10-K

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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

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                                   FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

  For the fiscal year ended December 31, 2000
                                       OR

[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

  For the transition period from         to         .

                       Commission file number 000-27287

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                      INTERTRUST TECHNOLOGIES CORPORATION
            (Exact name of registrant as specified in its charter)

                       
        Delaware                            52-1672106
(State of incorporation)       (I.R.S. Employer Identification No.)



            4750 Patrick Henry Blvd., Santa Clara, California 95054
         (Address of principal executive offices, including ZIP code)

                                (408) 855-0100
             (Registrant's telephone number, including area code)

          Securities registered pursuant to Section 12(b) of the Act:

                                     None

          Securities registered pursuant to Section 12(g) of the Act:

                             Common Stock, $0.001

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   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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]

   The aggregate market value of voting common stock held by non-affiliates of
the registrant as of March 15, 2001 was approximately $246 million. Shares of
common stock held by each officer and director have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.

   As of March 15, 2001, 93,631,223 shares of the registrant's common stock
were outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

   Part III--Portions of the registrant's definitive Proxy Statement to be
issued in conjunction with the registrant's Year 2001 Annual Meeting of
Stockholders. Except as expressly incorporated by reference, the registrant's
Proxy Statement shall not be deemed to be a part of this report on Form 10-K.

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                      INTERTRUST TECHNOLOGIES CORPORATION

                                   FORM 10-K

                               DECEMBER 31, 2000

                               TABLE OF CONTENTS


Item                                                                                          Page No.
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                                              PART I

1.    Business...............................................................................     3
2.    Properties.............................................................................    26
3.    Legal Proceedings......................................................................    26
4.    Submission of Matters to a Vote of Security Holders....................................    26

                                              PART II

5.    Market for Registrant's Common Equity and Related Stockholder Matters..................    27
6.    Selected Financial Data................................................................    28
7.    Management's Discussion and Analysis of Financial Condition and Results of Operations..    29
7A.   Quantitative and Qualitative Disclosure About Market Risk..............................    40
8.    Financial Statements and Supplementary Data............................................    41
9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...    41

                                             PART III

10.   Directors and Executive Officers of the Registrant.....................................    41
11.   Executive Compensation and Related Information.........................................    41
12.   Security Ownership of Certain Beneficial Owners and Management.........................    41
13.   Related Party Transactions.............................................................    41

                                              PART IV

14.   Exhibits, Financial Statement Schedule, and Reports on Form 8-K........................    42
      Signatures.............................................................................    44


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                                    PART I

ITEM 1. BUSINESS

   All statements in this discussion that are not historical are forward-
looking statements within the meaning of Section 21E of the Securities
Exchange Act, including statements regarding InterTrust's "expectations",
"beliefs", "hopes", "intentions", "strategies" or the like. Such statements
are based on management's current expectations and are subject to a number of
factors and uncertainties that could cause actual results to differ materially
from those described in the forward-looking statements. InterTrust cautions
investors that there can be no assurance that actual results or business
conditions will not differ materially from those projected or suggested in
such forward-looking statements as a result of various factors, including, but
not limited to, the risk factors discussed in this Annual Report on Form 10-K.
InterTrust expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statements contained
herein to reflect any change in InterTrust's expectations with regard thereto
or any change in events, conditions, or circumstances on which any such
statements are based.

Overview

   We have developed a general purpose digital rights management, or DRM,
platform to serve as a foundation for providers of digital information,
technology, and commerce services to participate in a global e-commerce
system. We provide our DRM platform as software, tools, and hardware to
licensees, which we call partners. These partners intend to offer digital
commerce services and applications that collectively will form a global
commerce system, which we have branded as the MetaTrust Utility.

   DRM technologies protect and manage the rights and interests in digital
information of artists, authors, producers, publishers, distributors, traders
and brokers, enterprises, governments and other institutions, and consumers.
The Internet and the music industry have dramatized the need for protection
and management of digital information. The very characteristics that make the
Internet ideal for distributing digital information also make it ideal for
pirating. DRM is needed by any industry that distributes information that can
be put into digital form.

   Our DRM platform provides a foundation for people and organizations to
define rules for using digital information and building commercial models. Our
technology is designed to protect digital information, apply rules
persistently after information is distributed, and automate many of the
commercial consequences of using the information. Our general purpose DRM
platform is designed to manage a broad range of rights across digital
information and media types.

   As of December 31, 2000, we had 61 partners including: ARM, Adobe, America
Online, Blockbuster, BMG Entertainment, Cirrus Logic, Compaq, Creative
Technology, Diamond Multimedia Systems, Enron, Mitsubishi Corporation,
MusicMatch, Magex, PricewaterhouseCoopers, RioPort, Texas Instruments,
Universal Music Group, and Wave Systems. These partners endorse or promote our
products and services through various sales and marketing activities,
including press releases and trade shows. Some of our partners, including
BMG Entertainment and Universal Music Group, began offering commercial
applications and services in the MetaTrust Utility in the second half of 2000.

Industry Background

   According to International Data Corporation's Internet Commerce Market
Model (ICMM) version 6.3, total worldwide Internet commerce spending doubled
between 1999 and 2000--reaching over $270 billion--and will continue to grow
at a healthy rate through 2004, topping $2.6 trillion. IDC further estimates
that worldwide Internet commerce spending per online buyer will grow from
$2,076 in 1999 to $8,960 per year in 2004. That same year, IDC projects that
40% of all Internet users will also purchase goods and services over the
Internet.

   While most Internet commerce to date has involved the delivery of physical
goods like books and compact discs ordered online, the Internet is poised to
become a leading distribution channel for digital goods as well.

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Today, most content is in, or can be easily put into, digital form. This
content includes music, videos, software, games, publications, business
information, and images. The Internet can be used to disseminate this digital
information efficiently to broad audiences without geographic boundaries, and
can eliminate many of the traditional costs associated with manufacturing,
packaging, and distribution. The use of the Internet for digital goods is
being supported both by the growing number of households and businesses
connected to the Internet, and by electronic devices other than the personal
computer, such as set-top boxes, portable music players, mobile phones, and
other hand-held devices, all of which are becoming connected to the Internet.
In addition, downloading digital content is becoming significantly easier with
the emergence and adoption of broadband technologies including digital
subscriber lines and cable modems, and enhanced compression technologies
including MP3 for music and MPEG-4 for video. The Internet will add to the
existing channels for distributing digital goods on physical media like
compact discs and DVDs.

   The characteristics that make the Internet ideal for distributing digital
goods also make it ideal for pirating and misusing them. Digital goods, if not
protected and managed, can be easily copied without any degradation in
quality, altered and defaced, and distributed with the touch of a button to a
large number of recipients. These threats are increased by advances in
broadband and compression technologies, wider uses of portable devices, and
wider availability of re-writeable compact disc and DVD devices. As the number
of users connected to the Internet and the amount of digital information
transmitted over the Internet increases, these users and this information
become more vulnerable to parties who wish to interfere with the integrity of
digital information and digital transactions.

   Recent events in the music industry provide the most visible example of an
industry facing the problem of protecting and managing its rights related to
digital information. A technology called MP3 that compresses music with near-
compact disc quality has rapidly become recognized as a major threat to the
industry. With readily available MP3-enabled software, music can be copied
from compact discs into computers, compressed to under 10% of its former size,
redistributed, played, and even copied back onto a blank compact disc for
private use or pirated resale. Songs in the MP3 format can be moved from
personal computers to new portable consumer devices and can then be played
through headphones or stereo speakers. Every compact disc published and
distributed is at risk of being copied. Already, many popular titles have been
digitized in MP3 form multiple times across the Internet and a new channel of
direct MP3 distribution is emerging.

   Digital rights management is needed across all content industries,
including music, video, software, games, publications, business information,
and images, and by all of the constituencies in these industries. These
constituencies, including artists, authors, producers, publishers, and
distributors, are all concerned about protecting and managing their rights in
digital content. All parties want to get paid. Artists and authors want to
protect the integrity of their works. Consumers want easy transparent access
to good content but are concerned about protecting their privacy. Producers,
publishers, and distributors want to structure and optimally manage their
business models.

   DRM applies to more than content industries. The Internet is becoming a
principal means for digital interaction among organizations and individuals. A
vast amount of data about organizations and individuals is digitized on
computers, sent over networks, and stored in electronic form. Much of this
information is confidential and proprietary, including trade secrets and
supply chain and product information. Some of this information is also
personal in nature, including financial and medical records. This information
is gathered, stored, and exchanged among many entities, including
corporations, governments, schools, hospitals, and individuals. These
organizations and individuals need to manage their digital rights in the flow
of proprietary and personal information, so that only the appropriate people
can use the information. DRM is also useful for protecting rights as these
information flows become more automated, in trading, brokering, regulatory
compliance, and other industries.

   Current computing environments and security techniques are not designed to
provide sufficient protection and management of digital rights. Historically,
computers, networks, and operating systems were designed primarily for
creating, processing, and distributing information. Similarly, security
technologies evolved to

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protect computers and networks from the outside environment and to protect
information during a point-to-point transmission, not to protect information
and rights once information has been received and properly accessed by a user.
In commercial transactions in current computing environments, information is
generally stored and transactions are processed at remote mainframes or
servers, even when it is less efficient, because the client and other parts of
the environment do not provide adequate protection and security. As a result,
these security technologies either do not consider an authorized user as a
potential threat, or fail to provide sufficient mechanisms to prevent the
improper use of information. With digital commerce, the threat comes not only
from the outside--a hacker trying to break into the protected computer or
decrypt an encrypted transmission. The threat comes also from the inside--a
user may be authorized initially to access digital information but performs an
unauthorized act, such as making or distributing copies. Moreover, the
requirement for centralized transaction processing and information storage is
less efficient, harder to scale, and more constrained in use than systems that
distribute secure processing.

   Current techniques for DRM that are built on these centralized security
approaches generally only provide secure digital distribution. For example,
these techniques generally lack the ability to persistently manage digital
information, especially when offline, and essentially allow only a limited
number of inflexible business relationships that are predetermined by the
technology provider. These techniques usually require online interaction,
which increases costs, limits consumer convenience, and makes some business
models uneconomical.

   A new computing technology is required to address all of these concerns--
one that, when distributed over a vast array of computers and devices,
consistently protects and manages rights related to digital information and
processes, online and offline, wherever this information and these processes
may occur. Creators, publishers, distributors, service providers, governments
and other institutions, and users must have the ability both to create and
associate rights and rules that persistently apply to digital information and
processes, and to modify the rights and rules, if permitted, even after the
information is distributed. These rights and rules might represent information
regarding ownership, access, payment, promotion, warranty, privacy, and other
elements of commerce in information. When these rights and rules are based on
a common foundation, they can form a basis for an interoperable global system
for digital commerce.

InterTrust Solution

   We have developed a general purpose DRM platform to serve as a foundation
for providers of digital information, technology, and commerce services to
participate in a global e-commerce system for digital commerce. Protected
information can flow from party to party, as it would in normal commerce, and
be managed throughout its lifecycle in compliance with specified rules. Our
platform consists of:

  .  DRM Software and Technology--We license platform software, tools, and
     hardware to partners that build products and operate commerce services.
     We also offer market specific software applications for our partners and
     customers to use to provide end-to-end commerce services. Our technology
     is designed to operate on the personal computers, devices, and servers
     in this global system and to provide the capability to package and
     publish protected information with rules for use. These rules are
     designed to be flexible, and can be applied and changed dynamically,
     enabling our partners to develop and program their business models
     easily. The rules are designed to be persistently enforced wherever the
     content may travel.

  .  TrustNet Clearinghouse Services--Through our TrustNet clearinghouse, we
     provide an infrastructure for our partners to run end-to-end
     applications and services. This service enables our DRM platform to be
     used on a common, neutral basis for publishers, merchants,
     organizations, consumers, and other participants to conduct business and
     exchange protected information.

  .  Professional Services--We provide two types of professional services to
     accelerate the ability for our partners to deploy our DRM solution.
     Where partners require the development of specific software or hardware
     applications, we provide consulting services. We also provide consulting
     services to help our partners add our DRM solution into their commerce
     solutions.

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  .  MetaTrust Utility Services--We maintain and administer the
     specifications that are designed to ensure the interoperability,
     security, and trustedness of the global digital commerce system being
     built by our partners.

   Our focus on providing DRM technology and MetaTrust Utility services in
addition to software solutions allows our partners to choose from developing
their own commercial models, having us build a customer solution for them, or
using one of our existing solutions. They can build the applications and
operate the commerce services themselves. A content provider can establish a
relationship with one or more of our partners and have its content managed
consistently as it flows throughout the entire system. As in traditional
commerce, a content provider can select several commerce service providers and
provide users with a choice of payment methods.

   Our general purpose DRM platform is designed to have broad capabilities to
address the needs of all parties seeking to distribute and manage digital
goods. We believe our platform provides the following benefits:

  .  Robust Security--Our highly sophisticated use of multiple layers of
     security and tamper-resistance techniques are designed to provide
     varying levels of security depending on the commercial value and nature
     of digital information consistent with the rights and interests of all
     parties.

  .  Persistent Protection and Management--Our platform is designed to allow
     content providers to protect persistently both the information itself
     and the rules of use. Persistent protection means that these rules
     continue to apply even after the information arrives, online or offline,
     each time the information is accessed, and even when it may be forwarded
     to other people.

  .  Flexible Business Models--Our platform is designed to allow content
     providers to specify and establish their own commercial models with
     fully programmable rules that manage the use of digital information.
     These rules can be easily changed, even after content is distributed,
     for example to permit promotional offers, to accommodate changing
     commercial circumstances, or to automatically present differing offers
     under differing circumstances. Our platform is also designed so that
     these rules can also adjust themselves dynamically to each consumer's
     unique identity characteristics and circumstances of access, for
     example, student or senior citizen discounts, membership in affinity
     groups, or employment at a specific corporation.

  .  Superdistribution--We believe content providers can take advantage of
     superdistribution--allowing and encouraging consumers to become
     redistributors of content in the system. Superdistribution means that
     users of content, if permitted by rules, can forward content to others,
     with persistent application of rules and protection of content. Our
     platform is designed to enable providers to get paid and users to act
     naturally by forwarding content they like to their associates or
     friends. If these parties are not already part of the digital commerce
     system, they have an incentive to join so that they may use the content.

  .  Multiple Content and Media Types--Content providers can use our platform
     for multiple content types. Our platform is designed to permit
     distributors to employ various means of digital distribution, including
     compact discs, DVDs, the Internet, and wireless devices. Consumers may
     sign up to use any one content type, like music, but then can use our
     client software for other content or services in the MetaTrust Utility
     system. Payment processors can use our technology both for digital goods
     transactions and to process payments for physical goods sold
     electronically.

  .  Efficient Transaction Processing--We believe processing partners can
     take advantage of significant increases in efficiency, including offline
     processing, immediate payment across all participants in the chain of
     distribution, and automated application of rules. Our platform is
     designed to securely store usage and payment transactions that take
     place offline, accumulate them until a minimum threshold is met, for
     example 30 days or $50, and then automatically forward the stored
     transactions for processing. This allows both micropayments and
     efficient collection of usage information. In addition, as required by
     provider-supplied rules, when processing these transactions, immediate
     payment can be made throughout the distribution chain, eliminating
     multiple parties handling payment.

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  .  New Advertising Models--Today, advertising on the Internet is largely
     limited to viewing banners and other promotional materials on a web
     page. With our technology, we believe advertising can be managed and
     audited locally on a user's machine every time the user sees the
     advertisement, whether the user is on-line or off-line. Our platform is
     designed to allow a rule to be applied to a brief product placement, for
     example, the appearance of a car within a music video, so that the car
     company promotes its products and pays for the promotion each time the
     car is viewed. This feature, combined with our ability to operate
     offline and securely store and later forward collected data, enables new
     cost- effective ways for companies to price content and generate revenue
     from advertising.

  .  Personalized Marketing--Our platform is designed so that marketing
     organizations can use many different aspects of our platform to identify
     and profile individual consumers and match content, offers, and ads to
     specific users or class of users, subject to user consent and privacy
     rights. Because our technology is designed to locally process ads and
     promotions as easily as digital content, this automated personalization
     can occur on the network or offline on the consumer's personal computer.

 The MetaTrust Utility

   We license our DRM platform as software, tools, and hardware to partners to
build applications and operate services for electronic commerce. By offering
commercial products and services based on our specifications and MetaTrust
Utility services, our partners can collectively build a global digital
commerce system, which we have branded as the MetaTrust Utility. Our DRM
platform is designed to enable creators, publishers, distributors, service
providers, governments and other institutions, and users to persistently
associate rights and rules with digital information.

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   The user experience with the MetaTrust Utility will typically begin by
activating our client software. The most common client software currently in
use by our partners is called the InterRights Point, which our partners will
either preinstall or distribute through a variety of means, including digital
download and optical disk distribution. The user will activate the InterRights
Point by establishing a relationship with one of our commerce service
partners. Users will provide basic identity and authentication information in
a largely automated process. Once initialized, the InterRights Point is
designed to interact with any of the services and content available in the
system, from any of our partners. The following diagram illustrates the
lifecycle of content commerce in the system.

                             Commerce Flow Example

                            [GRAPHIC APPEARS HERE]
Narrative Description of Graphic in the Business Section

Graphic titled "Commerce Flow Example." In the upper right hand corner is a
box titled "Key" in which there are four symbols. The first is a sphere with
three arrows pointing to its center labeled "ClientSoftware." The second is a
cube labeled "Secure Container." The third is the symbol "$" inside a circle
labeled "Payment." The fourth is the letter "i" inside a circle labeled "Usage
Information."

In the center is a cube labeled "Distributor." Above and to the right is a
picture of a piece of paper titled "Usage Rules." From the cube an arrow with
a cube in the middle points down towards a box labeled "User." Inside the box
is a human form, a sphere with three arrows meeting in its center, and a
picture of a computer monitor with an image, entitled "Agree to Rules,"
projecting from the screen.

From the box an arrow with a cube in the middle points to the right to a
picture of an electronic device entitled "Information Appliance."

From the box an arrow points to the left to a box entitled "Commerce Services
Provider." In the middle of the arrow is a clear cube containing the symbol
"$" and the letter "i", both in circles. Inside the box there are two
buildings and a sphere with three arrows that meet in its center. The building
on the left is marked with the symbol "$" in a circle. The building on the
right is marked with the letter "i" in a circle.

Two arrows, one with the symbol "$" in the middle and one with the letter "i"
in the middle, both in circles and clear cubes, point to a box titled
"Publisher." Inside the box is a human form, a sphere with three arrows
meeting in its center and a computer monitor. Pointing towards the sphere is a
picture of a piece of paper captioned "Usage Rules" and a sphere with the
caption "Digital Information." An arrow with a cube in the middle points back
to the cube in the center of the graphic.

  .  Packaging Content--With an application developed by one of our partners
     using our DRM technology, system participants can be both creators and
     consumers of digital information. Working from a personal computer, in
     this example, a user creates digital information and, using the
     InterRights Point client software, associates business rules with the
     information and packages the information securely in a DigiBox secure
     container. The DigiBox container is the most common secure container
     currently being used by our partners.

  .  Distributing Content--The information is disseminated in DigiBox
     containers over networks, on optical disks, or by other means of
     delivering digital information. The information can securely travel
     through unsecure networks, because the information in DigiBox containers
     is itself protected. In this example, distributors, portals, and web
     sites can, as enabled by the rules of the publisher, add additional
     rules for use or modify the rules--for example, mark up price, make
     promotional offers, bundle the content with other content, or establish
     frequent buyer programs. Importantly, rules for use can be easily
     changed, even after content is distributed.

  .  Using Content--A user can receive content in a DigiBox container, select
     the content and set in motion a secure process. The InterRights Point
     compares identity characteristics of the user or machine with

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     the rules that have been associated with the requested event, for
     example, listen or view, and presents the appropriate offers. The event
     occurs only as permitted by the rules. If the rules permit, protected
     content can be transferred to other devices. Our technology, if present,
     will continue to manage the information's use.

  .  Processing Transactions--The client software can process transactions
     involving both payment and usage information, for example, special
     surveys or information on interaction with an advertisement. These
     transactions could be processed immediately, much like a credit card
     event, or deferred, much like running up a tab, or any combination of
     immediate and deferred processing, as specified by the rules. The
     InterRights Point forwards the transactions in secure containers to our
     processing partners which ensure that everyone who is supposed to get
     paid gets paid, that usage information is made available to agreed upon
     parties, and that the privacy of the individual is protected.

Strategy

   Our goal is to empower multiple providers of digital information,
technology, and commerce services to build a global system for digital
commerce based on our DRM platform. The key elements of our strategy are:

 Expand Key Strategic Partnerships

   We are focused on bringing into the MetaTrust Utility an optimal
combination of digital information, technology, and commerce service
participants. Through this focus we intend to create mutually-reinforcing
widespread dissemination of our technology, an expanding consumer base, and
ever-broader participation by information providers. We are targeting
relationships that will establish our DRM initially in several large markets,
including entertainment, business information, and publishing. We intend to
leverage early success in any one market to help encourage adoption and usage
in other markets. We encourage potential participants to enter into
relationships with us, as well as with our partners, in the following key
areas:

   Content--We intend to continue entering into direct relationships with
premier and emerging publishers, distributors, and packagers of content. We
have established strategic relationships with Universal Music Group, BMG
Entertainment, and Blockbuster. In addition, we will encourage premier content
providers to participate in the MetaTrust Utility through our partners.

   Technology--We will continue to target leading technology and device
companies that can build our technology into the infrastructure of several
industries, including computers, consumer electronics, the Internet, and
communications. We have established strategic relationships with Adobe,
Compaq, Cirrus Logic, Diamond Multimedia Systems, Enron, Nokia, and Texas
Instruments to build our technology into portable music devices, chips, set
top boxes, wireless devices, and software players and viewers.

   Commerce Services--We are targeting partners with trusted brands and
operations, including America Online, Mitsubishi Corporation, Magex, and
PricewaterhouseCoopers. We believe that these partners' reputations, markets,
and customer base will facilitate user acceptance of the MetaTrust Utility.

   By having a combination of content, technology, and commerce service
participants in multiple markets in the MetaTrust Utility, we would not depend
on any one partner, any specific commercial model, or any specific vertical
market to succeed.

 Promote Widespread Deployment of our Client Technology

   We have designed our client technology and our licensing structure to
achieve efficient and rapid deployment. Our technology is designed so that it
can be conveniently activated by consumers. It is also designed so that it can
be flexibly deployed by our partners through a variety of means, including
digital download, optical disk distribution, and pre-installation. We will
also work with our partners to develop business models that

                                       9


promote rapid deployment, for example, superdistribution which allows users to
drive client software deployment through redistribution of content.

 Leverage the MetaTrust Utility Model

   We believe that our neutral utility model is fundamental to achieving
widespread adoption of our DRM platform. We believe partners are more likely
to participate in building a global commerce system if they perceive that the
provider of the foundational technology is unlikely to engage in commercial
models that directly compete with them. We intend to provide technology and
maintain policies needed for an interoperable, secure, and trusted foundation
for all participants in the MetaTrust Utility. Partners can take advantage of
the global interoperability and general purpose nature of this system to build
on the success of our other partners; as more partners and users participate
in the system, participation in the system becomes more efficient and
valuable. From time to time, we may provide special assistance to new ventures
using our technology and may in return take limited equity positions if we
believe it will not compromise our neutrality. In addition, we have developed
and plan to develop further special technology and services to assist our
partners in promoting the use of the MetaTrust Utility in various vertical
markets.

 Maintain Technology Lead

   We believe we are the leader in DRM technology and intend to continue
advancing the state-of-the-art of DRM. We have attracted a group of computer
scientists in both our engineering team and in STARLab, our electronic
commerce research facility, to focus on a broad range of topics important to
advancing DRM. These include commerce language, streaming media, security,
software tamper resistance, secure processing hardware, and watermarking. We
currently have 18 United States patents, one European patent, and one
Australian patent, and will continue to develop our intellectual property in
the fields of digital rights management and electronic commerce.

Products and MetaTrust Utility Services

   Our general purpose DRM platform is comprised of both proprietary software
and technology, and the utility services needed for security,
interoperability, and trustedness of the MetaTrust Utility.

 Products

   Our Commerce software is a general purpose DRM platform and includes
systems software, development tools, and applications for building, deploying,
and managing digital commerce applications. We shipped the general
availability version of our Commerce software at the end of December 1998.
Digital information providers and software companies can use the product to
integrate rights management capabilities into applications that securely
manage, control usage of, and fulfill digital information commerce through
digital distribution channels. Payment processing and Internet infrastructure
companies can use the product to provide various commerce services, including
payment clearing, usage reporting, market analysis and user profiling,
advertising, regulatory compliance, affinity marketing, and automated trading
systems.

   Our software is designed to be fully scalable and comes in several
packages, depending upon the scope of rights licensed by our partners. The key
components of our Commerce software are:

  .  InterRights Point--software that processes DigiBox containers, and
     manages usage of digital information throughout its lifecycle. It may
     function as a client or server, as determined by rules;

  .  Application Developer's Kit--software and tools for systems integrators,
     applications developers, software vendors, and web sites enabling them
     to develop end-user applications and services;

  .  Sample Applications--software and components that assist development of
     applications and services;

  .  RightsWallet Application--client software that manage identities,
     memberships, budgets, and transactions;

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  .  Transaction Authority Framework--software and databases for handling
     communications with InterRights Points and processing transactions; and

  .  Deployment Manager Application--software for activating and managing
     InterRights Points.

   We have developed and plan to develop further special technology to assist
our partners in promoting the adoption of our DRM platform in various vertical
markets. For example, we created Powerchord technology, comprised of tool kits
and full-featured demonstration applications, to help appropriate partners
accelerate the adoption of our DRM platform for protected digital music
distribution.

   We have also developed a DRM platform called Rights/System that is designed
to operate on personal computers and to extend our DRM platform to embedded
systems, including portable devices and set-top boxes. Rights/System is
designed to implement a range of DRM functions, including persistent
protection of digital information of all types, and support for simple to
complex business models. The key products we currently offer within the
Rights/System platform are:

  .  Rights/PD--software and tools for integrating our DRM technology into
     portable devices;

  .  Rights/Video Server--software and tools for integrating our DRM
     technology into streaming video-on-demand environments for use with
     compatible set-top box media players; and

  .  Rights/TV--software and tools for the integration of our DRM technology
     into set top box based media players.

  .  Rights/Phone--software and tools for the integration of our DRM
     technology into wireless devices.

   In addition to our software platform products, we have also developed an
embedded technologies product line which includes our RightsChip integrated
circuit product and our TrustChip architecture. The RightsChip product is a
hardware add-on device for both PCs and appliances which incorporates our DRM
technology. The TrustChip architecture is an integrated security architecture
for secure system-on-chip products. Cirrus Logic has announced a product based
on the TrustChip architecture and ARM is currently integrating the TrustChip
architecture into its products.

 MetaTrust Utility Services

   We plan to maintain the specifications and administer the interoperability,
security, and trustedness of the MetaTrust Utility. We do this through our
MetaTrust certification program, which has three essential elements:

  .  Specifications--Our partners and their products and services must comply
     with our specifications. These specifications establish policies that
     address technical, procedural, and related matters designed to promote
     the security, trustedness, integrity, interoperability, and performance
     of products and services in the MetaTrust Utility.

  .  Certification--We test and certify, or provide the means for testing and
     certifying, that products and services of participants in the MetaTrust
     Utility comply with our specifications. Certification applies to all
     applications that interface with an InterRights Point as well as partner
     sites and operations. We expect to provide various procedures designed
     to make certification an easy process, including pre-certification of
     components.

  .  Security--Our system addresses numerous areas of security, including
     securing digital information after initial use and providing tamper
     resistance in the InterRights Point software. We have designed, and plan
     to continue to design, countermeasures that we intend to implement if
     security is compromised. We also plan on assisting our partners in
     cryptographic key management.

   Through our TrustNet clearinghouse, we also provide an infrastructure for
our partners to pilot and test their applications and services.


                                      11


Technology

   Our DRM platform is based on our proprietary software and technology that
we believe add fundamental new functionality to traditional computing
environments. By using proven security technologies plus this new
functionality, we have created platform software designed to enable computing
environments to perform a broad range of new operating functions relating to
managing, not merely protecting, rights in digital information.

   Our DRM platform is general purpose and is
designed to enable digital commerce to operate in
compliance with provider-specified rules through a
network of independent, protected processing
environments. Our technology is currently
implemented as software and includes tools,
components, sample applications, documentation, and
training that allow our partners and their
customers to build digital commerce applications
and services and take advantage of the reusable,
common foundation of the MetaTrust Utility. The
accompanying diagram shows the primary
architectural elements of our platform.

                            [GRAPHIC APPEARS HERE]
Graphic titled "Intertrust DRM Platform". Box divided into four horizontal
rows. In the first row is the caption "Client Software" next to a sphere with
three arrows that meet in the middle. In the next row is the caption "Secure
Container" next to a cube. In the next row is the caption "Secure Container"
next to a cube. In the next is the caption "Usage Rules" next to a piece of
paper. In the last is the caption "Transaction Authority" next to a building.

  .  Client Software. The core element of our architecture is the client
     software, which operates on personal computers, servers, and devices in
     the MetaTrust Utility. DRM processing occurs at client software. The
     most common client software currently in use by our partners is the
     InterRights Point. Each InterRights Point acts as a secure virtual
     machine, a software application acting as a processing device, that is
     designed to manage each party's digital rights remotely. Each
     InterRights Point creates a local, secure database that stores the
     users' rights, identities, transactions, budgets and keys.

  .  Secure Container. Protected information in our system is encrypted and
     stored in a secure format. Once in a secure container, the information
     can flow across unsecured networks, and only our client software can
     access the information. Our design permits information in a secure
     container to remain protected even after a user has accessed it,
     providing persistent protection of the information and continuing
     control over its use regardless of where the information travels. The
     most common secure container currently in use by our partners is the
     DigiBox container.

  .  Usage Rules. Content usage is managed by rules, including price, payment
     offer, play, view, print, copy, save, superdistribution, and others. We
     offer a variety of tools designed to allow providers to create and
     change rules and to associate them with digital information. Rules are
     protected in the same way content is protected. Like content, they are
     stored in a secure container for distribution. Rules are designed to
     travel with the information, or separately, allowing our partners the
     flexibility to change any rule, including rights or price, after content
     has been delivered. The client software designed to ensure that
     applicable rules are followed every time an information usage event is
     requested.

  .  Transaction Authority Framework. In most of the current implementations
     of our DRM technology, InterRights Points connect into our processing
     partners' data centers through a communications controller system called
     the transaction authority framework. The transaction authority framework
     is designed to receive transaction records from InterRights Points,
     store the records, and forward them, as specified by usage rules, for
     further processing, including payment fulfillment. The transaction
     authority framework is also designed to store messages resulting from
     this further processing, like payment confirmation, and when the
     InterRights Point next connects to the data center, send these messages
     to the InterRights Points software. The transaction authority framework
     includes administrative software, called the deployment manager, that is
     designed to activate InterRights Points software and manage them after
     activation, including fraud detection, revocation, security updates, and
     back-up services.

   Currently most of our software runs on Windows 95, Windows NT, and Windows
98. Our transaction authority framework runs on Windows NT and Solaris
operating system environments. Our software is currently being modified to run
on additional operating systems. These efforts are in the development stage.

                                      12


Sales and Business Development

   Our sales and business development activities are designed to establish the
initial relationships with potential partners and help them understand the
services and applications that can be developed using our technology. We help
our partners and their potential customers understand both the business and
the technical benefits of the products, and assist them in expanding their
businesses with our technology. The sales and business development
organization assigns a representative that will serve as our primary contact
point for managing the potential relationship throughout the due diligence and
business discussion process. Our sales and business development organization
consisted of 53 employees as of December 31, 2000, 42 in Santa Clara, one in
Washington D.C., seven in London, England, two in Sydney, Australia and one in
Tokyo, Japan.

Marketing

   We market our products worldwide primarily through our partners in
combination with our own efforts. We conduct a variety of marketing programs
worldwide to educate our target market, create awareness and generate leads
for our MetaTrust Utility. To achieve these goals, we have engaged in
marketing activities including joint partner marketing, print and online
advertising campaigns and trade shows. These programs are targeted at key
business unit executives as well information technology officers. In addition,
we conduct comprehensive public relations programs that include establishing
and maintaining relationships with key trade press, business press, and
industry analysts. We have established consistent branding guidelines for all
of our partners to increase our brand awareness. Our programs are designed to
assist our partners in developing their internal marketing programs and
capabilities. Our marketing organization consisted of 19 employees as of
December 31, 2000.

Research and Development; Training and Support

   Our research and development organization is divided into product
development, training and support, and STARLab. To date, substantially all
software development costs have been expensed as incurred. Research and
development expenses were $24.5 million in 2000, $16.5 million in 1999 and
$13.0 million in 1998.

   As of December 31, 2000, our research and development and training and
support organizations were comprised of 170 employees.

 Product Development

   The product development organization is responsible for designing,
developing, and supporting commercial implementations of our DRM technology
and developing future enhancements to our software. There are six engineering
groups in the product development organization: core rights technology,
appliance technology, applications and components, security and tamper
resistance, product architecture, and advanced development. These six
engineering groups are supported by quality assurance, product management,
documentation, deployment operations, and developer support. The quality
assurance group implements a process designed to identify software defects
through the entire development cycle, including operational deployments. The
product management group is responsible for all functional and certification
specifications, schedules, and overall project coordination. The documentation
group is responsible for end user, administrator, and developer documentation
and support for our products. The deployment operations group is responsible
for MetaTrust Utility operations and management, including emergency response,
fraud detection, key management, and application certification. Developer
support is responsible for technical support to our partners' engineering
staffs.

 Training and Support

   Our training and support organizations work closely with the sales and
business development organization to provide partners with the training and
support contemplated under their license. We believe that customer
satisfaction is essential for our long-term success. In general, our license
agreements provide for a limited period of support and training, including
onsite visits, and email and web site support. We plan on providing our
partners

                                      13


with a variety of standard support packages after this initial support period.
As our partner base grows, we intend to increase the size of our support
organization.

 STARLab

   We have attracted a group of computer science experts for STARLab, our
electronic commerce research organization. STARLab projects cover a broad
range of topics necessary for advanced DRM, including commerce language,
streaming media, security, software tamper resistance, secure processing
hardware, and watermarking. The activities of STARLab are integrated with our
important strategic objectives, including:

  .  extending our portfolio of intellectual property;

  .  developing and prototyping new digital rights management technology;

  .  providing an engineering consulting resource to assist product
     development;

  .  participating in and leading standards efforts; and

  .  advising governmental, research, and other institutions.

Competition

   The market for DRM solutions is new, intensely competitive, and rapidly
evolving. We expect competition to continue to increase both from existing
competitors and new market entrants. The DRM market is new and we are not
aware of any one competitor that has established a dominant position in the
market. However, it is possible that one or more companies could become a
dominant, competitive force in the future. Our primary competition currently
comes from or is anticipated to come from:

  .  companies offering secure digital distribution systems, including IBM,
     Liquid Audio, Microsoft, Preview Systems, and Content Guard; and

  .  companies offering hardware-based content metering and copy protection
     systems, including Sony and the 4C Entity, comprised of IBM, Intel,
     Matsushita, and Toshiba.

   In addition to these two categories, in the future, operating system
developers like Microsoft or Sun Microsystems may also develop or license
digital rights management solutions for inclusion in their operating systems.
The primary bases of competition for providers of DRM solutions include:

  .  range of content types and markets, from specific content type to
     general purpose, multiple markets;

  .  flexibility of pricing and other business options, from narrow, fixed
     rules to flexible, dynamic rules;

  .  price of solution, from as high as 30-40% to a nominal percentage of
     transaction value;

  .  range of usage environments, from personal computer-based, online-only
     to multiple devices, offline and online;

  .  choice of service providers, from being tied to a single vendor that
     also provides DRM technology and processing services, to being able to
     choose among multiple, competing service providers; and

  .  business model of DRM provider, from vertically-integrated technology
     provider to neutral utility model.

   We believe that our ability to compete depends on many other factors both
within and beyond our control, including:

  .  the ease of use, performance, features, and reliability of our solutions
     and our partners' applications and services as compared to those of our
     competitors;

  .  the timing and market acceptance of new solutions and enhancements to
     existing solutions developed by us, our partners, and our competitors;

                                      14


  .  the quality of our partner development and support organization and
     similar organizations of our partners; and

  .  the effectiveness of our sales and marketing efforts, and of similar
     efforts of our partners.

   We believe that we currently compete favorably with our competitors in
these areas.

   Some of our competitors have longer operating histories and significantly
greater financial, technical, marketing, and other resources than we do. Many
of these companies have broader customer relationships that could be
leveraged, including relationships with many of our customers. These companies
also have more established customer support and professional services
organizations than we do.

Intellectual Property

   Our success will depend in part on our ability to protect our intellectual
property and other proprietary rights in our software and other technology. To
protect our proprietary rights, we rely on a combination of patent, trademark,
copyright, and trade secret law, and confidentiality and license agreements
with our employees, customers, partners, and others. Despite these
protections, others might use our intellectual property without our
authorization. If this occurs, a party might copy or obtain and use our
products or technology to develop similar technology. If we are unable to
protect our intellectual property adequately, it could materially affect our
financial performance. Moreover, potential competitors might be able to
develop technologies or services similar to ours without infringing our
patents. In addition, if our agreements with employees, consultants and others
who participate in product and service development activities are breached, we
may not have adequate remedies, and our trade secrets may become known or
independently developed by competitors.

 Patents

   We have devoted substantial time, resources, and capital to protecting our
intellectual property. We currently hold 18 United States patents, one
European patent, and one Australian patent. We also have filed 47 additional
United States patent applications, as well as counterpart foreign applications
in many instances. We believe that our issued patents and patent applications
cover a broad range of subjects generally relating to protecting electronic
rights and content, enabling secure electronic transactions, and applying DRM
technology in the digital economy. Expenses associated with the preparation of
new patent applications, patent application processing fees, and attorneys
costs associated with patent applications and maintaining our patent portfolio
totaled $262,000 for the year ended December 31, 2000, $244,000 for the year
ended December 31, 1999, and $237,000 for the year ended December 31, 1998.

   Any pending or future patent applications may not be granted, existing or
future patents may be challenged, invalidated or circumvented, and the rights
granted under a patent that has issued or any patent that may issue may not
provide competitive advantages to us.

   Many of our current and potential competitors dedicate substantial
resources to protection and enforcement of intellectual property rights,
especially patents. If a blocking patent has issued or issues in the future,
we would need either to obtain a license or to design around the patent. We
might not be able to obtain a required license on acceptable terms, if at all,
or to design around the patent.

   In part due to our broad range of technologies, we have not conducted and
do not conduct comprehensive patent searches to determine whether technology
that is used in our products infringes patents held by other third parties. In
addition, it is difficult to proceed with certainty in a rapidly evolving
technological environment in which there may be numerous patent applications
pending, many of which are confidential when filed, relating to similar
technologies. In the past, we have received notices alleging potential
infringements by us of the proprietary rights of others. In January 1996, we
received a letter from an attorney representing E-Data Corporation containing
an allegation of infringement of a patent E-Data allegedly owns. We exchanged

                                      15


correspondence with E-Data's attorneys ending in September 1996. We have not
heard from any representative of E-Data since that time. In November 1997, we
received a letter from representatives of TAU Systems Corporation informing us
of two patents held by TAU Systems. In the letter, the representatives stated
their opinion that our Commerce software contained various elements recited in
the two patents and requested that we discuss licensing the technology of
these patents. We responded to the letter stating that, although we had not
undertaken a detailed review of the patents, we were unaware of any of our
products having all of the elements required by the patent claims. We have not
received any further correspondence from TAU Systems. In May 1999, we received
a letter from representatives of TechSearch LLC offering us a license to a
patent held by TechSearch. We have reviewed the patent and do not believe that
we need to obtain a license to this patent. In the future, we could be found
to infringe upon the patent rights of E-Data, TAU Systems, TechSearch, or
other companies. Furthermore, companies in the software market are
increasingly bringing suits alleging infringement of their proprietary rights,
particularly patent rights. If we were to discover that our products violate
third-party proprietary rights, we might not be able to obtain licenses to
continue offering these products without substantial reengineering. Efforts to
undertake this reengineering might not be successful, licenses might be
unavailable on commercially reasonable terms, if at all, and litigation might
not be avoided or settled without substantial expense and damage awards.

 Other Intellectual Property

   We have received United States and selected foreign registrations for our
InterTrust, DigiBox, MetaTrust, and The MetaTrust Utility trademarks. We also
have pending applications for United States and foreign registration of
several of our trademarks and service marks, including InterRights, Rights/PD,
TrustMail, TrustNet, and others. We do not know if these marks will be
approved. In addition, a significant portion of our marks use the words inter,
trust, meta, or digi. We are aware of other companies that use one or more of
these words in their marks, alone or in combination with other words. We do
not expect to be able to prevent all third-party uses of these words. In
addition, the laws of some foreign countries do not protect our proprietary
rights to the same extent as do the laws of the United States, and effective
patent, copyright, trademark, and trade secret protection may not be available
in these jurisdictions. We license our proprietary rights to third parties,
and these licensees may fail to abide by compliance and quality control
guidelines relating to our proprietary rights or may take actions that would
harm our business.

   Our partners may rely in part on licenses included within the sealed
packaging of commercial software and licenses on a web site that are entered
into by clicking with a computer mouse on a button denoting assent to the
terms of the license displayed on the web site. These licenses, however, may
be or become unenforceable under the laws of some jurisdictions. As with other
software products, our products are susceptible to unauthorized copying and
uses that may go undetected. Policing unauthorized use is difficult.

   Any claims relating to the infringement of third-party proprietary rights,
even if meritless, could result in the expenditure of significant financial
and managerial resources and could result in injunctions preventing us from
distributing particular products and services. These claims could harm our
business. We also rely on technology that we license from third parties,
including software that is integrated with internally developed software and
used in our products and services to perform key functions. Third-party
technology licenses may not continue to be available to us on commercially
reasonable terms. The loss of any of these technologies could harm our
business. Although we generally seek to be indemnified against claims that
technology licensed by us infringes the intellectual property rights of
others, we do not receive indemnification in some cases. In some cases
indemnification is not available for all types of intellectual property and
proprietary rights, and in other cases the scope of indemnification is
limited. Even if we receive broad indemnification, third-party indemnitors are
not always well-capitalized and may not be able to indemnify us in the event
of infringement, resulting in substantial liability to us. Infringement or
invalidity claims may arise from the incorporation of third-party technology,
and our customers may make claims for indemnification. These claims, even if
meritless, could result in the expenditure of significant financial and
managerial resources in addition to potential product or service redevelopment
costs and delays, all of which could harm our business.


                                      16


Standards Bodies and Industry Groups

   We participate in selected industry groups to promote digital rights
management in the computer, consumer electronics, publishing, and
entertainment markets. With this aim in mind, we have most recently been
involved with the following standards bodies and industry groups: Moving
Picture Experts Group, Secure Digital Music Initiative, The Open eBook Forum,
The Cross Industry Working Team, Copy Protection Technical Working Group,
Trusted Computing Platform Alliance, and the Internet Streaming Media
Alliance. We believe our activities in the Moving Picture Experts Group, Open
eBook Forum, and the Secure Digital Music Initiative are of particular
importance.

   MPEG-4, the standard for multimedia software and devices, includes an
intellectual property management and protection architecture that permits DRM
systems to be used in future MPEG-4 systems, including set-top boxes, DVD
players, and game machines. We continue to play a major role in the definition
of the intellectual property management and protection interface for all MPEG
standards, which is consistent with our technology. MPEG-4 content developers
can use our technology to incorporate intellectual property management and
protection capabilities into their applications.

   The Open eBook Forum is developing global standards for electronic
publishing and has generated a specification to enable publications to be
readily published or re-publishing on any platform from personal computers to
handheld devices. The Open eBook Forum is also working on standards related to
digital rights management. We hold a seat on the Board of Directors and co-
chair the DRM working group at the Open eBook Forum.

   The Secure Digital Music Initiative was started by the Recording Industry
Association of America, the International Federation of the Phonographic
Industry, and the Recording Industry Association of Japan shortly after the
first release of the Diamond Rio MP3 music player in an effort to establish a
standard for secure digital delivery and use of recorded music. We have
participated in the Secure Digital Music Initiative from the beginning. We
have been active as one of three vice-chairs of the first working group, which
devised the specifications for secure digital music compliant-portable
devices. After the approval of the Portable Device Specification, we continued
to be active as chairs of various working groups as the Secure Digital Music
Initiative worked to specify additional music protection and management
technologies. We believe our technology will enable the protection and
management of digital audio content on the Internet, personal computers, and
portable devices in compliance with the Secure Digital Music Initiative
specifications. We plan to continue participating actively and developing our
technology to be compliant with emerging Secure Digital Music Initiative
specifications.

Employees

   At December 31, 2000, we had a total of 299 employees. Of the total, 170
were in research and development and training and support, 72 were in
marketing, sales and business development, 31 were in administration and
finance, and 26 were in clearinghouse services. None of our employees is
subject to a collective bargaining agreement, and we believe that our
relations with our employees are good.

   Our future operating results depend in significant part on the continued
service of our key technical, sales, and senior management personnel, none of
whom is bound by an employment agreement with specified terms. Our future
success also depends on our continuing ability to attract and retain highly
qualified technical, sales, and senior management personnel. Competition for
these personnel is intense, and we may not be able to retain our key
technical, sales and senior management personnel or to attract these personnel
in the future. We have experienced difficulty in recruiting qualified
technical, sales, and senior management personnel, and we expect to experience
these difficulties in the future. If we are unable to hire and retain
qualified personnel in the future, this inability could seriously harm our
business.

                                      17


RISK FACTORS

   In addition to the other information in this report, the following risk
factors should be considered carefully in evaluating our business and us:

Risk Related to Our Business

Our business model is new and unproven and we may not succeed in generating
sufficient revenue to sustain or grow our business.

   Our business model is new and unproven and may not generate sufficient
revenue for us to be successful. The market for digital commerce services and
applications has not developed as quickly as anticipated and, as a result, we
might not meet analysts' expectations of our future operating results. The
success of our business depends partly upon our ability to generate
transaction fees in the form of a percentage of fees charged by our licensees
in commercial transactions. However, some of our licensees have just begun
using our technology in the commercial distribution of their products and we
have not earned any material transaction fees under this business model. The
volume of products and services distributed using our technology may be too
small to support or grow our business. While some companies have licensed our
technology, other companies may wish to use other technology based on
different business models, including the payment of a one-time license fee
without sharing in ongoing revenues. If we are unable to generate revenues
from transaction fees, our current revenues, consisting of initial license
fees and support fees, may be insufficient to sustain our business.

Our quarterly operating results are volatile and difficult to predict. If we
fail to meet the expectations of public market analysts or investors, the
market price of our common stock may decrease significantly.

   Our operating results have varied from period to period and, in some future
quarter or quarters, will likely fall below the expectations of securities
analysts or investors, causing the market price of our common stock to
decline.

   Our quarterly operating results may fail to meet these expectations for a
number of reasons, including:

  .  the inability of our licensees and their customers to commercialize our
     technology, or delays or deferrals in this commercialization;

  .  the inability of our licensees to pay our license and other fees;

  .  our inability to develop or commercialize our technology to meet our
     customers' requirements on a timely basis;

  .  a decline in the demand for digital goods and services;

  .  a decline in the demand for our Commerce or Rights/System software
     products;

  .  our failure to quickly reduce costs in the event of unanticipated
     declines in revenues in a given period;

  .  delays or failure to license our Commerce software and services to one
     or more partners;

  .  expenses related to the issuance of stock to our partners;

  .  higher than expected operating expenses;

  .  higher spending on deployment programs; and

  .  customer budget cycles and changes in these budget cycles.

We are dependent on international sales which subject us to a variety of
risks.

   We received approximately 45% of our total revenues in 2000, 61% of our
total revenues in 1999, and 34% of our total revenues in 1998 from sales to
customers located outside the United States. Our international business
activities are subject to a variety of risks, including the adoption and
changes of laws, actions by third parties and political and economic
conditions that could restrict or eliminate our ability to do business in
certain

                                      18


jurisdictions. Although we currently transact business in U.S dollars, if we
transact business in foreign currencies in the future, we will become subject
to the risks associated with transacting in foreign currencies, including
potential negative effects of exchange rate fluctuations. To date, we have not
adopted a hedging program to protect from risks associated with foreign
currency fluctuations.

   Government regulation and requirements influence our sales internationally.
Current or new government laws and regulations, or the application of existing
laws and regulations including those related to property ownership, content
and taxation, could expose us to significant liabilities, significantly slow
our growth or otherwise seriously harm our business and results of operations.

If we or third parties do not deploy our technology and create a market for
digital commerce, our business will be harmed.

   Relationships with leading content, technology, and commerce service
providers are critical to our success. Our business and operating results
would be harmed to the extent we or our licensees fail, in whole or in part,
to:

  .  deploy our technology;

  .  develop an infrastructure for the sale and delivery of digital goods and
     services;

  .  generate transaction fees from the sale of digital content and services;

  .  develop and deploy new applications; and

  .  promote brand preference for InterTrust products and services and the
     MetaTrust Utility.

We have a history of losses, and we expect our operating expenses and losses
to increase significantly.

   Our failure to increase our revenues significantly would seriously harm our
business. We derive most of our revenues from the sale of a small number of
licenses. As a result, any delay in the recognition of revenue from a license
would have a material adverse effect on our results of operations for
subsequent accounting periods. We have experienced operating losses in each
quarterly and annual period since inception, and we expect to incur
significant and increasing losses in the future. We incurred net losses of
$55.6 million in 2000, $28.6 million in 1999, and $19.7 million in 1998. We
expect to significantly increase our research and development, sales and
marketing, and general and administrative expenses. As a result of these
additional expenses, we must significantly increase our revenues to become
profitable. We expect to incur significant losses for at least the foreseeable
future.

We need to significantly increase the number of companies that license our
technology to sustain and grow our business.

   We will not generate sufficient revenue to grow our business unless we
maintain relationships with existing licensees and significantly increase the
number of companies that license our technology and use it for the sale and
management of digital information and services. We have not yet attracted, and
may not in the future be able to attract, a sufficient number of these
companies. As of December 31, 2000, only 61 companies have licensed our
software for commercial use. As of December 31, 2000, approximately eight
companies have been involved in the limited commercial deployment of our
technology. Our ability to attract new licensees will depend on a variety of
factors, including the following:

  .  the performance, reliability and security of our products and services;

  .  the scalability of our products and services--the ability to rapidly
     increase deployment size from a limited number of end-users to a very
     large number of end-users;

  .  the cost-effectiveness of our products and services; and our ability to
     market our products and services effectively.

                                      19


   Our ability to attract new licensees will also depend on the performance of
our initial licensees and the overall success of the MetaTrust Utility. Many
potential licensees may resist working with us until our and our licensees'
applications and services have been successfully introduced into the market
and have achieved market acceptance. We may not be able to attract a critical
mass of licensees that will develop products and establish clearinghouses and
other commerce services, and our licensees may not achieve the widespread
deployment of users we believe is necessary for us to become successful.

   In addition, we may not be able to establish relationships with important
potential customers if we have already established relationships with their
competitors. Therefore, it is important that we are perceived as a neutral and
trusted technology and service provider. In addition, we require that products
and services operating within the MetaTrust Utility comply with specifications
administered by us. Potential licensees may be unwilling to be subject to the
control of these specifications.

Our operating results could be harmed if our licensees or potential licensees
suffer from downward economic cycles.

   Our ability to license our technology depends on the economic strength and
budgetary cycles of potential licensees. Many of our licensees are Internet-
related and start-up companies that currently face unfavorable market
conditions and budgetary pressures. Some of our licensees might default on
their payment obligations to us. This may be disruptive to our business and
may adversely affect our business, financial condition and results of
operations.

The long and complex process of licensing our Commerce and other software and
hardware products could delay the deployment of our technology and harm our
business.

   Licensing our Commerce and other software and hardware products is a long
and complex process. If initial license fees are delayed or reduced as a
result of this process, our future revenue and operating results could be
impaired. Before committing to license our product, our licensees must
generally consider a wide range of issues including product benefits,
installation and infrastructure requirements, ability to work with existing
computer systems, ability to support a large user base, functionality,
security, and reliability. The process of entering into a licensing agreement
with a company typically involves lengthy negotiations. As a result of our
long sales cycle, which in the past has generally ranged from six months to 18
months, it is difficult for us to predict the quarter in which a particular
prospect might sign a license agreement. In addition, in some cases we develop
specific software applications for our licensees. We cannot predict if we will
deliver these applications in a timely manner or at all.

   Because our technology must be integrated into the products and services of
our licensees, there will be significant delay between our licensing the
software and our licensees' commercial deployment of their products and
services, which will delay our receipt of transaction fee revenue.

   Our success depends upon the deployment of our technology by a potential
licensee in the use and sale of digital content. Our licensees undertake a
lengthy process of integrating our technology into their existing systems or a
new system. The integration often receives re-engineering of these business
processes, which may delay the deployment of our technology. Until a licensee
deploys our technology, we do not receive transaction fees from that licensee.

   We expect that the period between entering into a licensing arrangement and
the time our licensee commercially deploys applications based on our Commerce
software will be lengthy and will vary, which makes it difficult for us to
predict when revenue will be recognized.

                                      20


Our Commerce and other software and hardware products have only recently been
used by our licensees in pilot programs, making evaluation of our business and
prospects difficult.

   We began offering the general availability release of our Commerce software
in December 1998, and recently released version 1.3 in July 2000. Our and our
licensees' applications and services based on our Commerce and other software
and hardware products are in development or have only been released for
evaluation in very limited commercial launches. It is still possible that we
or our licensees may uncover serious technical and other problems resulting in
the delay or failure of the commercial deployment of our licensees'
implementation of our Commerce software, including problems relating to
security, the ability to support a large user base, and interoperability of
our software or the combination of our software with our licensees' software.
We may not successfully address any of these problems and the failure to do so
would seriously harm our business and operating results.

Security breaches of our software and our licensees' software could result in
decreased demand for our technology by our licensees or their customers or in
litigation.

   The secure transmission and trusted management of proprietary or
confidential information over the Internet are essential to establishing and
maintaining confidence in our Commerce and other software and hardware and the
software and services developed using our software. Without this confidence,
potential or current licensees may not use our technology and their customers
may not trust and use our licensees' products. Therefore, security concerns
and security breaches of our and our licensees' software could harm our
business and operating results. Advances in computer capabilities, new
discoveries, or other developments could result in a compromise or breach of
the security technology, including cryptography technology, that we and our
licensees use to protect customer digital content and transaction data.
Security breaches could damage our reputation and expose us to a risk of loss
or litigation. Our insurance policies have low coverage limits that may not be
adequate to reimburse us for losses caused by security breaches. We cannot
guarantee that our security measures will prevent security breaches.

Defects in our software and the software of our licensees could delay
deployment of our technology and reduce our revenues.

   Defects or errors in current or future products could result in delayed or
failed deployment of our technology, lost revenues, or a delay in or failure
to achieve market acceptance, any of which could seriously harm our business
and operating results. Complex software products like ours often contain
errors or defects, including errors relating to security, particularly when
first introduced or when new versions or enhancements are released. Because
this is a system used for commerce, we believe the standards for reliability
and performance will be very high.

   If our or our licensees' products and services contain errors or defects
not discovered in the process of development and pilot programs, it could
seriously undermine the perceived trust and security needed for a commercial
system and could delay or prevent market acceptance of digital commerce
resulting in serious harm to our business and operating results.

   The deployment and use of our products expose us to substantial risks of
product liability claims because our products are expected to be used in
sensitive and valuable digital commerce transactions and because we require
our partners to comply with our specifications. Although our license
agreements typically contain provisions designed to limit our exposure to
product liability claims, it is possible that these limitations of liability
provisions may not be effective as a result of existing or future laws or
unfavorable judicial decisions. A product liability claim brought against us,
even if not successful, would likely be time consuming and costly to defend
and could significantly harm our business and operating results.

                                      21


If we are unable to continue obtaining third-party software and applications,
we could be forced to change our product offering or find alternative
suppliers, which could delay shipment of our product.

   We integrate third-party software with our software. We would be seriously
harmed if the providers from which we license software ceased to deliver and
support reliable products, enhance their current products, or respond to
emerging industry standards. In addition, the third-party software may not
continue to be available to us on commercially reasonable terms or at all. The
loss of, or inability to maintain or obtain this software, could result in
shipment delays or reductions, or could force us to limit the features
available in our current or future product offerings. Either alternative could
seriously harm our business and operating results.

The market for digital rights management will be subject to rapid
technological change and new product introductions and enhancements that we
may not be able to address. We need to develop and introduce new products,
technologies, and services.

   The market for digital rights management solutions is fragmented and marked
by rapid technological change, frequent new product introductions and
enhancements, uncertain product life cycles, and changes in customer demands.
To succeed, we must develop and introduce, in response to customer and market
demands, new releases of our Commerce software that offer features and
functionality that we do not currently provide. Any delays in our ability to
develop and release enhanced or new products could seriously harm our business
and operating results. In the past we have experienced delays in new product
releases, and we may experience similar delays in the future.

Our markets are highly competitive and we may not be able to compete
successfully against current or potential competitors, reducing our market
share and revenue growth.

   Our markets are new, rapidly evolving, and highly competitive, and we
expect this competition to persist and intensify in the future. Our failure to
maintain and enhance our competitive position could reduce our market share
and cause our revenues to grow more slowly than anticipated or not at all. We
encounter current or potential competition from a number of sources,
including:

  .  providers of secure digital distribution technology like Adobe, IBM,
     Microsoft, Liquid Audio, Preview Systems, and Content Guard;

  .  providers of hardware-based content metering and copy protection
     systems, including Sony and the 4C Entity, comprised of IBM, Intel,
     Matsushita, and Toshiba; and

  .  operating system manufacturers, including Microsoft or Sun Microsystems,
     that may develop or license digital rights management solutions for
     inclusion in their operating systems.

   Potential competitors may bundle their products or incorporate a digital
rights management component into existing products in a manner that
discourages users from purchasing our products. For example, we expect that
future releases of Microsoft's Windows operating system, which manages the
programs on a computer, will include components addressing digital rights
management functions. Furthermore, new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. Our
competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements than we do.

   Some of our competitors have longer operating histories and significantly
greater financial, technical, marketing, and other resources than we do. Many
of these companies have more extensive customer bases and broader partner
relationships that they could leverage, including relationships with many of
our current and potential partners. These companies also have significantly
more established customer support and professional services organizations than
we do. In addition, these companies may adopt aggressive pricing policies.

                                      22


Any acquisitions that we make could disrupt our business and harm our
operating results.

   We purchased one company and the assets of a second company in 2000 and may
continue to acquire or make investments in complementary companies, products
or technologies. In the event of any such investments, acquisitions or joint
ventures we could:

  .  issue stock that would dilute our current stockholders' percentage
     ownership;

  .  incur debt;

  .  assume liabilities;

  .  incur amortization expenses related to goodwill and other intangible
     assets; or

  .  incur large and immediate write-offs.

   These investments, acquisitions or joint ventures also involve numerous
risks, including:

  .  problems combining the purchased operations, technologies or products
     with ours;

  .  unanticipated costs;

  .  division of management's attention from our core business;

  .  adverse effects on existing business relationships with suppliers and
     customers;

  .  potential loss of key employees, particularly those of the acquired
     organizations; and

  .  reliance to our disadvantage on the judgement and decisions of third
     parties and lack of control over the operations of a joint venture
     partner.

   Any acquisition or joint venture may cause our financial results to suffer
as a result of these risks.

We and our licensees may be found to infringe proprietary rights of others,
resulting in litigation, redesign expenses, or costly licenses.

   Digital rights management is an emerging field in which our competitors,
may obtain patents or other proprietary rights that would prevent, or limit or
interfere with, our, or our licensees', ability to make, use, or sell
products. Furthermore, companies in the software market are increasingly
bringing suits alleging infringement of their proprietary rights, particularly
patent rights. We and our licensees could incur substantial costs to defend or
settle any litigation, and intellectual property litigation could force us to
do one or more of the following:

  .  cease selling, incorporating, or using products or services that
     incorporate the infringed intellectual property;

  .  obtain a license from the holder of the infringed intellectual property
     right; or

  .  redesign products or services to avoid infringement.

Our or our licensees' products and services may be subject to a claim of
patent infringement independent of any infringement by our software.

   In the past, we have received notices alleging potential infringement by us
of the proprietary rights of others. In January 1996, we received a letter
from an attorney representing E-Data Corporation containing an allegation of
infringement of a patent E-Data allegedly owns. We exchanged correspondence
with E-Data's attorneys ending in September 1996. We have not heard from any
representative of E-Data since that time. In November 1997, we received a
letter from representatives of TAU Systems Corporation informing us of two
patents held by TAU Systems. In the letter, the representatives stated their
opinion that our Commerce software contained various elements recited in the
two patents and requested that we discuss licensing the technology of these
patents. We responded to the letter stating that, although we had not
undertaken a detailed review of the patents,

                                      23


we were unaware of any of our products having one of the elements required by
the patent claims. We have not received any further correspondence from TAU
Systems. In May 1999, we received a letter from representatives of TechSearch
LLC offering us a license to a patent held by TechSearch. We have reviewed the
patent and do not believe that we need to obtain a license to this patent. In
the future, however, we or our licensees could be found to infringe upon the
patent rights of E-Data, TAU Systems, TechSearch, or other companies.

Protection of our intellectual property is limited and efforts to protect our
intellectual property may be inadequate, time consuming, and expensive.

   Our success and ability to compete are substantially dependent on our
proprietary technology and trademarks, which we attempt to protect through a
combination of patent, copyright, trade secret, and trademark laws, as well as
confidentiality procedures and contractual provisions. These legal protections
afford only limited protection and may be time consuming and expensive.
Furthermore, despite our efforts, we may be unable to prevent third parties
from infringing upon or misappropriating our intellectual property. Also, our
competitors may independently develop similar, but not infringing, technology,
duplicate our products, or design around our patents or our other intellectual
property.

   Our patent applications or trademark registrations may not be approved.
Moreover, even if approved, the resulting patents or trademarks may not
provide us with any competitive advantage or may be challenged by third
parties. If challenged, our patents might not be upheld or their claims could
be narrowed. Any litigation surrounding our rights could force us to divert
important financial and other resources away from our business operations. In
addition, we license our products internationally, and the laws of many
countries do not protect our proprietary rights as well as the laws of the
United States.

To successfully license our product and grow our business, we must retain and
attract key personnel; competition for these personnel is intense.

   Our success depends largely on the skills, experience, and performance of
the members of our senior management and other key personnel, including our
chairman of the board and chief executive officer, Victor Shear. None of our
senior management or other key personnel must remain employed for any specific
time period. If we lose key employees, our business and operating results
could be significantly harmed. In addition, our future success will depend
largely on our ability to continue attracting, integrating, and retaining
highly skilled personnel. We have recently hired many key personnel, including
our president and our chief financial officer. Our ability to effectively
execute our strategies will depend in part upon our ability to integrate new
personnel into our operations. Further, competition for qualified sales and
marketing personnel is intense. We may not be able to hire enough qualified
individuals in the future or in a timely manner. New employees require
extensive training and typically take at least four to six months to achieve
full productivity. Although we provide compensation packages that include
stock options, cash incentives, and other employee benefits, the volatility
and current market price of our stock may make it difficult for us to attract,
assimilate, and retain highly qualified employees.

Failure to appropriately manage our growth and expansion could seriously harm
our business and operating results.

   Our historical growth has placed, and any further growth is likely to
continue to place, a significant strain on our resources. Any failure to
manage growth effectively could seriously harm our business and operating
results. We have grown from 87 employees at December 31, 1997 to approximately
299 employees at December 31, 2000. To be successful, we will need to
implement additional management information systems, improve our operating,
administrative, financial and accounting systems and controls, train new
employees, and maintain close coordination among our executive, engineering,
accounting, finance, marketing, and operations organizations.

                                      24


Our stock price has been volatile in the past and is likely to continue to be
volatile.

   The market price of our common stock has been volatile in the past and is
likely to continue to be volatile. In addition, the securities markets in
general, and Internet stocks in particular, have experienced significant price
volatility and accordingly the trading price of our common stock is likely to
be affected by this activity.

We have implemented anti-takeover provisions that could make it more difficult
to acquire us.

   Our sixth amended and restated certificate of incorporation, our amended
and restated bylaws, and Delaware law contain provisions that could make it
more difficult for a third party to acquire us, even if its doing so would be
beneficial to our stockholders. These provisions include:

  .  authorizing the issuance of shares of undesignated preferred stock
     without a vote of stockholders;

  .  prohibiting stockholder action by written consent; and

  .  limitations on stockholders' ability to call special stockholder
     meetings.

   We are also currently considering other anti-takeover measures, including a
stockholders' rights plan.

Stockholders may incur dilution as a result of future equity issuances.

   We have in the past and may in the future issue equity securities to our
partners. If we issue additional equity securities, stockholders may
experience dilution, and the new equity securities could have rights senior to
those of existing holders of our common stock.

Industry-Related Risks

Our revenues may not grow and our stock price may decline if digital music
commerce over the Internet does not develop.

   We currently devote a significant portion of our time, resources, and
attention pursuing partnerships and business within the music industry. As a
result, if digital music commerce over the Internet does not develop, or
develops more slowly than expected, our business and operating results will be
significantly harmed. A number of factors could delay or prevent the
development of digital music commerce. These factors include:

  .  music content providers' inability to attract significant music artists,
     record labels, and recordings to be distributed in their format;

  .  lack of development and adoption of compression technology to facilitate
     digital delivery of music or related information like music videos; and

  .  lack of development and adoption of consumer devices that are able to
     play downloaded digital music.

We may not receive sufficient revenues to be successful and our stock price
will decline if use of the Internet for commercial distribution of digital
content is not widely accepted.

   Acceptance and use of the Internet for commercial distribution of digital
content may not continue to develop at recent rates, and a sufficiently broad
base of consumers may not adopt, and continue to use, the Internet and other
online services as a medium for digital commerce. Because our transaction fees
are derived from digital commerce transactions, if digital commerce is not
accepted for any reason, our revenues would not grow sufficiently and our
business and operating results would be significantly harmed.

   We depend on the widespread acceptance of commerce in digital information
over the Internet, through DVD, and other means. These methods for
distribution of digital information may not be commercially accepted for a
number of reasons, including:

  .  failure to develop the necessary infrastructure for communication of
     digital information and for payment processing;

                                      25


  .  failure to develop or deploy enabling technologies, including
     compression or broadband technology necessary for distribution of
     particular digital content over the Internet;

  .  reduced demand for paid digital content due to the widespread
     availability of free content online and the ability to use and
     distribute this content without restriction; and

  .  insufficient speed, access, and server reliability, as well as lengthy
     download time for content.

If standards for digital rights management are not adopted, confusion among
content providers, distributors, and consumers may depress the level of
digital commerce, which would reduce our revenues.

   If standards for digital rights management are not adopted or complied
with, content providers may delay distributing content until they are
confident that the technology by which the content is to be distributed will
be commercially accepted. Standards for the distribution of various digital
content might not develop or might be found to violate antitrust laws or fair
use of copyright policies. In addition, the failure to develop a standard
among device manufacturers may affect the market for digital goods and
services. As a result, consumers may delay purchasing products and services
that include our technology if they are uncertain of commercial acceptance of
the standards with which our technology complies. There is uncertainty in the
market as to the best way to offer music digitally. For example, there are a
number different software formats available and it is possible that not all
music will play on the same devices. Consumer acceptance of digital delivery
of music depends upon the ability of the various software formats to work
together. Consequently, if a standard format for the secure delivery of
content on the Internet is not adopted, or if the standards are not compatible
with our digital rights management technology, our business and operating
results would likely be harmed.

We may face increased governmental regulation and legal uncertainties that
could increase our costs and provide a barrier to doing business.

   Exports of software products utilizing encryption technology are generally
restricted by the United States and various foreign governments. Although we
have obtained approval to export our Commerce software, changes in export laws
and regulations may impose restrictions that affect our ability to distribute
products and services internationally, limiting our ability to gain revenue
and grow our business.

   It is also possible that Congress or individual states could enact laws
regulating or taxing Internet commerce. In addition, several
telecommunications companies have petitioned the Federal Communications
Commission to regulate Internet service providers in a manner similar to long
distance telephone carriers and to impose access fees on these companies.
Access fees, sales taxes or any other taxes or fees could increase the cost of
transmitting data over the Internet and reduce the number or amount of
transactions from which we get our transaction fees.

ITEM 2. PROPERTIES

   Our principal administrative, sales, marketing, and research and
development facilities occupy approximately 121,000 square feet in Santa
Clara, California under two leases that terminate in September 2004. We also
lease office space for research and development facilities in Portland, Oregon
under a lease that terminates in February 2006 occupying approximately 17,000
square feet, in Billerica, Massachusetts under a lease that terminates in
August 2005 occupying 9,400 square feet, and in Princeton, New Jersey under a
lease that terminates in April 2006, occupying 9,700 square feet. InterTrust
International, our wholly-owned subsidiary, has offices located in London,
England, and Tokyo, Japan.

ITEM 3. LEGAL PROCEEDINGS

   None.

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

   No matters were submitted during the fourth quarter of the year ended
December 31, 2000.

                                      26


                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

   On February 24, 2000, we consummated a two-for-one stock split. All share
and per share data have been restated to reflect the split.

   Our common stock is traded on the Nasdaq National Market under the symbol
ITRU. The following table sets forth, for the periods indicated, the low and
high bid prices per share for our common stock as reported by the Nasdaq
National Market.



                                                                   Low    High
                                                                  ------ ------
                                                                   
   Fiscal 1999
   Fourth Fiscal Quarter (beginning October 27, 1999)............ $ 9.00 $93.63

   Fiscal 2000
   First Fiscal Quarter.......................................... $44.63 $97.47
   Second Fiscal Quarter......................................... $15.63 $49.88
   Third Fiscal Quarter.......................................... $11.81 $22.94
   Fourth Fiscal Quarter......................................... $ 3.38 $11.00


   As of December 31, 2000, there were approximately 595 holders of record of
our common stock.

   No dividends have been paid on our common stock. We currently intend to
retain all future earnings, if any, for use in our business and do not
anticipate paying any cash dividends on our common stock in the foreseeable
future.

RECENT SALES OF UNREGISTERED SECURITIES

   During the quarter ended December 31, 2000, we issued 874,718 shares of
common stock valued at $3.3 million to PassEdge Corporation in addition to
$7.8 million in cash and acquisition related costs of $60,000, in exchange for
$11.2 million in technology and other assets.

   The above shares were issued pursuant to an exemption by reason of Section
4(2) of the Securities Act of 1933. These sales were made without general
solicitation or advertising. Each purchaser was an accredited investor or a
sophisticated investor (either alone or through its representative) with
access to all relevant information necessary. These shares have not been
registered for resale by us.

USE OF PROCEEDS

   On April 12, 2000 we completed a public offering in which we sold 2,820,244
shares of common stock at $35 per share pursuant to a Registration Statement
on Form S-1 (File No. 333-32484) that was declared effective on April 6, 2000.
The total aggregate proceeds from these transactions were $98.7 million.
Underwriters' discounts and other related costs were approximately $6.5
million resulting in net proceeds $92.2 million.

   On November 1,1999, we completed our initial public offering, in which we
sold 13,000,000 shares of common stock at $9 per share pursuant to a
Registration Statement on Form S-1 (File No. 333-84033) that was declared
effective on October 26, 1999. Additionally, we sold 1,950,000 shares of
common stock at $9 per share in connection with the exercise of the
underwriters' over-allotment option. The total aggregate proceeds from these
transactions were $134.6 million. Underwriters' discounts and other related
costs were approximately $11.2 resulting in net proceeds $123.4 million.

   The net proceeds were used for working capital and general corporate
purposes. Remaining proceeds were predominantly held in cash, cash equivalents
and marketable securities at December 31, 2000.

                                      27


ITEM 6. SELECTED FINANCIAL DATA

   The following selected consolidated financial data should be read in
conjunction with, and are qualified by reference to, the consolidated
financial statements and related notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" appearing elsewhere
in this Form 10-K. The consolidated statements of operations data for the
years ended December 31, 2000, 1999 and 1998, and the consolidated balance
sheet data at December 31, 2000 and 1999 are derived from our audited
consolidated financial statements included in this Form 10-K. The consolidated
statements of operations data for the years ended December 31, 1997 and 1996,
and the consolidated balance sheet data at December 31, 1998, 1997 and 1996
are derived from our audited consolidated financial statements not included in
this Form 10-K. The historical results are not necessarily indicative of
future results.



                                         Years Ended December 31,
                                -----------------------------------------------
                                  2000      1999      1998      1997     1996
                                --------  --------  --------  --------  -------
                                   (in thousands, except per share data)
                                                         
Consolidated Statement of
 Operations Data:
Revenues:
 Licenses.....................  $  4,150  $    778  $    --   $  1,000  $   --
 Software support and
  training....................     3,149       613       152       100       25
 Services.....................       244       150       --        --       --
 Hardware.....................       445       --        --        --        --
                                --------  --------  --------  --------  -------
  Total revenues..............     7,988     1,541       152     1,100       25
Cost of revenues:
 Licenses.....................       436       141       --        --       --
 Software support and
  training....................       910       470       191       102        5
 Services.....................     3,670       436       --        --       --
 Hardware.....................       445       --        --        --       --
                                --------  --------  --------  --------  -------
  Total cost of revenues......     5,461     1,047       191       102        5
                                --------  --------  --------  --------  -------
Gross profit (loss)...........     2,527       494       (39)      998       20
Operating costs and expenses:
 Research and development.....    24,475    16,472    13,041     8,287    4,852
 Sales and marketing..........    18,539     6,886     3,870     2,717    1,573
 General and administrative...     9,890     5,588     2,717     1,932    1,735
 Purchased in-process research
  and development.............     6,100       --        --        --       --
 Amortization of goodwill and
  other intangible assets.....     3,004       --        --        --       --
 Amortization of deferred
  stock compensation..........     3,326     1,704       --        --       --
                                --------  --------  --------  --------  -------
  Total operating costs and
   expenses...................    65,334    30,650    19,628    12,936    8,160
                                --------  --------  --------  --------  -------
Loss from operations..........   (62,807)  (30,156)  (19,667)  (11,938)  (8,140)
Interest income, net..........    10,867     1,876         5       229      180
Loss on debt and equity
 investments..................    (3,699)      --        --        --       --
Provision for foreign income
 taxes........................        (2)     (325)      --        --       --
                                --------  --------  --------  --------  -------
Net loss......................  $(55,641) $(28,605) $(19,662) $(11,709) $(7,960)
                                ========  ========  ========  ========  =======
Basic and diluted net loss per
 share........................  $  (0.66) $  (0.71) $  (0.70) $  (0.43) $ (0.33)
                                ========  ========  ========  ========  =======
Shares used in computing the
 net loss per share...........    84,016    40,426    27,932    27,278   23,826
                                ========  ========  ========  ========  =======


                                               December 31,
                                -----------------------------------------------
                                  2000      1999      1998      1997     1996
                                --------  --------  --------  --------  -------
                                              (in thousands)
                                                         
Consolidated Balance Sheet
 Data:
Cash and cash equivalents and
 marketable and restricted
 investments..................  $176,245  $140,834  $  5,575  $  1,884  $ 8,359
Working capital...............   153,309   136,551     4,939       607    7,561
Total assets..................   226,873   151,497     8,280     3,111    9,076
Total Stockholders equity
 (deficit)....................   207,348   133,352    (2,014)     (847)   1,708


                                      28


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

   The following commentary should be read in conjunction with the financial
statements and related notes contained elsewhere in this Form 10-K. The
discussion contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future
financial performance. In many cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," "intend" or
"continue," or the negative of such terms and other comparable terminology.
These statements are only predictions. Our actual results may differ
materially from those anticipated in these forward-looking statements as a
result of a variety of factors, including, but not limited to, those set forth
under "Risk Factors" and elsewhere in this Form 10-K.

Overview

   We have developed a general purpose digital rights management, or DRM,
platform to serve as a foundation for providers of digital information,
technology, and commerce services to participate in a global e-commerce
system. InterTrust was formed and incorporated in January 1990. From inception
through 1998, our efforts were principally devoted to research and
development, raising capital, recruiting personnel, and establishing licensing
relationships. As a result, we were considered a development stage enterprise
during this period. The general availability version of our Commerce software
was not delivered to our partners until December 1998. Some partners began
using the technology on a limited commercial basis in January 2000.

   We license our DRM platform and software to companies to build digital
commerce services and applications. Our goal is to license to content,
technology, and commerce services partners to achieve widespread dissemination
of our technology, an expanding consumer base, and broad participation by
digital information providers. We currently derive of our revenues from
initial license fees, associated software support and training services,
TrustNet clearinghouse services, professional services, and the sale of chips
containing our DRM technology. Our license agreements also generally require
our partners to pay a transaction fee that is a percentage of amounts paid by
users or charged by our partners in commercial transactions and services that
use our technology, and for sales of products incorporating our technology.
Some of our license agreements relating to uses of our technology within
enterprises for privately managing proprietary data may require a per-user
fee. Within the next several years, we anticipate that a significant portion
of our revenues will be derived primarily from transaction fees. Any future
transaction fees are dependent on the success of our licensees and their
customers in commercially deploying services and applications.

   We are targeting relationships that will establish our DRM platform in
several markets, including entertainment, business information, and
publishing. To date, a significant part of our licensing efforts has been
focused on adoption of our technology by the music industry as we believe it
will be an early implementer of DRM technology. We believe that if our general
purpose platform is adopted in the music market, we will be positioned to have
our platform adopted in additional markets including video and publishing.

   We have four basic types of license agreements: commerce service licenses,
business licenses, applications licenses and hardware licenses. These
agreements provide different rights and technology depending on the commercial
plans of our partners. Initial license fees received from these agreements may
vary in amount depending on factors such as partner commitments, scope of the
license as it relates to commercial markets, territory, and term of agreement.
Examples of partner commitments include deploying licensed products within a
specified time frame, exclusively using portions of our technology, and using
and publicly promoting us as the partner's preferred digital rights management
technology. We have in the past decided, and may in the future decide, to
reduce or eliminate initial license fees based on these factors. We do not
believe that we can determine the amount of foregone revenue due to reduced or
eliminated license fees with any reliable degree of certainty. Our license
fees are negotiated based on the terms and conditions of each individual
agreement and take into

                                      29


account the scope of the license, the term, and the other commitments made by
our partners that provide strategic value to us. In addition, we have entered
into a limited number of license agreements which have varying license scopes
and terms and which do not provide adequate comparable data to determine the
amount of foregone revenue. In connection with our strategy to promote
widespread use of our technology, through December 31, 2000, we have on three
occasions received initial license fees for our Commerce software in the form
of minority equity positions in the licensees. Additionally, on five occasions
we received initial license fees in the form of convertible promissory notes.
In the future, we may enter into other equity payment arrangements.

   Licenses of our Commerce software generally require the payment of an
initial license fee. Initial license revenue, net of any discounts granted, is
recognized upon execution of a license agreement and delivery of our software
if we have no remaining obligations relating to development, upgrades, new
releases, or other future deliverables, if the license fee is fixed or
determinable, and if collection of the fee is probable. Our license agreements
generally include the right to obtain access to upgrades and new releases, on
a when and if available basis, for a specified period. Under these
circumstances, the license payments received, net of any discounts granted, in
advance of revenue recognition are deferred and recognized on a subscription
basis over the period of obligation beginning upon delivery of the licensed
product. In addition, under license agreements where we are obligated to
provide a specified custom development deliverable and do not have vendor
specific objective evidence of fair value of the specified deliverable, all of
the license revenue is deferred until the specified upgrade has been
delivered. Upon delivery of the specified deliverable, license revenue is
recognized using the subscription method. We began recognizing revenue under
some license agreements in January 1999, after shipping the general
availability version of our Commerce software at the end of December 1998. At
December 31, 2000, we had approximately $13.5 million of deferred license
revenue that will be recognized in future periods.

   Through December 31, 2000, on three occasions we received license fees in
the form of minority equity positions in non-public entities. On five
occasions we received license fees in the form of convertible promissory notes
from non-public entities in exchange for technology licenses. One of these
convertible promissory notes was already converted into 125,000 shares of
common stock which we believe represented approximately 1% of the outstanding
shares of the licensee as of the conversion date. Because the entities were
recently formed, privately held companies, and InterTrust was unable to obtain
sufficient evidence of the fair value of the common stock of the entity or
sufficient evidence of the fair value of the convertible promissory notes and
collectibility was not probable, InterTrust did not record revenue or deferred
revenue from the license fees. InterTrust is obligated to provide unspecified
upgrades and new releases, on a when and if available basis, to the licensees
over a one to two year period under the agreements for additional fees.
InterTrust is not obligated to provide any funding to any licensee for the
development of the licensee's software.

   Our license agreements also require the payment of a transaction fee that
is a percentage of revenues received by our partners from transactions and
services that use our technology and sales of products incorporating our
technology. Transactions involving the use of our technology to conduct the
sale, lease, rental, or licensing of commercial content require the payment of
a transaction fee based on the amounts paid by users or charged by our
partners for selling or distributing the content. Transactions involving the
use of our technology for commercial services generally require the payment of
a transaction fee based on the amounts paid by users or charged by our
partners for the services. Transactions involving the sale, lease, rental, or
licensing of products incorporating our technology generally require the
payment of a transaction fee based on the amounts paid by users or charged by
our partners for the product. Our partners are required to pay all amounts due
for transaction fees within specified periods, depending on the licensing
arrangement. Our revenue recognition policy relating to transaction fees is to
recognize the revenue when the amounts due are known, which will generally be
in the quarter after the transaction. Prepaid transaction fees are recorded as
deferred revenue and will be recognized when the related transactions occur.
We have received $1.5 million in prepaid transaction fees which are included
in deferred revenue as of December 31, 2000. Prepaid transaction fees may
generally be offset against a portion of transaction fee amounts due in any
given quarter. To date, we have not recognized any material transaction fees
from commercial transactions or services, or sales of products.

                                      30


   Software support and training services, which typically include the right
to telephone and online support and customer training, are generally provided
for in the license agreements for an agreed-upon amount. Software support and
training service revenue is recognized over the period in which the services
are provided.

   TrustNet clearinghouse service revenues represent primarily service fees
from our customers for the use of our TrustNet clearinghouse infrastructure in
pilot and test applications and services. Service revenues generally include
consulting and system integration services provided to the customer to
establish an interface with the TrustNet clearinghouse and monthly service
fees to use TrustNet for the clearing of commercial transactions. Consulting
and system integration fees are recognized as services are performed and
monthly service fees are recognized over the term of the service period.

   Professional services represent fees for consulting services provided to
our customers for development and system integration not essential to the
functionality of the software licensed. The revenue from these services is
recognized as services are performed.

   Hardware revenue is comprised of sales of chips containing our software to
a single customer, who is also a licensee of our technology, and with whom we
have a short-term contract to provide chips for testing and trial production.
The revenue from the sale of chips is recognized as the chips are shipped.

   Through the end of 2000, we had a limited number of licensees.
PricewaterhouseCoopers, National Computer Systems of Singapore, and
Bertelsmann accounted for 20%, 17% and 8% of total revenues respectively, in
2000. Mitsubishi, a stockholder, Reciprocal, and Computacenter accounted for
25%, 13%, and 12% of total revenues, respectively, in 1999. Our success
depends on significantly increasing the number of companies that license our
technology and use it for the sale and management of digital content and
services.

   In view of the rapidly changing nature of our industry and our new and
unproven business model, we believe that period-to-period comparisons of
revenues and operating results are not necessarily meaningful and should not
be relied upon as indications of future performance. In addition, our business
model has not succeeded in generating sufficient revenue to sustain our
business. We also operate in an intensely competitive market for highly
qualified technical, sales and marketing, and management personnel and
periodically make salary and other compensation adjustments to retain and hire
employees. We anticipate that our operating expenses will substantially
increase in future quarters. As a result, we will need to generate significant
additional revenue to achieve and maintain profitability. In addition, we have
limited and delayed insight on consumer trends and sales, which makes
prediction of our future revenues difficult. We expect to incur additional
losses for at least the next several years.

   In January 2001, we signed a purchase agreement with PublishOne Inc.
("PublishOne"), a developer of online publishing software solutions and
distribution services for business information publishers. Prior to the
acquisition, InterTrust owned approximately 7.9% of PublishOne's stock. Under
the terms of the purchase agreement, we acquired the remaining 92.1% of the
shares of PublishOne in exchange for 976,423 shares of our common stock with
an approximate fair value of $5 million and assumed all outstanding options of
PublishOne, which were converted into options to purchase 1,155,221 shares of
our common stock with an approximate fair value of $6 million. The transaction
will be accounted for as a purchase with an estimated purchase price of $11
million. Additionally, the agreement includes contingent consideration of
473,577 shares to be issued upon PublishOne meeting certain milestones, as
specified in the agreement. We are currently evaluating the acquisition,
including the value of in-process research and development, in order to
determine the allocation of the purchase price for accounting purposes.

   In December 2000, we purchased technology and other assets from PassEdge
Corporation, a developer of software solutions for managing digital rights for
internet based video broadcasting, in exchange for $7.8 million in cash,
acquisition related costs of $60,000, and 874,718 shares of our common stock
with a fair value of $3.3 million. The purchase price of $11.2 million was
capitalized as purchased technology, fixed asset and other intangible assets.
We are amortizing the value of the technology acquired over its estimated
useful life of

                                      31


approximately four years and the value of the other intangible assets over
their estimated useful lives of approximately three years.

   In March, 2000, we acquired Infinite Ink Corporation, a developer of
software solutions for rendering and protecting electronic publishing. Under
the terms of the purchase agreement, we acquired all of the shares of Infinite
Ink in exchange for 230,462 shares of our common stock with an aggregate fair
value of $18.7 million, and assumed 68,052 stock options with an aggregate
fair value of $5.8 million. Our consolidated financial statements include the
operating results of Infinite Ink from the date of acquisition.

   The transaction was accounted for as a purchase with a total purchase price
of $24.5 million. Of this amount, $6.1 million was expensed in March 2000 as
purchased in-process research and development. Purchased in-process research
and development consisted of three projects to combine digital rights
management with a software system that would allow users to securely purchase
and view published content on their personal computers. The projects in
development were approximately 60% complete at the time of acquisition and
have been incorporated into our product. Our management is responsible for
estimating the fair value of the purchased in-process research and
development. We estimated the revenues, costs and resulting net cash flows
from the project and discounted the net cash flows back to their net present
value. These estimates were based on several assumptions, including those
summarized below. The resulting value was then adjusted to reflect only the
value creation effort of Infinite Ink prior to the acquisition and further
reduced by the estimated value of core technology, which was included in
capitalized purchased technology. As of December 31, 2000, we estimated that
the projects in development were 80% complete.

   Revenues and operating profit attributable to the in-process research and
development were estimated over a three-year projection period. The resulting
projected net cash flows were discounted to their present value using a
discount rate of 30%, which was calculated based on the weighted-average cost
of capital, adjusted for the technology risk associated with the purchased in-
process research and development. The technology risk was considered to be
significant due to the rapid pace of technological change in the software
industry.

   The excess purchase price over the estimated value of the net tangible
assets and in-process research and development was allocated to various
intangible assets. $18.1 million of the excess purchase price was capitalized
as goodwill, and $400,000 was capitalized as the fair value of the assembled
workforce. The value of the assembled workforce was based upon the cost to
replace that workforce. The goodwill and value of assembled workforce will be
amortized ratably over the estimated useful lives of five and three years,
respectively.

   In October 1999, we purchased audio decoding and rendering technology and
related assets and received a license to video technology from a third party,
in exchange for 170,000 shares of our common stock and $100,000 in cash. The
purchase price of $1.4 million was capitalized as purchased technology and
included intangible assets. We are amortizing the value of the technology
acquired over its estimated useful life of approximately four years.

Results of Operations

Years Ended December 31, 2000 and 1999

 Revenues

   Total revenues increased to $8.0 million in 2000 from $1.5 million in 1999.
License fees, software support and training services, TrustNet clearinghouse
services, and revenue from the sales of chips containing our accounted for
52%, 39%, 3%, and 6% of total revenues in 2000 and 50%, 40%, 10%, and none of
total revenues in 1999.

   License revenues increased to $4.2 million in 2000 from $778,000 in 1999,
and represent the amortization of new and deferred license fees.

                                      32


   Revenues from software support and training services increased to $3.1
million in 2000 from $613,000 in 1999. This increase was due to support and
training fees from additional partner licensing agreements.

   TrustNet clearinghouse services revenues increased to $244,000 in 2000 from
$150,000 in 1999 due to the addition of new customers.

   Revenue from the sale of chips containing our software totaled $445,000 in
2000 and none in 1999. This revenue results from chips sold to one customer,
who is also a licensee, under the terms of a short-term purchase agreement to
provide chips for testing and trial production.

 Cost of Revenues

   Cost of license revenues consists primarily of the costs incurred to
manufacture, package, and distribute our products and related documentation
and the amortization of purchased technology. Cost of software support and
training services consists primarily of the cost of personnel, travel-related
expenditures, and training materials. These expenditures are incurred both
onsite at our facilities as well as off-site at partner locations. Cost of
TrustNet clearinghouse services includes the cost of personnel, computer
hardware, and support of the off-site service center. Costs related to the
sale of chips containing our software are related to the purchase price,
production, and transport of chips. Total cost of revenues was $5.5 million in
2000 and $1.0 million in 1999. The period-over-period increase resulted from
increased costs incurred to support our new partners build our TrustNet and
the purchase of chips in 2000.

   Cost of license revenues increased to $436,000 in 2000 from $141,000 in
1999 due to additional licensing agreements. Cost of license revenues is
expected to increase from the amortization of purchased technology and will
fluctuate from period to period depending on the number of new partners, the
number of software releases, and the amount of software documentation provided
to our partners during the period.

   Cost of software support and training services revenues increased to
$910,000 in 2000 from $470,000 in 1999. The increase in cost of software
support and training services revenues represents the increase in support
personnel time required to provide technical assistance and training to a
greater number of partners. Software support and training services costs are
expected to increase as we license to new partners and may vary significantly
from period to period depending on the support requirements of our partners.

   TrustNet clearinghouse costs increased to $3.7 million in 2000 from
$436,000 in 1999. TrustNet clearinghouse costs reflect the cost of personnel,
hardware expenses, and the cost of off-site service centers. TrustNet
clearinghouse costs are expected to increase as we provide services to new
partners and may vary significantly from period to period depending on the
service requirements of our partners.

   Costs related to the sale of chips totaled $445,000 in 2000 and none in
1999. These costs are related to the purchase of chips from a third party,
customization, and transport of the chips.

 Research and Development

   Research and development expenses consist principally of salaries and
related personnel expenses, consultant fees, and the cost of software used in
product development. Research and development expenses are expensed to
operations as incurred. Research and development spending was $24.5 million in
2000 and $16.5 million in 1999. This increase was primarily attributable to a
$5.3 million increase in personnel costs and consultant services associated
with product research and development and a $1.3 million increase in
facilities related expenses, such as rent and utilities. We believe that
continued investment in research and development is critical to attaining our
strategic product objective, and we expect these expenses to increase
significantly in absolute dollars in future periods.

                                      33


 Sales and Marketing

   Sales and marketing expenses consist of salaries and related expenses for
personnel engaged in direct sales, partner development, marketing, field
service support, consultant fees and advertising, promotional material, and
trade show exhibit expenses. Sales and marketing expenses increased to $18.5
million in 2000 from $6.9 million in 1999. This increase reflects the costs
associated with increased selling and promotional efforts. The increase in
these costs is comprised primarily of $5.0 million in increased personnel
costs, $4.0 million in increased public relations and other promotional costs,
$870,000 in increased facilities related expenses, and $693,000 in increased
travel costs. We expect sales and marketing expenses to increase significantly
in absolute dollars due to planned growth of our sales and marketing
organizations, including the establishment of additional domestic and
international offices, and aggressive implementation of advertising and
promotional programs.

 General and Administrative

   General and administrative expenses consist primarily of salaries and
related expenses for executive, legal, accounting and administrative
personnel, professional service fees, and general corporate expenses. General
and administrative expenses increased to $9.9 million in 2000 from $5.6
million in 1999. This increase was primarily attributable to a $1.5 million
increase in personnel costs, as a result of increased executive, legal and
accounting personnel, a $474,000 increase in building and facilities expenses,
$610,000 in insurance expenses, and $501,000 in expenses related to being a
public company for a full year. We expect general and administrative expenses
to increase in absolute dollars as we add personnel, incur additional costs to
support continued growth, and implement additional operating systems necessary
to support InterTrust.

 Acquired In-Process Research and Development

   In March 2000, we recorded $6.1 million of acquired in-process research and
development related to our acquisition of Infinite Ink Corporation. The
acquisition was accounted for under the purchase method of accounting in
accordance with Accounting Principles Board Opinion No. 16 ("APB 16"). This
expense is a non-recurring charge.

 Amortization of Goodwill and Other Intangible Assets

   Amortization of goodwill and other intangibles increased to $3.0 million in
2000 from none in 1999. The increase of amortization of goodwill and purchased
intangibles was due to the additional amortization related to the acquisition
of Infinite Ink Corporation and the purchase of technology and other assets
from PassEdge Corporation. See Note 2 of "Notes to Consolidated Financial
Statements."

 Deferred Stock Compensation

   We are amortizing deferred stock compensation of $8.3 million, recorded
prior to January 1, 2000, over the vesting periods of the applicable options
using a graded vesting method. This amount represents the difference between
the exercise prices of employee stock options and what were considered to be
the fair values of our common stock on the dates of the grants. We recognized
$3.3 million and $1.7 million of related compensation expense in 2000 and
1999.

 Interest Income (Expense), Net

   Interest income (expense), net, consists primarily of interest earned on
cash and cash equivalents and marketable securities. We recognized
approximately $10.9 million of interest income in 2000 and $1.9 million in
1999. The increase in interest income is primarily attributable to the
increase in our average investment balance from the proceeds of our public
offering in April 2000. We had no interest expense in 2000 nor 1999.

                                      34


 Loss on Debt and Equity Investments

   In April through June 2000, InterTrust made investments of $6.5 million in
equity securities in certain private technology companies. Investments in
privately-held companies primarily consist of equity and debt securities in
which we own less than a 20% interest. We do not have the ability to exercise
significant influence over any of these companies and accordingly account for
such investments using the cost method. These investments are assessed for
impairment periodically through review of operations and indications of
continued viability, such as subsequent rounds of financing. During 2000,
InterTrust recorded $3.0 million in losses as a result of other than temporary
declines in the value of investments in privately held companies. Furthermore,
in September and October 2000, we made two loans totaling $699,000 to a
privately held technology company. In December 2000, we reserved for the
entire balance of the notes receivable due to the uncertainty of collection,
based on the deterioration of the financial condition of the company.

 Income Taxes

   We have incurred net losses since inception for the federal and state tax
purposes and have not recognized a domestic tax provision or benefit. In 2000,
we recorded a tax provision of $2,000 related to foreign withholding taxes on
two license agreements for which we may receive a tax benefit in the future.
As of December 31, 2000, we had approximately $89.0 million of federal and
approximately $15.5 million of state net operating loss carryforwards to
offset against future taxable income. We also had approximately $2.2 million
and $1.8 million of federal and state research and development tax credit
carryforwards, respectively. The related deferred tax assets have been fully
reserved through December 31, 2000. The federal net operating loss and tax
credit carryforwards expire in years 2007 through 2020, if not used. The state
net operating losses and credits expire in years 2001 through 2010, if not
used. Utilization of net operating losses and credits may be subject to a
substantial annual limitation due to the change in ownership provisions of the
Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization.

Results of Operations

Years Ended December 31, 1999 and 1998

 Revenues

   Total revenues increased to $1.5 million in 1999 from $152,000 in 1998.
License fees, software support and training services, and TrustNet
clearinghouse services accounted for 50%, 40% and 10% of total revenues in
1999. Software support and training services accounted for 100% of total
revenues in 1998.

   License revenues were $778,000 in 1999, and represent the amortization of
deferred license fees. No license revenues were recognized in 1998 as the
general availability release of our Commerce software was not delivered to our
partners until December 1998.

   Revenues from software support and training services increased to $613,000
in 1999 from $152,000 in 1998. This increase was due to support and training
fees from additional partner licensing agreements.

   TrustNet clearinghouse services revenues of $150,000 in 1999 were received
from one partner. No TrustNet clearinghouse services revenue was recognized in
1998 as the service was first offered to our partners in the fourth quarter of
1999.

 Cost of Revenues

   Cost of license revenues consists primarily of the costs incurred to
manufacture, package, distribute our products and related documentation and
the amortization of purchased technology. Cost of software support and
training services consists primarily of the cost of personnel, travel related
expenditures, and training materials.

                                      35


These expenditures are incurred both onsite at our facilities as well as
offsite at partner locations. Cost of TrustNet clearinghouse services includes
the cost of personnel, computer hardware, and support of the off-site service
center. Total cost of revenues was $1.0 million in 1999 and $191,000 in 1998.
The period-over-period increase resulted from increased costs incurred to
support our new partners and the introduction of TrustNet clearinghouse
services in 1999.

   Cost of license revenues was $141,000 in 1999. Cost of license revenues is
expected to increase from the amortization of purchased technology and will
fluctuate from period to period depending on the number of new partners, the
number of software releases, and the amount of software documentation provided
to our partners during the period. No costs were incurred for licenses during
1998, as we did not deliver the general availability release of our Commerce
software to our partners until December 1998.

   Cost of software support and training services revenues increased to
$470,000 in 1999 from $191,000 in 1998. The increase in cost of software
support and training services revenues represents the increase in support
personnel time required to provide technical assistance and training to a
greater number of partners. Software support and training services costs are
expected to increase as we license to new partners and may vary significantly
from period to period depending on the support requirements of our partners.

   Cost for TrustNet clearinghouse services were $436,000 in 1999 and reflect
the cost of personnel, hardware expenses, and the cost of the off-site service
center. No costs were incurred for TrustNet clearinghouse services during
1998, as we did not provide this service until the fourth quarter of 1999.

 Research and Development

   Research and development expenses consist principally of salaries and
related personnel expenses, consultant fees, and the cost of software used in
product development. Research and development expenses are expensed to
operations as incurred. Research and development spending was $16.5 million in
1999 and $13.0 million in 1998. This increase was primarily attributable to a
$2.6 million increase in personnel costs and consultant services associated
with both product research and development and $329,000 of recruiting costs.

 Sales and Marketing

   Sales and marketing expenses consist of salaries and related expenses for
personnel engaged in direct sales, partner development, marketing, field
service support, consultant fees and advertising, promotional material, and
trade show exhibit expenses. Sales and marketing expenses increased to $6.9
million in 1999 from $3.9 million in 1998. This increase reflects the costs
associated with increased selling efforts. The increase in these costs is
comprised primarily of $1.4 million in increased personnel costs, $900,000 in
increased public relations and other promotional costs, and $500,000 in
increased travel costs.

 General and Administrative

   General and administrative expenses consist primarily of salaries and
related expenses for executive, legal, accounting and administrative
personnel, professional service fees, and general corporate expenses. General
and administrative expenses increased to $5.6 million in 1999 from $2.7
million in 1998. This increase was primarily attributable to a $1.5 million
increase in personnel costs, as a result of increased executive, legal and
accounting personnel, a $399,000 increase in outside legal costs, a $364,000
increase in travel costs, and $200,000 in expenses related to being a public
company.

 Deferred Stock Compensation

   We recorded total deferred stock compensation of $8.3 million in 1999. This
amount represents the difference between the exercise prices of employee stock
options and what were considered to be the fair values of our common stock on
the dates of the grants. We are amortizing this amount over the vesting
periods of the

                                      36


applicable options using a graded vesting method. We recognized $1.7 million
of related compensation expense in 1999.

 Interest Income (Expense), Net

   Interest income (expense), net, consists primarily of interest earned on
cash and cash equivalents and short-term investments offset by interest
expense incurred on convertible promissory notes. We recognized approximately
$1.9 million of interest income in 1999 and $42,000 of interest income in
1998. The increase in interest income results from increases in the amount of
interest-bearing investments outstanding, which were primarily derived from
the net proceeds of $123.4 million from our initial public offering in October
1999. We had no interest expense in 1999. We recorded $37,000 in interest
expense in 1998 related to convertible promissory notes that were subsequently
converted to preferred stock.

 Income Taxes

   We have incurred net losses since inception for federal and state tax
purposes and have not recognized a domestic tax provision or benefit. In 1999,
we recorded a tax provision of $325,000 related to foreign withholding taxes
on two license agreements for which we may receive a tax benefit in the
future. As of December 31, 1999, we had $58.4 million of federal and $7.4
million of state net operating loss carryforwards to offset against future
taxable income. We also had $1.5 million of federal research and development
tax credit carryforwards. The related deferred tax assets have been fully
reserved through December 31, 1999.

                                      37


Quarterly Results of Operations

   The following table contains, for the periods presented, selected data from
our consolidated statements of operations. The data has been derived from our
unaudited consolidated financial statements, and, in the opinion of our
management, includes all adjustments, consisting only of normal recurring
adjustments, that are necessary for a fair presentation of the results of
operations for these periods. This unaudited information should be read in
conjunction with the consolidated financial statements and notes included
elsewhere in this Form 10-K. The operating results in any quarter are not
necessarily indicative of the results that may be expected for any future
period. We have incurred losses in each quarter since inception and expect to
continue to incur losses through at least the next several years.



                                                     Three Months Ended
                          -------------------------------------------------------------------------------
                          Dec. 31,  Sept. 30,  June 30,  Mar. 31,  Dec. 31,  Sept. 30, June 30,  Mar. 31,
                            2000      2000       2000      2000      1999      1999      1999      1999
                          --------  ---------  --------  --------  --------  --------- --------  --------
                                            (in thousands, except per share data)
                                                                         
Consolidated Statement
 of Operations Data:
Revenues:
 Licenses...............  $  1,386  $  1,188   $    889  $    687  $   282    $   187  $   142   $   167
 Software support and
  training..............       996       861        632       660      260        176      112        65
 Services...............        50        48        146        --      150         --       --        --
 Hardware...............       445        --         --        --       --         --       --        --
                          --------  --------   --------  --------  -------    -------  -------   -------
   Total revenues.......     2,877     2,097      1,667     1,347      692        363      254       232
Cost of revenues:
 Licenses...............        90       133        110       103       75         24       10        32
 Software support and
  training..............       345       236        182       147      136        126      121        87
 Services...............     1,379       934        714       643      346         90       --        --
 Hardware...............       445        --         --        --       --         --       --        --
                          --------  --------   --------  --------  -------    -------  -------   -------
   Total cost of
    revenues............     2,259     1,303      1,006       893      557        240      131       119
                          --------  --------   --------  --------  -------    -------  -------   -------
Gross profit............       618       794        661       454      135        123      123       113
Operating costs and
 expenses:
 Research and
  development...........     7,029     6,470      5,775     5,201    4,797      4,587    3,652     3,436
 Sales and marketing....     6,028     4,493      4,361     3,657    2,705      1,732    1,315     1,134
 General and
  administrative........     2,869     2,520      2,273     2,228    1,950      1,521    1,358       759
 Purchased in-process
  research and
  development...........        --        --         --     6,100       --         --       --        --
 Amortization of
  goodwill and other
  intangible assets.....     1,159       923        922        --       --         --       --        --
 Amortization of
  deferred stock
  compensation..........       636       746        938     1,006      884        625      168        27
                          --------  --------   --------  --------  -------    -------  -------   -------
   Total operating costs
    and expenses........    17,721    15,152     14,269    18,192   10,336      8,465    6,493     5,356
                          --------  --------   --------  --------  -------    -------  -------   -------
Loss from operations....   (17,103)  (14,358)   (13,608)  (17,738) (10,201)    (8,342)  (6,370)   (5,243)
Interest income, net....     2,683     3,306      2,766     2,112    1,395        279      160        42
Loss from debt and
 equity investments.....    (3,699)       --         --        --       --         --       --        --
Provision for foreign
 income taxes...........        (2)       --         --        --     (325)        --       --        --
                          --------  --------   --------  --------  -------    -------  -------   -------
Net loss................  $(18,121) $(11,052)  $(10,842) $(15,626) $(9,131)   $(8,063) $(6,210)  $(5,201)
                          ========  ========   ========  ========  =======    =======  =======   =======
Basic and diluted net
 loss per share.........  $  (0.21) $  (0.13)  $  (0.13) $  (0.20) $ (0.12)   $ (0.23) $ (0.19)  $ (0.18)
                          ========  ========   ========  ========  =======    =======  =======   =======
Shares used in computing
 the net loss per
 share..................    86,759    85,434     84,247    78,931   73,910     34,411   31,891    29,337
                          ========  ========   ========  ========  =======    =======  =======   =======


   We began recognizing license and software support and training revenues on
a subscription basis in January 1999, after shipping the general availability
version of our product in December 1998. The general quarter over quarter
increase in license and software support and training revenues is as a result
of additional partner agreements. We also provide TrustNet clearinghouse
services on a subscription basis. Additionally we provide professional
services to our partners, which are recognized upon delivery. The increase in
services revenues in

                                      38


the quarters ended June 30, 2000 and December 31, 1999 were related to short-
term TrustNet pilot agreements with new partners. We began selling hardware in
the quarter ended December 31, 2000 to one customer, who is also a licensee,
under the terms of a short-term purchase agreement to provide chips for
testing and trial production.

   Cost of license revenue decreased in the quarter ended December 31, 2000
due to lower consulting and freight expenses. Quarter over quarter increases
in the cost of software support and training services reflect the increased
effort of engineering personnel to provide support services to our partners.

   Overall increases in research and development spending beginning in the
quarter ended March 31, 1999 are primarily attributable to increased headcount
and spending on software tools used in the development of our products. The
increases in sales and marketing spending since the quarter ended March 31,
1999 reflect additional headcount both domestically and internationally as
well as increased expenses for travel, trade shows, public relations, and
other promotional costs. General and administrative expenses generally
increased quarter over quarter, primarily as a result of increased legal and
accounting personnel, costs associated with patent prosecution including
filing and translation fees, and the use of outside patent counsel. Purchased
in-process research and development in the quarter ended March 31, 2000 was a
one-time charge related to an acquisition. The amortization of goodwill and
other intangible assets acquired began in the quarter ended June 30, 2000.

   We anticipate that research and development, sales and marketing, and
general and administrative expenses will increase in absolute dollars as a
result of new hires and related personnel costs. Sales and marketing spending
is expected to increase as a result of our spending on branding, trade shows,
advertising, and promotion.

   We expect our revenues to vary. If our revenue levels fall below our
expectations, our net loss will increase because only a small portion of our
expenses varies with our revenues. In the future, our operating results may
fall below the expectations of securities analysts and investors. If this
occurs, the market price of our common stock would likely decline.

Liquidity and Capital Resources

   Cash, cash equivalents and marketable and restricted investments totaled
$176.2 million at December 31, 2000, an increase of $35.4 million from
December 1999. The increase in 2000 is primarily the result of cash generated
from the net proceeds of $92.2 million from a public offering of our common
stock completed in April 2000, in addition to proceeds from the exercise of
employee stock options and employee stock purchases, offset by our net loss
for 2000 of $55.6 million.

   Net cash used in operating activities totaled $38.8 million in 2000. The
cash used in 2000 is primarily attributable to the net loss of $55.6 million
and increases in accounts receivable of $1.4 million, and prepaid and other
current assets of $1.6 million, partially offset by various non-cash charges
such as depreciation and amortization of $5.2 million, stock related
compensation of $3.3 million, loss on debt and equity investments of $3.7
million, and purchased in-process reasearch and development of $6.1 million.

   Net cash used in investing activities totaled $133.5 million in 2000. The
cash used in 2000 is primarily atributable to capital expenditures totaling
$7.2 million, net purchases of marketable and restricted investments totaling
$109.4 million, and $17.0 million of investments in other non-current assets
and purchased technology. Capital acquisitions were principally comprised of
office furniture and equipment for our new corporate facility and computer
equipment and software used to support our product development and growing
employee base. Although to date our requirements for capital expenditures have
been moderate, we anticipate continued increase capital expenditures and lease
commitments consistent with anticipated growth in operations, infrastructure,
and personnel.

   Net cash provided by financing activities was $97.9 million for 2000,
primarily due to cash generated from our public offering in April 2000 and, to
a lesser extent, from the exercise of employee stock options and employee
stock purchases.

                                      39


   At December 31, 2000, our principal source of liquidity was $176.2 million
in cash and cash equivalents and marketable and restricted investments. In
January 2001, we raised $20.0 million from the sale of 4.0 million shares to
Nokia Corporation. We believe that our cash and cash equivalents, and credit
facilities with our equipment vendors, will be sufficient to meet our working
capital needs for at least the next 12 months. In the future, 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 financing or from other sources. Additional financing may not be
available at all or, if available, may not be obtainable on terms favorable to
us. In addition, any additional financing may be dilutive and new equity
securities could have rights senior to those of existing holders of our common
stock. If we need to raise funds and cannot do so on acceptable terms, we may
not be able to respond to competitive pressures or anticipated requirements or
take advantage of future opportunities.

Recent Accounting Pronouncements

   In December 1999, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101 summarizes certain of the SEC's views in
applying accounting principles generally accepted in the United States of
America to revenue recognition in financial statements. We adopted SAB 101 in
the fourth quarter of 2000 effective as of January 1, 2000. The adoption of
SAB 101 did not have any impact on our financial position or results of
operations.

   In March 2000, the FASB issued Financial Interpretation, or FIN, No. 44,
"Accounting for Certain Transactions Involving Stock Compensation--an
Interpretation of APB No. 25." FIN 44 clarifies the application of APB 25 for
certain stock compensation matters was effective July 1, 2000, except for the
provisions that relate to modifications that directly or indirectly reduce the
exercise price of an award and the definition of an employee, which were
effective after December 15, 1998. The adoption of FIN 44 did not have a
material impact on our financial position or results of operations.

   In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and
reporting standards for derivative instruments, including foreign exchange
contracts, and hedging activities. In June 200, the FASB issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities", which addresses implementation issues related to SFAS No. 133.
SFAS No. 133, as amended, and SFAS No. 138 are effective for fiscal years
beginning after June 15, 2000. We are required to adopt SFAS 133 for the
quarter ending March 31, 2001. Because we currently hold no derivative
financial instruments and do not currently engage in hedging activities, the
adoption of SFAS 133 will not have a material impact on our financial position
or results or operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

   We develop products in the United States and license our products to
partners in North America, Europe, Asia, and Australia. As a result, our
financial results could be affected adversely by various factors, including
foreign currency exchange rates or weak economic conditions in foreign
markets.

   Our interest income is sensitive to changes in the general level of United
States interest rates, particularly since the majority of our investments are
in short-term instruments. Due to the nature of our investments in marketable
securities, we have concluded that there is no material market risk exposure.
Therefore, no quantitative tabular disclosures are required. At December 31,
2000 and December 31, 1999, our cash and cash equivalents consisted primarily
of demand deposits and money market funds held by two large institutions in
the United States.

                                      40


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

   The financial statements and supplementary data required by this Item 8
begin at page F-1 of this Report on Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
     FINANCIAL DISCLOSURE

   Not applicable.

                                   PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

   The information regarding our Directors and Executive Officers is
incorporated herein by reference from the section entitled "Election of
Directors" of our definitive Proxy Statement (the "Proxy Statement") to be
filed pursuant to Regulation 14A of the Securities Exchange Act of 1934, as
amended, for our Year 2001 Annual Meeting of Stockholders. The Proxy Statement
is anticipated to be filed within 120 days after the end of our fiscal year
ended December 31, 2000.

ITEM 11. EXECUTIVE COMPENSATION AND RELATED INFORMATION

   Information regarding executive compensation is incorporated herein by
reference from the section entitled "Executive Compensation and Related
Information" of the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTIAN BENEFICIAL OWNERS AND MANAGEMENT

   Information regarding security ownership of certain beneficial owners and
management is incorporated herein by reference from the section entitled
"Stock Ownership of Certain Beneficial Owners and Management" of the Proxy
Statement.

ITEM 13. RELATED PARTY TRANSACTIONS

   Information regarding certain relationships and related transactions is
incorporated herein by reference from the section entitled "Related Party
Transactions" of the Proxy Statement.

                                      41


                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K

   (a)(1) Financial Statements--See Index to Consolidated Financial Statements
at page F-1 of this Form 10-K.

   (a)(2) Financial Statement Schedule:

   See Schedule II, Valuation and Qualifying Accounts, at page F-22 of this
Form 10-K.

   (a)(3) Exhibits:



 Exhibit
   No.                                 Description
 -------                               -----------
      
  3.1    Sixth Amended and Restated Certificate of Incorporation filed with the
         Secretary of State of Delaware on November 1, 1999--incorporated
         herein by reference to Exhibit 3.2 to the Registrant's Registration
         Statement on Form S-1 (File No. 333-84033).

  3.2*** Amended and Restated Bylaws of the Registrant.

  4.1    Reference is made to Exhibits 3.1 and 3.2.

  4.2*   Form of Registrant's Common Stock certificate.

  4.3*   Form of Registration Rights under select Convertible Promissory Notes.

  4.4*   Form of Registration Rights under select Class A Common Stock Purchase
         Agreements.

  4.5*   Form of Series A Preferred Stock Registration Rights.

  4.6*   Form of Series B, C, D and E Preferred Stock Registration Rights.

  4.7*   Form of Registration Rights found in a Class B Non-Voting Common Stock
         Warrant.

  4.8    Stockholder Rights Agreement, by and between the Registrant and Nokia
         Finance International, B.V., dated January 31, 2000--incorporated
         herein by reference to Exhibit 4.1 to the Registrant's Form 8-K filed
         February 20, 2001.

 10.1*   Form of Indemnification Agreement entered into by the Registrant with
         each of its directors and executive officers.

 10.2*   1999 Equity Incentive Plan and forms of agreements thereunder

 10.3*   1999 Employee Stock Purchase Plan.

 10.4*   1999 Non-Employee Directors Option Plan.

 10.5    Lease between Mission West Properties, L.P. and the Registrant dated
         July 21, 1999--incorporated herein by reference to Exhibit 10.11 to
         the Registrant's Registration Statement on Form S-1 (File No. 333-
         84033).

 10.6+   Technology Development, Marketing, and License Agreement by and
         between the Registrant and National Westminster Bank PLC dated August
         18, 1998--incorporated herein by reference to Exhibit 10.12 to the
         Registrant's Registration Statement on Form S-1 (File No. 333-84033).

 10.7+   Technology Development and License Agreement by and between the
         Registrant and Universal Music Group, Inc. dated April 13, 1999--
         incorporated herein by reference to Exhibit 10.13 to the Registrant's
         Registration Statement on Form S-1 (File No. 333-84033).

 10.8+   Technology Development and License Agreement by and between the
         Registrant and Upgrade Corporation of America dated August 7, 1996--
         incorporated herein by reference to Exhibit 10.14 to the Registrant's
         Registration Statement on Form S-1 (File No. 333-84033).

 10.9+   Technology Development and License Agreement by and between the
         Registrant and Mitsubishi Corporation dated October 7, 1996--
         incorporated herein by reference to Exhibit 10.15 to the Registrant's
         Registration Statement on Form S-1 (File No. 333-84033).



                                      42




 Exhibit
   No.                                 Description
 -------                               -----------
       
 10.10    Warrant for the purchase of Class A Voting Common Stock made by the
          Registrant and held by Allen & Company Incorporated, dated September
          7, 1999--incorporated herein by reference to Exhibit 10.16 to the
          Registrant's Registration Statement on Form S-1 (File No. 333-84033).

 10.11    Amendment to Technology, Development, Marketing and License Agreement
          by and between the Registrant and National Westminster Bank dated
          August 18, 1998--incorporated herein by reference to Exhibit 10.17 to
          the Registrant's Registration Statement on Form S-1
          (File No. 333-84033).

 10.12    Amendment to Technology Development and License Agreement by and
          between the Registrant and Universal Music Group, Inc. dated April
          13, 1999--incorporated herein by reference to Exhibit 10.18 to the
          Registrant's Registration Statement on Form S-1 (File No. 333-84033).

 10.19**  Building Lease Agreement by and between First State Realty of
          America, Inc. and the Registrant dated January 24, 2000.

 10.20*** Employment Agreement by and between the Company and David Ludvigson
          dated August 4, 2000.

 10.21    2000 Supplemental Option Plan.

 10.22    Full-Recourse Promissory Note dated December 7, 2000 from Bruce
          Fredrickson to the Company.

 21.1*    Subsidiaries of the Company.

 23.1     Consent of Ernst & Young LLP, independent auditors.

 24.1     Power of Attorney (See page 44).

- --------
  * Incorporated herein by reference to the exhibit of the same number in the
    Registrant's Registration Statement on Form S-1 (File No. 333-84033).

 ** Incorporated herein by reference to the exhibit of the same number in the
    Registrant's Registration Statement Form S-1 (File No. 333-32484).

*** Incorporated herein by reference to the exhibit of the same number in the
    Registrant's Form 10-Q for the quarter ended September 30, 2000.

  + Confidential treatment requested.

  (b) Reports on Form 8-K

     None.

  (c) Exhibits

     See (a)(3) above.

  (d) Financial Statement Schedule

     See (a)(2) above.

                                       43


                                  SIGNATURES

   Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

April 2, 2001                             INTERTRUST TECHNOLOGIES CORPORATION
                                          (Registrant)

                                                    /s/ Victor Shear
                                          By: _________________________________
                                                        Victor Shear
                                                 Chairman of the Board and
                                                  Chief Executive Officer


                               POWER OF ATTORNEY

   KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Victor Shear and Edmund J. Fish, or
either of them, each with the power of substitution, his attorney-in-fact, to
sign any amendments to this Form 10-K (including post-effective amendments),
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.

   Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.



            Signature                          Title                       Date
            ---------                          -----                       ----

                                                           
       /s/ Victor Shear            Chairman of the Board and          April 2, 2001
_________________________________  Chief
          Victor Shear              Executive Officer
                                   (Principal
                                    Executive Officer)

         /s/ Greg Wood             Chief Financial Officer            April 2, 2001
_________________________________  (Principal  Financial and
            Greg Wood              Accounting  Officer)

      /s/ Edmund J. Fish           Director and President             April 2, 2001
_________________________________   MetaTrust Utility
         Edmund J. Fish

     /s/ Bruce Fredrickson         Director                           April 2, 2001
_________________________________
        Bruce Fredrickson

      /s/ Satish K. Gupta          Director                           April 2, 2001
_________________________________
         Satish K. Gupta

      /s/ David Lockwood           Director                           April 2, 2001
_________________________________
         David Lockwood




                                      44


                      INTERTRUST TECHNOLOGIES CORPORATION

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                          
Report of Ernst & Young LLP, Independent Auditors........................... F-2

Consolidated Balance Sheets................................................. F-3

Consolidated Statement of Operations........................................ F-4

Consolidated Statements of Stockholders' Equity (Deficit)................... F-5

Consolidated Statements of Cash Flows....................................... F-6

Notes to Consolidated Financial Statements.................................. F-8



                                      F-1


               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
InterTrust Technologies Corporation

   We have audited the accompanying consolidated balance sheets of InterTrust
Technologies Corporation as of December 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity (deficit), and
cash flows for each of the three years in the period ended December 31, 2000.
Our audits also included the financial statement schedule listed in the Index
at Item 14(a). These financial statements and schedule are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.

   We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards required that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatements. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

   In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of InterTrust
Technologies Corporation at December 31, 2000 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in
the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States. Also in our opinion, the financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects, the
information set forth therein.

                                          /s/ Ernst & Young LLP

Palo Alto, California
January 22, 2001

                                      F-2


                      INTERTRUST TECHNOLOGIES CORPORATION

                          CONSOLIDATED BALANCE SHEETS
               (in thousands, except share and per share amounts)



                                                              December 31,
                                                           -------------------
                                                             2000       1999
                                                           ---------  --------
                          ASSETS
                                                                
Current assets:
  Cash and cash equivalents............................... $  23,811  $ 98,286
  Short-term investments..................................   134,707    42,548
  Accounts receivable, net of allowance of $178 in 2000
   and $-0- in 1999.......................................     3,928     2,562
  Prepaids and other current assets.......................     2,771     1,182
                                                           ---------  --------
    Total current assets..................................   165,217   144,578
  Property and equipment, net.............................     8,919     3,356
  Long-term investments...................................    16,783       --
  Restricted long-term investments........................       944       --
  Goodwill and other intangible assets, net...............    29,453     3,426
  Other assets............................................     5,557       137
                                                           ---------  --------
                                                           $ 226,873  $151,497
                                                           =========  ========

           LIABILITIES AND STOCKHOLDERS' EQUITY
                                                                
Current liabilities:
  Accounts payable........................................ $   2,728  $  2,184
  Accrued compensation....................................     2,155     1,113
  Other accrued liabilities...............................     1,110     1,678
  Deferred revenue........................................     5,915     3,052
                                                           ---------  --------
    Total current liabilities.............................    11,908     8,027
Deferred revenue--long-term portion.......................     7,617    10,118
                                                           ---------  --------
Total liabilities......................................... $  19,525  $ 18,145
                                                           =========  ========
Commitments and contingencies
Stockholders' equity:
  Convertible preferred stock, $.001 par value, 10,000,000
   shares authorized, none issued and outstanding at
   December 31, 2000 and 1999.............................       --        --
  Common stock, $0.001 par value, 120,000,000 shares
   authorized 87,776,991 and 79,216,996 shares issued and
   outstanding at December 31, 2000 and 1999..............        88        79
Additional paid-in capital................................   340,380   214,241
Deferred stock compensation...............................    (3,274)   (6,600)
Notes receivable from stockholders........................      (516)     (196)
Accumulated other comprehensive income (loss).............       376      (107)
Accumulated deficit.......................................  (129,706)  (74,065)
                                                           ---------  --------
    Total stockholders' equity............................   207,348   133,352
                                                           ---------  --------
                                                           $ 226,873  $151,497
                                                           =========  ========


                            See accompanying notes.

                                      F-3


                      INTERTRUST TECHNOLOGIES CORPORATION

                      CONSOLIDATED STATEMENT OF OPERATIONS
               (in thousands, except share and per share amounts)



                                                  Year Ended December 31,
                                                 ----------------------------
                                                   2000      1999      1998
                                                 --------  --------  --------
                                                            
Revenues:
  Licenses...................................... $  4,150  $    778  $    --
  Software support and training.................    3,149       613       152
  Services......................................      244       150       --
  Hardware......................................      445       --        --
                                                 --------  --------  --------
    Total revenues..............................    7,988     1,541       152
Cost of revenues:
  Licenses......................................      436       141       --
  Software support and training.................      910       470       191
  Services......................................    3,670       436       --
  Hardware......................................      445       --        --
                                                 --------  --------  --------
    Total cost of revenues......................    5,461     1,047       191
                                                 --------  --------  --------
Gross profit (loss).............................    2,527       494       (39)
Operating costs and expenses:
  Research and development......................   24,475    16,472    13,041
  Sales and marketing...........................   18,539     6,886     3,870
  General and administrative....................    9,890     5,588     2,717
  Purchased in-process research and
   development..................................    6,100       --        --
  Amortization of goodwill and other intangible
   assets.......................................    3,004       --        --
  Amortization of deferred stock compensation...    3,326     1,704       --
                                                 --------  --------  --------
    Total operating costs and expenses..........   65,334    30,650    19,628
                                                 --------  --------  --------
Loss from operations............................  (62,807)  (30,156)  (19,667)
Interest income.................................   10,867     1,876        42
Interest expense................................      --        --        (37)
Loss on debt and equity investments.............   (3,699)      --        --
Provision for foreign income taxes..............       (2)     (325)      --
                                                 --------  --------  --------
Net loss........................................ $(55,641) $(28,605) $(19,662)
                                                 ========  ========  ========
Basic and diluted net loss per share............ $  (0.66) $  (0.71) $  (0.70)
                                                 ========  ========  ========
Shares used in computing basic and diluted net
 loss per share.................................   84,016    40,426    27,932
                                                 ========  ========  ========


                            See accompanying notes.

                                      F-4


                      INTERTRUST TECHNOLOGIES CORPORATION

           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                         AND OTHER COMPREHENSIVE LOSS
                     (in thousands, except share amounts)



                      Convertible
                    Preferred Stock       Common Stock    Additional                   Notes     Accumulated
                   -------------------  -----------------  Paid-In   Deferred Stock  Receivable  Other Income Accumulated
                     Shares     Amount    Shares   Amount  Capital    Compensation  Stockholders    (Loss)      Deficit
                   -----------  ------  ---------- ------ ---------- -------------- ------------ ------------ -----------
                                                                                   
Balance at
December 31,
1997.............   12,600,776  $  13   27,580,250 $  27   $ 24,979     $   --         $ (68)       $ --       $ (25,798)
 Issuance of
 series B
 preferred
 stock...........    6,968,288      7          --    --      14,824         --           --           --             --
 Issuance of
 series B
 preferred stock
 upon conversion
 of convertible
 note payable and
 accrued
 interest........    1,431,710      1          --    --       3,066         --           --           --             --
 Issuance of
 common stock
 upon exercise of
 options.........          --     --     1,637,800     2        727         --          (366)         --             --
 Forgiveness of
 note receivable
 from
 stockholder.....          --     --           --    --         --          --           106          --             --
 Issuance of
 common stock
 upon net
 exercise of
 options and
 related
 compensation....          --     --        57,262   --          50         --           --           --             --
 Issuance of
 common stock
 upon net
 exercise of
 warrants and
 related
 compensation....          --     --        65,714   --          26         --           --           --             --
 Payments of
 notes receivable
 from
 stockholders....          --     --           --    --         --          --            52          --             --
 Net loss........          --     --           --    --         --          --           --           --         (19,662)
                   -----------  -----   ---------- -----   --------     -------        -----        -----      ---------
Balance at
December 31,
1998.............   21,000,774     21   29,341,296    29     43,672         --          (276)         --         (45,460)
 Issuance of
 series C
 preferred
 stock..........     1,700,000      2          --    --       5,005         --           --           --             --
 Issuance of
 series D
 preferred
 stock..........     2,284,046      2          --    --       9,705         --           --           --             --
 Issuance of
 series E
 preferred
 stock...........    2,619,400      3          --    --      15,688         --           --           --             --
 Issuance of
 series E
 preferred stock
 upon conversion
 of note
 payable.........      166,666    --           --    --       1,000         --           --           --             --
 Issuance of
 common stock
 upon exercise of
 options.........          --     --     6,354,814     6      3,893         --           --           --             --
 Issuance of
 common stock
 upon exercise of
 warrants........          --     --       630,000     1        374         --           --           --             --
 Conversion of
 preferred stock
 to common stock
 upon completion
 of initial
 public
 offering........  (27,770,886)   (28)  27,770,886    28        --          --           --           --             --
 Issuance of
 common stock in
 public offering,
 net of issuance
 costs of
 $11,123.........          --     --    14,950,000    15    123,412         --           --           --             --
 Issuance of
 common stock for
 asset
 acquisition.....          --     --       170,000   --       1,190         --           --           --             --
 Issuance of
 patent for
 patent
 acquisition.....          --     --           --    --       1,919         --           --           --             --
 Compensation
 related to
 issuance of
 common stock
 warrant.........          --     --           --    --          79         --           --           --             --
 Deferred stock
 compensation....          --     --           --    --       8,304      (8,304)         --           --             --
 Amortization of
 deferred
 compensation....          --     --           --    --         --        1,704          --           --             --
 Forgiveness of
 note receivable
 from
 stockholders....          --     --           --    --         --          --            80          --             --
 Unrealized loss
 on short-term
 investments.....          --     --           --    --         --          --           --          (107)           --
 Net loss........          --     --           --    --         --          --           --           --         (28,605)
                   -----------  -----   ---------- -----   --------     -------        -----        -----      ---------
 Total
 comprehensive
 loss............
Balance at
December 31,
1999.............          --     --    79,216,996    79    214,241      (6,600)        (196)        (107)       (74,065)
 Issuance of
 common stock for
 business
 combination and
 asset
 acquisitions....          --     --     1,105,180     1     27,850         --           --           --             --
 Issuance of
 common stock in
 public offering,
 net of issuance
 cost of $6,488..          --     --     2,820,244     3     92,232         --           --           --             --
 Issuance of
 common stock
 upon exercise of
 options.........          --     --     4,326,578     5      3,695         --           --           --             --
 Issuance of
 common stock
 upon employee
 stock
 purchases.......          --     --       307,993   --       2,362         --           --           --             --
 Note receivable
 from officer....          --     --           --    --         --          --          (500)         --             --
 Amortization of
 deferred stock
 compensation....          --     --           --    --         --        3,326          --           --             --
 Forgiveness and
 repayment of
 notes receivable
 from
 stockholders....          --     --           --    --         --          --           180          --             --
 Unrealized
 holding gain on
 investments.....          --     --           --    --         --          --           --           483            --
 Net loss........          --     --           --    --         --          --           --           --         (55,641)
                   -----------  -----   ---------- -----   --------     -------        -----        -----      ---------
 Total
 comprehensive
 loss............
Balance at
December 31,
2000.............          --   $ --    87,776,991 $  88   $340,380     $(3,274)       $(516)       $ 376      $(129,706)
                   ===========  =====   ========== =====   ========     =======        =====        =====      =========

                                     Total
                   Comprehensive Stockholders'
                   Income (Loss)    Equity
                   ------------- -------------
                           
Balance at
December 31,
1997.............    $    --       $   (847)
 Issuance of
 series B
 preferred
 stock...........         --         14,831
 Issuance of
 series B
 preferred stock
 upon conversion
 of convertible
 note payable and
 accrued
 interest........         --          3,067
 Issuance of
 common stock
 upon exercise of
 options.........         --            363
 Forgiveness of
 note receivable
 from
 stockholder.....         --            106
 Issuance of
 common stock
 upon net
 exercise of
 options and
 related
 compensation....         --             50
 Issuance of
 common stock
 upon net
 exercise of
 warrants and
 related
 compensation....         --             26
 Payments of
 notes receivable
 from
 stockholders....         --             52
 Net loss........         --        (19,662)
                   ------------- -------------
Balance at
December 31,
1998.............         --         (2,014)
 Issuance of
 series C
 preferred
 stock..........          --          5,007
 Issuance of
 series D
 preferred
 stock..........          --          9,707
 Issuance of
 series E
 preferred
 stock...........         --         15,691
 Issuance of
 series E
 preferred stock
 upon conversion
 of note
 payable.........         --          1,000
 Issuance of
 common stock
 upon exercise of
 options.........         --          3,899
 Issuance of
 common stock
 upon exercise of
 warrants........         --            375
 Conversion of
 preferred stock
 to common stock
 upon completion
 of initial
 public
 offering........         --            --
 Issuance of
 common stock in
 public offering,
 net of issuance
 costs of
 $11,123.........         --        123,427
 Issuance of
 common stock for
 asset
 acquisition.....         --          1,190
 Issuance of
 patent for
 patent
 acquisition.....         --          1,919
 Compensation
 related to
 issuance of
 common stock
 warrant.........         --             79
 Deferred stock
 compensation....         --            --
 Amortization of
 deferred
 compensation....         --          1,704
 Forgiveness of
 note receivable
 from
 stockholders....         --             80
 Unrealized loss
 on short-term
 investments.....        (107)         (107)
 Net loss........     (28,605)      (28,605)
                   ------------- -------------
 Total
 comprehensive
 loss............     (28,712)
Balance at
December 31,
1999.............                   133,352
 Issuance of
 common stock for
 business
 combination and
 asset
 acquisitions....         --         27,851
 Issuance of
 common stock in
 public offering,
 net of issuance
 cost of $6,488..         --         92,235
 Issuance of
 common stock
 upon exercise of
 options.........         --          3,700
 Issuance of
 common stock
 upon employee
 stock
 purchases.......         --          2,362
 Note receivable
 from officer....         --           (500)
 Amortization of
 deferred stock
 compensation....         --          3,326
 Forgiveness and
 repayment of
 notes receivable
 from
 stockholders....         --            180
 Unrealized
 holding gain on
 investments.....         483           483
 Net loss........     (55,641)      (55,641)
                   ------------- -------------
 Total
 comprehensive
 loss............    $(55,158)
                   =============
Balance at
December 31,
2000.............                  $207,348
                                 =============


                            See accompanying notes.

                                      F-5


                      INTERTRUST TECHNOLOGIES CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)



                                                  Years Ended December 31,
                                                 -----------------------------
                                                   2000       1999      1998
                                                 ---------  --------  --------
                                                             
Operating Activities:
 Net loss....................................... $ (55,641) $(28,605) $(19,662)
 Adjustments to reconcile net loss to net cash
  used in
  operating activities:
  Depreciation and amortization ................     1,694       660       538
  Amortization of goodwill and other intangible
   assets.......................................     3,492       --        --
  Amortization of deferred stock compensation
   and other stock related compensation
   charges......................................     3,326     1,863       182
  Compensation expense related to forgiveness of
   notes receivable from stockholders...........       118       --        --
  Loss on debt and equity investments...........     3,699       --        --
  Issuance of preferred stock for accrued
   interest.....................................       --        --         37
  Purchased in-process research and
   development..................................     6,100       --        --
 Changes in operating assets and liabilities:
  Accounts receivable...........................    (1,366)   (1,017)   (1,520)
  Prepaid and other current assets..............    (1,589)   (1,040)       24
  Accounts payable..............................       509     1,635      (105)
  Accrued compensation..........................     1,042       553       173
  Other accrued liabilities.....................      (568)      928       193
  Deferred revenue..............................       362     4,595     6,075
                                                 ---------  --------  --------
   Net cash used in operating activities........   (38,822)  (20,428)  (14,065)

Investing Activities:
 Capital expenditures...........................    (7,158)   (3,017)     (509)
 Purchases of short-term investments............  (140,503)  (42,655)      --
 Maturities and sales of short term
  investments...................................    48,704       --        --
 Purchases of long-term investments.............   (16,660)      --        --
 Purchases of restricted investments............      (944)      --        --
 Purchased technology...........................    (7,800)      --        --
 Other noncurrent assets, net...................    (9,151)     (295)      (11)
                                                 ---------  --------  --------
   Net cash used in investing activities........  (133,512)  (45,967)     (520)

Financing Activities:
 Proceeds from issuance of convertible
  promissory notes..............................       --      1,000     3,030
 Proceeds from issuance of preferred stock,
  net...........................................       --     30,405    14,831
 Proceeds from issuance of common stock, net....    92,235   123,427       --
 Proceeds from exercise of stock options and
  warrants and purchases under employee stock
  purchase plan.................................     6,062     4,274       363
 Loan to officer to purchase common stock.......      (500)      --        --
 Proceeds from notes receivable from
  stockholders..................................        62       --         52
                                                 ---------  --------  --------
   Net cash provided by financing activities....    97,859   159,106    18,276
Net increase (decrease) in cash and cash
 equivalents....................................   (74,475)   92,711     3,691
Cash and cash equivalents at beginning of
 period.........................................    98,286     5,575     1,884
                                                 ---------  --------  --------
Cash and cash equivalents at end of period...... $  23,811  $ 98,286  $  5,575
                                                 =========  ========  ========



                                      F-6


                      INTERTRUST TECHNOLOGIES CORPORATION

               CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
                                 (in thousands)



                                                          Years Ended December
                                                                   31,
                                                          ---------------------
                                                           2000    1999   1998
                                                          ------- ------ ------
                                                                
Supplemental schedule of noncash investing and financing
 activities:
Technology asset acquisition:
 Common stock issued in exchange for assets.............  $ 3,335 $1,190 $  --
                                                          ======= ====== ======
 Other assets received in exchange......................  $ 3,353 $   10 $  --
                                                          ======= ====== ======
 Other liabilities assumed in exchange..................  $    18 $  140 $  --
                                                          ======= ====== ======
Business acquisition:
 Common stock issued in conjunction with acquisition....  $24,516 $  --  $  --
                                                          ======= ====== ======
 Purchase price in excess of fair value of assets and
  liabilities acquired..................................  $18,433 $  --  $  --
                                                          ======= ====== ======
 Liabilities assumed in acquisition.....................  $    17 $  --  $  --
                                                          ======= ====== ======
Patent acquired in exchange for stock option............  $   --  $1,919 $  --
                                                          ======= ====== ======
Increase in deferred stock compensation.................  $   --  $8,304 $  --
                                                          ======= ====== ======
Conversion of convertible promissory notes and accrued
 interest into convertible preferred stock..............  $   --  $1,000 $3,067
                                                          ======= ====== ======



                            See accompanying notes.

                                      F-7


                      INTERTRUST TECHNOLOGIES CORPORATION

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               DECEMBER 31, 2000

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 Description of Business

   InterTrust Technologies Corporation (InterTrust) has developed a general-
purpose digital rights management (DRM) platform to serve as a foundation for
providers of digital information, technology, and commerce services to
participate in a global e-commerce system. DRM technologies manage rights and
interests in digital information. InterTrust was formed and incorporated in
January 1990. InterTrust first shipped the general availability version of its
Commerce software at the end of fiscal 1998. All of InterTrust's revenues
through December 31, 2000 have been generated from licenses of InterTrust's
Commerce software, related services, and sales of chips containing
InterTrust's DRM.

 Principles of Consolidation

   The consolidated financial statements include the accounts of InterTrust
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.

 Use of Estimates

   The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

 Revenue Recognition

   InterTrust recognizes revenue in accordance with Statement of Position 97-
2, "Software Revenue Recognition," as amended by Statements of Position 98-9,
"Modifications of SOP 97-2, Software Revenue Recognition with Respect to
Certain Transactions." InterTrust recognizes revenue from license fees,
clearinghouse services, development services, transaction fees, software
support and training services, and the sale of chips containing its DRM.
License revenue, net of any discounts granted, is recognized after execution
of a license agreement and delivery of the product, provided there are no
remaining obligations relating to development, upgrades, new releases, or
other future deliverables, and provided that the license fee is fixed or
determinable, and collection of the fee is probable. InterTrust allocates
revenue between the elements of the arrangements, including the license,
software support and training services, and the rights to unspecified upgrades
and new releases based on the vendor specific evidence of the fair value of
each of the elements. If Intertrust does not have vendor specific objective
evidence of the fair value of the undelivered elements, license revenue is
deferred for the delivered elements. InterTrust's license agreements generally
include the right to obtain access to upgrades and new releases, on a when and
if available basis, for a specified period. Under these circumstances, the
license payments received in advance of revenue recognition are deferred and
recognized on a subscription basis over the period of obligation beginning
upon delivery of the licensed product. In addition, under license agreements
where Intertrust is obligated to provide specified upgrades and does not have
vendor specific objective evidence of fair value of the specified upgrade, all
of the license revenue is deferred until the specified upgrade has been
delivered. Upon delivery of the specified upgrade, license revenue is
recognized using the subscription method.

   Through December 31, 2000, on three occasions InterTrust received license
fees in the form of minority equity positions in non-public entities. On five
occasions InterTrust received license fees in the form of convertible
promissory notes from non-public entities in exchange for technology licenses.
One of these convertible

                                      F-8


                      INTERTRUST TECHNOLOGIES CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

promissory notes was already converted into 125,000 shares of common stock
which InterTrust believes represented approximately 1% of the outstanding
shares of the licensees as of the conversion date. Because the entities were
recently formed, privately held companies and InterTrust was unable to obtain
sufficient evidence of the fair value of the common stock of the entity or
sufficient evidence of the fair value of the convertible promissory notes and
collectibility was not probable, InterTrust did not record revenue or deferred
revenue from the license fees. InterTrust is obligated to provide unspecified
upgrades and new releases, on a when and if available basis, to the licensees
over a two year period under the agreements for additional fees. InterTrust is
not obligated to provide any funding to any licensee for the development of
the licensee's software.

   InterTrust's license agreements also require the payment of a percentage
transaction fee to InterTrust based on the fulfillment of a transaction that
utilizes its technology. InterTrust's partners are required to pay all amounts
due for transaction fees within 30 to 90 days after the end of each quarter.
InterTrust's revenue recognition policy relating to transaction fees is to
recognize the revenue when the amounts due are known, which will generally be
in the quarter subsequent to the transaction. Prepaid transaction fees are
recorded as deferred revenue and will be recognized when the related
transactions occur. InterTrust received $1 million in prepaid transaction fees
from a stockholder, which is included in deferred revenue as of December 31,
2000 and 1999. No material transaction revenue has been recognized from
commercial transactions or services to date.

   Software support and training services, which typically include the right
to telephone and online support and customer training, are generally provided
for in the license agreements for an agreed upon amount. Software support and
training service revenue is recognized over the period in which the services
are provided, generally two years. Costs incurred to provide software support
and training services are included as a component of cost of revenues.

   Clearinghouse service revenues represent primarily service fees for the use
of InterTrust's TrustNet clearinghouse. Service revenues typically include
consulting services provided to the customer to establish an interface with
the clearinghouse and monthly service fees to use TrustNet for the clearing of
commercial transactions. Consulting fees are recognized as services are
performed and monthly clearinghouse service fees are recognized over the term
of the service period. Costs incurred to provide consulting personnel,
computer hardware and support of an off-site service center are included as a
component of cost of revenues.

   Professional services represent fees for consulting services provided to
InterTrust customers that is development not considered essential to the
functionality of the software licensed. The revenue from these services is
recognized as services are performed.

   Hardware revenue is comprised of sales of chips containing InterTrust
software to one customer, who is also a licensee of InterTrust technology, and
with whom InterTrust has a short-term contract to provide chips for testing
and trial production. The revenue from the sale of chips is recognized as the
chips are delivered.

 Cash and Cash Equivalents

   Cash and cash equivalents are stated at cost, which approximates fair
value. InterTrust considers all highly liquid instruments with insignificant
interest rate risk and maturities of three months or less to be cash
equivalents. Cash equivalents consist primarily high-grade commercial paper
and money market funds.

 Investments

   Investments are comprised primarily of U.S. government obligations and
corporate debt securities and are classified as available-for-sale
investments. Investments with a maturity date of less than one year that are
not

                                      F-9


                      INTERTRUST TECHNOLOGIES CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

restricted are classified as short term. The carrying value of the investments
is adjusted to fair value with a resulting adjustment to other comprehensive
loss. The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity, both of which are included in
interest income. Realized gains and loses are recorded using the specific
identification method and have been minimal through December 31, 2000. As of
December 31, 2000, InterTrust's restricted investments are classified as
available-for-sale but are pledged as collateral against three letters of
credit. Restricted investments are held in InterTrust's name by one major
financial institution.

 Foreign Currency Translation

   The U.S. dollar is the functional currency for InterTrust's foreign
operations. Gains and losses on the translation into U.S. dollars of amounts
denominated in foreign currencies are included in net income.

 Concentration of Credit Risk

   InterTrust operates in the Internet industry, which is rapidly evolving and
intensely competitive.

   Financial instruments that potentially subject InterTrust to a
concentration of credit risk consist of cash and cash equivalents, short-term
investments and accounts receivable. Cash and cash equivalents and short-term
investments are deposited with two major financial institutions and such
deposits exceed federally insured limits. InterTrust's accounts receivable are
primarily derived from customers located in North America, Europe, and Asia.
InterTrust performs ongoing credit evaluations of its customers but does not
require collateral from its customers. When required, InterTrust maintains
allowances for credit losses, and to date, these losses have been within
management's expectations.

   Three customers accounted for 20%, 17% and 8% of total revenues in 2000.
Three customers, one of which was also a stockholder, accounted for 25%, 13%,
and 12% of total revenues in 1999. Two customers accounted for 21% and 15% of
accounts receivable at December 31, 2000, and one customer accounted for 74%
of accounts receivable at December 31, 1999.

 Income Taxes

   InterTrust accounts for income taxes in accordance with FASB Statement No.
109 "Accounting for Income Taxes" ("FASB 109"), which requires the use of the
liability method in accounting for income taxes. Under FASB 109, deferred tax
assets and liabilities are measured based on differences between the financial
reporting and tax bases of assets and liabilities using enacted tax rates and
laws that are expected to be in effect when the differences are expected to
reverse.

 Fair Value of Financial Instruments

   The carrying values of InterTrust's financial instruments, which include
cash and cash equivalents, short term and long term investments, accounts
receivable, current liabilities, and notes receivable from stockholders,
approximate their fair value.

 Investment in Privately-held Companies

   In 2000, InterTrust received an approximately 1% equity interest in a non-
public entity as consideration for license fees. Additionally, on four
occasions InterTrust received license fees in the form of convertible
promissory notes from non-public entities. Because the entities were recently
formed, privately held companies and InterTrust was unable to obtain
sufficient evidence of the fair value of the common stock of the entity or

                                     F-10


                      INTERTRUST TECHNOLOGIES CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

sufficient evidence of the fair value of the convertible promissory notes,
InterTrust did not record revenue or deferred revenue from the license fees.

   In 2000, InterTrust made investments of $6.5 million in equity securities
in certain private technology companies. Investments in privately-held
companies primarily consist of equity and debt securities in which Intertrust
owns less than a 20% interest. InterTrust does not have the ability to
exercise significant influence over any of these companies and accordingly
accounts for such investments using the cost method. These investments are
assessed for impairment periodically through review of operations and
indications of continued viability, such as subsequent rounds of financing.
During 2000, InterTrust recorded $3.0 million in losses as a result of other
than temporary declines in the value of investments in privately held
companies. The remaining investment in privately-held companies of $3.5
millions at December 31, 2000 is included in other assets in the consolidated
balance sheet. Furthermore, in September and October 2000, InterTrust made two
loans totaling $699,000 to a privately held technology company. In December
2000, InterTrust reserved for the entire balance of the notes receivable due
to the uncertainty of collection, based on the deterioration of the financial
condition of the company.

 Property and Equipment

   Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets,
generally three years. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful lives of the
assets or the terms of the leases.

 Goodwill and other intangible assets

   Intangible assets are primarily comprised of goodwill, purchased technology
and patent rights, assets related to acquired workforce in place, and
capitalized patent application costs related to internally developed
technology. These assets are amortized using the straight-line method over the
estimated useful lives of the assets, generally four to seventeen years.

   InterTrust records impairment losses on intangible assets when events and
circumstances indicate that such assets might be impaired and the estimated
fair value of the asset is less than its recorded amount. Conditions that
would trigger an impairment assessment included material adverse changes in
operations or our decision to abandon acquired products, services or
technologies. If such circumstances arise, InterTrust uses an estimate of the
undiscounted value of expected future operating cash flows to determine
whether the intangible assets are impaired. To date, no such impairment has
occurred.

 Stock-Based Compensation

   InterTrust accounts for stock-based compensation for awards to employees
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and has adopted
the disclosure only alternative of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (FAS 123). InterTrust
accounts for stock-based compensation awards to non-employees using the fair
value method prescribed in FAS 123.

 Research and Development

   Research and development expenditures are expensed to operations as
incurred. Costs incurred in the development of new software and substantial
enhancements to existing software are expensed as incurred until

                                     F-11


                      INTERTRUST TECHNOLOGIES CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

technological feasibility of the software has been established, at which time
any additional costs would be capitalized in accordance with Statement of
Financial Accounting Standards No. 86, "Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed." To date, InterTrust's
software development has been completed concurrently with the establishment of
technological feasibility and, as a result, no research and development costs
have been capitalized.

 Advertising Expense

   InterTrust recognizes advertising expense as incurred. Advertising expense
has been immaterial in all periods since inception.

 Comprehensive Loss

   Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income", requires companies to report unrealized holding gains
and losses on available-for-sale securities in comprehensive income (loss) and
its components as part of the financial statements. Other comprehensive income
includes changes in equity that are excluded from net income (loss).
Comprehensive loss for the periods ended December 31, 2000 and 1999 have been
included in InterTrust's Consolidated Statement of Changes in Stockholders'
Equity.

 Net Loss per Share

   Basic and diluted net loss per share are computed by dividing the net loss
available to common stockholders by the weighted average number of common and
common equivalent shares outstanding during the period less shares subject to
repurchase. Common equivalent shares, comprised of incremental common shares
issuable upon the exercise of stock options and warrants, have not been
included in the computation of diluted net loss per share as their effect is
anti-dilutive.

 Segments

   InterTrust operates solely in one business segment. For the year ended
December 31, 2000, revenue from customers in Asia, Europe, and Australia
accounted for revenue totaling approximately $2.4 million, $1.1 million, and
$28,000, respectively. For the year ended December 31, 1999, revenue from
customers in Asia and Europe accounted for revenue totaling approximately
$597,000 and $349,000. For the year ended December 31, 1998, revenue from
customers from Asia and Europe accounted for revenue totaling approximately $0
and $52,000, respectively.

 Recent Accounting Pronouncements

   In December 1999, the Securities and Exchange Commission (the "SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101 summarizes certain of the SEC's views in
applying accounting principles generally accepted in the United States to
revenue recognition in financial statements. InterTrust adopted SAB 101 in
October 2000, effective January 1, 2000. The adoption of SAB 101 did not have
any impact on InterTrust's financial position revenues, or results of
operations.

   In March 2000, the FASB issued Financial Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation--an
Interpretation of APB No. 25." FIN 44 clarifies the application of APB 25 for
certain stock compensation matters and was effective July 1, 2000, except for
the provisions that relate to modifications that directly or indirectly reduce
the exercise price of an award and the definition of an employee, which were
effective after December 15, 1998. The adoption of FIN 44 did not have a
material impact on InterTrust's financial position or results of operations.

                                     F-12


                      INTERTRUST TECHNOLOGIES CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and
reporting standards for derivative instruments, including foreign exchange
contracts, and hedging activities. In June 200, the FASB issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities", which addresses implementation issues related to SFAS No. 133.
SFAS No. 133, as amended, and SFAS No. 138 are effective for fiscal years
beginning after June 15, 2000. We are required to adopt SFAS 133 for the
quarter ending March 31, 2001. Because InterTrust currently holds no
derivative financial instruments and does not currently engage in hedging
activities, the adoption of SFAS 133 will not have a material impact on
InterTrust's financial position or results or operations.

2. BUSINESS AND ASSET ACQUISITIONS

   In December 2000, InterTrust purchased technology and other assets from
PassEdge Corporation, a developer of software solutions for managing digital
rights for internet based video broadcasting, in exchange for $7.8 million in
cash, acquisition related costs of $60,000, and 874,718 shares of our common
stock with a fair value of $3.3 million. The purchase price of $11.2 million
was capitalized as purchased technology of $9.8 million, assembled workforce
of $1.1 million, and equipment of $277,000. Intertrust is amortizing the value
of the technology acquired over its estimated useful life of approximately 4
years and the value of the assembled workforce and equipment over their
estimated useful lives of approximately three years. As of December 31, 2000,
InterTrust had amortized $245,000 of the purchased technology, assembled
workforce, and equipment acquired from PassEdge.

   In March 2000, InterTrust acquired Infinite Ink Corporation ("Infinite
Ink"), a developer of software solutions for rendering and protecting
electronic publishing. InterTrust acquired all of the shares of Infinite Ink
in exchange for 230,462 shares of common stock with aggregate fair value of
$18.7 million, and assumed 68,052 stock options with an aggregate fair value
of $5.8 million. The consolidated financial statements include the operating
results of Infinite Ink from the date of acquisition. Pro forma results of
operations have not been presented because the effect of the acquisition was
not material.

   The transaction was accounted for as a purchase with a total purchase price
of $24.5 million. Of this amount, $6.1 million was expensed in March 2000 as
purchased in-process research and development ("IPRD"). Purchased in-process
research and development consisted of three projects to combine digital rights
management with a software system that would allows users to securely purchase
and view published content on their personal computers. The projects in
development were approximately 60% complete at the time of acquisition and
following the acquisition have been incorporated into the Company's product.
The InterTrust's management is primarily responsible for estimating the fair
value of the purchased in-process research and development. The InterTrust's
estimated the revenues, costs and resulting net cash flows from the project,
and discounted the net cash flows back to their net present value. These
estimates were based on several assumptions, including those summarized below.
The resultant value was then adjusted to reflect only the value creation
effort of Infinite Ink prior to the acquisition and further reduction by the
estimated value of core technology, which was included in capitalized
purchased technology. As of December 31, 2000, InterTrust estimated that the
projects in development were 80% complete.

   Revenues and operating profit attributable to the in-process research and
development were estimated over a three-year projection period. The resulting
projected net cash flows were discounted to their present value using a
discount rate of 30%, which was calculated based on the weighted-average cost
of capital, adjusted for the technology risk associated with the purchased in-
process research and development. The technology risk was considered to be
significant due to the rapid pace of technological change in the software
industry.

   The excess purchase price over the estimated value of the net tangible
assets and IPRD was allocated to various intangible assets. $18.1 million of
the excess purchase price was capitalized as goodwill, and $400,000

                                     F-13


                      INTERTRUST TECHNOLOGIES CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

was capitalized as the cost of the assembled workforce. The value of the
assembled workforce was based upon the cost to replace that workforce. The
goodwill and the fair value of the assembled workforce will be amortized
ratably over their estimated useful lives of five and three years,
respectively. As of December 31, 2000, InterTrust had amortized $2.8 million
of the goodwill and intangibles related to the acquisition of Infinite Ink.

   In October 1999, InterTrust purchased audio decoding and rendering
technology and related assets, received a license to video decoding and
rendering technology, and assumed certain liabilities, in exchange for
170,000 shares of InterTrust's common stock, which was valued at $1.3 million,
and $100,000 in cash. The purchase price of $1.4 million was capitalized as
purchased technology, and is being amortized over a four year expected life.
In 2000 and 1999, InterTrust amortized $359,000 and $60,000 of the capitalized
technology and related assets and is included in cost of license revenues.

3. INVESTMENTS

   The following is a summary fair value of available for sale securities and
restricted investments (in thousands):



                                                 December 31, 2000
                                      ----------------------------------------
                                                  Gross      Gross
                                      Amortized Unrealized Unrealized   Fair
                                        Cost      Gains      Losses    Value
                                      --------- ---------- ---------- --------
                                                          
Money market mutual funds............ $  8,898    $ --       $ --     $  8,898
U.S. Government and agency
 obligations.........................   62,590      249         (5)     62,834
Auction rate preferred stock.........   23,600      --         --       23,600
Corporate debt and equity
 securities..........................   65,868      138         (6)     66,000
                                      --------    -----      -----    --------
                                      $160,956    $ 387      $ (11)   $161,332
                                      ========    =====      =====    ========
Included in cash and cash equivalents................................ $  8,898
Included in short-term investments...................................  134,707
Included in long-term investments....................................   17,727
                                                                      --------
                                                                      $161,332
                                                                      ========


                                                 December 31, 1999
                                      ----------------------------------------
                                                  Gross      Gross
                                      Amortized Unrealized Unrealized   Fair
                                        Cost      Gains      Losses    Value
                                      --------- ---------- ---------- --------
                                                          
Money market mutual funds............ $ 24,770    $ --       $ (12)   $ 24,758
U.S. Government and agency
 obligations.........................   30,037      --         (18)     30,019
Auction rate preferred stock.........   28,947        3        --       28,950
Corporate debt and equity
 securities..........................   51,685      --         (80)     51,605
                                      --------    -----      -----    --------
                                      $135,439    $   3      $(110)   $135,332
                                      ========    =====      =====    ========
Included in cash and cash equivalents................................ $ 92,784
Included in short-term investments...................................   42,548
                                                                      --------
                                                                      $135,332
                                                                      ========


                                     F-14


                      INTERTRUST TECHNOLOGIES CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The following table summarizes the fair value of debt and equity securities
at December 31, 2000 (in thousands):



                                                             Amortized   Fair
                                                               Cost     Value
                                                             --------- --------
                                                                 
Due in less than 1 year..................................... $135,331  $135,651
Due in 1-2 years............................................   16,727    16,783
                                                             --------  --------
                                                             $152,058  $152,434
                                                             ========  ========


4. PROPERTY AND EQUIPMENT

   Property and equipment are stated at cost and consist of the following (in
thousands):



                                                                December 31,
                                                               ----------------
                                                                2000     1999
                                                               -------  -------
                                                                  
Computer equipment and software............................... $ 7,733  $ 2,727
Furniture and equipment.......................................   2,070    1,814
Leasehold improvements........................................   2,185      190
                                                               -------  -------
                                                                11,988    4,731
                                                               -------  -------
Accumulated depreciation and amortization.....................  (3,069)  (1,375)
                                                               -------  -------
                                                               $ 8,919  $ 3,356
                                                               =======  =======

5. GOODWILL AND OTHER INTANGIBLE ASSETS

   The following is a summary of goodwill and other intangibles (in
thousands):


                                                                December 31,
                                                               ----------------
                                                                2000     1999
                                                               -------  -------
                                                                  
Goodwill...................................................... $18,066  $   --
Purchased technology and licenses.............................  11,259    1,370
Patent costs..................................................   2,200    2,066
Other intangible assets.......................................   1,480       50
                                                               -------  -------
                                                                33,005    3,486
Less accumulated amortization.................................  (3,552)     (60)
                                                               -------  -------
                                                               $29,453  $ 3,426
                                                               =======  =======


6. COMMITMENTS

   InterTrust has entered into non-cancelable operating leases for facilities
and equipment that expire at various dates through August 2004. Rent under the
agreements is expensed to operations on a straight-line basis over the terms
of the leases. Future minimum lease payments under these leases at December
31, 2000 are as follows (in thousands):

                                                                  
Year ending December 31:
  2001.............................................................. $ 4,305,261
  2002..............................................................   3,703,263
  2003..............................................................   3,824,900
  2004..............................................................   2,862,657
  2005..............................................................     604,258
  Thereafter........................................................      33,700
                                                                     -----------
                                                                     $15,334,039
                                                                     ===========



                                     F-15


                      INTERTRUST TECHNOLOGIES CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Rent expense for all operating leases was approximately $3,222,000,
$1,199,000, and $258,000 in 2000, 1999, and 1998 respectively.

   As of December 31, 2000, InterTrust maintained irrevocable standby letters
of credit with one bank for the benefit of a vendor who supplies chips to
InterTrust, and for the benefit of two lessors of Intertrust occupied office
space, in the amounts of $500,000, $237,000 and $183,000, respectively.

7. STOCKHOLDERS' EQUITY (DEFICIT)

   In October 1999, InterTrust raised approximately $123.4 million, net of
issuance costs, from an initial public offering of 14,950,000 shares of its
common stock. In connection with the offering all of the then outstanding
shares of Series A, B, C, D, and E preferred stock and Class A and B common
stock were converted into common stock on a one-for-one basis.

   In April 2000, InterTrust sold 2,820,244 shares of common stock in an
underwritten public offering. The common stock was sold to the public at a
purchase price of $35 per share resulting in net proceeds of approximately
$92.2 million, after underwriting discounts and offering expenses.

 Preferred Stock

   Effective October 1999, the stockholders of InterTrust approved an
amendment to InterTrust's certificate of incorporation authorizing 10,000,000
shares of preferred Stock. The board of directors has the authority to issue
the preferred stock in one or more series and to fix its rights, preferences,
privileges, and restrictions, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences, and the number of shares constituting any series or
designation of the series.

 1999 and 1995 Stock Option Plans

   Pursuant to the 1999 Equity Incentive Plan and 1995 Stock Option Plan
("plans"), incentive stock options may be granted at prices not less than the
fair values as determined by the board of directors, while nonstatutory
options granted under the plans are at prices not less than 85% of the fair
values on the respective dates of the grant. Options expire after ten years.
Options generally vest ratably over a period of no more than five years. The
1999 Equity Incentive Plan provides for an automatic annual increase to the
plan by the lesser of 4% of the outstanding common stock at January 1 or
3,000,000 shares. At December 31, 2000, 905,236 options were available for
further grant under the 1999 Equity Incentive Plan, and none were available
under the 1995 stock option plan.

 Non-Plan Stock Options

   InterTrust's board of directors has granted to eligible participants
nonqualified stock options to purchase shares of common stock. The options
generally expire up to ten years after the date of grant or earlier if
employment or relationship is terminated. The options generally become
exercisable ratably over a period of no more than four years. In December
2000, the board of directors authorized options to acquire 5,000,000 shares of
common stock. Of the additional authorized non-plan options, 1,903,000 options
were granted in 2000.

 Employee Stock Purchase Plan

   The InterTrust Employee Stock Purchase Plan allows eligible employee
participants to purchase shares of our common stock at a discount through
payroll deductions. Eligible employees may purchase common stock at

                                     F-16


                      INTERTRUST TECHNOLOGIES CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

85% of the lesser of the fair market value of InterTrust's common stock on the
first day of the applicable two-year offering period or the last day of the
applicable six-month purchase period. The employee stock purchase plan
provides for an automatic annual increase to the plan by the lesser of 2% of
the outstanding common stock at January 1 or 700,000 shares. As of December
31, 2000, InterTrust had reserved 1.4 million shares of our common stock for
issuance under this plan, and approximately 1.1 million shares remain
available for future issuance.

   No purchase rights were granted prior to 2000. The weighted average fair
value of the purchase rights granted in 2000 was $7.29.

 Non-Employee Directors Option Plan

   The InterTrust director's plan provides for the automatic grant of options
to purchase shares of common stock to non-employee directors of InterTrust. A
total of 700,000 shares of common stock have been reserved for issuance under
the director's plan. The directors plan provides for an automatic annual
increase to the plan at January 1 to restore the available shares to 700,000
shares. As of December 31, 2000, options to purchase 190,000 shares had been
issued.

   Information about stock option activity is summarized as follows:



                                                                 Shares
                                                          ---------------------
                                                                       Weighted
                                                                       Average
                                                                       Exercise
                                              Available   Outstanding   Price
                                              ----------  -----------  --------
                                                              
Balance at December 31, 1997................     353,580  15,959,304    $ 0.54
  Shares authorized.........................   2,560,000         --        --
  Options granted...........................  (3,232,000)  3,232,000      2.64
  Options exercised.........................         --   (1,753,214)     0.46
  Options cancelled.........................     522,112    (522,112)     0.73
                                              ----------  ----------    ------
Balance at December 31, 1998................     203,692  16,915,978    $ 0.70
  Shares authorized.........................   6,524,056         --        --
  Options granted...........................  (5,830,658)  5,830,658      6.66
  Options exercised.........................         --   (6,368,706)     0.64
  Options cancelled.........................     828,848    (828,848)     1.16
  Options expired...........................    (637,338)        --        --
                                              ----------  ----------    ------
Balance at December 31, 1999................   1,088,600  15,549,082    $ 2.93
  Shares authorized.........................   8,000,000         --        --
  Options granted...........................  (6,533,754)  6,533,754     16.85
  Options exercised.........................         --   (4,326,578)     0.93
  Options cancelled.........................   1,865,852  (1,865,852)    12.13
  Options expired...........................    (530,462)        --        --
                                              ----------  ----------    ------
Balance at December 31, 2000................   3,890,236  15,890,406    $ 8.12
                                              ==========  ==========    ======
Exercisable and vested at December 31,
 2000.......................................               6,388,140
                                                          ==========
Shares of common stock subject to repurchase
 at December 31, 2000.......................                 158,334
                                                          ==========


   During 1998, InterTrust received a full recourse note receivable in the
amount of approximately $319,000 from one of its officers upon his exercise of
an option to purchase 640,000 shares of common stock. As of December 31, 2000,
approximately 107,000 of these shares were subject to repurchase by InterTrust
at the original exercise price.

                                     F-17


                      INTERTRUST TECHNOLOGIES CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The repurchase right lapses ratably over the 48-month vesting period of the
underlying option. The note bears interest at 8% per annum and is secured by
the related stock and general assets of the officer. The note and related
interest are being forgiven over a period of four years of employment.
InterTrust is recording compensation expense as the note is forgiven.

   During 2000, in connection with an option grant, InterTrust loaned one of
its officers, in the form of a full recourse note receivable, $500,000 for the
purpose of exercising 98,755 option shares. The shares will be subject to
repurchase, which will lapse ratably over the 48-month vesting period of the
underlying option shares. The note bears interest at 7% per annum and is
secured by the related stock and general assets of the officer. $250,000 of
the note and related interest are being forgiven over a period of two years of
employment. InterTrust is recording compensation expense as the note is
forgiven.


   The following table summarizes information about options at December 31,
2000:



                                                          Options
                 Options Outstanding                    Exercisable
   --------------------------------------------------------------------
                                 Weighted   Weighted           Weighted
                                  Average   Average            Average
      Range of                  Contractual Exercise           Exercise
  Exercise Prices      Shares      Life      Price    Shares    Price
  ---------------    ---------- ----------- -------- --------- --------
                                                
    $0.01 - $0.75     3,770,242    5.12      $ 0.59  3,200,987  $ 0.56
    $0.89 - $3.00     3,185,053    7.75      $ 1.74  1,442,938  $ 1.59
    $3.83 - $6.56     3,196,151    9.53      $ 5.20    456,666  $ 5.49
    $6.72 - $15.13    3,310,959    9.16      $10.50    877,422  $ 8.83
   $15.44 - $86.13    2,428,001    9.31      $28.81    508,882  $34.26
                     ----------                      ---------
        Total        15,890,406    8.02      $ 8.12  6,486,895  $ 4.89


 Stock-Based Compensation

   Prior to January 1, 2000, InterTrust recorded deferred stock compensation
for the difference between the exercise prices of options granted to employees
at their respective dates of grant and what was considered to be the fair
values for accounting purposes of the shares of common stock subject to the
options. These amounts are included as a reduction of stockholders' equity and
are being amortized on a graded vesting method. The compensation expense of
$3.3 million and $1.7 million during the years ended December 31, 2000 and
1999 relates to options awarded to employees in all operating expense
categories. These amounts have not been separately allocated between operating
expense categories.

   Pro forma information regarding net loss is required by FAS 123 as if
InterTrust had accounted for its stock-based awards to employees granted
subsequent to December 31, 1994 under the fair value method. The fair value
was estimated at the date of grant using the Black-Scholes option pricing
model.

   The fair value of InterTrust's stock-based awards to employees was
estimated assuming no expected dividend, a near-zero volatility as a non
public company in 1998, and the following weighted average assumptions:



                                                                 Year Ended
                                                                December 31,
                                                               ----------------
                                                               2000  1999  1998
                                                               ----  ----  ----
                                                                  
Expected life in years........................................ 4.0   4.0   4.0
Risk-free interest rate....................................... 5.0%  5.3%  6.0%
Volatility.................................................... 1.6   0.5   0.0


                                     F-18


                      INTERTRUST TECHNOLOGIES CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The weighted-average fair value of options granted during 2000, 1999, and
1998 was $14.05, $3.54, and $0.61 per share, respectively.

   For purposes of pro forma disclosures, the estimated fair value of the
above stock-based awards is amortized to expense over the vesting period of
the award. InterTrust's pro forma information is as follows:



                                                   Years Ended December 31,
                                                  ----------------------------
                                                    2000      1999      1998
                                                  --------  --------  --------
                                                             
Pro forma net loss............................... $(87,428) $(34,481) $(21,115)
Pro forma basic and diluted net loss per share... $  (1.04) $  (0.85) $  (0.76)


 Warrants

   In September 1999, InterTrust entered into a financial consulting
arrangement and concurrently issued a warrant to purchase 650,000 shares of
common stock at an exercise price of $7.00 per share. The warrant was fully
vested and non-forfeitable upon issuance but is only exercisable as to 50% of
the shares one year after the date of grant and the balance of such shares two
years after the date of grant or immediately prior to a merger or sale of
InterTrust. The warrant expires five years from the date of grant and is
subject to early termination upon the sale or merger of InterTrust. The fair
value of the warrant of $1,466,000 was determined using the Black-Scholes
method and is being amortized over the life of the service agreement.

   In October 1999, InterTrust issued a warrant to purchase 56,008 shares of
common stock at an exercise price of $9.00 per share. The warrant was issued
in exchange for recruiting services. The fair value of the warrant of $79,000
was determined using the Black-Scholes method and was expensed on the grant
date, when the related services were provided.

   At December 31, 2000, common stock reserved for issuance was as follows:

                                                                   
Exercise of outstanding stock options................................ 15,890,406
Shares of common stock available for grant...........................  3,890,236
Employee stock purchase plan.........................................  1,092,007
Non employees directors option plan..................................    670,000
Exercise of warrants.................................................    706,008
                                                                      ----------
                                                                      22,248,657
                                                                      ==========



8. INCOME TAXES

   For the year ended December 31, 2000, InterTrust recorded a tax provision
of $2,000. This provision represents foreign withholding taxes on license
payments received during the year.

   The difference between the amount of income tax benefit recorded and the
amount of income tax benefit calculated using the U.S. federal statutory rate
of 34% is primarily due to net operating losses not being benefited. For that
reason, there is no provision for federal or state income taxes for the years
ended December 31, 2000, 1999, and 1998.

                                     F-19


                      INTERTRUST TECHNOLOGIES CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Significant components of InterTrust's deferred tax assets are as follows
(in thousands):



                                                               December 31,
                                                             ------------------
                                                               2000      1999
                                                             --------  --------
                                                                 
Deferred tax assets:
  Net operating loss carryforwards.......................... $ 31,200  $ 20,300
  Capitalized research and development......................    1,800     1,300
  Research and development credit carryforwards.............    3,400     2,200
  Deferred revenue..........................................    7,900     5,200
  Other.....................................................       --       100
                                                             --------  --------
    Total deferred tax assets...............................   44,300    29,100
Valuation allowance.........................................  (44,300)  (29,100)
                                                             --------  --------
Net deferred tax assets..................................... $     --  $     --
                                                             ========  ========


   The Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," provides for the
recognition of deferred tax assets if realization of these assets is more
likely than not. Realization of deferred tax assets is dependent upon future
earnings, if any, the timing and amount of which are uncertain. Based upon the
weight of available evidence, which includes InterTrust's historical operating
performance and the reported cumulative net losses in all prior years,
InterTrust has provided a full valuation allowance against its gross deferred
tax assets.

   The valuation allowance increased by approximately $15.2 million and $10.6
million during the years ended December 31, 2000 and 1999, respectively.
Approximately $1.1 million of the valuation allowance at December 31, 2000
relates to the tax benefits of stock option deductions that will be credited
to additional paid-in capital when realized.

   As of December 31, 2000, InterTrust had federal and state net operating
loss carryforwards of approximately $89.0 million and $15.5 million,
respectively. InterTrust also had federal and state research and development
tax credit carryforwards of approximately $2.2 million and $1.8 million,
respectively. The federal and state net operating loss carryforwards expire in
years 2001 through 2020, if not utilized. The federal research and development
carryforwards expire in years 2008 through 2020, if not utilized.

   Utilization of the net operating loss and tax credit carryforwards may be
subject to a substantial annual limitation due to the change in ownership
provisions of the Internal Revenue Code of 1986, as amended, and similar state
provisions. The annual limitation may result in the expiration of net
operating loss and tax credit carryforwards before utilization.

                                     F-20


                      INTERTRUST TECHNOLOGIES CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


9. NET LOSS PER SHARE

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



                                                   Years Ended December 31,
                                                  ----------------------------
                                                    2000      1999      1998
                                                  --------  --------  --------
                                                             
Basic and diluted net loss per share:
  Numerator
    Net loss..................................... $(55,641) $(28,605) $(19,662)
                                                  ========  ========  ========
  Denominator
    Weighted average shares of common stock
     outstanding.................................   84,174    41,036    28,372
    Less weighted average shares subject to
     repurchase..................................     (158)     (610)     (440)
                                                  --------  --------  --------
    Weighted average shares of common stock
     outstanding used in computing basic and
     diluted net loss per share..................   84,016    40,426    27,932
                                                  ========  ========  ========
Basic and diluted net loss per share............. $  (0.66) $  (0.71) $  (0.70)
                                                  ========  ========  ========


   If InterTrust had reported net income, diluted net income per share would
have included the shares used in the computation of pro forma net loss per
share as well as the effect of approximately 6,955,295, 16,255,000 and
18,168,000 shares purchasable under outstanding options and warrants not
included above for the years ended December 31, 2000, 1999, and 1998,
respectively. The number of common equivalent shares from options and warrants
would be determined on a weighted average basis using the treasury stock
method.

10. RELATED PARTY TRANSACTIONS

   Under license agreements with two stockholders, InterTrust had received a
total of $4,000,000 from nonrefundable license payments as of December 31,
2000. Of this amount, Intertrust recognized $519,000 of revenue in both 2000
and 1999.

   In August 2000, InterTrust assumed a $70,000 loan to one of our executive
officers. The loan will be forgiven ratably over 29 months ending January 1,
2003. At December 31, 2000, the loan was included in other assets.

   In December 2000, InterTrust loaned $100,000 to a non-employee director of
the company. The loan is in the form of a full-recourse note which accrues
interest at the rate of 6.10% per year and is due in December 2001.

11. 401(k) PROFIT SHARING PLAN

   In 1996, InterTrust established a 401(k) Profit Sharing Plan (the "401(k)
Plan") which covers substantially all employees. Under the 401(k) Plan,
employees are permitted to contribute up to 20% of gross compensation not to
exceed the annual 402(g) limitation for any plan year. InterTrust may make
discretionary contributions but no contributions have been made to the 401(k)
Plan since inception.

                                      F-21


12. SUBSEQUENT EVENTS (unaudited)

   In January 2001, InterTrust signed a purchase agreement with PublishOne
Inc. ("PublishOne"), a developer of online publishing software solutions and
distribution services for business information publishers. Prior to
acquisition, InterTrust owned approximately 7.9% of PublishOne's stock. Under
the terms of the purchase agreement, InterTrust acquired the remaining 92.1%
of the shares of PublishOne in exchange for 976,423 shares of InterTrust
common stock with an approximate fair value of $5 million and assumed all
outstanding options of PublishOne, which were converted into options to
purchase 1,155,221 shares of InterTrust common stock with an approximate fair
value of $6 million. The transaction will be accounted for as a purchase with
an estimated purchase price of $11 million. Additionally, the agreement
includes contingent consideration of 473,577 shares to be issued upon
PublishOne meeting certain milestones, as specified in the agreement.
InterTrust is currently evaluating the acquisition, including the value of in-
process research and development, in order to determine the allocation of the
purchase price for accounting purposes.

   In January 2001, InterTrust sold 4,000,000 shares of common stock at $5.00
per share to Nokia Corporation ("Nokia") for a total cash consideration of
$20,000,000. In connection with its investment, Nokia agreed to license
InterTrust DRM solutions and select InterTrust as its preferred DRM
technology. Additionally per agreement, InterTrust has appointed an executive
officer of Nokia to the InterTrust Board of Directors.

                                     F-22


                      INTERTRUST TECHNOLOGIES CORPORATION

                                  SCHEDULE II

                       VALUATION AND QUALIFYING ACCOUNTS
                                 (in thousands)



                           Balance at
                           Beginning                       Balance at End
                           of Period  Additions Reductions   of Period
                           ---------- --------- ---------- --------------
                                               
Allowance for doubtful
 accounts:
 Year Ended:
  December 31, 2000.......    $--       $198       $(20)        $178
  December 31, 1999.......    $--       $--        $--          $--


                                      F-23


                               INDEX TO EXHIBITS



 Exhibit
   No.                                 Description
 -------                               -----------
      
  3.1    Sixth Amended and Restated Certificate of Incorporation filed with the
         Secretary of State of Delaware on November 1, 1999--incorporated
         herein by reference to Exhibit 3.2 to the Registrant's Registration
         Statement on Form S-1 (File No. 333-84033).

  3.2*** Amended and Restated Bylaws of the Registrant.

  4.1    Reference is made to Exhibits 3.1 and 3.2.

  4.2*   Form of Registrant's Common Stock certificate.

  4.3*   Form of Registration Rights under select Convertible Promissory Notes.

  4.4*   Form of Registration Rights under select Class A Common Stock Purchase
         Agreements.

  4.5*   Form of Series A Preferred Stock Registration Rights.

  4.6*   Form of Series B, C, D and E Preferred Stock Registration Rights.

  4.7*   Form of Registration Rights found in a Class B Non-Voting Common Stock
         Warrant.

  4.8    Stockholder Rights Agreement, by and between the Registrant and Nokia
         Finance International, B.V., dated January 31, 2001--incorporated
         herein by reference to Exhibit 4.1 to the Registrant's Form 8-K filed
         February 20, 2001.

 10.1*   Form of Indemnification Agreement entered into by the Registrant with
         each of its directors and executive officers.

 10.2*   1999 Equity Incentive Plan and forms of agreements thereunder

 10.3*   1999 Employee Stock Purchase Plan.

 10.4*   1999 Non-Employee Directors Option Plan.

 10.5    Lease between Mission West Properties, L.P. and the Registrant dated
         July 21, 1999--incorporated herein by reference to Exhibit 10.11 to
         the Registrant's Registration Statement on Form S-1 (File No. 333-
         84033).

 10.6+   Technology Development, Marketing, and License Agreement by and
         between the Registrant and National Westminster Bank PLC dated August
         18, 1998--incorporated herein by reference to Exhibit 10.12 to the
         Registrant's Registration Statement on Form S-1 (File No. 333-84033).

 10.7+   Technology Development and License Agreement by and between the
         Registrant and Universal Music Group, Inc. dated April 13, 1999--
         incorporated herein by reference to Exhibit 10.13 to the Registrant's
         Registration Statement on Form S-1 (File No. 333-84033).

 10.8+   Technology Development and License Agreement by and between the
         Registrant and Upgrade Corporation of America dated August 7, 1996--
         incorporated herein by reference to Exhibit 10.14 to the Registrant's
         Registration Statement on Form S-1 (File No. 333-84033).

 10.9+   Technology Development and License Agreement by and between the
         Registrant and Mitsubishi Corporation dated October 7, 1996--
         incorporated herein by reference to Exhibit 10.15 to the Registrant's
         Registration Statement on Form S-1 (File No. 333-84033).

 10.10   Warrant for the purchase of Class A Voting Common Stock made by the
         Registrant and held by Allen & Company Incorporated, dated September
         7, 1999--incorporated herein by reference to Exhibit 10.16 to the
         Registrant's Registration Statement on Form S-1 (File No. 333-84033).

 10.11   Amendment to Technology, Development, Marketing and License Agreement
         by and between the Registrant and National Westminster Bank dated
         August 18, 1998--incorporated herein by reference to Exhibit 10.17 to
         the Registrant's Registration Statement on Form S-1 (File No. 333-
         84033).






 Exhibit
   No.                                 Description
 -------                               -----------
       
 10.12    Amendment to Technology Development and License Agreement by and
          between the Registrant and Universal Music Group, Inc. dated April
          13, 1999--incorporated herein by reference to Exhibit 10.18 to the
          Registrant's Registration Statement on Form S-1 (File No. 333-84033).

 10.19**  Building Lease Agreement by and between First State Realty of
          America, Inc. and the Registrant dated January 24, 2000.

 10.20*** Employment Agreement by and between the Company and David Ludvigson
          dated August 4, 2000.

 10.21    2000 Supplemental Option Plan.


 10.22    Full-Recourse Promissory Note dated December 7, 2000 from Bruce
          Fredrickson to the Company.

 21.1*    Subsidiaries of the Company.

 23.1     Consent of Ernst & Young LLP, independent auditors.

 24.1     Power of Attorney (See page 44).

- --------
  * Incorporated herein by reference to the exhibit of the same number in the
    Registrant's Registration Statement on Form S-1 (File No. 333-84033).

 ** Incorporated herein by reference to the exhibit of the same number in the
    Registrant's Registration Statement on Form S-1 (File No. 333-32484).

*** Incorporated herein by reference to the exhibit of the same number in the
    Registrant's Form 10-Q for the quarter ended September 30, 2000.

  + Confidential treatment requested.

EX-10.21

                                                                   EXHIBIT 10.21

                      InterTrust Technologies Corporation


                            2000 Supplemental Plan

                         (As Adopted December 5, 2000)


                               TABLE OF CONTENTS



                                                                          Page
                                                                       
ARTICLE 1.  INTRODUCTION...............................................      1

ARTICLE 2.  ADMINISTRATION.............................................      1
     2.1  Committee Composition........................................      1
     2.2  Committee Responsibilities...................................      1

ARTICLE 3.  SHARES AVAILABLE FOR GRANTS................................      1
     3.1  Basic Limitation.............................................      1
     3.2  Additional Shares............................................      2
     3.3  Dividend Equivalents.........................................      2

ARTICLE 4.  ELIGIBILITY................................................      2

ARTICLE 5.  OPTIONS....................................................      2
     5.1  Stock Option Agreement.......................................      2
     5.2  Number of Shares.............................................      2
     5.3  Exercise Price...............................................      2
     5.4  Exercisability and Term......................................      2
     5.5  Modification or Assumption of Options........................      2
     5.6  Buyout Provisions............................................      3

ARTICLE 6.  PAYMENT FOR OPTION SHARES..................................      3
     6.1  General Rule.................................................      3
     6.2  Surrender of Stock...........................................      3
     6.3  Exercise/Sale................................................      3
     6.4  Exercise/Pledge..............................................      3
     6.5  Promissory Note..............................................      3
     6.6  Other Forms of Payment.......................................      3

ARTICLE 7.  RESTRICTED SHARES..........................................      4
     7.1  Restricted Stock Agreement...................................      4
     7.2  Payment for Awards...........................................      4
     7.3  Vesting Conditions...........................................      4
     7.4  Voting and Dividend Rights...................................      4

ARTICLE 8.  PROTECTION AGAINST DILUTION................................      4
     8.1  Adjustments..................................................      4
     8.2  Dissolution or Liquidation...................................      5
     8.3  Reorganizations..............................................      5



                                                                       
ARTICLE 9.  CHANGE IN CONTROL..........................................      5

ARTICLE 10. DEFERRAL OF AWARDS.........................................      5

ARTICLE 11. AWARDS UNDER OTHER PLANS...................................      6

ARTICLE 12. LIMITATION ON RIGHTS.......................................      6
     12.1  Retention Rights............................................      6
     12.2  Stockholders' Rights........................................      6
     12.3  Regulatory Requirements.....................................      6

ARTICLE 13. WITHHOLDING TAXES..........................................      7
     13.1  General.....................................................      7
     13.2  Share Withholding...........................................      7

ARTICLE 14. FUTURE OF THE PLAN.........................................      7
     14.1  Term of the Plan............................................      7
     14.2  Amendment or Termination....................................      7

ARTICLE 15. DEFINITIONS................................................      7
     15.1  Affiliate...................................................      7
     15.2  Award.......................................................      7
     15.3  Board.......................................................      7
     15.4  Change in Control...........................................      7
     15.5  Code........................................................      8
     15.6  Committee...................................................      8
     15.7  Common Share................................................      8
     15.8  Company.....................................................      8
     15.9  Consultant..................................................      8
     15.10 Employee....................................................      8
     15.11 Related Corporations........................................      8
     15.12 Exercise Price..............................................      8
     15.13 Fair Market Value...........................................      9
     15.14 NSO.........................................................      9
     15.15 Option......................................................      9
     15.16 Optionee....................................................      9
     15.17 Parent......................................................      9
     15.18 Participant.................................................      9
     15.19 Plan........................................................      9
     15.20 Restricted Share............................................      9
     15.21 Restricted Stock Agreement..................................      9
     15.22 Stock Option Agreement......................................      9
     15.23 Subsidiary..................................................      9




                      InterTrust Technologies Corporation

                            2000 Supplemental Plan

     ARTICLE 1. INTRODUCTION.

          The Plan was adopted by the Board on December 5, 2000 to be effective
as of the date adopted by the Board. The purpose of the Plan is to promote the
long-term success of the Company and the creation of stockholder value by (a)
encouraging Employees and Consultants to focus on critical long-range
objectives, (b) encouraging the attraction and retention of Employees, and
Consultants with exceptional qualifications and (c) linking Employees and
Consultants directly to stockholder interests through increased stock ownership.
The Plan seeks to achieve this purpose by providing for Awards in the form of
Restricted Shares and Options (which shall constitute nonstatutory stock
options).

          The Plan shall be governed by, and construed in accordance with, the
laws of the State of Delaware (except their choice-of-law provisions).

     ARTICLE 2. ADMINISTRATION.

     2.1  Committee Composition. The Plan shall be administered by the
Committee. The Committee shall consist exclusively of one or more directors of
the Company, who shall be appointed by the Board. In addition, the composition
of the Committee shall satisfy:

               (a) Such requirements as the Securities and Exchange Commission
     may establish for administrators acting under plans intended to qualify for
     exemption under Rule 16b-3 (or its successor) under the Exchange Act; and

               (b) Such requirements as the Internal Revenue Service may
     establish for outside directors acting under plans intended to qualify for
     exemption under section 162(m)(4)(C) of the Code.

     2.2  Committee Responsibilities. The Committee shall (a) select the
Employees and Consultants who are to receive Awards under the Plan, (b)
determine the type, number, vesting requirements and other features and
conditions of such Awards, (c) interpret the Plan and (d) make all other
decisions relating to the operation of the Plan. The Committee may adopt such
rules or guidelines as it deems appropriate to implement the Plan. The
Committee's determinations under the Plan shall be final and binding on all
persons.

     ARTICLE 3. SHARES AVAILABLE FOR GRANTS.

     3.1  Basic Limitation. Common Shares issued pursuant to the Plan may be
authorized but unissued shares or treasury shares. The aggregate number of
Options and Restricted Shares awarded under the Plan shall not exceed (a)
5,000,000 plus (b) the additional


Common Shares described in Sections 3.2 and 3.3. The limitations of this Section
3.1 and Section 3.2 shall be subject to adjustment pursuant to Article 8.

     3.2  Additional Shares. If Restricted Shares or Common Shares issued upon
the exercise of Options are forfeited, then such Common Shares shall again
become available for Awards under the Plan. If Options are forfeited or
terminate for any other reason before being exercised, then the corresponding
Common Shares shall again become available for Awards under the Plan.

     3.3  Dividend Equivalents. Any dividend equivalents paid or credited under
the Plan shall not be applied against the number of Restricted Shares or Options
available for Awards.

     ARTICLE 4. ELIGIBILITY.

          Only Employees and Consultants, who are neither officers of the
Company or members of the Board, shall be eligible for the grant of Options and
Restricted Shares.

     ARTICLE 5. OPTIONS.

     5.1  Stock Option Agreement. Each grant of an Option under the Plan shall
be evidenced by a Stock Option Agreement between the Optionee and the Company.
Such Option shall be subject to all applicable terms of the Plan and may be
subject to any other terms that are not inconsistent with the Plan. The Stock
Option Agreement shall specify that the Option is an NSO. The provisions of the
various Stock Option Agreements entered into under the Plan need not be
identical. Options may be granted in consideration of a reduction in the
Optionee's other compensation. A Stock Option Agreement may provide that a new
Option will be granted automatically to the Optionee when he or she exercises a
prior Option and pays the Exercise Price in the form described in Section 6.2.

     5.2  Number of Shares. Each Stock Option Agreement shall specify the number
of Common Shares subject to the Option and shall provide for the adjustment of
such number in accordance with Article 8.

     5.3  Exercise Price. Each Stock Option Agreement shall specify the Exercise
Price; provided that the Exercise Price shall in no event be less than 85% of
the Fair Market Value of a Common Share on the date of grant. A Stock Option
Agreement may specify an Exercise Price that varies in accordance with a
predetermined formula while the NSO is outstanding.

     5.4  Exercisability and Term. Each Stock Option Agreement shall specify the
date or event when all or any installment of the Option is to become
exercisable. The Stock Option Agreement shall also specify the term of the
Option. A Stock Option Agreement may provide for accelerated exercisability in
the event of the Optionee's death, disability or retirement or other events and
may provide for expiration prior to the end of its term in the event of the
termination of the Optionee's service.

     5.5  Modification or Assumption of Options. Within the limitations of the
Plan, the Committee may modify, extend or assume outstanding options or may
accept the cancellation of outstanding options (whether granted by the Company
or by another issuer) in return for the


grant of new options for the same or a different number of shares and at the
same or a different exercise price. The foregoing notwithstanding, no
modification of an Option shall, without the consent of the Optionee, alter or
impair his or her rights or obligations under such Option.

     5.6  Buyout Provisions. The Committee may at any time (a) offer to buy out
for a payment in cash or cash equivalents an Option previously granted or (b)
authorize an Optionee to elect to cash out an Option previously granted, in
either case at such time and based upon such terms and conditions as the
Committee shall establish.

     ARTICLE 6. PAYMENT FOR OPTION SHARES.

     6.1  General Rule. The entire Exercise Price of Common Shares issued upon
exercise of Options shall be payable in cash or cash equivalents at the time
when such Common Shares are purchased, except the Committee may at any time
accept payment in any form(s) described in this Article 6.

     6.2  Surrender of Stock. To the extent that this Section 6.2 is applicable,
all or any part of the Exercise Price may be paid by surrendering, or attesting
to the ownership of, Common Shares that are already owned by the Optionee. Such
Common Shares shall be valued at their Fair Market Value on the date when the
new Common Shares are purchased under the Plan. The Optionee shall not
surrender, or attest to the ownership of, Common Shares in payment of the
Exercise Price if such action would cause the Company to recognize compensation
expense (or additional compensation expense) with respect to the Option for
financial reporting purposes.

     6.3  Exercise/Sale. To the extent that this Section 6.3 is applicable, all
or any part of the Exercise Price and any withholding taxes may be paid by
delivering (on a form prescribed by the Company) an irrevocable direction to a
securities broker approved by the Company to sell all or part of the Common
Shares being purchased under the Plan and to deliver all or part of the sales
proceeds to the Company.

     6.4  Exercise/Pledge. To the extent that this Section 6.4 is applicable,
all or any part of the Exercise Price and any withholding taxes may be paid by
delivering (on a form prescribed by the Company) an irrevocable direction to
pledge all or part of the Common Shares being purchased under the Plan to a
securities broker or lender approved by the Company, as security for a loan, and
to deliver all or part of the loan proceeds to the Company.

     6.5  Promissory Note. To the extent that this Section 6.5 is applicable,
all or any part of the Exercise Price and any withholding taxes may be paid by
delivering (on a form prescribed by the Company) a full-recourse promissory
note. However, the par value of the Common Shares being purchased under the
Plan, if newly issued, shall be paid in cash or cash equivalents.

     6.6  Other Forms of Payment. To the extent that this Section 6.6 is
applicable, all or any part of the Exercise Price and any withholding taxes may
be paid in any other form that is consistent with applicable laws, regulations
and rules.


     ARTICLE 7. RESTRICTED SHARES.

     7.1  Restricted Stock Agreement. Each grant of Restricted Shares under the
Plan shall be evidenced by a Restricted Stock Agreement between the recipient
and the Company. Such Restricted Shares shall be subject to all applicable terms
of the Plan and may be subject to any other terms that are not inconsistent with
the Plan. The provisions of the various Restricted Stock Agreements entered into
under the Plan need not be identical.

     7.2  Payment for Awards. Subject to the following sentence, Restricted
Shares may be sold or awarded under the Plan for such consideration as the
Committee may determine, including (without limitation) cash, cash equivalents,
full-recourse promissory notes, past services and future services. To the extent
that an Award consists of newly issued Restricted Shares, the consideration
shall consist exclusively of cash, cash equivalents or past services rendered to
the Company (or a Parent or Subsidiary) or, for the amount in excess of the par
value of such newly issued Restricted Shares, full-recourse promissory notes, as
the Committee may determine.

     7.3  Vesting Conditions. Each Award of Restricted Shares may or may not be
subject to vesting. Vesting shall occur, in full or in installments, upon
satisfaction of the conditions specified in the Restricted Stock Agreement. A
Restricted Stock Agreement may provide for accelerated vesting in the event of
the Participant's death, disability or retirement or other events.

     7.4  Voting and Dividend Rights. The holders of Restricted Shares awarded
under the Plan shall have the same voting, dividend and other rights as the
Company's other stockholders. A Restricted Stock Agreement, however, may require
that the holders of Restricted Shares invest any cash dividends received in
additional Restricted Shares. Such additional Restricted Shares shall be subject
to the same conditions and restrictions as the Award with respect to which the
dividends were paid.

     ARTICLE 8. PROTECTION AGAINST DILUTION.

     8.1  Adjustments. In the event of a subdivision of the outstanding Common
Shares, a declaration of a dividend payable in Common Shares, a declaration of a
dividend payable in a form other than Common Shares in an amount that has a
material effect on the price of Common Shares, a combination or consolidation of
the outstanding Common Shares (by reclassification or otherwise) into a lesser
number of Common Shares, a recapitalization, a spin-off or a similar occurrence,
the Committee shall make such adjustments as it, in its sole discretion, deems
appropriate in one or more of:

               (a) The number of Options and Restricted Shares available for
     future Awards under Article 3;

               (b) The number of Common Shares covered by each outstanding
     Option;

               (c) The Exercise Price under each outstanding Option.


Except as provided in this Article 8, a Participant shall have no rights by
reason of any issue by the Company of stock of any class or securities
convertible into stock of any class, any subdivision or consolidation of shares
of stock of any class, the payment of any stock dividend or any other increase
or decrease in the number of shares of stock of any class.

     8.2  Dissolution or Liquidation. To the extent not previously exercised or
settled, Options, shall terminate immediately prior to the dissolution or
liquidation of the Company.

     8.3  Reorganizations. In the event that the Company is a party to a merger
or other reorganization, outstanding Awards shall be subject to the agreement of
merger or reorganization. Such agreement shall provide for (a) the continuation
of the outstanding Awards by the Company, if the Company is a surviving
corporation, (b) the assumption of the outstanding Awards by the surviving
corporation or its parent or subsidiary, (c) the substitution by the surviving
corporation or its parent or subsidiary of its own awards for the outstanding
Awards, (d) full exercisability or vesting and accelerated expiration of the
outstanding Awards or (e) settlement of the full value of the outstanding Awards
in cash or cash equivalents followed by cancellation of such Awards.

     ARTICLE 9. CHANGE IN CONTROL.

          Unless the applicable agreement evidencing the Award provides
otherwise, in the event of any Change in Control, the vesting and exercisability
of each outstanding Award shall automatically accelerate so that each such Award
shall, immediately prior to the effective date of the Change in Control, become
fully exercisable for all of the Common Shares at the time subject to such Award
and may be exercised for any or all of those shares as fully-vested Common
Shares. However, the vesting and exercisability of an outstanding Award shall
not so accelerate if and to the extent such Award, in connection with the Change
in Control, remains outstanding, or is assumed by the surviving corporation (or
parent thereof) or substituted with an award with substantially the same terms
by the surviving corporation (or parent thereof). The determination of whether a
substituted award has substantially the same terms as an Award shall be made by
the Committee, and its determination shall be final, binding and conclusive.

          If the Company and the other party to the transaction constituting a
Change in Control agree that such transaction is to be treated as a "pooling of
interests" for financial reporting purposes, and if such transaction in fact is
so treated, then the acceleration of vesting and exercisability shall not occur
to the extent that the Company's independent accountants and such other party's
independent accountants separately determine in good faith that such
acceleration would preclude the use of "pooling of interests" accounting.

     ARTICLE 10. DEFERRAL OF AWARDS.

          The Committee (in its sole discretion) may permit or require a
Participant to:

               (a) Have Common Shares that otherwise would be delivered to such
     Participant as a result of the exercise of an Option converted into an
     equal number of Stock Units; or


               (b) Have Common Shares that otherwise would be delivered to such
     Participant as a result of the exercise of an Option converted into amounts
     credited to a deferred compensation account established for such
     Participant by the Committee as an entry on the Company's books. Such
     amounts shall be determined by reference to the Fair Market Value of such
     Common Shares as of the date when they otherwise would have been delivered
     to such Participant.

A deferred compensation account established under this Article 10 may be
credited with interest or other forms of investment return, as determined by the
Committee. A Participant for whom such an account is established shall have no
rights other than those of a general creditor of the Company. Such an account
shall represent an unfunded and unsecured obligation of the Company and shall be
subject to the terms and conditions of the applicable agreement between such
Participant and the Company. If the deferral or conversion of Awards is
permitted or required, the Committee (in its sole discretion) may establish
rules, procedures and forms pertaining to such Awards, including (without
limitation) the settlement of deferred compensation accounts established under
this Article 10.

     ARTICLE 11. AWARDS UNDER OTHER PLANS.

          The Company may grant awards under other plans or programs. Such
awards may be settled in the form of Common Shares issued under this Plan. Such
Common Shares shall be treated for all purposes under the Plan like Common
Shares issued in settlement of stock units and shall, when issued, reduce the
number of Common Shares available under Article 3.

     ARTICLE 12. LIMITATION ON RIGHTS.

     12.1  Retention Rights. Neither the Plan nor any Award granted under the
Plan shall be deemed to give any individual a right to remain an Employee or
Consultant. The Company and its Parents, Subsidiaries and Affiliates reserve the
right to terminate the service of any Employee or Consultant at any time, with
or without cause, subject to applicable laws, the Company's certificate of
incorporation and by-laws and a written employment agreement (if any).

     12.2  Stockholders' Rights. A Participant shall have no dividend rights,
voting rights or other rights as a stockholder with respect to any Common Shares
covered by his or her Award prior to the time when a stock certificate for such
Common Shares is issued or, if applicable, the time when he or she becomes
entitled to receive such Common Shares by filing any required notice of exercise
and paying any required Exercise Price. No adjustment shall be made for cash
dividends or other rights for which the record date is prior to such time,
except as expressly provided in the Plan.

     12.3  Regulatory Requirements. Any other provision of the Plan
notwithstanding, the obligation of the Company to issue Common Shares under the
Plan shall be subject to all applicable laws, rules and regulations and such
approval by any regulatory body as may be required. The Company reserves the
right to restrict, in whole or in part, the delivery of Common Shares pursuant
to any Award prior to the satisfaction of all legal requirements relating


to the issuance of such Common Shares, to their registration, qualification or
listing or to an exemption from registration, qualification or listing.

     ARTICLE 13. WITHHOLDING TAXES.

     13.1  General. To the extent required by applicable federal, state, local
or foreign law, a Participant or his or her successor shall make arrangements
satisfactory to the Company for the satisfaction of any withholding tax
obligations that arise in connection with the Plan. The Company shall not be
required to issue any Common Shares or make any cash payment under the Plan
until such obligations are satisfied.

     13.2  Share Withholding. The Committee may permit a Participant to satisfy
all or part of his or her withholding or income tax obligations by having the
Company withhold all or a portion of any Common Shares that otherwise would be
issued to him or her or by surrendering all or a portion of any Common Shares
that he or she previously acquired. Such Common Shares shall be valued at their
Fair Market Value on the date when they are withheld or surrendered.

     ARTICLE 14. FUTURE OF THE PLAN.

     14.1  Term of the Plan. The Plan, as set forth herein, shall become
effective as of the adoption date. The Plan shall remain in effect until it is
terminated under Section 14.2.

     14.2  Amendment or Termination. The Board may, at any time and for any
reason, amend or terminate the Plan. An amendment of the Plan shall be subject
to the approval of the Company's stockholders only to the extent required by
applicable laws, regulations or rules. No Awards shall be granted under the Plan
after the termination thereof. The termination of the Plan, or any amendment
thereof, shall not affect any Award previously granted under the Plan.

     ARTICLE 15. DEFINITIONS.

     15.1  "Affiliate" means any entity other than a Subsidiary, if the Company
and/or one or more Subsidiaries own not less than 50% of such entity.

     15.2  "Award" means any award of an Option or a Restricted Share.

     15.3  "Board" means the Company's Board of Directors, as constituted from
time to time.

     15.4  "Change in Control" shall mean:

               (a) The consummation of a merger or consolidation of the Company
     with or into another entity or any other corporate reorganization, if
     persons who were not stockholders of the Company immediately prior to such
     merger, consolidation or other reorganization own immediately after such
     merger, consolidation or other reorganization 50% or more of the voting
     power of the outstanding securities of each of (i) the continuing or
     surviving entity and (ii) any direct or indirect parent corporation of such
     continuing or surviving entity;


               (b) The sale, transfer or other disposition of all or
     substantially all of the Company's assets;

               (c) A change in the composition of the Board, as a result of
     which fewer than 50% of the incumbent directors are directors who either
     (i) had been directors of the Company on the date 24 months prior to the
     date of the event that may constitute a Change in Control (the "original
     directors") or (ii) were elected, or nominated for election, to the Board
     with the affirmative votes of at least a majority of the aggregate of the
     original directors who were still in office at the time of the election or
     nomination and the directors whose election or nomination was previously so
     approved; or

               (d) Any transaction as a result of which any person is the
     "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
     directly or indirectly, of securities of the Company representing at least
     50% of the total voting power represented by the Company's then outstanding
     voting securities. For purposes of this Paragraph (d), the term "person"
     shall have the same meaning as when used in sections 13(d) and 14(d) of the
     Exchange Act but shall exclude (i) a trustee or other fiduciary holding
     securities under an employee benefit plan of the Company or of a Parent or
     Subsidiary and (ii) a corporation owned directly or indirectly by the
     stockholders of the Company in substantially the same proportions as their
     ownership of the common stock of the Company.

A transaction shall not constitute a Change in Control if its sole purpose is to
change the state of the Company's incorporation or to create a holding company
that will be owned in substantially the same proportions by the persons who held
the Company's securities immediately before such transaction.

     15.5  "Code" means the Internal Revenue Code of 1986, as amended.

     15.6  "Committee" means a committee of the Board, as described in Article
2.

     15.7  "Common Share" means one share of the class A voting common stock of
the Company.

     15.8  "Company" means InterTrust Technologies Corporation, a Delaware
corporation.

     15.9  "Consultant" means a consultant or adviser who provides bona fide
services to the Company, a Parent, a Subsidiary or an Affiliate as an
independent contractor. Service as a Consultant shall be considered employment
for all purposes of the Plan.

     15.10 "Employee" means a common-law employee of the Company, a Parent, a
Subsidiary or an Affiliate.

     15.11 "Exchange Act" means the Securities Exchange Act of 1934, as amended.

     15.12 "Exercise Price" means the amount for which one Common Share may be
purchased upon exercise of such Option, as specified in the applicable Stock
Option Agreement.


     15.13 "Fair Market Value" means the market price of Common Shares,
determined by the Committee in good faith on such basis as it deems appropriate.
Whenever possible, the determination of Fair Market Value by the Committee shall
be based on the prices reported in The Wall Street Journal. Such determination
                                   -----------------------
shall be conclusive and binding on all persons.

     15.14 "NSO" means a stock option not described in sections 422 or 423 of
the Code.

     15.15 "Option" means an NSO granted under the Plan and entitling the holder
to purchase Common Shares.

     15.16 "Optionee" means an individual or estate who holds an Option or SAR.

     15.17 "Parent" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company, if each of the
corporations other than the Company owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain. A corporation that attains the status of a Parent on
a date after the adoption of the Plan shall be considered a Parent commencing as
of such date.

     15.18 "Participant" means an individual or estate who holds an Award.

     15.19 "Plan" means this InterTrust Technologies Corporation 2000
Supplemental Plan, as amended from time to time.

     15.20 "Restricted Share" means a Common Share awarded under the Plan.

     15.21 "Restricted Stock Agreement" means the agreement between the Company
and the recipient of a Restricted Share which contains the terms, conditions and
restrictions pertaining to such Restricted Share.

     15.22 "Stock Option Agreement" means the agreement between the Company and
an Optionee that contains the terms, conditions and restrictions pertaining to
his or her Option.

     15.23 "Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company, if each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain. A corporation that attains
the status of a Subsidiary on a date after the adoption of the Plan shall be
considered a Subsidiary commencing as of such date.

EX-10.22

                                                                   EXHIBIT 10.22

                         Full-Recourse Promissory Note


$100,000.00                                                     December 7, 2000
                                                         Santa Clara, California


          FOR VALUE RECEIVED, the undersigned Borrower promises to pay to
InterTrust Technologies Corporation (the "Company") at its principal offices at
4750 Patrick Henry Blvd., Santa Clara, California 95054, the principal sum of
one hundred thousand dollars ($100,000.00) together with interest from the date
of this Note on the unpaid principal balance, upon the terms and conditions
specified below.

          1.  Term.  The principal balance of this Note, together with interest
accrued and unpaid to date, shall be due and payable at the close of business on
December 7, 2001.

          2.  Rate of Interest.  Interest shall accrue under the Note on any
unpaid principal balance at the rate of six and one-tenths of one percent
(6.10%) per annum, compounded annually.

          3.  Prepayment.  Prepayment of principal and interest may be made at
any time without penalty.

          4.  Events of Acceleration. The entire unpaid principal sum and unpaid
interest under this Note shall become immediately due and payable upon the
insolvency of the Borrower, the commission of an act of bankruptcy by the
Borrower, the execution by the Borrower of a general assignment for the benefit
of creditors, or the filing by or against the Borrower of a petition in
bankruptcy or a petition for relief under the provisions of the federal
bankruptcy act or another state or federal law for the relief of debtors and the
continuation of such petition without dismissal for a period of ninety (90) days
or more.

          5.  Security.  The Borrower shall be personally liable for payment of
this Note, and assets of the Borrower may be applied to the satisfaction of the
Borrower's obligations hereunder.

          6.  Collection.  If action is instituted to collect this Note, the
Borrower promises to pay all reasonable costs and expenses (including reasonable
attorney's fees) incurred in connection with such action.

          7.  Waiver.  No previous waiver and no failure or delay by the Company
or the Borrower in acting with respect to the terms of this Note shall
constitute a waiver of any breach, default or failure of condition under this
Note or the obligations secured thereby. A waiver of any term of this Note or of
any of the obligations secured thereby must be made in writing and signed by a
duly authorized officer of the Company and shall be limited to the express terms
of such waiver.


     The Borrower hereby expressly waives presentment and demand for payment at
such time as any payments are due under this Note.

          8.  Conflicting Agreements.  In the event of any inconsistencies
between the terms of this Note and the terms of any other document related to
the loan evidenced by the Note, the terms of this Note shall prevail.

          9.  Governing Law.  This Note shall be construed in accordance with
the laws of the State of California.


                                                 /s/ Bruce Fredrickson
                                                 ---------------------------
                                                 Bruce Fredrickson

                                                 Address:   10667 Goose Haven Dr
                                                            Laffayatte, CO 80026

                                       2

EX-23.1

                                                                   EXHIBIT 23.1

              CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

   We consent to the incorporation by reference in the Registration Statements
on Forms S-8 (No. 333-90163, No. 333-94961, No. 333-33906 and No. 333-56148)
pertaining to the InterTrust Technologies Corporation 1992 Stock Plan, 1995
Stock Plan, 1999 Equity Incentive Plan, 1999 Employee Stock Purchase Plan,
1999 Non-Employee Directors Option Plan, Options Granted Pursuant to Written
Compensation Agreements, Shares Acquired under Written Compensation
Agreements, the Infinite Ink Corporation 1999 Stock Incentive Plan, the 2000
Supplemental Plan, the PublishOne Inc. 1999 Stock Plan, and Shares Acquired
Under a Written Compensatory Agreement with Gregory S. Wood of InterTrust
Technologies Corporation of our report dated January 22, 2001 with respect to
the consolidated financial statements and schedule of InterTrust Technologies
Corporation, included in this Annual Report (Form 10-K) for the year ended
December 31, 2000.

                                          /s/ Ernst & Young LLP

Palo Alto, California
March 30, 2001