time to time, the Company is subject to various legal proceedings and
claims, either asserted or unasserted, which arise in the ordinary course of
business.  On February 19, 1999, a patent infringement suit was filed against
the Company.  The plaintiffs have requested that the Company be enjoined from
further infringement and pay damages for infringement, treble damages for
willful infringement and costs.   It is the Company's belief that the
allegations are without merit and the Company intends to vigorously defend the
lawsuit. While the outcome of these claims cannot be predicted with certainty,
management does not believe that the outcome of such legal matters will have a
material adverse effect on consolidated results of operations or consolidated
financial position.

12. EMPLOYEE SAVINGS PLAN

    The Company has a defined contribution retirement savings plan covering
substantially all of its full-time employees. This plan qualifies under Section
401(k) of the Internal Revenue Code for participating U.S. based employees. The
Company matches 50% of employee contributions up to 3% of their individual
compensation. Matching cotributions made by the Company totaled $183 and $383
for the years ended December 31, 1997 and 1998, respectively.

13. SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMER INFORMATION

Segment information

     The Company conducts business in one operating segment; namely, the design,
production and sale of software products and related services for encryption and
digital signature.  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
Chief Operating Decision Maker ("CODM"), the President and Chief Executive
Officer, on a geographic basis.  Accordingly, under SFAS 131, the Company has
included a summary of the segment financial information reported to the CODM as
follows in the next section regarding geographic information. The Company's
CODM does not view geographic segment results below net income (loss) before
income taxes and, therefore, the provision for income taxes is not broken out by
geographic segment below.  The accounting policies of the reportable geographic
segments are the same as those described in the summary of significant
accounting policies.

                                                                              50
<PAGE>
 
Geographic information



     Revenues are attributed to specific geographical areas based on where the
sales order originated.  Long-lived assets and total assets of the Company are
those that are identified with operations in the geographic areas.

     The Company operates in three main geographic areas as follows:



<TABLE>
<CAPTION>
 
                                                                        Year Ended December 31,
                                                                       --------------------------
                                                                         1996    1997      1998
                                                                       -------- -------   -------
<S>                                                                    <C>      <C>       <C> 
Revenues
      United States..............................................      $ 9,758  $14,978   $25,861
      Canada.....................................................        2,571    8,669    11,832
      Europe and Asia............................................          473    1,359    11,295
                                                                       ------- --------   -------
           Total revenues........................................      $12,802  $25,006   $48,988
                                                                       ======= ========   =======
Segment operating income (loss):
      United States.............................................       $    (8) $  (720)  $(3,297)
      Canada....................................................           268      356      (167)
      Europe and Asia...........................................             -      234      (862)
                                                                       ------- --------   -------
           Total segment operating income (loss)...............            260     (130)   (4,326)
                                                                       ------- --------   -------

Depreciation and amortization expense:
      United States.............................................            --        1       410
      Canada....................................................           204      356       573
      Europe and Asia...........................................            --        3       278
                                                                       ------- --------   -------
           Total depreciation and amortization..................           204      360     1,261
                                                                       ------- --------   -------
Interest income:
      United States.............................................            --      723     1,807
                                                                       ------- --------   -------   
Acquired in-process research and development:
      United States.............................................            --       --    20,208
                                                                       ------- --------   -------
Net income (loss) before income taxes:
      United States.............................................            (8)       2   (22,108)
      Canada....................................................            64       --      (740)
      Europe and Asia...........................................            --      231    (1,140)
                                                                       -------  -------  --------
           Total net income (loss) before income taxes..........       $    56  $   233  $(23,988)
                                                                       =======  =======  ========


                                                                              December 31,     
                                                                       --------------------------
                                                                         1996    1997      1998
                                                                       -------- -------   -------
Long-lived assets (generally depreciated over three 
  to five years):
      United States.............................................       $    --  $   118  $  4,323
      Canada....................................................         1,145    1,540     3,510
      Europe and Asia...........................................            --       40       775
                                                                       -------  -------  --------
           Total long-lived assets..............................       $ 1,145  $ 1,698  $  8,608
                                                                       =======  =======  ========

Total assets:
      United States.............................................       $ 2,025  $18,637  $ 95,110
      Canada....................................................         1,662    4,689     8,244
      Europe and Asia...........................................            --    1,431     4,475
                                                                       -------  -------  --------

           Total................................................       $ 3,687  $24,757  $107,829
                                                                       =======  =======  ========
</TABLE>
                                                                                

Major customer information

   In 1996, three customers accounted for an aggregate of 64% of revenues for
the year, and individually these customers accounted for 29%, 20% and 15% of
revenues for that year.  In 1997, three customers accounted for an aggregate of
42% of revenues.  One of these customers was the same customer who accounted for
29% of 1996 revenues and this customer accounted for 19% of revenues for 1997.
The other two major customers in 1997 accounted for 12% and 11% of revenues,
respectively.  In 1998, no individual customer accounted for 10% or more of
revenues.

                                                                              51
<PAGE>
 
                                 Exhibit Index
                                 -------------


<TABLE>
<CAPTION>
                                                                                              
                                                                                              
   Exhibit                                                                                    
   Number                                    Description                              Form     Number
   ------                                    -----------                              ----     ------
<S>            <C>                                                                    <C>      <C> 
                                                                                              
     2.1*      Asset Transfer Agreement, dated as of December 31, 1996, between the           
               Registrant and Northern Telecom Inc                                     S-1       2.1   
     2.2*      Asset Transfer Agreement, dated as of December 31, 1996, between               
               Entrust Technologies Limited and Northern Telecom Limited               S-1       2.2
     2.3*      Share Purchase Agreement, dated as of May 30, 1998, as amended,                
                                                                                              
               between the Registrant and Rainer A. Rueppel                            S-1       2.3
     2.4*      Share Purchase Agreement, dated as of May 30, 1998, as amended,                
               between the Registrant and Invision AG                                  S-1       2.4  
     2.5*      Form of Share Purchase Agreement between the Registrant and the                
               minority stockholders of r/3/ Security Engineering AG                   S-1       2.5
     3.1*      Amended and Restated Articles of Incorporation of the Registrant        S-1       3.2
     3.2*      Amended and Restated Bylaws of the Registrant                           S-1       3.4
     4.1*      Specimen certificate for shares of Common Stock                         S-1       4.1
    10.1*      Amended and Restated Registration Rights Agreement, dated as of July           
               30, 1998, by and among the Registrant and certain stockholders          S-1      10.3  
    10.2*      Strategic Alliance Agreement, dated as of December 31, 1996, between           
               the Registrant and Northern Telecom Limited                             S-1      10.5
    10.3*      Services Agreement, dated as of December 31, 1996, between the                 
               Registrant and Northern Telecom Limited                                 S-1      10.6
    10.4*      Support Agreement, dated as of December 31, 1996, between the                  
               Registrant and Entrust Technologies Limited                             S-1      10.7
    10.5*      Share Exchange Agreement, dated as of December 31, 1996, among the             
               Registrant, Entrust Technologies Limited and Northern Telecom Limited   S-1      10.8
    10.6*#     Letter Agreement, dated as of April 21, 1997, between the Registrant           
               and John A. Ryan                                                        S-1      10.9
    10.7*#     Letter Agreement, dated as of November 18, 1996, between Northern              
               Telecom Limited, on behalf of the Registrant, and Brian O'Higgins       S-1      10.10
    10.8*#     Letter Agreement, dated as of November 18, 1996, between Northern              
               Telecom Limited, on behalf of the Registrant, and Bradley N. Ross       S-1      10.11
    10.9*#     Letter Agreement, dated as of June 4, 1997, between the Registrant and         
               Richard D. Spurr                                                        S-1      10.12
   10.10*#     Letter Agreement, dated as of November 14, 1997, between the                   
               Registrant and Hansen Downer                                            S-1      10.13
   10.11*#     Amended and Restated 1996 Stock Incentive Plan                          S-1      10.14
   10.12*      Standard Office Building Lease Agreement, dated as of July 11, 1997,           
               between G&F International, Inc. and the Registrant.                     S-1      10.15
   10.13*      Lease Agreement, dated as of January 28, 1998, between Colonnade               
               Development Incorporated and Entrust Technologies Limited               S-1      10.16
   10.14*#     1998 Employee Stock Purchase Plan                                       S-1      10.17
   10.15*#     Letter Agreement, dated as of July 2, 1998, between the Registrant and         
               Michele L. Axelson                                                      S-1      10.18
   10.16       Standard Office Building Lease Agreement, dated as of January 19,1999,
               between HMS Office L.P. and the Registrant                              Enclosed herewith
   21          Subsidiaries of the Registrant                                          Enclosed herewith
   23.1        Consent of Deloitte & Touche LLP                                        Enclosed herewith  
   27          Financial Data Schedule (in EDGAR version only)                         Enclosed herewith
</TABLE>


*  Incorporated herein by reference to the Registrant's Registration Statement
on Form S-1 (File No. 333-57275).
#  Management contract or compensatory plan or arrangement filed in response to
 Item 14(a)(3) of the instructions to Form 10-K.

                                                                              52