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 June 30, 2008


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		(I.R.S. Employer
incorporation or organization)		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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller Reporting Company 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 July 31, 2008

Common Stock, $0.001 par value per share		45,842,000 shares

PART I: FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

INTERWOVEN, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)


	June 30,			December 31,
	2008			2007
	(Unaudited)			(Audited)
Assets

Current assets:
Cash and cash equivalents	$	92,300		$	68,453
Short-term investments		94,751			88,896
Accounts receivable, net		37,909			39,000
Prepaid expenses and other current assets		9,467			8,252

Total current assets		234,427			204,601
Property and equipment, net		15,945			16,247
Goodwill		217,719			217,777
Other intangible assets, net		17,010			20,960
Deferred tax assets		6,159			5,895
Other assets		2,092			2,878

Total assets	$	493,352		$	468,358


Liabilities and Stockholders’ Equity

Current liabilities:
Accounts payable	$	3,494		$	4,378
Accrued liabilities		28,762			30,707
Restructuring and excess facilities accrual		1,225			1,618
Deferred revenues		68,723			60,957

Total current liabilities		102,204			97,660

Long-term liabilities:
Accrued liabilities		7,761			7,816
Restructuring and excess facilities accrual		1,476			2,016
Deferred revenues		1,752			1,020

Total liabilities		113,193			108,512


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; 45,801 and 45,304 shares issued and outstanding, respectively		46			45
Additional paid-in capital		773,526			766,660
Accumulated other comprehensive income		260			415
Accumulated deficit		(393,673	)		(407,274	)

Total stockholders’ equity		380,159			359,846

Total liabilities and stockholders’ equity	$	493,352		$	468,358

See accompanying notes to condensed consolidated financial statements.

INTERWOVEN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)
(Unaudited)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2008		2007		2008			2007
Revenues:
License	$	23,378	$	21,017	$	45,350		$	40,631
Support and service		39,777		33,597		79,269			66,699

Total revenues		63,155		54,614		124,619			107,330


Cost of revenues:
License		2,165		2,086		3,944			4,046
Support and service		15,562		13,441		31,512			26,633

Total cost of revenues		17,727		15,527		35,456			30,679


Gross profit		45,428		39,087		89,163			76,651

Operating expenses:
Sales and marketing		22,670		20,204		44,707			40,008
Research and development		9,679		9,315		19,632			18,376
General and administrative		5,349		5,971		11,081			10,930
Amortization of intangible assets		668		828		1,336			1,656
Restructuring and excess facilities charges (recoveries)		44		61		(4	)		64

Total operating expenses		38,410		36,379		76,752			71,034

Income from operations		7,018		2,708		12,411			5,617
Interest income and other, net		1,249		2,282		2,427			4,774

Income before provision for income taxes		8,267		4,990		14,838			10,391
Provision for income taxes		787		785		1,237			1,458

Net income	$	7,480	$	4,205	$	13,601		$	8,933


Basic net income per common share	$	0.16	$	0.09	$	0.30		$	0.20


Shares used in computing basic net income per common share		45,599		45,057		45,517			44,847


Diluted net income per common share	$	0.16	$	0.09	$	0.29		$	0.19


Shares used in computing diluted net income per common share		46,476		46,575		46,534			46,514

See accompanying notes to condensed consolidated financial statements.

INTERWOVEN, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)
(Unaudited)


	Six Months Ended
	June 30,
	2008			2007
Cash flows from operating activities:
Net income	$	13,601		$	8,933
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,766			1,610
Stock-based compensation expense		4,915			2,130
Amortization of intangible assets and purchased technology		3,950			4,108
Deferred income taxes		(264	)		—
Change in allowances for doubtful accounts and sales returns		23			(24	)
Changes in operating assets and liabilities:
Accounts receivable		989			3,716
Prepaid expenses and other		(485	)		(124	)
Accounts payable and accrued liabilities		(3,604	)		(784	)
Restructuring and excess facilities accrual		(929	)		(3,523	)
Deferred revenues		8,498			2,031

Net cash provided by operating activities		29,460			18,073


Cash flows from investing activities:
Purchases of property and equipment		(2,464	)		(8,259	)
Purchases of investments		(53,592	)		(31,406	)
Maturities of investments		47,793			33,640

Net cash used in investing activities		(8,263	)		(6,025	)


Cash flows from financing activities:
Net proceeds from issuance of common stock		2,805			7,058

Net cash provided by financing activities		2,805			7,058


Effect of exchange rate changes on cash and cash equivalents		(155	)		99


Net increase in cash and cash equivalents		23,847			19,205
Cash and cash equivalents at beginning of period		68,453			74,119

Cash and cash equivalents at end of period	$	92,300		$	93,324

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 improving 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 condensed 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, 2007. The results of operations for the three and six months ended June 30, 2008 are not necessarily indicative of the results for the entire year or for any other period.

The consolidated balance sheet as of December 31, 2007 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.

Certain reclassifications have been made to the prior year consolidated financial statements to conform to the current period presentation.

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 income or losses from translation are charged or credited to other comprehensive income and are accumulated and reported in stockholders’ equity.

Summary of Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements on its Annual Report on Form 10-K for the year ended December 31, 2007. These accounting policies have not materially changed during six months ended June 30, 2008 except vendor specific objective evidence of fair value has been established for certain solutions of the multivariable testing and Web optimization services in our revenue recognition policy.

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. For arrangements that include multivariable testing and Web optimization service offerings for which vendor specific objective evidence of fair value has not yet been established, all revenue for such arrangements is recognized ratably over the longest service period in the arrangement, assuming all other criteria for revenue recognition have been met.

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 multivariable testing and Website optimization applications acquired in the November 2007 acquisition of Optimost LLC (“Optimost”) are provided as a service. The Company offers such service on a subscription basis and it recognizes subscription revenues ratably over the contract term, beginning on the effective date of the contract and upon providing the customer with access to the service.

The subscription service contracts include professional services. The Company recognizes professional services provided for in subscription service contracts as subscription revenues because these services are considered to be inseparable from the subscription service. All elements of these subscription services are recognized as subscription revenue over the contract term.

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

Recent Accounting Pronouncements

In May 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (the GAAP hierarchy). SFAS No. 162 will become effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles. The Company does not expect the adoption of SFAS No. 162 to have a material effect on its consolidated results of operations, financial condition and cash flows.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities. SFAS No. 161 requires companies with derivative instruments to disclose information that should enable financial-statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities and how derivative instruments and related hedged items affect a company’s financial position, financial performance and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the effect, if any, the adoption of SFAS No. 161 would have on its consolidated results of operations, financial position and cash flows.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations. SFAS No. 141R will establish new principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. Among the more significant changes from existing principles and requirements, SFAS No. 141R expands the definition of a business and a business combination; requires that all assets, liabilities and non-controlling interests (including goodwill) acquired in a business combination, whether full or partial, be recorded at fair value; requires acquisition related expenses and restructuring costs to be expensed as incurred rather than included as part of the acquisition cost; requires contingent assets, liabilities and contingent consideration to be recognized at fair value at the date of acquisition with subsequent changes recognized in earnings; requires changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period to be recognized as adjustments to income tax expense; and requires in-process research and development to be capitalized at fair value as an indefinite-lived asset and then amortized over its useful life when development is complete. SFAS No. 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS No. 141R is effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the potential impact of SFAS No. 141R. However, to the extent the Company makes acquisitions after the effective date of SFAS No. 141R, the Company expects that the adoption of this statement will have a significant impact on its consolidated results of operations, financial position and cash flows when compared to current accounting principles.

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. 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 has elected not to adopt SFAS No. 159 as of January 1, 2008. However, because the SFAS No. 159 election is based on an instrument-by-instrument election at the time the Company first recognizes an eligible item or enters into an eligible firm commitment, the Company may decide to exercise the option on new items when business reason supports doing so in the future.

In September 2006, the 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. In February 2008, the FASB issued FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157, which delays the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. These non-financial items include assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and non-financial assets acquired and liabilities assumed in a business combination. Effective January 1, 2008, we adopted SFAS No. 157 for financial assets and liabilities recognized at fair value on a recurring basis. The partial adoption of SFAS No. 157 for financial assets and liabilities did not have a material impact on its consolidated results of operations, financial position and cash flows. See Note 2, Investments and Fair Value Measurements, to the Condensed Consolidated Financial Statements.

Note 2. Investments and Fair Value Measurements

SFAS No. 157 provides for a fair value hierarchy based on the quality of the inputs used to measure fair value. In accordance with SFAS No. 157, the Company has categorized its financial instruments, based on the priority of the inputs to the value technique, into a three–level hierarchy. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument. This hierarchy requires companies to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, the Company measures certain financial assets and liabilities at fair value, including its “available-for-sale” securities and forward foreign exchange contracts.

Cash equivalents and short term investments. Cash equivalents consist of investments in money market funds with original maturities of 90 days or less on date of purchase. Short-term investments consist of United States government agency securities, corporate obligations, securities issued by government-sponsored enterprises, commercial paper, certificates of deposit and money market funds with original maturities exceeding 90 days.

Money market funds are recorded at their carrying value which is a reasonable estimate of their fair value.

Inputs to fair value measurement for commercial paper holdings include quoted prices for identical or similar instruments in markets that are not active, in which there are few transactions for the instrument along with other observable inputs like interest rates and yield curves observable at commonly quoted intervals, volatilities and credit risks.

Forward foreign exchange contracts. The principal market where the Company executes its forward foreign exchange contracts is the retail market in an over-the-counter environment with a relatively high level of price transparency. The market participants usually are large money center banks and regional banks. Forward foreign exchange contract pricing inputs are based on quotes from public data sources for a forward contract of similar length and do not involve management judgment.

The fair value of the financial assets and liabilities recorded on the condensed consolidated balance sheets are as follows at June 30, 2008 (in thousands):


			Fair Value Measurements
			At Reporting Date Using
			Quoted Prices
			In Active		Significant
			Markets for		Other
			Identical		Observable
			Assets		Inputs
	Total		(Level 1)		(Level 2)
Assets:
Money market funds	$	38,183	$	38,183	$	—
Government agencies		37,874		37,874		—
Corporate obligations		13,981		13,981		—
Government-sponsored enterprises		40,312		40,312		—
Commercial paper		2,555		—		2,555
Certificates of deposit		1,625		1,625		—

	$	134,530	$	131,975	$	2,555


Liabilities:
Forward foreign exchange contracts	$	9	$	—	$	9

Note 3. 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.

The following table sets forth the computation of basic and diluted net income per common share (in thousands, except per share data):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2008		2007		2008		2007
Net income	$	7,480	$	4,205	$	13,601	$	8,933

Weighted-average shares used in computing basic net income per common share		45,599		45,057		45,517		44,847
Dilutive common equivalent shares from stock compensation plans		877		1,518		1,017		1,667

Weighed-average shares used in computing diluted net income per common share		46,476		46,575		46,534		46,514


Basic net income per common share	$	0.16	$	0.09	$	0.30	$	0.20


Diluted net income per common share	$	0.16	$	0.09	$	0.29	$	0.19

For the three months ended June 30, 2008 and 2007, 6.6 million and 5.3 million stock options, respectively and for the six months ended June 30, 2008 and 2007, 6.5 million and 5.1 million stock options, respectively, were anti-dilutive and excluded from the diluted net income per share calculation due to the exercise price being greater than the average fair market value of the common stock during the period.

Note 4. Comprehensive Income

Comprehensive income refers to gains that under the accounting principles generally accepted in the United States of America are recorded as an element of stockholders’ equity and are excluded from operations. For the three and six months ended June 30, 2008 and 2007, the components of comprehensive income consisted of the following (in thousands):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
Net income	$	7,480		$	4,205		$	13,601		$	8,933

Other comprehensive income (loss):
Translation adjustment*		(190	)		98			(155	)		99
Unrealized gain (loss) on available-for-sale investments*		(456	)		(83	)		—			(47	)

Comprehensive income	$	6,834		$	4,220		$	13,446		$	8,985

Note 5. Mergers and Acquisitions

In November 2007, the Company acquired Optimost LLC (“Optimost”), a provider of software and services for Website optimization. The aggregate purchase price was $50.9 million in cash for all of the issued and outstanding membership units of Optimost and vested options to purchase Optimost membership units. Interwoven also assumed all of the outstanding unvested options to purchase Optimost membership units. The purchase price was allocated to purchased technology of $10.1 million, customer list of $3.7 million, non-competition covenants of $2.8 million, tradename of $870,000, goodwill of $32.4 million and net tangible assets of $1.0 million. These identifiable intangible assets are subject to amortization according to their estimated lives. The life of purchased technology is 6.0 years and the lives of customer list, non-compete covenants and tradename are 4.0 years. The weighted average amortization period in total is 5.2 years. The Company anticipates that goodwill of $32.4 million will be amortizable for tax purposes over a period of 15 years. The acquisition was accounted for using the purchase method of accounting.

Note 6. Employee Benefit Plans and Stock-Based Compensation

At June 30, 2008, the Company has an employee stock purchase plan, a 401(k) plan and six stock option plans.

Employee Stock Purchase Plan

The Company adopted the 1999 Employee Stock Purchase Plan (“ESPP”) and reserved 300,000 shares of common stock for issuance thereunder in September 1999, and amended and restated this plan in June 2008. Each January 1, the aggregate number of shares reserved for issuance under this plan will increase automatically by a number of shares equal to 1% of the Company’s outstanding shares on December 31 of the preceding year. Prior to the amendment and restatement of this plan, the aggregate number of shares reserved for issuance under this plan could not exceed 3.0 million shares. This limit was increased to 6.0 million shares as a result of the amendment and restatement of this plan. Employees generally are eligible to participate in the ESPP if they are employed by the Company for more than 20 hours per week and more than five months in a calendar year and are not 5% stockholders of the Company. Under this plan, eligible employees may select a rate of payroll deduction between 1% and 15% of their cash compensation subject to certain maximum purchase limitations. Each offering period is six months. Offering periods and purchase periods begin on May 1 and November 1 of each year. The price at which the common stock is purchased under the ESPP is 85% of the lesser of the fair market value of the Company’s common stock on the first day of the applicable offering period or on the last day of that purchase period.

2008 Equity Incentive Plan

In June 2008, the Company’s stockholders approved the 2008 Equity Incentive Plan. The aggregate number of shares of common stock reserved for issuance under the 2008 Equity Incentive Plan equaled 2.5 million shares, plus any shares remaining available for grant under the 1999 Equity Incentive Plan and 2000 Stock Incentive Plan, and any shares subject to awards granted under such plans that are cancelled, forfeited, settled in cash or that expire by their terms, including shares subject to awards granted under such plans that are outstanding on the date the 2008 Equity Incentive Plan becomes effective. There were a total of 3.8 million shares authorized and available for new grants under the 2008 Plan at June 30, 2008. The 2008 Stock Incentive Plan permits the granting of non-qualified and incentive stock options, restricted stock awards, stock bonus awards, stock appreciation rights, restricted stock units, and performance shares to employees (including employee directors and officers), consultants, advisors, independent contractors and non-employee directors, provided they render services to Interwoven.

Stock options will have a term no longer than ten years, except in the case of incentive stock options granted to holders of more than 10% of the Company’s voting power, which will have a term no longer than five years. Stock appreciation rights will have a term no longer than ten years. Stock options and stock appreciation rights must be granted at 100% of fair market value under the 2008 Equity Incentive Plan. The stock options and restricted stock units will generally vest over four years. The Compensation Committee of the Board of Directors has the discretion to use a different vesting schedule when each award is granted.

Prior Stock Option Plans

The Company’s 1996 Stock Option Plan and 1998 Stock Option Plan provide for the issuance of options to acquire 3,766,666 shares of common stock. These plans provide for the grant of incentive stock options to employees and nonqualified stock options to employees, directors and other eligible participants. Options granted under these plans vest at various terms, typically four years, determined by the Board of Directors and remain exercisable for a period not to exceed ten years. All of the shares of common stock that were available for issuance and not subject to outstanding awards under the plans when the 1999 Equity Incentive Plan became effective, became available for issuance under the 1999 Equity Incentive Plan. Options are no longer granted under these plans.

1999 Equity Incentive Plan

In September 1999, the Company adopted and stockholders approved the 1999 Equity Incentive Plan. The 1999 Equity Incentive Plan permitted the award of stock options, restricted stock, restricted stock units and stock bonuses. As a result of the stockholder approval of the 2008 Equity Incentive Plan, as of June 5, 2008, the Company will no longer award stock options, restricted stock, restricted stock units and stock bonuses under the 1999 Equity Incentive Plan and all of the shares of common stock that were available for issuance and not subject to outstanding awards under the 1999 Equity Incentive Plans when the 2008 Equity Incentive Plan became effective and available for issuance under the 2008 Equity Incentive Plan. Accordingly, there were no shares authorized and available for new grants under the 1999 Equity Incentive Plan at June 30, 2008. Options granted under this plan may be either incentive stock options or nonqualified stock options. Incentive stock options may be granted only to Company employees (including officers and directors who are also employees). Non-qualified stock options may be granted to employees, officers, directors, consultants, independent contractors and advisors of the Company.

Options under the 1999 Equity Incentive Plan may be granted for periods of up to ten years and, except for certain stock options identified in the Audit Committee review of historical stock option granting practices, have not been granted at prices less than 85% of the estimated fair value of the shares on the date of grant as determined by the Board of Directors, provided, however, that (i) the exercise price of an incentive stock option may not be less than 100% of the estimated fair value of the shares on the date of grant, and (ii) the exercise price of an incentive stock option granted to a 10% stockholder may not be less than 110% of the estimated fair value of the shares on the date of grant. Options granted under the 1999 Equity Incentive Plan typically vest over four years based on continued service. Restricted stock units, which represent the right to receive shares of the common stock of the Company on a one share for one unit basis on the settlement date, granted under the 1999 Plan typically vest over four years based on continued service.

Members of the Board of Directors, who are not employees of the Company, or any parent, subsidiary or affiliate of the Company, were eligible to participate in the 1999 Equity Incentive Plan prior to June 5, 2008. The option grants under this plan are automatic and nondiscretionary, and the exercise price of the options must be 100% of the fair market value of the common stock on the date of grant. Each eligible director was initially granted an option to purchase 10,000 shares on the date of election to the Board of Directors. Immediately following each annual meeting of the Company’s stockholders, each eligible director was automatically be granted an additional option to purchase 10,000 shares if such director has served continuously as a member of the Board of Directors since the date of such director’s initial grant or, if such director was ineligible to receive an initial grant. The term of such options is ten years, provided that they will terminate three months following the date the director ceases to be a director of the Company (12 months if the termination is due to death or disability). All options granted to directors under the 1999 Equity Incentive Plan vest 100% on the date of grant.

2000 Stock Incentive Plan

In May 2000, the Company adopted the 2000 Stock Incentive Plan. The 2000 Stock Incentive Plan permitted the award of stock options, restricted stock and restricted stock units. As a result of the stockholder approval of the 2008 Equity Incentive Plan, as of June 5, 2008, the Company will no longer award stock options, restricted stock and restricted stock units under the 2000 Stock Incentive Plan and all of the shares of common stock that were available for issuance and not subject to outstanding awards under the 2000 Stock Incentive Plans when the 2008 Equity Incentive Plan became effective and available for issuance under the 2008 Equity Incentive Plan. Accordingly, there were no shares authorized and available for new grants under the 2000 Plan at June 30, 2008. Only nonqualified stock options may be granted under this plan. Nonqualified stock options may be granted to employees, officers, directors, consultants, independent contractors and advisors of the Company. Awards granted to officers of the Company may not exceed the aggregate of 40% of all shares that are reserved for grant. Awards granted as restricted stock to officers of the Company may not exceed the aggregate of 40% of all shares that are granted as restricted stock.

Options under the 2000 Stock Incentive Plan may be granted for periods of up to ten years and at prices no less than par value of the shares on the date of grant. Restricted stock issued under the 2000 Stock Incentive Plan may be granted at prices no less than par value of the shares on the date of grant. Options and restricted stock units granted under the 2000 Plan typically vest over four years based on continued service.

2003 Acquisition Plan

In connection with the Company’s merger with iManage, Inc. (“iManage”) in November 2003, the Company adopted the 2003 Acquisition Plan and reserved 503,000 shares of common stock for issuance thereunder, as permitted by the NASDAQ Marketplace Rules. The 2003 Acquisition Plan authorized the award of options. Only nonqualified stock options are granted under this plan. Nonqualified stock options may be granted to any employee, officer, director, consultant, independent contractor or advisor of the Company who provided services to iManage immediately prior to the merger. Options under the 2003 Acquisition Plan may be granted for periods of up to ten years and at prices no less than the fair market value of the shares on the date of grant.

Stock-based Compensation Expense

The Company accounts for share-based payments under SFAS No. 123R, Share-Based Payment. 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 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 cancellations. 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 a 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						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
Expected life from grant date of option (in years)		3.3			3.3			2.3-5			3.3
Risk-free interest rate		2.2%-2.7	%		4.6%-5.0	%		2.2%-2.8	%		4.4%-5.0	%
Expected dividend yield		0.0	%		0.0	%		0.0	%		0.0	%
Expected volatility		33.6%-33.7	%		36.5%-36.9	%		33.5%-44.3	%		36.5%-37.2	%
Weighted average expected volatility		33.7	%		36.7	%		35.4	%		36.9	%

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						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
Expected life from grant date of ESPP (in years)		0.5			0.5			0.5			0.5
Risk-free interest rate		1.9	%		5.1	%		1.9	%		5.1	%
Expected dividend yield		0.0	%		0.0	%		0.0	%		0.0	%
Expected volatility		40.9	%		33.5	%		40.9	%		29.4%-33.5	%
Weighted average expected volatility		40.9	%		33.5	%		40.9	%		31.4	%

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 six months ended June 30, 2008 and 2007 (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2008		2007		2008		2007
Cost of revenues	$	297	$	143	$	595	$	291
Sales and marketing		748		460		1,633		875
Research and development		397		203		794		438
General and administrative		865		403		1,893		526

Total stock-based compensation expense	$	2,307	$	1,209	$	4,915	$	2,130

Note 7. Goodwill and Intangible Assets

The carrying amounts of the goodwill and other intangible assets as of June 30, 2008 and December 31, 2007 are as follows (in thousands):


	June 30, 2008							December 31, 2007
	Gross Carrying		Accumulated			Net		Gross Carrying		Accumulated			Net
	Amount		Amortization			Amount		Amount		Amortization			Amount
Purchased technology	$	52,155	$	(41,773	)	$	10,382	$	52,155	$	(39,420	)	$	12,735
Patents and patent applications		5,376		(4,651	)		725		5,376		(4,542	)		834
Customer list		16,510		(13,535	)		2,975		16,510		(12,659	)		3,851
Non-compete agreements		4,892		(1,964	)		2,928		4,892		(1,352	)		3,540

Other intangible assets	$	78,933	$	(61,923	)		17,010	$	78,933	$	(57,973	)		20,960

Goodwill							217,719							217,777

						$	234,729						$	238,737

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 and non-compete agreements is 4.5 years, 4.0 years, 3.8 years and 4.0 years, respectively. The aggregate amortization expense of intangible assets was $2.0 million and $2.1 million for three months ended June 30, 2008 and 2007, respectively, and $4.0 million and $4.1 million for six months ended June 30, 2008 and 2007, respectively. Of the $2.0 million in amortization of intangible assets recorded in the three months ended June 30, 2008, $1.3 million was recorded in cost of license revenues and $668,000 was recorded in operating expenses. Of the $2.1 million in amortization of intangible assets recorded in the three months ended June 30, 2007, $1.2 million was recorded in cost of license revenues and $828,000 was recorded in operating expenses. Of the $4.0 million in amortization of intangible assets for the six months ended June 30, 2008, $2.6 million was recorded in cost of license revenues and $1.4 million was recorded as operating expenses. Of the $4.1 million in amortization of intangible assets for the six months ended June 30, 2007, $2.4 million was recorded in cost of license revenues and $1.7 million was recorded as operating expenses. The estimated aggregate amortization expense of acquired intangible assets is expected to be $2.8 million in the remaining six months of 2008, $4.9 million in 2009, $4.1 million in 2010, $3.0 million in 2011, $1.4 million in 2012 and $826,000 in 2013.

Note 8. Restructuring and Excess Facilities

At various times since 2001, the Company implemented a series of restructuring and facility consolidation plans to improve operating performance. Restructuring and excess 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

At June 30, 2008, the Company had $2.7 million accrued for excess facilities, which is payable through 2010. This accrual includes minimum lease payments of $3.2 million and estimated operating expenses of $880,000 offset by estimated sublease income of $1.4 million. The Company reassesses this estimated liability each period based on current real estate market conditions. Most of the Company’s excess facilities have been subleased at rates below those the Company is required to pay under its lease agreements. 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, associated with these charges (in thousands):


	Excess
Years Ending December 31,	Facilities
2008 (remaining six months)	$	684
2009		1,081
2010		936

	$	2,701

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


Balance at December 31, 2007	$	3,634
Restructuring and excess facilities recoveries		(4	)
Cash payments and other		(929	)

Balance at June 30, 2008	$	2,701

Note 9. Borrowings

The Company has a line of credit agreement with a financial institution that provides for borrowings up to $7.0 million until July 31, 2009. Borrowings under the line of credit agreement are secured by cash and 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 5.0% at June 30, 2008, 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 June 30, 2008 and December 31, 2007, there were no borrowings under this line of credit agreement.

Note 10. 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 June 30, 2008 and December 31, 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 June 30, 2008 and December 31, 2007.

Note 11. Interest Income and Other, Net

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


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
Interest income	$	1,363		$	2,292		$	2,902		$	4,446
Foreign currency gain (loss)		(55	)		28			(361	)		(67	)
Other		(59	)		(38	)		(114	)		395

	$	1,249		$	2,282		$	2,427		$	4,774

Note 12. Commitments and Contingencies

Contractual Obligations

The Company leases its main office facilities in San Jose, 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.

Future minimum lease payments under non-cancelable operating leases, as of June 30, 2008, are as follows (in thousands):


					Future
	Occupied		Excess		Lease
Years Ending December 31,	Facilities		Facilities		Payments
2008 (remaining six months)	$	2,902	$	883	$	3,785
2009		4,255		1,310		5,565
2010		3,974		1,049		5,023
2011		3,796		—		3,796
2012		3,027		—		3,027
After 2012		7,123		—		7,123

	$	25,077	$	3,242	$	28,319

At June 30, 2008, the Company had $3.6 million outstanding under standby letters of credit with financial institutions, which are secured by cash and 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 2016.

Financial Instruments

The Company conducts business globally in numerous currencies. It enters into forward foreign exchange contracts where the counterparty is a bank to mitigate the risk of changes in foreign exchange rates on accounts receivable, and not for trading purposes. 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 the condensed consolidated statements of income in interest income and other, net and classified as either other current assets or other current liabilities in the consolidated balance sheets.

As of June 30, 2008, the notional equivalent of forward foreign currency contracts aggregated $9.4 million and the fair value of the net liability associated with forward foreign currency contracts recognized in the condensed consolidated financial statements was $9,000. The forward contracts outstanding as of June 30, 2008 expired in July 2008.

Royalties

The Company has certain royalty commitments associated with the shipment and licensing of certain products. Royalty expense is generally based on a dollar amount per unit shipped or a percentage of the underlying revenue.

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 allegations. On September 27, 2007, plaintiffs filed a motion for class certification in the six focus cases. In November 2007, defendants in the focus cases filed a motion to dismiss the complaint for failure to state a claim, which the District Court denied in March 2008. The issue of class certification is currently pending before the Court. 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. The issue of class certification is currently pending before the Court. 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. In February 2008, Ms. Simmonds filed an amended complaint. The suit names the Company as a nominal defendant, contains no claims against the Company, and seeks no relief from the Company.

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 the Company. 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 13. Income Taxes

The Company’s effective tax rate for the six months ended June 30, 2008 was 8% compared with 14% for the same period in 2007. The decrease in the effective rate was primarily due to the release of valuation allowance against deferred tax assets.

The Company continues to assess the need for a valuation allowance against the deferred tax assets. Based on its earnings history and projected future taxable income, the Company determined that it is more likely than not that it will be able to realize a benefit of an additional $216,000 of its deferred tax assets for the three months ended June 30, 2008. The release of the valuation allowance resulted in reductions to provision for income taxes and goodwill of approximately $150,000 and $67,000, respectively.

Note 14. Significant Customer Information and Segment Reporting

The Company’s chief operating decision-maker is considered to be its 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				Six Months Ended
	June 30,				June 30,
	2008		2007		2008		2007
Revenues:
United States of America	$	40,338	$	34,191	$	77,107	$	68,017
United Kingdom		8,910		8,319		22,767		16,565
Other Geographies		13,907		12,104		24,745		22,748

	$	63,155	$	54,614	$	124,619	$	107,330


	June 30,		December 31,
	2008		2007
Long-lived assets (excluding goodwill and intangible assets):
United States of America	$	14,684	$	14,761
International		1,261		1,486

	$	15,945	$	16,247

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				Six Months Ended
	June 30,				June 30,
	2008		2007		2008		2007
License	$	23,378	$	21,017	$	45,350	$	40,631
Customer support		26,681		23,758		53,179		47,002
Consulting		11,867		8,518		23,602		17,250
Training		1,229		1,321		2,488		2,447

	$	63,155	$	54,614	$	124,619	$	107,330

No customer accounted for more than 10% of the total revenues for the three and six months ended June 30, 2008 and 2007. At June 30, 2008, one customer accounted for approximately 19% of the outstanding accounts receivable balance. At December 31, 2007, no single customer accounted for more than 10% of the outstanding accounts receivable balance.

Note 14. Subsequent Events

In August 2008, the Company acquired Discovery Mining, Inc. (“Discovery Mining”), a provider of eDiscovery services to professional services firms and corporations. In connection with the acquisition, Interwoven paid approximately $35 million in cash for all of the issued and outstanding shares of Discovery Mining and vested options to purchase Discovery Mining shares, and the Company assumed all of the outstanding unvested options to purchase Discovery Mining shares.

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 improving online business performance, increasing collaboration and streamlining business processes both internally and externally. Since our inception, approximately 4,400 enterprise and professional services organizations in 70 countries worldwide have chosen our solutions.

We operate in a single segment, which is the design, development and marketing of 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 companies 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. In the first two quarters of 2008, we experienced reduced demand from customers in the global capital markets industry, resulting in lower revenues from these customers, primarily due to lower professional services revenues. We expect this industry-specific trend to continue for the foreseeable future. To the extent demand from customers in other industries declines in response to the unfavorable economic and market conditions that are currently affecting the United States, our sales cycle could lengthen and demand for our software products and services could decline, which in turn, could adversely affect our revenues and results of operations.

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.

Service revenues consist of software installation and integration, training and business process consulting, as well as revenue from software products we sell on a subscription basis. Other than our sales of software on a subscription basis, service revenues tend to lag software license revenues since consulting services, if purchased at all, 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. For the three and six months ended June 30, 2008, professional services revenues also include subscription revenues from our multivariable testing and Web optimization service, which we acquired through our acquisition of Optimost LLC (“Optimost”) during the fourth quarter of 2007. 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. The percentage of our new customer license orders that are influenced by or co-sold with our strategic partners and resellers was 76% for the three months ended June 30, 2008. In general, these strategic partners and resellers perform the installation and integration, consulting and other services for the enterprises to which they 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 15% and 17% for the quarters ended June 30, 2008 and 2007, respectively.

We recorded income from operations of $7.0 million and $2.7 million for the quarters ended June 30, 2008 and 2007, 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 922 employees worldwide at June 30, 2008 versus 781 employees at June 30, 2007. The increase in headcount from 2007 to 2008 was due primarily to the employees we hired as part of the acquisition of Optimost, staffing of our development operation in Bangalore, India and our efforts to reduce the degree to which we incur subcontractor expenses. 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 cost structure.

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 to, or which facilitate entry into adjacent markets. In evaluating these opportunities, we consider, among other strategic objectives, 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 acquired products and solutions with digital asset management, collaborative document management, records management, content publishing, Website 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. Accordingly, our financial results may not be directly comparable to those of the previous periods.

Recent Developments

In August 2008, we acquired Discovery Mining, Inc. (“Discovery Mining”), a provider of eDiscovery services to professional services firms and corporations. In connection with the acquisition, we paid approximately $35 million in cash for all of the issued and outstanding shares of Discovery Mining and vested options to purchase Discovery Mining shares, and we assumed all of the outstanding unvested options to purchase Discovery Mining shares.

Results of Operations

Revenues

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


	Three Months Ended									Six Months Ended
	June 30,									June 30,
	2008			2007			Change			2008			2007			Change
License	$	23,378		$	21,017			11	%	$	45,350		$	40,631			12	%
Percentage of total revenues		37	%		38	%					36	%		38	%
Support and service		39,777			33,597			18	%		79,269			66,699			19	%
Percentage of total revenues		63	%		62	%					64	%		62	%

	$	63,155		$	54,614			16	%	$	124,619		$	107,330			16	%

Total revenues increased 16% to $63.2 million for the three months ended June 30, 2008 from $54.6 million for the three months ended June 30, 2007. Sales outside of the United States of America represented 36% and 37% of our total revenues for the three months ended June 30, 2008 and 2007, respectively. We believe that the increase in revenues was attributable to higher revenues from license, customer support and consulting services in most of our geographic regions, particularly in the North America and Asia Pacific regions. Total revenues increased 16% to $124.6 million for the six months ended June 30, 2008 from $107.3 million for the six months ended June 30, 2007. We believe that the increase in revenues was attributable to higher revenues from license, customer support and consulting services in most of our geographic regions, particularly in the North America and Asia Pacific regions.

License. License revenues increased 11% to $23.4 million for the three months ended June 30, 2008 from $21.0 million for the three months ended June 30, 2007. License revenues represented 37% and 38% of total revenues for the three months ended June 30, 2008 and 2007, respectively. We believe that the increase in license revenues for the three months ended June 30, 2008 over the same period in 2007 was primarily due to higher license revenues in most of our geographic regions, particularly in the North America and Asia Pacific regions. We had two license transactions exceeding $1.0 million in the three months ended June 30, 2008, and one license transaction of $1.0 million or greater in the same period of 2007. Our average selling prices were $265,000 and $183,000 for the three months ended June 30, 2008 and 2007, respectively, for transactions in excess of $50,000 in aggregate license revenues. License revenues increased 12% to $45.4 million for the six months ended June 30, 2008 from $40.6 million for the six months ended June 30, 2007. We believe that the increase in license revenues for the six months ended June 30, 2008 over the same period in 2007 was attributable to higher information technology spending in all of our geographic regions. License revenues represented 36% and 38% of total revenues for the six months ended June 30, 2008 and 2007, respectively.

Support and Service. Support and service revenues increased 18% to $39.8 million for the three months ended June 30, 2008 from $33.6 million for the three months ended June 30, 2007. The increase in support and service revenues was primarily the result of a $3.3 million increase in consulting revenues primarily due to subscription revenue from our multivariable testing and Website optimization services and $2.9 million increase in customer support revenues from a larger installed base of customers and additional orders from our existing customers. Support and service revenues accounted for 63% and 62% of total revenues for the three months ended June 30, 2008 and 2007, respectively. Support and service revenues increased 19% to $79.3 million for the six months ended June 30, 2008 from $66.7 million for the six months ended June 30, 2007. The increase in support and service revenues was primarily the result of a $6.4 million increase in consulting services revenues primarily due to subscription revenue from our multivariable testing and Website optimization services and a $6.2 million increase in customer support revenues from a larger installed base of customers and additional orders from our existing customers and. Support and service revenues accounted for 64% and 62% of total revenues for the six months ended June 30, 2008 and 2007, 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 growth in customer support revenue. 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. Our ability to increase subscription revenues from our multivariable testing and Website optimization services and our eDiscovery solutions depends on our success in attracting new customers, retaining our existing customers and cross-selling these services to customers that have purchased software licenses from us.

Cost of Revenues

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


	Three Months Ended									Six Months Ended
	June 30,									June 30,
	2008			2007			Change			2008			2007			Change
License	$	2,165		$	2,086			4	%	$	3,944		$	4,046			(3	)%
Percentage of total revenues		3	%		4	%					3	%		4	%
Percentage of license revenues		9	%		10	%					9	%		10	%
Support and service		15,562			13,441			16	%		31,512			26,633			18	%
Percentage of total revenues		25	%		25	%					25	%		25	%
Percentage of support and service revenues		39	%		40	%					40	%		40	%

	$	17,727		$	15,527			14	%	$	35,456		$	30,679			16	%

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 10% of total license revenues for the three and six months ended June 30, 2008 and 2007, respectively. The increase in cost of license revenues in absolute dollars for the three months ended June 30, 2008 from the same period in 2007 was attributable primarily to a $378,000 increase in costs of licensing third-party software offset by a $299,000 decrease in amortization of purchased technology as certain purchased technology has become fully amortized. The decrease in cost of license revenues in absolute dollars for the six months ended June 30, 2008 from the same period in 2007 was primarily due to a $598,000 decrease in amortization of purchased technology as certain purchased technology has become fully amortized, offset by a $496,000 increase in costs of licensing third-party software. The decrease of cost of license revenue as a percentage of license revenues and total revenue in the three and six months of June 30, 2008 was primarily due to the increase in license revenue and total revenue.

Based solely on acquisitions completed through June 30, 2008 and assuming no impairments, we expect the amortization of purchased technology classified as a cost of license revenues to be $1.7 million for the remaining six months of 2008, $2.9 million in 2009, $2.5 million in 2010, $1.8 million in 2011, $1.3 million in 2012 and $826,000 for 2013. 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.

Support and Service. Cost of support and service revenues consists of salary and personnel-related expenses for our consulting, training and 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 16% to $15.6 million in the three months ended June 30, 2008 from $13.4 million for the same period in 2007. The increase in cost of support and service revenues in the three months ended June 30, 2008 from the same period in 2007 was due primarily to a $2.1 million increase in personnel-related costs as a result of increased headcount, amortization of purchased technology of $397,000 related to the acquisition of Optimost, a $154,000 increase in stock-based compensation expense offset by a decrease in subcontractor fees of $654,000 due to reduced consulting services engagements from customers in the global capital markets industry. Cost of support and service revenues represented 39% and 40% of support and service revenues for the three months ended June 30, 2008 and 2007, respectively. Cost of support and service revenues increased 18% to $31.5 million for the six months ended June 30, 2008 from $26.6 million for the same period in 2007. The increase in cost of support and service revenues in the six months ended June 30, 2008 from the same period in 2007 was due primarily to a $3.8 million increase in personnel-related costs as a result of increased headcount, amortization of purchased technology and hosting cost related to subscription revenue of $957,000, a $347,000 increase in travel cost, a $304,000 increase in stock-based compensation expense offset by a $686,000 decrease in subcontractor fees due to reduced consulting services engagements from customers in the global capital markets industry. Cost of support and service revenues represented 40% of support and service revenues in the six months ended June 30, 2008 and 2007. Support and service headcount was 293 and 216 at June 30, 2008 and 2007, 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. Further, the acquisition of Discovery Mining in August 2008 will increase the amortization of purchased technology.

Operating Expenses

Sales and Marketing

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


	Three Months Ended									Six Months Ended
	June 30,									June 30,
	2008			2007			Change			2008			2007			Change
Sales and marketing	$	22,670		$	20,204			12	%	$	44,707		$	40,008			12	%
Percentage of total revenues		36	%		37	%					36	%		37	%

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 12% to $22.7 million for the three months ended June 30, 2008 from $20.2 million for the three months ended June 30, 2007. The increase in sales and marketing expenses in the three months ended June 30, 2008 from the same period in 2007 was due primarily to a $2.3 million increase in personnel-related cost primarily due to higher sales commissions as a result of higher license revenues and increased headcount, a $288,000 increase in stock-based compensation expense offset by $143,000 decrease in marketing program expenses. Sales and marketing expenses increased 12% to $44.7 million for the six months ended June 30, 2008 from $40.0 million for the same period in 2007. The increase in sales and marketing expenses in the six months ended June 30, 2008 from the same period in 2007 was due primarily to a $3.7 million increase in personnel-related costs as result of increased headcount and higher sales commissions and a $757,000 increase in stock-based compensation expense primarily related to grants to sales executive in January 2008. Sales and marketing expenses represented 36% of total revenues in the three and six months ended June 30, 2008 and represented 37% of total revenues in the three and six months ended June 30, 2007. The decrease in sales and marketing expenses as a percentage of total revenues was due to higher total revenues. Sales and marketing headcount was 268 and 233 at June 30, 2008 and 2007, 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 expenses (in thousands, except percentages):


	Three Months Ended									Six Months Ended
	June 30,									June 30,
	2008			2007			Change			2008			2007			Change
Research and development	$	9,679		$	9,315			4	%	$	19,632		$	18,376			7	%
Percentage of total revenues		15	%		17	%					16	%		17	%

Research and development expenses consist of salaries and benefits, payments to third-party contractors, facilities and related overhead costs associated with our product development and quality assurance activities. Research and development expenses increased 4% to $9.7 million for the three months ended June 30, 2008 from $9.3 million for the three months ended June 30, 2007. The increase was primarily due to a $784,000 increase in personnel-related costs as a result of increased headcount and a $193,000 increase in stock-based compensation expense offset by a $554,000 decrease in facilities allocated cost due to research and development personnel representing a lower proportion of total headcount in the second quarter of 2008 than it did in second quarter of 2007. Research and development expenses represented 15% and 17% of total revenues for the three months ended June 30, 2008 and 2007, respectively. Research and development expenses increased 7% to $19.6 million for the six months ended June 30, 2008 from $18.4 million for the same period in 2007. The increase in the six months ended June 30, 2008 from the same period in 2007 was primarily due to a $1.5 million increase in personnel-related costs as result of increased headcount, a $355,000 increase in stock-based compensation expense, a $168,000 increase in payments to third-party contractors offset by an $895,000 decrease in facilities allocated cost due to research and development personnel representing a lower proportion of total headcount in the first six months of 2008 than it did in same period of 2007.

Research and development expenses represented 16% and 17% of total revenues for the six months ended June 30, 2008 and 2007, respectively. Research and development headcount was 254 and 230 at June 30, 2008 and 2007, respectively. The increase in headcount was primarily due to staffing of our development operation in Bangalore, India. We expect research and development expenses in 2008 will decline slightly as a percentage of total revenues when compared to 2007 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 expenses (in thousands, except percentages):


	Three Months Ended									Six Months Ended
	June 30,									June 30,
	2008			2007			Change			2008			2007			Change
General and administrative	$	5,349		$	5,971			(10	)%	$	11,081		$	10,930			1	%
Percentage of total revenues		8	%		11	%					9	%		10	%

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 decreased 10% to $5.3 million for the three months ended June 30, 2008 from $6.0 million for the three months ended June 30, 2007. For the three months ended June 30, 2008, we incurred higher stock-based compensation expense of $462,000, higher legal and professional services fees of $264,000 and higher personnel-related costs of $199,000 as a result of increased headcount. During the same period in 2007, we incurred $1.4 million in accounting and legal expenses relating to our voluntary review of historical stock option grant procedures. General and administrative expenses represented 8% and 11% of total revenues in the three months ended June 30, 2008 and 2007, respectively. General and administrative expenses increased 1% to $11.1 million for the six months ended June 30, 2008 from $10.9 million for the same period in 2007. The increase in general and administrative expense in the six months ended June 30, 2008 from the same period in 2007 was primarily due to a $1.4 million increase in stock-based compensation expense primarily related to grants to our Chief Executive Officer in connection with the commencement of his employment in April 2007 and to the re-elected members of our Board of Directors in February 2008, a $565,000 increase in personnel-related costs salary as a result of increased headcount and salary adjustments for the majority of our administrative employees and a $445,000 increase in legal and professional service fees. During the same period in 2007, we incurred $2.5 million in accounting and legal expenses relating to our voluntary review of historical stock option grant procedures. General and administrative expenses represented 9% and 10% of total revenues for the six months ended June 30, 2008 and 2007, respectively. General and administrative headcount was 107 and 102 at June 30, 2008 and 2007, respectively.

Amortization of Intangible Assets

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


	Three Months Ended									Six Months Ended
	June 30,									June 30,
	2008			2007			Change			2008			2007			Change
Amortization of intangible assets	$	668		$	828			(19	)%	$	1,336		$	1,656			(19	)%
Percentage of total revenues		1	%		2	%					1	%		2	%

Amortization of intangible assets was $668,000 and $828,000 for the three months ended June 30, 2008 and 2007 and $1.3 million and $1.7 million for the six months ended June 30, 2008 and 2007. The decrease in the three and six months ended June 30, 2008 from the same period in 2007 was primarily due to certain intangible assets becoming fully amortized. Based on the intangible assets balance as of June 30, 2008, we expect amortization of intangible assets classified as operating expenses to be $1.1 million in the remaining six months of 2008, $2.0 million in 2009, $1.7 million in 2010 and $1.2 million in 2011. We expect to incur additional amortization expense associated with our acquisition of Discovery Mining in August 2008 (which is not included in the above estimates) and may incur additional amortization expense to the extent we make additional acquisitions.

Restructuring and Excess Facilities Charges (Recoveries)

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

Three Months Ended

Six Months Ended

June 30,

2008

2007

Change

2008

2007

Change

Restructuring and excess facilities charges (recoveries)

)

Percentage of total revenues


*		percentage not meaningful

During the three and six months ended June 30, 2008 and 2007, we recorded additional charges or reversed the previously recorded restructuring accrual as a result of revisions to estimated operating expense for certain of our previously abandoned facilities.

The expenses 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 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, net (in thousands, except percentages):


	Three Months Ended									Six Months Ended
	June 30,									June 30,
	2008			2007			Change			2008			2007			Change
Interest income	$	1,363		$	2,292					$	2,902		$	4,446
Foreign currency gain (loss)		(55	)		28						(361	)		(67	)
Other		(59	)		(38	)					(114	)		395

Interest income and other, net	$	1,249		$	2,282			(45	)%	$	2,427		$	4,774			(49	)%

Percentage of total revenues		2	%		4	%					2	%		4	%

Interest income and other is composed of interest earned on our cash and cash equivalents and short-term investments, foreign exchange transaction gains and losses and other income. For the three months ended June 30, 2008, interest income and other decreased 45% to $1.2 million from $2.3 million for the three months ended June 30, 2007. For the six months ended June 30, 2008, interest and other decreased 49% to $2.4 million from $4.8 million in the same period in 2007. This decrease was due primarily to lower interest earned on our cash and cash equivalents and short-term investments as well as a lower average balance of cash and cash equivalents and short-term investments. We expect interest income to decline in 2008 due to these factors.

Provision for Income Taxes

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


	Three Months Ended								Six Months Ended
	June 30,								June 30,
	2008			2007			Change		2008			2007			Change
Provision for income taxes	$	787		$	785			*	$	1,237		$	1,458			(15	)%
Percentage of total revenues		1	%		1	%				1	%		1	%


*		percentage not meaningful

We recorded an income tax provision of $787,000 and $785,000 for the three months ended June 30, 2008 and 2007, respectively, and a provision of $1.2 million and $1.5 million for the six months ended June 30, 2008 and 2007, respectively. The income tax provisions for each of these periods were comprised of foreign income taxes and foreign withholding taxes, and also included a provision for federal alternative minimum and state income taxes.

The effective tax rate for the six months ended June 30, 2008 was 8% compared with 14% for the comparable period ended June 30, 2007. The decrease in the effective rate was primarily due to the release of valuation allowance against deferred tax assets. Additionally, we incur withholding taxes, which are comparable between the two periods and are not determined based on income before income taxes.

We continue to assess the need for a valuation allowance against the deferred tax assets. Based on our earnings history and projected future taxable income, we determined that it is more likely than not that we will be able to realize an incremental amount of our deferred tax assets as of June 30, 2008. The release of the valuation allowance in the quarter ended June 30, 2008 resulted in reductions to provision for income taxes and goodwill of approximately $150,000 and $67,000, respectively.

Liquidity and Capital Resources


	June 30,		December 31,
	2008		2007
	(in thousands)
Cash and cash equivalents and short-term investments	$	187,051	$	157,349
Working capital	$	130,471	$	105,921
Stockholders’ equity	$	380,159	$	359,846

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 and increase our market share.

A number of non-cash items were charged to expense in the three and six months ended June 30, 2008 and 2007. These items include depreciation and amortization of property and equipment and intangible assets, stock-based compensation and changes in deferred income taxes. 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 six months ended June 30, 2008 was $29.5 million, representing an improvement of $11.4 million from the same period in 2007. This change was primarily the result of improved operating results, after adjusting for non-cash expense, increase in deferred revenues, decrease in accounts receivable offset by decrease in accounts payable and accrued liabilities, increase in prepaid expenses and other assets and payments to reduce the restructuring and excess facilities accrual. Payments made to reduce our excess facilities obligations totaled $925,000. Our days sales outstanding in accounts receivable (“days outstanding”) were 55 days and 57 days at June 30, 2008 and December 31, 2007, respectively. Deferred revenues increased primarily due to increased customer support contracts and subscription revenues related to our multivariable testing and Web optimization services.

Cash provided by operating activities for the six months ended June 30, 2007 was $18.1 million. This amount primarily resulted from our net income, after adjusting for non-cash expense, increase in deferred revenues, decrease in accounts receivable offset by decrease in accounts payable and accrued liabilities and payments to reduce the restructuring and excess facilities accrual. Payments made to reduce our excess facilities obligations totaled $3.6 million. Our days sales outstanding in accounts receivable (“days outstanding”) were 51 days at June 30, 2007. Deferred revenues increased primarily due to increased customer support contracts related to sales of software licenses.

Cash used in investing activities was $8.3 million for the six months ended June 30, 2008. This resulted from net purchases of short-term investments of $5.8 million, comprised of $53.6 million used to purchase investment securities offset by the proceeds of $47.8 million from the maturity of investments, and $2.5 million to purchase property and equipment in the normal course of our business.

Cash used in investing activities was $6.0 million for the six months ended June 30, 2007. This resulted from net proceeds from short-term investments of $2.2 million, comprised of $33.6 million of proceeds from the maturity of investments offset by $31.4 million used to purchase investment securities, and $8.3 million to purchase property and equipment primarily for leasehold improvements to and furniture for our new headquarters facility.

Cash provided by financing activities was $2.8 million and $7.1 million for the six months ended June 30, 2008 and 2007, respectively, and consists primarily of cash received from the exercise of common stock options.

At June 30, 2008, we had $92.3 million in cash and cash equivalents and $94.8 million in short-term investments. These amounts have been invested in highly liquid United States government agency securities, corporate obligations, securities issued by government-sponsored enterprises, commercial paper, certificates of deposit and money market funds according to our investment policies. At June 30, 2008, our investments in mortgaged-backed securities totaled $40.3 million, all of which were issued by government-sponsored enterprises, including Fannie Mae, Freddie Mac and the Federal Home Loan Bank. 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 risking principal. 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 if a requirement for cash arises. 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 and our business outlook.

We have used cash to acquire businesses and technologies that enhance and expand our product offerings and increase our market share, and we anticipate that we will continue to do so in the future. We used approximately $35 million in cash to acquire Discovery Mining. 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 debt or equity financing to complete future acquisitions. Our financial condition could be harmed to the extent we incur substantial debt or use significant amounts of our cash resources in acquisitions. The issuance of equity securities for any acquisition or equity financing could be substantially dilutive to our existing stockholders.

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.

We have no long-term debt obligations, capital lease obligations, operating lease obligations, purchase obligations or other long-term liabilities reflected on our balance sheet under accounting principles generally accepted in the United States of America, other than the operating lease obligations described below.

Bank Borrowings. We had a $7.0 million line of credit available to us at June 30, 2008, which is secured by cash and cash equivalents and short-term investments and is primarily used as collateral for letters of credit required by our facilities leases. 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 this line of credit. The line of credit agreement expires in July 2009. There were no outstanding borrowings under this line of credit as of June 30, 2008.

Facilities. We lease facilities under operating lease agreements that expire at various dates through 2016. As of June 30, 2008, minimum cash payments due under operating lease obligations for our occupied and excess facilities totaled $28.3 million. The following table presents our prospective future lease payments under these agreements as of June 30, 2008, 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
2008 (remaining six months)	$	2,902	$	883	$	(395	)	$	196	$	684	$	3,586
2009		4,255		1,310		(575	)		346		1,081		5,336
2010		3,974		1,049		(452	)		339		936		4,910
2011		3,796		—		—			—		—		3,796
2012		3,027		—		—			—		—		3,027
Thereafter		7,123		—		—			—		—		7,123

	$	25,077	$	3,242	$	(1,422	)	$	881	$	2,701	$	27,778

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. We accrue the costs of expected lease restoration obligations over the term of the lease agreement.

The restructuring and excess facilities accrual at June 30, 2008 includes minimum lease payments of $3.2 million and estimated operating expenses of $881,000 offset by estimated sublease income of $1.4 million. 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 had a liability for unrecognized tax benefits and an accrual for the payment of related interest totaling approximately $3.1 million as of June 30, 2008. Due to the uncertainties to the tax matters, we are unable to reasonably estimate when the cash settlement with a taxing authority will occur.

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 June 30, 2008, we had $3.6 million outstanding under standby letters of credit, which are secured by cash and cash equivalents and short-term investments.

We currently anticipate that our cash generated from future operations, cash and cash equivalents and short-term investments balances, together with our existing line of credit on June 30, 2008, 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 that additional equity or debt financing, if required, will be available on acceptable terms, if at all. Our financial condition could be harmed to the extent we incur substantial debt or use significant amounts of our cash resources in acquisitions. The issuance of equity securities for any acquisition or equity financing could be substantially dilutive to our existing stockholders.

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 to reduce these exposures and not for speculative or trading purposes. Although these contracts are or can be effective as hedges from an economic perspective, they do not qualify for hedge accounting under Statement of Financial Accounting Standard (“SFAS”) No. 133, Accounting for Derivative Instruments and Hedging Activities. Gains and losses on the changes in the fair values of the forward contracts are included in interest income and other, net in our condensed consolidated statements of income. 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 our condensed consolidated balance sheets at fair value with unrealized gains and losses reported in accumulated other comprehensive income on our condensed 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 June 30, 2008, 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 our office facilities in the normal course of business. These arrangements are often referred to as a form of off-balance-sheet financing. As of June 30, 2008, we leased facilities and certain equipment under non-cancelable operating leases expiring between 2008 and 2016. Rent expense under operating leases was $1.5 million and $3.0 million for the three months ended June 30, 2008 and 2007, respectively, and $3.0 million and $5.7 million for the six months ended June 30, 2008 and 2007, respectively. Future minimum lease payments under our operating leases as of June 30, 2008 are detailed in “Liquidity and Capital Resources” above.

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 from operations and net income, as well as on the value of certain assets and liabilities on our consolidated balance sheet. 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 the suitability of these critical accounting policies and our critical accounting estimates with the Audit Committee of the Board of Directors and our independent registered public accountants. 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.

The critical accounting estimates associated with these policies are described in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operation” of our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2008. We believe there have been no material changes to our critical accounting policies and estimates during the six months ended June 301, 2008 compared to those discussed in our Annual Report on Form 10-K for the year ended December 31, 2007 except vendor specific objective evidence of fair value has been established for certain solutions of the multivariable testing and Web optimization services in our revenue recognition policy.

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. For arrangements that include multivariable testing and Web optimization services offerings for which vendor specific objective evidence of fair value has not yet been established, all revenue for such arrangements is recognized ratably over the longest service period in the arrangement, assuming all other criteria for revenue recognition have been met.

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.

Our multivariable testing and Website optimization applications acquired in our November 2007 acquisition of Optimost are provided as a service. We offer such service on a subscription basis and we recognize subscription revenues ratably over the contract term, beginning on the effective date of the contract and upon providing the customer with access to the service.

The subscription service contracts include professional services. We recognize professional services provided for in subscription service contracts as subscription revenues because these services are considered to be inseparable from the subscription service. All elements of these subscription services are recognized as subscription revenue over the contract term.

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.

Recent Accounting Pronouncements

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

During the three months ended June 30, 2008, there was no material change in our quantitative and qualitative disclosures about market risk contained in our Annual Report on Form 10-K for the year ended December 31, 2007. Reference is made to our disclosures in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2007.

ITEM 4. CONTROLS AND PROCEDURES.

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 June 30, 2008, 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.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting during the three months ended June 30, 2008 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” in Note 12 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, 2007, 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, 2007. You should consider carefully the following factors, in addition to other information in this Quarterly Report on Form 10-Q, in evaluating our business.

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.

We may not be able to sustain profitability.

We have incurred operating losses for most of our history and had an accumulated deficit of $393.7 million as of June 30, 2008. 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.

Sales cycles for our products are generally long, complex 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. The 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 revenues.

Because our software and solutions are often a critical element of 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 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 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.

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. Current and potential competitors may bundle their products in a manner that discourages users from purchasing our products or makes their products more appealing. Moreover, as we adapt our business model to target new markets or offer customers solutions that are different from the products we have traditionally offered, such as the software-as-a-service offerings we introduced following our acquisition of Optimost in November 2007 and Discovery Mining in July 2008, the degree to which we face the competitive challenges described above may be higher than has traditionally been the case. To the extent potential customers value experience in addressing such markets or providing the kinds of new solutions we introduce, or such experience or other competitive advantages otherwise enable our competitors to sell and provide solutions more effectively than we can, the benefits we expect to derive from adapting our business model may be delayed or may not materialize.

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; Cognos, Inc. and 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.

Adverse changes in general economic or political conditions could adversely affect our operating results.

Our business can be affected by a number of factors that are beyond our control such as general geopolitical and economic conditions, conditions in the financial services markets, the overall demand for enterprise software and services and general political and economic developments. A weakening of the global economy, or economic conditions in the United States or other key markets, could cause delays in and decreases in demand for our products. For example, there is increasing uncertainty about the direction and relative strength of the United States economy because of the various challenges that are currently affecting it. During the last six months, we observed some customers engage in careful budgeting processes and we experienced declining demand from these customers in the global capital markets industry, especially in consulting service engagements during the first six months of 2008. If the challenging economic conditions in the United States and other key countries persist or worsen, other customers may delay or reduce information technology spending. This could result in reductions in sales of our products and services, longer sales cycles, slower adoption of new technologies and increased price competition. Any of these events would likely harm our business, results of operations and financial condition.

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

For the three months ended June 30, 2008 and 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 limited number of vertical markets. In particular, our WorkSite product is primarily sold to professional services organizations, such as law firms, accounting firms, consulting firms and corporate legal departments. In addition, we derive a significant amount of our revenues 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 limited number of vertical markets exposes our operating results to the same macroeconomic risks and changing economic conditions that affect those vertical markets. For example, if the recent turbulence in the financial markets persists as we expect it will, our customers in the financial services industry may reduce spending, as we experienced with our customers in the global capital markets industry during the first six months of 2008, and our results could suffer.

To increase 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 63% and 62% of total revenues for the three months ended June 30, 2008 and 2007, respectively. 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 service revenues 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. In the three months ended June 30, 2008, our service revenue continued to be impacted by weakness in our global capital markets business, which has been impacted by the global economy and credit crisis. We believe that this weakness will negatively affect our future service revenue.

For the three months ended June 30, 2008 and 2007, we recognized support revenues of $26.7 million and $23.8 million, respectively. 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.

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 and service 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 two and one license transactions exceeding $1.0 million in the three months ended June 30, 2008, and 2007, respectively. 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, it is difficult for us to accurately predict the timing of large customer orders. 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.

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 affected revenues, sales cycles, average selling prices and frequency of 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 persists as we expect it will, our customers in the financial services industry may reduce spending, as we experienced with our customers in the global capital markets industry during the first six months of 2008, 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.

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 continue to be negatively affected to the extent geopolitical concerns continue and similar events occur or are anticipated to occur.

Our international operations have a significant impact on 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 three months ended June 30, 2008 and 2007, revenues from our international operations were approximately 36% and 37% of our total revenues, respectively. In addition, for the three months ended June 30, 2008, more than 20% of our operating expenses were attributable to international operations. Sales generated and expenses incurred outside of the United States are denominated in currencies other that the United States Dollar. We anticipate devoting significant resources and management attention to international opportunities and managing our international operations. This subjects us to a number of risks and uncertainties including:

	•		foreign currency fluctuations;

	•		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 United States 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.

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 financial 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 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.

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 many of the geographies in which we operate. 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.

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 in November 2007 and our acquisition of Discovery Mining in August 2008, 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, and related business models, with our current products, technologies and business model;

	•		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;

	•		issuing common stock that would dilute our current stockholders’ percentage ownership;

	•		using a substantial portion of our cash resources or incur debt;

	•		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 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.

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.

Our future revenues may depend in part on how successful we are at addressing the needs of the markets we enter.

Traditionally, our content management products have been technically complex and designed to appeal to the information technology professionals within large corporations, who we believe have the most significant impact on whether or not our sales efforts are successful. As we adapt our business model to target new markets or offer customers solutions that are different from the products we have traditionally offered, such as the introduction of several of our segmentation and analytics offerings during 2007 and the software-as-a-service offerings introduced following our acquisition of Optimost in November 2007 and Discovery Mining in July 2008, our success will depend, in part, on our ability to modify our sales efforts and product design to effectively address new markets and promote our new solutions. For example, with the introduction of the products and services mentioned above, our sales efforts have been increasingly focused on addressing the needs of marketing professionals, who we believe will have the most significant impact on whether or not our sales efforts with respect to those products and services will be successful. As marketing professionals value different kinds of product and service features and characteristics than information technology professionals, we must redesign our product and service offerings to appeal to marketing professionals to succeed in this market. The transition from focusing our sales efforts on information technology professionals to others, such as marketing professionals, will be difficult, and any success our sales teams have had selling to information technology professionals may not translate to their sales efforts with others. If we are unsuccessful in redesigning our products and services or making such transitions, our future revenue could be adversely affected, possibly causing our consolidated operating results to suffer and our stock price to decline.

Our cash and investments are subject to risks which may cause losses and affect the liquidity of these investments.

At June 30, 2008, we had $92.3 million in cash and cash equivalents and $94.8 million in short-term investments. Our investments in mortgaged-backed securities totaled $40.3 million, all of which were issued by government-sponsored enterprises, including Fannie Mae, Freddie Mac and the Federal Home Loan Bank. We have invested in highly-liquid United States government agency securities, corporate obligations, securities issued by government-sponsored enterprises, commercial paper, certificates of deposit and money market funds according to our investment policies. Certain of these investments are subject to general credit, liquidity, market and interest rate risks, which may be heightened as a result of recent turmoil in the financial and credit markets. Investments in both fixed rate and floating rate interest bearing instruments carry a degree of interest rate risk. Fixed rate debt securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates. Additionally, we may suffer losses in principal if we are forced to sell securities that decline in market value. These market and interest rate risks associated with our investment portfolio may have a material and adverse effect on our consolidated financial condition, results of operations and liquidity.

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. The percentage of our new license orders from customers that are influenced by or co-sold with our strategic partners and resellers was 76% for the three months ended June 30, 2008. 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.

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.

We may be named in lawsuits related to the Audit Committee review our historical stock option practices and resulting restatement in December 2007. 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 that concluded in December 2007. 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.

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.

Our results of operations could be materially impacted if there are changes in our accounting estimates used in the determination of stock compensation expense.

We estimate the fair value of stock options using the Black-Scholes valuation model, consistent with the provisions of SFAS No. 123R and the interpretive guidance of Staff Accounting Bulletin No. 107, Share-Based Payment. Option-pricing models require the input of highly subjective assumptions, including the option’s expected life and the price volatility of the underlying stock. Judgment is also required in estimating the number of stock-based awards that are expected to be issued and forfeited. If actual results or future changes in estimates differ significantly from our current estimates, stock-based compensation expense and our results of operations could be materially impacted.

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 income 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 and amortizable intangible assets 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 June 30, 2008, we had $217.7 million in goodwill and $17.0 million in other intangible assets, which we believe are recoverable. Generally accepted accounting principles in the United States of America require that we review the value of goodwill on at least an annual basis and the value of long-lived intangible assets when indicators of impairment arise to determine whether the recorded values have been impaired and should be reduced. 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, a decline in the price of our stock 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.

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

At our 2008 Annual Meeting of Stockholders held on June 5, 2008, the following matters were considered and voted upon:

(a)

The election of seven directors to hold office until the 2009 Annual Meeting of Stockholders. The votes cast and withheld for such nominees were as follows:


	Votes		Votes
	For		Withheld
Charles M. Boesenberg		41,340,645		1,632,497
Ronald E. F. Codd		41,801,971		1,171,171
Bob L. Corey		41,956,490		1,016,652
Joseph L. Cowan		41,959,084		1,014,058
Frank J. Fanzilli, Jr.		38,607,681		4,365,461
Roger J. Sippl		38,760,655		4,212,487
Thomas L. Thomas		38,759,981		4,213,161

(b)

The ratification and approval of the adoption of the 2008 Equity Incentive Plan.


For			28,982,239
Against			9,960,370
Abstain			1,076,525
Broker non-votes			2,954,008

(c)

The ratification and approval of the amendment and restatement of the 1999 Employee Stock Purchase Plan.


For			33,581,573
Against			5,360,853
Abstain			1,076,708
Broker non-votes			2,954,008

(d)

The ratification the selection of Ernst & Young LLP as our independent registered public accounting firm for the year ending December 31, 2008.


For			42,9203,48
Against			21,728
Abstain			31,066

Based on these voting results, each of the directors nominated was elected, the adoption of the 2008 Equity Incentive Plan was ratified and approved, the amendment and restatement of the 1999 Employee Stock Purchase Plan was ratified and approved and the selection of Ernst & Young LLP was ratified.


	Page No.
PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements:

Condensed Consolidated Balance Sheets June 30, 2008 and December 31, 2007		2

Condensed Consolidated Statements of Income Three and six months ended June 30, 2008 and 2007		3

Condensed Consolidated Statements of Cash Flows Three and six months ended June 30, 2008 and 2007		4

Notes to Condensed Consolidated Financial Statements		5

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk		31

Item 4. Controls and Procedures		31

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		32

Item 1A. Risk Factors		32

Item 4. Submission of Matters to a Vote of Security Holders		44

Item 6. Exhibits		45

Signatures		46
EXHIBIT 31.01
EXHIBIT 31.02
EXHIBIT 32.01
EXHIBIT 32.02


	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