Financials

2006 Third-Quarter Financial Statements

ENTRUST, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

(in thousands, except per share data)

Three Months Ended
September 30

Nine Months Ended
September 30

2006

2005

2006

2005

(unaudited)

(unaudited)

Revenues:

Product

$8,788

$7,668

$22,754

$25,135

Services and maintenance

15,243

15,983

44,430

48,232

Total revenues

24,031

23,651

67,184

73,367

Cost of revenues:

Product

1,246

1,420

4,420

3,400

Services and maintenance

7,252

7,291

21,700

23,505

Amortization of purchased product rights

319

215

738

600

Total cost of revenues

8,817

8,926

26,858

27,505

Total gross profit:

15,214

14,725

40,326

45,862

Operating expenses

Sales and marketing

9,710

6,709

24,431

21,480

Research and development

5,505

3,979

14,148

12,617

General and administrative

3,426

3,130

10,654

8,986

Restructuring charges and adjustments

-

-

2,765

-

Total operating expenses

18,641

13,818

51,998

43,083

Income (loss) from operations

(3,427)

907

(11,672)

2,779

Other income (expense):

Interest income

363

600

1,945

1705

Gain on sale of asset

-

-

-

200

Foreign exchange gain (loss)

(4)

(55)

(275)

(24)

Loss from equity investments

(51)

(210)

(344)

(661)

Writedown of long-term strategic and equity investments

-

-

(3,016)

-

Total other income (expense)

-

-

(3,016)

-

Income (loss) before income taxes

(3,119)

1,242

(13,362)

3,999

Provision for income taxes

120

286

309

981

Net income (loss)

$(3,239)

$956

$(13,671)

$3,018

Weighted average common shares used

Basic

59,753

59,974

59,796

61,129

Diluted

59,753

62,753

59,796

62,875

Net income (loss) per share

Basic

($0.05)

$0.02

($0.23)

$0.05

Diluted

($0.05)

$0.02

($0.23)

$0.05

ENTRUST, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

Sep. 30, 2006

Dec. 31, 2005
(unaudited)

ASSETS

Cash and marketable investments

$28,439

$82,453

Accounts receivable, net of allowance for doubtful accounts

15,582

20,341

Other current assets

3,535

4,782

Property and equipment, net

2,996

2,677

Purchased product rights and purchased non-contractual customer relationships, net

14,502

2,086

Goodwill, net

60,214

12,713

Long-term strategic and equity investment

270

3,630

Other long-term assets, net

1,387

1,767

Total assets

$126,925

$130,449

LIABILITIES AND SHAREHOLDERS' EQUITY

Accounts payable and accruals

$17,219

$13,634

Accrued restructuring charges

25,717

25,949

Deferred revenue

24,974

20,895

Long-term liabilities

236

859

Total liabilities

68,146

61,337

Shareholders' equity

58,779

69,112

Total liabilities and shareholders' equity

$126,925

$130,449

The following supplemental tables provide non-GAAP financial measures used by the company's management to evaluate operational results. The company believes this information may be useful to investors. In addition to disclosing financial results calculated in accordance with U.S. generally accepted accounting principles (GAAP), the company's earnings release contains non-GAAP financial measures that exclude the income statement effects of share-based compensation, amortization of purchase product rights, non recurring restructuring and impairment charges. The non-GAAP financial measures disclosed by the company should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and the financial results calculated in accordance with GAAP and reconciliations to those financial statements should be carefully evaluated. The non-GAAP financial measures used by the company may be calculated differently from, and therefore may not be comparable to, similarly titled measures used by other companies.

Set forth below are reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures.

For additional information regarding these non-GAAP financial measures, see the Form 8-K dated October 30, 2006 that Entrust has filed with the Securities and Exchange Commission.

ENTRUST, INC.

SUPPLEMENTAL

RECONCILIATIONS OF GAAP TO NON-GAAP MEASURES

(in thousands, except per share data)

Three Months Ended
September 30

Nine Months Ended
September 30

2006

2005

2006

2005

(unaudited)

(unaudited)

Reconciliation of net income (loss) per GAAP to Non-GAAP income (loss):

GAAP net income (loss)

$(3,239)

$956

$(13,671)

$3,018

Adjustments for share-based compensation expense:
Cost of revenues

68

-

191

-

Sales and marketing

282

-

635

-

Research and development

132

-

262

-

General and administrative

442

-

1,111

-

Amortization of other purchased intangibles:
Cost of revenues

51

-

51

-

Sales and marketing

217

19

251

56

Amortization of purchased product rights

319

215

738

600

Restructuring charges and adjustments

-

2,765

-

Write-down of long-term strategic and equity investments

-

3,016

-

Tax effect on Non-GAAP adjustments

-

(70)

-

(197)

Non-GAAP income (loss)

$(1,728)

$1,120

$(4,651)

$3,477

Reconciliation of net income (loss) per diluted share according to GAAP to Non-GAAP income (loss) per diluted share:

GAAP net income (loss) per diluted share

($0.05)

$0.02

($0.23)

$0.05

Adjustments for share-based compensation expense

0.01

-

0.04

-

Amortization of other purchased intangibles:

-

-

0.01

-

Amortization of purchased product rights

0.01

-

0.01

0.01

Restructuring charges and adjustments

-

-

0.04

-

Write-down of long-term strategic and equity investments

-

-

0.05

-

Tax effect on Non-GAAP adjustments

-

-

-

-

0.02

-

0.15

0.01

Non-GAAP income (loss) per diluted share

($0.03)

$0.02

($0.08)

$0.06

Weighted average common shares used

59,753

62,753

59,796

62,875

Forward Looking Guidance
for Six Months Ended December 31, 2006

Earnings Per Share
Range

U.S. GAAP measure

($0.03)

($0.09)

Adjustments to exclude the effects of amortization of intangible assets

$0.02

$0.02

Adjustments to exclude the effects of expenses related to stock-based compensation

$0.03

$0.03

Non-GAAP figures

$0.02

($0.04)
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