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                                 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, 2001

                                      OR

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

                       COMMISSION FILE NUMBER 000-24733

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

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

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

                          ONE HANOVER PARK, SUITE 800
                             16633 DALLAS PARKWAY
                               ADDISON, TX 75001
              (Address of principal executive offices & zip code)
      Registrant's telephone number, including area code: (972) 713-5800

    Securities registered pursuant to Section 12(b)
     the Act:                                      None
    Securities registered pursuant to Section 12(g)
     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.  [_]

   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
18, 2002, as reported on the Nasdaq National Market, was approximately
$262,000,000 (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 18, 2002 was 64,904,084.

                      DOCUMENTS INCORPORATED BY REFERENCE

   Portions of the definitive Proxy Statement to be delivered in connection
with the Annual Meeting of Stockholders to be held May 3, 2002 are incorporated
by reference into Part III of this Form 10-K.

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                                 ENTRUST, INC.

                               TABLE OF CONTENTS

<TABLE>
<C>         <S>                                                                        <C>
PART I.
                                                                                       Page
                                                                                       ----
Item 1.     Business..................................................................   3
Item 2.     Properties................................................................  24
Item 3.     Legal Proceedings.........................................................  25
Item 4.     Submission of Matters to a Vote of Security Holders.......................  25
            Executive Officers and Directors of the Registrant........................  26

PART II.
                                                                                       Page
                                                                                       ----
Item 5.     Market for Registrant's Common Stock and Related Stockholder Matters......  29
Item 6.     Selected Financial Data...................................................  30
Item 7.     Management's Discussion and Analysis of Financial Condition and Results
            of Operations.............................................................  31
Item 7A.    Quantitative and Qualitative Disclosures About Market Risk................  55
Item 8.     Financial Statements and Supplementary Data...............................  56
Item 9.     Changes in and Disagreements with Accountants on Accounting and Financial
            Disclosure................................................................  56

PART III.
                                                                                       Page
                                                                                       ----
Item 10.    Directors and Executive Officers of the Registrant........................  57
Item 11.    Executive Compensation....................................................  57
Item 12.    Security Ownership of Certain Beneficial Owners and Management............  57
Item 13.    Certain Relationships and Related Transactions............................  57

PART IV.
                                                                                       Page
                                                                                       ----
Item 14.    Exhibits, Financial Statements and Reports on Form 8-K....................  58

SIGNATURES............................................................................  59

CONSOLIDATED FINANCIAL STATEMENTS
                                                                                       Page
                                                                                       ----
Independent Auditors' Report..........................................................  60
Consolidated Balance Sheets as of December 31, 2000 and 2001..........................  61
Consolidated Statements of Operations for the years ended December 31, 1999, 2000 and
  2001................................................................................  62
Consolidated Statements of Shareholders' Equity and Comprehensive Income for the years
  ended December 31, 1999, 2000 and 2001..............................................  63
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 2000 and
  2001................................................................................  64
Notes to Consolidated Financial Statements............................................  65
</TABLE>

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   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 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 Entrust's expectations,
beliefs, intentions or strategies regarding the future. All forward-looking
statements included in this report are based on information available to
Entrust up to and including the date of this document, and Entrust expressly
disclaims any obligation to update or alter its forward-looking statements,
whether as a result of new information, future events or otherwise. Entrust's
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--Quarterly Results of Operations," "--Certain Factors
That May Affect Our Business" and elsewhere in this report. Readers should also
carefully review the risks outlined in other documents that Entrust files from
time to time with the Securities and Exchange Commission, including the
Quarterly Reports on Form 10-Q that Entrust files in 2002.

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

                                    PART I

ITEM 1.  BUSINESS

   Entrust, Inc. is a leading global provider of enhanced Internet security
solutions and services that make it safer to do business and complete
transactions over the wired and wireless Internet. Entrust has a broad set of
products that provide identification, entitlements, verification, privacy and
security management capabilities. Major government agencies, financial
institutions and global 1000 enterprises in more than 40 countries use the
privacy and security provided by Entrust's portfolio of award-winning security
technologies.

   Entrust's market leadership and expertise in delivering enhanced Internet
security solutions are demonstrated by the number of prestigious awards and
rankings it received in 2001 from leading security publications and
organizations:

  .   For the third time in five years, Network Magazine named the Entrust
      Authority certification authority "Product of the Year" in the
      Authentication and Access Control category.

  .   For the second year in a row, the Entrust GetAccess secure Web portal was
      presented with the OSA CrossRoads A-List award as the most comprehensive
      information security product for personalization and access management of
      global e-business portals.

  .   The Entrust Authority certification authority was awarded Network
      Computing's "Well Connected" Award as the best public-key infrastructure
      (PKI).

  .   The Entrust GetAccess secure Web portal was awarded the 2001 MIPS
      Technologies Best M-Commerce Implementation.

  .   In an October 11, 2001 Gartner report on the global security software
      market, which includes the encryption, anti-virus solutions, intrusion
      detection and firewall sectors, Entrust was ranked as the largest
      provider of encryption technology--across all operating systems--in the
      United States and Canada, and No. 2 worldwide. In the area of public-key
      infrastructure, or PKI, a type of technology used for enhanced Internet
      security, Entrust ranked No. 1 worldwide.

  .   In an October 2001 report, IDC ranked the Entrust GetAccess secure Web
      portal as No. 2 in Worldwide Web Single Sign-On Software revenue.

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   Entrust has more than 1,500 customers, including NASA, over 25 United States
Federal government agencies, Capital One Bank, Lloyds TSB, the U.S. Coast
Guard, the Royal Mail, the U.S. Postal Service, the Royal Canadian Mounted
Police and the Government of Canada and has provided security solutions to many
enterprises in the key verticals of government, financial services and Global
1000 companies.

Industry Background

   In the 2001 Computer Security Institute and Federal Bureau of Investigation
Computer Crime and Security Survey, 91 percent of respondents (primarily large
corporations and government agencies) reported detecting security breaches in
the previous 12 months. Carnegie Mellon noted that there were 52,658 security
incident reports in 2001, a 142% increase over the 21,756 reported in 2000.

   The tragic events of September 11, 2001, have changed the way the world
views security. The threat of cyber-terrorism has found its way onto world
agendas, and cyber-criminals are becoming ever more sophisticated. Hackers are
potentially capable of penetrating firewalls or launching swift, devastating
attacks against communication systems, financial institutions and power grids.
The public and private sectors frequently experience the consequences of
inadequate Internet security. In today's world, "basic" Internet security - pin
and password identification over Secure Sockets Layer, or SSL, which protects
information from Web browser to Web server - is not sufficient to protect
high-value and high-sensitivity information. Enhanced Internet security is now
a critical requirement if businesses are to protect brand equity, and
businesses and governments are to protect trust and financial assets, and
Entrust believes end-to-end enhanced Internet security is the next critical
phase in the Internet's evolution.

   Governments and businesses have become increasingly dependent on the
Internet as a foundation for communication, collaboration and commerce.
Enhanced Internet security is fundamental to preventing and countering threats
of cyber-terrorism, and business and government leaders are making
implementation of such cyber-defenses a top priority. By delivering enhanced
Internet security solutions built on identification, entitlements,
verification, privacy and security management capabilities, Entrust can help
customers in key market sectors, including government, financial services and
global 1000 enterprises, conduct high-value, highly sensitive transactions over
the wired and wireless Internet.

   Entrust pioneered enhanced Internet security solutions based on PKI
technology that makes it safer and more secure to do business over the
Internet. Entrust is a leading innovator in the Internet security field. With
over 90 patents and pending patent applications, Entrust is also an author,
visionary and driver on more than 30 industry standards boards and forums. In
addition, Entrust was the first security mover to recognize the value of
combining authorization technology with PKI, creating the Entrust Secure Web
Portal, and extending this value to XML, wireless devices and other innovations.

   Industry Issues

   "According to Gartner, by 2004, 80 percent of enterprises will be using the
Internet as an integral part of their business processes. Half will experience
a financially significant loss due to Internet-borne incidents by that time."
Source: June 2001 Press Release--In the report, Gartner also reported that
businesses and governments will spend at least ten times more on information
security by 2011.

   The very openness and accessibility that have stimulated the adoption and
growth of private networks, the Internet and the Web, also threaten the privacy
of individuals, the confidentiality of business information and the integrity
of transactions. Key concerns include risk of theft, alteration,

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interception and dissemination of confidential data, as well as fraud, loss of
reputation and economic loss. Threats to information security arise from
external sources such as competitors and computer hackers, as well as internal
sources, such as curious or disgruntled employees and contractors. These risks,
which can inhibit customer confidence in Internet-based services, are driving
the demand for enhanced and comprehensive network and information-security
solutions.

   Businesses and governments are expanding their online presence in order to
reduce costs and increase customer loyalty and market share. Organizations are
creating extranets for vendors, suppliers and preferred customers, setting up
virtual private networks to tie offices together, and providing remote access
to networks for employees and business partners. Sales, service and membership
organizations are striving to increase customer loyalty by personalizing online
service and improving customer-relationship management. These trends are
driving the need for enhanced Internet security as worldwide levels of access
and numbers of highly sensitive transactions proliferate. As businesses and
governments move high-value transactions and sensitive, mission-critical data
online, organizations will need to be able to identify with whom they are doing
business. Being able to make such identifications with confidence will become
crucial to the success of online applications.

   A new era of enhanced security is upon us. Governments and businesses are
moving beyond a reliance on basic security for crucial infrastructure and
transactions to deployment and management of enhanced Internet security tools
that protect electronic information.

Enhanced Internet Security

   "The greatest security threat to businesses over the next twelve months will
not be from viruses, outside hackers penetrating defenses, denial of service,
or inside jobs. It will be the loss of trust and brand equity." Bob Lonadier,
Hurwitz Group, April 2001.

   Confidence in the safety of electronic interactions can be increased
significantly by security solutions that are built on the following foundations:

   Identification:  Enhanced identification allows an individual to know with
greater confidence with whom he or she is dealing in the electronic world.

   Entitlements:  Enhanced entitlements enable an organization to grant
customers, employees and business partners different levels of access to
applications and data.

   Verification:  Enhanced verification helps to provide an auditable record
that helps in binding each party to a transaction and hence helps to reduce the
opportunities for repudiation. Verification can take the form of digital
signatures and digital receipts, both of which are recognized by legislation in
the United States and many European countries.

   Privacy:  Enhanced privacy entails maintaining data confidentiality
throughout the life of a transaction or information exchange, whether it's in
transit or storage, as well as maintaining strict policies governing an
organization's use and disclosure of information.

   Security Management:  Enhanced security management enables organizations to
more effectively and efficiently manage identification, entitlements,
verifications and privacy in ways that reduce the burden on end users and
administrators.

   Scalable applications can be deployed quickly with a high degree of
reliability and availability. Entrust solutions can protect transactions,
applications, content and data - from the end user's browser all the way
through to the Web server and in storage - without compromising performance.

                                      5

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Products, Solutions, Applications and Services

   IDC noted that PKI will become the standard way to perform authentication on
the Internet, October 2001.

   Entrust has developed a portfolio of enhanced Internet security products,
solutions, applications and services that provide identification, entitlements,
verification, privacy and security management.

   Entrust products help to improve efficiency, while mitigating risk,
enhancing customer confidence and helping to deliver electronic services to
millions of people served by governments and businesses around the world.

   Entrust's enhanced Internet security solutions enable the integrity and
confidentiality of documents, e-mail messages and business transactions. With
Entrust solutions, these types of communication are kept more secure and
private while traveling over public networks, and also while stored on personal
computers, Web servers and back-end data application servers. Entrust solutions
can authenticate users via passwords, tokens, biometric devices, smartcards and
digital identities. They enable only individuals with authorized credentials to
access information in protected documents, e-mails, Web pages and business
applications, such as enterprise resource planning, or ERP, customer
relationship management, or CRM, and supply chain management, or SCM. Entrust
solutions can also permit business critical paper processes to be replicated
electronically. Users can digitally sign documents and conduct business online,
and get personalized access to information at a Web portal via wired and
wireless devices.

   Use of Entrust solutions and services by organizations can help in
protecting their brand, increase customer share, convert one-time users into
repeat customers, and increase loyalty of customers, partners and suppliers by
delivering personalized services based on individual preferences. Governments
utilizing Entrust solutions and services can serve millions of citizens and
businesses, and help to achieve greater efficiencies while implementing
national programs by enabling easy access to private and personalized
information and services.

   Products

   "By 2011 businesses and governments will be spending on average at least ten
times more on information security." Source: Gartner "The Price of Information
Security", June 2001.

   Entrust offers a broad portfolio of enhanced Internet security products that
make it safer for governments, financial services companies and global 1000
enterprises to perform transactions over the Web.

   The Entrust Authority Product Portfolio

   The Entrust Authority product portfolio is the backbone of Entrust's
enhanced Internet security offerings. It enables identification, entitlements,
verification and privacy by providing security management to applications in a
consistent, transparent and automated way. Combined with other Entrust and
partner products, the Entrust Authority product portfolio provides a flexible
and interoperable solution that can be used across multiple applications and
various Internet security operations to provide the security required to move
critical applications online, and the automated administration to do so.

   Entrust Authority Security Manager facilitates several functions, while
remaining invisible to the end user, to help meet an organization's enhanced
Internet security requirements, including:

  .   enabling the use of digital signature, digital receipt, encryption and
      permissions-management services across a wide range of applications and
      solutions, allowing strong identification, privacy and verification;

  .   protecting communications in a verifiable manner by securely storing the
      certification authority private key;

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  .   providing enhanced security management with the ability to issue
      identities for both users and devices;

  .   publishing user certificate revocation lists and offering end-to-end
      digital ID management;

  .   offering flexibility, interoperability and choice by accommodating users
      who log on from different workstations, or use various methods of
      identification, such as smartcards or biometric devices; and

  .   providing a scalable solution that will accommodate an enterprise's needs
      as it grows.

   Entrust Authority toolkits provide customers and developers with the ability
to apply best-in-class security to almost any business application. These
toolkits provide a common set of services to permit developers to rapidly
deploy applications for business problems without having to spend valuable
development cycles developing these common services.

   The Entrust Authority toolkits use standards-based, application programming
interfaces to make it possible to implement a single enhanced Internet security
architecture across multiple applications and platforms. By minimizing the need
for separate administration modules with every deployed application, these
toolkits help to address administrative duplication and the overhead of
deploying across multiple platforms.

   The Entrust GetAccess Product Portfolio

   The Entrust GetAccess product portfolio provides organizations with the
security, flexibility and performance required to personalize a user's online
experience. As a foundation of the Entrust Secure Web Portal solution, Entrust
GetAccess software provides a critical aspect of online security. It makes it
possible for an organization to more accurately identify the users it is doing
business with through its Web portal and provide personalized access to
information based on this user identity. Entrust GetAccess software allows
multiple online applications to leverage a common infrastructure to manage
identities and entitlements, enabling new applications to be deployed more
securely and quickly. As security requirements for the portal change, the
foundation established by Entrust GetAccess software can be built upon with
solutions from the Entrust TruePass product portfolio to provide other enhanced
security features such as privacy and verification. The key attributes of the
Entrust GetAccess product are as follows:

   More efficient identification management

   Entrust GetAccess software provides a common infrastructure to administer
user identification information for various Web resources. Aside from allowing
an organization to perform functions more effectively, this solution can reduce
the operational and security risks associated with updating multiple access
control mechanisms to reflect change (i.e., employees changing jobs,
partnerships dissolving, customers upgrading a service).

   Centralization of user entitlement functions

   By centralizing all user entitlement functions based on the user identity,
role and the resource or application being accessed, Entrust GetAccess software
makes it easier for users to navigate to pertinent, targeted information
through a personalized menu.

   Performance without sacrificing security

   Unlike other vendors' products, Entrust GetAccess software does not cache
user information on the Web server in order to improve performance. It has been
regularly proven that Web servers are not

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safe places to keep sensitive information. Entrust GetAccess software continues
to provide competitive performance while maintaining a higher level of security
when compared to other vendor solutions by not caching user information on the
Web server.

   Single sign-on across applications and Web servers

   Entrust GetAccess software provides single sign-on across applications and
across domains allowing integration with an organization's Web partners and
affiliates with a reduced amount of effort. This flexible integration is
supported across both wired and wireless devices, including wireless access
protocol, or WAP, personal digital assistants, or PDAs, and more.

   Proven large-scale deployments

   Scalable and easy to administer, Entrust GetAccess software can support
millions of pages, dozens of applications, hundreds of Web servers, and
millions of users. Services can be distributed across multiple servers to
improve response times and provide continuous availability for customers around
the globe. Entrust GetAccess software is deployed to over a million users at
several client sites to power robust Web portals and used by hundreds more for
their intranet and extranet applications.

   Seamless integration with Entrust TruePass Products

   Entrust GetAccess software works seamlessly with the award-winning Entrust
TruePass product portfolio. This integration extends the capabilities of
Entrust GetAccess software to enable digital IDs for enhanced identification
and digital signatures for transaction verification.

   Entrust TruePass Product Portfolio

   The Entrust TruePass product portfolio gives organizations the peace of mind
to migrate critical applications onto the Internet. It provides the security to
move higher-value transactions and highly sensitive information online with
greater confidence. Organizations can conduct valuable and sensitive online
transactions more securely with customers, citizens, suppliers, partners and
employees using Entrust TruePass software to provide strong identification,
verification of transactions and end-to-end data privacy. The U.S. National
Institute of Standards and Technology and Canada's Communications Security
Establishment have awarded Entrust TruePass software the Federal Information
Processing Standards 140-1 validation. Entrust TruePass software is the first
and only Java application to gain this level of security validation from both
agencies.

   Entrust TruePass software provides many key features and benefits including:

  .   Verification of transactions:  Digital signatures can provide a permanent
      audit trail or verifiable record of transactions.

  .   Strong user identification:  Organizations can identify users with more
      accuracy using digital IDs. Challenge and response questions on personal
      information and mobile phones can all be used to add additional layers of
      identification and authentication security.

  .   Protection of privacy:  Data travels encrypted from the Web browser
      beyond Web servers to a safe back-end location where it is decrypted only
      when needed by authorized users.

  .   Easier to use and easier to roam:  Privacy and security features are
      transparent to Web site visitors and, unlike other security solutions, a
      company's customers, suppliers and partners are able to access secured
      Web-based services from multiple computers, anywhere, without losing the
      ability to digitally sign transactions.

  .   Easier to deploy:  Software is not installed on users' desktops and all
      security features and upgrades are centrally managed at the Web site.
      Netscape and Microsoft browsers are

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      supported on both the Microsoft(R) Windows(TM), Apple(R) Macintosh(TM)
      and Citrix operating systems, allowing organizations to reach a large
      audience. In addition, it is possible to use only those capabilities
      needed to meet current business requirements and add additional features
      as needs change and grow.

  .   Seamless integration with Entrust GetAccess Products:  Seamless
      integration with Entrust GetAccess software extends identification and
      entitlement capabilities to include certificate-based identification.

   Entrust Entelligence Product Portfolio

   The Entrust Entelligence product portfolio provides an end-to-end,
integrated solution that adds enhanced security to existing internal
applications, such as e-mail, file/folder encryption and Virtual Private
Networks, or VPNs. By integrating seamlessly into the desktop, Entrust
Entelligence delivers a single security layer that includes a wide range of
enterprise enhanced Internet security capabilities, including identification,
privacy, verification and security management. Entrust Entelligence software
makes it possible to add security to communications and applications to allow
critical business processes to be moved to the Internet with greater
confidence. It can be combined with Entrust-Ready products from third-party
vendors to provide enhanced security for multiple enterprise applications
including Enterprise Resource Planning, document management and legacy
applications.

   Entrust Entelligence products enable:

  .   rapid communication by enabling enhanced identification, verification and
      privacy in e-mail communications;

  .   increased security of sensitive and high-value information for files and
      folders;

  .   the ability to conduct higher value and higher sensitivity transactions
      on the Intranet with greater confidence through secured Web
      communications;

  .   more rapid and easier deployment through interoperability with multiple
      applications and devices, including tight integration and
      interoperability with Microsoft capabilities;

  .   simplicity and ease of use through single sign-on capabilities;

  .   strong identification and verification in a transaction or communication
      through encryption and digital signature capabilities; and

  .   enhanced security management through Entrust Authority Security Manager.

   Solutions and Applications

   IDC estimates the market for authentication, authorization and
administration solutions will grow to $9.4 billion by 2005, August 2001.

   Entrust's enhanced Internet security solutions can provide an integrated,
open and scalable security framework that can help to address government and
business security needs across multiple platforms and applications. Entrust's
solutions, with such robust features as multi-application certificates support,
are well suited for high-value e-business applications.

   Today, Entrust offers a broad portfolio of enhanced Internet security
solutions for Enterprise Desktops, Secure Web Portals and Virtual Private
Networks.

   Enterprise Desktop Solutions

   According to Federal Computer Week Online (July 20, 2001), hundreds of FBI
laptop computers, including at least one containing classified information,
have been stolen or lost. The U.S. Justice

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Department also acknowledged on July 17, 2001, that hundreds of its laptop
computers were lost, missing or stolen.

   Today, many enterprises communicate electronically through e-mail, and use
intranet/extranet Web access to help streamline management of information and
knowledge in an increasingly dispersed business world. Organizations are also
automating business processes. Applications such as ERP, SCM, CRM, workflow and
e-forms have been migrated online to improve productivity and reduce paper
costs and overheads. However, most organizations use only basic security
solutions, such as a single password, to secure these applications--a level of
security that is inadequate for sensitive business requirements.

   Enterprise Desktop solutions deliver enhanced security to new and existing
applications, helping an enterprise to protect itself, its employees, its
partners and the information that passes within its virtual walls.

   Key business applications of Enterprise Desktop solutions include:

   E-mail:  E-mail is fast and convenient, but is not without inherent risks.
Additionally, e-mail does not offer the same assurances as conventional
communications--such as handwritten signatures and delivery guarantees.
Enterprise Desktop solutions:

  .   turn popular e-mail software programs into more secure reliable
      communications vehicles;

  .   deliver enhanced security that provides encryption and digital signature
      technology;

  .   allow users to identify senders and receivers of e-mail communications
      with greater confidence; and

  .   verify message contents and keep them more private and confidential.

   File:  Desktop computers and laptops are frequently used to write,
negotiate, sell, plan and strategize about an organization's entire future.
Without enhanced security, highly sensitive information can be accessed by
unauthorized people. With the convenient portability of laptops this
information can be easily stolen or lost.

   Enterprise Desktop's file encryption and digital signature technology turns
hard-drives and networks into more secure-information storage mediums and
allows:

  .   information to be stored in an encrypted fashion until it is needed;

  .   documents to be encrypted so that only individuals with authorized
      credentials may view their contents;

  .   documents to be digitally signed online, which is now recognized in
      legislation in many jurisdictions;

  .   documents of a secure nature to be deleted so that all temporary copies
      will also be eliminated; and

  .   certain specified documents or folders to be automatically encrypted.

   Web:  Many organizations are opting to implement intranets that offer
employee self-access to information and resources. However, organizations must
be certain that all information--especially classified or highly sensitive
information--remains strictly confidential. The specialized encryption and
digital signature technology of the Enterprise Web Desktop solution allows:

  .   authentication of individuals logging into Web applications;

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  .   information on a corporate intranet--and data that are transmitted
      through a Web service--to be kept private, even when the information is
      not in use;

  .   entitlements to be used to dictate different levels of authorized access
      to different employees; and

  .   verification of transactions made over the Web so that processes
      requiring signatures can be performed online.

   Business Process:  To work efficiently, business-process applications must
be protected to provide for security of the information. The Enterprise
Business Process solution:

  .   allows organizations to add security to many common strategic
      applications; and

  .   integrates many third-party solutions using the Entrust Authority
      toolkits.

   Secure E-Forms:  Government and enterprises at all levels are working to
reduce paperwork and increase efficiency, and often law mandates these
initiatives. For example, the Government Paperwork Elimination Act requires
significant paperwork reduction by US federal agencies by 2003. Driving much of
the paperwork of governments and enterprises is the use of paper-based forms to
collect and process data. The cost of processing these forms manually is huge,
from printing paper forms to keying completed forms into a database.
Additionally, errors caused by incomplete or incorrect data and transcription
mistakes can result in further incremental costs and frustrating delays.

   Collecting and processing this information electronically through secure
e-forms can significantly reduce costs, which is why e-forms are being used at
all levels of government and enterprises as a method of reducing paperwork,
lowering costs and increasing efficiency. Elimination of dual data entry, rules
to enforce accurate completion and reduced printing costs combine to make
e-forms a viable, cost-effective solution to managing a wide variety of
processes.

The Secure E-Forms solution:

  .   moves paper-based processes to the Internet, increasing speed and cost
      effectiveness;

  .   offers a binding record with digital signatures including multiple levels;

  .   allows control of access to the content of the form; and

  .   allows for easy integration with top e-forms providers like Adobe,
      Accelio and Shana.

   Secure Web Portal Solution

   Web-based corporate banking is emerging as an increasingly high-profile
sector in financial services. Celent Communications predicts that by 2005, more
than 40 percent of leading U.S. banks will offer Internet portals with single
sign-on to their business customers, February 2001.

   To capitalize on the growing e-business market, organizations need a
strategy that retains existing customers, builds new customer relationships and
increases market share and revenue. Businesses want to present a single online
face to their customers, but often end up operating separate Web sites, such as
online banking and brokerage sites. This requires customers to remember and use
multiple user names and passwords.

   By moving transactions and information sharing to a single online source,
Web portals can increase customer convenience and potentially drive higher
volumes of transactions. Web portals must be able to provide personalized and
secured access to content, applications and data, as well as integrate the
organization's online applications into a single access point.

                                      11

<PAGE>

   The Entrust Secure Web Portal solution delivers a broad set of capabilities
that help to secure the content, applications and services an organization
provides via its Web portal.

   To create a personalized online experience, an organization must identify
the user with whom it is dealing, and understand and act according to that
user's assigned role and authority. The Entrust Secure Web Portal solution
automatically manages this information, allowing only authorized users access
to the information to which they are entitled. These capabilities can also lead
to strengthened online relationships making Web portals a strategic hub for
online business processes. Integrating different applications into a portal
requires different levels and methods of security. For applications that
involve high financial values or sensitive information, creating a permanent
and auditable record of the transaction is crucial, as is protecting the
privacy of the data.

   Key business benefits of Entrust's Secure Web Portal solution include:

  .   a reduction in cost and speed of deployment of online applications;

  .   increased opportunities with new online applications;

  .   protection of information both in transit and storage;

  .   an ability to add security while maintaining performance; and

  .   an enhanced online experience for customers.

   VPN Solutions

   "IDC believes that no VPN should be deployed without using a PKI for key
management." Source: IDC, December 2000.

   In today's global business environment, it is unusual for workers to be
located in a single office. In addition, traditional enterprises of the past
have been replaced by virtual enterprises in which mission-critical information
is shared among employees, customers, partners and suppliers. All of these
geographically dispersed knowledge workers need access to key assets, such as
human resources, accounting, production and forecasting systems, as well as
databases and shared workgroup documents.

   VPNs establish an encrypted tunnel through which users and devices can
exchange information. This is a high-speed, cost-effective method for
organizations to take advantage of the Internet and reduce communication costs.
VPNs, however, are only as secure as the method used to identify the users or
devices at each end of the communication. Out-of-the-box VPN products offer a
user name/password combination or shared-secret method of authenticating the
participants in a secure channel. This exposes organizations to unnecessary
risk.

   Passwords and shared secrets are widely recognized as being insufficient to
secure sensitive information for a variety of reasons, including:

  .   passwords are stored on local and network devices, and are often easy to
      find;

  .   the practice of using the same password/shared secret across multiple
      devices to simplify management increases the likelihood of compromise and
      the scope of risk;

  .   many user name/password implementations send passwords over the Internet
      without encryption;

  .   hackers can easily masquerade as legitimate users from any location; and

                                      12

<PAGE>

  .   password-hacking tools are readily available, making passwords easy to
      crack, but not as easy as post-it notes used to affix passwords to
      machines they are intended to protect.

   Entrust VPN solutions bring enhanced security to business communications and
transactions conducted across a distributed organization of remote employees,
as well as among partners, suppliers and customers. Incorporating the enhanced
Internet security capabilities of two Entrust product portfolios, Entrust
Entelligence and Entrust Authority, gives users confidence in the integrity and
privacy of their e-business interactions.

   Entrust VPN solutions provide the following enhanced Internet security
features:

  .   Authentication to provide privacy of interactions and for authorized
      access to high-value applications and transactions.

  .   Encryption to protect the confidentiality of information.

  .   Remote User Support to allow secured access to network resources.

  .   Remote Office Support to allow secured, permanent network connectivity.

  .   Digital Signature to indicate if tampering has occurred and to provide
      evidence to support the contention that a transaction is binding in the
      event of a dispute.

   Entrust VPN solutions create more secure ways to reach out to customers,
partners and vendors. This enables stronger relationships and more effective
business processes, providing an effective means of connecting remote
employees, customers, partners and suppliers to internal networks.

   Services

   Certificate Services

   In an April, 2001 IDC report, large companies rated security and privacy as
their two most important concerns, with 93 percent of CIOs rating security as
very important and 82 percent rating privacy as very important.

   Entrust certificate services provide publicly rooted digital certificates
for Web and WAP servers that enable a basic level of security on the Internet.
As a basis for more comprehensive secured Web portal initiatives, these
certificates provide information about the authenticity of Web sites and
provide a basic level of security for online transactions.

   Entrust Certificates encompass three types of security services:

   Web-server certificates provide identification and enable SSL encryption
between Web browsers and servers. Web Server Certificates from Entrust are
unique in the market as they are enabled for automatic review of the
Certificate Revocation List, or auto CRL, and thus can provide users with a
higher level of confidence about the legitimacy of a website.

   WAP-server certificates provide Web site identification and enable wireless
transport layer security, or WTLS, encryptors between mobile devices,
micro-browsers and servers that support the WTLS protocol.

   Certificate administrator service reduces acquisition costs by enabling
quantities of certificates to be pooled and expiration dates aligned as
e-business programs expand across an organization and multiple, distributed
SSL-enabled servers become a requirement.

                                      13

<PAGE>

   Services

   "Gartner forecasts that worldwide business-to-business (B2B) sales
transactions through the Internet will rise from $920 billion in 2001 to $8.5
trillion in 2005." Source: Gartner "Security Concerns Bring Regulation to the
Service Industry", November 2001.

   The Entrust Professional Services Team has demonstrated its experience by
delivering innovative solutions. Many of the Internet security industry's most
highly skilled and experienced engineers, cryptographers and cryptologists are
on the Entrust team. These experts have helped the world's governments and
leading companies address complex security issues. In the process, they have
established an outstanding reputation for helping clients convert demanding
challenges into exciting opportunities.

   Entrust's services include:

   Entrust Managed Security Services

   As part of its long-term commitment to provide customers with choice and
flexibility at every stage of deployment, Entrust has established relationships
with expert managed-service providers, including PwC beTRUSTed and EDS. Managed
security services offer a high level of security for e-commerce and information
transfer within a networked environment combining Entrust's expertise in
enhanced Internet security with consulting and integration from some of the
world's largest professional services organizations.

   Internet Security Consulting Services

   Entrust Internet security consulting services empower customers with
knowledge by identifying Internet security business drivers related to
organizations' needs, requirements and priorities. This knowledge is used to
prepare security-requirement analyses and security-policy documents, develop
business cases and help speed time-to-market.

   Deployment Services

   Entrust deployment services provide planning and implementation expertise to
assist in the installation and deployment of Entrust enhanced Internet security
solutions. For organizations seeking a proven solution aligned with business
objectives, Entrust deployment services provide end-to-end project management
and execution.

   Systems Integration Services

   To maximize the impact of an Entrust enhanced Internet security solution,
customers can leverage the expertise of Entrust's systems integration team.
Common areas of integration include customization of user registration and
identification systems, incorporation of entitlements with third-party and
legacy applications, improvement of existing legacy and third-party application
security, and provision of enhanced user and security management.

   With a broad range of expertise and proven experience on multiple platforms,
applications and environments, the Entrust system integration team delivers
tangible solutions to integrating and customizing challenges. The team also
provides for clear alignment with business requirements while driving project
success.

                                      14

<PAGE>

   Training

   More than 2,800 people completed Entrust training in 2001. Based on
Entrust's products and solutions, the courses and certifications provide
Internet security knowledge and training in deploying, operating,
administering, extending, customizing and supporting Entrust Internet Security
Solutions.

   As enhanced Internet security enables the Internet evolution, companies are
looking for a way to validate the knowledge and skills of their security
operations staff. Accordingly, Entrust introduced the Entrust-Certified
Registration Authority (RA) Specialist designation. The designation helps
provide individuals with the training and skills to manage the day-to-day
operations of an Entrust PKI. Because of the sensitive nature of Internet
security-related services, Entrust-Certified RA Specialists are not only tested
on their ability to administer a PKI, but also on their ability to understand
the implications associated with their actions.

   Entrust also introduced the Certified Consultant designation. An
Entrust-Certified Consultant is taught the training and skills to recommend
appropriate Entrust Internet security solutions to satisfy customer needs. In
addition, it is intended that an Entrust-Certified Consultant should be able to
participate in the creation, maintenance and interpretation of security
policies and procedures, and play a primary role in the deployment of
large-scale Internet security projects.

   An Entrust-Certified Consultant is taught about deployment issues as well as
the purpose and structure of Certificate Policies, Certification Practice
Statements, PKI Disclosure Statements, and security project deliverables. Prior
to pursuing the Entrust-Certified Consultant designation, individuals must have
knowledge and practical experience in the field of project management, as well
as a solid understanding of general network security issues.

   Entrust Cygnacom

   Entrust CygnaCom is a wholly owned subsidiary of Entrust and has been
providing professional computer security services and cryptographic solutions
to governments and businesses since 1994. With a staff of highly qualified
engineers, Entrust CygnaCom offers clients a broad package of customized
solutions to support information security strategy and securing of
transactions. Entrust CygnaCom has performed professional services for a wide
range of clients, including the U.S. government and various enterprises in the
healthcare and banking industries. Its McLean, Virginia location provides
Entrust with a large professional services organization to meet the growing
needs of the U.S. federal government. Entrust Cygnacom's facilities were among
the first to be accredited by the U.S. Department of Commerce, the National
Institute of Standards and Technology, and the National Voluntary Laboratory
Accreditation Program for information technology security testing against the
federal cryptographic criteria (Common Criteria (ISO/IEC 15408)).

Strategy

   Last year was a rebuilding year for Entrust. Major restructuring in the
second quarter included realignment of core products, regions and vertical
markets. This strategy centralized resources around government, financial
services and global 1000 verticals in 20 key countries. Entrust also refocused
its primary efforts towards the provision of software solutions, opting to
provide products on an outsourced services basis through key third-party
providers that specialized in this area.

                                      15

<PAGE>

   Entrust's priority in 2002 is a return to profitability. To help achieve
this goal, Entrust plans to drive revenue growth, optimize company structure,
maintain control of expenses and cash, and remain focused on customers and
potential customers. Key initiatives continue to be:

  .   Keen geographic focus--Focusing on 20 countries and leveraging partners
      in non-core geographies;

  .   Focus on early adopter Vertical Markets--Providing solutions and sales
      and marketing programs targeted at the government, financial services and
      global 1000 enterprises;

  .   Strong go-to-market partners--Developing strategic relationships with key
      channels to market such as system integrators and system consultants,
      global and regional distributors and original equipment manufacturer, or
      OEM, opportunities with other technology manufacturers;

  .   Increased use of marketing programs--Raising the awareness of Entrust and
      the need for enhanced Internet security capabilities; and

  .   New and innovative solutions--Continuing to build on Entrust's leadership
      position in providing enhanced Internet security products and solutions.

   Geographic Focus

   Entrust is focused on selling its solutions in North America, Europe and
Japan. These core geographies have demonstrated the most potential for early
adoption of Entrust solutions.

   Entrust supplements other non-core geographies through strategic partner
relationships, which increase the leverage of its direct sales channel in the
core regions.

   In North America, Entrust is focused on a return to revenue growth in its
software business after a year that was severely impacted by the downturn in
the United States economy. The sales force is well positioned for success with
the addition of new leadership, ongoing training programs, an increase in
integrated marketing programs and the launch of Entrust Secure Web Portal
Solution.

   Europe is a domain Entrust will continue to prioritize. The region provided
strong growth in the third and fourth quarters of 2001, with customer wins and
extensions in the government, financial and wireless markets. Entrust believes
this growth will continue in 2002, with increased momentum from governments and
enterprises as they add enhanced Internet security to existing network
infrastructures.

   Vertical Markets

   Entrust plans to continue to sharpen its approach to key vertical markets,
such as government, financial services and global 1000 enterprises. Entrust
plans to remain focused on its core business and on continued work with
third-party providers to add security to the networks of governments and
enterprises around the globe.

   A crucial early focus for Entrust in 2002 will be the financial services
vertical, where indications signal further opportunities for growth. One key
market indicator is a 2001 report from Evans Data Corp. stating that database
software developers in the banking and financial industries had reported more
security breaches than developers in any other industry polled.

   Entrust plans to continue its focus on governments in 2002. A number of
governments are moving quickly to adopt Entrust solutions for adding security
to internal transactions as well as to government-

                                      16

<PAGE>

to-business and government-to-constituent transactions as they move forward
with their E-Government initiatives. According to a 2001 Accenture study,
Entrust is well positioned in this market space with six of the top eight
leading E-Government countries utilizing Entrust solutions for their enhanced
Internet security needs.

   Go-to-Market Partners

   Entrust plans to continue to improve support to its strategic global
resellers and regional resellers. Both strategic and regional channels
performed well in the fourth quarter of 2001, and Entrust believes there is
continued momentum in 2002. Entrust is committed to extending market reach
through strategic alliances and resellers, and structuring these relationships
so that they are optimally structured to deliver value to customers,
shareholders and employees.

   Key to this strategy will be to extend Entrust leadership and market
coverage through strong relationships with systems integrators, systems
consultants and security services providers. In today's market, there is a
significant and growing need for enhanced security to enable identification,
entitlements, privacy, verification and security management for customer
transactions and communications.

   While security technology markets grow, there will be an increasing demand
and need for services to enable systems to operate effectively and seamlessly.
Entrust is working with channels to bring Entrust solutions to a wider market.
This approach gives the channel the opportunity to benefit from the growing
enhanced security market, while providing customers with premier levels of
service and assistance.

   Entrust channels have shown a desire to deliver enhanced Internet security
practices, products, services and policies. Entrust also works with hardware
and software OEMs to package its enhanced Internet security solutions.

   In December 2001, Entrust announced a strategic alliance with beTRUSTed, the
e-security business of PricewaterhouseCoopers. The Entrust/beTRUSTed alliance
is structured to expand the depth of services offered to both companies'
clients worldwide. beTRUSTed offers a high level of security for e-commerce and
information transfer within a networked environment, combining Entrust's PKI
and certification-authority expertise with consulting and integration from PwC.
The additional focus of the beTRUSTed sales force on reselling the Entrust
enhanced Internet security portfolio expands Entrust's market reach by
providing a secondary sales channel for Entrust products on a global scale.

   Marketing Programs

   Entrust plans to continue to launch marketing programs targeted at
increasing the awareness of both its solution and its leadership position in
providing enhanced Internet security capabilities. A key area of focus for the
programs will be centered on generating sales opportunities in the key vertical
markets of government, financial services and the global 1000 in the core
geographies of North America, Europe and Asia Pacific.

   The November 2001 launch of the Entrust Secure Web Portal solution came as
part of Entrust's commitment to deliver on its promise of enhanced Internet
security through the integration of PKI and access management capabilities. The
Entrust Secure Web Portal solution allows customers the flexibility to install
only those pieces of the solution needed to meet current requirements;
additional enhanced security features can be added easily as requirements
change. Entrust believes it has a strategic advantage in providing this type of
solution to the market. It plans to market the solution heavily to enterprises
and governments as they move more business applications to the Web.

                                      17

<PAGE>

   Also in November, Entrust launched a government blueprint to help enable
governments to conduct Internet-based E-Government and Homeland Security
operations with significantly enhanced Internet security.

   These programs, along with marketing programs focused on the financial
vertical and Web forms, are planned to be implemented during 2002 to help
support the sales effort in Entrust's core geographies.

   New and innovative solutions

   Entrust is entering 2002 in a strong position. Entrust plans to continue to
move aggressively to capitalize on its leadership position and advantage as a
first mover by delivering a broad set of security capabilities and providing
customers with enhanced Internet security to migrate high-value,
high-sensitivity transactions to the Internet with greater confidence.

   In 2002, Entrust plans to launch more innovative, easily deployable enhanced
Internet security solutions. This plan includes feature upgrades to the Entrust
Authority product portfolio, added functionality and capabilities to the
Entrust TruePass family, and continued integration and enhancements to the
Entrust Secure Web Portal solution. Entrust also plans to further improve its
desktop and e-mail enhanced security solutions.

   To encourage widespread adoption of its solutions, Entrust has enhanced the
Entrust-Ready Program with a new Web-based, self-service, partner-driven model.
The new program supports third-party software, hardware and directory vendors
that want to achieve compatibility and interoperability between their
commercially available products and the Entrust-enhanced Internet security
portfolio. Program participants are licensed development tools to assist them
in adding Entrust-enhanced security to their applications and testing tools and
guidelines to check interoperability and compatibility to earn the
Entrust-Ready designation. By adding enhanced security functionality to their
software, hardware or directory products, and achieving the Entrust-Ready
designation, third-party vendors can deliver a more robust product to the
market. These products represent key business solutions that can operate with
Entrust solutions. To date, more than 150 third-party applications have been
granted Entrust-Ready status, including Chrysalis ITS, Oracle, Adobe, Cisco,
Datakey and Sun.

Customers

   Entrust's customers are domestic and foreign government agencies and global
1000 enterprises, including financial, healthcare, telecommunications and large
manufacturing organizations. As of December 31, 2001, Entrust had licensed
software to more than 1,500 customers in 40 countries. These customers in turn
have used the software to deliver secured Internet services to millions of
business and consumer end users.

   In 2001, Entrust received a $17.6 million contract--the largest in its
history--from Bell Nexxia to deliver enhanced Internet security for the
Government of Canada's Secure Channel project. Other major contracts were
signed with:

  .   Vodafone to provide Secure e-Business Services to over 550,000 customers;

  .   Lloyds TSB to offer its 750,000 business customers a convenient secured
      online banking experience using Entrust's enhanced Internet security and
      smartcards;

  .   China Financial Certification Authority, which plans to use Entrust's
      enhanced Internet security to issue 100,000 digital ID's to meet online
      banking demand;

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<PAGE>

  .   Blue Cross Blue Shield of Michigan, which implemented a customized
      privacy and security protection solution to support a broadened
      e-business strategy;

  .   Sprint, which selected Entrust to enhance its online security offerings
      for enterprise customers. Through the contract, Entrust's enhanced
      Internet security solutions will be integrated into Sprint's e/Solutions
      Managed Virtual Private Networks (VPN) and Security Services portfolio;

  .   Perot Systems Corporation to provide its employees with enhanced, secure,
      wireless access to the company's Internet and Web portal global corporate
      network;

  .   KPN, which is deploying the Entrust GetAccess Web Portal Solution to
      provide enhanced Internet security for 400,000 business and residential
      customers; and

  .   The Royal Canadian Mounted Police to provide enhanced authentication,
      verification and privacy for more than 75,000 police officers across
      Canada.

   The following is a representative list of customers that have each accounted
for more than $200,000 in revenues:

<TABLE>
<S>                                     <C>                           <C>
Bank of Bermuda                         Ericsson                      Royal Mail
BCE Emergis                             Experian                      S.W.I.F.T.
BeTRUSTed (PricewaterhouseCoopers)      Government of Ontario         Schlumberger
Blue Cross Blue Shield of Michigan      Government of Canada          Sprint
Bureau of Census                        Lloyds TSB                    State of Illinois
Canadian Dept. of National Defense      MCI Worldcom                  Teledenmark
China Financial Certification Authority NASA                          Telenor
Citibank                                New York Life                 Telia
Columbia/HCA Healthcare Corporation     Nortel Networks               Thomson Consumer Electronics
Credit Suisse                           Perot Systems                 U.S. Coast Guard
CrestCo                                 Personal Path Systems         U.S. Department of Energy
Countrywide                             Pharmacia Upjohn              U.S. Patent and Trademark Office
EDS                                     Royal Canadian Mounted Police U.S. Postal Service
Egg
</TABLE>

Research and Development

   Entrust's research and development efforts are focused on developing new
products, core technologies and improvements to existing enhanced Internet
security solutions, allowing it to maintain and extend its technology and
product leadership position. Entrust spent $16.6 million, $27.6 million and
$30.9 million on research and development in 1999, 2000 and 2001, respectively.
As of December 31, 2001, Entrust had research and development facilities in
Santa Clara, California and Ottawa, Canada and a staff of 213 employees.

   Entrust is committed to aggressive research and development to support
market readiness and competitive advantage. Entrust's research and development
staff has contributed to a number of standards in Internet and data security
areas and is active in several prominent standards-setting bodies, including:

    .  the IETF (Internet Engineering Task Force);

    .  ANSI (American National Standards Institute);

    .  OASIS (Organization for the Advancement of Structured Information
       Standards);

    .  the Internet PKIX (public-key infrastructure x.509) group; and

    .  the PKI Forum and ISO (the International Organization for
       Standardization).

                                      19

<PAGE>

   Entrust believes it is well placed to respond to changes in relevant
industry standards, and continues to participate in the development of these
standards as the requirements of businesses, governments and users become
increasingly complex.

   Some of Entrust's current and planned product development efforts include
continued development of its Entrust Entelligence, Entrust GetAccess, Entrust
TruePass and Entrust Authority product portfolios. Entrust products serve
emerging markets that are evolving rapidly and require continued product
enhancement through the incorporation of additional features and the adoption
of new standards. In addition, continued work on the performance, manageability
and reliability of Entrust products is required to meet the demands of each
customer operating environment. Entrust also continues to deliver new product
capability within each of its product sets to take advantage of new market
opportunities in the Internet security market.

Support

   Entrust continued to make significant investment in support services in
2001. Entrust believes that a high level of customer and technical support is
crucial to its success and Entrust service and support program is a key
component of its commitment to offer the industry's broadest set of enhanced
Internet security services. Entrust's three-tiered, global support program
gives customers the flexibility to choose between proven service and support
levels that align with business needs. In addition, customers can leverage an
extranet for online support, 24-hours-a-day, seven days a week.

   Support offerings include:

  .   Software maintenance--including software upgrades and maintenance
      releases;

  .   Support Extranet--24/7 online access to information including frequently
      asked questions, documentation, technical bulletins, newsletters, and
      service request submissions and updates; and

  .   Quarterly service reviews--regular performance-to-objectives and
      satisfaction reviews.

Sales, Marketing and Business Development

   Entrust completed a major restructuring of its business in 2001, including
an overhaul of how it sells and markets its solutions. Entrust offers its
products, solutions and services through a multi-tiered approach, reflecting
the characteristics and buying behavior of markets covered. As of December 31,
2001, Entrust had 202 employees in sales, marketing and business development.

   Sales

   Entrust plans to continue to focus marketing and sales efforts to take
advantage of the need for enhanced Internet security within the government and
financial services markets. Entrust plans to utilize a strategic combination of
direct and indirect sales channels around the globe, believing that its direct
sales force, working in conjunction with indirect channels offering
complementary products and services, gives a competitive advantage in
responding to customer needs as they evolve.

   Direct Sales

   Entrust has streamlined the way it delivers enhanced Internet security
products, services and solutions by focusing direct-sales resources on the
needs of customers in key vertical markets: government, financial services and
global 1000 enterprises. Entrust's direct sales and service contacts with
customers enable Entrust to respond rapidly to changing customer needs and
enhanced product requirements. Entrust's direct sales force comprises 33
individuals in North America, 18 in Europe, Middle East and Africa and five on
other continents.

                                      20

<PAGE>

   Indirect Sales

   To supplement its direct sales force, Entrust has an indirect sales team
focused on developing alternative channels to market Entrust products,
solutions, applications and services. Significant resources have been dedicated
to enable system integrators, system consultants and strategic OEMs to expand
Entrust's market coverage. New channels have been identified to sell Entrust's
enhanced Internet security solutions and develop relationships to fulfill sales
objectives. Indirect sales is a growing area and represents a significant
opportunity to leverage other organizations' sales forces and customer bases.

   Indirect channels include:

  .   Value-added resellers and original equipment manufacturers who focus on
      creating bundled solutions to permit customers to purchase total desktop
      applications incorporating Entrust solutions. These partners, including
      Compaq, EDS, Hewlett-Packard, Schlumberger and Siemens, sell their
      hardware and networking solutions with Entrust products included.

  .   Distributors and agents who promote and sell Entrust solutions in defined
      geographic markets.

  .   Consultant and systems integration partners who recommend and implement
      Entrust-Ready security solutions as part of their overall service
      offerings to customers. These partners include PricewaterhouseCoopers,
      Accenture, Ernst &Young, Unysis and KPMG.

  .   Trusted Third Party and Applications Service Providers that set up and
      manage outsourced certification-authority services to provide
      certificate-based enhanced Internet security solutions to their
      customers. These partners include EDS and beTRUSTed.

   Marketing

   To support its sales force, Entrust has a marketing team whose goals are to
create a consistent, focused communication strategy that increases awareness of
Entrust-enhanced Internet security solutions and services, and leverages that
awareness in the identification of new sales opportunities. The marketing team
conducts programs that include advertising, direct mail, trade shows, seminars,
Web marketing, public relations and ongoing customer communication.

   Entrust plans to continue to invest in targeted marketing programs to global
government and financial verticals, and also appointed its first chief
marketing officer, or CMO, in June 2001. The CMO's role is to strengthen
Entrust's customer focus and relationship management programs by leveraging his
customer-oriented vision and interactive marketing expertise.

   Business Development

   Identifying new markets and opportunities in advance of current competitive
thinking has been a consistent theme at Entrust. The breadth of Entrust's
enhanced Internet security products, solutions, applications and services, key
relationships and number of customers are testimony to Entrust's success.

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

                                      21

<PAGE>

Competition

   As a result of the acknowledged strength of Entrust's enhanced Internet
security solutions and ability to solve a variety of security challenges,
Entrust currently competes, or may compete in the future, with several
organizations, including:

  .   Certification-authority service providers that are not using an Entrust
      infrastructure. These include VeriSign, Baltimore Technologies, RSA
      Security and any affiliates or partners these companies may engage to
      represent and/or resell their certificate-authority services.

  .   Public-key infrastructure providers including RSA Security, Baltimore
      Technologies, VeriSign (outsourced model) and others.

  .   Access management and authorization software vendors including IBM,
      Netegrity, Oblix and several recent entrants to this market such as RSA
      Security and others.

  .   Large organizations that are developing complementary technology to
      existing products and services. These include organizations such as
      Computer Associates, IBM, Microsoft and Network Associates that offer
      authentication and/or authorization functionality as stand-alone or
      embedded functionality within their respective products or services.

   Entrust believes that the principal competitive factors affecting the market
for Internet security solutions include an enhanced level of security and
features such as ease of use, quality/reliability of security, scalability,
customer service and support, and price. Although Entrust believes that its
products compete favorably in respect to all these factors, there can be no
assurance that Entrust can maintain its competitive position against current or
potential competitors.

Regulatory Matters

   Entrust's products are subject to special export requirements administered
by the governments of the United States, Canada and other countries. Entrust's
products may also be subject to import restrictions and/or use restrictions
imposed by some countries. Consequently, Entrust's ability to export its
products to destinations outside the U.S. and Canada is subject to a variety of
administrative requirements, government approvals or licensing requirements.
Re-exports 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 regulations, depending on the country of
destination, industry sector and/or end user, some of our products may not be
sold to certain parties, and some products made available abroad may contain
significantly weaker encryption capabilities than those available to customers
in the U.S. and Canada. There can be no assurance that Entrust will continue to
be able to export its products to any destination outside the U.S. and Canada.
Such restrictions could potentially have an adverse effect on Entrust's
business, financial condition or results of operations.

   The U.S. encryption export regulations were significantly relaxed in 2000.
On January 14, 2000, the U.S. Department of Commerce amended its export
regulations to make it substantially easier to sell U.S. encryption products
abroad. In general, the new rules eliminated constraints based on the strength
of the encryption that may be exported after a one-time government review of
the product, and greatly broaden the end users who may receive the products
without a license. On October 19, 2000, the U.S. Department of Commerce further
amended the encryption export regulations to, among other things, relax some of
the reporting requirements and allow quicker export of new products to many
countries.

   These changes allow Entrust's products that are under the export license
authority of the U.S. to be more competitive with products of foreign
producers. However, Entrust believes that some of its

                                      22

<PAGE>

products are exempt from U.S. export authorization and they have been marketed
accordingly. U.S. producers of products that compete with Entrust's non-U.S.
products may be able to market more aggressively in foreign countries, offering
stronger encryption and offering products to broader industry groups.

   In summary, the rules are as follows: U.S. products cannot be exported to
certain prohibited persons and entities or to certain embargoed countries. No
governmental review is required for some exports, such as products containing
relatively weak encryption, products that are limited to financial
applications, and exports for internal use by foreign subsidiaries of U.S.
companies. For other encryption products, exports to non-governmental end-users
are allowed after a one-time 30-day review. Exports to government and
non-government end-users in 23 designated countries may proceed when the
product is submitted for review, without waiting for the review to be
completed. Exports to non-government end-users in other countries may proceed
after the 30-day review. Export licenses are required only for government
end-users in these other countries, unless the product is specifically
designated as a "retail" encryption item. The Department of Commerce has
confirmed that a number of Entrust's products are exportable to
non-governmental end users worldwide without further review under the revised
regulations, except to prohibited persons and entities and the embargoed
countries. In addition, Entrust's products which have been approved by the
Department of Commerce in the past may be exported to non-government end users
without a new technical review unless exports were previously limited to
subsidiaries of U.S. companies.

   Export licenses are still required for exports of non-retail encryption
products to Internet and telecommunications service providers if the products
are used to provide services specifically to a foreign government or provide
non-subscriber-based bulk backbone encryption.

   Any mass-market encryption product previously authorized for export under
License Exception "TSU" may be upgraded to 64-bit encryption without a new
technical review.

   The U.S. government has imposed post-export semi-annual reporting
requirements for most export products, but this should not affect Entrust's
export sales. However, these reporting requirements create some administrative
obligations.

   Entrust has 19 products that are classified under the Export Administration
Regulation as 5D002 "retail" and nine that are 5D992 "no license required".

   Entrust believes, and has informed the U.S. Government, that certain of its
products are exempt from U.S. encryption export restrictions under these
criteria. However, Entrust has not obtained any formal U.S. Government ruling
that any of its 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 Entrust's 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 Entrust's products outside the U.S. and Canada, having a
potentially significant adverse effect on Entrust's business, financial
condition and results of operations.

Intellectual Property

   Entrust relies on a combination of patent, copyright, trademark and trade
secret laws, nondisclosure agreements and other contractual provisions to
establish, maintain and protect the company's proprietary rights. Entrust and
its subsidiaries owned 35 issued patents and had 60 pending patent applications
as of February 28, 2002. Pursuant to patent cross license agreements, some of
these patents are and will continue to be subject to certain license grants to
others, including Nortel Networks and certain of its licensees. Entrust has
copyright and trade secret rights for its products,

                                      23

<PAGE>

consisting mainly of source code and products documentation. Entrust uses a
combination of written licenses and shrink-wrap licenses for users of its
products to protect certain of its copyrights and trade secrets.

Employees

   As of December 31, 2001, Entrust had 792 full-time employees, 464 of whom
were employed by Entrust Technologies Limited, Entrust's Canadian subsidiary.
Of Entrust's employees, 213 were involved in research and development, 202 in
sales, marketing and business development, 260 in professional and customer
support services, and 117 in administration. No employees are covered by any
collective bargaining agreements, and Entrust believes that its relationship
with its employees is good.

Corporate Information

   Stockholder Information
   Computershare Investor Services, LLC
   2 North LaSalle Street
   Chicago, IL 60602
   USA
   Phone: (312) 588-4993
   Fax: (312) 601-4350

   Legal Counsel
   Hale and Dorr LLP
   60 State Street
   Boston, MA 02109
   USA

   Independent Auditors
   Deloitte &Touche LLP
   2200 Ross Avenue, Suite 1600,
   Dallas, TX 75201
   USA

   For More Information
   Please contact Entrust, Inc.'s Investor Relations Department at:
   Phone: (972) 713-5858
   E-mail: investor@entrust.com

ITEM 2.  PROPERTIES

   Entrust's U.S. headquarters, including executive offices and administrative
facilities, is located in Addison, Texas, where Entrust leases approximately
25,251 square feet of office space. Entrust also leases approximately 146,100
square feet of office space at its Canadian headquarters in Ottawa, Ontario,
Canada. Entrust leases approximately 12,500 square feet of office space in
Santa Clara, California, which houses primarily research and development,
marketing and business development personnel. Entrust's Europe, Middle East and
Africa (EMEA) region is headquartered out of Reading, England. Entrust also
leases approximately 17,700 square feet of office space in McLean, Virginia
where its sales and services businesses that focus on the United States Federal
Government are based.

                                      24

<PAGE>

   Entrust has sales and services offices in the U.S. in Rosemount, Illinois;
New York, New York; Lexington, Kentucky; Clayton, Missouri; Morristown, New
Jersey; Pittsburgh, Pennsylvania; Cambridge, Massachusetts; Washington, D.C.;
McLean, Virginia; and Cary, North Carolina. Offices in Canada are located in
Toronto, Ontario; Montreal, Quebec; Edmonton, Alberta; Unionville, Ontario;
Markham, Ontario; and Vancouver, British Columbia. Entrust also leases sales
and service offices in Munich, Germany; Paris, France; and Milan, Italy.

ITEM 3.  LEGAL PROCEEDINGS

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

   Entrust moved to dismiss the consolidated complaint. On July 31, 2001, the
Court granted the motion to dismiss. The Court granted plaintiffs 30 days leave
to file an amended complaint. On August 30, 2001, plaintiffs filed an amended
complaint. On September 21, 2001, Entrust moved to dismiss the amended
complaint. The Court has not yet ruled on Entrust's motion to dismiss. There
has been no discovery to date, and no trial date has been established.

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

   Entrust is subject to various other 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 currently believe that the outcome of any of these legal matters will have
a significant adverse effect on its consolidated results of operations or
consolidated financial position.

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

   No matter was submitted to a vote of Entrust shareholders during the fourth
quarter of 2001.

                                      25

<PAGE>

              EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT

   Entrust's executive officers and directors and their respective ages and
positions as of March 20, 2002, are as follows:

<TABLE>
<CAPTION>
Name                    Age Position
----                    --- --------
<C>                     <C> <S>
F. William Conner...... 43  President, Chief Executive Officer and Chairman of the
                            Board
David L. Thompson...... 48  Senior Vice President and Chief Financial Officer
William G. McGee....... 38  Senior Vice President, New Product Portfolio
Edward J. Pillman...... 59  Senior Vice President, Global Portfolio and Services
General Wesley K. Clark 57  Director
Butler C. Derrick, Jr.. 65  Director
Jawaid Ekram........... 51  Director
Terrell B. Jones....... 52  Director
Michael P. Ressner..... 53  Director
Douglas Schloss........ 43  Director
Christopher M. Stone... 44  Director
Liener Temerlin........ 73  Director
J. Alberto Yepez....... 42  Director
</TABLE>

   F. William Conner, age 43, has served as our President and Chief Executive
Officer since April 2001 and as Chairman of the Board since January 2002. He
has been on our board of directors since July 1997 and was Chairman of the
Board from October 1998 to May 2000. From November 1999 to April 2001, Mr.
Conner served as President, Enterprise Networks and eBusiness Solutions of
Nortel Networks, a global Internet and communications company, where he led the
turnaround of the Enterprise business while redefining and delivering ebusiness
applications. From September 1998 to October 1999, he served as the first Chief
Marketing Officer of Nortel Networks, leading the effort to reposition the
company as a global leader in building the high-performance Internet. From 1992
to September 1998, Mr. Conner held a number of key executive leadership
positions at Nortel Networks, including President of its first data business,
Executive Vice President of Nortel Networks' Enterprise Networks Business and a
variety of other key leadership positions in sales and marketing. Mr. Conner
currently serves on the Board of Directors of Travelocity.com.

   David L. Thompson, age 48, has been our Senior Vice President since May 2001
and our Chief Financial Officer since October 1999. From February 2001 to April
2001, he also served as our interim Co-President and Co-Chief Executive
Officer. He was our Executive Vice President, Finance and Administration from
January 2001 to May 2001 and our Senior Vice President, Finance from October
1999 to January 2001. From September 1996 to September 1999, he served as Vice
President of Finance of Nortel Networks' Enterprise Solutions global business,
which comprises customer premise data and voice equipment research,
manufacturing, sales and service. From January 1994 to August 1996, he served
as Vice President of Finance of Nortel Networks World Trade, the marketing,
sales and service organization for Nortel Networks' suite of products outside
North America. From January 1992 to December 1994, he served as Vice President
of Finance for Nortel Networks' Asia/Pacific business.

   William G. McGee, age 38, has served as our Senior Vice President, New
Product Portfolio since November 2001, directing our Next Generation research
and development. Mr. McGee was our Vice President, Engineering from October
1998 to November 2001, and our Director, Engineering from April 1996 to October
1998, responsible for managing our research and development in each of these
capacities.

                                      26

<PAGE>

   Edward J. Pillman, age 59, has been our Senior Vice President, Global
Portfolio and Services since July 2001. Prior to joining Entrust, he served as
President of Nortel Networks' Enterprise Product Portfolio from September 1999
to May 2001, where he directed the growth and development of Nortel Networks'
voice, data and e-business portfolios for the enterprise market. From June 1996
to September 1999, he was Vice President and General Manager of the Multimedia
Enterprises Systems division of Nortel Networks, and from March 1989 to May
1996, he was Vice President and General Manager of the Meridian I Communication
Systems division of Nortel Networks. From November 1983 to March 1989, he was
Chief Information Officer of Nortel Networks. Prior to these assignments, Mr.
Pillman held a variety of sales and executive positions at IBM Canada.

   General Wesley K. Clark, age 57, has served on our board of directors since
January 2002. He has served as Managing Director, Merchant Banking of Stephens
Group, Inc., a high technology venture capital firm, since March 2001. From
July 2000 to March 2001, General Clark was a consultant to Stephens Group,
providing advice on investments. Prior to joining Stephens Group, he served as
a consultant to Goldman, Sachs & Co., an investment bank, serving on the
Shareholders Board of Messer-Griesheim, Co., Germany. From July 1997 to June
2000, he served as the Supreme Allied Commander, Europe and Commander in Chief
of the United States European Command. From June 1996 to July 1997, General
Clark was Commander in Chief of the United States Southern Command, Panama.
General Clark currently serves on the Board of Directors of Acxiom Corp., a
provider of customer data integration software and database management services.

   Butler C. Derrick, Jr., age 65, has served on our board of directors since
May 1999. Since August 1998, Mr. Derrick has been a Partner at the law firm of
Powell, Goldstein, Frazer & Murphy LLP, Washington, D.C. From January 1995 to
July 1998, Mr. Derrick was a Partner at the law firm of Williams & Jensen,
Washington, D.C. Mr. Derrick served in Congress as a United States
Representative from South Carolina from January 1975 to January 1995. While in
Congress, Mr. Derrick held numerous posts, including Deputy Majority Whip and
Vice Chairman of the House Rules Committee.

   Jawaid Ekram, age 51, has served on our board of directors since May 1999.
Since October 2000, he has been Vice President of Operations, PlaceWare, Inc.,
a provider of Web conferencing services. From February 2000 to August 2000, Mr.
Ekram served as Vice President of Systems Development for Broadband Office, an
Internet start-up company. From December 1994 through January 2000, Mr. Ekram
was a Senior Vice President of Visa International Incorporated, a credit card
company, in various capacities and was responsible for International Network &
Global Access Technology Services.

   Terrell B. Jones, age 52, has served on our board of directors since
November 1998. He has served as President and Chief Executive Officer of
Travelocity.com, a provider of online travel reservation capabilities, since it
became a public company in March 2000. He previously served as President of its
predecessor company, SABRE Interactive, and as Executive Vice President and
Chief Information Officer of SABRE Holdings Corporation, an information
technology company, since July 1996. He was President of SABRE Computer
Services (a unit of SABRE Holdings) from 1993 to 1996.

   Michael P. Ressner, age 53, has served on our board of directors since May
1999. He has served as Vice President, Nortel Networks since January 2001.
Prior to that time, Mr. Ressner served as Vice President of Finance of Nortel
Networks Enterprise Solutions group from February 1999 to January 2001. From
May 1994 to January 1999, Mr. Ressner served as Vice President of Finance for
the Carrier Solutions business unit of Nortel Networks. Prior to these
assignments, Mr. Ressner held a number of senior finance management posts
within various business units of Nortel Networks.

                                      27

<PAGE>

   Douglas Schloss, age 43, has served on our board of directors since July
2001. Since January 1994, he has been the President and Chief Executive Officer
of Rexford Management, Inc., a firm that manages an investment partnership
specializing in transaction arbitrage. He has also served as Chief Executive
Officer and Chairman of Marcus Schloss & Co., Inc., a registered broker-dealer
and formerly a New York Stock Exchange specialist firm, since March 1993. Prior
to these positions, Mr. Schloss managed the equity trading desk and arbitrage
investment portfolio of Marcus Schloss & Co.

   Christopher M. Stone, age 44, has served on our board of directors since May
1999. He has been Vice Chairman, Office of the Chief Executive Officer, for
Novell, Inc., a network software provider, since February 2002. From December
1999 to February 2002, Mr. Stone served as Chief Executive Officer of Tilion,
Inc., a company founded by Mr. Stone which builds an XML-based platform for
supply chain visibility. From 1989 to October 1999, he served as Senior Vice
President, Strategy and Corporate Development for Novell. Prior to joining
Novell in 1989, Mr. Stone founded Object Management Group, Inc., creator of the
CORBA software standard, and served as its Chairman, President and Chief
Executive Officer until 1997. Mr. Stone currently serves on the Boards of
Directors of Radview Software and Courion Corporation.

   Liener Temerlin, age 73, has served on our board of directors since January
2002. Since October 2001, he has served as Chairman Emeritus of, and a
consultant to, Temerlin McLain, an advertising agency and wholly owned
subsidiary of the Interpublic Group, an international advertising, marketing
and communications company. From May 1992 to October 2001, Mr. Temerlin was
Chairman of the Board of Temerlin McLain.

   J. Alberto Yepez, age 42, has served on our board since June 2000 when we
acquired enCommerce, Inc., a provider of management solutions for e-business
portals, which Mr. Yepez co-founded in January 1995. Since June 2001, Mr. Yepez
has served as a consultant at Strategic Matters, a sole proprietorship owned by
Mr. Yepez that provides consulting services to high technology companies and
venture capital firms on strategic matters, including investments. From
February 2001 to April 2001, he served as our interim Co-President and Co-Chief
Executive Officer, and from June 2000 to June 2001 as President, Entrust
Ventures Group. Mr. Yepez served as President, Chief Executive Officer and
Chairman of the Board of enCommerce from January 1995 to June 2000.

                                      28

<PAGE>

                                    PART II

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

   Our common stock has been quoted on the Nasdaq National Market under the
symbol "ENTU" since August 18, 1998. The following table sets forth, for the
periods indicated, the high and low sales prices per share of our common stock
as reported on the Nasdaq National Market.

<TABLE>
<CAPTION>
                                         High    Low
                                        ------- ------
                         <S>            <C>     <C>
                         2000
                         ----
                         First Quarter. $150.00 $44.25
                         Second Quarter   83.50  31.31
                         Third Quarter.   81.69  22.63
                         Fourth Quarter   33.44  10.13

                         2001
                         ----
                         First Quarter. $ 21.38 $ 7.06
                         Second Quarter    8.13   3.88
                         Third Quarter.    6.40   2.66
                         Fourth Quarter   11.04   2.55
</TABLE>

   As of March 18, 2002, we had approximately 472 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.

   We have never declared or paid any cash dividends on our shares of common
stock. We intend to retain future earnings, if any, to finance our growth
strategy. We do not anticipate paying cash dividends on our common stock in the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of our board of directors after taking into account various factors,
including our financial condition, our operating results, our current and
anticipated cash needs, restrictions in any future financing agreements and our
plans for expansion. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources".

                                      29

<PAGE>

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 Results of Operations" and
our consolidated financial statements and notes thereto included elsewhere in
this Annual Report.

<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                                                    ------------------------------------------------
                                                     1997      1998      1999      2000      2001
                                                    -------  --------  --------  --------  ---------
                                                          (in thousands, except per share data)
<S>                                                 <C>      <C>       <C>       <C>       <C>
Statement of Operations Data:
Revenues:
  License.......................................... $16,486  $ 36,773  $ 61,482  $ 93,112  $  48,027
  Services and maintenance.........................   8,520    12,215    23,732    55,265     69,938
                                                    -------  --------  --------  --------  ---------
    Total revenues.................................  25,006    48,988    85,214   148,377    117,965
                                                    -------  --------  --------  --------  ---------
Cost of revenues:
  License..........................................     502     1,985     2,286     4,418      4,515
  Services and maintenance.........................   4,414     7,546    13,016    32,418     43,640
                                                    -------  --------  --------  --------  ---------
    Total cost of revenues.........................   4,916     9,531    15,302    36,836     48,155
                                                    -------  --------  --------  --------  ---------
Gross profit.......................................  20,090    39,457    69,912   111,541     69,810
                                                    -------  --------  --------  --------  ---------
Operating expenses:
  Sales and marketing..............................  11,193    26,802    40,900    73,248     87,439
  Research and development.........................   5,692    12,840    16,605    27,625     30,892
  General and administrative.......................   3,695     5,046     7,752    12,083     20,509
  Acquired in-process research and development.....      --    20,208        --    29,614         --
  Amortization of purchased product rights.........      --        --        --     2,751      3,322
  Amortization of goodwill and other
   purchased intangibles...........................      --       356       712    59,952     62,142
  Impairment of goodwill, purchased product rights
   and other purchased intangibles.................      --        --        --        --    326,953
  Restructuring charges............................      --        --        --        --     65,511
  Write-down of leaseholds and other long-lived
   assets..........................................      --        --        --        --     13,519
                                                    -------  --------  --------  --------  ---------
    Total operating expenses.......................  20,580    65,252    65,969   205,273    610,287
                                                    -------  --------  --------  --------  ---------
Income (loss) from operations......................    (490)  (25,795)    3,943   (93,732)  (540,477)
                                                    -------  --------  --------  --------  ---------
Other income (expense):
  Interest income..................................     723     1,807     3,776    13,809      8,330
  Realized gain on investments.....................      --        --        --        --      1,103
  Write-down of long-term strategic investments....      --        --        --        --    (10,800)
                                                    -------  --------  --------  --------  ---------
    Total other income (expense)...................     723     1,807     3,776    13,809     (1,367)
                                                    -------  --------  --------  --------  ---------
Income (loss) before income taxes..................     233   (23,988)    7,719   (79,923)  (541,844)
(Provision) benefit for income taxes...............     281       160    (1,800)   (2,337)    (1,828)
                                                    -------  --------  --------  --------  ---------
Net income (loss).................................. $   514  $(23,828) $  5,919  $(82,260) $(543,672)
                                                    =======  ========  ========  ========  =========
Net income (loss) per basic share.................. $  0.02  $  (0.68) $   0.13  $  (1.44) $   (8.57)
Net income (loss) per diluted share................ $  0.01  $  (0.68) $   0.11  $  (1.44) $   (8.57)
Shares used in basic per share computation.........  30,700    35,255    43,847    57,003     63,411
Shares used in diluted per share computation.......  41,743    35,255    54,803    57,003     63,411

                                                                      December 31,
                                                    ------------------------------------------------
                                                     1997      1998      1999      2000      2001
                                                    -------  --------  --------  --------  ---------
                                                                     (in thousands)
Balance Sheet Data:
Cash, cash equivalents and short-term
 marketable investments............................ $12,638  $ 81,067  $ 89,271  $227,687  $ 153,555
Working capital....................................  13,707    77,438    87,918   224,026     89,012
Long-term marketable investments...................      --        --     2,405        60      9,038
Total assets.......................................  24,757   107,829   130,520   734,106    229,438
Shareholders' equity...............................  14,662    87,059   103,155   674,064    135,845
</TABLE>

                                      30

<PAGE>

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

   The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with "Selected Financial Data" and
our consolidated financial statements and notes thereto appearing elsewhere in
this Annual Report. This discussion and analysis contains forward-looking
statements that involve risks, uncertainties and assumptions. Our actual
results may differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under
"Certain Factors That May Affect Our Business" and elsewhere in this Annual
Report.

Background

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

   We were incorporated in December 1996 with nominal share capital, all of
which was contributed by Nortel Networks Corporation and its subsidiary Nortel
Networks Inc. At the close of business on December 31, 1996, Nortel Networks
transferred to us certain of their assets and liabilities, intellectual
property, rights, licenses and contracts. In exchange, Nortel Networks received
Series A common stock, Special Voting stock, and cash consideration. At the
close of business on December 31, 1996, we issued Series B common stock in a
private placement. After the completion of the private placement, Nortel
Networks owned approximately 73% of the outstanding shares of our voting stock
assuming conversion of the Series B common stock and Series B Non-Voting common
stock.

   On August 21, 1998, we closed our initial public offering, issuing 5,400,000
shares of our Common stock at an initial public offering price of $16 per
share. The net proceeds from the offering, after deducting underwriting
discounts and commissions and offering expenses incurred, were approximately
$79.1 million.

   On February 29, 2000 and March 2, 2000, we closed our follow-on offering,
which included an over-allotment option closing, issuing an aggregate of
2,074,260 shares of our Common stock at an offering price $82 per share. The
net proceeds from the offering, after deducting underwriting discounts and
commissions and offering expenses incurred, were approximately $161.5 million.

   On June 4, 2001, we changed our name to Entrust, Inc.

   At December 31, 2001, Nortel Networks owned approximately 21% of our Common
stock.

   Business Overview

   Fiscal 2001 was a challenging year for Entrust. The economic slowdown that
began in early 2001 affected us, as it affected many companies in the
technology sector. Revenues for 2001 were down 20% to $118.0 million from
$148.4 million in 2000. We underwent a restructuring in the second quarter of
2001 to better position ourselves in "Securing the Internet", which we believe
will be the next major phase of the Internet's evolution.

                                      31

<PAGE>

   Our 2001 restructuring was implemented to re-focus Entrust back to its core
geographic and vertical markets and its core technical competencies in Internet
security. Implementing the broad corporate-wide plan resulted in a
restructuring charge of $65.5 million and special non-recurring charges of
$369.5 million, including $327.0 million impairment to goodwill. The major
elements of the 2001 restructuring plan included:

  .   Eliminating approximately 400 positions, or 33% of the existing
      workforce, through layoffs and attrition;

  .   Reorganizing Entrust along global functional lines, versus multiple
      individual business programs;

  .   Closing eight offices to vacate underutilized office space that resulted
      from the employee reduction and global functional re-alignment to a more
      geographically efficient organization; and

  .   Conducting a revaluation assessment of the goodwill and other intangibles
      related to past acquisitions, specifically around potential impairment.
      The majority of the goodwill impairment was related to the enCommerce
      acquisition.


   Despite the challenges of 2001, we achieved several major accomplishments in
the year:

  .   We were awarded the largest contract in our history, a $17.6 million
      contract with Bell Nexxia for the Government of Canada project known as
      "Secure Channel". This contract is being accounted for on a subscription
      basis over four fiscal quarters with software revenue recognition
      beginning in the second quarter of 2001 and ending during the first
      quarter of 2002;

  .   We reduced our quarterly losses in the second half of 2001 to $0.13 and
      $0.09 losses per share in the third and fourth quarters, respectively.
      This compares to quarterly losses per share of $0.81 and $7.58 in the
      first and second quarters of 2001, respectively; and

  .   We ended the year with $162.6 million in cash and marketable securities
      and no debt.

   Going forward into 2002, we remain focused on our core markets, both
vertical and geographic, and our core technology strengths in enhanced Internet
security. Our success continues to be dependant on our ability to design,
develop, market and sell our Internet security solutions to our global
customers.

Critical Accounting Policies

   The nature of our business is not highly complex, as we operate in one
primary business. We develop, market and sell Internet security software
solutions. We also perform professional services to install, support and
integrate our Internet security software solutions with other applications. We
operate globally in a functional organization. We do not have any off-balance
sheet financing, other than operating leases entered into in the normal course
of business, and we do not actively engage in hedging transactions.

   In 2001, our most complex accounting judgments were made in the areas of
software revenue recognition, goodwill impairment, restructuring and other
special non-recurring charges, impairment of long-term strategic investments
and allowance for doubtful accounts. The goodwill impairment, and restructuring
and other special non-recurring charges are not anticipated to be recurring in
nature. Software revenue recognition, impairment of long-term strategic
investments, and allowance for doubtful accounts are expected to continue to be
an on-going element of our accounting processes and judgments.

                                      32

<PAGE>

   Software Revenue Recognition

   With respect to software revenue recognition, we recognize revenues in
accordance with the provisions of the American Institute of Certified Public
Accountants' Statement of Position No. 97-2, "Software Revenue Recognition" and
SOP No. 98-9, "Modifications of SOP No. 97-2, Software Revenue Recognition,
with Respect to Certain Transactions".

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

   Due to the complexity of some software license agreements, we routinely
apply judgment to the application of software revenue recognition accounting
principles to specific agreements and transactions. Different judgments and/or
different contract structures could have led to different accounting
conclusions, which could have had a material effect on our reported quarterly
earnings.

   Goodwill Impairment

   We assess the impairment of identifiable intangibles, long-lived assets and
related goodwill and enterprise-level goodwill on a periodic basis or whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. In 2001, we performed our valuation of these assets based on
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of",
APB Opinion No. 17, "Intangible Assets", and the relevant provisions of the
SEC's SAB No. 100, "Restructuring and Impairment Charges".

   During the second quarter of 2001, we recorded an impairment of goodwill of
$327.0 million. $325.4 million of this amount was the result of the enCommerce
acquisition in 2000 and $1.6 million from the r/3/ acquisition in 1998. In
performing this impairment assessment, management made judgments regarding the
anticipated future cash flows from these acquisitions. Different assumptions in
this assessment could have led to a different impairment amount, which could
have had a material effect on our reported earnings.

   As of December 31, 2001, goodwill and purchased intangible assets, net of
accumulated amortization, amounted to $14.0 million.

   SFAS No. 142, "Goodwill and Other Intangible Assets" became effective for us
on January 1, 2002 and, as a result, we estimate on a preliminary basis that we
will cease to amortize approximately $11.2 million of goodwill and other
purchased intangibles. We will continue to amortize $2.8 million of purchased
product rights. We had recorded approximately $62.1 million of amortization on
these amounts during 2001 and would have recorded approximately $8.7 million of
amortization during 2002. In lieu of amortization, we are required to perform
an initial impairment review of our goodwill in 2002 and an annual impairment
review thereafter. We expect to complete our initial review during the first
quarter of 2002.

   We currently do not expect to record an impairment charge upon completion of
the initial impairment review. However, there can be no assurance that, at the
time the review is completed, a material impairment charge will not be required.

                                      33

<PAGE>

   Restructuring and Other Special Non-recurring Charges

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

   As a result of the restructuring and other related special non-recurring
charges and the impact of the macroeconomic conditions on us and our global
base of customers, we recorded restructuring and special non-recurring charges,
excluding goodwill impairment, of $106.6 million in the second fiscal quarter
of 2001, with subsequent adjustments in the third and fourth quarters totaling
$1.4 million.

   We conducted our assessment of the accounting effects of the restructuring
program in accordance with EITF No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity", SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", APB Opinion No. 9, "Reporting the Results of
Operations" and the relevant provisions of the SEC's SAB No. 100,
"Restructuring and Impairment Charges".

   Our assessment required assumptions in estimating the original accrued
restructuring charges of $65.5 million on June 30, 2001, including estimating
future recoveries of sublet income from excess facilities, liabilities from
employee severances, and costs to exit business activities. Changes in these
assessments with respect to the accrued restructuring charges of $47.0 million
at December 31, 2001, could have a material effect on our reported results. In
addition, actual results could vary from these assumptions, resulting in an
adjustment that could have a material effect on our future financial results.

   Impairment of Long-term Strategic Investments

   We assess the recoverability of the carrying value of strategic investments
on a regular basis. Factors that we consider important and that we believe
could trigger impairment include, but are not limited to, the likelihood that
the company in which we invested would have insufficient cash flows to operate
for the next twelve months, significant changes in the company's operating
performance or business model and changes in overall market conditions. These
investments are in private companies of which we typically own less than 10% of
the outstanding stock. Because there is not a liquid market for these
securities, we often must make estimates of the value of our investments. We
recorded charges related to other than temporary declines in the value of
certain strategic investments of $10.8 million in 2001. We also recorded a gain
on the disposition of a long-term strategic investment of $1.6 million in 2001.

   As of December 31, 2001, long-term strategic investments, net of valuation
allowances, amounted to $5.1 million.

   Allowance for Doubtful Accounts

   We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. At the time of a
transaction, we assess whether the fee associated with the revenue transaction
is fixed and determinable and whether collection is reasonably assured.

   We assess whether the fee is fixed and determinable based on the payment
terms associated with the transaction and the creditworthiness of the customer.
If any portion of a fee is due after 365 days from the invoice date, we account
for the fee as not being fixed and determinable. In these cases, we recognize
revenue as the fees become due.

                                      34

<PAGE>

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

   We base our ongoing estimate of allowance for doubtful accounts primarily on
the aging of the balances in the accounts receivable, our historical collection
patterns and changes in the credit-worthiness of our customers. While credit
losses have historically been within our expectations and the provisions
established, we cannot guarantee that we will continue to experience the same
credit loss rates that we have in the past. Our accounts receivable include
material balances from a limited number of customers, with five customers
accounting for 43% of accounts receivable at December 31, 2001, as discussed in
"Certain Factors That May Affect Our Business". Therefore, changes in the
assumptions underlying this assessment or changes in the financial condition of
our customers could result in a different required allowance, which could have
a material impact on our reported quarterly earnings.

   As of December 31, 2001, accounts receivable totaled $23.7 million, net of
an allowance for doubtful accounts of $3.9 million.

                                      35

<PAGE>

Results Of Operations

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

<TABLE>
<CAPTION>
                                                                       Year Ended December 31,
                                                                       ---------------------
                                                                       1999   2000     2001
                                                                       -----  -----   ------
<S>                                                                    <C>    <C>     <C>
Revenues:
       License........................................................  72.2%  62.8%    40.7%
       Services and maintenance.......................................  27.8   37.2     59.3
                                                                       -----  -----   ------
          Total revenues.............................................. 100.0  100.0    100.0
                                                                       -----  -----   ------
Cost of revenues:
       License........................................................   2.7    3.0      3.8
       Services and maintenance.......................................  15.3   21.8     37.0
                                                                       -----  -----   ------
          Total cost of revenues......................................  18.0   24.8     40.8
                                                                       -----  -----   ------
Gross profit..........................................................  82.0   75.2     59.2
                                                                       -----  -----   ------
Operating expenses:
       Sales and marketing............................................  48.0   49.4     74.1
       Research and development.......................................  19.5   18.6     26.2
       General and administrative.....................................   9.1    8.1     17.4
       Acquired in-process research and development...................    --   19.9       --
       Amortization of purchased product rights.......................    --    1.9      2.8
       Amortization of goodwill and other purchased intangibles.......   0.8   40.4     52.7
       Impairment of goodwill, purchased product rights and other
         purchased intangibles........................................    --     --    277.2
       Restructuring charges..........................................    --     --     55.5
       Write-down of leaseholds and other long-lived assets...........    --     --     11.5
                                                                       -----  -----   ------
          Total operating expenses....................................  77.4  138.3    517.4
                                                                       -----  -----   ------
Income (loss) from operations.........................................   4.6  (63.1)  (458.2)
                                                                       -----  -----   ------
Other income (expense):
   Interest income....................................................   4.4    9.3      7.1
   Realized gain on investments.......................................    --     --      0.9
   Write-down of long-term strategic investments......................    --     --     (9.1)
                                                                       -----  -----   ------
          Total other income (expense)................................   4.4    9.3     (1.1)
                                                                       -----  -----   ------
Income (loss) before income taxes.....................................   9.0  (53.8)  (459.3)
Provision for income taxes............................................  (2.1)  (1.6)    (1.6)
                                                                       -----  -----   ------
Net income (loss).....................................................   6.9% (55.4)% (460.9)%
                                                                       =====  =====   ======
</TABLE>

Years Ended December 31, 1999, 2000 and 2001

   Revenues

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

                                      36

<PAGE>

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

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

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

   We use the percentage-of-completion method to account for fixed-price 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. The project cost estimates are reviewed on a regular basis.

   Total Revenues.  Total revenues increased 74% from $85.2 million in 1999 to
$148.4 million in 2000 and decreased 20% to $118.0 million in 2001. Total
revenues derived from North America increased 44% from $71.8 million in 1999 to
$103.5 million in 2000 and decreased 24% to $79.1 million in 2001, while total
revenues derived from outside of North America increased 235% from $13.4
million in 1999 to $44.9 million in 2000 and decreased 13% to $38.9 million in
2001. The majority of the overall decline in total revenues, in absolute
dollars, in 2001 was experienced in North America, which is reflective of the
prolonged economic downturn experienced in this region. Also, until the end of
the second quarter of 2001, we had focused on growing our revenue base
internationally, including heavy investment in our direct sales force,
particularly in Europe, Asia and South America, which resulted in growing
revenues in 1999 and 2000 and resulted in a smaller decline in non-North
American revenues in 2001. However, the continued softening of the economic
climate internationally and our restructuring program from the second quarter
of 2001 resulted in fewer sales resources being applied to all regions, but
specifically in Asia Pacific and Latin America. The level of non-North American
revenues has fluctuated from period to period, and this trend is expected to
continue in the foreseeable future. In 1999, a single customer accounted for
24% of revenues, and no other customers accounted for 10% or more of revenues.
In 2000, no individual customer accounted for 10% or more of revenues. In 2001,
a single customer accounted for 11% of revenues, and no other customers
accounted for 10% or more of revenues.

   License Revenues.  License revenues increased 51% from $61.5 million in 1999
to $93.1 million in 2000 and decreased 48% to $48.0 million in 2001,
representing 72%, 63% and 41% of total revenues in the respective years. The
decrease in license revenues in absolute dollars in 2001 was primarily due to
the slowing of the global economy, particularly the continued economic downturn
experienced in North America. The types of license transactions most
significantly impacted by the less favorable economic conditions were those
license transactions greater than $500,000 in value, which normally represent a
substantial deployment to a broad base of users or the addition of new
applications to customers' previously installed infrastructure. The rapid
global downturn has had a

                                      37

<PAGE>

significant impact on information technology projects and, as a result,
customers could not make the commitments we were expecting in 2001, compared to
previous years. License revenues as a percentage of total revenues decreased
from 1999 to 2000 and from 2000 to 2001. This was primarily as a result of a
continued strong demand for services and maintenance from our customers and
increased professional services revenues from the addition of CygnaCom in March
2000, and enCommerce in June 2000, and partly due to decreased license revenues
in 2001.

   Services and Maintenance Revenues.  Services and maintenance revenues
increased 133% from $23.7 million in 1999 to $55.3 million in 2000 and
increased 26% to $69.9 million in 2001, representing 28%, 37% and 59% of total
revenues in the respective years. The increase in services and maintenance
revenues in absolute dollars in 2000 and 2001 was primarily the result of an
increase in demand for consulting services and customer support, the
acquisitions of CygnaCom and enCommerce, and increases in maintenance revenues
from a larger installed product base and strong customer renewals of annual
maintenance agreements. The growth in our customer base has resulted in
acceleration in the demand from customers to assist them in deploying our
solutions. We have invested heavily in additional professional services
resources in response to this increased demand from customers, particularly
throughout 1999, 2000 and the first half of 2001. The slowed growth of our
services and maintenance business from 2000 to 2001 reflected the completion of
a large professional services contract in Europe in the second quarter of 2001,
resulting in some lower utilization rates in this region in the second half of
the year, and also reflected the slowed growth of the installed base of
customers in 2001. The increase in services and maintenance revenues as a
percentage of total revenues reflected a continuing shift in the mix of
revenues from license to services and maintenance revenues in 2001, compared to
2000 and 1999. This shift was largely due to the continued growth of our
services and maintenance business in response to customer demand, the impact of
the professional services revenues of CygnaCom and enCommerce since their
respective acquisitions, and the decrease in license revenues during 2001. We
continue to focus on developing new service offerings for our customers that
are core to our business and also on building our relationships with
third-party service providers so that we have adequate resources available to
meet the demands of our customers.

   Cost of Revenues

   Cost of License Revenues.  Cost of license revenues consists primarily of
costs associated with product media, documentation, packaging and royalties to
third-party software vendors. Amortization of purchased product rights acquired
as part of the acquisition of enCommerce of $2.8 million in 2000 and $3.3
million in 2001 has been excluded from cost of license revenues and instead has
been included in operating expenses. Cost of license revenues was $2.3 million
in 1999, $4.4 million in 2000 and $4.5 million in 2001, representing 3%, 3% and
4% of total revenues for the respective years. While the cost of license
revenues in absolute dollars was relatively flat from 2000 to 2001, the
increase in cost of license revenues in 2000, compared to 1999, was primarily a
result of higher royalty fees paid to third-party software vendors, in response
to the increase in license revenues in general and specifically for those
Entrust products that require third-party royalty payments. The cost of license
revenues as a percentage of total revenues was flat from 1999 to 2000, despite
the absolute dollar increase, due to the acquisition of enCommerce, which
eliminated our requirement to pay royalties to third-party vendors related to
the sale of authentication/privilege management software when bundled with our
PKI product sales. The increase in the cost of license revenues as a percentage
of total revenues from 2000 to 2001, despite the lower software license revenue
levels, was primarily a result of higher royalty rates paid to third-party
software vendors and an increase in the number of third-party technologies
embedded in our products sold. The mix of third-party products may vary from
period to period and, consequently, our gross margins and results of operations
could be adversely affected.

                                      38

<PAGE>

   Cost of Services and Maintenance Revenues.  Cost of services and maintenance
revenues consists primarily of personnel costs associated with customer
support, training and consulting services, as well as amounts paid to
third-party consulting firms for those services. Cost of services and
maintenance revenues was $13.0 million in 1999, $32.4 million in 2000 and $43.6
million in 2001, representing 15%, 22% and 37% of total revenues for the
respective years. The increase in absolute dollars in 2000 and 2001 reflected
the increased costs associated with the increased levels of services and
maintenance revenues experienced in those periods and the increased costs
associated with the CygnaCom and enCommerce resources. The increase in the cost
of services and maintenance revenues as a percentage of total revenues in 2000
was primarily the result of slightly lower productivity and utilization for
available services resources compared to 1999, due to the training required to
integrate the professional services teams acquired from CygnaCom and enCommerce
as well as the new employees hired in 2000. The increase in the cost of
services and maintenance revenues as a percentage of total revenues in 2001
reflected the rapid growth of services and maintenance revenues in comparison
to license revenues, and reflected the significant shift in the mix of revenues
from license to services and maintenance revenues during this period. As the
services and maintenance revenues represented the larger proportion of total
revenues and grew faster than total revenues, the cost of generating those
services and maintenance revenues represented a much larger percentage when
compared against total revenues, because significant investment was necessary
in order to prepare for current and future growth in this business. Also, we
made significant investments in additional customer support personnel to
support the growing base of customers with previously installed products in
2000 and 2001.

   Services and maintenance gross profit as a percentage of services and
maintenance revenues was 45% in 1999, 41% in 2000 and 38% in 2001. The decrease
in the services and maintenance gross profit as a percentage of services and
maintenance revenues from 1999 to 2000, and from 2000 to 2001 reflected the
investment we made in the professional services team through the acquisition of
CygnaCom late in the first quarter of 2000 and enCommerce at the end of the
second quarter of 2000, which represented a slight shift in the mix of
components within services revenues toward the lower-margin professional
services revenues. Also, the decrease in the services and maintenance gross
profit as a percentage of services and maintenance revenues reflected the
investment made in additional customer support personnel in 2000 and 2001, and
the continued development and rollout of new services offerings, especially
prior to our restructuring in the second quarter of 2001.

   Operating Expenses

   Sales and Marketing

<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                                 -------------------------
                                                  1999     2000     2001
                                                 -------  -------  -------
                                                       (in thousands)
    <S>                                          <C>      <C>      <C>
    Per statement of operations................. $40,900  $73,248  $87,439
    Less: Special non-recurring charges included      --       --   12,637
                                                 -------  -------  -------
    Pro forma................................... $40,900  $73,248  $74,802
                                                 =======  =======  =======
    Percentage of total revenues................      48%      49%      63%
                                                 =======  =======  =======
</TABLE>

   Sales and marketing expenses increased from $40.9 million in 1999 to $73.2
million in 2000 and $74.8 million in 2001, on a pro forma basis, representing
48%, 49% and 63% of total revenues in the respective years. The increases in
sales and marketing expenses in absolute dollars from 1999 to 2001 were
primarily the result of costs associated with the expansion of our sales and
marketing organization, both domestically and internationally, up until the end
of the first half of 2001. In addition, until the implementation of our
restructuring plan in June 2001, we continued to make significant

                                      39

<PAGE>

investments in marketing to support the launch of new products, services and
marketing programs. We had continued our strategy of investing in (a) hiring
and training the members of our direct sales organization in anticipation of
future market growth, and (b) marketing efforts in support of new product
launches. The sales and marketing expenses as a percentage of total revenues in
2000, compared to 1999, has remained fairly consistent. However, the increase
in sales and marketing expenses as a percentage of total revenues in 2001,
compared to 2000, was mainly due to the combination of lower than expected
license revenues in the first half of 2001, and sales and marketing expenses
that were largely fixed prior to the beginning of each of the first two
quarters of 2001 based on expected license revenues for those periods. The
increase in sales and marketing expenses as a percentage of total revenues in
2001 also reflected the increased expenses related to the impact of the
enCommerce sales and marketing organization. We will continue to focus on
improving the productivity of our sales and marketing organizations, in light
of the current economic conditions. Failure of these investments in sales and
marketing, as adjusted through our restructuring plan, to generate future
revenues will have a significant adverse effect on our operations.

   Research and Development

<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                                 -------------------------
                                                  1999     2000     2001
                                                 -------  -------  -------
                                                       (in thousands)
    <S>                                          <C>      <C>      <C>
    Per statement of operations................. $16,605  $27,625  $30,892
    Less: Special non-recurring charges included      --       --       --
                                                 -------  -------  -------
    Pro forma................................... $16,605  $27,625  $30,892
                                                 =======  =======  =======
    Percentage of total revenues................      20%      19%      26%
                                                 =======  =======  =======
</TABLE>

   Research and development expenses increased from $16.6 million in 1999 to
$27.6 million in 2000 and $30.9 million in 2001, representing 20%, 19% and 26%
of total revenues in the respective periods. The increased investment in
research and development expenses in absolute dollars from 1999 to 2001
reflected higher expenses related to increased staffing of software developers.
We had hired these employees primarily in connection with the continuing
expansion, enhancement and globalization of our product offerings, our
commitment to quality assurance and testing, and the addition of development
employees in connection with the acquisition of enCommerce. The investment in
research and development as a percentage of total revenues increased in 2001,
compared to 2000 and 1999, due primarily to the lower than expected license
revenues in the first half of 2001, as these costs were largely fixed prior to
the start of the first two quarters of 2001, and due to the acquisition of
enCommerce and the corresponding addition of the GetAccess(TM) development
team. The cost reduction impact of our restructuring on research and
development expenses did not come into effect until June 2001. However, we
believe that we must continue to invest in research and development in order to
maintain our technological leadership position and, thus, we expect research
and development to increase in absolute dollars in the future as additional
experienced security experts and software engineers are required.

   General and Administrative

<TABLE>
<CAPTION>
                                                   Year Ended December 31,
                                                  ------------------------
                                                   1999    2000     2001
                                                  ------  -------  -------
                                                       (in thousands)
     <S>                                          <C>     <C>      <C>
     Per statement of operations................. $7,752  $12,083  $20,509
     Less: Special non-recurring charges included     --       --    5,596
                                                  ------  -------  -------
     Pro forma................................... $7,752  $12,083  $14,913
                                                  ======  =======  =======
     Percentage of total revenues................      9%       8%      13%
                                                  ======  =======  =======
</TABLE>

                                      40

<PAGE>

   General and administrative expenses increased from $7.8 million in 1999 to
$12.1 million in 2000 and $14.9 million in 2001, on a pro forma basis,
representing 9%, 8% and 13% of total revenues in the respective years. The
increase in general and administrative expenses in absolute dollars reflected
our continued investment in increased staffing and related expenses for the
enhancement of the infrastructure necessary to support our changing business,
including investor relation programs, improved management information systems
and the increased utilization of outside professional service firms. In
addition, the increase in general and administrative expenses in 2001 compared
to 2000 was partly due to expenses we incurred in connection with the
resignation of a senior executive. General and administrative expenses as a
percentage of total revenues increased in 2001, compared to 2000 and 1999, due
primarily to the lower than expected license revenues in the first half of
2001, as these costs were largely fixed prior to the start of each quarter. The
cost reduction impact of our restructuring on general and administrative
expenses did not come into effect until June 2001. We continue to look for ways
to gain additional efficiencies in our administrative processes.

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

   On March 14, 2000, we completed the acquisition of CygnaCom, a company based
in McLean, Virginia that delivers information technology products and services,
with expertise in public key infrastructure, cryptographic technologies,
security engineering and systems integration and development. Pursuant to the
stock purchase agreement dated March 14, 2000, entered into between us,
CygnaCom and the shareholders of CygnaCom, we agreed to acquire all of the
outstanding shares of CygnaCom for an aggregate purchase price of
$16.6 million, which included cash consideration of $16.0 million. The
acquisition was recorded under the purchase method of accounting and,
therefore, the results of operations of CygnaCom are included in our financial
statements from the acquisition date. Upon consummation of the acquisition,
CygnaCom became a wholly owned subsidiary. In connection with this acquisition,
we recorded goodwill of $16.6 million and, accordingly, we have expensed $4.6
million and $5.5 million of goodwill amortization in 2000 and 2001,
respectively.

   On June 26, 2000, we completed the acquisition of enCommerce, a company
based in Santa Clara, California that provides software and services for
managing global e-business relationships. The acquisition of enCommerce's
outstanding capital stock, options and warrants for a total consideration of
$505.5 million was accounted for under the purchase method of accounting, which
resulted in an allocation of $449.6 million to purchased product rights,
goodwill and other purchased intangibles. Also, in connection with this
acquisition, an appraisal was done of the intangible assets, resulting in $29.6
million of the purchase price being allocated to in-process research and
development that had not yet reached technological feasibility and had no
alternative future use. This in-process research and development was expensed
in June 2000. Amortization of purchased product rights of $2.8 million and $3.3
million were expensed in 2000 and 2001, respectively. Amortization of goodwill
and other purchased intangibles of $54.4 million and $56.2 million were
expensed in 2000 and 2001, respectively.

   In addition, we recorded amortization of $712,000, $907,000 and $470,000 in
1999, 2000 and 2001, respectively, with respect to goodwill recorded as a
result of the acquisition of r/3/ in 1998.

   Amortization expense in connection with acquisition-related intangibles
decreased in 2001, as compared to 2000, due to the impairment of goodwill,
purchased product rights and other purchased intangibles recorded in June 2001.

   Restructuring and Other Special Non-recurring Charges

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

                                      41

<PAGE>

   As a result of the restructuring and other related special non-recurring
charges and the impact of the macroeconomic conditions on us and our global
base of customers, we recognized restructuring and special non-recurring
charges of $433.6 million in the second fiscal quarter of 2001, with subsequent
adjustments in the third and fourth quarter of $1.4 million, as outlined below
(in millions):

<TABLE>
<CAPTION>
                                                                   Total   Adjustments
                                                                  Special    Recorded   Total Special
                                                                  Charges  July 1, 2001    Charges
                                         Accrued    Other Special through       to         through
                                      Restructuring Non-recurring June 30, December 31, December 31,
                                         Charges       Charges      2001       2001         2001
                                      ------------- ------------- -------- ------------ -------------
<S>                                   <C>           <C>           <C>      <C>          <C>
Workforce reduction and other
  personnel costs....................     $13.5        $  4.1      $ 17.6     $ 0.3        $ 17.9
Consolidation of excess facilities...      38.2          13.5        51.7       0.5          52.2
Discontinuance of non-core products
  and programs.......................      13.8           6.4        20.2      (0.8)         19.4
Impairment of goodwill, purchased
  product rights and other intangible
  purchased assets...................        --         327.0       327.0        --         327.0
Write-down of long-term strategic
  investments........................        --           6.1         6.1       4.7          10.8
Bad debt write-offs and additional
  provisions to the allowance for
  doubtful accounts..................        --          11.0        11.0      (3.3)          7.7
                                          -----        ------      ------     -----        ------
Total................................     $65.5        $368.1      $433.6     $ 1.4        $435.0
                                          =====        ======      ======     =====        ======
</TABLE>
   The following paragraphs provide information relating to the restructuring
programs that resulted in the total special charges listed above, which were
recognized in 2001.

   Workforce reduction and other personnel costs

   The restructuring program resulted in the reduction of approximately 400 of
our regular full-time employees, or 33% of the total workforce. The reduction
was across all major geographic locations, all business programs and all
functions within the organization. The reductions were more heavily weighted in
sales and marketing, non-core business programs such as Entrust.Net(TM) and
Entrust@YourService(TM) and secondary geographies such as Asia Pacific and
Latin America. The majority of the affected employees were notified of their
termination in the second quarter, and the workforce portion of the
restructuring was largely completed by the end of the fourth quarter of 2001.
We recorded a workforce reduction charge of $13.4 million primarily related to
severance costs, fringe benefits due to severed employees and outplacement
services.

   Other special non-recurring charges included employee relocation expenses,
hiring fees and signing bonuses totaling $4.5 million, which were recorded
primarily in general and administrative expenses.

   Consolidation of excess facilities

   We recorded restructuring costs of $39.2 million relating to the
consolidation of excess facilities. The consolidation of excess facilities
includes a total of eight offices in seven cities throughout the world. The
majority (approximately 85%) of the costs are related to the 75,000 square foot
facility in Santa Clara, CA. The costs for consolidation of excess facilities
are related primarily to non-cancelable lease costs offset by estimated sublet
recoveries. These costs are payable contractually over up to 10 years, which is
the lease term of the Santa Clara facility. However, we will be evaluating
ongoing possibilities to settle this obligation in the most economic manner.

                                      42

<PAGE>

   In addition to the $39.2 million of restructuring costs related to excess
facilities, an additional $13.0 million of facilities-related costs were
recorded as a special non-recurring charge as a result of impairment of
leasehold improvements and other property and equipment that was disposed of or
removed from operations as a result of the consolidation of excess facilities,
and were included in the write-down of leaseholds and other long-lived assets
in accordance with the provisions of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of".
These assets were identified as assets to be disposed of that would have no
future benefit to us. Therefore, these assets were reported at the lower of
carrying amount and fair value, less costs of disposition. The majority of
these costs are non-cash charges.

   Discontinuance of non-core products and programs

   In support of the restructuring objective to reduce costs and focus on our
core technologies, we discontinued several non-core products and programs. The
discontinued products and programs, totaling $12.9 million, are primarily
related to our services business initiatives and to certain desktop
applications for which we have not achieved the growth and profitability
targets in line with our core products and financial objectives. The
restructuring charge also includes costs related to the exit of certain
marketing events and programs that had been committed to prior to the
restructuring, but which are being cancelled due to the change in corporate
focus. The cash outflow related to the majority of these items is expected to
be substantially incurred by the end of the first quarter of fiscal 2002.
Accrued estimated minimum royalty obligations related to certain discontinued
products of $4.2 million are payable contractually over the next three years.

   The discontinuance of products and programs, and expenses related to
rebranding of our identity and our products, resulted in $6.5 million of
special non-recurring charges, which was primarily recorded in sales and
marketing expenses.

  Summary of accrued restructuring charges

   The following table is a summary of the accrued restructuring charges as at
December 31, 2001 (in millions):

<TABLE>
<CAPTION>
                                                Total                            Accrued
                                               Charges                        Restructuring
                                              Accrued at                       Charges at
                                               June 30,    Cash               December 31,
                                                 2001    Payments Adjustments     2001
                                              ---------- -------- ----------- -------------
<S>                                           <C>        <C>      <C>         <C>
Workforce reduction and other personnel costs   $13.5     $11.1      $(0.1)       $ 2.3
Consolidation of excess facilities...........    38.2       4.6        1.0         34.6
Discontinuance of non-core products and
  programs...................................    13.8       2.8       (0.9)        10.1
                                                -----     -----      -----        -----
Total........................................   $65.5     $18.5      $  --        $47.0
                                                =====     =====      =====        =====
</TABLE>

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

   Due to the decline in our market capitalization, the decline in current
overall business conditions within our target market segments and the
restructuring program, we completed an assessment of the recoverability of
goodwill on our balance sheet, in accordance with APB Opinion No. 17 and the
relevant guidance in SFAS No. 121. This impairment analysis indicated that the
carrying amount of the goodwill, purchased product rights and other purchased
intangible assets of the enCommerce and r/3/ acquisitions will not be recovered
through the estimated undiscounted future cash flows. We then completed an
analysis of the discounted future cash flows from the enCommerce acquisition
and the r/3/ acquisition. The result of this analysis is a charge of $327.0
million related to the impairment of goodwill, purchased product rights and
other purchased intangible assets. Goodwill, purchased product rights and other
purchased intangibles from the enCommerce acquisition account for $325.4
million of the impairment. This acquisition has failed to meet the financial
planning forecasts made at the time of the acquisition due largely to the
change in the economic conditions since the time of the acquisition

                                      43

<PAGE>

and in part due to additional product development and maintenance costs related
to the GetAccess(TM) product that are now estimated to be required in the
future and were not known at the time of the acquisition. The remaining $1.6
million of goodwill impairment is the result of the r/3/ acquisition, which was
impacted primarily by the workforce restructuring.

   Revenues from the enCommerce products and services are estimated to have
contributed approximately 20% to 25% of total revenues in 2001, but are
estimated to have generated operating losses since acquisition. The results of
operations related to the r/3/ acquisition were not significant.

   Write-down of long-term strategic investments

   We assess the recoverability of the carrying value of our strategic
investments on a regular basis. Factors that we consider important that could
trigger impairment include, but are not limited to, the likelihood that the
company in which we invested would have insufficient cash flows to operate for
the next twelve months, significant changes in the company's operating
performance or business model, and changes in overall market conditions. We
recorded charges related to other than temporary declines in the value of
certain strategic investments of $10.8 million in 2001. We also recorded a gain
on the disposition of a long-term strategic investment of $1.6 million in 2001.

   Bad debt write-offs and additional provisions to the allowance for doubtful
   accounts

   Due to the changes in the economic environment and the impact of the
restructuring program, particularly the curtailment of certain products and
presence in certain geographies, we recorded bad debt write-offs and additional
provisions to the allowance for doubtful accounts totaling $7.7 million in the
year ended December 31, 2001, which was recorded primarily in sales and
marketing expenses.

   Interest Income

   Interest income increased from $3.8 million in 1999 to $13.8 million in 2000
and decreased to $8.3 million in 2001, representing 4%, 9% and 7% of total
revenues in the respective years. The decrease in investment income for 2001
from 2000 reflected the reduced balance of funds invested, as these amounts
have been drawn down to fund cash flow from operations and to acquire
long-lived assets and long-term strategic investments. In addition, the
decrease was due to the lower interest rates that were available in 2001
compared to 2000. The increase in investment income from 1999 to 2000 reflected
the interest earned on cash provided by operations in 1999 and 2000, and on the
net proceeds of our follow-on offering in February and March 2000.

   Provision for Income Taxes

   We recorded an income tax provision of $1.8 million in 1999, $2.3 million in
2000 and $1.8 million 2001. We account for income taxes in accordance with SFAS
No. 109. The effective income tax rates differed from statutory rates primarily
due to the non-deductibility of in-process research and development,
amortization and impairment of goodwill, purchased product rights, and other
purchased intangible assets, as well as adjustment of the valuation allowance
that has offset substantially the tax benefits from the significant net
operation loss and tax credit carry-forwards available.

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

                                      44

<PAGE>

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
these regards, we have from time to time experienced delays in recognizing
revenues with respect to certain orders. In any period a significant portion of
our revenue may be derived from large sales to a limited number of customers.
Despite the uncertainties in our revenue patterns, our operating expenses are
based upon anticipated revenue levels and such expenses are incurred on an
approximately ratable basis throughout the quarter. As a result, if expected
revenues are delayed or otherwise not realized in a quarter for any reason, our
business, operating results and financial condition would be adversely affected
in a significant way.

   Under our restructuring program, as discussed earlier, the levels of
operating expenses decreased and the net loss decreased in the third and fourth
quarters of 2001.

   The following tables set forth certain unaudited consolidated quarterly
statement of operations data for the eight quarters in the period ended
December 31, 2001, as well as such data expressed as a percentage of our total
revenues for the periods indicated. These data have 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
Annual Report.


                                      45

<PAGE>

   The operating results for any quarter are not necessarily indicative of
results for any future period.

<TABLE>
<CAPTION>
                                                                      Quarter Ended
                                      -----------------------------------------------------------------------------
                                      Mar. 31, June 30,  Sept. 30, Dec. 31,  Mar. 31,  June 30,   Sept. 30, Dec. 31,
                                        2000     2000      2000      2000      2001      2001       2001      2001
                                      -------- --------  --------- --------  --------  ---------  --------- --------
                                                          (in thousands, except per share data)
Statement of Operations Data:
<S>                                   <C>      <C>       <C>       <C>       <C>       <C>        <C>       <C>
Revenues:
  License............................ $20,889  $ 18,780  $ 25,451  $ 27,992  $ 10,559  $  12,554   $12,288  $12,626
  Services and maintenance...........   8,173    10,536    16,736    19,820    20,946     17,462    15,732   15,798
                                      -------  --------  --------  --------  --------  ---------   -------  -------
   Total revenues....................  29,062    29,316    42,187    47,812    31,505     30,016    28,020   28,424
                                      -------  --------  --------  --------  --------  ---------   -------  -------
Cost of revenues:
  License............................     937       953       787     1,741       901      1,207     1,247    1,160
  Services and maintenance...........   4,568     6,064     9,982    11,804    13,346     11,312     9,710    9,272
                                      -------  --------  --------  --------  --------  ---------   -------  -------
   Total cost of revenues............   5,505     7,017    10,769    13,545    14,247     12,519    10,957   10,432
                                      -------  --------  --------  --------  --------  ---------   -------  -------
Gross profit.........................  23,557    22,299    31,418    34,267    17,258     17,497    17,063   17,992
                                      -------  --------  --------  --------  --------  ---------   -------  -------
Operating expenses:
  Sales and marketing................  12,857    14,905    21,337    24,149    26,580     38,219    13,971    8,669
  Research and development...........   4,993     5,825     8,454     8,353     9,487      8,345     6,527    6,533
  General and administrative.........   2,192     2,722     3,745     3,424     4,687      9,363     3,313    3,146
  Acquired in-process research and
   development.......................      --    29,614        --        --        --         --        --       --
  Amortization of purchased product
   rights............................      --        --     1,377     1,374     1,377      1,377       284      284
  Amortization of goodwill and other
   purchased intangibles.............     661     1,615    28,836    28,840    28,900     28,900     2,171    2,171
  Impairment of goodwill, purchased
   product rights and other
   purchased intangibles.............      --        --        --        --        --    326,953        --       --
  Restructuring charges..............      --        --        --        --        --     65,511        --       --
  Write-down of leaseholds and other
   long-lived assets.................      --        --        --        --        --     13,519        --       --
                                      -------  --------  --------  --------  --------  ---------   -------  -------
   Total operating expenses..........  20,703    54,681    63,749    66,140    71,031    492,187    26,266   20,803
                                      -------  --------  --------  --------  --------  ---------   -------  -------
Income (loss) from operations........   2,854   (32,382)  (32,331)  (31,873)  (53,773)  (474,690)   (9,203)  (2,811)
                                      -------  --------  --------  --------  --------  ---------   -------  -------
Other income (expense):
  Interest income....................   1,886     3,727     3,767     4,429     3,244      2,399     1,511    1,176
  Realized gain on investments.......      --        --        --        --        --         --     1,103       --
  Write-down of long-term strategic
   investments.......................      --        --        --        --        --     (6,100)   (1,406)  (3,294)
                                      -------  --------  --------  --------  --------  ---------   -------  -------
   Total other income (expense)......   1,886     3,727     3,767     4,429     3,244     (3,701)    1,208   (2,118)
                                      -------  --------  --------  --------  --------  ---------   -------  -------
Income (loss) before income taxes....   4,740   (28,655)  (28,564)  (27,444)  (50,529)  (478,391)   (7,995)  (4,929)
Provision for income taxes...........  (1,422)     (287)     (212)     (416)     (350)      (396)     (303)    (779)
                                      -------  --------  --------  --------  --------  ---------   -------  -------
Net income (loss).................... $ 3,318  $(28,942) $(28,776) $(27,860) $(50,879) $(478,787)  $(8,298) $(5,708)
                                      =======  ========  ========  ========  ========  =========   =======  =======
Net income (loss) per share
   Basic............................. $  0.07  $  (0.54) $  (0.46) $  (0.44) $  (0.81) $   (7.58)  $ (0.13) $ (0.09)
                                      =======  ========  ========  ========  ========  =========   =======  =======
   Diluted........................... $  0.06  $  (0.54) $  (0.46) $  (0.44) $  (0.81) $   (7.58)  $ (0.13) $ (0.09)
                                      =======  ========  ========  ========  ========  =========   =======  =======
Shares used in per share computation
   Basic.............................  49,250    53,581    62,507    62,677    62,911     63,205    63,491   64,036
                                      =======  ========  ========  ========  ========  =========   =======  =======
   Diluted...........................  57,760    53,581    62,507    62,677    62,911     63,205    63,491   64,036
                                      =======  ========  ========  ========  ========  =========   =======  =======
</TABLE>

                                      46

<PAGE>

<TABLE>
<CAPTION>
                                                                     Quarter Ended
                                     ---------------------------------------------------------------------------
                                     Mar. 31, June 30,  Sept. 30, Dec. 31, Mar. 31,  June 30,   Sept. 30, Dec. 31,
                                       2000     2000      2000      2000     2001      2001       2001      2001
                                     -------- --------  --------- -------- --------  --------   --------- --------
Statement of Operations Data:
<S>                                  <C>      <C>       <C>       <C>      <C>       <C>        <C>       <C>
Revenues:
  License...........................   71.9%     64.1%     60.3%    58.5%     33.5%      41.8%     43.9%    44.4%
  Services and maintenance..........   28.1      35.9      39.7     41.5      66.5       58.2      56.1     55.6
                                      -----    ------     -----    -----    ------   --------     -----    -----
   Total revenues...................  100.0     100.0     100.0    100.0     100.0      100.0     100.0    100.0
                                      -----    ------     -----    -----    ------   --------     -----    -----
Cost of revenues:
  License...........................    3.2       3.3       1.8      3.6       2.8        4.0       4.4      4.1
  Services and maintenance..........   15.7      20.7      23.7     24.7      42.4       37.7      34.7     32.6
                                      -----    ------     -----    -----    ------   --------     -----    -----
   Total cost of revenues...........   18.9      24.0      25.5     28.3      45.2       41.7      39.1     36.7
                                      -----    ------     -----    -----    ------   --------     -----    -----
Gross profit........................   81.1      76.0      74.5     71.7      54.8       58.3      60.9     63.3
                                      -----    ------     -----    -----    ------   --------     -----    -----
Operating expenses:
  Sales and marketing...............   44.3      50.8      50.6     50.5      84.4      127.3      49.9     30.5
  Research and development..........   17.2      19.9      20.0     17.5      30.1       27.8      23.3     23.0
  General and administrative........    7.5       9.3       8.9      7.2      14.9       31.2      11.8     11.1
  Acquired in-process research
   and development..................     --     101.0        --       --        --         --        --       --
  Amortization of purchased
   product rights...................     --        --       3.3      2.9       4.4        4.6       1.0      1.0
  Amortization of goodwill and
   other purchased intangibles......    2.3       5.5      68.3     60.3      91.7       96.3       7.7      7.6
  Impairment of goodwill, purchased
   product rights and other
   purchased intangibles............     --        --        --       --        --    1,089.3        --       --
  Restructuring charges.............     --        --        --       --        --      218.3        --       --
  Write-down of leaseholds and
   other long-lived assets..........     --        --        --       --        --       45.0        --       --
                                      -----    ------     -----    -----    ------   --------     -----    -----
   Total operating expenses.........   71.3     186.5     151.1    138.4     225.5    1,639.8      93.7     73.2
                                      -----    ------     -----    -----    ------   --------     -----    -----
Income (loss) from operations.......    9.8    (110.5)    (76.6)   (66.7)   (170.7)  (1,581.5)    (32.8)    (9.9)
                                      -----    ------     -----    -----    ------   --------     -----    -----
Other income (expense):.............
  Interest income...................    6.5      12.7       8.9      9.3      10.3        8.0       5.4      4.1
  Realized gain on investments......     --        --        --       --        --         --       3.9       --
  Write-down of long-term
   strategic investments............     --        --        --       --        --      (20.3)     (5.0)   (11.6)
                                      -----    ------     -----    -----    ------   --------     -----    -----
   Total other income (expense).....    6.5      12.7       8.9      9.3      10.3      (12.3)      4.3     (7.5)
                                      -----    ------     -----    -----    ------   --------     -----    -----
Income (loss) before income taxes...   16.3     (97.8)    (67.7)   (57.4)   (160.4)  (1,593.8)    (28.5)   (17.4)
Provision for income taxes..........   (4.9)     (0.9)     (0.5)    (0.9)     (1.1)      (1.3)     (1.1)    (2.7)
                                      -----    ------     -----    -----    ------   --------     -----    -----
Net income (loss)...................   11.4%    (98.7)%   (68.2)%  (58.3)%  (161.5)% (1,595.1)%   (29.6)%  (20.1)%
                                      =====    ======     =====    =====    ======   ========     =====    =====
</TABLE>

Liquidity and Capital Resources

   We used cash of $58.5 million in operating activities during 2001. This cash
outflow was primarily a result of a net loss before non-cash charges of $109.1
million, a decrease in accounts payable, accrued liabilities and deferred
revenue of $12.4 million, partially offset by cash inflows resulting from a
decrease in accounts receivable of $13.6 million and an increase in accrued
restructuring charges of $47.0 million during the year. Our average days sales
outstanding at December 31, 2001 was 75 days, which represents a decrease from
the 87 days that we reported at December 31, 2000. The overall decrease in days
sales outstanding from December 31, 2000 reflected an increase in the allowance
for doubtful accounts, better collection cycles despite longer payment terms
for international customers, and improved linearity of revenues during the last
two quarters of 2001. For purposes of calculating average days sales
outstanding, we divide ending accounts receivable by the current quarter's
revenues and multiply this amount by 90 days. The level of accounts receivable
at each quarter end will be affected by the concentration of revenues in the
final weeks of each quarter and may be negatively affected by expanded
international revenues in relation to total revenues as licenses to
international customers often have longer payment terms.

   During 2001, we generated $73.4 million of cash in investing activities,
primarily due to cash provided by reductions in our marketable investments in
the amount of $86.1 million, net of $202.6 million of marketable investment
purchases, and proceeds of $4.6 million from the disposition of a long-term
strategic investment.

                                      47

<PAGE>

   This was partially offset by $13.6 million invested in property and
equipment, $2.3 million invested in long-term strategic investments and $1.7
million invested in other long-term assets. The property and equipment
investments were primarily computer hardware, furniture and leasehold
improvements to support our growing organization, largely costs related to the
fit-up of our new facility in Addison, Texas and completion of the fit-up of
our facilities in Santa Clara, California and Ottawa, Canada. The long-term
investments funded were strategic in nature, represented investments in less
than 10% of the capital stock of privately held electronic security and
technology companies or advances to existing investees, and were accounted for
on a cost basis. The investment in other long-term assets relates primarily to
product localization work performed by third party contractors and a security
deposit for our Addison facility.

   Cash provided by financing activities for 2001 was $5.9 million, primarily
from the exercise of employee stock options and the sale of shares under our
employee stock purchase plan.

   For disclosure regarding our contractual obligations and commercial
commitments, please see notes 9 and 14 to our consolidated financial
statements, which are included elsewhere in this Annual Report.

   As of December 31, 2001, our cash, cash equivalents and marketable
investments in the amount of $162.6 million provided our principal sources of
liquidity. Overall, we used $65.1 million from our cash, cash equivalents and
marketable investments in 2001. Although we expect improved profitability in
2002 as we progress towards breakeven operating earnings, we estimate that we
will continue to use cash in 2002 to fund operating losses and to satisfy the
obligations accrued for under our restructuring program. While there can be no
assurance as to the extent of usage of liquid resources in the next fiscal
year, we believe that our cash flows from operations and existing cash, cash
equivalents and short-term marketable investments will be sufficient to meet
our needs for at least the next twelve months.

Certain Factors That May Affect Our Business

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

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

  .   length of sales cycles associated with our product offerings;

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

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

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

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

  .   changes in pricing policies by our competitors;

  .   changes in our operating expenses; and

  .   fluctuations in foreign currency exchange rates.

                                      48

<PAGE>

   In addition, in June 2001 we signed a $17.6 million contract with Bell
Nexxia for the Government of Canada project known as "Secure Channel". This
contract is being accounted for on a subscription basis over four fiscal
quarters, with software revenue recognition beginning in the second quarter of
2001 and ending during the first quarter of 2002. As a result of the completion
of the subscription period, we will have to increase new software license
revenues by a larger amount than achieved in the past four quarters in order to
maintain operating results at current levels. While we are focused on marketing
programs and revenue generating opportunities to increase software revenues,
there can be no assurances that these initiatives will be successful.

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

   Estimating future revenues is difficult because we ship our products soon
after an order is received and, as such, we do not have a significant backlog.
Thus, quarterly license revenues depend heavily upon orders received and
shipped within the same quarter. Moreover, we historically have recorded 50% to
80% of our total quarterly revenues in the third month of the quarter, with a
concentration of revenues in the second half of that month. We expect that this
concentration of revenues, which is attributable in part to the tendency of
some customers to make significant capital expenditures at the end of a fiscal
quarter and to sales patterns within the software industry, will continue for
the foreseeable future.

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

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

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

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

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

  .   customers' budgetary constraints;

  .   the timing of customers' budget cycles; and

  .   customers' internal approval processes.

                                      49

<PAGE>

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

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

   Historically, a limited number of customers has accounted for a significant
percentage of our revenues. In 1999, our three largest customers accounted for
31% of revenues, with the largest customer accounting for 24% of revenues. In
2000, our three largest customers accounted for 12% of revenues. In 2001, our
three largest customers accounted for 18% of revenues. 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. In addition,
we anticipate that such customers will continue to vary over time, so that the
achievement of our long-term goals will require us to obtain additional
significant customers on an ongoing basis. Our failure to enter into a
sufficient number of large licensing agreements during a particular period
could have a significant adverse effect on our revenues.

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

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

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

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

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

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

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

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

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

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

   Like virtually all software systems, our products contain errors, failures
or bugs that our existing testing procedures have not detected. The errors may
become evident at any time during the life of our

                                      50

<PAGE>

products. The discovery of any errors, failures or bugs in any products,
including third-party technology incorporated into our products, may result in:

  .   adverse publicity;

  .   product returns;

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

  .   third-party claims against us.

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

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

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

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

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

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

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

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

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

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

   Our personnel, systems, procedures and controls may not be adequate to
support our operations. The geographic dispersal of our operations, including
the separation of our headquarters in Addison, Texas, from our research and
development facilities in Ottawa, Canada, and Santa Clara, California

                                      51

<PAGE>

and from our European headquarters in Reading, United Kingdom, may make it more
difficult to manage our growth.

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

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

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

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

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

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

    .  difficulties in collecting international accounts receivable;

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

    .  potentially longer payment cycles for customer payments;

    .  increased costs associated with maintaining international marketing
       efforts;

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

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

    .  difficulties managing personnel and operations in remote locations; and

    .  increased complexity in global corporate tax structure.

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

                                      52

<PAGE>

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

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

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

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

    .  copy aspects of our products;

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

    .  infringe upon our patents.

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

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

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

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

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

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

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

                                      53

<PAGE>

significant adverse effect on our business, financial condition or results of
operations. A successful claim against us could also have a significant adverse
effect on our results of operations for the period in which damages are paid.

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

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

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

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

  .   actual or anticipated fluctuations in our operating results;

  .   announcements of technological innovations;

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

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

  .   conditions and trends in the security industry;

  .   changes in financial estimates by securities analysts; and

  .   general market conditions and other factors.

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

   As of February 28, 2002, Nortel Networks Limited, through its subsidiary,
Nortel Networks Inc., beneficially owned approximately 19.5% of our outstanding
voting stock, and one of our ten directors was a representative of Nortel
Networks. Accordingly, Nortel Networks has the ability to exert significant
influence over our affairs, including the election of directors and decisions
relating to our strategic and operating activities. This concentration of
ownership may have the effect of delaying or preventing a change in control
that other stockholders may find favorable.

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

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

                                      54

<PAGE>

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 marketable investments, in investments
that are designed to preserve principal, maintain liquidity and maximize
return. We actively manage our investments in accordance with these objectives.
Some of these investments are subject to interest rate risk, whereby a change
in market interest rates will cause the principal amount of the underlying
investment to fluctuate. Therefore, depreciation in principal value of an
investment is possible in situations where the investment is made at a fixed
interest rate and the market interest rate then subsequently increases. We try
to manage this risk by maintaining our cash, cash equivalents and marketable
investments with high quality financial institutions and investment managers.
We also restrict the investments to primarily securities with short-term
maturities, such that, at December 31, 2001, the majority of our marketable
investments had maturities of less than six months from that date. As a result,
we believe that our exposure to market risk related to interest rates is
minimal.

   The following table presents the cash, cash equivalents and marketable
investments that we held at December 31, 2000 and 2001, that would have been
subject to interest rate risk, and the related ranges of maturities as of that
date:

<TABLE>
<CAPTION>
                                      December 31, 2000                                 December 31, 2001
                          ------------------------------------------ -------------------------------------------------------
                                           Maturity                                         Maturity
                          ------------------------------------------ -------------------------------------------------------
                           Within                                     Within
                          3 Months 3-6 Months (greater than)6 Months 3 Months 3-6 Months 6-12 Months (greater than)12 Months
                          -------- ---------- ---------------------- -------- ---------- ----------- -----------------------
                                                      (in thousands)
<S>                       <C>      <C>        <C>                    <C>      <C>        <C>         <C>
Investments classified as
 cash and cash
 equivalents............. $13,124   $     --          $   --         $31,388   $    --     $    --           $   --
Investments classified as
 held to maturity
 marketable investments..  62,797    131,066           6,243          31,476    45,486      29,826            9,038
                          -------   --------          ------         -------   -------     -------           ------
   Total amortized cost.. $75,921   $131,066          $6,243         $62,864   $45,486     $29,826           $9,038
                          =======   ========          ======         =======   =======     =======           ======
Fair Value............... $75,922   $131,231          $6,275         $63,243   $45,489     $29,917           $9,009
                          =======   ========          ======         =======   =======     =======           ======
</TABLE>

   Risk Associated with Exchange Rates

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

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

   Risk Associated with Equity Investments

   We hold short-term equity securities of a publicly traded company. It is
possible that the market value of these securities could decline significantly
in the near future. For example, due to stock market volatility, we had
recorded an unrealized loss of $1.5 million in this investment based on its
market

                                      55

<PAGE>

value at December 31, 2000. In connection with this investment, we had engaged
in a hedging transaction that provided us with the right to receive an amount
equal to the difference between the price we paid for these securities and the
aggregate of the fair market values on the dates that the securities are made
available for sale on the public market. We accounted for this option as a fair
value hedge, in accordance with SFAS No. 133 and, as a result, recorded an
unrealized gain of $1.5 million on the hedge instrument. Prior to December 31,
2001, we exercised the call option and, consequently, received additional
shares of the investee. At December 31, 2001, we recorded an unrealized loss of
$220,000 on the remaining portion of these shares owned, in order to adjust the
cost basis to reflect market value. Upon completion of this call option, the
hedge was successful in covering the majority of the original investment value.
However, hedging activity may not always sufficiently cover the value of the
corresponding investment.

   In addition, we have invested in several privately held companies, most of
which are technology companies in the start-up or development stage, or are
companies with technologies and products that are targeted at geographically
distant markets. If the demand for the technologies and products offered by
these privately held companies materializes slowly, to a minimum extent, or not
at all in the relevant markets, we could lose all or substantially all of our
investments in these companies. To date, we have recorded losses of $10.8
million from impairments and a realized gain of $1.6 million from dispositions
in connection with these investments.

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.

   Our "Quarterly Results of Operations" set forth in Item 7 is incorporated
herein by reference.

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

   None.

                                      56

<PAGE>

                                   PART III

   Certain information required by Part III is omitted from this Annual Report
as we intend to file our definitive Proxy Statement for our Annual Meeting of
Stockholders to be held on May 3, 2002, pursuant to Regulation 14A of the
Securities Exchange Act of 1934, 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 herein
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 sections entitled "Employment, Non-Competition,
Retention and Separation Agreements" and "Certain Transactions" in the Proxy
Statement is incorporated herein by reference.

                                      57

<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, Inc. are filed as part of this Form 10-K on the
       pages indicated:

<TABLE>
<CAPTION>
                                                                                       Page
ENTRUST, INC.                                                                          ----
<S>                                                                                    <C>
Independent Auditors' Report..........................................................  60
Consolidated Balance Sheets as of December 31, 2000 and 2001..........................  61
Consolidated Statements of Operations for the years ended December 31, 1999, 2000 and
  2001................................................................................  62
Consolidated Statements of Shareholders' Equity and Comprehensive Income for the years
  ended December 31, 1999, 2000 and 2001..............................................  63
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 2000 and
  2001................................................................................  64
Notes to Consolidated Financial Statements............................................  65
</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, 2001.

                                      58

<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 27th day of
March, 2002.

                                               ENTRUST, INC.
                                                         (Registrant)

                                               By:    /s/  F. WILLIAM CONNER
                                                   -----------------------------
                                                         F. William Conner
                                                    President, Chief Executive
                                                            Officer and
                                                       Chairman of the Board

   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 27th day of March, 2002.

<TABLE>
<CAPTION>
          Signature                                      Title
          ---------                                       -----
<S>                           <C>                            <C>

   /s/  F. WILLIAM CONNER     President, Chief Executive Officer and Chairman of the Board
-----------------------------   (Principal Executive Officer)
      F. William Conner

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

 /s/  BUTLER C. DERRICK, JR.  Director
-----------------------------
   Butler C. Derrick, Jr.

     /s/  JAWAID EKRAM        Director
-----------------------------
        Jawaid Ekram

   /s/  TERRELL B. JONES      Director
-----------------------------
      Terrell B. Jones

   /s/  MICHAEL P. RESSNER    Director
-----------------------------
     Michael P. Ressner

    /s/  DOUGLAS SCHLOSS      Director
-----------------------------
       Douglas Schloss

    /s/  LIENER TEMERLIN      Director
-----------------------------
       Liener Temerlin

    /s/  J. ALBERTO YEPEZ     Director
-----------------------------
      J. Alberto Yepez
</TABLE>

                                      59

<PAGE>

                         INDEPENDENT AUDITORS' REPORT

To the Directors and Shareholders of Entrust, Inc.:

   We have audited the consolidated balance sheets of Entrust, Inc. as of
December 31, 2000 and 2001, 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, 2001. 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 auditing standards generally
accepted in the United States of America. 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, Inc. at December 31,
2000 and 2001, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America.

/s/ DELOITTE & TOUCHE LLP
Dallas, Texas

February 15, 2002

                                      60

<PAGE>

                                 ENTRUST, INC.

                          CONSOLIDATED BALANCE SHEETS
                       (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                                 December 31,
                                                                             --------------------
                                                                               2000       2001
                                                                             ---------  ---------
<S>                                                                          <C>        <C>
                                  ASSETS
Current assets:
   Cash and cash equivalents................................................ $  24,241  $  45,267
   Short-term marketable investments........................................   203,446    108,288
   Accounts receivable (net of allowance for doubtful accounts of $2,932 in
     2000 and $3,909 in 2001)...............................................    46,301     23,732
   Other receivables........................................................     3,456      1,720
   Prepaid expenses.........................................................     6,147      3,482
                                                                             ---------  ---------
       Total current assets.................................................   283,591    182,489
Long-term marketable investments............................................        60      9,038
Property and equipment, net.................................................    25,168     17,390
Purchased product rights, net...............................................    19,259      2,838
Goodwill, net...............................................................   365,127      6,436
Other purchased intangibles, net............................................    22,054      4,750
Long-term strategic investments.............................................    16,615      5,076
Other long-term assets, net.................................................     2,232      1,421
                                                                             ---------  ---------
       Total assets......................................................... $ 734,106  $ 229,438
                                                                             =========  =========

                   LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable......................................................... $  16,989  $  13,815
   Accrued liabilities......................................................    22,311     15,121
   Accrued restructuring charges............................................        --     46,988
   Deferred revenue.........................................................    19,466     17,553
   Due to related party.....................................................       799         --
                                                                             ---------  ---------
       Total current liabilities............................................    59,565     93,477
Long-term liabilities.......................................................       477        116
                                                                             ---------  ---------
       Total liabilities....................................................    60,042     93,593
                                                                             ---------  ---------
Shareholders' equity:
   Common stock, par value $0.01 per share; 62,753,738 and 64,432,052
     issued and outstanding shares at December 31, 2000 and 2001,
     respectively...........................................................       628        645
   Additional paid-in capital...............................................   775,604    781,879
   Unearned compensation....................................................      (316)      (100)
   Accumulated deficit......................................................  (101,518)  (645,190)
   Accumulated other comprehensive loss.....................................      (334)    (1,389)
                                                                             ---------  ---------
       Total shareholders' equity...........................................   674,064    135,845
                                                                             ---------  ---------
       Total liabilities and shareholders' equity........................... $ 734,106  $ 229,438
                                                                             =========  =========
</TABLE>

                See notes to consolidated financial statements

                                      61

<PAGE>

                                 ENTRUST, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                (in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                Year Ended December 31,
                                                         -------------------------------------
                                                            1999         2000         2001
                                                         -----------  -----------  -----------
<S>                                                      <C>          <C>          <C>
Revenues:
   License.............................................. $    61,482  $    93,112  $    48,027
   Services and maintenance.............................      23,732       55,265       69,938
                                                         -----------  -----------  -----------
       Total revenues...................................      85,214      148,377      117,965
                                                         -----------  -----------  -----------

Cost of revenues:
   License..............................................       2,286        4,418        4,515
   Services and maintenance.............................      13,016       32,418       43,640
                                                         -----------  -----------  -----------
       Total cost of revenues...........................      15,302       36,836       48,155
                                                         -----------  -----------  -----------
Gross profit............................................      69,912      111,541       69,810
                                                         -----------  -----------  -----------

Operating expenses:
   Sales and marketing..................................      40,900       73,248       87,439
   Research and development.............................      16,605       27,625       30,892
   General and administrative...........................       7,752       12,083       20,509
   Acquired in-process research and development.........          --       29,614           --
   Amortization of purchased product rights.............          --        2,751        3,322
   Amortization of goodwill and other purchased
     intangibles........................................         712       59,952       62,142
   Impairment of goodwill, purchased product rights and
     other purchased intangibles........................          --           --      326,953
   Restructuring charges................................          --           --       65,511
   Write-down of leaseholds and other long-lived
     assets.............................................          --           --       13,519
                                                         -----------  -----------  -----------
       Total operating expenses.........................      65,969      205,273      610,287
                                                         -----------  -----------  -----------
Income (loss) from operations...........................       3,943      (93,732)    (540,477)
                                                         -----------  -----------  -----------
Other income (expense):
   Interest income......................................       3,776       13,809        8,330
   Realized gain on investments.........................          --           --        1,103
   Write-down of long-term strategic investments........          --           --      (10,800)
                                                         -----------  -----------  -----------
       Total other income (expense).....................       3,776       13,809       (1,367)
                                                         -----------  -----------  -----------
Income (loss) before income taxes.......................       7,719      (79,923)    (541,844)
Provision for income taxes..............................      (1,800)      (2,337)      (1,828)
                                                         -----------  -----------  -----------
Net income (loss)....................................... $     5,919  $   (82,260) $  (543,672)
                                                         ===========  ===========  ===========

Net income (loss) per share:
   Basic................................................ $      0.13  $     (1.44) $     (8.57)
   Diluted.............................................. $      0.11  $     (1.44) $     (8.57)
Weighted average common shares used in per share
  computations:
   Basic................................................  43,846,922   57,003,479   63,410,786
   Diluted..............................................  54,802,682   57,003,479   63,410,786
</TABLE>

                See notes to consolidated financial statements

                                      62

<PAGE>

                                 ENTRUST, INC.

   CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
             for the years ended December 31, 1999, 2000 and 2001
                       (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                                                         Accumulated
                                   Common Stock    Special Voting Stock Additional Unearned Accumulated     Other
                                 ----------------- -------------------   Paid-In   Compen-    Income    Comprehensive
                                   Shares   Amount   Shares      Amount  Capital    sation   (Deficit)  Income (Loss)
                                 ---------- ------ ----------    ------ ---------- -------- ----------- -------------
<S>                              <C>        <C>    <C>           <C>    <C>        <C>      <C>         <C>
Balances at December 31,
 1998........................... 42,492,681  $425   5,157,289     $ 52   $112,483   $(635)   $ (25,177)    $   (89)
 Unearned compensation
  amortized.....................         --    --          --       --         --     196           --          --
 Common shares issued:
   Stock option exercises.......  2,636,482    27          --       --      8,388      --           --          --
   Employee Stock Purchase
    Plan........................     74,285    --          --       --      1,304      --           --          --
 Tax equivalent related to non-
  qualified option exercises....         --    --          --       --        708      --           --          --
 Comprehensive income (loss):
   Net income...................         --    --          --       --         --      --        5,919          --
   Translation adjustment.......         --    --          --       --         --      --           --        (446)
                                 ----------  ----  ----------     ----   --------   -----    ---------     -------
   Total comprehensive
    income......................


Balances at December 31,
 1999........................... 45,203,448   452   5,157,289       52    122,883    (439)     (19,258)       (535)
 Unearned compensation
  related to non-employee
  stock options granted.........         --    --          --       --        101    (101)          --          --
 Unearned compensation
  amortized.....................         --    --          --       --         --     224           --          --
 Special voting shares
  exchanged.....................  5,157,289    52  (5,157,289)     (52)        --      --           --          --
 Common shares issued:..........
 Cash...........................  2,074,260    21          --       --    162,622      --           --          --
 Acquisitions, including
  options and warrants..........  8,548,177    85          --       --    482,187      --           --          --
 Stock option exercises.........  1,701,659    17          --       --      6,320      --           --          --
 Employee Stock Purchase
  Plan..........................     68,905     1          --       --      1,705      --           --          --
 Common shares issuance
  costs.........................         --    --          --       --     (1,130)     --           --          --
 Tax equivalent related to non-
  qualified option exercises....         --    --          --       --        916      --           --          --
 Comprehensive income (loss):
   Net loss.....................         --    --          --       --         --      --      (82,260)         --
   Unrealized loss on
    investments.................         --    --          --       --         --      --           --      (1,457)
   Unrealized gain on gross-up
    receivable related to
    investments.................         --    --          --       --         --      --           --       1,457
   Translation adjustment.......         --    --          --       --         --      --           --         201
                                 ----------  ----  ----------     ----   --------   -----    ---------     -------
   Total comprehensive loss.....

Balances at December 31,
 2000........................... 62,753,738   628          --       --    775,604    (316)    (101,518)       (334)
 Unearned compensation
  related to non-employee
  stock options granted.........         --    --          --       --          6      (6)          --          --
 Unearned compensation
  amortized.....................         --    --          --       --         --     222           --          --
 Warrants and options issued
  to non-employee for
  services rendered.............         --    --          --       --      1,092      --           --          --
 Common shares issued:
   Stock option exercises.......  1,422,735    14          --       --      3,070      --           --          --
   Employee Stock Purchase
    Plan........................    255,579     3          --       --      2,107      --           --          --
 Comprehensive loss:
   Net loss.....................         --    --          --       --         --      --     (543,672)         --
   Unrealized loss on
    investments, net
    of reclassification
    adjustment..................         --    --          --       --         --      --           --        (220)
   Translation adjustment.......         --    --          --       --         --      --           --        (835)
                                 ----------  ----  ----------     ----   --------   -----    ---------     -------
   Total comprehensive loss.....

Balances at December 31,
 2001........................... 64,432,052  $645          --     $ --   $781,879   $(100)   $(645,190)    $(1,389)
                                 ==========  ====  ==========     ====   ========   =====    =========     =======
</TABLE>
<TABLE>
<CAPTION>

                                                   Total
                                 Comprehensive Shareholders'
                                 Income (Loss)    Equity
                                 ------------- -------------
<S>                              <C>           <C>
Balances at December 31,
 1998...........................                 $  87,059
 Unearned compensation
  amortized.....................                       196
 Common shares issued:
   Stock option exercises.......                     8,415
   Employee Stock Purchase
    Plan........................                     1,304
 Tax equivalent related to non-
  qualified option exercises....                       708
 Comprehensive income (loss):
   Net income...................   $   5,919         5,919
   Translation adjustment.......        (446)         (446)
                                   ---------     ---------
   Total comprehensive
    income......................   $   5,473
                                   =========

Balances at December 31,
 1999...........................                   103,155
 Unearned compensation
  related to non-employee
  stock options granted.........                        --
 Unearned compensation
  amortized.....................                       224
 Special voting shares
  exchanged.....................                        --
 Common shares issued:..........
 Cash...........................                   162,643
 Acquisitions, including
  options and warrants..........                   482,272
 Stock option exercises.........                     6,337
 Employee Stock Purchase
  Plan..........................                     1,706
 Common shares issuance
  costs.........................                    (1,130)
 Tax equivalent related to non-
  qualified option exercises....                       916
 Comprehensive income (loss):
   Net loss.....................   $ (82,260)      (82,260)
   Unrealized loss on
    investments.................      (1,457)       (1,457)
   Unrealized gain on gross-up
    receivable related to
    investments.................       1,457         1,457
   Translation adjustment.......         201           201
                                   ---------     ---------
   Total comprehensive loss.....   $ (82,059)
                                   =========
Balances at December 31,
 2000...........................                   674,064
 Unearned compensation
  related to non-employee
  stock options granted.........                        --
 Unearned compensation
  amortized.....................                       222
 Warrants and options issued
  to non-employee for
  services rendered.............                     1,092
 Common shares issued:
   Stock option exercises.......                     3,084
   Employee Stock Purchase
    Plan........................                     2,110
 Comprehensive loss:
   Net loss.....................   $(543,672)     (543,672)
   Unrealized loss on
    investments, net
    of reclassification
    adjustment..................        (220)         (220)
   Translation adjustment.......        (835)         (835)
                                   ---------     ---------
   Total comprehensive loss.....   $(544,727)
                                   =========
Balances at December 31,
 2001...........................                 $ 135,845
                                                 =========
</TABLE>

                See notes to consolidated financial statements

                                      63

<PAGE>

                                 ENTRUST, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (in thousands)

<TABLE>
<CAPTION>
                                                                    Year Ended December 31,
                                                                -------------------------------
                                                                  1999       2000       2001
                                                                ---------  ---------  ---------
<S>                                                             <C>        <C>        <C>
Operating activities:
 Net income (loss)............................................. $   5,919  $ (82,260) $(543,672)
 Non-cash items in income (loss):
   Depreciation and amortization...............................     3,348     67,026     73,431
   Deferred income taxes.......................................       867         --         --
   Tax equivalent related to non-qualified option exercises....       708        916         --
   Unearned compensation amortized.............................       196        224        222
   Acquired in-process research and development................        --     29,614         --
   Revenue from non-monetary transaction.......................        --     (2,988)      (734)
   Loss on disposition of short-term marketable investments....        --         --        261
   Provision for doubtful accounts.............................       157      1,688      8,508
   Impairment of goodwill, purchase product rights and other
     purchased intangibles.....................................        --         --    326,953
   Non-cash other special non-recurring charges................        --         --      3,212
   Gain on disposition of long-term strategic investments......        --         --     (1,584)
   Write-down of leaseholds and other long-lived assets........        --         --     13,519
   Write-down of long-term strategic investments...............        --         --     10,800
 Changes in operating assets and liabilities, net of effects of
   acquisitions:
   Decrease (increase) in accounts receivable..................    (7,961)   (21,740)    13,642
   Decrease (increase) in other receivables....................       108     (1,458)     1,736
   Decrease (increase) in prepaid expenses and other assets....    (1,029)    (3,788)     1,395
   Increase (decrease) in accounts payable.....................      (551)     5,879     (2,984)
   Increase (decrease) in accrued liabilities..................     4,175      8,283     (7,601)
   Increase in accrued restructuring charges...................        --         --     46,988
   Increase (decrease) in deferred revenue.....................     2,970      5,777     (1,790)
   Increase (decrease) due to related party....................        31         --       (799)
                                                                ---------  ---------  ---------
     Net cash provided by (used in) operating activities.......     8,938      7,173    (58,497)
                                                                ---------  ---------  ---------
Investing activities:
 Purchases of marketable investments...........................  (102,230)  (346,369)  (202,638)
 Dispositions of marketable investments........................   109,786    216,062    288,737
 Purchases of property and equipment...........................    (4,421)   (19,717)   (13,629)
 Proceeds on disposition of property and equipment.............        --         --        264
 Increase in long-term strategic investments...................    (1,300)   (14,922)    (2,308)
 Proceeds on disposition of long-term strategic investments....        --         --      4,632
 Increase in other long-term assets............................    (1,849)    (1,218)    (1,692)
 Net cash payments in purchase transactions....................        --     (7,739)        --
                                                                ---------  ---------  ---------
     Net cash provided by (used in) investing activities.......       (14)  (173,903)    73,366
                                                                ---------  ---------  ---------
Financing activities:
 Repayment of long-term liabilities............................       (32)       (75)      (355)
 Proceeds from exercise of stock options and employee stock
   purchase plan...............................................     9,719      8,043      6,287
 Proceeds from issuance of common stock, net...................        --    161,513         --
                                                                ---------  ---------  ---------
     Net cash provided by financing activities.................     9,687    169,481      5,932
                                                                ---------  ---------  ---------
Effect of exchange rate changes on cash........................      (446)      (387)       225
                                                                ---------  ---------  ---------
Net change in cash and cash equivalents........................    18,165      2,364     21,026
Cash and cash equivalents at beginning of year.................     3,712     21,877     24,241
                                                                ---------  ---------  ---------
Cash and cash equivalents at end of year....................... $  21,877  $  24,241  $  45,267
                                                                =========  =========  =========
</TABLE>

                See notes to consolidated financial statements

                                      64

<PAGE>

                                 ENTRUST, INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  (in thousands, except share and per share data, unless indicated otherwise)

1.  Company Background

   Entrust, Inc. (the "Company") is a leading global provider of Internet
security solutions and services that make it safe to do business and complete
transactions over the Internet. The Company has a broad set of identification,
entitlements, verification, privacy and security management capabilities. Major
corporations, service providers, financial institutions and government agencies
in more than 40 countries rely on the privacy, security and trust provided
through the Company's portfolio of award-winning technologies.

   The Company was incorporated in December 1996 with nominal share capital,
all of which was contributed by Nortel Networks Corporation and its subsidiary
Nortel Networks Inc. (collectively, "Nortel Networks"). At the close of
business on December 31, 1996, Nortel Networks transferred to the Company
certain of its assets and liabilities, intellectual property, rights, licenses
and contracts. In exchange, Nortel Networks received Series A common stock,
Special Voting stock, and cash consideration. At the close of business on
December 31, 1996, the Company issued Series B common stock in a private
placement. After the completion of the private placement, Nortel Networks owned
approximately 73% of the outstanding shares of the Company's voting stock
assuming conversion of the Series B common stock and Series B Non-Voting 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 $79,100.

   On February 29, 2000 and March 2, 2000, the Company closed its follow-on
offering (which included an over-allotment option closing), issuing an
aggregate of 2,074,260 shares of its Common stock at an offering price $82 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 $161,500.

   On June 4, 2001, the Company changed its name to Entrust, Inc.

   At December 31, 2001, Nortel Networks owned approximately 21% of the
Company's Common stock.

2.  Significant Accounting Policies

Consolidation

   The consolidated financial statements of the Company include the accounts of
its majority-owned Canadian subsidiary, Entrust Technologies Limited, and its
wholly-owned subsidiaries, Entrust (Europe) Limited and enCommerce Limited in
the U.K., Entrust GmbH in Germany, r/3/ Security Engineering AG ("r/3/") and
Entrust Technologies (Switzerland) GmbH in Switzerland, CygnaCom Solutions,
Inc. ("CygnaCom") and enCommerce, Inc. ("enCommerce") in the U.S., Entrust
s.a.r.l. in France, and enCommerce K.K. in Japan. The minority interest in the
Canadian subsidiary has been insignificant to date. All significant
intercompany transactions and accounts are eliminated in consolidation.

                                      65

<PAGE>

                                 ENTRUST, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
  (in thousands, except share and per share data, unless indicated otherwise)


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 derivative financial products for hedging or
speculative purposes related to foreign currency. Therefore, 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,
France, Japan, Switzerland and the United Kingdom. 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. Also,
management periodically reviews the potential financial impact of this risk and
currently believes that the Company is not subject to significant potential
losses.

Revenue recognition

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

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

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

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

                                      66

<PAGE>

                                 ENTRUST, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
  (in thousands, except share and per share data, unless indicated otherwise)


   The Company uses the percentage-of-completion method to account for
fixed-price custom development contracts. Under this method, the Company
recognizes 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. The total project cost estimates
are reviewed on a regular basis.

Cost of revenues

   Cost of licenses includes the cost of product media, product packaging,
documentation, other production costs and third-party royalties. Amortization
of purchased products rights acquired as part of the acquisition of enCommerce
has been excluded from cost of license revenues and instead is included in
operating expenses.

   Cost of services and maintenance consists primarily of salaries, benefits
and allocated overhead costs related to consulting, training and customer
support personnel, as well as amounts paid to third-party consulting firms for
those services.

Research and development costs

   Research and development costs are expensed as incurred. In applying
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 eligible for capitalization have been insignificant. To
date, the Company has not capitalized any internal software development costs
and has capitalized, in limited circumstances, costs of software development by
third-party contractors.

Cash and cash equivalents

   The Company considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. Cash and cash equivalents are
maintained with a bank and a brokerage institution.

Marketable and other investments

   The Company maintains marketable investments mainly in a strategic cash
management account. This account is invested primarily in highly rated
corporate securities, in securities guaranteed by the U.S. government or its
agencies and highly rated municipal bonds, primarily with a remaining maturity
of not more than 12 months. The Company has the intent and ability to hold all
of these investments until maturity. Therefore, all such investments are
classified as held to maturity investments, and are stated at amortized cost.
At December 31, 2000 and 2001, the amortized cost of the Company's held to
maturity investments approximated fair value. Based on contractual maturities,
these marketable investments were classified in either current or long-term
assets.

                                      67

<PAGE>

                                 ENTRUST, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
  (in thousands, except share and per share data, unless indicated otherwise)


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

   The Company has a policy that allows for the use of hedges on equity
investments in publicly traded companies. In 2000, the Company entered into and
designated such a hedge on the investment classified as available for sale, in
the form of a call option hedge that enabled the Company to receive, from the
investee, a combination of cash and additional in-kind equity securities equal
to any deficiency between the original cost basis of the equity securities of
$3,400 and the aggregate of the market values on the dates that the securities
were made available for sale on the applicable public equity market. This
option was accounted for as a fair value hedge in accordance with SFAS No. 133.
In 2001, the Company exercised the call option and, as a result, received
additional common stock of the investee valued then at $1,700.

   Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended by SFAS No. 137 and
SFAS No. 138, which establishes accounting and reporting standards for
derivative financial instruments and hedging activities and requires the
recognition of all derivatives as either assets or liabilities on the balance
sheet and measurement at fair value. The adoption of SFAS No. 133 did not have
a significant impact on the Company's financial position or results of
operations because the Company is engaged in limited derivatives use. In
implementing SFAS No. 133, the Company reclassified both the unrealized loss on
an investment and the offsetting unrealized gain on a related hedge of $1,500
at January 1, 2001 from accumulated other comprehensive income to results of
operations with zero net effect on earnings.

   The Company holds equity securities stated at cost, which represent
long-term investments in private companies made for business and strategic
alliance purposes. The Company's ownership share in these companies ranges from
1% to 10% of voting share capital. Consistent with the Company's policies for
other long-lived assets, the carrying value of these long-term strategic
investments is periodically reviewed for impairment based upon such
quantitative measures as expected undiscounted cash flows as well as
qualitative factors. In addition, the Strategic Investment Committee of the
Board of Directors monitors and assesses the ongoing operating performance of
the underlying companies for evidence of impairment. In 2001, the Company
recorded impairments totaling $10,800 and a realized gain on disposition of
$1,600 related to these investments. These investments have a remaining
carrying value of $4,555 at December 31, 2001.

   The Company recorded revenues representing less than 6%, 6% and 4% of total
revenues in December 31, 1999, 2000 and 2001, respectively, with respect to
arms-length transactions with companies in which it had made strategic equity
investments recorded at cost.

                                      68

<PAGE>

                                 ENTRUST, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
  (in thousands, except share and per share data, unless indicated otherwise)


Accounts receivable and other current receivables

   The Company's customer base consists primarily of large, well-established
companies or government agencies. Five customers accounted for approximately
24% and 43% of accounts receivable as of December 31, 2000 and 2001,
respectively. No individual customer accounted for more than 10% of accounts
receivable at December 31, 2000. One customer accounted for 16% of accounts
receivable at December 31, 2001. Accounts receivable at December 31, 2001 also
include an accrued unbilled receivable of $3,700 that will not be billed until
April 2002. The Company performs ongoing credit evaluations of its customers
and, generally, does not require collateral from its customers to support
accounts receivable. The Company maintains an allowance for potential losses
due to credit risk, and believes that the allowance for losses is adequate. The
following table summarizes the changes in the allowance for doubtful accounts:

<TABLE>
<CAPTION>
                                                           December 31,
                                                      ----------------------
                                                      1999    2000    2001
                                                      -----  ------  -------
   <S>                                                <C>    <C>     <C>
   Allowance for doubtful accounts, beginning of year $ 753  $  703  $ 2,932
   Additional provision:
      Doubtful accounts..............................   426   1,690    8,508
      Arising from acquisitions......................    --   1,278       --
   Amounts written-off, net of recoveries............  (476)   (739)  (7,531)
                                                      -----  ------  -------
   Allowance for doubtful accounts, end of year...... $ 703  $2,932  $ 3,909
                                                      =====  ======  =======
</TABLE>

   Other current receivables include federal income tax and other tax refunds
of $1,421 and $758 as well as work-in-process relating to time-and-materials
services contracts of $1,225 and $490 at December 31, 2000 and 2001,
respectively.

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.

   Recoverability of property, equipment and other long-lived assets is
periodically reviewed for impairment on the basis of undiscounted cash flows.
If the expected cash flows are less than the asset's carrying value, the asset
is written down to its fair value.

Goodwill, purchased product rights and other purchased intangibles

   Acquisition-related intangible assets are amortized using the straight-line
method over their estimated useful lives. The expected useful lives of
goodwill, purchased product rights and other purchased intangibles is three to
five years. These assets are reviewed for impairment whenever events indicate
that their carrying amount may not be recoverable. In such reviews, the related
undiscounted cash flows expected are compared with their carrying values to
determine if a write-down to fair value is required.

                                      69

<PAGE>

                                 ENTRUST, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
  (In thousands, except share and per share data, unless indicated otherwise)


Other long-term assets

   Other long-term assets consist primarily of licenses of technology, used by
the Company to provide services, and capitalized localization costs. These
costs of $2,752 and $1,642 are amortized on a straight-line basis over three to
four years and are stated net of accumulated amortization of $520 and $499 at
December 31, 2000 and 2001, respectively. Other long-term assets also include
long-term rent deposits of $279 at December 31, 2001.

Advertising expense

   Advertising costs are charged to expense as incurred and totaled $1,990,
$3,282 and $7,101 in 1999, 2000 and 2001, respectively. Expense in 2001
includes $1,311 relating to restructuring and special non-recurring charges.

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.

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. 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 11 the required pro forma effect on net
income (loss) and earnings per share.

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 the period. Diluted net income (loss) per share is computed
by dividing the net income (loss) by the weighted average number of shares of
Common stock and potential Common stock outstanding, and when dilutive,
exchangeable Special Voting stock on an as-if exchanged basis, and options to
purchase Common stock using the treasury stock method. The 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.

Financial instruments and concentration of credit risk

   The carrying amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value due to the short-term nature of these
instruments. Marketable investments

                                      70

<PAGE>

                                 ENTRUST, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
  (In thousands, except share and per share data, unless indicated otherwise)

consist of publicly traded debt and equity securities. The amortized cost basis
of publicly traded debt securities classified as held to maturity approximates
fair value due to the short-term nature of these instruments. Marketable
investments classified as available for sale are recorded at market value based
on specific identification.

   Financial instruments that potentially subject the Company to interest rate
and credit risk consist principally of cash equivalents, marketable 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 marketable 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.

Recent accounting pronouncements

   In June 2001, the Financial Accounting Standards Board ("FASB") approved for
issuance SFAS No. 141, "Business Combinations". This standard eliminates the
pooling method of accounting for business combinations initiated after June 30,
2001. In addition, SFAS No. 141 addresses the accounting for intangible assets
and goodwill acquired in a business combination. This portion of SFAS No. 141
is effective for business combinations completed after June 30, 2001. The
Company does not expect SFAS No. 141 to have a material effect on the Company's
financial position or results of operations.

   Also in June 2001, the FASB approved for issuance SFAS No. 142, "Goodwill
and Intangible Assets", which revises the accounting for purchased goodwill and
intangible assets. Under SFAS No. 142, goodwill and intangible assets with
indefinite lives will no longer be amortized, but will be tested for impairment
annually and also in the event of an impairment indicator. Adoption of SFAS
No. 142 is effective for the Company beginning January 1, 2002, and will reduce
amortization expense thereafter. The Company is still in the process of
evaluating the complete impact of the provisions of SFAS No. 142 with respect
to the carrying values of goodwill and other purchased intangibles.

   In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets", which is effective for the Company beginning
January 1, 2002 and supersedes SFAS No. 121, "Accounting for the Impairment of
Long- Lived Assets and for Long-Lived Assets to be Disposed of". SFAS No. 144
provides a single method of accounting for long-lived assets to be disposed of
and retains requirements found in SFAS No. 121 with regard to the impairment of
long-lived assets. The Company is in the process of evaluating the impact of
the provisions of SFAS No. 144.

Use of estimates

   The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America,
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 significantly from those estimates.

                                      71

<PAGE>

                                 ENTRUST, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
  (In thousands, except share and per share data, unless indicated otherwise)


Reclassifications

   Certain reclassifications have been made to prior years' balances in order
to conform to fiscal 2001 presentation.

3.  Restructuring and Other Special Non-recurring Charges

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

   As a result of the restructuring and other related special non-recurring
charges and the impact of the macroeconomic conditions on the Company and its
global base of customers, the Company recognized restructuring and special
non-recurring charges of $433,600 in the second fiscal quarter of 2001, with
subsequent adjustments in the third and fourth quarter of $1,400, as outlined
below (table in millions):

<TABLE>
<CAPTION>
                                                                   Total
                                                                  Special    Adjustments   Total Special
                                                                  Charges     Recorded        Charges
                                         Accrued    Other Special through  July 1, 2001 to    through
                                      Restructuring Non-recurring June 30,  December 31,   December 31,
                                         Charges       Charges      2001        2001           2001
                                      ------------- ------------- -------- --------------- -------------
<S>                                   <C>           <C>           <C>      <C>             <C>
Workforce reduction and other
  personnel costs....................     $13.5        $  4.1      $ 17.6       $ 0.3         $ 17.9
Consolidation of excess
  facilities.........................      38.2          13.5        51.7         0.5           52.2
Discontinuance of non-core
  products and programs..............      13.8           6.4        20.2        (0.8)          19.4
Impairment of goodwill, purchased
  product rights and other intangible
  purchased assets...................        --         327.0       327.0          --          327.0
Write-down of long-term strategic
  investments........................        --           6.1         6.1         4.7           10.8
Bad debt write-offs and additional
  provisions to the allowance for
  doubtful accounts..................        --          11.0        11.0        (3.3)           7.7
                                          -----        ------      ------       -----         ------
Total................................     $65.5        $368.1      $433.6       $ 1.4         $435.0
                                          =====        ======      ======       =====         ======
</TABLE>

   The following paragraphs provide information relating to the restructuring
programs that resulted in the total special charges listed above, which were
recognized in 2001.

Workforce reduction and other personnel costs

   The restructuring program resulted in the reduction of approximately 400
regular full-time employees across the Company, or 33% of the total workforce.
The reduction was across all major geographic locations, all business programs,
and all functions within the organization. The reductions were more heavily
weighted in sales and marketing, non-core business programs such as

                                      72

<PAGE>

                                 ENTRUST, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
  (In thousands, except share and per share data, unless indicated otherwise)

Entrust.Net(TM) and Entrust@YourService(TM) and secondary geographies such as
Asia Pacific and Latin America. The majority of the affected employees were
notified of their termination in the second quarter, and the workforce portion
of the restructuring was largely completed by the end of the fourth quarter of
2001. The Company recorded a workforce reduction charge of $13,400 primarily
related to severance costs, fringe benefits due to severed employees and
outplacement services.

   Other special non-recurring charges included employee relocation expenses,
hiring fees and signing bonuses totaling $4,500, which were recorded primarily
in general and administrative expenses.

Consolidation of excess facilities

   The Company recorded restructuring costs of $39,200 relating to the
consolidation of excess facilities. The consolidation of excess facilities
includes a total of eight offices in seven cities throughout the world. The
majority (approximately 85%) of the costs are related to the 75,000 square foot
facility in Santa Clara, CA. The costs for consolidation of excess facilities
are related primarily to non-cancelable lease costs offset by estimated sublet
recoveries. These costs are payable contractually over up to 10 years, which is
the lease term of the Santa Clara facility. However, the Company will be
evaluating ongoing possibilities to settle this obligation in the most economic
manner. Therefore, it has been classified as current in nature.

   In addition to the $39,200 of restructuring costs related to excess
facilities, an additional $13,000 of facilities-related costs were recorded as
a special non-recurring charge as a result of impairment of leasehold
improvements and other property and equipment that was disposed of or removed
from operations as a result of the consolidation of excess facilities, and were
included in the write-down of leaseholds and other long-lived assets in
accordance with the provisions of SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of". These assets
were identified as assets to be disposed of that would have no future benefit
to the Company. Therefore, these assets were reported at the lower of carrying
amount and fair value, less costs of disposition. The majority of these costs
are non-cash charges.

Discontinuance of non-core products and programs

   In support of the restructuring objective to reduce costs and focus the
Company on core technologies, the Company discontinued several non-core
products and programs. The discontinued products and programs, totaling
$12,900, are primarily related to the Company's services business initiatives
and to certain desktop applications for which the Company has not achieved the
growth and profitability targets in line with its core products and financial
objectives. The restructuring charge also includes costs related to the exit of
certain marketing events and programs that had been committed to prior to the
restructuring, but which are being cancelled due to the change in corporate
focus. The cash outflow related to the majority of these items is expected to
be substantially incurred by the end of the first quarter of fiscal 2002.
Accrued estimated minimum royalty obligations related to certain discontinued
products of $4,200 are payable contractually over the next three years.

   The discontinuance of products and programs, and expenses related to
rebranding of the Company and its products, resulted in $6,500 of special
non-recurring charges, which was primarily recorded in sales and marketing
expenses.

                                      73

<PAGE>

                                 ENTRUST, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
  (In thousands, except share and per share data, unless indicated otherwise)


Summary of accrued restructuring charges

   The following table is a summary of the accrued restructuring charges as at
December 31, 2001 (table in millions):

<TABLE>
<CAPTION>
                                                Total                            Accrued
                                               Charges                        Restructuring
                                              Accrued at                       Charges at
                                               June 30,    Cash               December 31,
                                                 2001    Payments Adjustments     2001
                                              ---------- -------- ----------- -------------
<S>                                           <C>        <C>      <C>         <C>
Workforce reduction and other personnel costs   $13.5     $11.1      $(0.1)       $ 2.3
Consolidation of excess facilities...........    38.2       4.6        1.0         34.6
Discontinuance of non-core products and
  programs...................................    13.8       2.8       (0.9)        10.1
                                                -----     -----      -----        -----
Total........................................   $65.5     $18.5      $  --        $47.0
                                                =====     =====      =====        =====
</TABLE>

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

   Due to the decline in the Company's market capitalization, the decline in
current overall business conditions within its target market segments and the
restructuring program, the Company completed an assessment of the
recoverability of goodwill on its balance sheet, in accordance with APB Opinion
No. 17 and the relevant guidance in SFAS No. 121. This impairment analysis
indicated that the carrying amount of the goodwill, purchased product rights
and other purchased intangible assets of the enCommerce and r/3/ acquisitions
will not be recovered through the estimated undiscounted future cash flows. The
Company then completed an analysis of the discounted future cash flows from the
enCommerce acquisition and the r/3/ acquisition. The result of this analysis is
a charge of $327,000 related to the impairment of goodwill, purchased product
rights and other purchased intangible assets. Goodwill, purchased product
rights and other purchased intangibles from the enCommerce acquisition account
for $325,400 of the impairment. This acquisition has failed to meet the
financial planning forecasts made at the time of the acquisition due largely to
the change in the economic conditions since the time of the acquisition and in
part due to additional product development and maintenance costs related to the
GetAccess(TM) product that are now estimated to be required in the future and
were not known at the time of the acquisition. The remaining $1,600 of goodwill
impairment is the result of the r/3/ acquisition, which was impacted primarily
by the workforce restructuring.

   Revenues from the enCommerce products and services are estimated to have
contributed approximately 20% to 25% of total revenues of the Company in 2001,
but are estimated to have generated operating losses since acquisition. The
results of operations related to the r/3/ acquisition were not significant.

Write-down of long-term strategic investments

   The Company assesses the recoverability of the carrying value of its
strategic investments on a regular basis. Factors that the Company considers
important that could trigger impairment include, but are not limited to, the
likelihood that the company in which the Company invested would have
insufficient cash flows to operate for the next twelve months, significant
changes in such company's operating performance or business model, and changes
in overall market conditions. The Company recorded charges related to other
than temporary declines in the value of certain strategic investments of
$10,800 in 2001. The Company also recorded a gain on the disposition of a
long-term strategic investment of $1,600 in 2001.

                                      74

<PAGE>

                                 ENTRUST, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
  (In thousands, except share and per share data, unless indicated otherwise)


Bad debt write-offs and additional provisions to the allowance for doubtful
accounts.

   Due to the changes in the economic environment and the impact of the
restructuring program, particularly the curtailment of certain products and
presence in certain geographies, the Company recorded bad debt write-offs and
additional provisions to the allowance for doubtful accounts totaling $7,700 in
the year ended December 31, 2001, which was recorded primarily in sales and
marketing expenses.

4.  Acquisitions and Related Intangible Assets

   On June 26, 2000, the Company completed the acquisition of all of the
outstanding capital stock, options and warrants of enCommerce, a global portal
infrastructure company and a provider of software and services designed to
manage electronic business relationships, based in Santa Clara, California,
with subsidiaries in England and Japan, in exchange for an aggregate of
8,548,177 shares of the Company's Common stock and options and warrants to
purchase 1,701,823 shares of Common stock, with an aggregate fair value of
$482,272. The Company also incurred approximately $23,246 in
acquisition-related costs. The enCommerce acquisition was accounted for under
the purchase method of accounting and, accordingly, the purchase price of
approximately $505,518 was allocated to the fair value of the tangible and
intangible assets and liabilities acquired, with the remaining $449,640
allocated to purchased product rights, goodwill and other purchased
intangibles. Also, in connection with this acquisition, an independent
appraisal was done of the intangible assets, resulting in $29,614 of the
purchase price being allocated to in-process research and development that had
not yet reached technological feasibility and had no alternative future use.
This in-process research and development was expensed in June 2000.
Amortization of $57,196 and $59,473 was recorded in 2000 and 2001,
respectively, related to goodwill and other purchased intangible assets arising
from this acquisition. In addition, the Company recorded an impairment of
$325,379 related to the goodwill, purchased product rights and other purchased
intangibles from this acquisition in 2001.

   On March 14, 2000, the Company completed the acquisition of all of the
outstanding stock of CygnaCom, a Virginia corporation, that delivers
information technology products and services, with expertise in public key
infrastructure, cryptographic technologies, security engineering and systems
integration and development. All of the outstanding common shares of CygnaCom
were exchanged, in the aggregate, for a purchase price of $16,000 in cash and
$555 in assumed net liabilities and acquisition expenses. The acquisition was
accounted for under the purchase method of accounting and, accordingly, the
purchase price was allocated to the fair value of the assets and liabilities
acquired, with the remainder allocated to goodwill. Goodwill of $16,555 was
recorded as a result of this acquisition and, accordingly, $4,600 and $5,520 of
goodwill amortization was recorded in 2000 and 2001, respectively.

   The results of operations of the businesses acquired in 2000 have been
included in the Company's financial statements commencing from the respective
effective acquisition dates for accounting purposes. The following unaudited
pro forma data summarize the combined results of operations of Entrust,
CygnaCom and enCommerce for the years ended December 31, 1999 and 2000,
respectively, as if the acquisitions had taken place as of the beginning of the
respective periods, and, accordingly, exclude the $29,614 write-off of
in-process research and development, a non-recurring charge directly
attributable to the acquisition of enCommerce and include a full period's
amortization of goodwill and other purchased intangibles in each period shown.
Also, the per share

                                      75

<PAGE>

                                 ENTRUST, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
  (In thousands, except share and per share data, unless indicated otherwise)

data, in each period shown, includes the Common shares of the Company issued in
connection with the acquisition of enCommerce, but excludes options and
warrants issued as their effect is antidilutive.

<TABLE>
<CAPTION>
                                                       Pro forma
                                                Year Ended December 31,
                                                ----------------------
                                                   1999         2000
                                                ---------    ---------
           <S>                                  <C>          <C>
           Revenues............................ $ 102,320    $ 159,975
                                                =========    =========
           Net loss............................ $(124,916)   $(124,596)
                                                =========    =========
           Net loss per basic and diluted share $   (2.38)   $   (2.03)
                                                =========    =========
</TABLE>

   In addition, on June 8, 1998, the Company acquired r/3/, 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 of the outstanding shares of r/3/ 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) and approximately $994 in assumed net liabilities and acquisition
costs. This acquisition was 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 and, accordingly, the $20,208 was included as an expense in
the consolidated statement of operations in 1998. The Company recorded goodwill
of $4,016 as a result of this acquisition and, accordingly, has recorded $712,
$907 and $470 of amortization with respect to the goodwill in 1999, 2000 and
2001, respectively. In addition, the Company recorded an impairment of $1,574
to the goodwill related to this acquisition in 2001.

   The primary components of acquisition-related intangible assets, including
goodwill and purchased product rights, are as follows:

<TABLE>
<CAPTION>
                                                   December 31
                                               -------------------
                                                 2000      2001
                                               --------  ---------
            <S>                                <C>       <C>
            Goodwill.......................... $421,736  $ 365,127
            Less: accumulated amortization....  (56,609)   (56,144)
            Less: impairment of carrying value       --   (302,547)
                                               --------  ---------
            Goodwill, net..................... $365,127  $   6,436
                                               ========  =========
            Other purchased intangibles:
            Customer list..................... $  3,360  $   2,800
            Assembled work force..............   23,105     19,254
                                               --------  ---------
                                                 26,465     22,054
            Less: accumulated amortization....   (4,411)    (5,994)
            Less: impairment of carrying value       --    (11,310)
                                               --------  ---------
            Other purchased intangibles, net.. $ 22,054  $   4,750
                                               ========  =========
            Purchased product rights.......... $ 22,010  $  19,259
            Less: accumulated amortization....   (2,751)    (3,325)
            Less: impairment of carrying value       --    (13,096)
                                               --------  ---------
            Purchased product rights, net..... $ 19,259  $   2,838
                                               ========  =========
</TABLE>


                                      76

<PAGE>

                                 ENTRUST, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
  (In thousands, except share and per share data, unless indicated otherwise)

5.  Investments

   The Company's investments consist of the following:

<TABLE>
<CAPTION>
                                                               December 31,
                                                            ------------------
                                                              2000      2001
                                                            --------  --------
 <S>                                                        <C>       <C>
 Short-term marketable investments:
    Held to maturity, at amortized cost:
        U.S. government agency debt securities............. $ 29,707  $ 13,073
        Corporate debt securities..........................  170,339    93,715
                                                            --------  --------
                                                             200,046   106,788
                                                            --------  --------
    Available for sale equity securities, at cost..........    3,400     1,720
        Unrealized loss....................................   (1,457)     (220)
                                                            --------  --------
           At market.......................................    1,943     1,500
                                                            --------  --------
    Receivable from gross-up provision, at cost............       --        --
        Unrealized gain....................................    1,457        --
                                                            --------  --------
           At market.......................................    1,457        --
                                                            --------  --------
               Total....................................... $203,446  $108,288
                                                            ========  ========
 Long-term investments:
    Marketable, held to maturity, at amortized cost:
        U.S. government agency debt securities............. $     --  $  2,776
        Corporate debt securities..........................       60     6,262
                                                            --------  --------
               Total long-term marketable.................. $     60  $  9,038
                                                            ========  ========
    Strategic:
        Other equity securities, at cost................... $ 16,615  $  4,555
        Advances to strategic equity investee, at cost.....       --       521
                                                            --------  --------
               Total long-term strategic................... $ 16,615  $  5,076
                                                            ========  ========
</TABLE>


                                      77

<PAGE>

                                 ENTRUST, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
  (In thousands, except share and per share data, unless indicated otherwise)

   As of December 31, 2000, the Company had recorded an aggregate unrealized
loss, included in other comprehensive income (loss), on the marketable equity
securities recorded at market, and classified as available for sale, in the
amount of $1,457. However, this unrealized loss was completely offset by an
aggregate unrealized gain recorded as a result of a "gross-up" provision
indexed to the same equity securities, which represented a call option hedge to
December 2001 that enabled the Company to receive a combination of cash and
additional in-kind equity securities equal to the deficiency between the
original cost basis of the equity securities and the aggregate of the market
values on the dates that the securities were made available for sale on the
applicable public equity market. This investment arose as a result of a
non-monetary revenue transaction in the normal course of business, in 2000, in
which shares in the customer's common stock were received as an in-kind payment
in lieu of cash. Upon settlement of the hedge and the sale of the related
securities in 2001, the reversal of the unrealized gain on the hedge and loss
on the investment again were offsetting as reclassification adjustments to
other comprehensive income.

   As of December 31, 2001, the Company recorded an aggregate unrealized loss,
included in other comprehensive income, on the remaining balance of marketable
equity securities, classified as available for sale, in the amount of $220, in
order to adjust this investment to market value.

6.  Property and Equipment

   Property and equipment, at cost, consist of the following:

<TABLE>
<CAPTION>
                                                         December 31,
                                                       ----------------
                                                        2000     2001
                                                       -------  -------
       <S>                                             <C>      <C>
       Computer and telecom equipment................. $11,634  $ 9,535
       Furniture and fixtures.........................   6,411    3,898
       Leasehold improvements.........................   8,411    8,760
       Internal-use software..........................   4,031    4,394
       Equipment under capital lease..................     107       92
                                                       -------  -------
                                                        30,594   26,679
       Less: accumulated depreciation and amortization  (7,726)  (9,819)
                                                       -------  -------
       Subtotal.......................................  22,868   16,860
       Assets to be placed in service.................   2,300      530
                                                       -------  -------
       Total property and equipment, net.............. $25,168  $17,390
                                                       =======  =======
</TABLE>

7.  Accrued Liabilities

   Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
                                                            December 31,
                                                           ---------------
                                                            2000    2001
                                                           ------- -------
     <S>                                                   <C>     <C>
     Payroll and related benefits......................... $10,360 $ 9,383
     Withholding taxes payable for stock options exercised   6,472      50
     Other................................................   5,479   5,688
                                                           ------- -------
                                                           $22,311 $15,121
                                                           ======= =======
</TABLE>

                                      78

<PAGE>

                                 ENTRUST, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
  (In thousands, except share and per share data, unless indicated otherwise)


8.  Income Taxes

   The following table presents the U.S. and foreign components of income
(loss) before income taxes and the provision for income taxes.

<TABLE>
<CAPTION>
                                                           Year Ended December 31,
                                                        ----------------------------
                                                         1999      2000      2001
                                                        -------  --------  ---------
<S>                                                     <C>      <C>       <C>
Income (loss) before income taxes:
   United States....................................... $ 4,271  $(85,876) $(519,062)
   Foreign.............................................   3,448     5,953    (22,782)
                                                        -------  --------  ---------
                                                        $ 7,719  $(79,923) $(541,844)
                                                        =======  ========  =========
(Provision) benefit for income taxes:
   Current:
       Federal......................................... $    21  $     --  $      --
       State and local.................................     (70)       --       (147)
       Foreign.........................................    (176)   (1,421)    (1,681)
                                                        -------  --------  ---------
                                                           (225)   (1,421)    (1,828)
                                                        -------  --------  ---------
   Deferred:
       Federal.........................................    (360)       --         --
       State and local.................................    (189)       --         --
       Foreign.........................................    (318)       --         --
                                                        -------  --------  ---------
                                                           (867)       --         --
                                                        -------  --------  ---------
       Federal and State tax equivalent related to
         non-qualified option exercises (credited
         to additional paid-in capital)................    (708)     (916)        --
                                                        -------  --------  ---------
Total provision for income taxes....................... $(1,800) $ (2,337) $  (1,828)
                                                        =======  ========  =========
</TABLE>

   A reconciliation between income taxes computed at the federal statutory rate
and income tax (provision) benefit is shown below:

<TABLE>
<CAPTION>
                                                             Year Ended December 31,
                                                          -----------------------------
                                                            1999      2000      2001
                                                          --------  --------  ---------
<S>                                                       <C>       <C>       <C>
Income tax (provision) benefit at federal statutory rate. $ (2,624) $ 27,174  $ 184,227
State and local taxes, net of federal benefits...........     (171)      (65)     5,599
Foreign earnings benefit (tax) at different rate.........     (226)      (38)     1,975
Acquired in-process research and development.............       --   (10,069)        --
Amortization and impairment of goodwill and other
  purchased intangibles..................................     (242)  (19,755)  (131,546)
Foreign research and development tax credits.............    1,933     2,065      1,719
Tax write-offs of intercompany investment in, advances to
  and operations of foreign subsidiary...................   10,472     2,602         --
Other....................................................    3,556    (2,222)     1,246
Valuation allowances on future benefits of tax losses and
  credits available......................................  (14,498)   (2,029)   (65,048)
                                                          --------  --------  ---------
Total provision for income taxes......................... $ (1,800) $ (2,337) $  (1,828)
                                                          ========  ========  =========
</TABLE>

                                      79

<PAGE>

                                 ENTRUST, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
  (In thousands, except share and per share data, unless indicated otherwise)


   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,
                                                                   -------------------
                                                                     2000      2001
                                                                   --------  ---------
<S>                                                                <C>       <C>
Current asset:
   Accrued restructuring charges not currently deductible......... $     --  $  17,855
   Other allowances and accruals not currently deductible.........    1,540      1,300
   Deferred income currently taxable..............................    1,220        183
                                                                   --------  ---------
       Total......................................................    2,760     19,338
                                                                   --------  ---------
Non-current asset (liability):
   Deferred depreciation and amortization for tax purposes........    4,212      4,864
   Write-downs of long-lived assets and strategic investments not
     currently deductible.........................................       --      9,242
   United States and Foreign NOL and tax credit carry-forwards....   36,160     76,182
                                                                   --------  ---------
       Total......................................................   40,372     90,288
                                                                   --------  ---------
Total deferred tax asset..........................................   43,132    109,626
Valuation allowance...............................................  (43,132)  (109,626)
                                                                   --------  ---------
Net deferred tax asset............................................ $     --  $      --
                                                                   ========  =========
</TABLE>

   United States and foreign NOL and tax credit carry-forwards include $12,402
and $13,808 at December 31, 2000 and December 31, 2001, respectively, related
to NOL carry-forwards resulting from the exercise in 2000 and 2001 of
non-qualified stock options with a corresponding amount included in the
valuation allowance, the tax benefit of which, when recognized, will be
credited to additional paid-in capital. In addition, United States and foreign
NOL and tax credit carry-forwards include NOL carry-forwards of approximately
$12,034 from enCommerce at the date of acquisition, with a corresponding amount
included in the valuation allowance, the tax benefit of which, when recognized,
will be first credited to the applicable goodwill and other intangibles arising
from the acquisition and then to income tax expense. The annual utilization of
acquired NOL carry-forwards may be limited by certain historical ownership
changes at enCommerce.

   As at December 31, 2001, the Company has available the following income tax
carry-forwards to reduce future income tax liabilities:

<TABLE>
<CAPTION>
                                                               Period
                                                      Amount  Expiring
                                                      ------- ---------
        <S>                                           <C>     <C>
        Net operating losses (tax benefits):
           United States............................. $55,642 2012-2021
           Foreign...................................  14,139 2005-2008
                                                      -------
                                                       69,781
        Foreign research and development tax credits.   6,401 2007-2011
                                                      -------
                                                      $76,182
                                                      =======
</TABLE>

                                      80

<PAGE>

                                 ENTRUST, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
  (In thousands, except share and per share data, unless indicated otherwise)


9.  Long-term Liabilities

   Long-term liabilities includes notes payable of $477 and $266 at December
31, 2000 and 2001, respectively, and capital lease obligations of $98 and $65
at December 31, 2000 and 2001, respectively, assumed as a result of the
acquisition of enCommerce in 2000. These notes were entered into by enCommerce
to finance the purchase of fixed assets, and will be retired by January 2003.
The total future minimum lease payments of $78 on capital lease obligations are
payable through May 2004. As of December 31, 2001, the current portions of $223
and $33, on the notes and lease obligations, respectively, have been included
in accrued liabilities. These long-term liabilities bear interest at rates
ranging from 8% to 14% and are collateralized by the financed assets.

   The remaining balance of long-term liabilities consists primary of long-term
deposits and deferred rent assumed from enCommerce.

10.  Capital Stock

   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.

   Concurrent with the closing of the follow-on offering on February 29, 2000
and March 2, 2000, the remaining 5,157,289 shares of Special Voting stock and
Exchangeable shares were exchanged into an equivalent number of shares of
Common stock.

   On January 26, 2001, the Company's Board of Directors adopted, and
recommended to the stockholders to approve, articles of amendment to the
Company's charter to (i) increase the total number of authorized shares of
Common stock, $0.01 par value per share, from 100,000,000 shares to 250,000,000
shares and (ii) eliminate the Special Voting stock from the Company's
authorized capital and delete all references to Special Voting stock contained
in the Company's charter. The stockholders adopted this proposal at their
annual meeting on April 27, 2001.

   As of December 31, 2001, there were no authorized, issued or outstanding
shares of the Company's Series A, Redeemable Series A or Series B common stock.

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 250,000,000 shares of Common
stock.

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

                                      81

<PAGE>

                                 ENTRUST, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
  (In thousands, except share and per share data, unless indicated otherwise)

restrictions, including voting rights, dividend rights, conversion rights and
liquidation preferences, as shall be determined by the Board of Directors. As
of December 31, 2001, the Company had not issued any shares of Preferred stock.

11.  Stock Options and Warrants

Stock Option Plans

   In 2000, the Company's Board of Directors increased the number of authorized
shares under the 1999 Non-Officer Employee Stock Incentive Plan (the "1999
Plan") to 7,600,000 shares. Also in 2000, the Company's Board of Directors
approved an increase to 14,600,000 as the total number of authorized shares
available for issuance under the 1996 Stock Incentive Plan (the "1996 Plan")
applicable to the Company's full-time employees, officers, directors and
consultants, plus an annual increase to be added on each of January 1, 2001 and
January 1, 2002, equal to the lower of (i) 5% of the total number of
outstanding shares of Common stock on such date or (ii) a lesser amount
determined by the Board; provided, however, that the maximum number of shares
of Common stock available for issuance under the 1996 Plan is 26,000,000
shares. In addition, concurrent with the acquisition of enCommerce, the
Company's Board of Directors approved the assumption of the enCommerce 1997
Stock Option Plan and the enCommerce 1997B Stock Option Plan (collectively, the
"enCommerce 1997 Plans"), and all outstanding warrants of enCommerce, and
authorized an aggregate of 1,701,823 shares for issuance thereunder. As of
January 1, 2001, the Company reserved 3,137,101 shares of Common stock for
issuance under the 1996 Plan, as a result of the annual increase provision
described above. In April 2001, the Board of Directors increased the Common
stock reserved for issuance under the 1999 Plan by an additional 2,000,000
shares. On April 22, 2001, the Company entered into a Special Nonstatutory
Stock Option Agreement (the "Special Plan") whereby an option was granted to
acquire 2,000,000 shares of Common stock. Accordingly, the Company has reserved
2,000,000 shares of Common stock for issuance under the Special Plan. The
options under the 1996 Plan, 1999 Plan, Special Plan and enCommerce 1997 Plan
are granted at the then-current fair market value of the Common stock 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 generally
expire on the tenth anniversary of the grant date or upon termination of
employment.

   On June 19, 2001, the Company announced a voluntary stock option exchange
program for its eligible employees. Under the program, Company employees were
offered the opportunity to cancel certain outstanding stock options to purchase
shares of Common stock previously granted to them. In exchange these employees
will receive new options that will be granted under the 1999 Plan. The number
of shares subject to the new options to be granted to each eligible employee
will depend on the exercise price of the options tendered by the eligible
employee and accepted for exchange. If the tendered options carry an exercise
price of less than $50 per share, then the number of shares subject to new
options will be equal to the number of shares subject to the options cancelled.
If the tendered options carry an exercise price of $50 per share or more, then
the number of shares subject to new options will be equal to one-half (1/2) the
number of shares subject to the options cancelled. The new options are to be
granted at a future date, at least six months and one day from the cancellation
date of July 30, 2001. The exercise price of these new options will be equal to
the fair market value of the Company's Common stock on the date of grant, which
is not expected to be later than January 31, 2002. The Company has provided no
promise to compensate the employees for any increases in the market price of
the stock after the cancellation date. In addition, based on the July 30, 2001

                                      82

<PAGE>

                                 ENTRUST, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
  (In thousands, except share and per share data, unless indicated otherwise)

cancellation date, those employees that choose to participate in the offer will
also be required to tender all options granted since January 30, 2001. New
options to be issued will have terms and conditions that are substantially the
same as those of the cancelled options. This voluntary exchange program
complies with FASB Interpretation No. 44, "Accounting for Certain Transactions
Involving Stock Compensation" and related FASB EITF guidance and, accordingly,
is not expected to result in any variable accounting compensation charges.
Members of the Company's Board of Directors and executive officers were not
eligible to participate in this program.

   Pursuant to the terms and conditions of the Offer to Exchange, a total of
592 eligible optionees participated in the option exchange program. The Company
accepted for cancellation options to purchase 5,480,261 shares of its Common
stock. Subject to the terms and conditions of the Offer to Exchange, the
Company subsequently granted new options to purchase 5,033,822 shares of its
Common stock on January 31, 2002, at an exercise price of $6.75 per share, in
exchange for the options surrendered and accepted under the program.

   In connection with acquisitions in 2000, the Company assumed options to
purchase 1,542,131 shares of Common stock held by employees and a warrant to
purchase 159,692 shares of Common stock held by a non-employee third party. The
fair values of these options and warrants were included in the total purchase
price of the acquired businesses.

   A summary of the activity under the 1996 Plan, 1999 Plan, Special Plan and
enCommerce 1997 Plans is set forth below:

<TABLE>
<CAPTION>
                                                            Options and Warrants Outstanding
                                                            --------------------------------
                                                                                    Weighted
                                                             Shares                 Average
                                                            Available   Number of   Exercise
                                                            for Grant    Shares      Price
                                                            ----------  ----------  --------
<S>                                                         <C>         <C>         <C>
Balance at December 31, 1998...............................  1,560,228   8,020,926   $ 4.13
   Authorized..............................................  2,500,000          --
   Granted................................................. (2,531,330)  2,531,330    32.85
   Forfeited...............................................    496,951    (496,951)   11.35
   Exercised...............................................         --  (2,636,482)    3.28
                                                            ----------  ----------
Balance at December 31, 1999...............................  2,025,849   7,418,823    13.76
   Authorized.............................................. 11,801,823          --
   Granted................................................. (6,158,836)  6,158,836    39.76
   Assumed in acquisition.................................. (1,701,823)  1,701,823     7.13
   Forfeited...............................................    357,661    (357,661)   35.70
   Exercised...............................................         --  (1,701,659)    3.77
                                                            ----------  ----------
Balance at December 31, 2000...............................  6,324,674  13,220,162    25.68
   Authorized..............................................  7,137,101          --
   Granted................................................. (9,470,721)  9,470,721     9.55
   Cancelled under voluntary stock option exchange program.  5,480,261  (5,480,261)   33.82
   Forfeited...............................................  3,327,658  (3,327,658)   27.28
   Exercised...............................................         --  (1,422,735)    2.20
                                                            ----------  ----------
Balance at December 31, 2001............................... 12,798,973  12,460,229    11.98
                                                            ==========  ==========
</TABLE>

   The number of outstanding options and warrants exercisable into common stock
was 3,441,860, 4,142,586 and 5,414,036 at December 31, 1999, 2000 and 2001,
respectively. The weighted average exercise price of these exercisable
outstanding options was $3.16, $8.73 and $11.57, respectively.

                                      83

<PAGE>

                                 ENTRUST, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
  (In thousands, except share and per share data, unless indicated otherwise)


   The following table summarizes information concerning currently outstanding
options and warrants as at December 31, 2001:

<TABLE>
<CAPTION>
                                                                            Options and Warrants
                                Options and Warrants Outstanding                 Exercisable
                         ---------------------------------------------- -----------------------------
                                                  Weighted     Weighted                      Weighted
                              Number of           Average      Average       Number of       Average
                         Options and Warrants    Remaining     Exercise Options and Warrants Exercise
Range of Exercise Prices     Outstanding      Contractual Life  Price       Exercisable       Price
------------------------ -------------------- ---------------- -------- -------------------- --------
<S>                      <C>                  <C>              <C>      <C>                  <C>
   $0.12 to $2.67.......       1,904,871         4.5 years     $  2.04       1,842,864       $  2.04
   $3.25 to $4.99.......         324,942         9.6 years        3.99           7,101          4.05
   $5.00 to $7.30.......       6,201,948         8.5 years        6.57       1,933,900          6.60
   $7.46 to $10.74......         101,925         9.2 years        8.78           9,340          8.69
   $11.00 to $16.38.....         846,346         7.8 years       13.66         256,853         14.00
   $16.50 to $24.81.....       1,627,242         7.5 years       19.45         675,828         20.97
   $25.13 to $36.65.....         698,133         8.5 years       27.31         318,984         27.18
   $39.00 to $55.13.....         649,333         7.7 years       48.19         322,642         48.33
   $58.19 to $82.75.....          47,862         8.2 years       63.46          20,604         63.11
   $89.94 to $112.50....          57,627         8.2 years      102.10          25,920        102.34
                              ----------                                     ---------
                              12,460,229                         11.98       5,414,036         11.57
                              ==========                                     =========
</TABLE>

Employee Stock Purchase Plan

   The Company's 1998 Employee Stock Purchase Plan (the "Purchase Plan")
authorizes 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, as amended, the price per share paid
by each participant on the last day of an offering period is an amount equal to
85% of the lesser of the fair market value per share of the Common stock on the
first business day of an offering period or the last business day of such
period.

   At the Annual Meeting of Stockholders held April 27, 2001, the stockholders
of the Company approved an amendment to the Purchase Plan whereby the Common
stock reserved for issuance under the 1998 Plan was increased to 1,000,000
shares.

   Termination of the Purchase Plan is at the discretion of the Board of
Directors. Upon termination of the Purchase Plan, all amounts in the accounts
of participating employees will be promptly refunded.

Stock-based Compensation

   On April 22, 2001, the Company issued a warrant to purchase 258,333 shares
of the Company's Common stock, with an exercise price of $6.87 per share and
expiration date of April 22, 2004, to a consultant of the Company. Also, in
2000 and 2001, the Company granted non-employee options to purchase 3,000 and
9,500 shares of Common stock at $44.00 and $8.20 per share over 10 years. The
fair value of these options and warrants of $1,092 was recorded as an expense
in 2001, when they vested.

                                      84

<PAGE>

                                 ENTRUST, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
  (In thousands, except share and per share data, unless indicated otherwise)

In addition, the Company recorded unearned compensation of $102 in 2000 and $6
in 2001 for these non-employee options, which is being amortized over the
vesting period of four years from the date of grant. Accordingly, $28 and $25
was amortized into compensation expense for 2000 and 2001, respectively.

   The Company applies APB Opinion No. 25 and related interpretations in
accounting for its employee stock-based compensation plans. Accordingly,
compensation expense was recognized for its stock-based compensation plans in
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 recorded unearned compensation
of $784 for 1998. This amount is being amortized over the vesting period of
four years from the date of grant, with $196 amortized into compensation
expense for each of the years 1999, 2000 and 2001. For all other options
granted to employees in the periods disclosed, the exercise price of each
option granted was equal to the fair value of the underlying stock at the date
of grant. Had compensation costs for the Company's 1996 Plan, 1999 Plan,
Special Plan and enCommerce 1997 Plans been determined based on the fair value
of the options at the grant date for awards to employees under these plans,
consistent with the methodology prescribed under SFAS No. 123, the Company's
net loss and net loss per share would have been as follows, on a pro forma
basis.

<TABLE>
<CAPTION>
                                                        Year Ended December 31,
                                                    ------------------------------
                                                      1999      2000       2001
                                                    --------  ---------  ---------
<S>                                                 <C>       <C>        <C>
Net income (loss), as reported..................... $  5,919  $ (82,260) $(543,672)
Estimated additional stock based compensation costs
  under SFAS No. 123...............................  (13,464)   (95,200)   (49,141)
                                                    --------  ---------  ---------
Pro forma net loss................................. $ (7,545) $(177,460) $(592,813)
                                                    ========  =========  =========
Pro forma basic and diluted net loss per share..... $  (0.17) $   (3.11) $   (9.35)
                                                    ========  =========  =========
</TABLE>

   In the pro forma calculations, the weighted average fair value for stock
options granted during 1999, 2000 and 2001 was estimated at $24.97, $34.43 and
$8.09 per option, respectively. The fair values of options were estimated as of
the date of grant using the Black-Scholes option pricing model. The following
weighted average assumptions were used in the calculations.

<TABLE>
<CAPTION>
                                             Year Ended December 31,
                                             ----------------------
                                              1999      2000   2001
                                             ----      ----   ----
              <S>                            <C>       <C>    <C>
              Expected option life, in years    5         5      5
              Risk free interest rate....... 5.69%     6.11%  4.79%
              Dividend yield................   --        --     --
              Volatility....................   98%      127%   119%
</TABLE>

12.  Net Income (Loss) per Share

   For the years ended December 31, 2000 and 2001, the antidilutive effect
excluded from the diluted net loss per share computation due to the
exchangeable Special Voting stock outstanding was 644,661 and nil shares,
respectively, and due to options to purchase Common stock was 4,783,877 and
1,984,917 shares, respectively.


                                      85

<PAGE>

                                 ENTRUST, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
  (In thousands, except share and per share data, unless indicated otherwise)

   Net income (loss) per share has been calculated as follows:

<TABLE>
<CAPTION>
                                                         December 31,
                                             ------------------------------------
                                                1999        2000         2001
                                             ----------- -----------  -----------
<S>                                          <C>         <C>          <C>
Net income (loss) available to common
  shareholders.............................. $     5,919 $   (82,260) $  (543,672)
                                             =========== ===========  ===========
Weighted average common shares outstanding:
Basic:
   Basic weighted average common shares
     outstanding............................  43,846,922  57,003,479   63,410,786
                                             ----------- -----------  -----------
   Basic net income (loss) per share........ $      0.13 $     (1.44) $     (8.57)
                                             =========== ===========  ===========
Diluted:
   Basic weighted average common shares
     outstanding............................  43,846,922  57,003,479   63,410,786
                                             ----------- -----------  -----------
   Exchange rights on Special Voting stock..   5,157,289         N/A          N/A
   Net effect of dilutive options using the
     treasury stock method..................   5,798,470         N/A          N/A
                                             ----------- -----------  -----------
   Subtotal.................................  10,955,759         N/A          N/A
                                             ----------- -----------  -----------
   Diluted weighted average common shares
     outstanding............................  54,802,682  57,003,479   63,410,786
                                             =========== ===========  ===========
   Diluted net income (loss) per share...... $      0.11 $     (1.44) $     (8.57)
                                             =========== ===========  ===========
</TABLE>

13.  Related Party Transactions

   Significant related party transactions with the Company's largest
shareholder, Nortel Networks, and affiliated companies, not otherwise disclosed
in the financial statements, include the following:

   Revenues include sales to Nortel Networks for 1999, 2000 and 2001 of $1,453,
$751 and $119, respectively. Revenues for 1999 include sales to Nortel Networks
affiliated companies totaling $269.

   The Company reimburses Nortel Networks for expenses paid by Nortel Networks
on behalf of the Company, net of revenues collected by Nortel Networks on
behalf of the Company. The net expenses reimbursed amounted to $512, $295 and
$210 for 1999, 2000 and 2001, 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. The accounts receivable at
December 31, 2000 and 2001, related to Nortel Networks and its affiliates, was
insignificant.


                                      86

<PAGE>

                                 ENTRUST, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
  (In thousands, except share and per share data, unless indicated otherwise)

14.  Commitments and Contingencies

Lease commitments

   The Company leases administrative and sales offices and certain property and
equipment under noncancelable operating leases that will expire in 2011 with
certain renewal options. Total rent expense under such leases for 1999, 2000
and 2001 were $4,754, $7,288 and $10,106, respectively. At December 31, 2001,
the future minimum lease payments under operating leases were as follows:

<TABLE>
                  <S>                                 <C>
                  2002............................... $ 6,936
                  2003...............................   4,943
                  2004...............................   3,960
                  2005...............................   3,627
                  2006...............................   3,761
                  Thereafter.........................  13,587
                                                      -------
                  Total future minimum lease payments $36,814
                                                      =======
</TABLE>

   In addition to the lease commitments included above, the Company has
provided letters of credit totaling $10,700 as security deposits in connection
with certain office leases. The Company has noncancelable subleases of certain
facilities included above. Payments to be received under these subleases will
total $116 and $66 in 2002 and 2003, respectively.

Legal proceedings

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

   The Company moved to dismiss the consolidated complaint. On July 31, 2001,
the Court granted the motion to dismiss. The Court granted plaintiffs 30 days
leave to file an amended complaint. On August 30, 2001, plaintiffs filed an
amended complaint. On September 21, 2001, the Company moved to dismiss the
amended complaint. The Court has not yet ruled on the Company's motion to
dismiss. There has been no discovery to date, and no trial date has been
established.

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

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

                                      87

<PAGE>

                                 ENTRUST, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
  (In thousands, except share and per share data, unless indicated otherwise)


15.  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 contributions made by the Company totaled $592, $1,732
and $2,627 for 1999, 2000 and 2001, respectively.

16.  Supplemental Cash Flows Information

   The following is provided as supplemental information to the consolidated
statements of cash flows:

<TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                                                        -----------------------
                                                                         1999     2000    2001
                                                                        -----   -------- ------
<S>                                                                     <C>     <C>      <C>
Non-cash investing and financing activities:
   Issuance of Common stock, stock options and warrants related to the
     acquisition of enCommerce, Inc.................................... $  --   $482,272 $   --
                                                                        =====   ======== ======
Income taxes paid (received), net...................................... $(933)  $    243 $1,594
                                                                        =====   ======== ======
</TABLE>

17.  Segment, Geographic and Major Customer Information

Segment information

   The Company conducts business in one operating segment: the design,
production and sale of software products and related services for Internet
security. 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 No. 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.

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 respective geographic areas.


                                      88

<PAGE>

                                 ENTRUST, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
  (In thousands, except share and per share data, unless indicated otherwise)

   The Company operates in three main geographic areas as follows:

<TABLE>
<CAPTION>
                                                                       Year Ended December 31,
                                                                    ----------------------------
                                                                      1999     2000      2001
                                                                    -------- --------  ---------
<S>                                                                 <C>      <C>       <C>
Revenues:
   United States................................................... $ 55,709 $ 81,245  $  48,634
   Canada..........................................................   16,107   22,282     30,450
   Europe, Asia and Other..........................................   13,398   44,850     38,881
                                                                    -------- --------  ---------
       Total revenues.............................................. $ 85,214 $148,377  $ 117,965
                                                                    ======== ========  =========
Segment operating income (loss):
   United States................................................... $  1,724 $ (6,171) $ (57,898)
   Canada..........................................................    3,950    3,749    (10,140)
   Europe, Asia and Other..........................................    1,617    5,330      6,975
                                                                    -------- --------  ---------
       Total segment operating income (loss).......................    7,291    2,908    (61,063)
                                                                    -------- --------  ---------
Depreciation and amortization expense:
   United States...................................................    1,229   63,900     66,739
   Canada..........................................................    1,625    2,687      5,954
   Europe, Asia and Other..........................................      494      439        738
                                                                    -------- --------  ---------
       Total depreciation and amortization.........................    3,348   67,026     73,431
                                                                    -------- --------  ---------
Other income (expense):
   United States...................................................    3,776   13,809     (1,367)
                                                                    -------- --------  ---------
Acquired in-process research and development:
   United States...................................................       --   29,614         --
                                                                    -------- --------  ---------
Impairment of intangibles, write-downs of other long-lived assets,
  and restructuring charges:
   United States...................................................       --       --    393,058
   Canada..........................................................       --       --      9,739
   Europe, Asia and Other..........................................       --       --      3,186
                                                                    -------- --------  ---------
       Total.......................................................       --       --    405,983
                                                                    -------- --------  ---------
Income (loss) before income taxes:
   United States...................................................    4,271  (85,876)  (519,062)
   Canada..........................................................    2,325    1,062    (25,833)
   Europe, Asia and Other..........................................    1,123    4,891      3,051
                                                                    -------- --------  ---------
Total income (loss) before income taxes............................ $  7,719 $(79,923) $(541,844)
                                                                    ======== ========  =========

                                                                            December 31,
                                                                    ----------------------------
                                                                      1999     2000      2001
                                                                    -------- --------  ---------
Long-lived assets (generally depreciated over three to five years):
   United States................................................... $  8,493 $429,396  $  32,342
   Canada..........................................................    5,921   19,690     13,753
   Europe, Asia and Other..........................................      823    1,429        854
                                                                    -------- --------  ---------
       Total long-lived assets..................................... $ 15,237 $450,515  $  46,949
                                                                    ======== ========  =========
Total assets:
   United States................................................... $107,517 $671,103  $ 191,886
   Canada..........................................................   15,216   45,628     32,916
   Europe, Asia and Other..........................................    7,787   17,375      4,636
                                                                    -------- --------  ---------
       Total....................................................... $130,520 $734,106  $ 229,438
                                                                    ======== ========  =========
</TABLE>

                                      89

<PAGE>

                                 ENTRUST, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
  (In thousands, except share and per share data, unless indicated otherwise)


Major customer information

   In 1999, a single customer in the United States accounted for 24% of
revenues, and no other customers accounted for 10% or more of revenues. In
2000, no individual customer accounted for 10% or more of revenues. In 2001, a
single customer in Canada accounted for 11% of revenues, and no other customers
accounted for 10% or more of revenues.

                                      90

<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
 Exhibit
 Number                                 Description                               Form Number
 ------   ----------------------------------------------------------------------- ---- ------
<C>       <S>                                                                     <C>  <C>
2.1(1)+   Stock Purchase Agreement dated March 14, 2000 by and among the
          Registrant, Cygnacom Solutions Inc. and the Stockholders of Cygnacom
          Solutions Inc.                                                           8-K     2
2.2(2)+   Agreement and Plan of Merger dated April 18, 2000 by and among the
          Registrant, Enable Acquisition Corp. and enCommerce, Inc.                8-K     2
3.1       Articles of Amendment and Restatement of Charter, as amended, of the     Enclosed
          Registrant                                                               herewith
3.2(3)    Amended and Restated Bylaws of the Registrant                            S-1   3.4
4.1(4)    Specimen certificate for shares of Common Stock, $.01 par value, of the
          Registrant                                                              10-Q   4.1
10.1(3)   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(3)   Strategic Alliance Agreement, dated as of December 31, 1996, between
          the Registrant and Northern Telecom Limited                              S-1  10.5
10.3(5)*  Employment Letter Agreement dated May 5, 2000 between the
          Registrant and Paul A. Doscher                                          10-Q  10.6
10.4(6)*  Separation Agreement and Release dated February 24, 2001 between
          the Registrant and John A. Ryan                                         10-K  10.4
10.5(3)*  Letter Agreement, dated as of June 4, 1997, between the Registrant and
          Richard D. Spurr                                                         S-1 10.12
10.6(7)*  Amendment to Separation Agreement and Release, dated August 22,
          2001, between the Registrant and John A. Ryan                           10-Q  10.1
10.7(5)*  Amended and Restated 1996 Stock Incentive Plan, as amended              10-Q 10.10
10.8(3)   Lease Agreement dated as of January 28, 1998, between Colonnade
          Development Incorporated and Entrust Technologies Limited                S-1 10.16
10.9      Lease Agreement dated November 16, 2001 between Intervest-               Enclosed
          Parkway, Ltd. and the Registrant                                         herewith
10.10(8)* Letter Agreement dated October 11, 1999 between the Registrant and
          David L. Thompson                                                        S-3  10.3
10.11(8)  Development Agreement dated December 29, 1999 between Canderel
          Management Inc. and Entrust Technologies Limited                         S-3  10.4
10.12(8)  Lease dated December 29, 1999 in Pursuance of the Short Forms of
          Lease Act between 786473 Ontario Limited, Entrust Technologies
          Limited and Registrant                                                   S-3  10.5
10.13(8)  Lease dated December 29, 1999 by and between 3559807 Canada Inc.,
          Entrust Technologies Limited and the Registrant                          S-3  10.6
10.14(5)* enCommerce, Inc. 1997 Stock Option Plan                                 10-Q  10.1
10.15(5)  enCommerce, Inc. 1997B Stock Option Plan                                10-Q  10.2
10.16(5)* Employment Letter Agreement dated May 5, 2000 between the
          Registrant and J. Alberto Yepez                                         10-Q  10.4
10.17(6)  Common Stock Warrant No. 1 of the Registrant dated June 26, 2000
          issued to Andersen Consulting LLP                                       10-K 10.17
10.18(5)* Non-competition and Non-solicitation Agreement effective as of June 26,
          2000 between the Registrant and Alberto Yepez                           10-Q  10.5
10.19(5)* Non-competition and Non-solicitation Agreement effective as of June 26,
          2000 between the Registrant and Paul Doscher                            10-Q  10.7
</TABLE>

                                      1

<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number                                Description                              Form Number
 ------   --------------------------------------------------------------------- ---- ------
<C>       <S>                                                                   <C>  <C>
10.20     Lease dated November 14, 2000 between Sobrato Interests II and the     Enclosed
          Registrant                                                             herewith
10.21     First Amendment to Lease dated July 26, 2001 by and between Sobrato    Enclosed
          Interests II and the Registrant                                        herewith
10.22(4)* Employment Agreement dated as of April 22, 2001 by and between
          F. William Conner and the Registrant                                  10-Q  10.1
10.23(4)* Special Nonstatutory Stock Option Agreement dated April 22, 2001
          between the Registrant and F. William Connor                          10-Q  10.2
10.24(4)* Nonstatutory Stock Option Agreement Granted Under the Amended and
          Restated 1996 Stock Incentive Plan dated April 22, 2001 between the
          Registrant and F. William Conner                                      10-Q  10.3
10.25(4)  Common Stock Purchase Warrant of the Registrant dated April 22, 2001
          to Heidrick & Struggles, Inc.                                         10-Q  10.4
10.26(4)* Separation Agreement and Release dated June 28, 2001 between the
          Registrant and J. Alberto Yepez                                       10-Q  10.5
10.27(4)* Separation Agreement and Release dated May 30, 2001 between the
          Registrant and Paul Doscher                                           10-Q  10.6
10.28(4)* Form of Nonstatutory Stock Option Agreement Granted Under the
          Amended And Restated 1996 Stock Incentive Plan to Non-Employee
          Directors of the Registrant                                           10-Q  10.7
10.29*    Separation Agreement and Release dated October 4, 2001 between         Enclosed
          Richard D. Spurr and the Registrant                                    herewith
10.30*    Non-Competition and Non-Solicitation Agreement effective as of         Enclosed
          March 6, 2001 between the Registrant and Richard D. Spurr              herewith
10.31*    Officer Retention Program and Agreement effective as of March 6, 2001  Enclosed
          between David L. Thompson and the Registrant, as amended               herewith
10.32*    Non-Competition and Non-Solicitation Agreement effective as of         Enclosed
          March 6, 2001 between the Registrant and David L. Thompson             herewith
10.33*    Letter Agreement dated May 17, 2001 between the Registrant and         Enclosed
          Edward J. Pillman                                                      herewith
21        Subsidiaries of the Registrant                                         Enclosed
                                                                                 herewith
23.1      Consent of Deloitte & Touche LLP                                       Enclosed
                                                                                 herewith
</TABLE>
--------
*  Management contract or compensatory plan or arrangement filed in response to
   Item 14(a)(3) of the instructions to Form 10-K
(1) Incorporated herein by reference to the Registrant's Current Report on Form
    8-K dated March 14, 2000 filed with the Securities and Exchange Commission
    on March 24, 2000 (File No. 000-24733).
(2) Incorporated herein by reference to the Registrant's Current Report on Form
    8-K dated April 18, 2000 filed with the Securities and Exchange Commission
    on May 1, 2000 (File No. 000-24733).
(3) Incorporated herein by reference to the Registrant's Registration Statement
    on Form S-1 (File No. 333-57275).
(4) Incorporated herein by reference to the Registrant's Quarterly Report on
    Form 10-Q for the quarterly period ended June 30, 2001 (File No. 000-24733).
(5) Incorporated herein by reference to the Registrant's Quarterly Report on
    Form 10-Q for the quarterly period ended June 30, 2000 (File No. 000-24733).

                                      2

<PAGE>

(6) Incorporated herein by reference to the Registrant's Annual Report on Form
    10-K for the fiscal year ended December 31, 2000 (File No. 000-24733).
(7) Incorporated herein by reference to the Registrant's Quarterly Report on
    Form 10-Q for the quarterly period ended September 30, 2001 (File No.
    000-24733).
(8) Incorporated herein by reference to the Registrant's Registration Statement
    on Form S-3 (File No. 333-95375).
+  The Registrant agrees to furnish supplementary a copy of any omitted
   schedules to this agreement to the Securities and Exchange Commission upon
   its request.

                                      3