e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2007


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

Commission File Number: 000-27389

INTERWOVEN, INC.

(Exact name of registrant as specified in its charter)


Delaware		77-0523543
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

160 E. Tasman Drive
San Jose, California 95134
(Address of principal executive offices and zip code)

(408) 774-2000
(Registrant’s telephone number, including area code)

None
(Former name, former address and former fiscal year, if changed since last report)

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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer þ Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding at October 31, 2007

Common Stock, $0.001 par value per share		45,284,000 shares

EXPLANATORY NOTE

On January 30, 2007, we announced that the Audit Committee of the Board of Directors was conducting a voluntary review of our historical stock option granting practices and related accounting. Following the conclusion of the Audit Committee review, and with the concurrence of management and the Audit Committee, we determined that we should have recognized approximately $31.5 million in pre-tax, non-cash stock-based compensation expense and previously unrecorded adjustments which were deemed to be not material during the years ended December 31, 1999 through 2005 that was not accounted for in our previously filed consolidated financial statements. Therefore, in our Annual Report on Form 10-K for the year ended December 31, 2006, we restated the financial information for each of the years ended December 31, 2002, 2003, 2004 and 2005, each of the quarters in 2005 and the balance sheet for the first three quarters of 2006. None of the information in this Quarterly Report on Form 10-Q is restated, although the filing of this report was delayed pending the completion and filing of the Annual Report on Form 10-K for the year ended December 31, 2006.

PART I: FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

INTERWOVEN, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)


	September 30,			December 31,
	2007			2006
	(Unaudited)			(Audited)
Assets
Current assets:
Cash and cash equivalents	$	108,959		$	74,119
Short-term investments		88,928			102,342
Accounts receivable, net		33,278			34,492
Prepaid expenses and other current assets		5,609			5,371

Total current assets		236,774			216,324
Property and equipment, net		16,789			4,815
Goodwill		189,315			190,935
Other intangible assets, net		4,756			10,655
Other assets		3,223			3,558

Total assets	$	450,857		$	426,287


Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	5,344		$	1,897
Accrued liabilities		30,673			31,684
Restructuring and excess facilities accrual		1,685			5,132
Deferred revenues		56,947			57,317

Total current liabilities		94,649			96,030
Accrued liabilities		6,726			2,733
Restructuring and excess facilities accrual, less current portion		2,288			3,564

Total liabilities		103,663			102,327


Commitments and contingencies

Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000 shares authorized; no shares issued and outstanding		—			—
Common stock, $0.001 par value, 125,000 shares authorized; 45,284 and 44,417 shares issued and outstanding, respectively		45			44
Additional paid-in capital		764,663			754,904
Accumulated other comprehensive income (loss)		444			(36	)
Accumulated deficit		(417,958	)		(430,952	)

Total stockholders’ equity		347,194			323,960

Total liabilities and stockholders’ equity	$	450,857		$	426,287

See accompanying notes to condensed consolidated financial statements.

INTERWOVEN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
Revenues:
License	$	21,225	$	18,580	$	61,856	$	54,657
Support and service		34,228		32,335		100,927		91,745

Total revenues		55,453		50,915		162,783		146,402

Cost of revenues:
License		1,859		4,426		5,905		13,015
Support and service		13,915		13,140		40,548		37,324

Total cost of revenues		15,774		17,566		46,453		50,339

Gross profit		39,679		33,349		116,330		96,063
Operating expenses:
Sales and marketing		19,000		18,877		59,008		56,446
Research and development		9,552		8,902		27,928		25,984
General and administrative		6,812		3,964		17,742		13,015
Amortization of intangible assets		814		828		2,470		2,484
Restructuring and excess facilities charges (recoveries)		1		41		65		(887	)

Total operating expenses		36,179		32,612		107,213		97,042

Income (loss) from operations		3,500		737		9,117		(979	)
Interest income and other, net		2,199		1,631		6,973		4,436

Income before provision for income taxes		5,699		2,368		16,090		3,457
Provision for income taxes		1,638		595		3,096		1,350

Net income	$	4,061	$	1,773	$	12,994	$	2,107


Basic net income per common share	$	0.09	$	0.04	$	0.29	$	0.05


Shares used in computing basic net income per common share		45,293		43,045		44,995		42,701


Diluted net income per common share	$	0.09	$	0.04	$	0.28	$	0.05


Shares used in computing diluted net income per common share		46,538		43,922		46,555		43,446

See accompanying notes to condensed consolidated financial statements.

INTERWOVEN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Nine Months Ended
	September 30,
	2007			2006
Cash flows from operating activities:
Net income	$	12,994		$	2,107
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		2,772			2,893
Stock-based compensation expense		3,431			2,390
Amortization of intangible assets and purchased technology		5,899			13,246
Changes in allowance for doubtful accounts and sales returns		19			(241	)
Changes in operating assets and liabilities:
Accounts receivable		1,195			1,920
Prepaid expenses and other		(1,416	)		(1,263	)
Accounts payable and accrued liabilities		7,320			5,264
Restructuring and excess facilities accrual		(4,723	)		(6,461	)
Deferred revenues		(370	)		(898	)

Net cash provided by operating activities		27,121			18,957


Cash flows from investing activities:
Purchases of property and equipment		(14,746	)		(2,722	)
Purchases of investments		(51,005	)		(108,060	)
Maturities of investments		66,065			90,949
Acquisition of technology		—			(1,590	)

Net cash provided by (used in) investing activities		314			(21,423	)


Cash flows from financing activities:
Net proceeds from issuance of common stock		7,058			7,940

Net cash provided by financing activities		7,058			7,940


Effect of exchange rate changes on cash and cash equivalents		347			(73	)


Net increase in cash and cash equivalents		34,840			5,401
Cash and cash equivalents at beginning of period		74,119			73,618

Cash and cash equivalents at end of period	$	108,959		$	79,019

See accompanying notes to condensed consolidated financial statements.

INTERWOVEN, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Description of Business and Summary of Significant Accounting Policies

Description of Business

Interwoven, Inc. (“Interwoven” or the “Company”) is a provider of content management software solutions. The Company’s software and services enable organizations to leverage content to drive business growth by maximizing online business performance, increasing collaboration, and streamlining business processes both internally and externally. Interwoven markets and licenses its software products and services in North America and through subsidiaries in Europe and Asia Pacific.

Basis of Presentation

The condensed consolidated financial statements included herein are unaudited and reflect all adjustments (consisting only of normal recurring adjustments), which are, in the opinion of management, necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for the interim periods presented. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. The results of operations for the three and nine months ended September 30, 2007 are not necessarily indicative of the results for the entire year or for any other period.

The consolidated balance sheet as of December 31, 2006 has been derived from audited consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. Such disclosures are contained in the Company’s Annual Report on Form 10-K.

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

All assets and liabilities of the Company’s foreign subsidiaries, whose functional currency is the local currency, are translated using current rates of exchange at the balance sheet date, while revenues and expenses are translated using weighted-average exchange rates prevailing during the period. The resulting gains or losses from translation are charged or credited to other comprehensive income (loss) and are accumulated and reported in stockholders’ equity. In accordance with Statement of Financial Accounting Standard (“SFAS”) No. 52, Foreign Currency Translation, the Company recorded an unrealized gain (loss) due to foreign currency translation of $248,000 and $(80,000) for the three months ended September 30, 2007 and 2006, respectively, and $347,000 and $(73,000) for the nine months ended September 30, 2007 and 2006, respectively.

Use of Estimates

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

Revenue Recognition

Revenue consists principally of perpetual software licenses, support, consulting and training fees. The Company recognizes revenue using the residual method in accordance with Statement of Position (“SOP”) No. 97-2, Software Revenue Recognition, as amended by SOP No. 98-9, Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions. Under the residual method, revenue is recognized for the delivered elements in a multiple element arrangement provided vendor-specific objective evidence (“VSOE”) of fair value exists for all of the

undelivered elements. The Company’s VSOE for support is based on the renewal rate as stated in the agreement, so long as the rate is substantive. The Company’s VSOE for other undelivered elements, such as professional services and training, is based on the price of the element when sold separately. Once the Company has established the fair value of each of the undelivered elements, the dollar value of the arrangement is allocated to the undelivered elements first and the residual of the dollar value of the arrangement is then allocated to the delivered elements. At the outset of a customer arrangement, the Company defers revenue for the fair value of its undelivered elements (e.g., support, consulting and training) and recognizes revenue for the residual fee attributable to the elements initially delivered (i.e., software product) when the basic criteria in SOP No. 97-2 have been met. Assuming all other revenue recognition criteria are met, revenue from licenses is recognized upon delivery using the residual method in accordance with SOP No. 98-9, revenue from support services is recognized ratably over its respective support period and revenue from professional services is recognized as the services are rendered. For arrangements that include a support renewal rate that the Company determines is not substantive, all revenue for such arrangement is recognized ratably over the applicable support period.

Under SOP No. 97-2, revenue attributable to an element in a customer arrangement is recognized when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, (iv) collectibility is probable and (v) the arrangement does not require services that are essential to the functionality of the software.

Persuasive evidence of an arrangement exists. The Company determines that persuasive evidence of an arrangement exists with respect to a customer when it has a written contract, which is signed by both the customer and the Company, or a valid purchase order from the customer and the customer agrees or has previously agreed to a license arrangement with the Company.

Delivery has occurred. The Company’s software may be delivered either physically or electronically to the customer. The Company determines that delivery has occurred upon shipment of the software pursuant to the terms of the agreement or when the software is made available to the customer through electronic delivery.

The fee is fixed or determinable. If at the outset of the customer arrangement, the Company determines that the arrangement fee is not fixed or determinable, revenue is recognized when the fee becomes due and payable assuming all other criteria for revenue recognition have been met. Fees due under an arrangement are deemed not to be fixed or determinable if a portion of the license fee is due beyond the Company’s normal payment terms, which are no greater than 185 days from the date of invoice.

Collectibility is probable. The Company determines whether collectibility is probable on a case-by-case basis. When assessing probability of collection, the Company considers the number of years the customer has been in business, history of collection for each customer and market acceptance of its products within each geographic sales region. The Company typically sells to customers with whom there is a history of successful collection. New customers are subject to a credit review process, which evaluates the customer’s financial position and, ultimately, its ability to pay. If the Company determines from the outset of an arrangement or based on historical experience in a specific geographic region that collectibility is not probable based upon its review process, revenue is recognized as payments are received and all other criteria for revenue recognition have been met. The Company periodically reviews collection patterns from its geographic locations to ensure that its historical collection results provide a reasonable basis for revenue recognition upon entering into an arrangement.

Certain software orders are placed by resellers on behalf of end users. Interwoven recognizes revenue on these orders when end users have been identified, persuasive evidence of arrangements with end users exist and all other revenue recognition criteria are met.

Support and service revenues consist of professional services and support fees. The Company’s professional services, which are comprised of software installation and integration, business process consulting and training, are, in almost all cases, not essential to the functionality of its software products. The Company’s products are fully functional upon delivery and do not require any significant modification or alteration for customer use. Customers purchase professional services to facilitate the adoption of the Company’s technology and dedicate personnel to participate in the services being performed, but they may also decide to use their own resources or appoint other professional service organizations to provide these services. Software products are billed separately from professional services, which are

generally billed on a time-and-materials basis. The Company recognizes revenue from professional services as services are performed.

Services provided to customers under support contracts include technical support and unspecified product upgrades when and if available. Support contracts are typically priced based on a percentage of license fees and have a one-year term. Revenues from support contracts are recognized ratably over the term of the agreement.

The Company expenses all manufacturing, packaging and distribution costs associated with its software as cost of license revenues.

Cash, Cash Equivalents and Short-Term Investments

The Company considers all highly liquid investments with original maturities of three months or less on the date of purchase to be cash equivalents. Cash and cash equivalents include money market funds, commercial paper, government agency securities and various deposit accounts. Cash equivalents are recorded at fair value, which approximates cost.

The Company’s short-term investments are classified as “available-for-sale” and are carried at fair value based on quoted market prices. These investments consist of corporate obligations that include commercial paper, corporate bonds and notes, United States government agency securities and certificate of deposits. Realized gains and losses are calculated using the specific identification method. There were no realized gains (losses) for the three and nine month periods ended September 30, 2007 and 2006, respectively. For the three months ended September 30, 2007 and 2006, unrealized gains totaled $180,000 and $198,000, respectively, and for the nine months ended September 30, 2007 and 2006, unrealized gains totaled $133,000 and $256,000, respectively. Unrealized gains are included as a separate component of accumulated other comprehensive income (loss) in stockholders’ equity.

Allowance for Doubtful Accounts

The Company makes estimates as to the overall collectibility of accounts receivable and provides an allowance for accounts receivable considered uncollectible. The Company specifically analyzes its accounts receivable and historical bad debt experience, customer concentrations, customer credit-worthiness, current economic trends and changes in its customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. At September 30, 2007 and December 31, 2006, the Company’s allowance for doubtful accounts was $509,000 and $449,000, respectively.

Allowance for Sales Returns

The Company makes an estimate of its expected product returns and provides an allowance for sales returns. The accumulated allowance for sales returns is reflected as a reduction from accounts receivable. The Company analyzes its revenue transactions, customer software installation patterns, historical return patterns, current economic trends and changes in its customer payment terms when evaluating the adequacy of the allowance for sales returns. At September 30, 2007 and December 31, 2006, the Company’s allowance for sales returns was $301,000 and $342,000, respectively.

Risks and Concentrations

Financial instruments that subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, short-term investments and accounts receivable. The Company maintains the majority of its cash, cash equivalents and short-term investments with four financial institutions domiciled in the United States and one financial institution in the United Kingdom. The Company performs ongoing evaluations of its customers’ financial condition and generally requires no collateral from its customers on accounts receivable. The Company maintains an allowance for doubtful accounts based on various factors, including the review of credit profiles of its customers, contractual terms and conditions and historical payment experience.

The Company derived a significant portion of total revenues for the three and nine months ended September 30, 2007 and 2006 from sales of its Web content management and collaborative document management products. The Company expects that these products will continue to account for a significant portion of its revenues in future periods.

The Company relies on software licensed from third parties, including software that is integrated with internally developed software. These software license agreements expire on various dates from 2008 to 2011 and the majority of these agreements are renewable with written consent of the parties. Either party may terminate the agreement for cause before the expiration date with written notice.

Financial Instruments

The Company enters into forward foreign exchange contracts where the counterparty is a bank. The Company purchases forward foreign exchange contracts to mitigate the risk of changes in foreign exchange rates on accounts receivable. The Company’s forward foreign exchange contracts generally have terms of 45 days or less. Although these contracts are or can be effective as hedges from an economic perspective, they do not qualify for hedge accounting under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, and, therefore, are marked to market each period with the change in fair value recognized in results of operations in interest income and other and classified as either other current assets or other current liabilities in the consolidated balance sheet.

At September 30, 2007 and December 31, 2006, the notional equivalent of forward foreign currency contracts aggregated $7.7 million and $10.2 million, respectively. The fair value of the liability associated with forward foreign currency contracts recognized in the consolidated financial statements as of September 30, 2007 and 2006 were $21,000 and $11,000, respectively. The forward contracts outstanding as of September 30, 2007 expired in October 2007.

Stock-based Compensation

In accordance with the SFAS No. 123R, Share-Based Payment, the Company measured all share-based payments to employees, including grants of employee stock options and restricted stock units, using a fair value-based method and accounted for stock-based compensation in the Company’s condensed consolidated statements of operations.

Income Taxes

The Company accounts for income taxes under the provisions of SFAS No. 109, Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and carryforwards of net operating losses and tax credits. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized.

The effective tax rate for the nine months ended September 30, 2007 was 20% compared with 39% for the comparable period ended September 30, 2006. This change in the effective rate was primarily due to higher income before income taxes for the nine months ended September 30, 2007 as compared to the same period in 2006. Additionally, the Company incurs withholding taxes, which are comparable between the two periods and are not determined based on income before income taxes. The provision for income taxes for the nine months ended September 30, 2007 was also impacted by the utilization of net operating losses from acquired entities, the benefit of which was recorded to goodwill.

On January 1, 2007, the Company adopted Financial Accounting Standards Board Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FAS Statement No. 109. This interpretation prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. FIN No. 48 prescribes a two-step process to determine the amount of tax benefit to be recognized. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to estimate and measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as this requires the Company to determine the probability of various possible outcomes. The Company reevaluates these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period.

Determining the consolidated provision for income tax expense, income tax liabilities and deferred tax assets and liabilities involves judgment. The Company calculates and provides for income taxes in each of the tax jurisdictions in which it operates. This involves estimating current tax exposures in each jurisdiction as well as making judgments regarding the recoverability of deferred tax assets. The estimates could differ from actual results and impact the future results of its operations.

The Company has an unrecognized tax benefit of approximately $2.9 million which did not change significantly during the three months ended September 30, 2007. The unrecognized tax benefit is exclusive of accrued interest and penalties. Of these unrecognized tax benefits, $2.9 million would reduce the effective tax rate upon recognition. The amount of unrecognized tax benefits that would result in an adjustment to goodwill is zero. The application of FIN No. 48 would have resulted in an increase in accumulated deficit of $1.4 million, except that the change was fully offset by the application of a valuation allowance. The Company does not reasonably estimate that the unrecognized tax benefit will change significantly within the next twelve months.

The Company continues its practice of recognizing interest and penalties related to income tax matters in income tax expense. The Company had $60,000 accrued for interest and had no accrued penalties as of September 30, 2007.

The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. The Company is not currently under audit by Internal Revenue Service and state jurisdictions. The Company is subject to examination in various foreign jurisdictions, for which it believes it has established adequate reserves.

Note 2. Net Income Per Common Share

Basic net income per common share is computed using the weighted average number of outstanding shares of common stock during the period. Diluted net income per common share is computed using the weighted average number of common shares outstanding during the period and, when dilutive, potential common shares from options to purchase common stock using the treasury stock method.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
Net income	$	4,061	$	1,773	$	12,994	$	2,107

Weighted-average shares used in computing basic net income per common share		45,293		43,045		44,995		42,701
Dilutive common equivalent shares from stock compensation plans		1,245		877		1,560		745

Weighed-average shares used in computing diluted net income per common share		46,538		43,922		46,555		43,446


Basic net income per common share	$	0.09	$	0.04	$	0.29	$	0.05


Diluted net income per common share	$	0.09	$	0.04	$	0.28	$	0.05

Note 3. Comprehensive Income

For the three and nine months ended September 30, 2007 and 2006, the components of comprehensive income (loss) consisted of the following (in thousands):


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2007		2006			2007		2006
Net income	$	4,061	$	1,773		$	12,994	$	2,107
Other comprehensive income (loss):
Translation adjustment *		248		(80	)		347		(73	)
Unrealized gain on available-for-sale investments *		180		198			133		256

Comprehensive income	$	4,489	$	1,891		$	13,474	$	2,290

Accumulated other comprehensive income (loss) as of September 30, 2007 and December 31, 2006 consisted of the following (in thousands):


	September 30,		December 31,
	2007		2006
Unrealized gain (loss) on available-for-sale investments *	$	47	$	(86	)
Cumulative translation adjustment *		397		50

Accumulated other comprehensive income (loss)	$	444	$	(36	)


•		The tax effect on translation adjustments and unrealized gain (loss) was not significant.

Note 4. Stock-Based Compensation

The Company accounts for share-based payments under SFAS No. 123R. SFAS No. 123R requires the measurement of all share-based payments to employees, including grants of employee stock options and restricted stock units, using a fair value-based method, and requires the recording of such expense in the Company’s consolidated statements of operations.

Summary of Assumptions

The fair value of each equity compensation award is estimated on the date of grant using the Black-Scholes option valuation model. The Black-Scholes option valuation model requires the use of certain assumptions. The assumptions used by the Company are noted below.

Valuation and Amortization Method. Option-pricing models require the input of highly subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. For options granted prior to January 1, 2006, the Company estimated the fair value granted using the Black-Scholes option valuation model and a multiple option award approach. The fair value for these options is amortized on an accelerated basis. For options granted on or after January 1, 2006, the Company estimated the fair value using the Black-Scholes option valuation model and a single option award approach. The fair value for these options is amortized on a straight-line basis. All options are amortized over the requisite service periods of the awards, which are generally the vesting periods. The Company amortizes the value of restricted stock units on a straight-line basis over the vesting period.

Expected Life. The expected life of options granted represents the period of time that they are expected to be outstanding. The Company estimated the expected life of options granted based on the Company’s history of option grants, exercises and cancelations. For options granted prior to January 1, 2006, the Company used tranche-specific assumptions with estimated expected lives for each of the four separate tranches. For options granted on or after January 1, 2006, the Company derived an average single expected life.

Expected Volatility. The Company estimated the volatility based on historical prices of the Company’s common stock over the expected life of each option. For options granted prior to January 1, 2006, the Company used different

volatility for each of the four separate tranches based on the expected life for each tranche. For options granted on or after January 1, 2006, the Company calculated the historical volatility over the expected life of the options.

Risk-Free Interest Rates. The risk-free interest rates are based on the United States Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the options.

Dividends. The Company has never paid any cash dividends on its common stock and the Company does not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company used an expected dividend yield of zero in the Black-Scholes option valuation model.

Forfeitures. The Company used historical data to estimate pre-vesting option forfeitures. As required by SFAS No. 123R, the Company recorded stock-based compensation only for those options that are expected to vest.

The fair value of each option is estimated on the date of grant using the Black-Scholes option valuation method, with the following weighted-average assumptions:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
Expected life from grant date of option (in years)		3.3			3.3			3.3			3.3
Risk-free interest rate		4.1%-4.8	%		4.7%-5.1	%		4.1%-5.0	%		4.4%-5.1	%
Expected dividend yield		0.0	%		0.0	%		0.0	%		0.0	%
Expected volatility		35.7%-35.9	%		43.7%-48.1	%		35.7%-37.2	%		43.7%-59.5	%
Weighted average expected volatility		35.8	%		45.6	%		36.7	%		47.7	%

The fair value of each stock purchase right granted under the ESPP is estimated using the Black-Scholes option valuation method, using the following assumptions:


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2007		2006			2007			2006
Expected life from grant date of ESPP (in years)		—		0.5			0.5			0.5
Risk-free interest rate		—		5.1	%		5.1	%		4.9%-5.1	%
Expected dividend yield		—		0.0	%		0.0	%		0.0	%
Expected volatility		—		33.2	%		29.4-33.5	%		30.0%-33.2	%
Weighted average expected volatility		—		33.2	%		31.4	%		31.5	%

The following table summarizes the stock-based compensation expense for stock options, restricted stock units and awards granted under the ESPP that the Company recorded in accordance with SFAS No. 123R for the three and nine months ended September 30, 2007 and 2006 (in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
Cost of revenues	$	169	$	157	$	460	$	494
Sales and marketing		450		352		1,325		967
Research and development		213		230		651		590
General and administrative		469		232		995		339

Total stock-based compensation expense	$	1,301	$	971	$	3,431	$	2,390

Note 5. Goodwill and Intangible Assets

The carrying amounts of the goodwill and other intangible assets as of September 30, 2007 and December 31, 2006 are as follows (in thousands):


	September 30, 2007							December 31, 2006
	Gross Carrying		Accumulated			Net		Gross Carrying		Accumulated			Net
	Amount		Amortization			Amount		Amount		Amortization			Amount
Purchased technology	$	44,103	$	(41,099	)	$	3,004	$	44,103	$	(38,119	)	$	5,984
Patents and patent applications		4,506		(4,506	)		—		4,506		(4,447	)		59
Customer list		12,831		(12,054	)		777		12,831		(9,584	)		3,247
Non-compete agreements		9,009		(8,034	)		975		9,009		(7,644	)		1,365

Other intangible assets	$	70,449	$	(65,693	)		4,756	$	70,449	$	(59,794	)		10,655

Goodwill							189,315							190,935

						$	194,071						$	201,590

Intangible assets, other than goodwill, are amortized over estimated useful lives of between 12 and 48 months. The weighted average life for purchased technology, patents, customer list, existing contract and non-compete agreements is 3.1 years, 3.1 years, 3.9 years, 3.0 years and 2.5 years, respectively. The aggregate amortization expense of intangible assets was $1.8 million and $4.5 million for three months ended September 30, 2007 and 2006, respectively, and $5.9 million and $13.2 million for nine months ended September 30, 2007 and 2006, respectively. Of the $1.8 million amortization of intangible assets recorded in the three months ended September 30, 2007, $977,000 was recorded in cost of license revenues and $814,000 was recorded in operating expenses. Of the $4.5 million amortization of intangible assets recorded in the three months ended September 30, 2006, $3.7 million was recorded in cost of license revenues and $828,000 was recorded in operating expenses. Of the $5.9 million amortization of intangible assets for the nine months ended September 30, 2007, $3.4 million was recorded in cost of license revenues and $2.5 million was recorded in operating expenses. Of the $13.2 million amortization of intangible assets for the nine months ended September 30, 2006, $10.7 million was recorded in cost of license revenues and $2.5 million was recorded in operating expenses. The estimated aggregate amortization expense of acquired intangible assets is expected to be $1.4 million in the remaining three months of 2007, $2.9 million in 2008 and $445,000 in 2009.

The decrease of $1.6 million in goodwill in the nine months ended September 30, 2007 was due to the utilization of net operating losses of an acquired company.

Note 6. Restructuring and Excess Facilities

At various times since 2001, the Company implemented restructuring and facility consolidation plans to improve operating performance. Restructuring and facilities consolidation costs consist of workforce reductions, the consolidation of excess facilities and the impairment of leasehold improvements and other equipment associated with abandoned facilities.

Excess Facilities

During the three months ended September 30, 2007, the Company recorded $1,000 of additional restructuring expense to accrete the excess facilities obligations to present value.

At September 30, 2007 the Company had $4.0 million accrued for excess facilities, which is payable through 2010. This accrual includes minimum lease payments of $4.9 million and estimated operating expenses of $1.1 million offset by estimated sublease income of $2.0 million and the present value discount of $2,000 recorded in accordance with SFAS No. 146. The facilities costs were estimated as of September 30, 2007. All of the Company’s excess facilities have been subleased at rates below those the Company is required to pay under its lease agreements. The Company reassesses this estimated liability each period based on current real estate market conditions. Accordingly, the estimate of excess facilities costs could differ from actual results and such differences could result in additional charges or credits that could affect the Company’s consolidated financial condition and results of operations.

The restructuring costs and excess facilities charges have had a material impact on the Company’s consolidated results of operations and will require additional cash payments in future periods. The following table summarizes the estimated payments, net of estimated sublease income and the impact of discounting, associated with these charges (in thousands):


	Excess
Years Ending December 31,	Facilities
2007 (remaining three months)	$	471
2008		1,528
2009		1,080
2010		896

		3,975
Present value discount of future lease payments		(2	)

	$	3,973

The following table summarizes the activity in the related restructuring and excess facilities accrual (in thousands):


Balance at December 31, 2006	$	8,696
Restructuring and excess facilities recoveries		46
Accretion of restructuring obligations to present value		19
Cash payments		(4,788	)

Balance at September 30, 2007	$	3,973

Note 7. Borrowings

The Company entered into a line of credit agreement with a financial institution, which was amended in July 2007. This line of credit agreement provides for borrowings up to $13.0 million until September 30, 2007 and $7.0 million from October 1, 2007 to July 31, 2008. Borrowings under the line of credit agreement are secured by cash, cash equivalents and short-term investments. The line of credit bears interest at the lower of 1% below the bank’s prime rate, which was 8.25% at September 30, 2007, or 1.5% above LIBOR in effect on the first day of the term. The line of credit primarily serves as collateral for letters of credit required by facilities leases. There are no financial covenant requirements associated with the line of credit. At September 30, 2007 and December 31, 2006, there were no borrowings under this line of credit agreement.

Note 8. Guarantees

The Company enters into standard indemnification agreements in the ordinary course of business. Pursuant to these agreements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party - generally, the Company’s business partners, subsidiaries and/or customers in connection with any United States patent or any copyright or other intellectual property infringement claim by any third party with respect to the Company’s products or services. The term of these indemnification agreements is generally perpetual commencing after execution of the agreement. The potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company has not incurred significant costs to defend lawsuits or settle claims related to these indemnification agreements and does not expect the liability to be material.

The Company generally warrants that its software products will perform in all material respects in accordance with the Company’s standard published specifications in effect at the time of delivery of the licensed products to the customer. Additionally, the Company warrants that its support and services will be performed consistent with generally accepted industry standards. If necessary, the Company would provide for the estimated cost of product and service warranties based on specific warranty claims and claim history. The Company has not incurred significant expense under its product or services warranties. As of September 30, 2007, the Company does not have or require an accrual for product or service warranties.

The Company may, at its discretion and in the ordinary course of business, subcontract the performance of any of its services. Accordingly, the Company enters into standard indemnification agreements with its customers, whereby

customers are indemnified for acts of the Company’s subcontractors. The potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. However, the Company has general and umbrella insurance policies that enable it to recover a portion of any amounts paid. The Company has not incurred significant costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is not significant. Accordingly, the Company has no liabilities recorded for these agreements at September 30, 2007.

Note 9. Interest Income and Other, Net

Interest income and other, net consisted of the following (in thousands):


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
Interest income	$	2,341		$	1,632		$	6,787		$	4,438
Foreign currency gains (losses)		(61	)		36			(128	)		127
Other		(81	)		(37	)		314			(129	)

	$	2,199		$	1,631		$	6,973		$	4,436

For the nine months ended September 30, 2007, other included the receipt of $472,000 from amounts held in escrow related to the settlement of certain claims associated with the acquisition of Scrittura, Inc.

Note 10. Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 is effective for years beginning after November 15, 2007 and interim periods within those years. The Company is currently evaluating the effect, if any, the adoption of SFAS No. 157 would have on its consolidated results of operations, financial position and cash flows.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115. SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value. The objective of SFAS No. 159 is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. The standard requires companies to provide additional information that will help investors and other users of financial statements to more easily understand the effect of the company’s choice to use fair value on its earnings. Under SFAS No. 159, a company may elect to use fair value to measure eligible items at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Eligible items include, but are not limited to, accounts and loans receivable, available-for-sale and held-to-maturity securities, equity method investments, accounts payable, guarantees, issued debt and firm commitments. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, although earlier adoption is permitted. The Company is currently evaluating the effect, if any, the adoption of SFAS No. 159 would have on its consolidated results of operations, financial position and cash flows.

Note 11. Contingencies

Contractual Obligations

The Company leases its main office facilities in Sunnyvale, California and various sales offices in North America, Europe and Asia Pacific under non-cancelable operating leases, which expire at various times through July 2016. The Company has entered into a lease for a new headquarters facility in San Jose, California, consisting of approximately 110,000 square feet. The lease commenced August 1, 2007 and will expire on July 31, 2014.

Future minimum lease payments under non-cancelable operating leases, as of September 30, 2007, are as follows (in thousands):


					Future
	Occupied		Excess		Lease
Years Ending December 31,	Facilities		Facilities		Payments
2007 (remaining three months)	$	1,340	$	572	$	1,912
2008		4,622		1,973		6,595
2009		2,823		1,258		4,081
2010		2,687		1,049		3,736
2011		2,834		—		2,834
After 2011		10,109		—		10,109

	$	24,415	$	4,852	$	29,267

At September 30, 2007, the Company had $3.6 million outstanding under standby letters of credit with financial institutions, which are secured by cash, cash equivalents and short-term investments. These letter of credit agreements are associated with the Company’s operating lease commitments for its facilities and expire at various times through 2014.

Litigation

Beginning in 2001, the Company and certain of its officers and directors and certain investment banking firms were named as defendants in a securities class action lawsuit brought in the Southern District of New York. This case is one of several hundred similar cases that have been consolidated into a single action in that court. The case alleges misstatements and omissions concerning underwriting practices in connection with the Company’s public offerings. The plaintiff seeks damages in an unspecified amount. In October 2002, the Company’s officers were dismissed without prejudice as defendants in the lawsuit. In February 2003, the District Court denied a motion to dismiss by all parties. Although the Company believes that the plaintiffs’ claims have no merit, in July 2003, the Company decided to participate in a proposed settlement to avoid the cost and distraction of continued litigation. A settlement proposal was preliminarily approved by the District Court. However, in December 2006, the Court of Appeals reversed the District Court’s finding that six focus cases could be certified as class actions. In April 2007, the Court of Appeals denied the plaintiffs’ petition for rehearing, but acknowledged that the District Court might certify a more limited class. At a June 2007 status conference, the District Court terminated the proposed settlement as stipulated among the parties. In August 2007, plaintiffs filed an amended complaint in the six focus cases to test the sufficiency of their class allegations. In November 2007, defendants in the focus cases filed a motion to dismiss the complaint for failure to state a claim. All matters in the case, including any settlement proposal, await determination of this motion to dismiss and any motion by plaintiffs to certify a newly defined class. If a new complaint is filed against the Company, the Company would continue to defend itself vigorously. Any liability the Company incurs in connection with this lawsuit could materially harm its business and financial position and, even if it defends itself successfully, there is a risk that management’s distraction in dealing with this lawsuit could harm its results. In addition, in October 2007, a lawsuit was filed in the United States District Court for the Western District of Washington by Vanessa Simmonds, captioned Simmonds v. Bank of America Corp., No.07-1585, alleging that the underwriters of the Company’s initial public offering violated section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. section 78p(b), by engaging in short-swing trades, and seeks disgorgement to the Company of profits in amounts to be proven at trial from the underwriters. The suit names the Company as a nominal defendant, contains no claims against the Company, and seeks no relief from the Company.

On October 24, 2007, Interwoven was notified by the Staff of the Securities and Exchange Commission that no enforcement action is currently being recommended with respect to the Company’s historical stock option granting practices.

From time to time, in addition to those identified above, the Company is subject to legal proceedings, claims, investigations and proceedings in the ordinary course of business, including claims of alleged infringement of third-party patents and other intellectual property rights, commercial, employment and other matters. In accordance with generally accepted accounting principles in the United States of America, the Company makes a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and are adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular matter. Litigation is inherently

unpredictable. However, the Company believes that it has valid defenses with respect to the legal matters pending against us. It is possible, nevertheless, that the Company’s consolidated financial position, cash flows or results of operations could be affected by the resolution of one or more of such contingencies.

Note 12. Significant Customer Information and Segment Reporting

The Company’s chief operating decision-maker is considered to be Interwoven’s Chief Executive Officer. The Chief Executive Officer reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenues by geographic region for purposes of making operating decisions and assessing financial performance. On this basis, the Company is organized and operates in a single segment: the design, development and marketing of software solutions.

The following table presents geographic information (in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
Revenues:
United States of America	$	35,098	$	34,409	$	103,115	$	94,153
United Kingdom		8,265		5,939		24,830		21,257
Other geographies		12,090		10,567		34,838		30,992

	$	55,453	$	50,915	$	162,783	$	146,402


	September 30,		December 31,
	2007		2006
Long-lived assets (excluding goodwill and intangible assets):
United States of America	$	15,142	$	3,083
International		1,647		1,732

	$	16,789	$	4,815

The Company’s revenues are derived from software licenses, consulting and training services and customer support. Although management believes that a significant portion of the Company’s revenue is derived from TeamSite and WorkSite products and related services, the Company does not specifically track revenues by individual products. It is also impracticable to disaggregate software license revenue by product. The Company’s disaggregated revenue information is as follows (in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
License	$	21,225	$	18,580	$	61,856	$	54,657
Customer support		24,104		21,941		71,106		64,021
Consulting		8,766		9,297		26,016		24,072
Training		1,358		1,097		3,805		3,652

	$	55,453	$	50,915	$	162,783	$	146,402

No customer accounted for more than 10% of the total revenues for the three and nine months ended September 30, 2007 and 2006. At September 30, 2007 and December 31, 2006, no single customer accounted for more than 10% of the outstanding accounts receivable balance.

Note 13. Subsequent Events

In November 2007, the Company acquired Optimost LLC (“Optimost”), a provider of software and services for Website optimization. In connection with the acquisition, Interwoven paid approximately $52.0 million in cash for all of the issued and outstanding membership units of Optimost and vested options to purchase Optimost membership units, and Interwoven assumed all of the outstanding unvested options to purchase Optimost membership units.

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

The following contains 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. Words such as “anticipates,” “expects,” “believes,” “seeks,” “estimates” and similar expressions identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, expectations regarding customer spending patterns, trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements. Factors that could cause actual results to differ materially from expectations include those set forth in the following discussion, and, in particular, the risks discussed below under Part II, Item 1A, Risk Factors, and under Part I, Item 1A, Risk Factors of our Annual Report on Form 10-K and in our subsequent filings with the Securities and Exchange Commission. Unless required by law, we do not undertake any obligation to update any forward-looking statements.

Overview

Incorporated in March 1995, we are a provider of content management software solutions. Our software and services enable organizations to leverage content to drive business growth by maximizing online business performance, increasing collaboration and streamlining business processes both internally and externally. Today, over 4,000 enterprise and professional services organizations in 50 countries worldwide have chosen our solutions.

We operate in a single segment, which is the design, development and marketing of content management software solutions. Our goal is to be the leading provider of content management software solutions. We are focused on generating profitable and sustainable growth through internal research and development, licensing from third parties and acquisitions of businesses with complementary products and technologies.

We license our software to businesses, professional services organizations, capital markets business and government agencies generally on a non-exclusive and perpetual basis. The growth in our software license revenues is affected by the strength of general economic and business conditions, customer budgetary constraints and the competitive position of our software solutions. Software licenses revenues are also affected by long, unpredictable sales cycles, so they are difficult to forecast from period to period. Although our consolidated results of operations have improved in recent periods, our results were impacted in these periods by long product evaluation periods, protracted contract negotiations and multiple authorization requirements of our customers, all of which we believe are characteristic of the market for content management products and services.

Customer support revenues are primarily influenced by the number and size of new support contracts sold in connection with software licenses and the renewal rate of existing support contracts. Customers that purchase software licenses usually purchase support contracts and renew their support contracts annually. Our support contracts entitle our customers to unspecified product upgrades and technical support during the support period, which is typically one year.

Services revenues consist of software installation and integration, training and business process consulting. These services tend to lag software license revenues since consulting services, if purchased, are typically performed after the purchase of new software licenses or in connection with software upgrades. Professional services are predominately billed on a time-and-materials basis and we recognize revenues when the services are performed. Professional services revenues are influenced primarily by the number of professional services engagements sold in connection with software license sales and the customers’ use of third party services providers.

Because our products are complex and involve a consultative sales model, our strategy is to market and sell our products and services primarily through a direct sales force. We look to augment those efforts through relationships with technology vendors, professional services firms, systems integrators and other strategic partners, which assist our direct sales force in obtaining customer leads and referrals. Approximately 54% of our new customer license orders for the three months ended September 30, 2007 were influenced by or co-sold with our strategic partners and resellers. In general, these partners and resellers perform the installation and integration, consulting and other services for the

enterprises to which they influence the sale of or resell our products, and we are not engaged by their customers for these services.

Our sales efforts are targeted to senior executives and personnel who are responsible for managing an enterprise’s information technology initiatives. We generate demand for our products and services primarily through our direct sales force and strategic relationships. Our direct sales force is responsible for managing customer relationships and opportunities and is supported by product, marketing and service specialists.

In the rapidly changing and increasingly complex and competitive information technology environment, we believe product differentiation will be a key to market leadership. Thus, our strategy is to continually work to enhance and extend the features and functionality of our existing products and develop new and innovative solutions for our customers. We have in the past and expect to continue to devote substantial resources to our research and development activities. As a percentage of total revenues, research and development expenses were 17% for the three months ended September 30, 2007 and 2006.

We recorded income from operations of $3.5 million and $737,000 for the three months ended September 30, 2007 and 2006, respectively. We are focused on improving our operating margins by increasing our revenues and actively managing our expenses through improved productivity and utilization of economies of scale. As a significant portion of our expenses are employee-related, we manage our headcount from period to period. We had 791 employees worldwide at September 30, 2007 versus 774 employees at December 31, 2006. We also look to improve our cost structure by hiring personnel in countries where advanced technical expertise is available at lower costs. Additionally, we pay close attention to other costs, including facilities and related expense, professional fees and promotional expenses, which are each significant components of our expense structure. While we have been carefully managing our costs and expenses relating to the operation of our business, our general and administrative expenses have increased significantly during 2007 as compared to 2006 as we have incurred significant accounting, legal and other expenses relating to the Audit Committee’s review of our historical stock option grant procedures and related accounting throughout 2007.

Our acquisition strategy is an important element of our overall business strategy. We seek to identify acquisition opportunities that will enhance the features and functionality of our existing products, provide new products and technologies to sell to our installed base of customers, acquire additional customers that we can sell our existing products, or which facilitate entry into adjacent markets. In evaluating these opportunities, we consider, among other items, both time to market of the technologies or products to be acquired and potential market share gains. We have completed a number of acquisitions in the past, and we may acquire other technologies, products and companies in the future. In recent years, we have added through acquisition products and solutions with digital asset management, collaborative document management, records management, content publishing, Web optimization and capital markets vertical market capabilities. The results of operations of these business combinations have been included prospectively from the closing dates of these transactions.

Subsequent Events

In November 2007, we acquired Optimost LLC (“Optimost”), a provider of software and services for Website optimization. In connection with the acquisition, we paid approximately $52.0 million in cash for all of the issued and outstanding membership units of Optimost and vested options to purchase Optimost membership units, and we assumed all of the outstanding unvested options to purchase Optimost membership units.

Results of Operations

Revenues

The following sets forth, for the periods indicated, our revenues (in thousands, except percentages):


	Three Months Ended									Nine Months Ended
	September 30,									September 30,
	2007			2006			Change			2007			2006			Change
License	$	21,225		$	18,580			14	%	$	61,856		$	54,657			13	%
Percentage of total revenues		38	%		36	%					38	%		37	%
Support and service		34,228			32,335			6	%		100,927			91,745			10	%
Percentage of total revenues		62	%		64	%					62	%		63	%

	$	55,453		$	50,915			9	%	$	162,783		$	146,402			11	%

Total revenues increased 9% to $55.5 million for the three months ended September 30, 2007 from $50.9 million for the three months ended September 30, 2006. Sales outside of the United States of America represented 37% and 32% of our total revenues for the three months ended September 30, 2007 and 2006, respectively. We believe that the increase in revenues was attributable to higher revenues from license, customer support and training services in most of our geographic regions, particularly in the United States of America and Europe. Total revenues increased 11% to $162.8 million for the nine months ended September 30, 2007 from $146.4 million for the nine months ended September 30, 2006. We believe that the increase in revenues in the nine months ended September 30, 2007 was attributable to higher revenues from all categories in all of our geographic regions.

License. License revenues increased 14% to $21.2 million for the three months ended September 30, 2007 from $18.6 million for the three months ended September 30, 2006. License revenues represented 38% and 36% of total revenues for the three months ended September 30, 2007 and 2006, respectively. We believe that the increase in license revenues for the three months ended September 30, 2007 over the same period in 2006 was primarily due to higher information technology spending in most of our geographic regions, particularly in the United States of America and Europe. We had one license transaction exceeding $1.0 million in the three ended September 30, 2007 and in the same period of 2006. Our average selling prices were $195,000 and $158,000 for the three months ended September 30, 2007 and 2006, respectively, for transactions in excess of $50,000 in aggregate license revenues. License revenues increased 13% to $61.9 million for the nine months ended September 30, 2007 from $54.7 million in the same period in 2006. We believe that the increase in license revenues for the nine months ended September 30, 2007 over the prior year was attributable to higher information technology spending in all of our geographic regions, in particular the United States of America and Europe. License revenues represented 38% and 37% of total revenues for the nine months ended September 30, 2007 and 2006, respectively.

Support and Service. Support and service revenues increased 6% to $34.2 million for the three months ended September 30, 2007 from $32.3 million for the same period in 2006. The increase in support and service revenues was primarily the result of a $2.2 million increase in customer support revenues from a larger installed base of customers and additional orders from our existing customers offset by a slight decrease in consulting services revenue. The consulting service revenue was comparably lower because of a number of large consulting engagements in 2006 and the early completion of a few consulting engagements with customer acceptance provisions in the three months ended September 30, 2006. Support and service revenues accounted for 62% and 64% of total revenues for the three months ended September 30, 2007 and 2006, respectively. Support and service revenues increased 10% to $100.9 million for the nine months ended September 30, 2007 from $91.7 million for the same period in 2006. The increase in support and service revenues was primarily the result of a $7.1 million increase in customer support revenues from a larger installed base of customers and additional orders from our existing customers and a $1.9 million increase in consulting services revenues. Support and service revenues accounted for 62% and 63% of total revenues for the nine months ended September 30, 2007 and 2006, respectively. Our support renewal rates have not fluctuated significantly during these periods.

To the extent that our license revenues decline in the future, our support and service revenues may also decline. Specifically, a decline in license revenues may result in fewer consulting engagements. Additionally, since customer support contracts are generally sold with each license transaction, a decline in license revenues may also result in a

slowing of customer support revenues. However, since customer support revenues are recognized over the duration of the support contract, the impact will not be experienced for up to several months after a decline in license revenues. In the future, customer support revenues may also be adversely impacted if customers fail to renew their support agreements or reduce the license software quantity under their support agreements.

Cost of Revenues

The following sets forth, for the periods indicated, our cost of revenues (in thousands, except percentages):


	Three Months Ended									Nine Months Ended
	September 30,									September 30,
	2007			2006			Change			2007			2006			Change
License	$	1,859		$	4,426			(58	)%	$	5,905		$	13,015			(55	)%
Percentage of total revenues		3	%		9	%					4	%		9	%
Percentage of license revenues		9	%		24	%					10	%		24	%
Support and service		13,915			13,140			6	%		40,548			37,324			9	%
Percentage of total revenues		25	%		26	%					25	%		25	%
Percentage of support and service revenues		41	%		41	%					41	%		41	%

	$	15,774		$	17,566			(10	)%	$	46,453		$	50,339			(8	)%

License. Cost of license revenues includes expenses incurred to manufacture, package and distribute our software products and documentation, as well as costs of licensing third-party software embedded in or sold with our software products and amortization of purchased technology associated with business combinations. Cost of license revenues represented 9% and 24% of license revenues for the three months ended September 30, 2007 and 2006, respectively. Cost of license revenues represented 10% and 24% of license revenues for the nine months ended September 30, 2007 and 2006, respectively. The decrease in cost of license revenues in absolute dollars and as a percentage for the three months and nine months ended September 30, 2007 from the same periods in 2006 was attributable primarily to the decrease in amortization of purchased technology. The decrease in amortization of purchased technology is due to a reduction in the amortization of certain purchased technology associated with certain acquisitions, which have become fully amortized in the three months ended September 30, 2007.

Based solely on acquisitions completed through the nine months ended September 30, 2007 and assuming no impairments, we expect the amortization of purchased technology classified as a cost of license revenues to be $897,000 for the remaining three months of 2007, $2.6 million in 2008 and $445,000 for 2009. We expect cost of license revenues as a percentage of license revenues to vary from period to period depending on the mix of software products sold, the extent to which third-party software products are bundled with our products and the amount of overall license revenues, as many of the third-party software products embedded in our software are under fixed-fee arrangements. Further, the acquisition of Optimost in November 2007 will increase the amortization of purchased technology.

Support and Service. Cost of support and service revenues consists of salary and personnel-related expenses for our consulting, training and customer support personnel, costs associated with furnishing product updates to customers under active support contracts, subcontractor expenses and depreciation of equipment used in our services and customer support operation. Cost of support and service revenues increased 6% from $13.1 million to $13.9 million in the three months ended September 30, 2007 from the same period in 2006. The increase in cost of support and service revenues in the three months ended September 30, 2007 from the same period in 2006 was due primarily to a $326,000 increase in personnel related costs and an increase in travel costs of $100,000. Cost of support and service revenues represented 41% of support and service revenues for the three months ended September 30, 2007 and 2006. Cost of support and service revenues increased 9% to $40.5 million for the nine months ended September 30, 2007 from $37.3 million for the same period in 2006. The increase in cost of support and service revenues in the nine months ended September 30, 2007 from the same period in 2006 was due primarily to a $1.4 million increase in personnel related costs, resulting primarily from additional headcount, higher subcontractor fees of $1.1 million as a result of the increased usage of outside consulting firms to supplement our current services capacity and a $347,000 increase in travel expenses attributable to higher levels of activity in our consulting services engagements. Cost of support and service revenues represented 41% of support and service revenues in the nine months ended September 30, 2007 and 2006. The consistent percentage in cost of support and service revenues as a percentage of its related revenues represents stable

growth in all categories of support and service revenues, as well as stable growth in the associated costs. Support and service headcount was 225 and 212 at September 30, 2007 and 2006, respectively.

We realize lower gross profits on support and service revenues than on license revenues. In addition, we may contract with outside consultants and system integrators to supplement the services we provide to customers, which increases our costs and further reduces gross profits. As a result, if support and service revenues increase as a percentage of total revenues or if we increase our use of third parties to provide such services, our gross profits will be lower and our operating results may be adversely affected.

Operating Expenses

Sales and Marketing

The following sets forth, for the periods indicated, our sales and marketing expense (in thousands, except percentages):


	Three Months Ended									Nine Months Ended
	September 30,									September 30,
	2007			2006			Change			2007			2006			Change
Sales and marketing	$	19,000		$	18,877			1	%	$	59,008		$	56,446			5	%
Percentage of total revenues		34	%		37	%					36	%		39	%

Sales and marketing expenses consist of salaries, commissions, benefits and related costs for sales and marketing personnel, travel and marketing programs, including customer conferences, promotional materials, trade shows and advertising. Sales and marketing expenses increased slightly for the three months ended September 30, 2007 from the same period in 2006. Sales and marketing expenses increased 5% to $59.0 million for the nine months ended September 30, 2007 from $56.4 million for the same period in 2006. The increase in sales and marketing expenses in the nine months ended September 30, 2007 from the same period in 2006 was due primarily to a $1.6 million increase in marketing program expense, a $1.0 million increase in personnel-related costs including a $601,000 accrual for severance cost for a former employee, a $358,000 increase in stock-based compensation offset by $885,000 decrease in use of outside services and travel expenses. Sales and marketing expenses represented 34% and 37% as a percentage of total revenues in the three months ended September 30, 2007 and 2006, respectively and represented 36% and 39% as a percentage of total revenues in the nine months ended September 30, 2007 and 2006, respectively. The decrease in sales and marketing expenses as a percentage of total revenues is due to higher total revenues and lower headcount in 2007 as compared to 2006. Sales and marketing headcount was 234 and 236 at September 30, 2007 and 2006, respectively.

We expect that the percentage of total revenues represented by sales and marketing expenses will fluctuate from period to period due to the timing of hiring of new sales and marketing personnel, our spending on marketing programs and the level of revenues, in particular license revenues, in each period.

Research and Development

The following sets forth, for the periods indicated, our research and development expense (in thousands, except percentages):


	Three Months Ended									Nine Months Ended
	September 30,									September 30,
	2007			2006			Change			2007			2006			Change
Research and development	$	9,552		$	8,902			7	%	$	27,928		$	25,984			7	%
Percentage of total revenues		17	%		17	%					17	%		18	%

Research and development expense consists of salaries and benefits, third-party contractors, facilities and related overhead costs associated with our product development and quality assurance activities. Research and development expense increased 7% to $9.6 million in the three months ended September 30, 2007 from $8.9 million for the same period in 2006. The increase in the three months ended September 30, 2007 from the same period in 2006 was primarily due to a $241,000 increase in third-party contractor fees, a $136,000 increase in personnel related costs due to

salary adjustment and a $52,000 increase in travel expenses. Research and development expense increased 7% to $27.9 million for the nine months ended September 30, 2007 from $26.0 million for the same period in 2006. The increase in the nine months ended September 30, 2007 from the same period in 2006 was primarily due to a $577,000 increase in personnel related costs due to salary adjustment, a $533,000 increase in third-party contractor fee, a $98,000 increase in travel expense and a $61,000 increase in stock-based compensation. Research and development expense was 17% of total revenues in the three months ended September 30, 2007 and 2006 and was 17% and 18% for the nine months ended September 30, 2007 and 2006, respectively. Research and development headcount was 230 at September 30, 2007 and 2006. We expect research and development expenses in 2007 will decline slightly as a percentage of total revenues when compared to 2006 as we continue to manage our expenses and realize greater cost efficiencies in our product development activities.

General and Administrative

The following sets forth, for the periods indicated, our general and administrative expense (in thousands, except percentages):


	Three Months Ended									Nine Months Ended
	September 30,									September 30,
	2007			2006			Change			2007			2006			Change
General and administrative	$	6,812		$	3,964			72	%	$	17,742		$	13,015			36	%
Percentage of total revenues		12	%		8	%					11	%		9	%

General and administrative expenses consist of salaries and related costs for general corporate functions including finance, accounting, human resources, legal and information technology. General and administrative expenses increased 72% to $6.8 million for the three months ended September 30, 2007 when compared to the same period ended September 30, 2006. General and administrative expenses increased 36% to $17.7 million for the nine months ended September 30, 2007 from $13.0 million for the same period in 2006. For the three and nine months ended September 30, 2007, we incurred $2.0 million and $4.5 million, respectively, in accounting and legal expenses relating to our voluntary review of historical stock option grant procedures. Also in the three and nine months ended September 30, 2007, we incurred additional rent expense of $152,000 and $758,000, respectively, associated with our new corporate headquarters while we are in the process of completing tenant improvements. We occupied the new headquarters in July 2007. Besides these expenses, the increase in the three months ended September 30, 2007 is also due to a $612,000 increase in personnel-related costs related primarily to the hiring of our Chief Executive Officer and salary adjustment for the majority of our employees in July 2007 and a $273,000 increase in stock-based compensation. In the nine months ended September 30, 2007, we incurred $1.2 million in personnel-related costs related primarily to the hiring of our new Chief Executive Officer. In the same period in 2006, we incurred $1.6 million non-recurring charges related to the retirement of our former Chief Executive Officer. General and administrative expenses represented 12% and 8% of total revenues in the three months ended September 30, 2007 and 2006, respectively and 11% and 9% of total revenues for the nine months ended September 30, 2007 and 2006, respectively. General and administrative headcount was 102 and 92 at September 30, 2007 and 2006, respectively. We expect the general and administrative expenses will increase in 2007 when compared to 2006 due to the hiring of our new Chief Executive Officer. Further, in 2007, we incurred and expect to incur significant accounting and legal expense relating to the Audit Committee’s review of our historical stock option grant procedures and related activities. In addition, we incurred additional rent expense associated with our new corporate office in the first seven months of 2007 and moving costs in the third quarter of 2007.

Amortization of Intangible Assets

The following sets forth, for the periods indicated, our amortization of intangible assets (in thousands, except percentages):


	Three Months Ended								Nine Months Ended
	September 30,								September 30,
	2007			2006			Change		2007			2006			Change
Amortization of intangible assets	$	814		$	828			*	$	2,470		$	2,484			*
Percentage of total revenues		1	%		2	%				2	%		2	%

percentage not meaningful

Amortization of intangible assets was $814,000 and $828,000 for the three months ended September 30, 2007 and 2006, respectively, and $2.5 million for the nine months ended September 30, 2007 and 2006. Based on the intangible assets recorded as of September 30, 2007, we expect amortization of intangible assets classified as operating expenses to be $469,000 in the remaining three months of 2007 and $308,000 in 2008. We expect to incur additional amortization expense associated with the acquisition of Optimost in November 2007 (which is not included in the above estimate) and may incur additional amortization expense to the extent we make additional acquisitions.

We performed our annual impairment test on goodwill in the third quarter of 2007. Based on this testing, we determined that the carrying value of recorded goodwill of $189.3 million had not been impaired. Accordingly, no impairment charge was recorded as a result of this testing. Generally accepted accounting principles in the United States of America require that we review the value of goodwill and intangible assets from time to time to determine whether the recorded values of these assets have been impaired and should be reduced. We perform impairment assessments on an interim basis when indicators exist that goodwill or our intangible assets may be impaired. These indicators include our market capitalization declining below our net book value or if we suffer a sustained decline in our stock price. If we determine there has been an impairment of goodwill and other intangible assets, the carrying value of those assets will be written down to fair value, and a charge against operating results will be recorded in the period that the determination is made. Any impairment could have a material impact on our consolidated operating results and financial position, and could harm the trading price of our common stock.

Restructuring and Excess Facilities Charges (Recoveries)

The following sets forth, for the periods indicated, our restructuring and excess facilities charges (in thousands, except percentages):


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007		2006		Change		2007		2006			Change
Restructuring and excess facilities charges (recoveries)	$	1	$	41		*	$	65	$	(887	)		*


*		percentage not meaningful

During the three and nine months ended September 30, 2007, the Company recorded $1,000 and $19,000, respectively, of additional restructuring expense to accrete the excess facilities obligations to present value. During the nine months ended September 30, 2007, we also recorded additional charges of $46,000 to increase the operating expenses for certain of our previously abandoned facilities.

For the three and nine months ended September 30, 2006, we recorded $31,000 and $126,000, respectively, of additional restructuring expense to accrete the remaining excess facilities obligations to present value. During the three months ended September 30, 2006, we recorded charges of $10,000 to true up the remaining costs for the excess facilities with leases expiring in 2007. During the nine months ended September 30, 2006, we reversed $1.0 million of the previously recorded restructuring accrual as a result of revisions to estimated operating expenses for certain of our previously abandoned facilities. We also reversed $15,000 of the previously recorded restructuring accrual related to litigation exposure and expected legal costs associated with an employee termination.

The charges recorded for excess facilities were based on payments due over the remainder of the lease term and estimated operating costs offset by our estimate of future sublease income. Accordingly, our estimate of excess facilities costs may differ from actual results and such differences may result in additional charges or credits that could materially affect our consolidated financial condition and results of operations.

Interest Income and Other, Net

The following sets forth, for the periods indicated, our interest income and other (in thousands, except percentages):


	Three Months Ended									Nine Months Ended
	September 30,									September 30,
	2007			2006			Change			2007			2006			Change
Interest income and other, net	$	2,199		$	1,631			35	%	$	6,973		$	4,436			57	%
Percentage of total revenues		4	%		3	%					4	%		3	%

Interest income and other is composed of interest earned on our cash, cash equivalents and short-term investments, foreign exchange transaction gains and losses and other income. Interest income and other increased 35% to $2.2 million for the three months ended September 30, 2007 from $1.6 million for the three months ended September 30, 2006. For the nine months ended September 30, 2007, interest and other income increased 57% to $7.0 million from $4.4 million in the same period in 2006. This increase was due primarily to higher interest rates on our higher cash and investments balance and the distribution to us of $472,000 from amounts held in escrow pending settlement of certain claims associated with our acquisition of Scrittura, Inc. as a result of the settlement of those claims.

Provision for Income Taxes

The following sets forth, for the periods indicated, our provision for income taxes (in thousands, except percentages):


	Three Months Ended									Nine Months Ended
	September 30,									September 30,
	2007			2006			Change			2007			2006			Change
Provision for income taxes	$	1,638		$	595			175	%	$	3,096		$	1,350			129	%
Percentage of total revenues		3	%		1	%					2	%		1	%

We recorded an income tax provision of $1.6 million and $3.1 million for the three and nine months ended September 30, 2007, respectively, and a provision of $595,000 and $1.4 million for the three and nine months ended September 30, 2006, respectively. The income tax provisions for each of these periods were comprised primarily of foreign income taxes and foreign withholding taxes, and also included a provision for federal alternative minimum and state income taxes. Additionally, the provision for the nine months ended September 30, 2007 was impacted by the utilization of net operating losses, the benefit of which was recorded to goodwill.

The effective tax rate for the nine months ended September 30, 2007 was calculated based on the results of operations for the nine months ended September 30, 2007, and does not reflect an annual effective tax rate. Since we cannot consistently predict our future operating income, or in which jurisdiction it will be earned, we are not using an annual effective tax rate to apply to the income before income taxes for the nine-month period ended September 30, 2007.

The effective tax rate for the nine months ended September 30, 2007 was 19% compared with 39% for the comparable period ended September 30, 2006. This change in the effective rate was primarily due to higher income before income taxes for the nine months ended September 30, 2007 as compared to the same period in 2006. Additionally, we incur withholding taxes, which are comparable betweem the two periods and are not determined based on income before income taxes. The provision for income taxes for the nine months ended September 30, 2007 was also impacted by the utilization of net operating losses from acquired entities, the benefit of which was recorded as goodwill.

We adopted the provisions of FIN No. 48 on January 1, 2007. We have an unrecognized tax benefit of approximately $2.9 million which did not change significantly during the three months ended September 30, 2007. The unrecognized tax benefit is exclusive of accrued interest and penalties. Of these unrecognized tax benefits, $2.9 million would reduce the effective tax rate upon recognition. The amount of unrecognized tax benefits that would result in an adjustment to goodwill is zero. The application of FIN No. 48 would have resulted in an increase in accumulated deficit of $1.4 million, except that the change was fully offset by the application of a valuation allowance. We do not reasonably estimate that the unrecognized tax benefit will change significantly within the next twelve months. The Company historically classified unrecognized tax benefits in current tax payable. As a result of adoption of FIN No. 48, the unrecognized tax benefits were reclassified to long-term income taxes payables.

We continue our practice of recognizing interest and penalties related to income tax matters in income tax expense. We had $60,000 accrued for interest and had no accrued penalties as of September 30, 2007.

We file our tax returns as prescribed by the tax laws of the jurisdictions in which we operate. We are not currently under audit by Internal Revenue Service and state jurisdictions. We are subject to examination in various foreign jurisdictions, for which we believe we have established adequate reserves. In our significant jurisdictions, the 1998 to 2006 tax years remain subject to examination by the appropriate governmental agencies.

We have a valuation allowance against the full amount of our net deferred tax asset. We currently provide a valuation allowance against deferred tax assets when it is more likely than not that some portion, or all of our deferred tax assets, will not be realized. Additionally, while we have net operating loss carryforwards, the amounts of and benefits from net operating loss carryforwards may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating loss that we may utilize in any one year include, but are not limited to, a cumulative ownership change as defined under Section 382 of the Internal Revenue Code. Additionally, net operating losses and credits related to companies that we have acquired or may acquire in the future may be subject to similar limitations.

Realization of our deferred tax assets is dependent primarily upon future Unites States taxable income. Based on our forecast of income before income taxes and our continual assessment regarding the realizability of our deferred tax assets, we may release some portion of our of valuation allowance that is not related to stock options. Such release could have a significant impact on our effective tax rate during the quarter in which this assessment is made.

Liquidity and Capital Resources


	September 30,		December 31,
	2007		2006
	(in thousands)
Cash, cash equivalents and short-term investments	$	197,887	$	176,461
Working capital	$	142,125	$	120,294
Stockholders’ equity	$	347,194	$	323,960

Our primary sources of cash are the collection of accounts receivable from our customers and proceeds from the exercise of stock options and stock purchased under our employee stock purchase plan. Our uses of cash include payroll and payroll-related expenses and operating expenses such as marketing programs, travel, professional fees and facilities and related costs. We also use cash to purchase property and equipment, pay liabilities for excess facilities and to acquire businesses and technologies to expand our product offerings.

A number of non-cash items were charged to expense in the three and nine months ended September 30, 2007 and 2006. These items include depreciation and amortization of property and equipment and intangible assets and stock-based compensation. Although these non-cash items may increase or decrease in amount and, therefore, cause an associated increase or decrease in our future operating results, these items will have no corresponding impact on our operating cash flows.

Cash provided by operating activities for the nine months ended September 30, 2007 was $27.1 million, representing an increase of $8.2 million from the same period in 2006. This increase primarily resulted from our net income, after adjusting for non-cash items, and increases in accounts payable, accrued liabilities and prepaid expenses, decreases in accounts receivable and deferred revenue, offset by payments to reduce our restructuring and excess facilities accrual. In the three months ended September, 2007, we received $3.3 million from our landlord as allowance to our cost of leasehold improvements for our new headquarters facility. Payments made to reduce our restructuring and excess facilities obligations totaled $4.8 million in the nine months ended September 30, 2007. Our days sales outstanding in accounts receivable (“days outstanding”) were 55 days and 59 days at September 30, 2007 and December 31, 2006, respectively.

Cash provided by operating activities for the nine months ended September 30, 2006 was $19.0 million. This amount primarily resulted from our net income, after adjusting for non-cash items, and increases in accounts payable, accrued liabilities, decreases in accounts receivable, offset by payments to reduce our restructuring and excess facilities accrual.

Cash provided by investing activities was $314,000 for the nine months ended September 30, 2007. This resulted from net proceeds out of our cash and cash equivalents for the maturities of short-term investments of $15.1 million and $14.7 million to purchase property and equipment primarily for leasehold improvements to and furniture for our new headquarters facility.

Cash used in investing activities was $21.4 million for the nine months ended September 30, 2006. This resulted from net payments out of our cash and cash equivalents for the purchase of short-term investments of $17.1 million; $1.6 million in purchased technology and $2.7 million to purchase property and equipment.

Cash provided from financing activities was $7.1 million and $7.9 million for the nine months ended September 30, 2007 and 2006, respectively, and consists of cash received from the exercise of common stock options and shares issued under the Company’s employee stock purchase plan.

We have classified our investment portfolio as “available for sale,” and our investment objectives are to preserve principal and provide liquidity while at the same time maximizing yields without significantly increasing risk. We may sell an investment at any time if the quality rating of the investment declines, the yield on the investment is no longer attractive or we are in need of cash. Because we invest only in investment securities that are highly liquid with a ready market, we believe that the purchase, maturity or sale of our investments has no material impact on our overall liquidity.

We anticipate that we will continue to purchase property and equipment as necessary in the normal course of our business. The amount and timing of these purchases and the related cash outflows in future periods is difficult to predict and is dependent on a number of factors including the hiring of employees, the rate of change of computer hardware and software used in our business, the leasing of a new office facility and our business outlook. In 2007, we purchased furniture and equipment and made leasehold improvements to our new headquarters facility in San Jose, California.

We have used cash to acquire businesses and technologies that enhance and expand our product offerings and we anticipate that we will continue to do so in the future. For example, in November 2007, we acquired all the membership interests of Optimost in exchange for $52.0 million in cash and assumed certain unvested stock options. The nature of these transactions makes it difficult to predict the amount and timing of such cash requirements. We may also be required to raise additional financing to complete future acquisitions.

We receive cash from the exercise of common stock options and the sale of common stock under our employee stock purchase plan. While we expect to continue to receive these proceeds in future periods, the timing and amount of such proceeds are difficult to predict and are contingent on a number of factors including the price of our common stock, the number of employees participating in our stock option plans and our employee stock purchase plan and general market conditions. Since April 2007 employees were unable to exercise stock options or purchase shares under our employee stock purchase plan. Accordingly, proceeds from such exercises and purchases will be lower in 2007 than 2006.

Bank Borrowings. We have a line of credit available to us at September 30, 2007, which is secured by cash, cash equivalents and investments. This line of credit agreement provides for borrowings up to $13.0 million until September 30, 2007 and $7.0 million from October 1, 2007 to July 31, 2008. The line of credit bears interest at the lower of 1% below the bank’s prime rate adjusted from time to time or a fixed rate of 1.5% above the LIBOR in effect on the first day of the term. There are no financial covenant requirements under our line of credit. The line of credit primarily serves as collateral for letters of credit required by our facilities leases. There were no outstanding borrowings under this line of credit as of September 30, 2007.

Facilities. We lease facilities under operating lease agreements that expire at various dates through 2016. As of September 30, 2007, minimum cash payments due under operating lease obligations for our occupied and excess facilities totaled $29.3 million. The following table presents our prospective future lease payments under these agreements as of September 30, 2007, which includes estimated operating expenses offset by estimate of potential sublease income (in thousands):


			Excess Facilities
	Occupied		Minimum Lease		Estimated Sub-		Estimated		Net
Years Ending December 31,	Facilities		Commitments		Lease Income		Costs		Outflows			Total
2007 (remaining three months)	$	1,340	$	572	$	220	$	119	$	471		$	1,811
2008		4,622		1,973		802		357		1,528			6,150
2009		2,823		1,258		523		345		1,080			3,903
2010		2,687		1,049		452		299		896			3,583
2011		2,834		¾		¾		¾		¾			2,834
Thereafter		10,109		¾		¾		¾		¾			10,109

	$	24,415	$	4,852	$	1,997	$	1,120		3,975		$	28,390

Present value discount of future lease payments										(2	)

Obligations for excess facilities as of September 30, 2007									$	3,973

Our total lease commitment for our occupied facilities of $24.4 million includes a total of $12.4 million operating lease payments associated with our new headquarters in San Jose, California over the term of the lease. The lease commenced August 1, 2007 and will expire on July 31, 2014.

Some of our lease agreements contain clauses which require us to restore occupied leased premises to their original shape and condition. We may or may not incur costs to fulfill the obligation in accordance with the terms of our lease agreements.

The restructuring and excess facilities accrual at September 30, 2007 includes minimum lease payments of $4.9 million and estimated operating expenses of $1.1 million offset by estimated sublease income of $2.0 million and the present value discount of $2,000. We estimated sublease income and the related timing thereof based on existing sublease agreements or with the input of third-party real estate consultants and current market conditions, among other factors. Our estimates of sublease income may vary significantly from actual amounts realized depending, in part, on factors that may be beyond our control, such as the time periods required to locate and contract suitable subleases and the market rates at the time of such subleases.

We have entered into various standby letter of credit agreements associated with our facilities leases, which serve as required security deposits for such facilities. These letters of credit expire at various times through 2016. At September 30, 2007, we had $3.6 million outstanding under standby letters of credit, which are secured by cash, cash equivalents and investments.

We currently anticipate that our current cash, cash equivalents and short-term investments, together with our line of credit, will be sufficient to meet our anticipated needs for working capital and capital expenditures for at least the next 12 months. However, we may be required, or could elect, to seek additional funding at any time. We cannot assure you that additional equity or debt financing, if required, will be available on acceptable terms, if at all.

Financial Risk Management

As we operate in a number of countries around the world, we face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and may have a material adverse impact on our consolidated financial results. Our primary exposures relate to non-United States Dollar-denominated revenues and operating expenses in Europe, Asia Pacific and Canada.

We use foreign currency forward contracts as risk management tools and not for speculative or trading purposes. Gains and losses on the changes in the fair values of the forward contracts are included in interest income and other, net in our consolidated statements of operations. We do not anticipate significant currency gains or losses in the near term.

We maintain investment portfolio holdings of various issuers, types and maturities. These securities are classified as available-for-sale and, consequently, are recorded on the consolidated balance sheet at fair value with unrealized gains and losses reported in accumulated other comprehensive income (loss) on our consolidated balance sheets. These securities are not leveraged and are held for purposes other than trading.

Off-Balance Sheet Arrangements

We do not use off-balance sheet arrangements with unconsolidated entities or related parties, nor do we use other forms of off-balance sheet arrangements such as research and development arrangements. Accordingly, our liquidity and capital resources are not subject to off-balance sheet risks from unconsolidated entities. As of September 30, 2007, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Securities and Exchange Commission Regulation S-K.

We have entered into operating leases for most United States and international offices in the normal course of business. These arrangements are often referred to as a form of off-balance sheet financing. As of September 30, 2007, we leased facilities and certain equipment under non-cancelable operating leases expiring between 2007 and 2016. Rent expense under operating leases were $2.0 million and $7.8 million for the three and nine months ended September 30, 2007, respectively, and $1.9 million and $5.9 million for the three and nine months ended September 30, 2006, respectively. Future minimum lease payments under our operating leases as of September 30, 2007 are detailed previously in “Liquidity and Capital Resources.”

In the normal course of business, we provide indemnifications of varying scope to customers against claims of intellectual property infringement made by third parties arising from the use of our products. Historically, costs related to these indemnification provisions have not been significant and we are unable to estimate the maximum potential impact of these indemnification provisions on our future consolidated results of operations.

Critical Accounting Policies and Estimates

In preparing our consolidated financial statements, we make estimates, assumptions and judgments that can have a significant impact on our revenues, income (loss) from operations and net income (loss), as well as on the value of certain assets and liabilities on our consolidated balance sheets. We base our estimates, assumptions and judgments on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our estimates, assumptions and judgments and make changes as deemed appropriate under the circumstances. We also discuss and review our critical accounting estimates with the Audit Committee of the Board of Directors. We believe that there are several accounting policies that are critical to an understanding of our historical and future performance, as these policies affect the reported amounts of revenues, expenses and significant estimates and judgments applied by management in the preparation of our consolidated financial statements. While there are a number of accounting policies, methods and estimates affecting our consolidated financial statements, areas that are of particular significance include:

	•		revenue recognition;

	•		estimating the allowance for doubtful accounts and sales returns;

	•		estimating the accrual for restructuring and excess facilities costs;

	•		accounting for stock-based compensation;

	•		accounting for income taxes; and

	•		valuation of long-lived assets, intangible assets and goodwill.

Revenue Recognition. We derive revenues from the license of our software products and from support, consulting and training services.

We recognize revenue using the “residual method” in accordance with Statement of Position (“SOP”) No. 97-2, Software Revenue Recognition, as amended by SOP No. 98-9, Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions. Under the residual method, for agreements that have multiple deliverables or “multiple element arrangements” (e.g., software products, services, support, etc), revenue is recognized for delivered elements only where vendor specific objective evidence of fair value exists for all of the undelivered elements. Our specific objective evidence of fair value for support is based on the renewal rate as stated in the agreement, so long as the rate is substantive. Our specific objective evidence of fair value for our other undelivered elements is based on the price of the element when sold separately. Once we have established the fair value of each of the undelivered elements, the dollar value of the arrangement is allocated to the undelivered elements first and the residual of the dollar value of the arrangement is then allocated to the delivered elements. At the outset of the arrangement with the customer, we

defer revenue for the fair value of undelivered elements (e.g., support, consulting and training) and recognize revenue for the remainder of the arrangement fee attributable to the elements initially delivered in the arrangement (i.e., software product) when the basic criteria in SOP No. 97-2 have been met. For arrangements that include a support renewal rate that we determine is not substantive, all revenue for such arrangement is recognized ratably over the applicable support period.

Under SOP No. 97-2, revenue attributable to an element in a customer arrangement is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, collectibility is probable and the arrangement does not require additional services that are essential to the functionality of the software.

At the outset of our customer arrangements, if we determine that the arrangement fee is not fixed or determinable, we recognize revenue when the arrangement fee becomes due and payable. We use judgment to assess whether the fee is fixed or determinable based on the payment terms associated with each transaction. If a portion of the license fee is due beyond our normal payments terms, which generally does not exceed 185 days from the invoice date, we do not consider the fee to be fixed or determinable. In these cases, we recognize revenue as the fees become due. We use judgment to determine collectibility on a case-by-case basis, following analysis of the general payment history within the geographic sales region and a customer’s years of operation, payment history and credit profile. If we determine from the outset of an arrangement that collectibility is not probable based upon our review process, we recognize revenue as payments are received. We periodically review collection patterns from our geographic locations to ensure historical collection results provide a reasonable basis for revenue recognition upon signing of an arrangement.

Support and service revenues consist of professional services and support fees. Professional services consist of software installation and integration, training and business process consulting. Professional services are predominantly billed on a time-and-materials basis and we recognize revenues as the services are performed. If uncertainty exists about our ability to complete the project, our ability to collect the amounts due, or in the case of fixed fee consulting arrangements, our ability to estimate the remaining costs to be incurred to complete the project, revenue is deferred until the uncertainty is resolved.

Support contracts are typically priced as a percentage of the product license fee and generally have a one-year term. Services provided to customers under support contracts include technical product support and unspecified product upgrades when and if available. Revenues from advanced payments for support contracts are recognized ratably over the term of the agreement.

Allowance for Doubtful Accounts. We make estimates as to the overall collectibility of accounts receivable and provide an allowance for accounts receivable considered uncollectible. In estimating this allowance, our management specifically analyzes our accounts receivable and historical bad debt experience, customer concentrations, customer credit-worthiness, current economic trends and changes in its customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Actual customer collections could differ from our estimates. In general, our allowance for doubtful accounts consists of specific accounts where we believe collection is not probable and an estimate, based on historical write-offs, of the potential write-offs for receivables not specifically reserved.

Allowance for Sales Returns. From time to time, a customer may return to us some or all of the software purchased. While our software and reseller agreements generally do not provide for a specific right of return, we may accept product returns in certain circumstances. To date, sales returns have been infrequent and not significant in relation to our total revenues. We make an estimate of our expected returns and provide an allowance for sales returns in accordance with SFAS No. 48, Revenue Recognition When Right of Return Exists. Management specifically analyzes our revenue transactions, customer software installation patterns, historical return pattern, current economic trends and customer payment terms when evaluating the adequacy of the allowance for sales returns.

Restructuring and Excess Facilities Accrual. In connection with our restructuring and facility consolidation plans, we perform evaluations of our then-current facilities requirements and identify facilities that are in excess of our current and estimated future needs. When a facility is identified as excess and we have ceased use of the facility, we accrue the fair value of the remaining lease obligation. In determining fair value of expected sublease income over the remainder of the lease term and of related exit costs, if any, we receive appraisals from real estate brokers to aid in our estimate. In addition, during the evaluation of our facilities requirements, we also identify operating equipment and leasehold improvements that may be impaired. Excluding the facilities that are currently subleased, our excess facilities are being marketed for sublease and are currently unoccupied. Accordingly, our estimate of sublease income from vacant excess

facilities could differ from actual results and such differences could require additional charges or credits that could materially affect our consolidated financial condition and results of operations. We reassess our excess facilities liability each period based on current real estate market conditions to determine if our estimates of the amount and timing of future sublease income are reasonable.

Accounting for Stock-Based Compensation. Effective January 1, 2006, we adopted SFAS No. 123R, Share-Based Payment, using the modified prospective transition method, in which compensation expense is recognized beginning with the effective date (a) based on the requirements of SFAS 123R for all share-based payments granted after the effective date and (b) based on the original provisions of SFAS No. 123, Accounting for Stock-Based Compensation, for all stock options granted to employees prior to the effective date of SFAS No. 123R that remain unvested on the effective date. Since we elected to use the modified prospective transition method, the consolidated results of operations have not been restated for prior periods. At September 30, 2007, there was $13.9 million of total unrecognized compensation cost related to unvested stock-based compensation arrangements granted under all equity compensation plans. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. We expect to recognize that cost over a weighted average period of 3.0 years.

Determining the appropriate fair value model and calculating the fair value of stock-based awards requires judgment, including estimating expected life, stock price volatility and forfeiture rates. We estimate the fair value of options granted using the Black-Scholes option valuation model and the assumptions are shown in the Notes to the Consolidated Financial Statements. We estimate the expected life of options granted based on the history of grants, exercises and cancellations in our option database. We also estimate the volatility based upon the historical volatility experienced in our stock price over the expected term of the option. To the extent volatility of our stock price changes in the future, our estimates of the fair value of options granted in the future would change, thereby increasing or decreasing stock-based compensation expense in future periods. The risk free interest rates are based on the United States Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the options. We have never paid any cash dividends on our common stock and we do not anticipate paying any cash dividends in the foreseeable future. Consequently, we used an expected dividend yield of zero in the Black-Scholes option valuation model. In addition, we apply an expected forfeiture rate when amortizing our expense. Our estimate of the forfeiture rate was based primarily upon historical experience of employee turnover. To the extent we revise our estimates in the future, our stock-based compensation expense could be materially impacted in the quarter of revision, as well as in following quarters. In the future, as empirical evidence regarding these input estimates is able to provide more directionally predictive results, we may change or refine our approach of deriving these input estimates. These changes could impact our fair value of options granted in the future.

Accounting for Income Taxes. We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

In preparing our consolidated financial statements, we assess the likelihood that our deferred tax assets will be realized from future taxable income. We also review our net operating loss and credit carryforwards to assess the impact of statutory limitations. We establish a valuation allowance if we determine that it is more likely than not that some portion of the deferred tax assets will not be realized. Changes in the valuation allowance, when recorded, would be included in our consolidated statements of operations as a provision for (benefit from) income taxes. We exercise significant judgment in determining our provisions for income taxes, our deferred tax assets and liabilities and our future taxable income for purposes of assessing our ability to utilize any future tax benefit from our deferred tax assets. As of September 30, 2007, we assessed the need for a valuation allowance against our deferred tax assets and based on earnings history and projected future taxable income, management determined that it is more likely than not that the deferred tax assets would not be fully realized.

We calculate our current and deferred tax provision based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. Adjustments based on filed returns are recorded when those returns are filed and the impacts of the adjustments are known.

As a matter of course we may be audited by various taxing authorities and those audits may result in proposed assessments where the ultimate resolution results in us owing additional taxes. We establish reserves when, despite our

belief that our tax return positions are appropriate and supportable under local tax law, we believe certain positions are likely to be challenged by tax authorities and we may not succeed in realizing the tax benefit. We evaluate these reserves each quarter and adjust the reserves and the related interest in light of changing facts and circumstances that affect the probability of realizing tax benefits, such as the progress of a tax audit or the expiration of a statute of limitations. We believe that our tax positions comply with applicable tax law and that we have adequately provided for any known tax contingencies, however, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the periods that assessments are resolved or when the statutes of limitations expire.

Impairment of Goodwill and Long-Lived Assets. We account for goodwill under SFAS No. 142, Goodwill and Other Intangible Assets. Under SFAS No. 142, we are required to perform an impairment review of goodwill on at least an annual basis. This impairment review involves a two-step process as follows:

	•		Step 1 — We compare the fair value of our single reporting unit to its carrying value, including goodwill. If the reporting unit’s carrying value, including goodwill, exceeds the unit’s fair value, we move on to Step 2. If the unit’s fair value exceeds the carrying value, no further work is performed and no impairment charge is necessary.

	•		Step 2 — We perform an allocation of the fair value of the reporting unit to its identifiable tangible and non-goodwill intangible assets and liabilities. This allocation derives an implied fair value for the reporting unit’s goodwill. We then compare the implied fair value of the reporting unit’s goodwill with the carrying amount of the reporting unit’s goodwill. If the carrying amount of the reporting unit’s goodwill is greater than the implied fair value of its goodwill, an impairment charge would be recognized for the excess.

We have determined that we have one reporting unit. We performed and completed the required annual impairment testing in the third quarter of 2007. Upon completing our review, we determined that the carrying value of the recorded goodwill had not been impaired and no impairment charge was recorded. Assumptions and estimates about future values and remaining useful lives are complex and often subjective. Although we determined in 2006 that the recorded goodwill had not been impaired, changes in the economy, the business in which we operate and our own relative performance may result in goodwill impairment in future periods. Accordingly, future changes in market capitalization could result in significantly different fair values of the reporting unit, which may impair goodwill.

We are also required to assess goodwill for impairment on an interim basis when indicators exist that goodwill may be impaired based on the factors mentioned above. For example, if our market capitalization declines below our net book value or we suffer a sustained decline in our stock price, we will assess whether the goodwill has been impaired. A significant impairment could result in additional charges and have a material adverse impact on our consolidated financial condition and operating results.

We account for the impairment and disposal of long-lived assets utilizing SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 requires that long-lived assets, such as property and equipment, and purchased intangible assets subject to amortization, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The recoverability of an asset is measured by a comparison of the carrying amount of an asset to its estimated undiscounted future cash flows expected to be generated. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. We do not believe there were any circumstances which indicated that the carrying value of an asset may not be recoverable.

Intangible assets, other than goodwill, are amortized over estimated useful lives of between 12 and 48 months. The amortization expense related to the intangible assets may be accelerated in the future if we reduce the estimated useful life of the intangible assets or determine that an impairment has occurred.

Recent Accounting Pronouncements

For recent accounting pronouncements see Note 10 Recent Accounting Pronouncements to the Condensed Consolidated Financial Statements under Part I, Item. 1.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We have no material changes to the quantitative and qualitative disclosures about market risk during the first nine months of 2007. Reference is made to our disclosures in Item 7A. of our report on Annual Report on Form 10-K for the year ended December 31, 2006.

ITEM 4. CONTROLS AND PROCEDURES.

Audit Committee Voluntary Stock Option Review

Evaluation of Disclosure Controls and Procedures

We carried out an evaluation required by Rule 13a-15 of the Securities Exchange Act of 1934 (the “Exchange Act”), under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q.

The evaluation of our disclosure controls and procedures included a review of our processes and implementation and the effect on the information generated for use in this Quarterly Report on Form 10-Q. In the course of this evaluation, we sought to identify any significant deficiencies or material weaknesses in our disclosure controls and procedures, to determine whether we had identified any acts of fraud involving personnel who have a significant role in our disclosure controls and procedures, and to confirm that any necessary corrective action, including process improvements, was taken. This type of evaluation is done every quarter so that our conclusions concerning the effectiveness of these controls can be reported in the reports we file or submit under the Exchange Act. The overall goals of these evaluation activities are to monitor our disclosure controls and procedures and to make modifications as necessary. We intend to maintain these disclosure controls and procedures, modifying them as circumstances warrant.

Based on their evaluation as of September 30, 2007, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in our reports filed or submitted under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Management’s Consideration of the Restatement

As discussed in the Explanatory Note to this Quarterly Report on Form 10-Q and in our consolidated financial statements included in Item 8 of the Annual Report on Form 10-K for the year ended December 31, 2006, we restated previously issued consolidated financial statements for each of the years ended from December 31, 1999 through 2005, each of the quarters in 2005 and the balance sheets for the first three quarters of 2006. The accounting errors that lead to these restatements arose from deficiencies in our historical stock option grant procedures that we identified as a result of a voluntary review of our historical stock option granting practices and related accounting issues undertaken by the Audit Committee of our board of directors. In connection with that review, we determined that our historical grant procedures were not adequately designed to ensure the proper accounting for option grants and the contemporaneous documentation of grants. The Audit Committee found these deficiencies occurred predominately during the period from 1999 through 2001.

Beginning in 2001, we implemented improved procedures, processes and systems to provide additional safeguards and greater internal control over our stock option granting and administration. These improvements included issuing employee new hire, promotion and merit grants on the last trading day of each month. Also, prior to 2006, we implemented improvements to procedures, processes, and systems to provide additional safeguards and greater internal control over the stock option granting and administration functions. These improvements included:

•

Documenting and assessing the design and operation of internal controls;

	•		Segregating responsibilities, adding reviews and reconciliations;

	•		Upgrading systems that support the processes;

	•		Providing training to the stock administration function; and

	•		Identifying key controls, developing test plans, and testing controls in the stock option granting and administration function.

We believe these changes remediated the historical control deficiencies. We did not identify any material weakness in our stock option grant processes or internal control over financial reporting as of December 31, 2006.

In 2007, the Audit Committee recommended enhancements to our stock option grant procedures to ensure that future granting actions are documented and accounted for properly. In October 2007, we have adopted all of the Audit Committee’s recommendations, including updating our equity compensation award policy that provides for the methodology of determining the timing and exercise price of all awards and related procedures.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting during the three months ended September 30, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or internal control over financial reporting will prevent all errors or fraud. An internal control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all internal control systems, no evaluation of controls can provide absolute assurance that all control issues, errors and instances of fraud, if any, within Interwoven, Inc. have been detected.

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

Information with respect to this Item may be found under the caption “Litigation” and in Note 11 to the Condensed Consolidated Financial Statements under Part I, Item 1 of this report, which information is incorporated into this Item by reference.

ITEM 1A. RISK FACTORS.

Factors That May Impact Our Business

We operate in a dynamic and rapidly changing business environment that involves many risks and uncertainties. In Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2006, we discussed the factors that could cause, or contribute to causing, actual results to differ materially from what we expect or from any historical patterns or trends. These risks include those that we consider to be significant to your decision whether to invest in our common stock at this time. There may be risks that you view differently than we do, and there are other risks and uncertainties that we do not presently know of or that we currently deem immaterial, but that may, in fact, harm our business in the future. If any of these events occur, our business, results of operations and financial condition could be seriously harmed, the trading price of our common stock could decline and you may lose part or all of your investment. The description below includes any material changes to and supersedes the description of the risk factors affecting our business previously disclosed in Part I, Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended

December 31, 2006. You should consider carefully the following factors, in addition to other information in this Quarterly Report on Form 10-Q, in evaluating our business.

The Audit Committee review of our historical stock option practices and resulting restatement has been time consuming and expensive, and may have a material adverse effect on us.

The Audit Committee review of our historical stock option granting practices and the related restatement activities have required us to expend a significant amount of management time and to incur significant accounting, legal and other expenses. It is difficult for us to predict how much time will be required for us to resolve any follow-up matters that may arise as a result of the review and restatement, or what additional resources may be required. The cost and time required to complete any follow-up required as a result of the Audit Committee review, and to complete the restatement of our consolidated financial statements and the filing of our periodic reports with the Securities and Exchange Commission may have a material adverse effect on our operating results or cause the price of our common stock to decline.

We may be named in lawsuits in the future. Any such litigation could become time consuming and expensive and could result in the payment of significant judgments and settlements, which could have a material adverse effect on our financial condition and results of operations.

We may face future government actions, shareholder or derivative lawsuits and other legal proceedings related to the Audit Committee review of our historical stock option practices and the related restatement activities. We cannot predict when and whether any such lawsuits or other actions will occur, nor can we predict the outcome of any such lawsuits or other actions, or the amount of time and expense that will be required to resolve these lawsuits or other actions. If any such lawsuits or other actions occur, they may be time consuming and expensive, and unfavorable outcomes in any such cases could have a materially adverse effect on our business, financial condition and results of operations. Any of these events may require us to expend significant management time and to incur significant accounting, legal and other expenses, which could divert attention and resources from our business and adversely affect our financial condition and results of operations.

Our insurance coverage may not cover all or part of any such lawsuits or actions, in part because we have a significant deductible on certain aspects of the coverage. In addition, subject to certain limitations, we may be obligated to indemnify our current and former directors, officers and employees. We currently hold insurance policies for the benefit of our directors and officers, but it may not be sufficient to cover costs we may incur. Furthermore, the insurers may seek to deny or limit coverage in these matters, in which case we may have to self-fund all or a substantial portion of our indemnification obligations. If we need to self-fund, there is no assurance that we will prevail in our efforts to recover payment from our insurers.

Failure to maintain effective internal control over financial reporting may cause us to delay filing our periodic reports with the Securities and Exchange Commission, affect our NASDAQ Global Market listing and adversely affect our stock price.

Under Securities and Exchange Commission rules, we are required to include a report of management on our internal control over financial reporting in our Annual Report on Form 10-K that contains an assessment by management of the effectiveness of our internal control over financial reporting. In addition, our independent registered public accounting firm must attest to and report on management’s assessment of the effectiveness of the internal control over financial reporting. If we determine that our internal control over financial reporting is not effective, investors may lose confidence in the reliability of our financial statements, which could negatively impact the price of our common stock.

The Securities and Exchange Commission may disagree with the manner in which we have accounted for and reported, or not reported, the financial impact of the stock option grants that are being remeasured, and there is a risk that its inquiry could lead to circumstances in which we may have to further restate our prior consolidated financial statements, amend prior filings with the Securities and Exchange Commission, or otherwise take other actions not currently contemplated. In addition, the Securities and Exchange Commission may issue guidance or disclosure requirements related to the financial impact of past option grant measurement date errors that may require us to amend this filing or prior filings with the Securities and Exchange Commission to provide additional disclosures pursuant to

this guidance. Any such circumstance could also lead to future delays in filing our subsequent Securities and Exchange Commission reports and, ultimately, the delisting of our common stock from The NASDAQ Global Market.

We have not been in compliance with NASDAQ listing requirements and remain subject to the risk of our common stock being delisted from The NASDAQ Global Market, which could, among other things, reduce the price of our common stock and the levels of liquidity available to our stockholders.

Pending completion of our Audit Committee’s review of our historical stock option granting practices and related accounting, we were delinquent in filing our periodic reports with the Securities and Exchange Commission and, consequently, we were not in compliance with applicable NASDAQ listing requirements and our common stock became subject to delisting from The NASDAQ Global Market. The Board of Directors of The NASDAQ Stock Market, LLC called for review and stayed a decision of the NASDAQ Listing and Hearings Review Council to suspend our common stock from trading on The NASDAQ Global Market on December 5, 2007 if we did not file all our delinquent Securities and Exchange Commission reports and restatements by December 3, 2007, permitting our common stock to remain listed on The NASDAQ Global Market until we were able to file this Annual Report on Form 10-K for the year ended December 31, 2006 and our Quarterly Reports on Form 10-Q for the periods ended March 31, 2007, June 30, 2007 and September 30, 2007. We are waiting to receive confirmation that we have remedied our non-compliance with NASDAQ listing requirements. If, after completion of its compliance protocols, The NASDAQ Stock Market does not confirm that we are in compliance with the applicable listing requirements, our common stock may be delisted from The NASDAQ Global Market and it would be uncertain when, if ever, our common stock would be relisted. Even if we do regain compliance with the applicable NASDAQ listing requirements, our common stock could be delisted in the future if we do not maintain compliance with applicable NASDAQ listing requirements. For example, we will not be able to hold our 2007 Annual Meeting of Stockholders on or before December 31, 2007, which would constitute a failure to meet applicable NASDAQ listing requirements. It is expected that we will receive a Staff Determination Letter from NASDAQ notifying us that our common stock would be subject to delisting as a result of our noncompliance with NASDAQ listing requirements for failure to hold an annual meeting of stockholders on a timely basis, and of our right to request a hearing before the NASDAQ Listing Qualifications Panel. If our common stock is delisted from The NASDAQ Global Market, there can be no assurance that our common stock would be relisted or we will be able to obtain listing of our common stock on another national securities exchange. If we are not successful in listing our common stock on a national securities exchange, the price of our common stock, the ability of our stockholders to trade in our stock, and our ability to raise capital could be adversely affected.

We have only recently begun to report net income and may not be able to sustain profitability.

We have incurred operating losses for most of our history. Although we have recently begun reporting net income, we had an accumulated deficit of $418.0 million as of September 30, 2007. We must increase both our license and support and service revenues to sustain profitable operations and positive cash flows. If we are able to maintain profitability and positive cash flows, we cannot assure you that we can sustain or increase profitability or cash flows on a quarterly or annual basis in the future. Failure to achieve such financial performance would likely cause the price of our common stock to decline. In addition, if revenues decline, resulting in greater operating losses and significant negative cash flows, our business could fail and the price of our common stock would decline.

Many factors can cause our operating results to fluctuate and if we fail to satisfy the expectations of investors or securities analysts, our stock price may decline.

Our quarterly and annual operating results have fluctuated significantly in the past and we expect unpredictable fluctuations in the future. The main factors impacting these fluctuations are likely to be:

	•		the discretionary nature of our customers’ purchases and their budget cycles;

	•		the inherent complexity, length and associated unpredictability of our sales cycle;

	•		seasonal fluctuations in information technology purchasing;

	•		the success or failure of any of our product offerings to meet with customer acceptance;

	•		delays in recognizing revenue from license transactions;

	•		timing of new product releases;

	•		timing of large customer orders;

	•		changes in competitors’ product offerings;

	•		sales force capacity and the influence of resellers and systems integrator partners;

	•		our ability to integrate newly acquired products or technologies with our existing products and effectively sell newly acquired or enhanced products; and

	•		the level of our sales incentive and commission-related expenses.

Many of these factors are beyond our control. Further, because we experience seasonal variations in our operating results as part of our normal business cycle, we believe that quarterly comparisons of our operating results are not necessarily meaningful and that you should not rely on the results of one quarter as an indication of our future performance. If our results of operations do not meet our public forecasts or the expectations of securities analysts and investors, the price of our common stock is likely to decline.

Sales cycles for our products are generally long and unpredictable, so it is difficult to forecast our future results.

The length of our sales cycle — the period between initial contact with a prospective customer and the licensing of our software applications — typically ranges from six to twelve months and can be more than twelve months. Customer orders often include the purchase of multiple products. These kinds of orders are complex and difficult to complete because prospective customers generally consider a number of factors over an extended period of time before committing to purchase a suite of products or applications. Prospective customers consider many factors in evaluating our software, and the length of time a customer devotes to evaluation, contract negotiation and budgeting processes vary significantly from company to company. As a result, we spend a great deal of time and resources informing prospective customers about our solutions and services, incurring expenses that will lower our operating margins if no sale occurs. Even if a customer chooses to buy our software products or services, many factors affect the timing of revenue recognition as defined under accounting principles generally accepted in the United States of America, which makes our revenues difficult to forecast. These factors contributing to the timing variability of revenue recognition include the following:

	•		Licensing of our software products is often an enterprise-wide decision by our customers that involves many customer-specific factors, so our ability to make a sale may be affected by changes in the strategic importance of a particular project to a customer, budgetary constraints of the customer or changes in customer personnel.

	•		Customer approval and expenditure authorization processes can be difficult and time consuming, and delays in the process could impact the timing and amount of revenues recognized in a quarter.

	•		Changes in our sales incentive plans may have unexpected effects on our sales cycle and contracting activities.

	•		The significance and timing of our software enhancements, and the introduction of new software by our competitors, may affect customer purchases.

Our sales cycles are affected by intense customer scrutiny of software purchases regardless of transaction size. If our sales cycles lengthen, our future revenue could be lower than expected, which would have an adverse impact on our consolidated operating results and could cause our stock price to decline.

Our sales incentive plans are primarily based on quarterly and annual quotas for sales representatives and some sales support personnel, and include accelerated commission rates if a representative exceeds their assigned sales quota. The concentration of sales orders with a small number of sales representatives has resulted, and in the future may result, in commission expense exceeding forecasted levels, which would result in higher sales and marketing expenses.

Contractual terms or issues that arise during the negotiation process may delay anticipated transactions and revenue.

Because our software and solutions are often a critical element to the information technology systems of our customers, the process of contractual negotiation is often protracted. The additional time needed to negotiate mutually acceptable terms that culminate in an agreement to license our products can extend the sales cycle.

Several factors may also require us to defer recognition of license revenue for a significant period of time after entering into a license agreement, including instances in which we are required to deliver either specified additional

products or product upgrades for which we do not have vendor-specific objective evidence of fair value. We have a standard software license agreement that provides for revenue recognition assuming that, among other factors, delivery has taken place, collectibility from the customer is probable and no significant future obligations or customer acceptance rights exist. However, customer negotiations and revisions to these terms could have an impact on our ability to recognize revenue at the time of delivery.

In addition, slowdowns or variances from our expectations of our quarterly licensing activities may result in fewer customers, which could result in lower revenues from our customer training, consulting services and customer support organizations. Our ability to maintain or increase support and service revenues is highly dependent on our ability to increase the number of enterprises that license our software products and the number of seats licensed by those enterprises.

Our revenues depend on a small number of products and markets, so our results are vulnerable to unexpected shifts in demand.

For the years ended December 31, 2006, 2005 and 2004 and for the nine months ended September 30, 2007, we believe that a significant portion of our total revenue was derived from our Interwoven TeamSite and Interwoven WorkSite products and related services, and we expect this to be the case in future periods. Accordingly, any decline in the demand for these products and related services will have a material and adverse effect on our consolidated financial results.

We also derive a significant portion of our revenues from a few vertical markets. In particular, our WorkSite product is primarily sold to professional service organizations, such as law firms, accounting firms, consulting firms and corporate legal departments. In addition, we derive a significant amount of our revenue from companies in the financial services industry. In order to sustain and grow our business, we must continue to sell our software products and services into these vertical markets. Shifts in the dynamics of these vertical markets, such as new product introductions by our competitors, could seriously harm our prospects. Further, our reliance on a few vertical markets subjects us to the risk that changing economic conditions that are particularly germane to particular customer markets within that vertical could affect our operating results. For example, if the recent turbulence in the financial markets continues, our customers in the financial services industry may reduce spending and our results could suffer.

To increase our sales outside our core vertical markets, for example to large multi-national corporations in manufacturing, telecommunications and governmental entities, requires us to devote time and resources to hire and train sales employees familiar with those industries. Even if we are successful in hiring and training sales teams, customers in other industries may not need or sufficiently value our products.

Support and service revenues have represented a large percentage of our total revenues. Our support and service revenues are vulnerable to reduced demand and increased competition.

Our support and service revenues represented approximately 62%, 61% and 58% of total revenues for the years ended December 31, 2006, 2005 and 2004, respectively and 62% for the nine months ended September 30, 2007. Support and service revenues depend, in part, on our ability to license software products to new and existing customers that generate follow-on consulting, training and support revenues. Thus, any reduction in license revenue is likely to result in lower support and services revenue in the future.

The demand for consulting, training and support services is affected by competition from independent service providers and strategic partners, resellers and other systems integrators with knowledge of our software products. Factors other than price may not be determinative of whether prospective customers of consulting services engage us or alternative service providers. We have experienced increased competition for consulting services engagements, which has resulted in an overall decrease in average billing rates for our consultants and price pressure on our software support products. If our business continues to be affected this way, our support and service revenues and the related gross margin from these revenues may decline.

For the years ended December 31, 2006, 2005 and 2004, we recognized support revenues of $86.6 million, $76.8 million and $65.1 million, respectively, and $71.1 million for the nine months ended September 30, 2007. Our support agreements typically have a term of one year and are renewable thereafter for periods generally of one year. Customer support revenues are primarily influenced by the number and size of new support contracts sold in connection with

software licenses and the renewal rate of existing support contracts. Customers may elect not to renew their support agreements, renew their support contracts at lower prices or may reduce the license software quantity under their support agreements, thereby reducing our future support revenue.

Our revenues from international operations are a significant part of our overall operating results.

We have established offices in various international locations in Europe and Asia Pacific and we derive a significant portion of our revenues from these international locations. For the years ended December 31, 2006, 2005 and 2004, revenues from our international operations were approximately 36%, 32% and 34% of our total revenues, respectively, and were 37% for the nine months ended September 30, 2007. We anticipate devoting significant resources and management attention to international opportunities, which subjects us to a number of risks and uncertainties including:

	•		difficulties in attracting and retaining staff (particularly sales personnel) and managing foreign operations;

	•		the expense of foreign operations and compliance with applicable laws;

	•		political and economic instability;

	•		the expense of localizing our products for sale in various international markets and providing support and services in the local language;

	•		reduced protection for intellectual property rights in some countries;

	•		protectionist laws and business practices that favor local competitors;

	•		difficulties in the handling of transactions denominated in foreign currency and the risks associated with foreign currency fluctuations;

	•		regulation by U.S. federal and state laws, including the Foreign Corrupt Practices Act, and foreign laws, regulations and policies;

	•		changes in multiple tax and regulatory requirements;

	•		the effect of longer sales cycles and collection periods or seasonal reductions in business activity; and

	•		economic conditions in international markets.

Any of these risks could reduce revenues from international locations or increase our cost of doing business outside of the United States.

The timing of large customer orders may have a significant impact on our consolidated financial results from period to period.

Our ability to achieve our forecasted quarterly earnings is dependent on receiving a significant number of license transactions in the mid to high six-figure range or possibly even larger orders. From time to time, we receive large customer orders that have a significant impact on our consolidated financial results in the period in which the order is recognized as revenue. We had four individual license transactions in excess of $1.0 million in the nine months ended September 30, 2007 and we had three, four and three such license transactions in 2006, 2005 and 2004, respectively. Because it is difficult for us to accurately predict the timing of large customer orders, our consolidated financial results are likely to vary materially from quarter to quarter based on the receipt of such orders and their ultimate recognition as revenue. Additionally, the loss or delay of an anticipated large order in a given quarterly period could result in a shortfall of revenues from anticipated levels. Any shortfall in revenues from levels anticipated by our stockholders and securities analysts could have a material and adverse impact on the trading price of our common stock.

We must attract and retain qualified personnel to be successful and competition for qualified personnel is increasing in our market.

Our success depends to a significant extent upon the continued contributions of our key management, technical, sales, marketing and consulting personnel, many of whom would be difficult to replace. The loss of one or more of these employees could harm our business. We do not have key person life insurance for any of our key personnel. Our success also depends on our ability to identify, attract and retain qualified technical, sales, marketing, consulting and managerial personnel. Competition for qualified personnel is particularly intense in our industry and in our area. This makes it difficult to retain our key employees and to recruit highly qualified personnel. We have experienced, and may

continue to experience, difficulty in hiring and retaining candidates with appropriate qualifications. To be successful, we need to hire candidates with appropriate qualifications and retain our key executives and employees.

The volatility of our stock price has had an impact on our ability to offer competitive equity-based incentives to current and prospective employees, thereby affecting our ability to attract and retain highly qualified technical personnel. If these adverse conditions continue, we may not be able to hire or retain highly qualified employees in the future and this could harm our business. In addition, regulations adopted by The NASDAQ Stock Market requiring stockholder approval for all stock option plans, as well as regulations adopted by the New York Stock Exchange prohibiting NYSE member organizations from giving a proxy to vote on equity compensation plans unless the beneficial owner of the shares has given voting instructions, could make it more difficult for us to grant options to employees in the future. In addition, SFAS No. 123R, Share-Based Payment, which came into effect on January 1, 2006, requires us to record stock-based compensation expense for the fair value of equity awards granted to employees. To the extent that new regulations make it more difficult or expensive to grant equity awards to employees, we may incur increased cash compensation costs or find it difficult to attract, retain and motivate employees, either of which could harm our business.

We may not realize the anticipated benefits of past or future acquisitions, and integration of these acquisitions may disrupt our business and management.

In the past, we have acquired companies, products or technologies, such as our recently completed acquisition of Optimost, and we are likely to do so in the future. We may not realize the anticipated benefits of this or any other acquisition and each acquisition has numerous risks. These risks include:

	•		difficulty in assimilating the operations and personnel of the acquired company;

	•		difficulty in effectively integrating the acquired technologies or products with our current products and technologies;

	•		difficulty in maintaining controls, procedures and policies during the transition and integration;

	•		disruption of our ongoing business and distraction of our management and employees from other opportunities and challenges due to integration issues;

	•		difficulty integrating the acquired company’s accounting, management information, human resources and other administrative systems;

	•		inability to retain key technical and managerial personnel of the acquired business;

	•		inability to retain key customers, distributors, vendors and other business partners of the acquired business;

	•		inability to achieve the financial and strategic goals for the acquired and combined businesses;

	•		incurring acquisition-related costs or amortization costs for acquired intangible assets that could impact our operating results;

	•		potential impairment of our relationships with employees, customers, partners, distributors or third-party providers of technology or products;

	•		potential failure of the due diligence processes to identify significant issues with product quality, architecture and development, integration obstacles or legal and financial contingencies, among other things;

	•		incurring significant exit charges if products acquired in business combinations are unsuccessful;

	•		incurring additional expenses if disputes arise in connection with any acquisition;

	•		potential inability to assert that internal controls over financial reporting are effective;

	•		potential inability to obtain, or obtain in a timely manner, approvals from governmental authorities, which could delay or prevent such acquisitions; and

	•		potential delay in customer and distributor purchasing decisions due to uncertainty about the direction of our product offerings.

Mergers and acquisitions of high technology companies are inherently risky and ultimately, if we do not complete the integration of acquired businesses successfully and in a timely manner, we may not realize the benefits of the acquisitions to the extent anticipated, which could adversely affect our business, financial condition or results of operations.

In addition, the terms of our acquisitions may provide for future obligations, such as our payment of additional consideration upon the occurrence of specified future events or the achievement of future revenues or other financial milestones. To the extent these events or achievements involve subjective determinations, disputes may arise that require a third party to assess, resolve and/or make such determinations, or involve arbitration or litigation. For example, several of our recent acquisitions have included earn-out arrangements that contain audit rights. Should a dispute arise over determinations made under those arrangements, we may be forced to incur additional costs and spend time defending our position, and may ultimately lose the dispute, any of these outcomes would cause us not to realize all the anticipated benefits of the related acquisition and could impact our consolidated results of operations.

Economic conditions and significant world events have harmed and could continue to negatively affect our revenues and results of operations.

Our consolidated financial results could also be significantly and adversely affected by geopolitical concerns and world events, such as wars and terrorist attacks. Our revenues and financial results have been and could be negatively affected to the extent geopolitical concerns continue and similar events occur or are anticipated to occur.

Economic conditions and significant world events have harmed and could continue to negatively affect our revenues and results of operations.

Our revenue growth and profitability depend on the overall demand for our content management software applications and solutions. The decline in customer spending on many kinds of information technology initiatives worldwide over the first half of this decade has resulted in lower revenues, longer sales cycles, lower average selling prices and customer deferral of orders. To the extent that information technology spending, particularly spending on public-facing Web applications, does not continue to improve or declines from current levels, the demand for our products and services, and therefore our future revenues, will be negatively affected. Further, declines in our customers’ markets or in general economic conditions could reduce demand for our software applications and services, which would negatively affect our future revenues. For example, if the recent turbulence in the financial markets continues, our customers in the financial services industry may reduce spending and our results could suffer. If general or market-specific economic conditions worsen, the time it takes us to collect accounts receivable could lengthen and some accounts receivable could become uncollectible. As a result of these factors, our consolidated financial results could be significantly and adversely affected.

Increasing competition could cause us to reduce our prices and result in lower gross margins or loss of market share.

The enterprise content management market is rapidly changing and highly competitive. Our current competitors include:

	•		companies addressing needs of the market in which we compete such as EMC Corporation, IBM, Microsoft Corporation, Open Text Corporation, Oracle Corporation, Vignette Corporation and Xerox Corporation;

	•		intranet and groupware companies, such as IBM, Microsoft Corporation and Novell, Inc.;

	•		open source vendors, such as OpenCms, Mambo and RedHat, Inc.; and

	•		in-house development efforts by our customers and partners.

We also face potential competition from our strategic partners, such as Microsoft Corporation and IBM, or from other companies that may in the future decide to compete in our market, including companies that currently only compete with us for sales to small and medium sized enterprises. Many existing and potential competitors have longer operating histories, greater name recognition and greater financial, technical and marketing resources than we do. Many of these companies can also take advantage of extensive customer bases and adopt aggressive pricing policies to gain market share. Potential competitors may bundle their products in a manner that discourages users from purchasing our products or makes their products more appealing. Barriers to entering the content management software market are relatively low. Competitive pressures may also increase with the consolidation of competitors within our market and partners in our distribution channel, such as the acquisition of Stellent, Inc. by Oracle Corporation; Captiva Software Corporation, Documentum, Inc. and RSA Security Inc. by EMC Corporation; FileNet, Inc. by IBM; Artesia Technologies, Inc. and Hummingbird, Ltd. by Open Text Corporation and TOWER Technology Pty Ltd. and Epicentric, Inc. by Vignette Corporation.

With the intense competition in enterprise content management, some of our competitors, from time to time, have reduced their price proposals in an effort to strengthen their bids and expand their customer bases at our expense. Even if these tactics are unsuccessful, they could delay decisions by some customers who would otherwise purchase our software products and may reduce the ultimate selling price of our software and services, reducing our gross margins.

Our future revenues depend in part on our installed customer base continuing to license additional products, renew customer support agreements and purchase additional services.

Our installed customer base has traditionally generated additional license and support and service revenues. In addition, the success of our strategic plan depends on our ability to cross-sell products to our installed base of customers, such as the products acquired in our recent acquisitions. Our ability to cross-sell new products may depend in part on the degree to which new products have been integrated with our existing applications, which may vary with the timing of new product acquisitions or releases. In future periods, customers may not necessarily license additional products or contract for additional support or other services. Customer support agreements are generally renewable annually at a customer’s option, and there are no mandatory payment obligations or obligations to license additional software. Customer support revenues are primarily influenced by the number and size of new support contracts sold in connection with software licenses and the renewal rate (both pricing and participation) of existing support contracts. If our customers decide to cancel their support agreements or fail to license additional products or contract for additional services, or if they reduce the scope of their support agreements, revenues could decrease and our operating results could be adversely affected.

Because a significant portion of our revenues are influenced by referrals from strategic partners and, in some cases, sold through resellers, our future success depends in part on those partners, but their interests may differ from ours.

Our direct sales force depends, in part, on strategic partnerships, marketing alliances and resellers to obtain customer leads, referrals and distribution. Approximately 64% of our new license orders from customers for the year ended December 31, 2006 and the nine months ended September 30, 2007 were influenced by or co-sold with our strategic partners and resellers. If we are unable to maintain our existing strategic relationships or fail to enter into additional strategic relationships, our ability to increase revenues will be harmed, and we could also lose anticipated customer introductions and co-marketing benefits and lose our investments in those relationships. In addition, revenues from any strategic partnership, no matter how significant we expect it to be, depend on a number of factors outside our control, are highly uncertain and may vary from period to period. Our success depends in part on the success of our strategic partners and their ability and willingness to market our products and services successfully. Losing the support of these third parties may limit our ability to compete in existing and potential markets. These third parties are under no obligation to recommend or support our software products and could recommend or give higher priority to the products and services of other companies, including those of one or more of our competitors, or to their own products. Our inability to gain the support of resellers, consulting and systems integrator firms or a shift by these companies toward favoring competing products could negatively affect our software license and support and service revenues.

Some systems integrators also engage in joint marketing and sales efforts with us. If our relationships with these parties fail, we will have to devote substantially more resources to the sale and marketing of our software products. In many cases, these parties have extensive relationships with our existing and potential customers and influence the decisions of these customers. A number of our competitors have longer and more established relationships with these

systems integrators than we do and, as a result, these systems integrators may be more inclined to recommend competitors’ products and services.

We may also be unable to grow our revenues if we do not successfully obtain leads and referrals from our customers. If we are unable to maintain these existing customer relationships or fail to establish additional relationships of this kind, we will be required to devote substantially more resources to the sales and marketing of our products. As a result, we depend on the willingness of our customers to provide us with introductions, referrals and leads. Our current customer relationships do not afford us any exclusive marketing and distribution rights. In addition, our customers may terminate their relationship with us at any time, pursue relationships with our competitors or develop or acquire products that compete with our products. Even if our customers act as references and provide us with leads and introductions, we may not grow our revenues or be able to maintain or reduce sales and marketing expenses.

We also rely on our strategic relationships to aid in the development of our products. Should our strategic partners not regard us as significant to their own businesses, they could reduce their commitment to us or terminate their relationship with us, pursue competing relationships or attempt to develop or acquire products or services that compete with our products and services.

Fluctuations in the exchange rates of foreign currency, particularly in Euro, British Pound and Australian Dollar and the various other local currencies of Europe and Asia, may harm our business.

We are exposed to movements in foreign currency exchange rates because we translate foreign currencies into United States Dollars for reporting purposes. Our primary exposures have related to operating expenses and sales in Europe and Asia that were not United States Dollar-denominated. Weakness in the United States Dollar compared to foreign currencies has increased significantly increased the cost of our European-based operations in recent periods, as compared to the corresponding period in the prior year. We are unable to predict the extent to which expenses in future periods will be impacted by changes in foreign currency exchange rates. To the extent our international revenues and operations continue to grow, currency fluctuations could have a material adverse impact on our consolidated financial condition and results of operations.

Our stock price may be volatile, and your investment in our common stock could suffer a decline in value.

The market prices of the securities of software companies, including our own, have been extremely volatile and often unrelated to their operating performance. Broad market and industry factors may adversely affect the market price of our common stock, regardless of our actual operating performance. Factors that could cause fluctuations in the price of our stock may include, among other things:

	•		actual or anticipated variations in quarterly operating results, or key balance sheet metrics such as days sales outstanding;

	•		changes in financial estimates by us or in financial estimates or recommendations by any securities analysts who cover our stock;

	•		operating performance and stock market price and volume fluctuations of other publicly traded companies and, in particular, those that are deemed comparable to us;

	•		announcements by us or our competitors of new products or services, technological innovations, significant acquisitions, strategic relationships or divestitures;

	•		our failure to realize the expected benefits of acquisitions;

	•		announcements of investigations or regulatory scrutiny of our operations or lawsuits filed against us;

	•		announcements of negative conclusions about our internal controls;

	•		articles in periodicals covering us, our competitors or our markets;

	•		reports issued by market research and financial analysts;

	•		capital outlays or commitments;

	•		additions or departures of key personnel;

	•		sector factors including conditions or trends in our industry and the technology arena; and

	•		overall stock market factors, such as the price of oil futures, interest rates and the performance of the economy.

These fluctuations have made, and may make it more difficult to use our stock as currency to make acquisitions that might otherwise be advantageous, or to use stock compensation equity instruments as a means to attract and retain employees. Any shortfall in revenue or operating results compared to expectations could cause an immediate and significant decline in the trading price of our common stock. In addition, we may not learn of such shortfalls until late in the quarter and may not be able to adjust successfully to these shortfalls, which could result in an even more immediate and greater decline in the trading price of our common stock. In the past, securities class action litigation has often been initiated against companies following periods of volatility in their stock price. If we become subject to any litigation of this type, we could incur substantial costs and our management’s attention and resources could be diverted while the litigation is ongoing.

Our failure to deliver defect-free software could result in losses and harmful publicity.

Our software products are complex and have in the past and may in the future contain defects or failures that may be detected at any point in the product’s life. We have discovered software defects in the past in some of our products after their release. Although past defects have not had a material effect on our results of operations, in the future we may experience delays or lost revenues caused by new defects. Despite our testing, defects and errors may still be found in new or existing products, and may result in delayed or lost revenues, loss of market share, failure to achieve market acceptance, reduced customer satisfaction, diversion of development resources and damage to our reputation. As has occurred in the past, new releases of products or product enhancements may require us to provide additional services under our support contracts to ensure proper installation and implementation.

Errors in our application suite may be caused by defects in third-party software incorporated into our applications. If so, we may not be able to fix these defects without the cooperation of these software providers. Since these defects may not be as significant to our software providers as they are to us, we may not receive the rapid cooperation that we may require. We may not have the contractual right to access the source code of third-party software and, even if we access the source code, we may not be able to fix the defect.

As customers rely on our products for critical business applications, errors, defects or other performance problems of our products or services might result in damage to the businesses of our customers. Consequently, these customers could delay or withhold payment to us for our software and services, which could result in an increase in our provision for doubtful accounts or an increase in collection cycles for accounts receivable, both of which could disappoint investors and result in a significant decline in our stock price. In addition, these customers could seek significant compensation from us for their losses. Even if unsuccessful, a product liability claim brought against us would likely be time consuming and costly and harm our reputation, and thus our ability to license products to new customers. Even if a suit is not brought, correcting errors in our application suite could increase our expenses.

If our products cannot scale to meet the demands of thousands of concurrent users, our targeted customers may not license our software, which will cause our revenues to decline.

Our strategy includes targeting large organizations that require our enterprise content management software because of the significant amounts of content that these companies generate and use. For this strategy to succeed, our software products must be highly scalable and accommodate thousands of concurrent users. If our products cannot scale to accommodate a large number of concurrent users, our target markets will not accept our products and our business and operating results will suffer.

If our customers cannot successfully implement large-scale deployments of our software or if they determine that our products cannot accommodate large-scale deployments, our customers will not license our solutions and this will materially adversely affect our consolidated financial condition and operating results.

If our products do not operate with a wide variety of hardware, software and operating systems used by our customers, our revenues would be harmed.

We currently serve a customer base that uses a wide variety of constantly changing hardware, software applications and operating systems. For example, we have designed our products to work with databases and servers developed by, among others, Microsoft Corporation, Sun Microsystems, Inc., Sybase, Inc., Oracle Corporation and IBM and with common enterprise software applications, such as Microsoft Office, WordPerfect, Lotus Notes and Novell GroupWise. We must continually modify and enhance our software products to keep pace with changes in computer hardware and

software and database technology as well as emerging technical standards in the software industry. We further believe that our application suite will gain broad market acceptance only if it can support a wide variety of hardware, software applications and systems. If our products were unable to support a variety of these products, our business would be harmed. Additionally, customers could delay purchases of our software until they determine how our products will operate with these updated platforms or applications.

Our products currently operate on various Microsoft Windows platforms, Linux, IBM AIX, IBM zLinux, Hewlett Packard UX and Sun Solaris operating environments. If other platforms become more widely used, we could be required to convert our server application products to additional platforms. We may not succeed in these efforts, and even if we do, potential customers may not choose to license our products. In addition, our products are required to interoperate with leading content authoring tools and application servers. We must continually modify and enhance our products to keep pace with changes in these applications and operating systems. If our products were to be incompatible with a popular new operating system or business application, our business could be harmed. Also, uncertainties related to the timing and nature of new product announcements, introductions or modifications by vendors of operating systems, browsers, back-office applications and other technology-related applications, could harm our business.

Our products may lack essential functionality if we are unable to obtain and maintain licenses to third-party software and applications.

We rely on software that we license from third parties, including software that is integrated with our internally developed software and used in our products to perform key functions. The functionality of our software products, therefore, depends on our ability to integrate these third-party technologies into our products. Furthermore, we may license additional software from third parties in the future to add functionality to our products. If our efforts to integrate this third-party software into our products are not successful, our customers may not license our products and our business will suffer.

In addition, we would be seriously harmed if the providers from whom we license software fail to continue to deliver and support reliable products, enhance their current products or respond to emerging industry standards. Moreover, the third-party software may not continue to be available to us on commercially reasonable terms or at all. Each of these license agreements may be renewed only with the other party’s written consent. The loss of, or inability to maintain or obtain licensed software, could result in shipment delays or reductions. Furthermore, we may be forced to limit the features available in our current or future product offerings. Either alternative could seriously harm our business and operating results.

Our ability to use net operating losses to offset future taxable income may be subject to certain limitations.

In general, under Section 382 of the Internal Revenue Code, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change net operating losses to offset future taxable income. Our existing net operating losses and credits may be subject to limitations arising from previous and future ownership changes under Section 382 of the Internal Revenue Code. Additionally, net operating losses and credits related to companies that we have acquired or may acquire in the future may be subject to similar limitations or may be limited by the information we have retained following such acquisitions. For these reasons, we may not be able to fully utilize a portion of the net operating losses and tax credits disclosed in our consolidated financial statements to offset future income. This may result in a substantial increase to income tax expense in future periods.

Difficulties in introducing new products and product upgrades and integrating new products with our existing products in a timely manner will make market acceptance of our products less likely.

The market for our products is characterized by rapid technological change, frequent new product introductions and technology-related enhancements, uncertain product life cycles, changes in customer demands and evolving industry standards. We expect to add new functionality to our product offerings by internal development and possibly by acquisition. Content management and document management technology is more complex than most software and new products or product enhancements can require long development and testing periods. Any delays in developing and releasing new products or integrating new products with existing products could harm our business. New products or upgrades may not be released according to schedule, may not be adequately integrated with existing products or may contain defects when released, resulting in adverse publicity, loss of sales, delay in market acceptance of our products or

customer claims against us, any of which could harm our business. If we do not develop, license or acquire new software products, adequately integrate them with existing products or deliver enhancements to existing products, on a timely and cost-effective basis, our business will be harmed.

We might not be able to protect and enforce our intellectual property rights, a loss of which could harm our business.

We depend upon our proprietary technology and rely on a combination of patent, copyright and trademark laws, trade secrets, confidentiality procedures and contractual restrictions to protect it. These protections may not be adequate. Also, it is possible that patents will not be issued from our currently pending applications or any future patent application we may file. Despite our efforts to protect our proprietary technology, unauthorized parties may attempt to copy aspects of our products or to obtain and use information we regard as proprietary. In addition, the laws of some foreign countries do not protect our proprietary rights as effectively as the laws of the United States and we expect that it will become more difficult to monitor use of our products as we increase our international presence. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. Any such resulting litigation could result in substantial costs and diversion of resources that could materially and adversely affect our business, consolidated financial condition and results of operations.

Further, third parties have claimed and may claim in the future that our products infringe the intellectual property of their products. Additionally, our license agreements require that we indemnify our customers for infringement claims made by third parties involving our intellectual property. Intellectual property litigation is inherently uncertain and, regardless of the ultimate outcome, could be costly and time-consuming to defend or settle, cause us to cease making, licensing or using products that incorporate the challenged intellectual property, require us to redesign or reengineer such products, if feasible, divert management’s attention or resources, or cause product delays, or require us to enter into royalty or licensing agreements to obtain the right to use a necessary product, component or process; any of which could have a material impact on our consolidated financial condition and results of operations.

Charges to earnings resulting from the application of the purchase method of accounting and asset impairments may adversely affect the market value of our common stock.

In accordance with accounting principles generally accepted in the United States of America, we accounted for our acquisitions using the purchase method of accounting, which resulted in significant charges to our consolidated statement of operations in prior periods and, through ongoing amortization, will continue to generate charges that could have a material adverse effect on our consolidated financial statements. Under the purchase method of accounting, we allocated the total estimated purchase price of these acquisitions to their net tangible assets, amortizable intangible assets, intangible assets with indefinite lives based on their fair values as of the closing date of these transactions and recorded the excess of the purchase price over those fair values as goodwill. In some cases, a portion of the estimated purchase price may also be allocated to in-process technology and expensed in the quarter in which the acquisition was completed. We will incur additional depreciation and amortization expense over the useful lives of certain net tangible and intangible assets acquired and significant stock-based compensation expense in connection with our acquisitions. These depreciation and amortization charges could have a material impact on our consolidated results of operations.

At December 31, 2006, we had $190.9 million in net goodwill ($189.3 million at September 30, 2007) and $10.7 million in net other intangible assets ($4.8 million at September 30, 2007), which we believe are recoverable. Generally accepted accounting principles in the United States of America require that we review the value of these acquired assets from time to time to determine whether the recorded values have been impaired and should be reduced. We will continue to perform impairment assessments on an interim basis when indicators exist that suggest that our goodwill or intangible assets may be impaired. These indicators include our market capitalization declining below our net book value or if we suffer a sustained decline in our stock price. Changes in the economy, the business in which we operate and our own relative performance may result in indicators that our recorded asset values may be impaired. If we determine there has been an impairment of goodwill and other intangible assets, the carrying value of those assets will be written down to fair value, and a charge against operating results will be recorded in the period that the determination is made. Any impairment could have a material impact on our consolidated operating results and financial position, and could harm the trading price of our common stock.


	Page No.
PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements:

Condensed Consolidated Balance Sheets September 30, 2007 and December 31, 2006		3

Condensed Consolidated Statements of Operations Three and nine months ended September 30, 2007 and 2006		4

Condensed Consolidated Statements of Cash Flows Nine months ended September 30, 2007 and 2006		5

Notes to Condensed Consolidated Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		18

Item 3. Quantitative and Qualitative Disclosures About Market Risk		33

Item 4. Controls and Procedures		33

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		34

Item 1A. Risk Factors		34

Item 6. Exhibits		47

Signatures		48

Exhibit Index		49
EXHIBIT 31.01
EXHIBIT 31.02
EXHIBIT 32.01
EXHIBIT 32.02


Exhibit No.		Description
10.01		Employment Agreement between Registrant and Scipio M. Carnecchia (incorporated by reference to Exhibit 10.16 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2006, filed with the Commission on December 14, 2007)

10.02		Employment Agreement between Registrant and John E. Calonico, Jr. (incorporated by reference to Exhibit 10.17 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2006, filed with the Commission on December 14, 2007)

31.01		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-15(a).

31.02		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-15(a).

32.01		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350.

32.02		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350.


	INTERWOVEN, INC. (Registrant)
	By:	/s/ Joseph L. Cowan
		Joseph L. Cowan
		Chief Executive Officer


		/s/ John E. Calonico, Jr.
		John E. Calonico, Jr.
		Senior Vice President and Chief Financial Officer


Number		Exhibit Title
10.01		Employment Agreement between Registrant and Scipio M. Carnecchia (incorporated by reference to Exhibit 10.16 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2006, filed with the Commission on December 14, 2007)

10.02		Employment Agreement between Registrant and John E. Calonico, Jr. (incorporated by reference to Exhibit 10.17 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2006, filed with the Commission on December 14, 2007)

31.01		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-15(a).

31.02		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-15(a).

32.01		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350.

32.02		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350.