Marketable investments consist of investments 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 investments until maturity. Therefore, all such investments are classified as held to maturity investments and stated at amortized cost. At March 31, 2000, the amortized cost of the Company's investments approximated fair value.

NOTE 4. SEGMENT AND GEOGRAPHIC INFORMATION

Segment information

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

Geographic information

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

          The Company operates in three main geographic areas as follows:

		(Unaudited) Three Months Ended March 31,
		1999				2000
Revenues:
United States	$	10,533			$	17,109
Canada		3,800				6,602
Europe, Asia and Other		2,492				5,351
Total revenues	$	16,825			$	29,062
Income before income taxes:
United States	$	117			$	2,063
Canada		(102	)			2,445
Europe, Asia and Other		319				232
Total income before income taxes	$	334			$	4,740

NOTE 5. ACQUISITION OF CYGNACOM SOLUTIONS, INC.

          On March 14, 2000 (the "Acquisition Date"), the Company completed the acquisition of all of the outstanding stock of CygnaCom Solutions, Inc. ("CygnaCom"), a Virginia corporation, pursuant to a Stock Purchase Agreement ("Purchase Agreement"), dated as of March 14, 2000, by and among the Company, CygnaCom and the stockholders of CygnaCom. CygnaCom is based in McLean, Virginia and is a high technology company that delivers information technology products and services, with expertise in public key infrastructure, cryptographic technologies, security engineering and systems integration and development. The Company intends to continue CygnaCom's business substantially in the manner conducted by CygnaCom immediately prior to the acquisition.

          Pursuant to the Purchase Agreement, on the Acquisition Date, all of the outstanding shares of common stock 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, whereupon CygnaCom became a wholly-owned subsidiary of the Company. The Purchase Agreement and the acquisition of CygnaCom were approved by the Board of Directors of the Company, and the Board of Directors and stockholders of CygnaCom.

          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 $460 of goodwill amortization was recorded in the three months ended March 31, 2000. In addition, the results of operations of CygnaCom are included in the Company's financial statements from the Acquisition Date.

          The following unaudited pro forma data summarize the combined results of operations of Entrust Technologies Inc. and CygnaCom the three months ended March 31, 1999 and 2000, as if the acquisition had taken place as of the beginning of the respective periods, and accordingly, include a full period's goodwill amortization in each period shown.

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

OVERVIEW

          We are the leading global provider of public-key infrastructure, or PKI, products and services to e-businesses and other organizations. We are committed to enabling organizations to conduct e-commerce securely, ensuring they benefit from increased service efficiency, technology cost savings and the confidence associated with trusted e-business technologies. Our products and services enable organizations and their partners to manage trusted, secure electronic transactions and communications over today's advanced networks, including intranets, extranets and the Internet. Since 1994, we have provided our PKI solution primarily to global enterprises and government entities, as well as, small- to mid-sized businesses and individuals. To date, over four million users worldwide have been licensed to use Entrust products.

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

RESULTS OF OPERATIONS

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

REVENUES

          We recognize revenues in accordance with the provisions of the American Institute of Certified Public Accountants' Statement of Position 97-2 "Software Revenue Recognition". We generate revenues primarily 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.

           Accordingly, revenues from perpetual software license agreements are recognized as revenues upon receipt of an executed license agreement, or an unconditional order under an existing license agreement, and shipment of the software, if there are no significant remaining vendor obligations, collection of the receivable is probable and payment is due within twelve months.           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 by Entrust.net, our certification authority service, 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 large custom development contracts. Under this method, we recognize revenues and profit as the work on the contract progresses. Revenues are recognized by applying the percentage of the total cost incurred to date divided by the total estimated contract cost to the total contract value, and any projected loss is recognized immediately. The project cost estimates in each case are reviewed on a regular basis.

Total Revenues

          Total revenues increased 73% from $16.8 million for the three months ended March 31, 1999 to $29.1 million for the three months ended March 31, 2000. Total revenues derived from North America increased 66% from $14.3 million for the three months ended March 31, 1999 to $23.7 million for the three months ended March 31, 2000, while total revenues derived from outside of North America increased 116% from $2.5 million for the three months ended March 31, 1999 to $5.4 million for the three months ended March 31, 2000. Although the majority of the overall growth in total revenues in the first three months of 2000 has been experienced in North America, we have also focused on growing our revenue base internationally, particularly in Europe and Asia. However, the level of non-North American revenues has fluctuated from period to period and this trend is expected to continue for the foreseeable future.

License Revenues

          License revenues increased 80% from $11.6 million for the three months ended March 31, 1999 to $20.9 million for the three months ended March 31, 2000, representing 69% and 72% of total revenues in the respective periods. The increase in license revenues in absolute dollars was primarily due to increasing market awareness and acceptance of our product offerings, continued enhancement and increasing breadth of our product offerings, expansion of our sales and marketing organization, and sales to new industry segments. The increase in license revenues as a percentage of total revenues reflected our continued focus on the product side of our business and the increased use of third-party consulting firms and systems integrators to provide implementation services to our customers.

Services and Maintenance Revenues

          Services and maintenance revenues increased 57% from $5.2 million for the three months ended March 31, 1999 to $8.2 million for the three months ended March 31, 2000, representing 31% and 28% of total revenues in the respective periods. The increase in services and maintenance revenues in absolute dollars was primarily the result of an increase in demand for consulting services and customer support, the acquisition of CygnaCom, and increases in maintenance revenues from a larger installed product base and as these customers continue to renew their maintenance agreements. The growing customer base has resulted in an acceleration of demand for consulting services to assist these customers as they deploy our solutions. The decrease in services and maintenance revenues as a percentage of total revenues was largely due to our focus on building the product side of the business and building successful partnering relationships with third-party service providers to provide services to customers and as we focus internal resources on building new service offerings for our customers. We continue to focus on building our relationships with outside service providers to ensure that we have adequate resources available to meet the demand of our customers.

COST OF REVENUES

Cost of License Revenues

     Cost of license revenues consists primarily of costs associated with product media, documentation, packaging and royalties to third-party software vendors. Cost of license revenues increased from $395,000 for the three months ended March 31, 1999 to $937,000 for the three months ended March 31, 2000, representing 2% and 3% of total revenues for the respective periods. The increase in cost of license revenues in absolute dollars and as a percentage of total revenues was primarily a result of higher royalty fees paid to third-party software vendors, as we incorporated a higher level of third-party software in our products sold in the first three months of 2000, compared to the same period of 1999. The mix of third-party products may vary from period to period and our gross margins and, consequently, our results of operations could be adversely affected.

Cost of Services and Maintenance Revenues

     Cost of services and maintenance revenues consists primarily of personnel costs associated with customer support, training and consulting services, as well as amounts paid to third-party consulting firms for those services. Cost of services and maintenance revenues increased from $2.8 million for the three months ended March 31, 1999 to $4.6 million for the three months ended March 31, 2000, representing 17% and 16% of total revenues for the respective periods. The increase in absolute dollars during the three months ended March 31, 2000 reflected the increased costs associated with the increased levels of services and maintenance revenues experienced during this period. The decrease in the cost of services and maintenance revenues as a percentage of total revenues in the three months ended March 31, 2000 reflects improved productivity and utilization of available services resources compared to the same period of the previous year. Further, the decrease as a percentage of total revenues is indicative of the fact that license revenues grew more rapidly than services and maintenance revenues in the first quarter of 2000.

     Services and maintenance gross profit as a percentage of services and maintenance revenues was 45% and 44% for the three months ended March 31, 1999 and 2000, respectively. This decrease in the services and maintenance margin for the three months ended March 31, 2000, compared to the same period in 1999, reflects the investment we made in the professional services team through the acquisition of CygnaCom during the first quarter of 2000, which represents a slight shift in the mix of overall services revenue toward the lower-margin professional services revenues.

OPERATING EXPENSES

Sales and Marketing

     Sales and marketing expenses increased from $8.6 million for the three months ended March 31, 1999 to $12.9 million for the comparable period in 2000. Sales and marketing expenses represented 51% of total revenues for the three months ended March 31, 1999, compared to 44% for the comparable period in 2000. The increase in absolute dollars was primarily the result of costs associated with the expansion of our sales and marketing organization, both domestically and internationally, in order to support the growing revenue base, as we continue to penetrate new markets and industry segments. In addition, we continue to make significant investments in marketing to support the launch of new products, services and marketing programs. We have continued our strategy of (a) investing in hiring and training our direct sales organization in anticipation of future market growth, and (b) investing in marketing efforts in support of new product launches. Failure of these investments to generate future revenues could have a significant adverse effect on our operations. The decrease in sales and marketing expenses as a percentage of total revenues reflects the higher revenue base as well as improvements achieved in productivity of sales and marketing personnel and efficiencies gained in the related processes.

Research and Development

     Research and development expenses increased from $3.9 million for the three months ended March 31, 1999 to $5.0 million for the comparable period in 2000. Research and development expenses represented 23% of total revenues for the three months ended March 31, 1999, compared to 17% for the comparable period in 2000. The increased investment in research and development expenses in absolute dollars reflects higher expenses related to increased staffing of software developers. These employees were added primarily in connection with the continuing expansion and enhancement of our product offerings and our commitment to quality assurance and testing, and globalization of these product offerings. The investment in research and development as a percentage of total revenues decreased for the three months ended March 31, 2000, compared to the same period in 1999, as a result of the growth of revenues outpacing the expansion of the development team between those periods. However, we believe that we must continue to invest in research and development in order to maintain our technological leadership position and, thus, expect research and development expenses to continue to increase in absolute dollars as we hire additional experienced security experts and software engineers.

General and Administrative

     General and administrative expenses increased from $1.5 million for the three months ended March 31, 1999 to $2.2 million for the comparable period in 2000. General and administrative expenses represented 9% of total revenues for the three months ended March 31, 1999, compared to 8% for the comparable period in 2000. The increase in general and administrative expenses in absolute dollars reflected our continued investment in increased staffing and related expenses for the enhancement of the infrastructure necessary to support our growing business, including investor relations programs, improved management information systems and the increased utilization of outside professional service firms. The decrease as a percentage of total revenues reflected efficiencies gained throughout our administrative processes as we have grown as a company.

Goodwill Amortization

     On June 8, 1998, we completed the acquisition of r3 Security Engineering AG, a company based in Zurich, Switzerland, which provides consulting, applied research and product development services related to commercial security and encryption solutions. We have recorded $178,000 and $201,000 of amortization with respect to the goodwill that arose as a result of this acquisition in the three months ended March 31, 1999 and 2000, respectively.

     On March 14, 2000, we completed the acquisition of CygnaCom, a company based in McLean, Virginia that delivers information technology products and services, with expertise in public key infrastructure, cryptographic technologies, security engineering and systems integration and development. Pursuant to the stock purchase agreement dated March 14, 2000, entered into between us, CygnaCom and the shareholders of CygnaCom, we agreed to acquire all of the outstanding shares of CygnaCom for an aggregate purchase price of $16.6 million, which included cash consideration of $16.0 million. The acquisition was recorded under the purchase method of accounting and, therefore, the results of operations of CygnaCom are included in our financial statements from the acquisition date. Upon consummation of the acquisition, CygnaCom became a wholly owned subsidiary of ours. In connection with this acquisition, we recorded goodwill of $16.6 million and, accordingly, goodwill amortization of $460,000 has been expensed for the three months ended March 31, 2000.

Interest Income

     Interest income increased from $914,000 for the three months ended March 31, 1999 to $1.9 million for the comparable period in 2000, representing 5% and 7% of total revenues in the respective periods. This increase in investment income reflected the interest earned on the net proceeds of our initial public offering in August 1998, on cash provided by operations in 1999 and 2000, and on the net proceeds of our follow-on offering in February 2000.

Provision for Income Taxes

     We recorded an income tax provision of $1.4 million for the three months ended March 31, 2000 compared with no income tax provision for the same period of 1999. We account for income taxes in accordance with Statement of Financial Accounting Standards No. 109. The effective income tax rates differed from statutory rates primarily due to an adjustment of the valuation allowance, and therefore, the recognition of a portion of the tax benefits from the significant net operating loss and tax credit carry-forwards available.

LIQUIDITY AND CAPITAL RESOURCES

     We generated cash of $5.5 million from operating activities during the three months ended March 31, 2000. This cash inflow was primarily a result of an increase in accounts payable, accrued liabilities and deferred income and the net income achieved over the period. These inflows were partially offset by cash outflows relating to an increase in accounts receivable. Our average days sales outstanding at March 31, 2000 was 79 days, which represents an increase over the 75 days that we reported at December 31, 1999, but a decrease from the 84 days at March 31, 1999. The overall increase in days sales outstanding from December 31, 1999 reflects longer international payment terms experienced and the effect of accounts receivables assumed as part of the CygnaCom acquisition. However, the overall decrease in days sales outstanding from March 31, 1999 was primarily due to the improved collection efforts and the quality of our relationships with our customers. 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 the three months ended March 31, 2000, we used $5.9 million of cash in investing activities, primarily due to the $15.6 million we invested in the acquisition of CygnaCom. This was partially offset by cash provided by the reduction of our marketable investments by $11.0 million (net of $24.1 million of marketable investment purchases), while we invested $1.1 million in property and equipment and $200,000 in other long-term assets. The property and equipment investments were primarily computer hardware, furniture and leasehold improvements to support our growing organization.

     Cash provided by financing activities for the three months ended March 31, 2000 was $166.4 million, primarily due to the net proceeds of $161.5 million from the issuance of common stock in the follow-on offering in February 2000, and $4.9 million from the exercise of employee stock options and the sale of shares under our employee stock purchase plan.

     As of March 31, 2000, our cash, cash equivalents and short-term investments in the amount of $244.8 million comprised our principal sources of liquidity. It is our belief that cash flows from operations and existing cash and cash equivalents and short-term investments will be sufficient to meet our needs for at least the next twelve months.

CERTAIN FACTORS THAT MAY AFFECT OUR BUSINESS

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

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

• length of sales cycles associated with our product offerings;
• the timing, size and nature of our licensing transactions;
• market acceptance of new products or product enhancements by us or our competitors;
• the relative proportions of revenues derived from licenses and services and maintenance;
• the timing of new personnel hires and the rate at which new personnel become productive;
• changes in pricing policies by our competitors;
• changes in our operating expenses; and
• fluctuations in foreign currency exchange rates.

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

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

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

Because of the lengthy and unpredictable sales cycle associated with our large PKI 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 PKI solution often involve large expenditures, and the sales cycles for these transactions are often lengthy and unpredictable. Factors affecting the sales cycle include:

• customers' budgetary constraints;
• the timing of customers' budget cycles; and
• customers' internal approval processes.

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

A limited number of customers have 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 have accounted for a significant percentage of our revenues. In 1997, three customers accounted for 19%, 12% and 11% of revenues, respectively. In 1998, our three largest customers accounted for 23% of revenues. In 1999, our three largest customers accounted for 31% of revenues, with the largest customer accounting for 24% of revenues. 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 e-business security market does not continue to grow, demand for our products and services will be adversely affected

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

• the continued expansion of Internet usage and the number of organizations adopting or expanding intranets and extranets;
• the ability of network infrastructures to support an increasing number of users and services;

• the public recognition of the potential threat posed by computer hackers and other unauthorized users; and
• the continued development of new and improved services for implementation across the Internet, intranets and extranets.

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

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

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

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

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

• adverse publicity;
• product returns;
• the loss or delay of market acceptance of our products; and
• third-party claims against us.

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

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

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

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

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

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