UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q/A

(Amendment No. 2)

(Mark one)

For the quarterly period ended June 30, 2003

OR

For the transaction period from                      to                     

Commission File Number 000-24733

ENTRUST, INC.

(Exact name of registrant as specified in its charter)

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

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

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

There were 63,326,685 shares of the registrant’s $.01 par value Common stock outstanding as of August 5, 2003.

INTRODUCTORY NOTE

This Amendment No. 2 to the Quarterly Report of Entrust, Inc. (“Entrust” or the “Company”) on Form 10-Q/A for the quarter ended June 30, 2003 is being filed to amend only the following items contained in our Quarterly Report on Form 10-Q as originally filed with the Securities and Exchange Commission on August 8, 2003:

All information contained in this Amendment No. 2 is subject to updating and supplementing as provided in Entrust’s reports filed with the Securities and Exchange Commission, as amended, for periods subsequent to the date of the original filing of the Quarterly Report on Form 10-Q.

FORWARD-LOOKING STATEMENTS

This Amendment No. 2 to the Quarterly Report on Form 10-Q/A contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they do not materialize or prove incorrect, could cause the results of Entrust to differ materially from those expressed or implied by such forward-looking statements. All statements, other than statements of historical fact, are statements that could be deemed to be forward-looking statements, including any projections of results of operations, revenues, financial condition or other financial items; any statements of plans, strategies and objectives of management for future operations; any statements regarding proposed new products, services or developments; any statements regarding future economic conditions, prospects of performance; statements of belief and any statement of assumptions underlying any of the foregoing.

The forward-looking statements contained herein involve risks and uncertainties. To learn more about the risks and uncertainties that the Company faces, you should read the risk factors set forth in Entrust’s Securities and Exchange Commission periodic reports and filings, including but not limited to the items discussed elsewhere in this report. The Company assumes no obligation to update these forward-looking statements to reflect events that occur or circumstances that exist after the date on which they were made.

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ITEM 1. FINANCIAL STATEMENTS

ENTRUST, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

See notes to condensed consolidated financial statements

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ENTRUST, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See notes to condensed consolidated financial statements

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ENTRUST, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See notes to condensed consolidated financial statements

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ENTRUST, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

NOTE 1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the audited annual consolidated financial statements and, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows. The results of operations for the three and six months ended June 30, 2003 are not necessarily indicative of the results to be expected for the full year. Certain information and footnote disclosures normally contained in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the Notes to Consolidated Financial Statements for the year ended December 31, 2002 contained in the Company’s Annual Report on Form 10-K.

NOTE 2. RESTRUCTURING AND OTHER CHARGES

May 2003 Restructuring Plan

Following the first quarter of 2003, when the Company’s revenue fell short of its expectations and guidance, management began a re-assessment of the Company’s operations to ensure that its expenses were structured such that it could achieve its financial break-even target for the fourth quarter of 2003. In addition, during the second quarter of 2003, the Company completed development on more new products than in any other quarterly period in the Company’s history. Completion of these development programs allowed the Company to re-assess its development program.

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

The restructuring will result in a reduction of all expense lines, including total cost of revenues, sales and marketing expenses, research and development expenses and general and administrative expenses. As a result of the implementation of the restructuring plan, management expects the Company’s total expenses (operating expenses plus cost of revenues) to be $24,000 in the fourth quarter of 2003, a reduction of $2,900, or 12%, from the $26,900 incurred during the first quarter of 2003. The restructuring involves the elimination of 147 positions from across all functional areas of the Company, with a focus on the reduction of management positions.

Management does not expect the restructuring plan to materially impact its revenues positively or negatively. It is possible, however, that revenues may be negatively impacted.

The consolidation of under-utilized facilities includes costs relating to lease obligations through the first quarter of 2009, primarily from the Company’s Santa Clara, California and Addison, Texas facilities, and accelerated amortization of related leaseholds and equipment. The facilities plan has not been executed as of June 30, 2003, therefore, there are no charges during the second quarter of 2003 related to these facilities, except for accelerated amortization on leaseholds and equipment whose estimated useful lives have been impacted by the plan to cease using the related excess capacity in the Company’s facilities. However, the Company expects the cease-use date for the excess capacity in each location to occur by the end of the third quarter of 2003. The total amount of the workforce and facilities charges is expected to be $10,070. Of this amount, $4,646 had been incurred by June 30, 2003 and charged to the restructuring charges line in the consolidated statement of operations for the second quarter.

In addition, the Company recorded a non-cash charge related to the impairment of a long-term strategic investment made in Brazil three years ago. Due to a decline in market conditions and a restructuring of the investee by its management, it was concluded that the investment had suffered an other than temporary decline in fair value as determined by third party market transactions, and as such, the Company recorded an impairment in the second quarter of $2,780.

As a result of actions undertaken in the restructuring, coupled with the commercial release of a next generation software product, the Company reviewed the estimated future cash flows from the developed technology acquired from enCommerce. Based on these events, the net present value of the estimated future cash flows from the purchased product rights is negative. Therefore, the Company recorded an impairment charge related to this asset in the amount of the remaining carrying value of $1,134, as the Company determined the asset had minimal fair value.

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Summary of Accrued Restructuring Charges for May 2003 Restructuring

The following table is a summary of the accrued restructuring charges for the May 2003 plan as at June 30, 2003

(table in millions):

June 2001 Restructuring Plan

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

The workforce portion of the restructuring was largely completed by the end of the fourth quarter of 2001 and primarily related to severance costs, fringe benefits due to severed employees and outplacement services. The consolidation of excess facilities included the closure of eight offices throughout the world, but the majority of the costs related to the Company’s facility in Santa Clara, California. These costs are payable contractually over the remaining term of the Santa Clara facility lease, which runs through to 2011, reduced by estimated sublease recoveries. The Company continues to evaluate ongoing possibilities to settle this obligation in the most cost-effective manner and, therefore, it has been classified as current in nature. The discontinuance of non-core products and programs was primarily related to the discontinuance of certain of the Company’s business program initiatives and certain applications that had not achieved their growth and profitability objectives. In addition, the Company withdrew from certain committed marketing events and programs. The cash outflow related to the majority of these discontinued products and programs was substantially completed by the end of the second quarter of 2002, while estimated remaining marketing and distribution agreement obligations related to certain discontinued products of $2,750 were payable contractually through 2004. The Company had initiated all actions required by the restructuring plan by the end of the second quarter of 2002.

In connection with the May 2003 restructuring plan discussed above, which included a further reduction in space utilized at the Company’s Santa Clara, California facility, the Company reviewed market sub-lease rates in that region. Based on information supplied to the Company by its external real estate advisors, the Company has concluded that the sub-lease market will not recover in the timeframe that it had originally estimated due to the continued softening of sub-lease rates in that market, requiring an adjustment to increase the facility related accrual recorded in June 2001, by $6,743. This adjustment was charged to the restructuring charges line in the consolidated statement of operations for the second quarter.

In July 2003, the Company signed a settlement and general release agreement with Zix Corporation, that resulted in the remaining contractual obligation under the Company’s marketing and distribution agreement with Zix Corporation being settled at a value significantly less than the accrued $2,750 obligation at June 30, 2003. Under the settlement agreement, Entrust paid Zix Corporation $700 in July in fulfillment of all remaining obligations. This settlement resulted in savings to the Company of $2,050, which will be recorded through the restructuring charges line in the consolidated statement of operations for the third quarter of 2003.

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Summary of Accrued Restructuring Charges for June 2001 Restructuring

The following table is a summary of the accrued restructuring charges for the June 2001 plan as at June 30, 2003 and December 31, 2002 (table in millions):

NOTE 3. STOCK-BASED COMPENSATION AND STOCK OPTION PLANS

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, “Accounting for Stock Issued to Employees”. SFAS No. 123, “Accounting for Stock-Based Compensation” 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 and related interpretations in accounting for stock-based compensation awards to employees under its stock option plans. For all options granted to employees in the periods disclosed, the exercise price of each option granted was equal to the fair value of the underlying stock at the date of grant and, therefore, no stock-based compensation costs are reflected in earnings for these options. 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.

In the pro forma calculations above, the weighted average fair value for stock options granted during the three and six months ended June 30, 2003 was estimated at $2.19, $2.32, compared to $3.50 and $5.53 per option for the three and six months ended June 30, 2002, 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.

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The Company recorded amortization of unearned compensation of $6 and $14 into compensation expense for the three and six months ended June 30, 2003, respectively, related to options granted to non-employees in a prior period.

Stock Option Plans

The following tables summarize information concerning outstanding options and warrants as at June 30, 2003:

The following table sets forth a comparison as of June 30, 2003, of the number of shares subject to options with exercise prices at or below the closing price per share of our Common stock on June 30, 2003 (“In-the-Money” options) to the number of shares of our Common stock subject to options with exercise prices greater than the closing price per share of our Common stock on such date (“Out-of-the-Money” options) (in actual shares):

In-the-Money and Out-of-the-Money Option Information as of June 30, 2003⁽¹⁾

On August 1, 2003, the Company’s Board of Directors authorized a special grant to employees totaling approximately 2,400,000 options to purchase Common stock of the Company. The exercise price on these options was $3.20 per share, which was the market price of the Company’s stock on the date of grant.

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NOTE 4. EQUITY INVESTMENT IN ENTRUST JAPAN CO., LTD. (“Entrust Japan”)

On April 12, 2002, the Company increased its investment in the voting capital of Entrust Japan from an ownership share of less than 10% to approximately 39% by converting a previous cash advance of $524, and by exchanging cash of approximately $957, Entrust software product valued at $385 and distribution rights for certain Entrust products for the Japanese market, for additional shares in Entrust Japan. The Company’s increased investment followed additional investments made by Toyota and SECOM in the fourth quarter of 2001. The Company concluded that because of the additional investment and increased voting ownership, as of the second quarter of 2002, it had the potential ability to exercise significant influence over the operations of Entrust Japan. Therefore, beginning in the same period of 2002, the Company began accounting for its investment in Entrust Japan under the equity method, in accordance with the provisions of APB No. 18, “The Equity Method of Accounting for Investments in Common Stock” and ARB No. 51, “Consolidated Financial Statements”. Accordingly, the Company has included its share of post-acquisition losses of Entrust Japan, in the amount of $133 and $238 for the three and six months ended June 30, 2003, respectively, in its consolidated losses for the current fiscal year. To date, the Company has recorded cumulative losses from its investment in Entrust Japan of $840, since the increased investment in the second quarter of 2002.

Financial Accounting Standards Board Interpretation No. 46, “Consolidation of Variable Interest Entities” (“Interpretation No. 46”), requires the primary beneficiary of a variable interest entity to include the assets, liabilities, and results of the activities of the variable interest entity in its consolidated financial statements, as well as disclosure of information about the assets and liabilities, and the nature, purpose and activities of consolidated variable interest entities. In addition, Interpretation No. 46 requires disclosure of information about the nature, purpose and activities of consolidated variable interest entities in which the Company holds a significant variable interest. The provisions of Interpretation No. 46 are effective immediately for any interests in variable interest entities acquired after January 31, 2003 and effective beginning in the third quarter of 2003 for all variable interests acquired before February 1, 2003. The Company is currently evaluating the applicability of Interpretation No. 46 to its investment in Entrust Japan and the possible impact on its consolidated results of operations and consolidated balance sheet.

NOTE 5. STOCK REPURCHASE PROGRAM AND SHARE REGISTRATIONS

On July 29, 2002, the Company announced that its board of directors had authorized the Company to repurchase up to an aggregate of 7,000,000 shares of its Common stock. As of June 30, 2003, the Company has repurchased 2,229,200 shares of its Common stock under this program, for a total cash outlay of $5,937, at an average price of $2.66 per share, including commissions paid to brokers. For the three months ended June 30, 2003, the Company had repurchased 341,900 shares of its Common stock, for a total cash outlay of $844. On July 22, 2003, the Company announced that its board of directors had authorized an extension to this stock repurchase program. Entrust’s original stock repurchase program would have expired on July 28, 2003. The extended plan permits the new purchase of up to 7,000,000 shares of the Company’s Common stock, through September 1, 2004 in addition to the 2,229,200 shares already purchased.

Repurchases under the stock repurchase program may take place from time to time until September 1, 2004, or an earlier date determined by the Company’s board of directors, in open market, negotiated or block transactions, and may be suspended or discontinued at any time. The timing and amount of shares repurchased will be determined by the Company’s management based on its evaluation of market and business conditions. The repurchased shares will be considered authorized but unissued shares of the Company and will be available for issuance under the Company’s stock incentive, employee stock purchase and other stock benefit plans, and for general corporate purposes, including possible acquisitions. The stock repurchase program will be funded using the Company’s working capital.

Nortel Networks Limited and its subsidiary Nortel Networks Inc., which we refer to collectively as “Nortel Networks”, has the right to sell its shares under Rule 144 of the Securities Act of 1933 or through the exercise of demand registration rights. In July 2003, the Company received notice of a demand registration from Nortel Networks pursuant to its Amended and Restated Registration Rights Agreement, dated July 29, 1998, with the Company. The demand is for the registration of the 8,351,259 shares of Entrust common stock that Nortel Networks Inc. holds. The Amended and Restated Registration Rights Agreement was set to expire in August 2003. The

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Company is currently in the process of complying with that demand and filed a registration statement on Form S-3 with the Securities and Exchange Commission on July 31, 2003, as a result of that demand.

NOTE 6. NET INCOME (LOSS) PER SHARE AND SHARES OUTSTANDING

Basic net income (loss) per share is computed by dividing the net income (loss) by the weighted average number of shares of Common stock of all classes outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) by the weighted average number of shares of Common stock and potential Common stock outstanding, and when dilutive, options to purchase Common stock using the treasury stock method. The dilutive effect of the options to purchase Common stock are excluded from the computation of diluted net income (loss) per share if the effect is antidilutive. For the three and six months ended June 30, 2003, the number of shares of Common stock issuable upon exercise of options excluded from the diluted net loss per share computation due to their antidilutive effect was 401,368 and 537,502 shares, respectively, compared to an antidilutive effect of 610,380 and 1,199,886 shares for the three and six months ended June 30, 2002, respectively.

In the three and six months ended June 30, 2003, the Company issued 142,629 and 248,992 shares, respectively, of Common stock related to the exercise of employee stock options and the sale of shares under the employee stock purchase plan. In addition, the Company issued 9,000 shares of its Common stock to non-employee members of an advisory committee during the second quarter of 2003 which were recorded in the consolidated statement of operations at their fair value on date of grant.

NOTE 7. 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. 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 June 30, 2003, the amortized cost of the Company’s held to maturity investments approximated fair value. Based on contractual maturities, these marketable investments were classified in either current assets or long-term assets.

Realized gains and losses on disposition of available for sale marketable investments are included in investment income in the results of operations. Unrealized gains and losses are included in other comprehensive income. As at June 30, 2003, the Company did not hold any available for sale investments.

The Company has a policy that allows for the use of hedges on equity investments in publicly traded companies. However, the Company is not presently engaged in any such hedges.

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 the outstanding voting share capital at June 30, 2003. 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 Audit Committee of the Board of Directors monitors and assesses the ongoing operating performance of the underlying companies for evidence of impairment. To date, the Company has recorded impairments totaling $14,817 with respect to these investments, which includes an impairment of $2,780 recorded in the quarter ended June 30, 2003 related to a strategic investment in Brazil. The net remaining balance, as of June 30, 2003, is $78. See note 2 for additional discussion.

In addition, the Company holds an equity interest in Entrust Japan, which represents approximately 39% of the voting share capital, and is accounted for by the Company using the equity method of accounting for investments in common stock (Note 4).

The Company recorded revenues representing less than 1% of total revenues for each of the three and six months ended June 30, 2003 and 2002, with respect to arm’s-length transactions with companies in which it has made

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strategic equity investments recorded at cost. In addition, revenues recorded by the Company from Entrust Japan represented less than 3% of total revenues for each of the three and six months ended June 30, 2003, compared to 2% of total revenues for each of the three and six months ended June 30, 2002.

NOTE 8. SEGMENT INFORMATION

Segment information

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

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:

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NOTE 9. COMPREHENSIVE INCOME (LOSS)

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

NOTE 10. LEGAL PROCEEDINGS

Frankel v. Entrust Technologies Inc.

On September 30, 2002, Judge T. John Ward of the U.S. District Court for the Eastern District of Texas (the “Court”) issued an order dismissing a class action lawsuit pending against the Company.

As previously disclosed, on July 7, 2000, an action entitled Frankel v. Entrust Technologies Inc., et al., No. 2-00-CV-119, was filed in the Court. Subsequently, several similar actions were also filed. All of these actions were consolidated and on January 22, 2001, a consolidated complaint was filed. The consolidated complaint purported to be a class action lawsuit brought on behalf of persons who purchased or otherwise acquired Common stock of the Company during the period from October 19, 1999 through July 3, 2000. The consolidated complaint alleged that the defendants misrepresented and failed to disclose certain information about the Company’s business and prospects, as required by the Securities Exchange Act of 1934. It did not specify the amount of damages sought.

On September 21, 2001, the Company moved to dismiss an amended complaint filed on August 30, 2001. On September 30, 2002, the Court found that the Private Securities Litigation Reform Act required dismissal of the case because of the lack of specificity with which the amended complaint was pleaded. The case was dismissed with prejudice; however, the order is subject to the possibility of an appeal. As of the date of this filing, the Company had not learned of any appeal being filed. If an appeal is granted, 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.

Other legal matters

The Company is subject, from time to time, 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.

NOTE 11. CONTINGENCIES

Entrust entered into a contract with the General Services Administration (“GSA”) on March 31, 2000. It had come to the Company’s attention that it might have a potential liability to the GSA under this contract, and the Company has advised the GSA of this matter. The Company has been conducting a self-assessment of its compliance and internal processes with respect to the agreement, as well as the pricing requirements of the agreement. At this time, the Company’s self-assessment is nearing completion and, as a result, the Company has been able to make a reasonable estimate of its probable liability. The Company accrued this estimated amount in the quarter ended June 30, 2003. Management believes that the self-assessed liability is not material and based on the current information available, that the final outcome will not have a material adverse effect on the Company’s consolidated results of operations or consolidated financial position.

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

This report contains forward-looking statements that involve risks and uncertainties. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including without limitation statements regarding our expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this report are based on information available to us, up to and including the date of this document, and we assume no obligation to update any such forward-looking statements. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors, including those set forth below, under “Overview”, “Certain Factors that May Affect Our Business”, elsewhere in this report and in our Annual Report on Form 10-K. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and notes thereto appearing elsewhere in this report.

OVERVIEW

Background

We are a leading global provider of software that secures digital identities and information. This software and the associated services enable businesses and governments around the world to securely execute transactions and communicate information over wired and wireless networks, including the Internet. We have a broad set of products that provides identification, entitlements, verification, privacy and security management capabilities. Major government agencies, financial institutions and Global 1500 enterprises in more than 40 countries have purchased our portfolio of award-winning security technologies.

We were incorporated in December 1996 with nominal share capital, all of which was contributed by Nortel Networks Limited and its subsidiary Nortel Networks Inc., which we refer to collectively as “Nortel Networks”. 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 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 Common stock at an offering price of $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 July 25, 2003, Nortel Networks Inc. owned 8,351,259 shares, or approximately 13%, of our Common stock. We received notice of a demand registration from Nortel Networks pursuant to its Amended and Restated Registration Rights Agreement, dated July 29, 1998, with the Company. The demand is for the registration of the 8,351,259 shares of Entrust common stock that Nortel Networks Inc. holds. The Amended and Restated Registration Rights Agreement was set to expire in August 2003. We are currently in the process of complying with that demand.

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BUSINESS OVERVIEW

During the second quarter of 2003, we continued our strategy of focusing on core vertical and geographic markets. We also announced a restructuring plan that resulted in us recording restructuring charges of $11.4 million in the second quarter. The restructuring included charges for employee-related severance costs of approximately $4.3 million, charges of $6.7 million due to adjustments of projected sublet recoveries from future lease obligations for previously abandoned facilities in Santa Clara, California and charges of $357,000 related to accelerated amortization on leaseholds and equipment for facilities with excess capacity that we intend to abandon in the third quarter of 2003. In addition, impairments were recorded for a strategic investment made three years ago in Brazil of $2.8 million and for purchased product rights of $1.1 million. The purchased product rights impairment was the result of a re-assessment of this asset due to the restructuring plan.

Software revenues grew 16% from the first quarter of 2003 driven by our classic authentication products to both Enterprise and Government. In the quarter, approximately 62% of our revenues came from global enterprises implementing our authentication and authorization solutions. Revenues from digital certificate-based Secure Desktop Applications accounted for approximately 40% of software revenue. Secure Messaging, Secure VPN and secure authentication and encryption for customer applications were the key drivers for our classic PKI based solutions in the quarter. Secure Web Portal accounted for approximately 40% of the second quarter software revenue. Entrust Get-Access continued to show strength in the quarter as we continue to see additional interest in our authorization and web single sign-on solution since the launch of the latest version, GetAccess 7.0, in April of 2003. Entrust Certificate Services recorded their highest orders in more than two years. Increasingly customers are finding transparency, ease of administration and the quality of technical support as the critical values for web server security. Other highlights from the quarter included:

Our key technology-related accomplishments during the first quarter of 2003 included the following:

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CRITICAL ACCOUNTING POLICIES

We operate in one primary business. We develop, market and sell software that secures digital identities and information. We also perform professional services to install, support and integrate our software solutions with other applications. All of these activities may be fulfilled in conjunction with partners and managed through a global 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 the second quarter of 2003, our most complex accounting judgments were made in the areas of software revenue recognition, allowance for doubtful accounts, restructuring and other special non-recurring charges, impairment of long-term strategic investments and purchased product rights, the provision of income taxes and stock-based compensation. The restructuring and other special non-recurring charges are not anticipated to be recurring in nature. However, the financial reporting of restructuring and other special non-recurring charges will continue to require judgments until such time as the corresponding accruals are fully paid out and/or no longer required. Software revenue recognition, allowance for doubtful accounts, impairment of long-term strategic investments, provision for income taxes and stock-based compensation are expected to continue to be ongoing elements of our accounting processes and judgments.

Software Revenue Recognition

With respect to software revenue recognition, we recognize revenues in accordance with the provisions of the American Institute of Certified Public Accountants’ Statement of Position No. 97-2, “Software Revenue Recognition”, Statement of Position No. 98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions” and related accounting guidance and pronouncements.

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

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from the first instance of product delivery. This policy is applicable to all sales transactions, including sales to resellers and end user customers. We do not offer a right of return on sales of our software products.

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

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

Allowance for Doubtful Accounts

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

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

We base our ongoing estimate of allowance for doubtful accounts primarily on the aging of the balances in the accounts receivable, our historical collection patterns and changes in the creditworthiness of our customers. While credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Each circumstance in which we conclude that a provision for non-payment by a customer may be required must be carefully considered in order to determine the true factors leading to that potential non-payment to ensure that it is proper for it to be categorized as an allowance for bad debts. Our accounts receivable include material balances from a limited number of customers, with five customers accounting for 43% of gross accounts receivable at June 30, 2003, compared to 41% of gross accounts receivable at June 30, 2002. For more information on our customer concentration, see our related discussion in “Certain Factors That May Affect Our Business”. Therefore, changes in the assumptions underlying this assessment or changes in the financial condition of our customers and the timing of information related to the change in financial condition could result in a different assessment of the existing credit risk of our accounts receivable and thus, a different required allowance, which could have a material impact on our reported earnings.

As of June 30, 2003, accounts receivable totaled $17.0 million, net of an allowance for doubtful accounts of $4.1 million.

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Restructuring and Other Charges

June 2001 Restructuring Plan

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 program and the impact of the macroeconomic conditions on us and our global base of customers, we recorded restructuring and other special non-recurring charges, excluding goodwill impairment, of $106.6 million in the second quarter of 2001, with a subsequent increase of $1.4 million in the second half of 2001 and a reduction of $1.3 million in the first half of 2002. In the second quarter of 2003, we made a further adjustment to increase the restructuring charges that we had previously recorded related to the June 2001 restructuring program by $6.7 million to reflect a change in our projected sublet lease recoveries for our Santa Clara, California facility. We concluded that this was required as a result of our realization that the market for leased facilities in that region will not recover in the timeframe that we had estimated, as evidenced by significantly lower projected sublease rates for our facility as supplied to us by our external real estate advisors.

We conducted our assessment of the accounting effects of the June 2001 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 at June 30, 2001, including estimating future recoveries of sublet income from excess facilities, liabilities from employee severances, and costs to exit business activities. Changes in these assessments with respect to the accrued restructuring charges for the June 2001 restructuring program of $36.5 million at June 30, 2003, could have a material effect on our reported results. In addition, actual results could vary from these assumptions and estimates, in particular with regard to the sublet of excess facilities, resulting in an adjustment that could have a material effect on our future financial results. As at June 30, 2003, we estimated a total of $25.6 million of estimated sublease recoveries in our restructuring accrual. Of this amount, $25.3 million is related to the Santa Clara facility. In addition, $10.8 million of the $25.6 million is recoverable under existing sublease agreements, and the remaining $14.8 million of rent recoveries is based on estimates which may be subject to adjustment based upon changes in the real estate sublet markets.

The restructuring plan announced on June 4, 2001 was completed by June 2002. No further charges are anticipated. However, actual results could vary from the currently recorded estimates. In that regard, we recorded a $2.1 million reduction to our June 2001 restructuring accrual in the third quarter of 2003, as a result of the July 2003 settlement of an existing contractual obligation under a marketing and distribution agreement, at a value significantly less than the full accrued obligation.

May 2003 Restructuring Plan

On May 27, 2003, we announced an action plan aimed at lowering costs and better aligning our resources to customer needs. The plan allows us to have tighter integration between our customer touch functions, which better positions us to take advantage of the market opportunities for our new products and solutions. The restructuring plan includes the elimination of positions to lower operating costs, closing of under-utilized office capacity, and re-assessing the value of related excess long-lived assets.

The workforce portion included severance and related costs for 147 positions from all functional areas of the company and has been significantly completed by June 30, 2003, with the remaining costs to be incurred in the third quarter of 2003. The consolidation of under-utilized facilities includes primarily remaining lease obligations through the first quarter of 2009, primarily from the Company’s Santa Clara, California and Addison, Texas facilities, and accelerated amortization on related leaseholds and equipment, but has not been executed as of June 30, 2003. Therefore, there are no charges during the second quarter of 2003 related to these facilities, except for accelerated amortization on leaseholds and equipment whose estimated useful lives have been impacted by the plan to cease using the related excess capacity in our facilities. However, we expect the cease-use date for the excess capacity in each location to occur by the end of the third quarter of 2003. The total amount of the workforce and facilities charges is expected to be $10.1 million, of which $4.6 million had been incurred by June 30, 2003.

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We conducted our assessment of the accounting effects of the May 2003 restructuring program in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, 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 incurred and expected restructuring charges of $10.1 million, including estimating liabilities from employee severances, future recoveries of sublet income from excess facilities, and other costs to exit activities. Changes in these assessments with respect to the accrued restructuring charges for the May 2003 restructuring program of $3.3 million at June 30, 2003 and the $5.4 million of costs to be incurred in the third quarter of 2003, could have a material effect on our reported results. In addition, actual results could vary from these assumptions and estimates, in particular with regard to the sublet of excess facilities, resulting in an adjustment that could have a material effect on our future financial results.

Impairment of Long-Term Strategic and Equity Investments

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

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. During 2002, we recorded additional impairments of $1.825 million. These impairments were related to our investments in several different companies, which were fully impaired due to insolvency after having been partially impaired in 2001. One investment was impaired due to an other than temporary decline in value which was triggered by a significant impact of foreign currency exchange rates on the company.

In the second quarter of 2003, due to a decline in market conditions and a restructuring of the investee by its management, we concluded that our investment in Modulo Security Solutions had suffered an other than temporary decline in fair value as determined by third party market transactions, and as such, we recorded an impairment in the second quarter of $2.8 million. To date, we have recorded a total of $14.8 million of impairments with respect to our long-term strategic investments. Further write-downs may be required in the future depending upon our assessment of the performance of the underlying investee companies at that time. As of June 30, 2003, long-term strategic investments amounted to $78 thousand, which represents the remaining investment in Modulo Security Solutions in Brazil.

In April 2002, we began accounting for our investment in Entrust Japan under the equity method in accordance with the provisions of APB No. 18, “The Equity Method of Accounting for Investments in Common Stock” and ARB No. 51, “Consolidated Financial Statements”. Accordingly, on the step-by-step acquisition method, during the second quarter of 2002, we recorded a retroactive adjustment to consolidated accumulated deficit to record our share of the post-acquisition losses of Entrust Japan for prior years in the amount of $393 thousand, as required by this accounting guidance. This retroactive adjustment is attributable to our pro rata share of losses recorded by Entrust Japan during the period in which we owned less than 10% of its voting stock, to the extent of our previous investment and affected the results of periods prior to those shown here.

In addition, we recorded our share of post-acquisition losses of Entrust Japan, in the amount of $602 thousand in our consolidated losses for 2002 and $133 thousand and $238 thousand for the three and six months ended June 30, 2003. These losses are attributable to our pro rata share of Entrust Japan’s losses while we have had an equity ownership of approximately 39% of its voting stock.

During 2002, Entrust Japan exceeded the performance targets established at the date of our increased investment. However, in the second quarter of 2003, the actual growth of Entrust Japan was less than the original projections. It is possible that future growth will also fall short of projections, and due to Entrust Japan’s history of operating losses, it is possible that all or substantially all of the remaining $1.0 million equity investment in Entrust Japan at June 30, 2003 may be expensed through our operating earnings in future quarters as a result of our recognition of

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our equity share of losses in Entrust Japan. As of June 30, 2003, we believe that there has not been an impairment of our investment in Entrust Japan.

Impairment of Purchased Product Rights

Purchased product rights 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.

In the first quarter of 2002, we assessed the nature and valuation of the purchased product rights, obtained in the acquisition of enCommerce in June 2000, in accordance with the guidance in SFAS No. 142, “Goodwill and Intangible Assets” and determined that it should most appropriately be treated as having a finite life. It was concluded that the original assumption made in the allocation of purchase price for the enCommerce acquisition of four years, ending in June 2004, remained the best estimate of useful life of this asset. We reviewed the valuation of the purchased product rights for impairment in the fourth quarter of 2002 in accordance with the provision of SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of” and as part of an annual review process. The undiscounted value of estimated cash flow from this developed technology continued to exceed the carrying amount of the purchased product rights and therefore, no impairment was required at that time.

As a result of actions undertaken in the restructuring in the second quarter of 2003, coupled with the commercial release of a next generation software product, we reviewed the estimated future cash flows from the developed technology acquired from enCommerce. Based on these events, the net present value of the estimated future cash flows from the purchased product rights is negative. Therefore, in accordance with SFAS No. 144, we recorded an impairment charge related to this asset in the amount of the remaining carrying value of $1.1 million, as we determined the asset had minimal fair value.

Provision for Income Taxes

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

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against deferred tax assets. We recorded a valuation allowance of $122.7 million as of June 30, 2003, which consists of U.S. and Foreign net operating loss (NOL) and tax credit carry-forwards in the amount of $88.7 million and $34.0 million of deferred tax assets resulting from temporary differences. This valuation allowance represents the full value of our deferred tax assets, due to uncertainties related to our ability to utilize our deferred tax assets due to our recent history of financial losses. Therefore, our balance sheet includes no net deferred tax benefits related to these NOL’s and tax credit carry-forwards. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to adjust our valuation allowance, which could materially impact our financial position and results of operations.

Stock-Based Compensation

Our stock option program is a broad-based, long-term retention program that is intended to contribute to our success by attracting, retaining and motivating talented employees and to align employee interests with the interests of our existing stockholders. Stock options are typically granted to employees when they first join us but can also be granted when there is a significant change in an employee’s responsibilities and, occasionally, to achieve equity within a peer group. The Compensation Committee of the Board of Directors may, however, grant additional options

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to executive officers and key employees for other reasons. Under the stock option plans, the participants may be granted options to purchase shares of Common stock and substantially all of our employees and directors participate in at least one of our plans. Options issued under these plans generally are granted at fair market value at the date of grant, become exercisable at varying rates, generally over three or four years and generally expire ten years from the date of grant.

We recognize that stock options dilute existing shareholders and have attempted to control the number of options granted while remaining competitive with our compensation packages. At June 30, 2003, a large percentage (approximately 80%) of our outstanding employee stock options carried exercise prices in excess of the closing market price of our Common stock on that day. The Compensation Committee of the Board of Directors overseas the granting of all stock-based incentive awards.

We account for our stock option plans under the recognition and intrinsic value measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related accounting guidance. Accordingly, no stock-based compensation expense is reflected in net earnings for grants to employees under these plans, when the exercise price for options granted under these plans is equal to the market value of the underlying Common stock on the date of grant. All of the options granted to employees in the periods after 1998 had exercise prices equal to the fair value of the underlying stock on the date of grant and therefore, no stock-based compensation costs are reflected in earnings for these options in these periods. Compensation expense was recognized for our 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, we recorded unearned compensation of $784 thousand for 1998. If we had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, to stock-based compensation, the effect would have been to increase our net loss to $24.6 million and $33.2 million in the three and six months ended June 30, 2003, respectively, compared to $12.9 million and $23.2 million in the three and six months ended June 30, 2002, respectively, and consequently, increase our net loss per share to $0.39 and $0.52 for the three and six months ended June 30, 2003, respectively, compared to a net loss per share of $0.20 and $0.36 for the three and six months ended June 30, 2002, respectively. The effect for the year ended December 31, 2002 would have been to increase our net loss to $42.4 million and, consequently, increase our net loss per share to $0.65. However, Entrust believes, that due to the volatility of our stock and the inherent limitations of option valuation models, the expenses that would be recorded under SFAS No. 123 are not as meaningful as a careful consideration of the outstanding option data, which is disclosed in note 3 of our condensed consolidated financial statements, included elsewhere in this Quarterly Report.

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:

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REVENUES

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

Revenues from perpetual software license agreements are recognized as revenue 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. This policy is applicable to all sales transactions, including sales to resellers and end user customers. We do not offer a right of return on sales of our software products.

For arrangements involving multiple elements, we allocate revenue to each component of the arrangement using the residual value method, based on vendor-specific objective evidence of the fair value of the various elements. These elements may include one or more of the following: software licenses, maintenance and support, consulting services and training. We first allocate the arrangement fee, in a multiple-element transaction, to the undelivered elements based on the total fair value of those undelivered elements, as indicated by vendor-specific objective evidence. This portion of the arrangement fee is deferred. Then the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. We attribute the discount offered in a multiple-element arrangement entirely to the delivered elements of the transaction, which are typically software licenses. Fair values for the future maintenance and support services are based upon separate sales of renewals of maintenance and support contracts. Fair value of future services training or consulting services is based upon separate sales of these services to other customers. In some instances, a group of contracts or agreements

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with the same customer may be so closely related that they are, in effect, part of a single multiple-element arrangement, and therefore, we would allocate the corresponding revenues among the various components, as described above.

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

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

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

Total Revenues

Total revenues were $22.4 million for the three months ended June 30, 2003, which represented a decrease of 15% from the $26.5 million of total revenues for the three months ended June 30, 2002. Total revenues were $44.1 million for the six months ended June 30, 2003, which represented a decrease of 18% from the $54.0 million of total revenues for the six months ended June 30, 2002. Total revenues derived from North America of $14.4 million for the three months ended June 30, 2003 represented a decrease of 24% from the $19.1 million for the three months ended June 30, 2002, while the total revenues derived from outside of North America of $8.0 million for the three months ended June 30, 2003 represented an increase of 8% from the $7.4 million for the three months ended June 30, 2002. Total revenues derived from North America of $29.7 million for the six months ended June 30, 2003 represented a decrease of 24% from the $38.9 million for the six months ended June 30, 2002, while total revenues derived from outside of North America of $14.4 million for the six months ended June 30, 2003 represented a decrease of 5% from the $15.1 million for the six months ended June 30, 2002. The overall decline in total revenues in the three and six months ended June 30, 2003 was driven by a reduced closure rate for software deals, particularly in the first quarter of 2003, due to an already soft global economic environment coupled with the war and continued uncertainty in Iraq. The effect was felt most strongly in North America, due to the continued soft economic climate, despite the fact that total revenues increased 3% in the second quarter of 2003 compared to the first quarter. The decline was heavily felt in Canada, where the first half of 2002 included $4.4 million of revenues from software deliveries accounted for on a subscription basis for the Government of Canada Secure Channel project, the revenues from which were difficult to replace in the first half of 2003. The level of non-North American revenues has fluctuated from period to period and this trend is expected to continue. In the three and six months ended June 30, 2003, no individual customer accounted for 10% or more of total revenues.

License Revenues

License revenues of $8.4 million for the three months ended June 30, 2003 represented a decrease of 29% from the $11.9 million for the three months ended June 30, 2002, representing 37% and 45% of total revenues in the respective periods. License revenues of $15.6 million for the six months ended June 30, 2003 represented a decrease of 35% from the $24.0 million for the six months ended June 30, 2002, representing 35% and 44% of total revenues in the respective periods. The decrease in license revenues in absolute dollars primarily reflected the changed buying patterns that we experienced during the six-month period, with customers delaying purchases as a result of the soft economic climate internationally and concerns over the war in Iraq. In addition, the global downturn has had a significant impact on information technology projects and the commitments that customers have made to expenditures in this area, with customers buying to their immediate needs, as opposed to buying total project or enterprise wide. Highlighting this trend, we had 145 license revenue transactions (a transaction is defined as a

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license sale in excess of $10 thousand) in the first half of 2003, down from 159 in the first half of 2002, or a 9% decrease. In addition, the average transaction size decreased from $146 thousand in the first half of 2002 to $103 thousand in the first half of 2003, or a decrease of 29%. Also, the first half of 2003 experienced a significant decrease in license revenues in Canada, as compared to the first half of 2002, which included $4.4 million of revenues from software deliveries accounted for on a subscription basis for the Government of Canada Secure Channel project. These revenues were difficult to replace in the first half of 2003. License revenues as a percentage of total revenues decreased for the three and six months ended June 30, 2003 compared to the same period in 2002 due to a stronger demand for services, primarily maintenance and support services, relative to the demand for software.

Services and Maintenance Revenues

Services and maintenance revenues of $14.1 million for the three months ended June 30, 2003 represented a decrease of 3% from the $14.6 million for the three months ended June 30, 2002, representing 63% and 55% of total revenues in the respective periods. Service and maintenance revenues of $28.6 million for the six months ended June 30, 2003 represented a decrease of 5% from the $30.0 million for the six months ended June 30, 2002, representing 65% and 56% in the respective periods. The decrease in services and maintenance revenues was due primarily to continued pressure on information technology services spending. However, support revenues and support contract renewals continue to be at the highest levels in our history, representing a $2.1 million increase over the first half of 2002 which helped to offset the effect of the decline of $3.4 million in spending by customers on professional services as compared to the first half of 2002. We believe this support revenue performance reflects the value our products provided to our customers globally, the increasing customer deployment of solutions and the level of service quality that our support and maintenance team delivers. In addition, to a greater degree, we have been fulfilling our customers’ deployment needs in conjunction with partners, as our solutions are now easier to deploy and, as a result, the demand for our consulting services has declined for customer deployment and integration requirements. The increase in services and maintenance revenues as a percentage of total revenues for the three and six months ended June 30, 2003 compared to the same periods in 2002 reflected the shift in the mix of revenues from license to services and maintenance revenues discussed in the previous section. This shift was largely due to the strength of demand for our services and maintenance business relative to the demand for software.

EXPENSES

Total Expenses

Total expenses consist of costs of revenues and operating expenses associated with sales and marketing, research and development, general and administrative, amortization and impairment of purchased products rights and restructuring charges. Total expenses of $41.6 million for the three months ended June 30, 2003 represented a increase of 39% from $29.9 million for the three months ended June 30, 2002. Total expenses of $68.5 million for the six months ended June 30, 2003 represented a increase of 12% from $61.3 million for the six months ended June 30, 2002. As of June 30, 2003, we had 560 full-time employees globally, compared to 665 full-time employees at March 31, 2003 and 742 full-time employees at June 30, 2002. Additionally, 41 of the 560 employees have received notice that their employment will end in the third quarter of 2003. No employees are covered by any collective bargaining agreements, and we believe that our relationship with our employees is good.

Cost of License Revenues

Cost of license revenues consists primarily of costs associated with product media, documentation, packaging and royalties to third-party software vendors. Cost of license revenues was $913,000 for the three months ended June 30, 2003, which represented a decrease from $1.0 million for the three months ended June 30, 2002, representing 4% of total revenues in each of the respective periods. Cost of license revenues of $1.7 million for the six months ended June 30, 2003 represented a decrease from $2.0 million for the six months ended June 30, 2002, representing 4% of total revenues in each of the respective periods. While the cost of license revenues as a percentage of total revenues remained relatively flat for the three and six months ended June 30, 2003, compared to the same periods of 2002, the decrease in cost of license revenues in absolute dollars was primarily a result of lower software license revenues in the first half of 2003, compared to the same period in 2002. 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.

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Cost of Services and Maintenance Revenues