Quarterly Report on Form 10-Q

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

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

There were 105,937,482 shares of the Registrant’s common stock, par value $0.001, outstanding on August 5, 2003.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

The interim unaudited condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position and results of operations and cash flows of Interwoven, Inc. (the “Company”) for the three and six months ended June 30, 2003 and 2002. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited financial statements and related notes included in the Company’s 2002 Annual Report on Form 10-K. The results of operations for the three and six months ended June 30, 2003 are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year.

Revenue consists principally of fees for licenses of the Company’s software products, maintenance, consulting and training. The Company recognizes revenue using the residual method in accordance with Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions.” Under the residual method, revenue is recognized in a multiple element arrangement in which company-specific objective evidence of fair value exists for all of the undelivered elements in the arrangement, but does not exist for one or more of the delivered elements in the arrangement. Company-specific objective evidence of fair value of maintenance and other services is based on the Company’s customary pricing for such maintenance and/or services when sold separately. At the outset of the arrangement with the customer, the Company defers revenue for the fair value of its undelivered elements (e.g., maintenance, consulting and training) and recognizes 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 97-2 have been met. If such evidence of fair value for each undelivered element of the arrangement does not exist, all revenue from the arrangement is deferred until such time that evidence of fair value does exist or until all elements of the arrangement are delivered.

Under SOP 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 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 purchase order from the customer and the customer has previously executed a standard license arrangement with the Company. The Company does not offer product return rights to resellers or end users.

Delivery has occurred. The Company’s software may be either physically or electronically delivered to the customer. The Company determines that delivery has occurred upon shipment of the software pursuant to the billing 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 arrangement fee becomes due and payable. Fees due under an arrangement are generally deemed not to be fixed or determinable if a significant portion of the fee is beyond the Company’s normal payment terms, which are generally no greater than 180 days from the date of invoice.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 in business, history of collection, and product acceptance for each customer within each geographic sales region. The Company typically sells to customers, for 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 their ability to pay. If the Company determines from the outset of an arrangement that collectibility is not probable based upon its review process, revenue is recognized as payments are received.

Due to the Company’s relatively limited operating history outside of the United States, the Company generally defers revenue recognition on sales outside of the United States until cash is collected or when a letter of credit is obtained. However, the Company recognizes revenue from sales occurring in Northern Europe and Australia upon the signing of the contract and shipment of the product, assuming all other revenue recognition criteria have been met because its history of collections and the development of its sales infrastructure in those regions allow it to ascertain that collection is probable. The Company expects to continually assess the appropriateness of revenue recognition on sales agreements in other geographic locations once it has developed an adequate infrastructure and collections history for customers in those regions.

The Company allocates revenue on software arrangements involving multiple elements to each element based on the relative fair value of each element. The Company’s determination of fair value of each element in multiple-element arrangements is based on vendor-specific objective evidence (“VSOE”). The Company limits its assessment of VSOE for each element to the price charged when the same element is sold separately. The Company has analyzed all of the elements included in its multiple-element arrangements and determined that it has sufficient VSOE to allocate revenue to the maintenance, support and professional services components of its perpetual license arrangements. The Company sells its professional services separately, and has established VSOE on this basis. VSOE for maintenance and support is determined based upon the customer’s annual renewal rates for these elements. Accordingly, assuming all other revenue recognition criteria are met, revenue from perpetual licenses is recognized upon delivery using the residual method in accordance with SOP 98-9, and revenue from maintenance and support services is recognized ratably over their respective terms. The Company recognizes revenue from time-based licenses ratably over the license terms as the Company does not have VSOE for the individual elements in these arrangements.

Services revenues consist of professional services and maintenance fees. In general, the Company’s professional services, which are comprised of software installation and integration, business process consulting and training, are not essential to the functionality of the software. The Company’s software products are fully functional upon delivery and implementation and do not require any significant modification or alteration of products for customer use. Customers purchase these 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.

Maintenance agreements are typically priced based on a percentage of the product license fee and have a one-year term, renewable annually. Services provided to customers under maintenance agreements include technical product support and unspecified product upgrades. Deferred revenues from advanced payments for maintenance agreements are recognized ratably over the term of the agreement, which is typically one year.

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

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company has five stock-based employee compensation plans and accounts for those plans under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations. In connection with stock options granted prior to its initial public offering and options assumed through acquisitions, the Company recorded deferred stock-based compensation which is being amortized over the vesting periods of the applicable options. Amortization expense recognized during the three months ended June 30, 2003 and 2002 totaled $493,000 and $58,000, respectively. Amortization expense recognized during the six months ended June 30, 2003 and 2002 totaled $1.0 million and $3.3 million, respectively. The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”, to stock-based employee compensation. The following table presents the pro forma information (in thousands, except per share amounts):

The Company calculated the fair value of each option grant on the date of grant and stock purchase right using the Black-Scholes option-pricing model as prescribed by SFAS No. 123 using the following assumptions:

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Amortization of deferred stock-based compensation is attributable to the following categories (in thousands):

For the three months ended June 30, 2003, comprehensive loss of $7.3 million consists of $119,000 net unrealized investment loss and $7.2 million net loss. For the three months ended June 30, 2002, comprehensive loss of $13.5 million consists of $254,000 net unrealized investment gain and $13.8 million net loss. For the six months ended June 30, 2003, comprehensive loss of $16.4 million consists of $104,000 net unrealized investment loss and $16.3 million net loss. For the six months ended June 30, 2002, comprehensive loss of $29.6 million consists of $77,000 net unrealized investment loss and $29.5 million net loss.

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

On June 27, 2003, the Company acquired MediaBin, Inc. (“MediaBin”). MediaBin develops standards-based enterprise brand management solutions to help companies manage, produce, share and deliver volumes of digital assets, such as product photographs, advertisements, brochures, presentations, video clips and other marketing collateral. The aggregate purchase price of the acquisition was $16.8 million, which included cash of $4.2 million, issuance of 2.8 million shares of common stock with an estimated fair value of $6.4 million, assumed stock options with a fair value of $683,000, assumed liabilities of $4.7 million and transaction costs of $899,000. In connection with this acquisition, the three largest shareholders of MediaBin who had advanced loans to MediaBin collectively agreed to place an aggregate of $300,000 of the repayment of indebtedness owed by MediaBin to them in escrow with the Company as security against certain financial contingencies. These funds will be released to these former shareholders (less any amounts deducted by the Company in regards to the occurrence of these contingencies) no later than October 25, 2003. The transaction was completed on June 27, 2003, from which time the results of operations of MediaBin and the estimated fair values of the net assets acquired and liabilities assumed and incurred have been included in the results of operations of the Company. Pro forma results of operations have not been presented because the effect of the acquisition was not material to the Company.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The allocation of the purchase price for this acquisition, as of the date of the acquisition, is as follows (in thousands, except amortization life):

The acquisition was accounted for as a purchase transaction, and accordingly, the assets and liabilities of MediaBin were recorded at their estimated fair values at the date of the acquisition. None of the goodwill recorded is expected to be deductible for tax purposes. With the exception of the goodwill, the identified intangible assets will be amortized on a straight-line basis over their useful lives. The $599,000 of the purchase price allocated to in-process research and development, as well as the purchase price allocated to the identifiable intangible assets, was determined, in part, by a third party appraiser through established valuation techniques. The acquired in-process research and development was immediately expensed because technological feasibility had not been established and no future alternative existed at the date of the acquisition.

The Company computes net loss per share in accordance with SFAS No. 128, “Earnings per Share”. The following is a reconciliation of the numerators and denominators used in computing basic and diluted net loss per share (in thousands, except per share amounts):

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table sets forth potential shares of common stock that are not included in the diluted net loss per share calculation above, as their effect would have been antidilutive for the periods indicated (in thousands):

In July 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 revises the accounting for specified employee and contract terminations that are part of restructuring activities. Companies will be allowed to record a liability for a cost associated with an exit or disposal activity only when the liability is incurred and can be measured at fair value. The Company adopted SFAS No. 146 on January 1, 2003. The adoption of SFAS No. 146 did not have a material impact on its financial position and results of operations.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure”. SFAS No. 148 amends FASB Statement No. 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. It also requires additional disclosures about the effects on reported net income or loss of an entity’s accounting policy with respect to stock-based employee compensation. The Company adopted the annual disclosure requirements of SFAS No. 148 during the year ended December 31, 2002. The Company adopted the interim disclosure requirements of SFAS No. 148 during the three months ended March 31, 2003.

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantors Accounting and Disclosure Requirement for Guarantors, including Indirect Guarantors of Indebtedness Others” (“FIN 45”). FIN 45 creates new disclosure and liability recognition requirements for certain guarantees, including obligations to stand ready to perform. The initial recognition and measurement requirements of FIN 45 are effective prospectively for guarantees issued or modified after December 31, 2002 and the disclosure requirements are effective for financial statement periods ending after December 15, 2002. The Company had no existing guarantees as of June 30, 2003, and the adoption of FIN 45 did not have a material impact on the Company’s financial position or results of operations.

Indemnification and warranty provisions contained within the Company’s license and service agreements are generally consistent with those prevalent in its industry. The duration of the Company’s product warranties generally does not exceed 90 days following delivery of the related products. The Company has not incurred significant obligations under customer indemnification or warranty provisions historically and does not expect to incur significant obligations in the future. Accordingly, the Company does not maintain accruals for potential customer indemnification or warranty-related obligations.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table provides information relating to the intangible and other assets contained within the Company’s unaudited condensed consolidated balance sheets as of June 30, 2003 and December 31, 2002 (in thousands):

The Company’s goodwill balance increased from December 31, 2002, to June 30, 2003, by $11.4 million, directly related to the goodwill resulting from the MediaBin acquisition. The Company expects annual amortization of acquired intangible assets to be $1.3 million for the remainder of 2003, $2.3 million in 2004, $928,000 in 2005, $854,000 in 2006 and $427,000 in 2007.

Due to the continuing economic slowdown and in light of the global reduction in spending on information technology initiatives, throughout 2002 and 2003, the Company has implemented a series of restructuring and facility consolidation plans to improve operating performance. Restructuring and facilities consolidation costs consist of workforce reductions, the consolidation of excess facilities and the impairment of leasehold improvements and other equipment associated with abandoned facilities.

During the six months ended June 30, 2002, the Company implemented several restructuring plans in an effort to better align its expenses and revenues. These cost saving efforts resulted in the termination of 182 employees worldwide, throughout all functional areas. The Company recorded charges of $4.7 million associated with involuntary terminations, which included severance costs. The workforce reductions associated with these plans were substantially completed as of December 31, 2002

During the six months ended June 30, 2003, the Company implemented additional restructuring plans in an effort to better align its expenses and revenues. These cost saving efforts resulted in the termination of 60 employees worldwide, throughout all functional areas. The Company recorded charges of $2.4 million associated with involuntary terminations. The workforce reductions associated with these plans were substantially completed as of June 30, 2003, and $419,000 was accrued at June 30, 2003, associated with future severance payments.

During 2002, as a result of reduced staffing levels, the Company performed an evaluation of its current facilities requirements and identified facilities that were in excess of current and estimated future needs. As a result of this analysis, the Company recorded charges of $24.1 million associated with lease abandonment related to these excess facilities. It also evaluated operating equipment and leasehold improvements associated with

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

these facilities to identify those assets that had suffered a reduction in their economic useful lives. Based on these evaluations, the Company incurred charges of $1.2 million associated with the impairment and accelerated amortization of leasehold improvements and certain operating equipment associated with these abandoned facilities. Additionally, due to the deterioration of the commercial real estate market, the Company revised its assumptions regarding future sublease income for certain facilities previously abandoned in 2001. As a result, the Company reduced its estimates regarding sublease income and recorded charges of an additional $4.7 million to reflect this change in estimate. At June 30, 2003, $35.1 million has been accrued associated with facility consolidation plans and is payable through 2010. The facilities charges were an estimate as of June 30, 2003. The Company will reassess this liability each period based on current market conditions and revisions to the estimates of these liabilities could materially impact the operating results and financial position of the Company in future periods if anticipated events and key assumptions, such as the timing and amounts of sublease rental income, change from previous estimates.

The restructuring costs and excess facility charges the Company has incurred to date have had a material impact on its results of operations and will require additional payments in future periods. The following table summarizes our estimated payments associated with these charges as of June 30, 2003 (in thousands):

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

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or group, in deciding how to allocate resources and in assessing performance.

The Company’s chief operating decision maker, 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. Accordingly, the Company considers itself to be in a single industry segment, specifically the license, implementation and support of its software applications.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Information regarding revenues for the three and six months ended June 30, 2003 and 2002, and information regarding long-lived assets in geographic areas as of June 30, 2003 and December 31, 2002, are as follows (in thousands):

It is impracticable to disaggregate license revenue by product, because the vast majority of our license revenue is derived from sales of the Company’s flagship product, TeamSite. Disaggregated product information is as follows (in thousands):

On November 8, 2001, the Company and certain of its officers and directors and certain investment banking firms, were named as defendants in a purported securities class-action lawsuit filed in the United States District Court Southern District of New York, which was subsequently consolidated with more than 300 substantially identical proceedings against other companies. The consolidated complaint asserts that the prospectuses for the Company’s October 8, 1999 initial public offering and the Company’s January 26, 2000 follow-on public offering failed to disclose certain alleged actions by the underwriters for the offerings. In addition, the consolidated complaint alleges claims under Section 11 and 15 of the Securities Act of 1933 and under Section 10(b) and 20(a) of the Securities Exchange Act of 1934 against the Company and certain of its officers and directors. The plaintiff seeks damages in an unspecified amount. In June 2003, following the dismissal of the Company’s officers and directors from the litigation without prejudice and after several months of negotiation, the plaintiffs named in the consolidated compliant and the Company, together with the other issuers named thereunder and their respective insurance carriers, agreed to settle the litigation and dispose of any remaining claims against the issuers named in the consolidated compliant, in each case without admitting any wrongdoing.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As part of this settlement, the Company’s insurance carrier has agreed to assume the Company’s entire payment obligation under the terms of the settlement. This settlement will be presented to the District Court for approval in the coming months; however, there can be no guarantee that the District Court will approve the settlement.

In addition to the matters mentioned above, the Company has been named as a defendant in various employment-related lawsuits that have arisen in the ordinary course of business. In the opinion of management, the outcome of such lawsuits will not have a material effect on the financial statements of the Company.

On August 6, 2003, the Company entered into a definitive agreement to acquire iManage, Inc. (“iManage”) in a stock and cash transaction. iManage is a provider of collaborative content management software. Pursuant to the definitive agreement and subject to the terms and conditions set forth therein, iManage will be merged with and into a wholly-owned subsidiary of the Company (the “Merger”), with this wholly-owned subsidiary continuing as the surviving corporation of the Merger. Under the definitive agreement, the Company would issue 2.0943 shares of its common stock and $1.20 in cash, without interest, for each share of iManage common stock. After the Merger, the stockholders of the Company are expected to own approximately 67% of the combined company while iManage stockholders will own approximately 33% of the combined company. The transaction is expected to close in the fourth quarter of 2003, subject to customary conditions, including obtaining necessary regulatory and stockholder approvals.

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

Some of the statements contained in this report constitute forward-looking statements that involve substantial risks and uncertainties. In some cases, you can identify these statements by forward-looking words such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “estimate” or “continue” and variations of these words or comparable words. In addition, any statements which refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. Our Management’s Discussion and Analysis of Financial Condition and Results of Operations contains many such forward-looking statements. For example, we make projections regarding future revenues, gross profit, and various operating expense items, as well as future liquidity. These forward-looking statements involve known and unknown risks, uncertainties and situations that may cause our or our industry’s actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. The risk factors contained in this report, as well as any other cautionary language in this report, provide examples of risks, uncertainties and events that may cause our actual results to differ from the expectations described or implied in our forward-looking statements. Readers are urged to review and consider carefully our various disclosures, in this report and in our Annual Report on Form 10-K, that advise of risks and uncertainties that affect our business.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Further, except as expressly indicated below, these forward-looking statements are made without taking into account our proposed merger with iManage, Inc. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this report. Except as required by law, we do not undertake to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

As a result of our limited operating history and the rapidly evolving nature of the market for content management software and services, it is difficult for us to accurately forecast our revenues or earnings. It is possible that in some future periods our results of operations may not meet management’s projections or expectations of securities analysts and investors. If this occurs, the price of our common stock is likely to decline. Factors that have caused our results to fluctuate in the past, and are likely to cause fluctuations in the future, include:

The following discussion and analysis of the financial condition and results of operations should be read in conjunction with our financial statements and notes appearing elsewhere in this report.

Interwoven was incorporated in March 1995, to provide software products and services for content management. Our software products and services help customers automate the process of developing, managing and deploying content assets used in business applications. The information technology industry refers to this process as “content management.” Our products are designed to allow all content contributors within an organization to create, manage and deploy content assets, such as documents, XML/HTML, rich media, database content and application code. In May 1997, we shipped the first version of our principal product, TeamSite. We have subsequently developed and released enhanced versions of TeamSite and have introduced related products to compliment our content management offerings. As of June 30, 2003, we had sold our products and services to over 1,250 customers. We market and sell our products primarily through a direct sales force and augment our sales efforts through relationships with systems integrators and other strategic partners. Our revenues to date have been derived primarily from accounts in North America; however, revenues from outside of North America represented 35% and 34% of our total revenues during the six months ended June 30, 2003 and 2002, respectively. We are headquartered in Sunnyvale, California, with 567 employees company-wide as of June 30, 2003.

We have incurred substantial costs to develop our technology and products, to recruit and train personnel for our engineering, sales and marketing and services organizations, and to establish our administrative organization. As a result, we incurred net losses through June 30, 2003 and had an accumulated deficit of $352.1 million as of June 30, 2003. We have experienced declining revenues since 2001 due to the sustained economic slowdown that resulted in substantial reductions in spending on information technology initiatives, to increased competition from other enterprise software firms and to the loss of service revenues to system integrators. We expect the continued economic slowdown and the competitive business environment to negatively affect our business for the foreseeable future. We expect to make acquisitions in the future, thereby potentially reducing our cash and cash equivalents and incurring stock-based compensation and intangible amortization charges, which would increase our reported losses, including non-cash expenses.

In connection with our earnings releases and investor conference calls, we provide supplemental consolidated financial information that excludes from our reported earnings and earnings per share, the effects of expenses such as the amortization of deferred stock-based compensation, amortization of acquired intangibles, in-process research and development, restructuring charges and impairment of goodwill. This supplemental consolidated financial information is reported as pro forma net loss and pro forma net loss per share in addition to information that is reported based on generally accepted accounting principles in the United States (“GAAP”). We believe that such pro forma information provides investors with a more meaningful measure of our operations because it excludes certain expenses that we believe are not indicative of our ongoing operations; we believe that the underlying trends in our business are more evident when the information is viewed this way. However, we urge readers to review and consider carefully the GAAP financial information contained within our earnings releases.

On August 6, 2003, we entered into a definitive agreement to acquire iManage, Inc. in a stock and cash transaction. iManage is a provider of collaborative content management software. Pursuant to the definitive agreement and subject to the terms and conditions set forth therein, iManage will be merged with and into our wholly-owned subsidiary, with this wholly-owned subsidiary continuing as the surviving corporation of the merger. Under the definitive agreement, we would issue 2.0943 shares of our common stock and $1.20 in cash, without interest, for each share of iManage common stock. Following completion of the merger, our stockholders are expected to own approximately 67% of the combined company. We expect this transaction will close in the fourth quarter of 2003, subject to customary conditions, including obtaining necessary regulatory and stockholder approvals, though we cannot assure you that it will be completed. Failure to complete the merger could have a material adverse effect on our stock price, financial condition and results of operations. A more

detailed description of the merger and the risks associated thereto are set forth under “Factors Affecting Future Results – We face numerous risks in connection with the proposed merger with iManage. These risks may adversely affect our results of operations whether or not the merger is completed” below.

We derive revenues from the license of our software products and from services that we provide to our customers.

To date, we have derived the majority of our license revenues from licenses of TeamSite. We recognize revenue using the residual method in accordance with Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions.” Based on these accounting standards, we recognize revenue under what is commonly referred to as the “residual method”. Under the residual method, for agreements that have multiple deliverables or “multiple element arrangements” (e.g., software products, services, support, etc.), revenue is recognized based on company-specific objective evidence of fair value for all of the delivered elements. Our specific objective evidence of fair value 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 that amount is then allocated to the delivered elements. At the outset of the arrangement with the customer, we defer revenue for the fair value of its undelivered elements (e.g., maintenance, 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 97-2 have been met. If such evidence of fair value for each undelivered element of the arrangement does not exist, all revenue from the arrangement is deferred until such time that evidence of fair value does exist or until all elements of the arrangement are delivered.

Under SOP 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 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 assess whether the fee is fixed or determinable based on the payment terms associated with each transaction. If a significant portion of a fee is due beyond our normal payments terms, which generally does not exceed 180 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 do not offer product return rights to resellers or end users. We 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. In general, for sales occurring outside of the United States, we defer recognition of revenue until cash is collected or when a letter of credit is obtained, because in most countries we do not have a sufficient operating history to determine whether collectibility is probable. However, we recognize revenue from our customers in Northern Europe and Australia upon the signing of the contract and shipment of the product, assuming all other revenue recognition criteria have been met. Our history of collections and development of sales infrastructure in those regions enables us to determine that collectibility is probable in those areas. We expect to continually assess the appropriateness of revenue recognition on sales agreements in other geographic locations as our sales infrastructure matures, and our collections history improves, in those regions.

Services revenues consist of professional services and maintenance fees. Professional services primarily 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.

Maintenance agreements are typically priced as a percentage of the product license fee and have a one-year term, renewable annually. Services provided to customers under maintenance agreements include technical product support and unspecified product upgrades. Deferred revenues from advanced payments for maintenance agreements are recognized ratably over the term of the agreement, which is typically one year.

Due to the continued economic slowdown and in light of the global reduction in spending on information technology initiatives, we implemented a series of restructuring and facility consolidation plans to improve our operating performance. Restructuring and facilities consolidation costs consist of expenses associated with workforce reductions, consolidation of excess facilities and the impairment of leasehold improvements and other equipment associated with abandoned facilities.

During the six months ended June 30, 2003, we implemented several restructuring plans in an effort to better align our expenses and revenues. These cost saving efforts resulted in the termination of 60 employees worldwide, throughout all functional areas. We recorded charges of $2.4 million associated with involuntary terminations. The workforce reductions associated with these plans were substantially completed as of June 30, 2003, and $419,000 was accrued at June 30, 2003, associated with future severance payments.

During the six months ended June 30, 2002, we implemented several restructuring plans in an effort to better align our expenses and revenues. These cost saving efforts resulted in the termination of 182 employees worldwide, throughout all functional areas. We recorded charges of $4.7 million associated with involuntary terminations, which included severance costs. The workforce reductions associated with these plans were completed as of December 31, 2002.

During 2002, as a result of our reduced staffing levels, we performed an evaluation of our current facilities requirements and identified facilities that were in excess of our current and estimated future needs. As a result of this analysis, we recorded charges of $24.1 million associated with lease abandonment related to identified excess facilities, which primarily consisted of domestic sales offices. We also evaluated operating equipment and leasehold improvements associated with these facilities to identify those assets that had suffered a reduction in their economic useful lives. Based on these evaluations, we incurred charges of $1.2 million associated with the impairment and accelerated amortization of leasehold improvements and certain operating equipment associated with these abandoned facilities. Additionally, due to the deterioration of the commercial real estate market, after receiving independent appraisals from real estate brokers to estimate such lease rates, we revised our assumptions regarding future sublease income for certain facilities previously abandoned in 2001. As a result, we reduced our estimates regarding sublease income and recorded charges of an additional $4.7 million to reflect this change in estimate. At June 30, 2003, $35.1 million has been accrued associated with facility consolidation plans and is payable through 2010. The facilities charges were an estimate as of June 30, 2003. We reassess this estimated liability each period based on current market conditions. Revisions to our estimated liabilities could materially impact our operating results and financial position in future periods if anticipated events and key assumptions, such as the timing and amounts of sublease rental income change from previous estimates, are different from expected. We expect to revise the estimated liability if necessary.

The restructuring costs and excess facilities charges we have incurred to date have had a material impact on our results of operations and will require additional payments in future periods. The following table summarizes our estimated payments associated with these charges (in thousands):

We have acquired five corporations since our inception. Under GAAP, we have accounted for these business combinations using the purchase method of accounting and recorded the market value of our common stock and options issued in connection with these acquisitions and the related amount of direct transaction costs as the cost of acquiring these entities. These costs are allocated among the individual assets acquired and liabilities assumed, including goodwill and various identifiable intangible assets such as in-process research and development, acquired technology and covenants not to compete, based on their respective fair values. We allocated the amount by which the purchase price exceeded the fair value of the net identifiable assets to goodwill. The impact of purchase accounting on our results of operations has been significant. Amortization of intangibles assets associated with business acquisitions were $887,000 and $2.5 million during the six months ended June 30, 2003 and 2002, respectively. In September 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and Other Intangible Assets”, which became effective for us on January 1, 2002. Under SFAS No. 142, we ceased amortizing $148.2 million of goodwill as of January 1, 2002. Additionally, during 2002, we reclassified to deferred stock-based compensation $1.2 million of goodwill recorded in connection with our acquisition of Neonyoyo, Inc. In lieu of amortization of goodwill, we performed a transitional impairment test of our goodwill on January 1, 2002, and have been subject to annual impairment testing thereafter. We plan to complete our required annual impairment testing during the three months ended September 30, 2003.

We also assess the impairment of identifiable intangibles, long-lived assets and related goodwill from time to time as changes in circumstances indicate that the carrying value may not be recoverable. We consider key indicators of impairment to include:

We have determined that we have one reporting unit for evaluation purposes under SFAS No. 142. When determining if the carrying value of our goodwill is impaired, we will perform a two-step process. First, we will compare the estimated fair value of our reporting unit to its carrying value, including goodwill. Second, if the

carrying value exceeds the fair value of the reporting unit, then the implied fair value of the reporting unit’s goodwill will be determined and compared to the carrying value of the goodwill. The implied fair value of goodwill is determined by allocating the fair value of all of the reporting unit’s assets and liabilities as if the reporting unit had been newly acquired in a business combination as described above. If the carrying value of the reporting unit’s goodwill exceeds its implied fair value, then an impairment charge will be recognized equal to the difference of the computed and recorded amounts.

During the three months ended September 30, 2002, we completed our annual impairment testing. Using the steps mentioned above to determine the estimated fair value of goodwill, we determined that goodwill had been impaired as of the valuation date. Accordingly, we recorded a goodwill impairment charge of $76.4 million during the three months ended September 30, 2002. In performing our testing, we were required to make estimates regarding future operating trends and other variables used in the analysis. Actual future results could differ from the estimates used in the analysis.

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

We have recorded deferred compensation liabilities related to options assumed and restricted shares issued to effect business combinations, and options granted below fair market value associated with our initial public offering in October 1999.

The following table reflects the prospective impact of all deferred compensation costs and the annual amortization of purchased identifiable intangibles attributable to our mergers and acquisitions that have occurred since our inception, for the remaining six months of 2003 and the following annual periods (in thousands):

The amortization expense related to the identifiable intangible assets acquired may be accelerated in the future if we reduce the estimated useful life of the intangible assets. Intangible assets may become impaired in the future if expected cash flows to be generated by these assets decline.

Accounts receivable are recorded net of allowance for doubtful accounts and sales return reserves in the amount of $1.8 million and $1.9 million at June 30, 2003 and December 31, 2002, respectively. We regularly review the adequacy of our allowances through identification of specific receivables where we expect that payment will not be received, and we have established a general reserve policy that is applied to all amounts that are not specifically identified. In determining specific receivables where collection may not be received, we review past due receivables and give consideration to prior collection history, changes in the customer’s overall business condition and the potential risk associated with the customer’s industry, among other factors. We establish a general reserve for all receivable amounts that have not been specifically identified by applying a percentage based on historical collection experience. We establish a general reserve for sales returns by applying a historical percentage based on our license and service revenues activity. The allowances reflect our best estimate as of the reporting dates. Changes may occur in the future, which may make us reassess the collectibility of amounts and at which time we may need to provide additional allowances in excess of that currently provided.

The following table lists, for the periods indicated, our statement of operations data as a percentage of total revenues:

Revenues. Total revenues decreased 21% from $33.0 million for the three months ended June 30, 2002 to $26.2 million for the three months ended June 30, 2003. This decrease in revenues was attributable to the continued worldwide economic slowdown which has resulted in a substantial reduction in overall spending on information technology initiatives, extended sales cycles, and increased competition from other enterprise software firms. We also experienced a decrease in our average selling prices from approximately $250,000 for the three months ended June 30, 2002 to $115,000 for the three months ended June 30, 2003. We believe that this decrease is due to a sustained shift in customer spending patterns that have resulted in a greater number of smaller dollar value agreements representing a larger percentage of the total number of agreements into which we enter, to the loss of service revenues to systems integrators, and to general pricing pressures. We expect this economic slowdown to continue to adversely affect our business for the foreseeable future.

License. License revenues decreased 36% from $15.9 million for the three months ended June 30, 2002 to $10.2 million for the three months ended June 30, 2003. License revenues represented 48% and 39% of total revenues, respectively, in those periods. The decrease in license revenues as a percentage of total revenues and in

absolute dollars was primarily attributable to the factors mentioned above. The number of new license customers declined from 51 for the three months ended June 30, 2002 to 39 for the three months ended June 30, 2003.

Services. Services revenues decreased 6% from $17.1 million for the three months ended June 30, 2002 to $16.0 million for the three months ended June 30, 2003. Services revenues represented 52% and 61% of total revenues, respectively, in those periods. The decrease in services revenues reflects a $950,000 decrease in professional services revenues. We believe our customers increasingly use third party system integrators, rather than our personnel, to perform software implementations, reflecting the competitive pricing and lower cost structures of these system integrators.

License. Cost of license revenues includes expenses incurred to manufacture, package and distribute our software products and related documentation, as well as costs of licensing third-party software sold in conjunction with our software products. Cost of license revenues decreased 57% from $1.1 million for the three months ended June 30, 2002 to $465,000 for the three months ended June 30, 2003. Cost of license revenues represented 7% and 5%, respectively, of license revenues in those periods. The decreases in cost of license revenues and cost of license revenues as a percentage of license revenues were attributable to lower license revenues and the mix of products sold in the period, which was weighted towards products that incorporate third-party software with lower costs or royalty rates.

We expect cost of license revenues as a percentage of license revenues to vary from period to period depending primarily on the mix of the products we sell and fluctuations in the amount of royalties paid to third parties and purchases of third-party software incorporated into our product offerings.

Services. Cost of services revenues consists of salary and related costs of our professional services, training, support personnel and subcontractor expenses. Cost of services revenues decreased 17% from $9.2 million for the three months ended June 30, 2002 to $7.6 million for the three months ended June 30, 2003. This decrease was primarily attributable to lower personnel costs as a result of reduced staffing within our services organization. Cost of services revenues represented 54% and 48% of services revenues, respectively, in those periods. The decrease in cost of services revenues as a percentage of services revenues is primarily attributable to an increase in maintenance revenues as a percentage of services revenues, as maintenance revenues generally have lower costs associated with them.

Since our services revenues have lower gross margins than our license revenues, our overall gross margins will typically decline if our service revenues decline slower or grow faster than our license revenues. We expect cost of services revenues as a percentage of services revenues to vary from period to period, depending in part on whether the services are performed by our in-house staff, subcontractors or third-party system integrators, and on the overall utilization rates of our in-house professional services staff. As our customers increase their use of systems integrators to perform customer implementations in the future, we expect our services revenues and cost of services revenues to decline.

Gross Profit. Gross profit decreased 20% from $22.7 million for the three months ended June 30, 2002 to $18.1 million for the three months ended June 30, 2003. Gross profit represented 69% of total revenues in both periods. The decrease in absolute dollar amounts reflects a decrease in both license and services revenues during those periods.

Research and Development. Research and development expenses consist of personnel and related costs to support product development activities. To date, all software development costs have been expensed in the period incurred. Research and development expenses decreased 15% from $7.0 million for the three months ended June 30, 2002 to $6.0 million for the three months ended June 30, 2003, representing 21% and 23% of total revenues in those periods, respectively. This decrease in absolute dollars reflects a decrease in personnel costs due to reduced staffing as a result of cost saving strategies implemented to help improve our overall operational performance.

We expect that the percentage of total revenues represented by research and development expenses will remain relatively consistent as we continue to manage our expenses in line with our projected operational performance in the continued economic downturn. With evidence of a sustained recovery of the worldwide economy, we would anticipate making investments within our research and development efforts to continue to further advance and expand our product offerings.

Sales and Marketing. Sales and marketing expenses consist primarily of salaries and related costs for sales and marketing personnel, sales commissions, travel and marketing programs. Sales and marketing expenses decreased 27% from $17.9 million for the three months ended June 30, 2002 to $13.1 million for the three months ended June 30, 2003, representing 54% and 50% of total revenues in those periods, respectively. This decrease in absolute dollar amounts primarily relates to a decrease of $3.3 million in personnel costs associated with headcount reductions, a decrease of $679,000 in commissions as a result of lower sales activity and revenue, and a reduction of $465,000 in expenses related to our promotional efforts.

We are endeavoring to reduce our sales and marketing costs during the current economic slowdown. We anticipate that with evidence of a sustained recovery of the worldwide economy, we would review spending in sales and marketing to expand our customer base and increase brand awareness. We also anticipate that the percentage of total revenues represented by sales and marketing expenses will fluctuate from period to period depending primarily on when we hire new sales personnel, the timing of new marketing programs and the levels of revenues in each period.

General and Administrative. General and administrative expenses consist of salaries and related costs for accounting, human resources, legal and other administrative functions, as well as provisions for doubtful accounts. General and administrative expenses decreased 7% from $4.5 million for the three months ended June 30, 2002 to $4.2 million for the three months ended June 30, 2003, representing 14% and 16% of total revenues in those periods, respectively. The decrease in absolute dollar amounts was attributable to a $200,000 decrease in personnel costs associated with reduced staffing and to a decrease of $100,000 in bad debt expense as a result of the overall stability of our customer base and current collections patterns.

We are endeavoring to reduce our general and administrative costs in light of the current economic slowdown. We anticipate that, with evidence of a sustained recovery of the worldwide economy, we will review investments in our general and administrative infrastructure to support our operations. With evidence of a sustained recovery of the worldwide economy, we would expect to make investments in our general and administrative infrastructure to support further expansion of our operations.

Amortization of Deferred Stock-Based Compensation. We recorded deferred stock-based compensation in connection with stock options granted prior to our initial public offering and in connection with stock options granted and assumed during our business acquisitions. Amortization of deferred stock-based compensation was $58,000 for the three months ended June 30, 2002 and $493,000 for the three months ended June 30, 2003. The increase was primarily attributable to adjustments to deferred compensation expense in 2002 related to options assumed during business acquisitions associated with employees who were terminated prior to vesting of such

options. Amortization of deferred stock-based compensation is attributable to the following categories for the three months ended June 30, 2003 and 2002, respectively (in thousands):

We expect amortization of deferred stock-based compensation to be $646,000 for the remaining six months of 2003 and $514,000 for 2004 including the projected variable accounting charge associated with our stock option exchange program (based on the assumption that our stock price in future periods will remain unchanged from June 30, 2003). The variable component of the accounting charge for the options exchanged under this program will be reassessed and reflected in the statement of operations for each reporting period based on the then current stock price for each period.

Amortization of Acquired Intangible Assets. Effective January 1, 2002, we adopted SFAS No. 142. In connection with the adoption of SFAS No. 142, we ceased amortizing net goodwill of $148.2 million, including $1.7 million related to assembled workforce. In conjunction with our acquisition of MediaBin, Inc. during the three months ended June 30, 2003, we recorded $3.4 million in net identifiable intangible assets, which will be amortized over the average useful lives of these assets of 4 years. We expect amortization of acquired intangible assets to be $1.3 million for the remainder of 2003, $2.3 million in 2004, $928,000 in 2005, $854,000 in 2006 and $427,000 in 2007.

In-Process Research and Development. In conjunction with our acquisition of MediaBin, Inc. during the three months ended June 30, 2003, we recorded a charge of $599,000 for acquired in-process research and development. The acquired in-process research and development was immediately expensed because technological feasibility had not been established for the acquired technology and no future alternative use exists. The portion of the purchase price allocated to in-process research and development was determined, in part, by a third-party appraiser through established valuation techniques.

Restructuring Charges. During the three months ended June 30, 2002, we implemented a restructuring plan in an effort to better align our expenses and revenues. As a result of this plan, we recorded a charge of $3.5 million associated with workforce reductions. Workforce reduction costs primarily consisted of severance benefits associated with involuntary terminations. In addition, we recorded $3.2 million in abandonment charges associated with excess facilities and the reduction of expected sublease income estimates and $555,000 for the write-down of leasehold improvements and operating equipment.

During the three months ended June 30, 2003, we implemented a restructuring plan. As a result of this additional restructuring plan, we recorded a charge of $1.3 million associated with workforce reductions. Workforce reduction costs primarily consisted of severance benefits associated with involuntary termination.

Interest Income and Other, Net. Interest income and other, net, decreased from $1.9 million for the three months ended June 30, 2002 to $1.0 million for the three months ended June 30, 2003, primarily due to a decrease in interest rates earned on cash and short-term investments and lower average cash and short-term investment balances during the period.

Provision for Income Taxes. Income tax expense for the three months ended June 30, 2002 and 2003 was $334,000 and $198,000, respectively. Income tax expense was associated with state and foreign income taxes.

Revenues. Total revenues decreased 21% from $65.7 million for the six months ended June 30, 2002 to $51.8 million for the six months ended June 30, 2003. The decrease in total revenues is attributable to the continued worldwide economic slowdown which has resulted in a substantial reduction in overall spending on information technology initiatives, extended sales cycles, and increased competition from other enterprise software firms. We also experienced a decrease in our average selling prices from approximately $230,000 for the six months ended June 30, 2002 to $136,000 for the six months ended June 30, 2003. We believe that this decrease is due to a sustained shift to a greater number of smaller dollar value agreements accounting for a larger percentage of the total number of agreements into which we enter, to the loss of service revenues to system integrators, and to general pricing pressures.

License. License revenues decreased 37% from $30.9 million for the six months ended June 30, 2002 to $19.3 million for the six months ended June 30, 2003. License revenues represented 47% and 37% of total revenues, respectively, in those periods. The decrease in license revenues as a percentage of total revenues and absolute dollars was primarily attributable to the factors mentioned above. The number of new license customers declined from 117 for the six months ended June 30, 2002 to 68 for the six months ended June 30, 2003.

Services. Services revenues decreased 7% from $34.8 million for the six months ended June 30, 2002 to $32.4 million for the six months ended June 30, 2003. Services revenues represented 53% and 63% of total revenues, respectively, in those periods. The decrease in services revenues reflects a $2.5 million decrease in professional service revenues and a $641,000 decrease in training revenues, partially offset by a $780,000 increase in maintenance revenues. We believe our customers increasingly use third party system integrators, rather than our personnel, to perform software implementations, reflecting the competitive pricing and lower cost structures of these system integrators. The decrease in training revenues was due to a decrease in customer training participation as a result of a decline in license revenues. The increase in maintenance revenues was due to greater maintenance fees earned from our larger customer base.

License. Cost of license revenues decreased 42% from $2.0 million for the six months ended June 30, 2002 to $1.2 million for the six months ended June 30, 2003. Cost of license revenues represented 7% and 6%, respectively, of license revenues in those periods. The decreases in cost of license revenues and cost of license revenues as a percentage of license revenues were attributable to lower license revenue and the mix of products sold in the period, which was weighted towards products that incorporate third-party software with lower costs or royalty rates.

Services. Cost of services revenues decreased 19% from $19.2 million for the six months ended June 30, 2002 to $15.5 million for the six months ended June 30, 2003. This decrease was primarily attributable to lower personnel costs as a result of reduced staffing within our services organization. Cost of services revenues represented 55% and 48% of services revenues, respectively, in those periods. The decrease in cost of services revenues as a percentage of services revenues is primarily attributable to an increase in maintenance revenues as a percentage of services revenues, as maintenance revenues generally have lower costs associated with them.

Gross Profit. Gross profit decreased 21% from $44.5 million for the six months ended June 30, 2002 to $35.1 million for the six months ended June 30, 2003. Gross profit represented 68% of total revenues in both periods. The decrease in absolute dollar amounts reflects a decrease in both license and services revenues during those periods.

Research and Development. Research and development expenses decreased 15% from $14.0 million for the six months ended June 30, 2002 to $11.9 million for the six months ended June 30, 2003, representing 21%

and 23% of total revenues in those periods, respectively. The decrease in absolute dollars reflects a decrease in personnel costs attributable to reduced staffing as a result of cost saving strategies implemented to improve our overall operational performance.

Sales and Marketing. Sales and marketing expenses decreased 29% from $38.7 million for the six months ended June 30, 2002 to $27.6 million for the six months ended June 30, 2003, representing 59% and 53% of total revenues in those periods, respectively. This decrease in absolute dollar amounts primarily relates to a decrease of $5.0 million in personnel costs associated with headcount reductions, a decrease of $2.3 million in commissions as a result of lower sales activity and revenues and a reduction of $729,000 in expenses related to our promotional efforts.

General and Administrative. General and administrative expenses decreased 13% from $9.6 million for the six months ended June 30, 2002 to $8.3 million for the six months ended June 30, 2003, representing 15% and 16% of total revenues in those periods, respectively. The decrease in absolute dollar amounts was attributable to a $654,000 decrease in personnel costs associated with reduced staffing, and to a decrease of $600,000 in bad debt expense as a result of the overall stability of our customer base and current collection patterns.

Amortization of Deferred Stock-Based Compensation. Amortization of deferred stock-based compensation was $3.3 million for the six months ended June 30, 2002 and $1.0 million for the six months ended June 30, 2003. The decrease was primarily attributable to the use of the accelerated method of amortizing deferred compensation expense, as prescribed by Financial Accounting Standards Board Interpretation No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans (An Interpretation of APB Opinions No. 15 and 25)”, which resulted in greater recognition of amortization expense in the beginning of the vesting period for such options. Amortization of deferred stock-based compensation is attributable to the following categories for the six months ended June 30, 2003 and 2002, respectively (in thousands):

Amortization of Acquired Intangible Assets. Amortization of acquired intangible assets decreased 65% from $2.5 million for the six months ended June 30, 2002 to $887,000 for the six months ended June 30, 2003. The decrease in absolute dollar amounts was attributable to the completion of amortization of certain acquired intangible assets during 2002.

In-Process Research and Development. In conjunction with our acquisition of MediaBin, Inc. during the six months ended June 30, 2003, we recorded a charge of $599,000 associated with acquired in-process research and development. The acquired in-process research and development was immediately expensed because technological feasibility had not been established for the acquired technology and no future alternative use exists. The portion of the purchase price allocated to in-process research and development was determined, in part, by a third-party appraiser through established valuation techniques.

Restructuring Charges. During the six months ended June 30, 2002, we implemented several restructuring plans in an effort to better align our expenses and revenues. We recorded a charge of $4.7 million with workforce reductions. Workforce reduction costs primarily consisted of severance benefits associated with involuntary terminations, which included severance costs. In addition, we recorded $3.2 million in abandonment charges associated with excess facilities and the reduction of sublease income estimates and $555,000 for the write-down of leasehold improvements and operating equipment.

During the six months ended June 30, 2003, we implemented additional restructuring plans. As a result of these additional restructuring plans, we recorded a charge of $2.4 million associated with workforce reductions. Workforce reduction costs primarily consisted of severance benefits associated with involuntary termination.

Interest Income and Other, Net. Interest income and other, net, decreased from $3.4 million for the six months ended June 30, 2002 to $1.9 million for the six months ended June 30, 2003, primarily due to a decrease in interest rates earned on cash and short-term investments and lower average cash and short-term investment balances during the period.

Provision for Income Taxes. Income tax expense for the six months ended June 30, 2002 and 2003 was $788,000 and $639,000, respectively. Income tax expense was associated with state and foreign income taxes.

Net cash used in operating activities was $17.4 million in the six months ended June 30, 2002 and $16.2 million in the six months ended June 30, 2003. Net cash used in operating activities during the six months ended June 30, 2002 primarily reflected net losses and decreases in accrued liabilities and deferred revenue, increases in prepaid expenses and other assets offset in part by depreciation expense, amortization of deferred stock-based compensation, amortization of acquired intangibles, restructuring and excess facilities charges and a decrease in accounts receivable. Net cash used in operating activities during the six months ended June 30, 2003 primarily reflected net losses, restructuring and excess facilities charges and decreases in accounts payable, accrued liabilities and deferred revenue, offset in part by amortization of deferred stock-based compensation, amortization of acquired intangible assets, depreciation expense and a decrease in accounts receivable.

A significant portion of our cash inflows have historically been generated by our sales. These inflows may fluctuate significantly from period to period. A decrease in customer demand or decrease in the market acceptance of our products would jeopardize our ability to generate positive cash flows from operations.

During the six months ended June 30, 2002 and 2003, investing activities included purchases of property and equipment, principally computer hardware and software to upgrade our current operating systems. Cash used to purchase property and equipment was $957,000 and $516,000 during the six months ended June 30, 2002 and 2003, respectively. We do not expect that capital expenditures will increase substantially over our expenditure levels in prior periods. As of June 30, 2003, we had no material capital expenditure commitments.

During the six months ended June 30, 2002 and 2003, our investing activities included purchases and maturities of short-term investments. Net maturities of investments were $12.9 million and $20.4 million during the six months ended June 30, 2002 and 2003, respectively. As of June 30, 2003, we had not invested in derivative securities. In the future, we expect that cash in excess of current requirements will continue to be invested in high credit quality, interest-bearing securities.

During the six months ended June 30, 2003, our investing activities included $4.2 million in cash paid for businesses acquired, attributable to the acquisition of MediaBin, Inc.

During the six months ended June 30, 2002 and 2003, our financing activities included proceeds from the issuance of common stock and our repurchase of outstanding stock. During the six months ended June 30, 2002 and 2003, proceeds from the issuance of common stock were $4.4 million and $866,000, respectively. During the six months ended June 30, 2002, we repurchased 1,750,000 shares of our common stock at a cost of $6.0 million.

At June 30, 2003, our sources of liquidity consisted of $161.6 million in cash, cash equivalents and investments. At June 30, 2003, we had $126.5 million in working capital. We have a $20.0 million line of credit with Washington Mutual Business Bank, which bears interest at the Wall Street Journal’s prime rate, which was 4.25% at June 30, 2003 and is secured by cash. This line of credit agreement expires in July 2004. We also have

a $7.5 million line of credit with Wells Fargo Bank, which is secured by cash and bears interest at our option of either a variable rate 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. This line of credit agreement expires in December 2003. We had no outstanding borrowings under these lines of credit as of June 30, 2003. There are no covenant requirements associated with these lines of credit. We intend to maintain these lines of credit in the future.

We lease our facilities under operating lease agreements that expire at various dates through 2010. The following presents our prospective future lease payments under these agreements (in thousands):

Of these total minimum lease commitments, $35.1 million has been accrued, which is net of estimated sublease income, in restructuring and excess facilities costs at June 30, 2003.

We have entered into various standby letter of credit agreements associated with our facilities operating leases, which serve as required deposits for such facilities. These letters of credit expire at various times through 2013. At June 30, 2003, we had $11.9 million outstanding under standby letters of credit, which are secured by substantially all of our assets. The following presents our outstanding commitments under these agreements at each respective balance sheet date (in thousands):

Pursuant to the terms of the definitive agreement related to the proposed merger with iManage, we are obligated to pay a $6.0 million fee if iManage terminates the definitive agreement because our board of directors fails to support the merger in certain ways or our stockholders fail to approve the merger following our involvement in another acquisition under certain circumstances.

We believe that our current cash and cash equivalents, short-term investments, cash flows from operations and funds available under existing credit facilities will be sufficient to meet our working capital requirements and capital expenditures for the foreseeable future. Long-term, we may require additional funds to support our working capital requirements or for other purposes and may seek to raise additional funds through public or private equity or debt financing or from other sources. We cannot assure you that additional financing will be available on acceptable terms, or at all.

If adequate funds are not available or are not available on acceptable terms, we may be unable to develop or enhance our products, take advantage of future opportunities, or respond to competitive pressures or unanticipated requirements, which could harm our business, financial condition and operating results.

The risks and uncertainties described below are not the only risks we face. These risks are the ones we consider to be significant to your decision whether to invest in our common stock at this time. We might be wrong. There may be risks that you, in particular, view differently than we do, and there are other risks and uncertainties that we do not presently know 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 all or part of your investment.

In addition to other information in this Form 10-Q, the following factors should be considered carefully in evaluating Interwoven and our business.

We face many risks in connection with our proposed merger with iManage. Some of those risks apply whether or not the merger is completed.

Our proposed merger with iManage might not be completed on a timely basis or at all. If that were to happen, these risks include the following:

Even if the proposed merger is completed, the combined company may not realize expected benefits because of integration and other challenges. These risks include the following:

These and other risks will be described in more detail in the joint proxy statement/prospectus related to the merger that we will file with the SEC as a registration statement on Form S-4. In addition, we call your attention to the fact that iManage’s business differs from our business, and iManage’s results of operations, as well as the price of iManage’s common stock, may be affected by factors different than those affecting our results of operations and the price of our common stock before the merger. For further information on iManage’s business and certain factors to consider in connection with the proposed merger, please refer to iManage’s annual report on Form 10-K for the fiscal year ended December 31, 2002, subsequently filed quarterly reports on Form 10-Q and Rule 425 filings—each of which may be accessed through the SEC’s EDGAR filings on their website at www.sec.gov.

Since we first sold our TeamSite product in 1997, we have experienced wide swings in market demand for our products, and have revised our corporate strategy from time to time, which make the evaluation of our performance and our common stock difficult.

We shipped our first product, Team Site, in May 1997. Since that time, we have derived the vast majority of our revenues from licensing TeamSite and related products and services. In evaluating our common stock, you should consider the risks and difficulties frequently encountered by companies in new and rapidly evolving markets, particularly those companies whose businesses depend on the Internet and corporate information technology spending. These risks and difficulties, as they apply to us in particular, include:

One or more of the foregoing factors may cause our operating expenses to be disproportionately high during any given period or may cause our net revenues and operating results to be significantly lower than expected. We may experience a shortfall in revenues or earnings or otherwise fail to meet public market expectations, which could harm our business, financial condition and the market price of our common stock.

If we do not increase our license revenues significantly, we will fail to achieve and sustain operating profitability.

We have incurred net losses from operations in each quarter since our inception through the quarter ended June 30, 2003. As of June 30, 2003, we had an accumulated deficit of approximately $352.1 million. Although our losses in recent quarters have been smaller, we cannot assure you that this trend will continue. To achieve and sustain operating profitability on a quarterly and annual basis, we will need to increase our revenues significantly, particularly our license revenues. We cannot predict when we will become profitable, if at all. Furthermore, we have generally made business decisions with reference to pro forma metrics that exclude non-cash charges, such as acquisition and stock-based compensation charges. We expect to continue to make acquisitions, and to incur additional non-cash charges such as stock-based compensation and intangible amortization charges, which will increase our losses.

Services revenue has represented an increasingly larger percentage of our total revenue in 2002 and 2003, but our services revenue is vulnerable to reduced demand and increased competition, particularly from systems integrators we use to complete software implementations.

Our services revenues represented 52% and 61% of total revenues during the three months ended June 30, 2002 and 2003, respectively. In that period, services revenue declined from $17.1 million for the three months ended June 30, 2002 to $16.0 million for the three months ended June 30, 2003. To a large extent, the level of our services revenues depends upon our ability to license products that generate follow-on services revenues, such as maintenance. Services revenue also depends on demand for professional services, which is subject to fluctuation in response to economic slowdowns. The continued economic slowdown has and may continue to reduce demand for our professional services. As systems integrators and other third parties, have become proficient at installing and servicing our products, our services revenues have declined, and we expect them to continue to decline. Whether we will be able to successfully manage our professional services capacity during the continued economic slowdown is difficult to predict. If our professional services capacity is too low, we may not be able to capitalize on future increases in demand for our services, but if our capacity is too high, our gross margin on services revenue will be worse.

Many factors can cause our revenues to fluctuate on a quarterly basis, and if we fail to satisfy the expectations of investors or market analysts and our stock price may decline.

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

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.

The longer that the economic slowdown continues to affect our customer base, the more our losses will be extended.

The current widespread economic slowdowns in the markets we serve have harmed our sales. Capital spending on information technology in general, and capital spending on web initiatives in particular, have

declined in recent years. Further, the pricing of our products and the typical size of customer purchases in the current economic environment usually requires multiple approvals within the customer organization. As a result, our sales process has become more difficult and we are increasingly finding that our customers’ purchasing decisions take longer, and decisions to purchase content management products compete with decisions to purchase other information technology products. We believe these pressures have caused our new customers to make lower dollar value purchases, reducing our average sales prices, which have dropped from $250,000 in the three months ended June 30, 2002 to $115,000 in the three months ended June 30, 2003. This reduction has adversely affected our revenues. We expect these trends to continue. In addition, since many of our customers are also adversely affected by the general economic slowdown, we may find that collecting accounts receivable from existing or new customers will take longer than we expect or that some accounts receivable will become uncollectible.

Competition in our market is intense, which makes it harder for us to grow and achieve profitability.

We also face potential competition from our strategic partners, such as BEA Systems, IBM and Oracle, or from other companies that may in the future decide to compete in our market. Some of our existing and potential competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than we do. Many of these companies can also take advantage of extensive customer bases and adopt aggressive pricing policies to gain market share. Potential competitors may bundle their products in a manner that discourages users from purchasing our products. For example, Microsoft has introduced a content management product and might choose to bundle it with other products in ways that would harm our competitive position. Barriers to entering the content management software market are relatively low.

Although we believe the number of our competitors is increasing, we believe there may be consolidation in the content management software industry. We expect that the general downturn of stock prices in the technology-related companies since March 2000 will result in significant acceleration of this trend, with fewer but more financially-sound competitors surviving that are better able to compete with us for our current and potential customers.

Because most of our revenues are influenced by referrals from strategic partners, our future success depends in part on those partners, but their interests differ from ours.

Our direct sales force depends on strategic partnerships and marketing alliances to obtain customer leads, referrals and distribution. The majority of our revenues are influenced by our strategic partners. If we are unable to maintain our existing strategic relationships or fail to enter into additional strategic relationships, our ability to increase our sales and reduce expenses will be harmed, and we could also lose anticipated customer introductions and co-marketing benefits. Our success depends in part on the success of our strategic partners and their ability and willingness to market our products and services successfully. We also rely on our strategic partnerships to aid in the development of our products. Should our strategic partners not regard us as significant for their own businesses, they could reduce their commitment to us or terminate their respective relationships with us, pursue competing relationships, or attempt to develop or acquire products or services that compete with our products and services.

Because the market for content management software is evolving rapidly, we do not know whether existing and potential customers will purchase our products in sufficient quantity for us to achieve profitability.

The market for content management software is relatively new and is evolving rapidly. We expect that we will continue to need to educate prospective clients about the uses and benefits of our products and services. Various factors could inhibit the growth of the market and market acceptance of our products and services. In particular, potential customers that have invested substantial resources in other methods of conducting business over the Internet may be reluctant to adopt a new approach that may replace, limit or compete with their existing systems. We cannot be certain that the market for our products will expand or continue to deteriorate further.

We may be required to write-off all or a portion of the goodwill value of companies we have acquired.

Accounting principles require companies to review the value of assets from time to time to determine whether those values have been impaired. As a result, we are required periodically to review the value on our balance sheet of companies we have acquired, to determine if those values should be reduced. In connection with our 2002 periodic review, we reduced the amount of goodwill of acquired companies on our balance sheet. We may in the future be required to write down the carrying value of goodwill assets, including goodwill associated with our proposed merger with iManage.

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 in the period that the determination is made. Any significant impairment harms our operating results will be taken for that period and our financial position, and could harm the price of our stock.

Our workforce reductions may require us to reduce our facilities commitments, which may cause us to incur expenses or recognize financial statement charges.

Since June 30, 2001, we have reduced our employee headcount by more than 40% of our employees worldwide. In connection with these restructurings, we relocated offices and abandoned facilities in the San Francisco Bay area and Austin, Texas. However, it is possible that our present facilities may exceed our estimated future needs, particularly if the proposed merger with iManage is not consummated. If this happens, and given the decline in the commercial real estate market, we could be faced with paying rent for space we are not using, or with subleasing the excess space for less than our lease rate and recognizing a financial statement charge reflecting the loss. For example, in 2002 we recorded $24.2 million in lease abandonment charges associated with excess facilities, revised our earlier assumptions about future sublease income, and accrued $36.8 million for facility consolidation plans. If the commercial real estate market continues to deteriorate, or if we cannot sublease these facilities at all, we may record additional facilities charges in the future. Any charge we record would be based on assumptions and our estimates about our ability to sublease facilities or terminate leases. We cannot assure you that our estimates and assumptions about these charges will be accurate in the future, and additional charges may be required in future periods.

Our lengthy sales cycle makes it particularly difficult for us to forecast revenues, requires us to incur high costs of revenues and increases the variability of our quarterly results.

The time between our initial contact with a potential customer and the ultimate sale, which we refer to as our sales cycle, typically ranges between three and nine months, depending largely on the customer. We believe that the continuing economic slowdown has lengthened our sales cycle as customers delay or defer decisions on implementing content management initiatives. If we do not shorten our sales cycle, it will be difficult for us to reduce sales and marketing expenses. In addition, as a result of our lengthy sales cycle, we have only a limited ability to forecast the timing and size of specific sales. This makes it more difficult to predict quarterly financial performance, or to achieve it, and any delay in completing sales in a particular quarter could harm our business and cause our operating results to vary significantly.

We continue to rely heavily on sales of one product, TeamSite, which accounts for the vast majority of our revenue, so if it loses market acceptance, we will experience greater losses.

Since 1997, we have generated the vast majority of our revenues from licenses of, and services related to, our TeamSite product. In 1997 TeamSite accounted for virtually all of our revenue, and in 2002 approximately 80% of our revenue was associated with TeamSite. We believe that revenues generated from TeamSite will continue to account for a large portion of our revenues for the foreseeable future. A decline in the price of TeamSite, or our inability to increase license sales of TeamSite, would harm our business and operating results more seriously than it would if we had several different products and services to sell. In addition, our future financial performance will depend upon successfully developing and selling enhanced versions of TeamSite. If we fail to deliver product enhancements or new products that customers want, it will be more difficult for us to succeed.

Difficulties in introducing new products and upgrades 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 content management functionality to our product offerings by internal development, and possibly by acquisition. Content 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 could harm our business. New products or upgrades may not be released according to schedule or may contain defects when released. Either situation could result 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, or deliver enhancements to existing products on a timely and cost-effective basis, our business will be harmed.

Our products might not be compatible with all major platforms, which could limit our revenues.

Our products currently operate on the Microsoft Windows NT, Microsoft Windows 2000, Linux, IBM AIX, Hewlett Packard UX and Sun Solaris operating systems. 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 would be harmed. In addition, 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 also harm our business.

Stock-based compensation charges and amortization of acquired intangibles reduce our reported net income.

In connection with our acquisitions, we generally allocate a portion of the purchase price to intangible assets such as goodwill, in-process research and development, acquired technology, acquired workforce and covenants not to compete. We have also recorded deferred compensation related to options assumed and shares issued to effect business combinations, as well as options granted below fair market value associated with our initial public offering in October 1999. The future amortization expense related to the acquisitions and deferred stock-based compensation may be accelerated as we assess the value and useful life of the intangible assets, and accelerated expense would reduce our earnings.

In addition, our stock option repricing program requires us to record a compensation charge on a quarterly basis as a result of variable plan accounting treatment, which will lower our earnings. This charge will be evaluated on a quarterly basis and additional charges will be recorded if the market price of our stock exceeds the price of the repriced options. Since the variable component of this charge is computed based on the current market price of our stock, such charges may vary significantly from period to period.

Acquisitions may harm our business by being more difficult than expected to integrate, by diverting management attention or by subjecting us to unforeseen accounting problems.

As part of our business strategy, we may seek to acquire or invest in additional businesses, products or technologies that we feel could complement or expand our business. If we identify an appropriate acquisition opportunity, we might be unable to negotiate the terms of that acquisition successfully, finance it, develop the intellectual property acquired from it or integrate it into our existing business and operations. We may also be unable to select, manage or absorb any future acquisitions successfully. Further, the negotiation of potential acquisitions, as well as the integration of an acquired business, especially if it involved our entering a new market, would divert management time and other resources and put us at a competitive disadvantage. We may have to use a substantial portion of our available cash, including proceeds from public offerings, to consummate an acquisition. On the other hand, if we consummate acquisitions through an exchange of our securities, our stockholders could suffer significant dilution. In addition, we cannot assure you that any particular acquisition, even if successfully completed, will ultimately benefit our business.

In connection with our acquisitions, we may be required to write-off software development costs or other assets, incur severance liabilities, amortization expenses related to acquired intangible assets or incur debt, any of which could harm our business, financial condition, cash flows and results of operations. The companies we acquire may not have audited financial statements, detailed financial information or adequate internal controls. There can be no assurance that an audit subsequent to the completion of an acquisition will not reveal matters of significance, including with respect to revenues, expenses, contingent or other liabilities and intellectual property. Any such write-off could harm our financial results.

Sales outside North America account for about one-third of our revenues, so our business is exposed to risks of international operations to a greater extent than are companies with more domestic sales.

Sales to customers located outside North America have historically accounted for a significant percentage of our revenues and we anticipate that such sales will continue to represent a significant percentage of our revenues. Sales to international customers were 34% and 35% of total revenues for the six months ended June 30, 2002 and 2003. As a result, we face special risks associated with our international operations, such as:

Any of these risks could reduce international sales or increase our cost of doing business outside of North America.

Fluctuations in the exchange rates of foreign currency, particularly in the Euro and the various local currencies of Australia, Asia and Europe, may harm our business.

We are exposed to adverse movements in foreign currency exchange rates because we translate foreign currencies into U.S. Dollars for reporting purposes. Our primary exposures have related to operating expenses and sales in Australia, Asia and Europe that were not U.S. Dollar-denominated. Historically, these risks were minimal for us, but as our international revenues and operations have grown and continue to grow, the adverse currency fluctuations could have a material adverse impact on our financial results. The increasing use of the Euro as a common currency for members of the European Union could affect our foreign exchange exposure.

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 provisions to protect it. We currently have three issued United States patents and one foreign patent, as well as several U.S. and foreign patents pending approval. It is possible that patents will not be issued from our currently pending patent applications or any future patent application we may file. We have also restricted customer access to our source code and required all employees to enter into confidentiality and invention assignment agreements. Despite our efforts to protect our proprietary technology, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that 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. Further, third parties may claim that our products infringe the intellectual property of their products.

Our workforce reductions plans may hurt the morale and performance of our continuing personnel, and make it more difficult to retain the services of key personnel.

We restructured our operations over the past two years, resulting in substantial workforce reductions worldwide, in all functional areas. In addition to direct economic costs, these personnel reductions may hurt morale among continuing employees, or create concerns about job security. These morale issues may lower productivity or make it more likely that some of our key employees will seek new employment and require us to hire replacements. These reductions may also make the management of our business more difficult, subject us to increased risk of litigation and make it harder for us to attract employees in the future.

Since large orders may have a significant impact on our results from time to time, our quarterly results are subject to wide fluctuations.

We expect that any relatively large orders that we may receive from time to time in the future would have a significant impact on our license revenues in the quarter in which we recognize revenues from these orders. Large orders make our net revenues and operating results more likely to vary from quarter to quarter because the number of large orders we receive is expected to vary from period to period. The loss of any particular large order in any period could be significant. As a result, our operating results could suffer if any large orders are delayed or cancelled in any future period.

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 maintenance contracts to ensure proper installation and implementation. Because customers rely on our products for business critical processes, defects or errors in our products or services might result in tort or warranty claims. Moreover, third parties may develop and spread computer viruses that may damage the functionality of our software products. Any damage to or interruption in the performance of our software could also harm our business.

We have various mechanisms in place to discourage takeover attempts, which might tend to suppress our stock price.

Provisions of our certificate of incorporation and bylaws that may discourage, delay or prevent a change in control include:

We develop products in the United States and market our products in North America, and, to a lesser extent in Europe and Asia Pacific. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets.

Since a majority of our revenue is currently denominated in U.S. Dollars, a strengthening of the dollar could make our products less competitive in foreign markets. Our interest income and expense is sensitive to changes in the general level of U.S. interest rates, particularly since the majority of our financial investments are in cash equivalents and investments. Due to the nature of our financial investments, we believe that there is no material risk exposure.

The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including both government and corporate obligations and money market funds. We believe an immediate 10% increase or decrease in interest rates affecting our investment portfolio as of June 30, 2003 would not have a material effect on our financial position or results of operations.

We did not hold derivative financial instruments as of June 30, 2003, and have never held such instruments in the past. In addition, we had no outstanding debt as of June 30, 2003.

Currently the majority of our sales and expenses are denominated in U.S. Dollars, as a result we have experienced no significant foreign exchange gains and losses to date. While we do expect to effect some transactions in foreign currencies in 2003, we do not anticipate that foreign exchange gains or losses will be significant. We have not engaged in foreign currency hedging activities to date.

Regulations under the Securities Exchange Act of 1934 require public companies, including Interwoven, to maintain “disclosure controls and procedures,” which are defined to mean a company’s controls and other procedures that are designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Our chief executive officer and our chief financial officer, based upon their evaluation of our disclosure controls and procedures as of the end of the period covered by this report, concluded that as of the date of this evaluation, our disclosure controls and procedures were effective for this purpose.

During the period covered by this report, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

We held our Annual Meeting of Stockholders on June 5, 2003. Descriptions of the matters voted upon and the results of such meeting are set forth below:

On July 22, 2003, we announced that Max Carnecchia had been named as our Senior Vice President of Sales, Americas and EMEA.

1. On April 4, 2003, we filed a report on Form 8-K dated April 2, 2003 to report under Item 5: Other Events changes in our management team and to report under Item 12: Results of Operations and Financial Condition our preliminary quarterly earnings release and investor conference call, and related financial and operating information, and Item 7: Financial Statements and Exhibits with respect to earnings release and conference call transcript exhibits.

2. On April 23, 2003, we filed a report on Form 8-K dated April 17, 2003 to report under Item 12: Results of Operations and Financial Condition our quarterly earnings release and investor conference call, and related financial and operating information, and Item 7: Financial Statements and Exhibits with respect to earnings release and conference call transcript exhibits.

3. On June 2, 2003, we filed a report on Form 8-K dated May 30, 2003 to report under Item 5: Other Events that we had entered into a definitive agreement to acquire MediaBin, Inc., and the related financial effects of this acquisition, and under Item 7: Financial Statements and Exhibits with respect to a press release exhibit.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

INTERWOVEN, INC.

By:		/s/ DAVID M. ALLEN
		David M. Allen Senior Vice President and Chief Financial Officer (Principal Financial Officer and Chief Accounting Officer)

Delaware		77-0523543
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

803 11th Avenue, Sunnyvale, CA		94089
(Address of principal executive offices)		(Zip Code)

		Page No.
	PART I FINANCIAL INFORMATION
Item 1. Financial Statements:

	Unaudited Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002	3

	Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2003 and 2002	4

	Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2002	5

	Notes to the Unaudited Condensed Consolidated Financial Statements	6

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	39

Item 4.	Controls and Procedures	39

	PART II OTHER INFORMATION

Item 1.	Legal Proceedings	40

Item 2.	Changes in Securities and Use of Proceeds	40

Item 3.	Defaults upon Senior Securities	40

Item 4.	Submission of Matters to a Vote of Security Holders	40

Item 5.	Other Information	40

Item 6.	Exhibits and Reports on Form 8-K	40

SIGNATURE		42

	June 30, 2003			December 31, 2002
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	59,263		$	58,855
Short-term investments		102,288			122,814
Accounts receivable, net of allowances of $1,849 and $1,926, respectively		17,223			22,151
Prepaid expenses		3,691			3,715
Other current assets		3,742			3,562

Total current assets		186,207			211,097
Property and equipment, net		8,741			11,694
Goodwill, net		82,019			70,564
Other intangible assets, net		5,837			3,308
Restricted cash		378			378
Other assets		1,616			1,616

	$	284,798		$	298,657


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	4,118		$	3,438
Accrued liabilities		14,549			13,319
Restructuring and excess facilities costs		8,669			10,564
Deferred revenue		32,381			36,331

Total current liabilities		59,717			63,652

Other accrued liabilities, net of current portion		2,037			2,070
Restructuring and excess facilities costs, net of current portion		26,809			29,210

Total liabilities		88,563			94,932

Stockholders’ equity:
Common stock and additional paid-in capital, 500,000 shares authorized, 105,886 and 102,536 shares issued and outstanding, respectively		549,279			541,377
Deferred stock-based compensation		(1,160	)		(2,166	)
Accumulated other comprehensive income		219			323
Accumulated deficit		(352,103	)		(335,809	)

Total stockholders’ equity		196,235			203,725

	$	284,798		$	298,657

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
	(unaudited)
Revenues:
License	$	10,192		$	15,946		$	19,343		$	30,873
Services		16,003			17,070			32,438			34,815

Total revenues		26,195			33,016			51,781			65,688

Cost of revenues:
License		465			1,069			1,167			2,017
Services		7,645			9,202			15,540			19,175

Total cost of revenues		8,110			10,271			16,707			21,192

Gross profit		18,085			22,745			35,074			44,496

Operating expenses:
Research and development		6,002			7,029			11,886			14,000
Sales and marketing		13,056			17,938			27,570			38,685
General and administrative		4,211			4,509			8,338			9,592
Amortization of deferred stock-based compensation		493			58			1,006			3,265
Amortization of acquired intangible assets		444			1,310			887			2,546
In-process research and development		599			—			599			—
Restructuring charges		1,311			7,244			2,377			8,464

Total operating expenses		26,116			38,088			52,663			76,552

Loss from operations		(8,031	)		(15,343	)		(17,589	)		(32,056	)
Interest income and other, net		1,035			1,886			1,934			3,389

Net loss before provision for income taxes		(6,996	)		(13,457	)		(15,655	)		(28,667	)
Provision for income taxes		198			334			639			788

Net loss	$	(7,194	)	$	(13,791	)	$	(16,294	)	$	(29,455	)

Basic and diluted net loss per share	$	(0.07	)	$	(0.13	)	$	(0.16	)	$	(0.29	)

Shares used in computing basic and diluted net loss per share		102,638			103,414			102,400			103,020

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
Net loss, as reported	$	(7,194	)	$	(13,791	)	$	(16,294	)	$	(29,455	)
Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects		493			58			1,006			3,265
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(4,958	)		(6,107	)		(11,624	)		(14,896	)

Pro forma net loss	$	(11,659	)	$	(19,840	)	$	(26,912	)	$	(41,086	)

Net loss per share:
Basic and diluted—as reported	$	(0.07	)	$	(0.13	)	$	(0.16	)	$	(0.29	)

Basic and diluted—pro forma	$	(0.11	)	$	(0.19	)	$	(0.26	)	$	(0.40	)

	Three Months Ended June 30,					Six Months Ended June 30,
	2003		2002			2003		2002
Cost of services revenues	$	—	$	26		$	9	$	69
Research and development		308		(341	)		622		809
Sales and marketing		178		306			359		2,177
General and administrative		7		67			16		210

Total	$	493	$	58		$	1,006	$	3,265

Allocation of Purchase Price:	Amortization Life (Years)	Amount
Fair value of tangible assets		$	1,323
Customer list	4		220
Patents/patent applications	4		474
Completed technology	4		2,721
In-process research and development	N/A		599
Goodwill	N/A		11,455

Total assets acquired			16,792

Accounts payable			2,897
Accrued liabilities			1,597
Deferred revenue			160

Total liabilities assumed			4,654

Transaction costs accrued and incurred			899

Total consideration		$	11,239

	Three Months Ended June 30,		Six Months Ended June 30,
	2003	2002	2003	2002
Weighted average unvested common stock subject to repurchase	359	890	385	1,047
Weighted average common stock options outstanding	27,059	29,472	26,654	29,188

	27,418	30,362	27,039	30,235

	June 30, 2003				December 31, 2002
	Cost		Accumulated amortization		Cost		Accumulated amortization
Goodwill	$	263,590	$	181,571	$	252,135	$	181,571

Acquired identifiable intangibles:
Covenants not to compete	$	6,929	$	6,929	$	6,929	$	6,929
Completed technology and other		9,390		3,553		5,975		2,667

	$	16,319	$	10,482	$	12,904	$	9,596

Year Ending December 31,	Workforce Reductions		Excess Facilities		Total
2003 (remaining six months)	$	419	$	5,850	$	6,269
2004		—		6,873		6,873
2005		—		7,063		7,063
2006		—		6,726		6,726
2007		—		4,590		4,590
Thereafter		—		3,957		3,957

Total	$	419	$	35,059	$	35,478

	Work Force Reductions			Non-Cancelable Lease Commitments And Other			Total
Balance at December 31, 2002	$	1,042		$	38,732		$	39,774
Restructuring costs		2,377			—			2,377
Cash payments		(3,000	)		(3,673	)		(6,673	)

Balance at June 30, 2003	$	419		$	35,059		$	35,478

	2003		2004		2005		2006		2007
Identifiable intangible assets	$	1,314	$	2,313	$	928	$	854	$	427
Stock-based compensation		646		514		—		—		—

	$	1,960	$	2,827	$	928	$	854	$	427

	Three Months Ended June 30,				Six Months Ended June 30,
	2003		2002		2003		2002
Revenues:
License	39	%	48	%	37	%	47	%
Services	61		52		63		53

Total revenues	100		100		100		100

Cost of revenues:
License	2		3		2		3
Services	29		28		30		29

Total cost of revenues	31		31		32		32

Gross profit	69		69		68		68

Operating expenses:
Research and development	23		21		23		21
Sales and marketing	50		54		53		59
General and administrative	16		14		16		15
Amortization of deferred stock-based compensation	2		—		2		5
Amortization of acquired intangible assets	2		4		2		4
In-process research and development	2		—		1		—
Restructuring charges	5		22		5		13

Total operating expenses	100		115		102		117

Loss from operations	(31	)	(46	)	(34	)	(49	)
Interest income and other, net	4		6		4		5

Net loss before provision for income taxes	(27	)	(40	)	(30	)	(44	)
Provision for income taxes	1		1		1		1

Net loss	(28	)%	(41	)%	(31	)%	(45	)%

Year Ended December 31,	Occupied Facilities		Abandoned Facilities		Total
Year Ended December 31,	Occupied Facilities		Abandoned Facilities		Total
2003 (remaining six months)	$	5,804	$	4,755	$	10,559
2004		10,601		8,895		19,496
2005		10,244		9,104		19,348
2006		10,293		8,679		18,972
2007		5,225		5,873		11,098
Thereafter		414		3,565		3,979

Total	$	42,581	$	40,871	$	83,452

	Three Months Ended June 30,				Six Months Ended June 30,
	2003		2002		2003		2002
Risk-free interest rates	2.6	%	4.4	%	2.7	%	4.4	%
Expected lives from vest date (in years)—Options	1.0		1.0		1.0		1.0
Expected lives from vest date (in years)—ESPP	0.5		0.5		0.5		0.5
Dividend yield	0.0	%	0.0	%	0.0	%	0.0	%
Expected volatility	101.3	%	89.2	%	101.3	%	89.2	%

December 31,	Standby Letters of Credit
2003	$	10,625
2004	$	8,785
2005	$	8,712
2006	$	8,712
2007	$	6,600
Thereafter	$	6,600

		Votes For	Votes Against	Votes Withheld	Votes Abstained	Broker Non-Votes
1.	Election of Directors:
	Martin W. Brauns	72,201,190	15,858,399	—	—	—
	Anthony Zingale	85,576,048	2,483,541	—	—	—
2.	Ratification of KPMG LLP as our
	independent accountants for the fiscal
	year ending December 31, 2003.	86,653,445	1,329,119	—	77,025	—

Exhibit No.		Description

4.01		Subscription Agreement, dated May 30, 2003, among the Registrant and the investors listed therein (incorporated by reference to Exhibit 4.03 to the registration statement on Form S-3 (Registration No. 333-106825) filed by the Registrant with the Commission on July 3, 2003).

4.02		Registration Rights Agreement, dated May 30, 2003, among the Registrant and the investors listed therein (incorporated by reference to Exhibit 4.04 to the registration statement on Form S-3 (Registration No. 333-106825) filed by the Registrant with the Commission on July 3, 2003).

10.01		Notice of Grant of Stock Options and Option Agreement and related Stock Option Agreement between the Registrant and each of the officers identified in this exhibit.

10.02		Notice of Grant of Stock Options and Option Agreement and related Stock Option Agreement between the Registrant and Martin W. Brauns.

10.03		Letter agreement regarding Terms of Separation, dated May 1, 2003, between the Registrant and John Van Siclen.

10.04		Employment arrangement between the Registrant and Martin W. Brauns.

31.01		Certification

31.02		Certification

32.01		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.02		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.