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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2002 or

For the transition period from ____________ to ____________

Commission file number 000-27389

INTERWOVEN, INC.

(Exact name of registrant as specified in its charter)

803 11th Avenue, Sunnyvale, CA 94089

(Address of principal executive offices) (Zip code)

(408) 774-2000

(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 par value;

(Title of Class)

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 the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any amendment to this Form 10-K. ¨

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

The aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 30, 2002 was approximately $323,607,373 (based on the last reported sale price of $3.05 on June 28, 2002 on the NASDAQ National Market).

The number of shares of registrant’s common stock outstanding as of March 18, 2003 was 102,592,715.

Certain sections of Registrant’s definitive proxy statement for the 2003 Annual Meeting of Stockholders to be held on June 5, 2003, are incorporated by reference in Part III of this Annual Report on Form 10-K to the extent stated herein.

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INTERWOVEN, INC.

2002 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

Interwoven, TeamSite, MetaTagger, OpenDeploy, DataDeploy, MetaCode, MetaFinder, MetaSource, OpenTransform, SmartContext, TeamCatalog, TeamCode, TeamDoc, TeamPortal, TeamTurbo, TeamXML, TeamXpress, VisualAnnotate, the taglines, logo and service marks are trademarks of Interwoven, Inc., which may be registered in certain jurisdictions. All other trademarks are owned by their respective owners.

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CAUTION REGARDING FORWARD LOOKING STATEMENTS

Some of the statements contained in this report constitute forward-looking statements that involve substantial risks and uncertainties. In some cases, you can identify these statements by forward-looking words such as “expect,” “plan,” “anticipate,” “believe,” “estimate” or “continue “and variations of these words or comparable words. In addition, any statements which refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. Our Management’s Discussion and Analysis of Financial Condition and Results of Operations contain many such forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and situations that may cause our or our industry’s actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. The risk factors contained in this report, as well as any other cautionary language in this report, provide examples of risks, uncertainties and events that may cause our actual results to differ from the expectations described or implied in our forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this report. Except as required by law, we do not undertake to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

PART I

Overview

Interwoven provides a software platform, solutions and services that help customers automate the process of developing, managing and deploying content used in important software applications used by business enterprises, such as customer relationship management and enterprise portal applications. Our “Open Content Platform” consists of a comprehensive suite of products that enables businesses to take advantage of content-rich applications to deliver business value. This platform can meet the needs of a small group of users and can scale to serve the global enterprise. Our products are designed to allow many types of contributors within an organization to create, manage, tag and deploy code and content assets, such as documents, database information, XML and HTML content, and application code, to a host of enterprise applications and initiatives.

Our suite consists of five product lines:

Our products support enterprise applications such as enterprise portals, web technologies including application servers, database servers, and authoring tools. Further, our products adhere to many widely accepted industry standards and protocols.

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Interwoven was incorporated in California in 1995 and reincorporated in Delaware in 1999. Interwoven is headquartered in Sunnyvale, California and our mailing address is 803 11th Avenue, Sunnyvale, California, 94089, and our telephone number is (408) 774-2000. Our corporate web site address is http://www.interwoven.com. We make available free of charge through our web site our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after filing such material electronically or otherwise furnishing it to the Securities and Exchange Commission.

Products and Services

Our product suite consists of five product lines: Content Management, with our flagship product TeamSite; Content Intelligence, with MetaTagger; Content Distribution, with OpenDeploy, Enterprise Application Connectors Suite, with our TeamPortal series of connectors to enterprise portals; and Development Suite, with TeamCode. Additional modules include: TeamXML Content Server, TeamTurbo, Content Provider, OpenTransform and OpenSyndicate. We generally license our products on a per-server, per-CPU basis and occasionally license them on an enterprise or site license basis. We also provide services, including professional services, maintenance and support.

Content Management

Our flagship product, TeamSite, provides a highly scalable infrastructure to manage enterprise content. TeamSite is designed to increase the rapid deployment of major eBusiness initiatives, including enterprise portals, customer relationship management, Intranet/Internet web sites and eCommerce, among others.

Collaboration.    TeamSite provides a virtual work area for each contributor within an organization. A virtual work area is a local, desktop representation that appears to a contributor as a complete, fully functioning web site. This provides developers and contributors with the ability to see and test changes to individual documents, collections of documents and web pages, as they would appear in an actual production environment. This approach helps users ensure quality by promoting individual accountability, allowing developers to discover costly bugs, and helping contributors prevent deployment of inaccurate content to the production site. Users submit revised content from work areas to a common staging area, a pre-production version of the web site that consolidates changes. After the consolidated changes in the staging area are approved, the next edition of the production site can be authorized and deployed. This content management process makes site-level rollbacks, site recovery and site audits possible.

Parallel Development.    TeamSite supports multiple contributors working on a single project, and multiple teams working on many projects simultaneously, by utilizing a technique we refer to as branching. A development branch typically consists of many work areas connected to one staging area. For example, branches might represent a company’s Intranet and extranet sites. When required, the content within these independent branches can be synchronized.

Archival and Rollback.    TeamSite captures the history of modifications to content within each contributor’s work area as well as the content within the common staging area. Our content versioning technology allows customers to record and manage content modifications and capture complete histories of files. This functionality is critical in industries where regulatory requirements warrant this type of archival. TeamSite captures and stores the history of content modifications and allows users to re-publish, what we refer to as rollback of earlier versions of assets, such as a particular set of documents to an entire web site.

Forms-Based Content Entry and Publishing.    TeamSite enables contributors to create and publish content through a simple forms based environment, which we call templating. Customers can create these forms, or templates, through our Visual Templated Builder tool that allows users to select the appropriate template to facilitate content entry. Upon completion of the template, the content is stored as XML in the TeamSite and can be coupled with a presentation template that controls the look and feel of the final page.

Business Process Automation.    TeamSite is designed to allow diverse groups of users, including both non-technical and technical users, to participate in building and contributing content. To facilitate the management of these contributors, TeamSite automates workflow processes such as task assignment, resource scheduling, content routing, content approval and content tracking through the entire production lifecycle.

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Integrated Repository.    TeamSite Content Store serves as a repository for a host of asset types, including documents, rich media, database content, application code and web content.

Extensions.    In October 2002, we formed a strategic relationship with MediaBin, a company that develops multi-media asset management products, for the purpose of extending and enhancing our capabilities in the multi-media arena.

Interoperability.    The architecture of TeamSite enables businesses to implement it without making significant changes to their existing content or systems architecture, resulting in rapid implementation. Additionally, TeamSite’s open architecture allows users to choose their preferred content authoring software and application servers.

TeamSite currently operates on Sun Solaris, IBM AIX, Microsoft Windows NT and Microsoft Windows 2000 operating systems. TeamSite was first shipped in May 1997. We first shipped the current version of TeamSite, TeamSite 5.5.2, in June 2002.

Content Intelligence

MetaTagger offers enterprises highly advanced capabilities for the generation and management of metadata, reference information about content assets.

MetaData Management.    MetaTagger provides metadata management services for enterprise content. MetaTagger inspects each document, including the full text of a document and any properties associated with the document, to provide keywords, summaries and classification notations about a selected document. These items—or metadata—enable more individuals to more accurately find the documents they need and applications to provision content relevant to the context of their application.

Taxonomy Development and Maintenance.    Classification of documents is critical to maintaining an overall structure for an organization’s content. MetaTagger can generate this structure from existing content or structures of content or import this structure from third parties, such as industry standards bodies. This process is referred to as taxonomy or ontology. MetaTagger Studio provides a means for information scientists to update and maintain these taxonomies in a visual environment.

Metadata Provisioning.    MetaTagger provides both fully automated and semi-automated metadata development and provisioning. Utilized in its fully automated mode, users can develop metadata from existing documents through batch processing, which allows users to update collections of documents concurrently. Customers can also utilize MetaTagger in a semi-automated mode, allowing contributors to review and edit metadata within a form-based environment that has been pre-populated by MetaTagger. We believe that this flexibility is central to overall metadata management experience.

External Repository Support.    While MetaTagger remains fully integrated with our other products, MetaTagger can operate independently of TeamSite and content managed by our other products.

Search and Portal Integration.    Metadata is used by our customers to improve search capabilities, both in stand-alone applications, such as an Internet site and in enterprise portals. Interwoven and several of its partners have collaborated to provide integrations between MetaTagger and Verity products (K2 and UltraSeek, formerly Inktomi’s enterprise search product) and iPhrase One-Step.

We first shipped MetaTagger in May 2001, and shipped the current version, MetaTagger 3.5, with MetaTagger Studio, in February 2003. MetaTagger operates on Sun Solaris, Microsoft Windows NT and Microsoft Windows 2000 operating systems.

Content Distribution

OpenDeploy Distribution Server allows users to distribute and replicate code and content generated during development and testing stages in a customer’s code and content production cycle to multi-tiered production servers throughout a dispersed enterprise network. OpenDeploy distributes content from multiple target sources, such as repositories of application code and enterprise content, to multiple target destinations, such as web servers and enterprise applications, in a reliable, secure, and automated fashion. OpenDeploy’s graphical user interface allows information technology managers to administer, control and monitor content deployments from remote locations.

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Secure Transactional Replication.    OpenDeploy ensures that code and content is synchronized to target destinations and enterprise applications in a reliable, secure, and automated fashion. OpenDeploy encrypts content for secure transfer over Transactional Control Protocol/Internet Protocol (TCP/IP). The domestic version of OpenDeploy uses 128-bit Secure Sockets Layer (SSL) encryption; the international version does not utilize this feature due to export regulations. OpenDeploy further provides transactional services and communications to ensure that content designated for distribution reaches and is utilized at target destinations.

Multi Server Synchronization.    OpenDeploy allows organizations to synchronize content among a multitude of servers. OpenDeploy can be configured to support a deployment procedure for all target destinations or a defined select set of destinations. This functionality provides additional flexibility for network administrators.

External Repository Support.    While OpenDeploy remains fully integrated with other portions of the Interwoven platform, it can operate independent of TeamSite, providing distribution services for code and content maintained within other repositories.

Synchronized Replication, Rollback and Reporting.    OpenDeploy deploys code and content from multiple sources in a synchronized manner. This enables enterprises to combine content maintained within a source code management system with content from a content management system. This content can further be distributed in a production site or application. OpenDeploy further supports rollback of code and content objects, important for overall quality. OpenDeploy provides a full reporting environment for transactions and production server status.

Content Network Integration.    OpenDeploy allows enterprises to distribute content from sources to caching networks to improve the performance and response times of their applications. OpenDeploy integrates with content networking products, including Network Appliance and Akamai to facilitate content distribution.

OpenSyndicate, Interwoven’s syndication server, enhances the Content Distribution product line as it is designed to provide content to distributed divisions, partners or suppliers. OpenDeploy operates on Sun Solaris, Microsoft Windows NT, Microsoft Windows 2000, IBM AIX, Hewlett Packard UX and Linux operating systems. We first shipped OpenDeploy in January 1998, and shipped the current version, OpenDeploy 5.6, in January 2003.

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Enterprise Application Connector Suite

Our enterprise application connector suite, featuring TeamPortal, is used to integrate our platform with enterprise portal applications and customer relationship management systems from leading vendors. TeamPortal allows portal users to utilize Interwoven capabilities, such as document development and publishing, directly from their portal interface. It also allows users to publish content to those portal applications. TeamPortal manages the lifecycle of portal-based content, including documents, rich media, application code, and XML and HTML content. It also, helps to ensure that content within an enterprise’s portal is accurate, relevant, and searchable. TeamPortal is compatible with a variety of portal applications, including BEA Systems, IBM, Plumtree Software, Oracle, and SAP. We first shipped TeamPortal 1.1, our current version in, June 2002.

Developer Suite

Our developer suite, featuring TeamCode, provides developers with the tools needed to integrate Interwoven capabilities with their applications, and also allows them to develop and manage web applications. TeamCode allows developers to develop and manage the code and content required for customized web applications. TeamCode combines critical code functionality, such as branches, merging, conflict resolution, visual and source differencing, workflow capability, and whole-site versioning, with integration to developer tools, such as IBM’s WebSphere Studio Application Developer. TeamCode provides a single repository, helping to eliminate the need for multiple separate servers and various software applications that are currently being used to address code and content challenges. We first shipped TeamCode 1.0, our current version in, March 2003.

Optional Add-on Modules

Our optional modules include TeamXML, TeamTurbo, ContentProvider, OpenTransform and OpenSyndicate. TeamXML extends TeamSite’s capability to manage XML components for advanced data reuse. TeamTurbo enables TeamSite customers to manage dynamic content such as applications, personalization rules and targeting rules, thereby enhancing an enterprise’s ability to share content across its business and leverage content from one initiative to many others initiatives. Content Provider enables TeamSite customers to leverage existing content dispersed throughout existing enterprise repositories. OpenTransform enables TeamSite users to convert content from proprietary file formats into existing open, extensible formats, such as XML, MS Word, and HTML. OpenSyndicate enables OpenDeploy customers to profile, share and exchange content between enterprises in a secure environment.

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The following table highlights some of the features of our products:

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Interwoven Services

Our worldwide professional services organization provides implementation consulting and other technical services to our license customers. We provide our customers with the services necessary to install, integrate and deploy our solutions. Our services professionals utilize a comprehensive methodology to deliver our content platform to our customers and configure our products to meet the specific needs of the customer. We sell services in conjunction with licenses of our software products. These services include:

Customer Support and Training

We offer a comprehensive array of customer support programs that are designed to ensure successful implementation and customer satisfaction. These programs include maintenance, technical support and professional services, as well as educational offerings. Our educational offerings include technical training and end-user training. In addition, we offer various levels of product maintenance to our customers. Maintenance services are typically subject to an annual, renewable contract and are typically priced as a percentage of product license fees.

Technology

We believe that our technology offers our customers and our partners, a highly scalable content platform based on an open architecture that incorporates widely accepted industry standards and supports a wide variety of software applications. Our customers typically use our technology as the platform to manage their enterprise-wide content operations. In 2002, we upgraded TeamSite’s internal systems architecture to take advantage of operating system improvements and new design features. As a result of these upgrades, access times and content throughput have increased significantly. Disaster recovery capabilities, multi-store content management functionality and an XML, web services-based interface additions have also strengthened diverse applications at customer sites.

Interwoven continues to ensure that our products are integrated to leading enterprise standards, from content authoring environments to application architectures. Accordingly, TeamSite integrates with many commercially available authoring tools, allowing users the freedom to choose which authoring applications to use. For example, to add content to a site, a graphics designer may use Adobe Systems’ Photoshop, a layout expert may use Macromedia’s Dreamweaver, and a non-technical contributor may use Microsoft’s Office 2000. Interwoven products also are compatible with leading application servers, databases, and web servers and industry standards, such as SOAP.

Scalability, Performance and Availability

Scalability and Performance.    TeamSite uses a multi-threaded approach to promote faster server performance through parallel software code execution. It also uses C++ and object-oriented programming to promote scalability and performance. In addition, OpenDeploy can distribute content to a single or to multiple productions application servers simultaneously. This content replication functionality meets the requirements for the most demanding geographic and application environments.

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Availability.    Our design promotes reliability and availability by allowing customers to employ their normal data backup and recovery tools. In addition, critical data is duplicated, providing the necessary redundancy for data recovery to minimize the potential for data loss.

Industry Standards

Interwoven is committed to ensuring its products are compatible with Java 2 Enterprise Edition (J2EE) and Microsoft .Net standards. We also participate in various technology standards bodies including: W3C, a web standards body; OASIS, an industry standards body promoting XML standards; PRISM, a metadata standards body; and IDE Alliance, a digital asset standards body.

Open to Many Files, Tools and Applications.    Unlike proprietary, closed implementations, our products have been developed to accommodate industry-leading technologies, such as XML and Java, and other evolving industry standards. The TeamSite Content Server presents its content through popular file management systems such as Unix Network File System and Microsoft Windows Network File System.

eXtensible Markup Language.    XML provides customers with the ability to integrate new applications and data with other XML-compliant technologies and legacy applications. Our products support the use of XML for data and content exchange. Our technology accelerates the adoption of XML by our customers, enabling them to reuse and re-purpose individual assets, which reduces redundant content within an organization.

Customers

Our products and services are marketed and sold to a diverse group of customers operating in a broad range of industries. Our customers include both established companies migrating their operations online, new companies formed specifically to deliver products and services over the Internet and companies whose objective is to deploy and manage critical business content across their organization. These customers typically consider the Internet-enabled applications to be critical to their future success. As of December 31, 2002, over 1,100 companies had licensed our products. In 2002, no customer accounted for ten percent or more of our total revenues. Our sales of products and services in the United States accounted for 81%, 66% and 63% of our total revenues in 2000, 2001 and 2002, respectively.

Technology Vendors and Service Providers

Technology Vendors

To ensure that our products deliver value to our customers, we work with leading technology vendors to ensure the compatibility of our products. Interwoven products are compatible with Macromedia’s Dreamweaver, Microsoft’s Office 2000 and Adobe Systems’ Photoshop authoring tools, among others. Interwoven products are also integrated or compatible with a wide range of enterprise applications, such as BEA Systems’ WebLogic Application and Portal servers, IBM’s Websphere Application and Portal Servers, Oracle 9iAS Application and Portal servers, Plumtree Software’s Portal Server, SAP’s MySAP Enterprise Portal Server, and Siebel Systems’ eBusiness Applications for customer relationship management. Further, Interwoven products are integrated to leading search engines including Verity (and Inktomi, which Verity acquired) and iPhrase; content distribution products from Network Appliance and Akamai; developer solutions like IBM’s WebSphere Studio Application Developer; and web site analysis tools from Watchfire. Our products are resold by the IBM Software Group and other technology vendors.

Service Providers

We work with leading systems integrators, such as Accenture, Bearing Point, Cap Gemini Ernst & Young, Deloitte and Touche, EDS, and IBM Global Services, and with Internet professional services firms, such as Aquent, Agency.com, eForce, Sapient, and SBI and Company. Our prospective customers frequently retain the services of these firms to scope, recommend and implement content technologies as part of their eBusiness application consulting and implementation. Our products are resold by Accenture and IBM Global Services, among others.

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We believe that our relationships with these entities are critical to our success as we seek to integrate our products with current and future technologies and to deploy and implement our solutions at customer sites. As the economy may cause demand for consulting services to implement our technology and integrate our products to decline, we anticipate that the revenue from services provided by us may decline significantly as systems integrators that we work with aggressively promote their services to our customers. Our relationships with technology providers and service providers can be terminated at any time.

Sales and Marketing

To date, we have sold our products and services primarily through our direct sales force in North America, Europe and the Asia Pacific region. Since opening our first international sales and support office in May 1999, we have added additional international sales offices, and now maintain operations in Australia, Canada, France, Germany, Hong Kong, Italy, Japan, Netherlands, Norway, Singapore, South Korea, Spain, Sweden, Taiwan, the United Kingdom and the United States. We have introduced localized versions of our applications for the major European and Asian markets.

We are developing our indirect sales channel by expanding our relationships with leading technology vendors, technology professional services firms and systems integrators that recommend and when appropriate, resell our products. Our ability to achieve significant revenue growth in the future will depend in large part on how successfully we recruit, train and retain sufficient direct sales, technical and customer support personnel, and how well we continue to establish and maintain relationships with our strategic partners.

Research and Development

We invest significantly in research and development to enhance our current products, and develop new products. Our research and development expenses were $17.7 million in 2000, $31.4 million in 2001 and $26.5 million in 2002.

We may fail to complete our product development efforts within our anticipated schedules, and even if completed, the products developed may not have the features necessary to make them successful in the marketplace. Future delays or problems in the development or marketing of product enhancements or new products could harm our business. See “Factors Affecting Future Results—Difficulties in introducing new products and upgrades in a timely manner will make market acceptance of our products less likely.”

Acquisitions

In July 1999, we acquired Lexington Software Associates, a software consulting company, to help support our existing customer base and to help attract and retain new customers. In July 2000, we acquired Neonyoyo, a developer of wireless technology that delivered targeted XML content, to support our content management initiatives, including wireless initiatives, for our customer base. In October 2000, we acquired Ajuba Solutions, a software development company with expertise in XML, Java and eBusiness integration, to expand our research and development staff to handle our XML-based initiatives, especially our wireless and business-to-business initiatives. Additionally, in November 2000, we acquired Metacode Technologies, a content tagging and taxonomy software developer, to enhance our product offerings. This functionality, referred to as metatagging, enables the use of metadata, or data about data, for enhanced personalization and search capabilities.

Competition

The market for content management solutions is rapidly emerging and is characterized by intense competition. We expect existing competition and competition from new market entrants to increase dramatically. A growing number of companies are vying to provide content management solutions. In addition, existing or potential customers may develop, or may have developed, in-house solutions, which might make it more difficult for us to sell products to them. In this market for content management solutions, new products are frequently introduced and existing products are often enhanced. Also, new companies, or alliances among existing companies, may be formed that may rapidly achieve a significant market position.

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We compete with software companies who provide a variety of products and services in the areas of content management, document management, software configuration management, and content-based applications such as: Documentum, Filenet, Microsoft, Open Text, Stellent and Vignette. We also compete with providers of workgroup solutions, content publishing application providers, and current or potential customers who may develop in-house solutions. We may face increased competition from these providers in the future. Other potential competitors include client/server software vendors that are developing or extending existing products, which address our market. In addition, although we currently partner with a number of companies that provide complementary products such as web tools, enterprise document repositories and web servers, these partners may introduce competitive products in the future. Other large software companies, such as Oracle and IBM, may also introduce competitive products. Some of our existing and potential competitors have greater technical, marketing and financial resources than we do.

We believe that competitive factors in the content management industry include:

We believe our products compete favorably on each of these factors.

Successful Customer Implementations

Our success depends on our customers’ successful implementations of our products and services. We actively support customer deployment efforts by providing Internet-based and telephone technical support, providing comprehensive instructor-led training, and by assigning to each customer an account management team that includes a sales representative, a technical account manager and an executive sponsor.

Proprietary Rights and Licensing

Our success depends upon our ability to maintain the proprietary aspects of our technology and operate without infringing the proprietary rights of others. We rely on a combination of patent, trademark, trade secret and copyright law, and contractual restrictions to protect the proprietary aspects of our technology. We seek to protect our source code for our software, documentation and other written materials under trade secret and copyright laws. These legal protections afford only limited protection for our technology. We currently have the following issued United States and foreign patents:

We have applied for other U.S. and foreign patents, but no assurance can be given about whether other patents will be issued from our applications. While our patents are an important element of our success, our business as a whole is not materially dependent on any one patent or on all of our patents combined.

Our license agreements impose restrictions on our customers’ ability to use our software. We also seek to protect our intellectual property by requiring employees and consultants with access to our proprietary information to execute confidentiality agreements with us and by restricting access to our source code. There can be no assurance that all employees or consultants have signed or could sign these agreements. Due to the rapid pace of technological change, we believe that to establish and maintain a technology leadership position, developing the technological and creative skills of our personnel, and enhancing new product developments are as important to our business as the various legal protections of our technology.

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Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult, and while we are unable to determine the extent to which piracy of our software exists, software piracy can be expected to be a persistent problem. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. However, the laws of many countries do not protect our proprietary rights to as great an extent as do the laws of the United States.

Any litigation could result in substantial costs and diversion of resources and could harm our business, operating results and financial condition. There can be no assurance that our means of protecting our proprietary rights will be adequate or that our competitors will not independently develop similar technology. Any failure by us to meaningfully protect our property could seriously harm our business, operating results and financial condition.

To date, we have not been notified that our products directly infringe upon the proprietary rights of third parties, but there can be no assurance that third parties will not claim infringement by us with respect to our current or future products. We expect that developers of web-based commerce software products will increasingly be subject to infringement claims as the number of products and competitors in our industry segment grows, and as the functionality of products in different segments of the software industry increasingly overlaps. Any claims, with or without merit, could be time-consuming to defend, result in costly litigation, divert management’s attention and resources, cause product shipment delays, or require us to enter into royalty or licensing agreements. These royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all. A successful infringement claim against us and our inability to license the infringed technology or develop or license technology with comparable functionality could seriously harm our business, financial condition and operating results. See “Factors Affecting Future Results—We might not be able to protect and enforce our intellectual property rights, a loss of which could harm our business.”

Seasonality

Our business has experienced seasonality, in part due to customer buying patterns. In recent years, we have generally had weaker demand in the quarter ending in March when compared to the quarters ending in June, September and December. We expect this pattern to continue.

Employees

As of December 31, 2002, we employed 608 people, including 226 in sales and marketing, 171 in professional services, 133 in research and development and 78 in general and administrative. Of our employees, 68 were located in the Asia Pacific region, 86 were located in Europe and 454 were located in North America. Our future success will depend in part on our continued ability to attract, hire and retain qualified personnel. None of our employees are represented by a labor union (other than statutory unions required by law in certain European countries). We have not experienced any work stoppages and consider our relations with our employees to be good.

Our headquarters occupies approximately 175,000 square feet in Sunnyvale, California, under leases that expire in 2007. We believe that our existing facilities are adequate for our current needs.

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On November 8, 2001, Interwoven and certain of our officers and directors and certain investment banking firms, were named as defendants in a purported securities class-action lawsuit filed in the United States District Court Southern District of New York. The complaint asserts that the prospectuses for our October 8, 1999 initial public offering and our January 26, 2000 follow-on public offering failed to disclose certain alleged actions by the underwriters for the offerings. The complaint alleges claims under Section 11 and 15 of the Securities Act of 1933 against us and certain of our officers and directors. The plaintiff seeks damages in an unspecified amount. In February 2003, the District Court denied a motion to dismiss all claims brought collectively by the issuers and investment banks. We continue to believe this lawsuit is without merit and we intend to defend ourselves vigorously. However, an unfavorable resolution of such suit could significantly harm our business, operating results and financial condition. We are participating in a mediation and certain settlement proposals are under consideration that could mitigate the risk of an unfavorable resolution in litigation. There can be no guarantee that the parties will be able to reach agreement on either a partial dismissal or a global resolution of the claims against us.

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

None.

PART II

Price Range of Common Stock

Our common stock has been quoted on the NASDAQ National Market under the symbol “IWOV” since our initial public offering on October 8, 1999. Before then, there was no public market for our common stock. The following table shows, for the periods indicated, the high and low sales prices per share of our common stock. The prices indicated below have been adjusted to give retroactive effect to all stock splits that have occurred since our inception.

On March 18, 2003 the closing sale price of our common stock was $2.00 per share. On that date, there were 521 holders of record. This does not include the number of persons whose stock is in nominee or “street name” accounts through brokers.

Dividends

We have never declared or paid cash dividends on our common stock or other securities, and we do not anticipate paying a cash dividend in the foreseeable future. Our line of credit agreements currently prohibit the payment of dividends.

Recent Sales of Unregistered Securities

None.

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The following selected consolidated financial data is qualified in its entirety by, and should be read in conjunction with, our consolidated financial statements and the notes thereto, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations. The selected consolidated statements of operations and consolidated balance sheet data as of and for each of the five years in the period ended, and as of December 31, 2002, have been derived from our audited consolidated financial statements. The supplemental consolidated financial data for each of the five years ended December 31, 2002 have been derived from our unaudited results of operations, excluding accretion of mandatorily redeemable convertible preferred stock, stock-based compensation, restructuring costs, excess facilities charges, acquisition charges and impairment of goodwill. All share and per share amounts have been adjusted to give retroactive effect to stock splits that have occurred since our inception.

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The following discussion and analysis of financial condition and results of operations should be read in conjunction with Item 6, Selected Financial Data, Item 8, Financial Statements and Supplementary Data, and Item 15, Exhibits, Financial Statement Schedules and Reports on Form 8-K. This discussion includes forward-looking statements, such as our projections about future results of operations, which are inherently uncertain. Our actual results could differ materially from those anticipated in our forward-looking statements as a result of many factors, including but not limited to those discussed in “Factors Affecting Future Results” in this document.

Overview

Interwoven was incorporated in March 1995, to provide software products and services for enterprise content management. Our software products and services help customers automate the process of developing, managing and deploying content assets used in business applications. The information technology industry refers to this process as “content management.” Our products are designed to allow all content contributors within an organization to create, manage and deploy content assets, such as documents, XML/HTML, rich media, database content and application code. In May 1997, we shipped the first version of our principal product, TeamSite. We have subsequently developed and released enhanced versions of TeamSite and have introduced related products to compliment our content management offerings. As of December 31, 2002, we had sold our products and services to over 1,100 customers. We market and sell our products primarily through a direct sales force and augment our sales efforts through relationships with systems integrators and other strategic partners. Our revenues to date have been derived primarily from accounts in North America; however revenues from outside of North America represented 34% of our revenues in 2002. We are headquartered in Sunnyvale, California and maintain additional offices in the metropolitan areas of Atlanta, Boston, Chicago, Columbus, Dallas, Los Angeles, New York City, San Francisco, Seattle and Washington, D.C. In addition, we have offices in Australia, Canada, France, Germany, Hong Kong, Italy, Japan, Netherlands, Norway, Singapore, South Korea, Spain, Sweden, Taiwan and the United Kingdom. We had 608 employees as of December 31, 2002.

We have incurred substantial costs to develop our technology and products, to recruit and train personnel for our engineering, sales and marketing and services organizations, and to establish our administrative organization. As a result, we incurred net losses through December 31, 2002 and had an accumulated deficit of $335.8 million as of December 31, 2002. We experienced declining revenues during 2001 and throughout 2002, due to the continued economic slowdown that has resulted in substantial reductions in spending on information technology initiatives, and to the loss of services revenues to system integrators. We expect the current economic slowdown to affect our business for the foreseeable future. We will continue to make a concerted effort to manage costs to align our revenues and our expenses. In light of the current economic slowdown and as a result of our cost management efforts, we do not anticipate a significant increase in our expenses in the foreseeable future. Additionally, due to our limited operating history and the weakness of the current economic environment, the prediction of future results is difficult and, accordingly, we cannot assure you that we will achieve or sustain profitability. We expect to make acquisitions in the future, thereby potentially incurring stock-based compensation and intangible amortization charges, which would increase our reported losses, including non-cash expenses.

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

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Critical Accounting Policies and Judgments

Revenue Recognition

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

To date, we have derived the majority of our license revenues from licenses of TeamSite. We recognize revenue using the “residual method” in accordance with Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions.” Under the residual method, for agreements that have multiple deliverables or “multiple element arrangements” (e.g., software products, services, support, etc.), revenue is recognized based on company-specific objective evidence of fair value for all of the delivered elements. Our specific objective evidence of fair value is based on the price of the element when sold separately. Once we have established the fair value of each of the undelivered elements, the dollar value of the arrangement is allocated to the undelivered elements first and the residual of that amount is then allocated to the delivered elements. At the outset of the arrangement with the customer, we defer revenue for the fair value of its undelivered elements (e.g., maintenance, consulting and training) and recognize revenue for the remainder of the arrangement fee attributable to the elements initially delivered in the arrangement (i.e., software product) when the basic criteria in SOP 97-2 have been met. If such evidence of fair value for each undelivered element of the arrangement does not exist, all revenue from the arrangement is deferred until such time that evidence of fair value does exist or until all elements of the arrangement are delivered.

Under SOP 97-2, revenue attributable to an element in a customer arrangement is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, collectibility is reasonably assured and the arrangement does not require services that are essential to the functionality of the software.

At the outset of our customer arrangements, if we determine that the arrangement fee is not fixed or determinable, we recognize revenue when the arrangement fee becomes due and payable. We assess whether the fee is fixed or determinable based on the payment terms associated with each transaction. If a significant portion of a fee is due beyond our normal payments terms, which generally does not exceed 180 days from the invoice date, we do not consider the fee to be fixed or determinable. In these cases, we recognize revenue as the fees become due. We do not offer product return rights to resellers or end users. We determine collectibility on a case-by-case basis, following analysis of the general payment history within the geographic sales region and a customer’s years of operation, payment history and credit profile. If we determine from the outset of an arrangement that collectibility is not probable based upon our review process, we recognize revenue as payments are received. In general, for sales occurring outside of the United States, we defer recognition of revenue until cash is collected or when a letter of credit is obtained, because in most countries we do not have a sufficient operating history to determine whether collectibility is probable. However, we recognize revenue from our customers in Northern Europe and Australia upon the signing of the contract and shipment of the product, assuming all other revenue recognition criteria have been met. Our history of collections and development of our sales infrastructure in those regions enables us to determine that collectibility is probable in those areas. We expect to continually assess the appropriateness of revenue recognition on sales agreements in other geographic locations as our sales infrastructure matures, and our collections history improves, in those regions.

Services revenues consist of professional services and maintenance fees. Professional services primarily consist of software installation and integration, training and business process consulting. Professional services are predominantly billed on a time-and-materials basis and we recognize revenues as the services are performed.

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

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Restructuring and Excess Facilities Charges

Due to the continuing economic slowdown, during 2001 and 2002, we implemented a series of restructuring and facility consolidation plans to improve our operating performance in light of the global reduction in spending on information technology initiatives. Restructuring and facilities consolidation costs consist of expenses associated with workforce reductions, consolidation of excess facilities and the impairment of leasehold improvements and other equipment associated with abandoned facilities.

Workforce Reductions

During 2001, we implemented a restructuring plan that resulted in the termination of 68 employees worldwide, in all functional areas. As result of this plan, we recorded a charge of $650,000 associated with involuntary termination benefits including severance costs. The workforce reduction was completed prior to September 30, 2001 and all accrued costs associated with this plan were paid prior to December 31, 2001.

During 2002, we implemented additional restructuring plans in an effort to better align our expenses and revenues in light of the continued economic slowdown. These cost saving efforts resulted in the termination of 304 employees worldwide, in all functional areas. We recorded charges of $8.1 million associated with involuntary terminations, which included severance costs and cash basis deferred compensation charges associated with accelerated vesting of stock awards. The workforce reductions associated with these plans were substantially completed as of December 31, 2002, and $1.0 million was accrued at December 31, 2002, associated with future severance payments.

Excess Facilities

During 2001, we recorded a $22.2 million charge associated with costs of consolidation of our facilities. This charge included $16.7 million in lease abandonment charges relating to the consolidation of our three facilities in the San Francisco Bay area into a single corporate location, as well as costs associated with an abandoned lease in Austin, Texas. These charges include the remaining lease commitments of these facilities reduced by the estimated sublease income throughout the duration of the lease term. To determine the estimated sublease income associated with these abandoned facilities, we received independent appraisals from real estate brokers to estimate such amounts. Additionally, we evaluated operating equipment and leasehold improvements associated with these abandoned facilities to identify those assets that had suffered a reduction in their economic useful lives. Based on these evaluations, we incurred charges of $3.5 million consisting of the impairment of certain operating equipment and leasehold improvements associated with the abandoned facilities. We also incurred a $2.0 million charge as a result of duplicate lease costs associated with dual lease obligations of our current and abandoned facilities.

During 2002, as a result of our reduced staffing levels, we performed an evaluation of our current facilities requirements and identified additional facilities that were in excess of our current and estimated future needs. As a result of this analysis, we recorded $24.1 million in lease abandonment charges associated with identified excess facilities, which primarily consisted of domestic sales offices. We also evaluated operating equipment and leasehold improvements associated with these facilities to identify those assets that had suffered a reduction in their economic useful lives. Based on these evaluations, we incurred charges of $1.2 million associated with the impairment of leasehold improvements and certain operating equipment associated with the abandoned facilities. Additionally, due to the deterioration of the commercial real estate market, after receiving independent appraisals from real estate brokers to estimate such lease rates, we revised our assumptions regarding future sublease income for certain facilities previously abandoned in 2001. As a result, we reduced our estimates regarding sublease income and recorded an additional $4.7 million in charges to reflect this change in estimate. At December 31, 2002, $38.7 million had been accrued associated with facility consolidation plans and is payable through 2010. The facilities charges were an estimate as of December 31, 2002. We reassess this liability each period based on current market conditions and revisions to our estimates of these liabilities could materially impact our operating results and financial position in future periods if anticipated events and key assumptions, such as the timing and amounts of sublease rental income change from previous estimates.

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

Amortization of Intangibles

We have acquired four corporations since our inception. Under GAAP, we have accounted for these business combinations using the purchase method of accounting and recorded the market value of our common stock and options issued in connection with these acquisitions and the related amount of direct transaction costs as the cost of acquiring these entities. These costs are allocated among the individual assets acquired and liabilities assumed, including goodwill and various identifiable intangible assets such as, in-process research and development, acquired technology and covenants not to compete, based on their respective fair values. We allocated the amount by which the purchase price exceeded the fair value of the net assets to goodwill. The impact of purchase accounting on our results of operations has been significant. Amortization of goodwill and intangibles assets associated with business acquisitions were $22.3 million, $88.3 million and $3.7 million during the years ended December 31, 2000, 2001 and 2002, respectively. In September 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and Other Intangible Assets”, which became effective for us on January 1, 2002. Under SFAS No. 142, we ceased amortizing $148.2 million of goodwill as of January 1, 2002. Additionally, during 2002, we reclassified to deferred stock-based compensation $1.2 million of goodwill recorded in connection with our acquisition of Neonyoyo, Inc. In lieu of amortization of goodwill, we performed a transitional impairment test of our goodwill on January 1, 2002, and annual impairment testing thereafter.

We assess the impairment of identifiable intangibles, long-lived assets and related goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger impairment include the following:

We have one reporting unit for evaluation under SFAS No. 142. When determining if the carrying value of our goodwill is impaired, we will perform a two-step process. First, we will compare the estimated fair value of our reporting unit to its carrying value, including goodwill. Second, if the carrying value exceeds the fair value of the reporting unit, then the implied fair value of the reporting unit’s goodwill will be determined and compared to the carrying value of the goodwill. The implied fair value of goodwill is determined by allocating the fair value of all of the reporting unit’s assets and liabilities as if the reporting unit had been newly acquired in a business combination as described above. If the carrying value of the reporting unit’s goodwill exceeds its implied fair value, then an impairment charge will be recognized equal to the difference of the computed and recorded amounts.

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As required by the provisions of SFAS No. 142, we performed and completed our transitional impairment testing during the six months ended June 30, 2002. Upon completing our review, we determined that the carrying value of our recorded goodwill as of January 1, 2002, had not been impaired. Accordingly, no transitional impairment charge was recorded as a result of the adoption of SFAS No. 142. SFAS No. 142 requires us to perform an annual impairment testing, which we elected to do during the third quarter of 2002.

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

We are also required to assess goodwill for impairment on an interim basis when indicators exist that goodwill may be impaired based on the factors mentioned above. As a result of the severe conditions that have affected the stock markets in 2002, our market capitalization has declined. If a sustained decline in our stock price continues, this decline would be considered an indicator that goodwill may be impaired. A significant impairment could result in additional charges and have a material adverse impact on our financial position and operating results.

Stock-Based Compensation and Intangibles

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

The following table reflects the prospective impact of all deferred compensation costs and the annual amortization of purchased intangibles (other than goodwill) attributable to our mergers and acquisitions that have occurred since our inception (in thousands):

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

Accounts Receivable

Accounts receivable were recorded net of allowance for doubtful accounts and sales return reserves in the amount of $1.9 million and $2.2 million at December 31, 2002 and December 31, 2001, respectively. We regularly review the adequacy of our allowances through identification of specific receivables where we expect that payment will not be received, and we have established a general reserve policy that is applied to all amounts that are not specifically identified. In determining specific receivables where collection may not be received, we review past due receivables and give consideration to prior collection history, changes in the customer’s overall business condition and the potential risk associated with the customer’s industry among other factors. We establish a general reserve for all receivable amounts that have not been specifically identified by applying a percentage based on our historical collection experience. We establish a general reserve for sales returns by applying a historical percentage based on our license and services revenues activity. The allowances reflect our best estimate as of the reporting dates. Changes may occur in the future which may make us reassess the collectibility of amounts, and at which time we may need to provide additional allowances in excess of that currently provided.

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Results of Operations

Some of the statements in this report constitute forward-looking statements that involve substantial risks and uncertainties. In some cases, you can identify these statements by forward-looking words such as “may”, “will”, “should”, “expect”, “plan”, “anticipate”, “believe”, “estimate” or “continue” and variations of these words or comparable words. In addition, statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. Our Management’s Discussion and Analysis of Financial Condition and Results of Operations contain many such forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and situations that may cause our or our industry’s actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. The risk factors contained in this report, as well as any other cautionary language in this report, provide examples of risks, uncertainties and events that may cause our actual results to differ from the expectations described or implied in our forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this report. Except as required by law, we do not undertake to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

The following table sets forth, as a percentage of total revenues, consolidated statement of operations data for the periods indicated:

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Comparison of the Years Ended December 31, 2001 and 2002

Revenues.    Total revenues decreased 38% from $204.6 million in 2001 to $126.8 million in 2002. The decrease in total revenues is attributable to the significant decrease in information technology spending resulting from the continued economic slowdown. As a result of the economic slowdown, we have experienced longer sales cycles, lower average selling prices due to general pricing pressures, a shift to a greater number of smaller dollar value agreements accounting for a larger percentage of our total revenues and the loss of service revenues to systems integrators. Sales outside of North America represented 34% of our total revenues in 2002 and 32% of our total revenues in 2001. Although our international revenues decreased in absolute dollars in 2002 compared to 2001, our international revenues, as a percentage of total revenues, were relatively unchanged. We expect the current economic slowdown to continue to adversely affect our business for the foreseeable future.

License.    License revenues decreased 49% from $112.8 million in 2001 to $57.3 million in 2002. License revenues represented 55% and 45% of total revenues, respectively, in those periods. The decrease in license revenues as a percentage of total revenues and in absolute dollars was primarily attributable to delays in customer spending, which we believe was caused by the general slowdown in the worldwide economy.

Services.    Services revenues decreased 24% from $91.9 million in 2001 to $69.5 million in 2002. Services revenues represented 45% and 55% of total revenues, respectively, in those periods. The decrease in services revenues reflects a $22.4 million decrease in professional service revenues and a $2.4 million decrease in training revenues, partially offset by a $2.4 million increase in maintenance revenues. The decrease in professional service revenues is primarily attributable to a decline in selling prices of professional services as a result of general pricing pressures and to a lesser extent, a shift to using systems integrators to perform more customer implementations. The decrease in training revenues was due to a decrease in customer training participation as a result of a decline in license revenues. The increase in maintenance revenues was due to greater maintenance fees earned from our larger customer base.

Cost of Revenues

License.    Cost of license revenues includes expenses incurred to manufacture, package and distribute our software products and related documentation, as well as costs of licensing third-party software sold in conjunction with our software products. Cost of license revenues increased 21% from $2.7 million in 2001 to $3.3 million in 2002. Cost of license revenues represented 2% and 6%, respectively, of license revenues in those periods. The increase in cost of license revenues in absolute dollars and as a percentage of total revenues was attributable to an increase in purchases of third-party software that was integrated into our software applications to enhance our current product offerings.

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

Services.    Cost of services revenues consist primarily of salary and related costs of our professional services, training, support personnel and subcontractor expenses. Cost of services revenues decreased 38% from $60.0 million in 2001 to $37.0 million in 2002. This decrease was primarily attributable to lower subcontractor expenses as a result of greater use of in-house staff to perform customer implementations, a reduction of personnel costs as a result of reduced staffing associated with our restructuring plans and our effort to use systems integrators to perform more customer implementations. Cost of services revenues represented 65% and 53% of services revenues, respectively, in those periods. The decrease in cost of services revenues as a percentage of services revenues was primarily attributable to an increase in maintenance revenues as a percentage of total services revenues which, generally have lower associated costs in providing such services.

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

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Gross Profit.    Gross profit decreased 39% from $141.9 million in 2001 to $86.6 million in 2002. Gross profit represented 70% and 68% of total revenues, respectively, in these periods. The decrease in gross profit as a percentage of total revenues was a result of the decrease in license revenues, as a percentage of total revenues, resulting from a general slowdown in spending on information technology initiatives. The decrease in absolute dollar amounts reflects a decrease in both license and services revenues during those periods.

Operating Expenses

Research and Development.    Research and development expenses consist primarily of personnel and related costs to support product development activities. To date, all software development costs have been expensed in the period incurred. Research and development expenses decreased 16% from $31.4 million in 2001 to $26.5 million in 2002, representing 15% and 21% of total revenues in those periods, respectively. This decrease in absolute dollars primarily reflects lower subcontractor expenses as a result of fewer product development initiatives and increased use of in-house personnel in development activities, and a decrease in personnel costs as a result of reduced staffing.

We expect that the percentage of total revenues represented by research and development expenses will fluctuate from period to period depending primarily on the fluctuation of our revenues, and to a lesser extent to the timing of when we hire new research and development personnel and secondarily on the size and timing of product development projects.

Sales and Marketing.    Sales and marketing expenses consist primarily of salaries and related costs for sales and marketing personnel, sales commissions, travel and marketing programs. Sales and marketing expenses decreased 27% from $98.9 million in 2001 to $72.3 million in 2002, representing 48% and 57% of total revenues in those periods, respectively. This decrease in absolute dollar amounts primarily relates to lower personnel costs associated with headcount reductions and lower commissions as a result of the decrease in revenues during the respective periods.

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

General and Administrative.    General and administrative expenses consist primarily of salaries and related costs for accounting, human resources, legal and other administrative functions, as well as provisions for doubtful accounts. General and administrative expenses decreased 19% from $22.4 million in 2001 to $18.1 million in 2002, representing 11% and 14% of total revenues in those periods, respectively. The decrease in absolute dollar amounts was primarily attributable to decreased personnel costs associated with reduced staffing within general and administrative functions.

We are endeavoring to control, and reduce, our general and administrative costs in light of the current economic slowdown. We anticipate that, with evidence of a sustained recovery of the global economy, we would review investments in our general and administrative infrastructure to support our operations. We expect that the percentage of total revenues represented by general and administrative expenses will fluctuate from period to period depending primarily on the fluctuation of our revenues and when we hire new general and administrative personnel to support our operations.

Amortization of Deferred Stock-Based Compensation.    We recorded deferred stock-based compensation in connection with stock options granted prior to our initial public offering and in connection with stock options granted and assumed during our business acquisitions. Amortization of deferred stock-based compensation was $14.2 million in 2001 and $4.9 million in 2002. The decrease was primarily attributable to adjustments to deferred compensation recorded associated with employees who were terminated prior to vesting. During 2002, we also recognized cash basis restructuring costs of $1.6 million

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associated with accelerated vesting of stock awards of terminated employees. Amortization of deferred stock-based compensation is attributable to the following categories for 2001 and 2002, respectively (in thousands):

Amortization of Acquired Intangible Assets.    Effective January 1, 2002, we adopted SFAS No. 142 and we ceased amortizing net goodwill of $148.2 million, including $1.7 million related to assembled workforce. During 2002, we reclassified $1.2 million of goodwill recorded in connection with our acquisition of Neonyoyo, Inc., to deferred stock-based compensation. We expect amortization of acquired intangible assets to be $1.8 million in 2003, $1.5 million in 2004 and $74,000 in 2005.

Restructuring and Excess Facilities Charges.    During 2001, we implemented a restructuring plan to improve our operating performance in light of the global reduction in spending on information technology initiatives. Additionally, we abandoned certain facilities in the San Francisco Bay area and Austin, Texas in an effort to consolidate our existing operating facilities. As a result of these plans, we recorded a charge of $650,000 associated with workforce reductions, which consisted of severance benefits associated with involuntary terminations. We also recorded a $22.2 million charge associated with the abandonment of leased facilities which included our remaining lease commitments, less our estimate of sub-lease income during the duration of the lease commitment, and the impairment of certain operating equipment and leasehold improvements associated with these abandoned facilities.

During 2002, we implemented additional restructuring plans in an effort to better align our expenses and revenues in light of the continued economic slowdown. As a result of these additional restructuring plans, we recorded a charge of $8.1 million associated with workforce reductions and a charge of $25.3 million associated with the abandonment of excess facilities and the impairment of certain operating equipment and leasehold improvement at these facilities. Additionally, due to the deterioration of the commercial real estate market, we revised our assumptions regarding future sublease income for certain facilities previously abandoned in 2001. As a result, we reduced our estimates regarding sublease income and recorded an additional $4.7 million in charges to reflect this change in estimate. The charges we recorded in respect of these abandoned facilities were based on estimated sublease income earned throughout the lease term for these facilities. Our estimates could differ from actual results and such differences could result in additional charges that could materially affect our financial position and results of operations.

Impairment of Goodwill.    We elected to perform our annual impairment test under SFAS No. 142 during the third quarter of 2002. Upon the completion of our analysis under SFAS No. 142, it was determined that an impairment of our goodwill had occurred as a result of a decrease in our market capitalization and due to a decline in our operational performance. Accordingly, we recorded an impairment charge of $76.4 million in 2002, reflecting the write-down of the carrying value of goodwill to its estimated fair value.

Interest and Other Income, Net.    Interest income and other, net, decreased from $8.5 million in 2001 to $6.0 million in 2002 primarily due to the decrease in interest rates earned on cash and short-term investments and lower average cash and short-term investment balances during the period.

Provision for Income Taxes.    Income tax expense decreased from $1.4 million in 2001 to $1.1 million in 2002. Our income tax expense during both periods was associated with state and foreign income taxes.

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Comparison of the Years Ended December 31, 2000 and 2001

Revenues

Total revenues increased 53% from $133.6 million in 2000 to $204.6 million in 2001. This increase was primarily attributable to sales to new customers in 2001, as well as due to additional sales to existing customers, reflecting greater market acceptance of our products and expanded product configurations. Our ability to attract new customers was a result of our developing a larger and more experienced sales and marketing staff and as a result of increased levels of partner-influenced sales. During the second quarter of 2001, we began to experience a decline in demand for our products due to a worldwide economic slowdown that has resulted in a substantial reduction in overall spending in information technology initiatives. We also experienced a slight decrease in our average selling prices during 2001, due to overall pricing pressures as well as a shift to a greater number of smaller dollar value agreements accounting for a larger percentage of our total revenues.

License.    License revenues increased 30% from $87.0 million in 2000 to $112.8 million in 2001. License revenues represented 65% and 55% of total revenues, respectively, in those periods. The decrease in license revenues as a percentage of total revenues reflects delays in customer spending and the general slowdown in the economy. The increase in license revenues in absolute dollars reflected our growing customer base.

Services.    Services revenues increased 97% from $46.6 million in 2000 to $91.9 million in 2001. Services revenues represented 35% and 45% of total revenues, respectively, in those periods. The increase in services revenues as a percentage of total revenues reflected a $24.1 million increase in maintenance fees, a $16.4 million increase in professional services fees, and a $4.8 million increase in training fees. The increased professional services and maintenance fees were due to increased demand for our products, maintenance fees earned from a larger customer base and due to an increase in the number and utilization of our professional services staff.

Cost of Revenues

License.    Cost of license revenues was $1.1 million in 2000 and $2.7 million in 2001. Cost of license revenues represented 1% and 2% of license revenues in 2000 and 2001, respectively. The increase in absolute dollars of cost of license revenues was attributable to an increase in royalties paid to third-party software vendors commensurate with increased revenues of our products.

Services.    Cost of services revenues increased 51% from $40.0 million in 2000 to $60.0 million in 2001. This increase was primarily attributable to an increase in personnel costs as a result of increased staffing to meet the demand of our increased customer base. Cost of services revenues represented 86% and 65% of services revenues, respectively, in those periods. The decrease in cost of services revenues as a percentage of services revenues was a result of improved productivity and greater utilization in the services organization and due to an increase in maintenance revenues as a percentage of total revenues, which generally have lower associated costs in providing such services.

Gross Profit.    Gross profit increased 53% from $92.5 million in 2000 to $141.9 million in 2001. Gross profit represented 69% and 70% of total revenues in 2000 and 2001, respectively. This increase in absolute dollar amounts reflects increased license and services revenues from a larger customer base.

Operating Expenses

Research and Development.    Research and development expenses increased 78% from $17.7 million in 2000 to $31.4 million in 2001, representing 13% and 15% of total revenues, respectively, in those periods. This increase in absolute dollars was due to an increase in allocated expenses such as rent and depreciation and due to an increase in personnel costs of our product development personnel as a result of increased staffing.

Sales and Marketing.    Sales and marketing expenses increased 36% from $72.7 million in 2000 to $98.9 million in 2001, representing 54% and 48% of total revenues in those periods, respectively. This increase in absolute dollar amounts primarily relates to increases in sales and marketing personnel costs as a result of increased staffing of our sales and marketing departments, and secondarily, increased marketing-related costs associated with brand awareness initiatives and other promotional efforts. The decrease in sales and marketing expenses as a percentage of total revenues reflects total revenues increasing more rapidly than sales expenses and a reduced rate of spending on marketing programs as a result of the economic slowdown.

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General and Administrative.    General and administrative expenses increased 61% from $13.9 million in 2000 to $22.4 million in 2001, representing 10% and 11% of total revenues in those periods, respectively. The increase in absolute dollar amounts was due to increased staffing of general and administrative functions to support our expanded operations. Other increases in general and administrative expenses were due to increased bad debt expense and increases in allocated expenses such as rent and depreciation.

Amortization of Deferred Stock-Based Compensation.    Amortization of deferred stock-based compensation was $7.5 million in 2000 and $14.2 million in 2001. Amortization of deferred stock-based compensation is attributable to the following categories for the years ended December 31, 2000 and 2001, respectively (in thousands):

Amortization of Acquired Intangible Assets.    In July 2000, we recorded intangible assets of approximately $85.4 million in connection with the acquisition of Neonyoyo, Inc. Goodwill related to this transaction approximated $77.9 million, intangible assets related to workforce and covenants not to compete of Neonyoyo, Inc. approximated $7.5 million, and in-process research and development approximated $1.7 million of the purchase price. The total purchase price for this acquisition was approximately $88.2 million. The purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based upon their respective fair values at the acquisition date. In October 2000, we recorded intangible assets of approximately $27.2 million in connection with the acquisition of Ajuba Solutions, Inc. including goodwill in the amount of approximately $25.7 million and intangible assets related to workforce of approximately $1.5 million of the purchase price. The total purchase price for this acquisition was approximately $24.9 million. In November 2000, we recorded intangible assets of approximately $147.8 million in connection with the acquisition of Metacode Technologies, Inc. including goodwill of approximately $143.5 million, intangible assets related to the workforce of Metacode of approximately $1.7 million and completed technology of approximately $2.6 million of the purchase price. The total purchase price for this acquisition was approximately $152.5 million. Amortization of acquired intangible assets was $22.3 million in 2000 and $88.3 million in 2001.

Restructuring and Excess Facilities Charges.    During 2001, we implemented a restructuring plan to improve our operating performance in light of the global reduction in spending on information technology initiatives. Additionally, we abandoned certain facilities in the San Francisco Bay area and in Austin, Texas in an effort to consolidate our existing operating facilities. As a result of these plans, we recorded a charge of $650,000 associated with workforce reductions, which consisted of severance benefits associated with involuntary terminations. We also recorded a $22.2 million charge associated with the abandonment of leased facilities which included our remaining lease commitments, less our estimate of sub-lease income during the duration of the lease commitment, and the impairment of certain operating equipment and leasehold improvements associated with these abandoned facilities.

Interest and Other Income, Net.    Interest income and other, net, decreased from $12.1 million in 2000 to $8.5 million in 2001 primarily due to the decrease in interest rates earned on cash and short-term investments.

Provision for Income Taxes.    Income tax expense increased 133% from $610,000 in 2000 to $1.4 million in 2001. Our income tax expense in 2000 and 2001 was associated with state and foreign income taxes.

Recent Accounting Pronouncements

In September 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 141 requires the purchase method of accounting on all transactions initiated after July 1, 2001 and the pooling of interests method is no longer allowed. We adopted the provisions of SFAS No. 141, effective July 1, 2001. The adoption of SFAS No. 141 did not have a material impact on our financial position or results of operations. SFAS No. 142 requires that goodwill and all identifiable intangible assets that have an infinite life be recognized as assets but not be amortized. We are now required to assess these assets for

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impairment on an annual basis. Identifiable intangible assets that have a finite life will continue to be segregated from goodwill and amortized over their useful lives. We will assess these assets for impairment pursuant to guidance in SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” Goodwill and other intangible assets arising from acquisitions completed before July 1, 2001 (previously recognized goodwill and intangible assets) are to be accounted for in accordance with the provisions of SFAS No. 142 beginning January 1, 2002. Under SFAS No. 142, we ceased amortizing net goodwill of $148.2 million, which includes $1.7 million related to assembled workforce. We completed our evaluation of goodwill under the SFAS No. 142 transitional impairment test requirements during the second quarter of 2002, and found that the carrying value of goodwill was not impaired as of January 1, 2002. As required by the provisions of SFAS No. 142, we will continue to evaluate goodwill for impairment on an annual basis. In completing our testing, we determined that we have one reporting unit for evaluation purposes. In assessing goodwill for impairment, we will perform the following procedures:

Step 1—We will compare the fair value of our reporting unit(s) to the carrying value, including goodwill of the unit(s). For each reporting unit where the carrying value, including goodwill, exceeds the unit’s fair value, we will move on step two as described below. If a unit’s fair value exceeds the carrying value, no impairment charge would be necessary.

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

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

SFAS No. 142 requires companies to assess goodwill for impairment on an interim basis when indicators exist that goodwill may be impaired. A significant impairment could have a material adverse effect on our financial position and results of operations.

In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. SFAS No. 144 superseded SFAS No. 121 and the accounting and reporting provisions of Accounting Principles Board No. 30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” SFAS No. 144 established a single accounting model for impairment or disposal by sale of long-lived assets. We adopted the provisions of SFAS No. 144 as of January 1, 2002. The adoption of SFAS No. 144 did not have a material impact on our financial position or the results of operations.

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 revises the accounting for specified employee and contract terminations that are part of restructuring activities. Companies will be allowed to record a liability for a cost associated with an exit or disposal activity only when the liability is incurred and can be measured at fair value. We are required to adopt this statement for exit or disposal activities initiated after December 31, 2002. We are currently evaluating the impact, if any, the adoption of SFAS No. 146 will have on our financial position and results of operations.

In January 2002, the FASB issued EITF No. 01-14, “Income Statement Characterization of Reimbursements Received for out-of-pocket Expenses Incurred”, which requires companies to report reimbursements of “out-of-pocket” expenses as revenues and the corresponding expenses incurred as costs of revenues within the income statement. We adopted the provisions EITF No. 01-14 as of January 1, 2002. Under EITF No. 01-14, we reclassified reimbursable expenses as services revenues and a corresponding increase in cost of services revenues. Reimbursable “out-of-pocket” expenses included within services revenues and cost of services revenues were $1.5 million, $1.9 million and $1.0 million in 2000, 2001 and 2002, respectively.

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In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure”. SFAS No. 148 amends FASB Statement No. 123, “Accounting for Stock-Based Compensation”, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. It also requires additional disclosures about the effects on reported net income of an entity’s accounting policy with respect to stock-based employee compensation. The provisions of SFAS No. 148 are generally effective for fiscal years ending after December 15, 2002.

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

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

Liquidity and Capital Resources

Net cash provided by operating activities was $7.9 million in 2001. Net cash used in operating activities was $31.1 million in 2002. Net cash provided by operating activities during 2001 primarily reflected net losses and decreases in accounts payable offset in part by increases in deferred revenue, accrued liabilities, amortization of acquired intangibles, restructuring costs and facilities consolidation charges and amortization of deferred stock-based compensation. Net cash used in operating activities during 2002 primarily reflected net losses and decreases in accrued liabilities offset in part by non-cash charges for impairment of goodwill, restructuring and excess facilities, amortization of deferred stock-based compensation, depreciation expense and decreases in accounts receivable.

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

During 2001 and 2002, investing activities included purchases of property and equipment, principally computer hardware and software to upgrade our current operating systems. Cash used to purchase property and equipment was $16.2 million and $2.0 million during 2001 and 2002, respectively. We do not expect that capital expenditures will increase substantially in future periods in light of our cost control efforts. As of December 31, 2002, we had no material capital expenditure commitments.

During 2001 and 2002, our investing activities included purchases and maturities of short-term investments. Net purchases of investments were $3.1 million during 2001 and net maturities of investments were $27.9 million during 2002. As of December 31, 2002, we had not invested in derivative securities. In the future, we expect that cash in excess of current requirements will continue to be invested in high credit quality, interest-bearing securities.

During 2001, our investing activities included a $3.9 million purchase price adjustment, which primarily related to Metacode Technologies, Inc. The purchase price adjustment reflects a reduction in the valuation of cash and investments, subsequent to the acquisition date and upon completion of an audit of Metacode Technologies, Inc.

During 2001 and 2002, our financing activities included proceeds from the issuance of common stock and our repurchase of outstanding stock. During 2001 and 2002, proceeds from the issuance of common stock were $15.4 million and $5.6 million, respectively. During 2001, we repurchased 827,500 shares of our common stock at a cost of $3.6 million. During 2002, we repurchased 3,500,100 shares of our common stock on the open market at a cost of $10.1 million. We may repurchase shares of our common stock on the open market in future quarters.

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At December 31, 2002, our sources of liquidity consisted of $181.7 million in cash, cash equivalents and investments. At December 31, 2002, we had $147.4 million in working capital. We have a $20.0 million line of credit with Washington Mutual Business Bank, which bears interest at the Wall Street Journal’s prime rate, which was 4.25% at December 31, 2002 and is secured by cash. This line of credit agreement expires in July 2003. We also have a $7.5 million line of credit with Wells Fargo Bank, which is secured by cash and bears interest at our option of either a variable rate of 1% below the bank’s prime rate adjusted from time to time or a fixed rate of 1.5% above the LIBOR in effect on the first day of the term. This line of credit agreement expires in December 2003. We had no outstanding borrowings under these lines of credit as of December 31, 2002. There are no covenant requirements associated with these lines of credit. We intend to maintain these lines of credit in the future.

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

Of these total minimum lease payment commitments, $38.7 million has been accrued, which is net of estimated sublease income, in restructuring and excess facilities costs at December 31, 2002.

We have entered into various standby letter of credit agreements associated with our facilities operating leases, which serve as required deposits for such facilities. These letters of credit expire at various times through 2013. At December 31, 2002, we had $11.9 million outstanding under standby letters of credit, which are secured by substantially all of our assets. The following presents our outstanding commitments under these agreements at each respective balance sheet date (in thousands):

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

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

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FACTORS AFFECTING FUTURE RESULTS

The risks and uncertainties described below are not the only risks we face. These risks are the ones we consider to be significant to your decision whether to invest in our common stock at this time. We might be wrong. There may be risks that you, in particular, view differently than we do, and there are other risks and uncertainties that we do not presently know or that we currently deem immaterial, but that may in fact harm our business in the future. If any of these events occur, our business, results of operations and financial condition could be seriously harmed, the trading price of our common stock could decline and you may lose all or part of your investment.

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

Our operating history is limited, so it will be difficult for you to evaluate our business in making an investment decision.

We have a limited operating history and are still in the early stages of our development, which makes the evaluation of our business operations and our prospects difficult. We shipped our first product in May 1997. Since that time, we have derived substantially all of our revenues from licensing our TeamSite product and related products and services. In evaluating our common stock, you should consider the risks and difficulties frequently encountered by companies in new and rapidly evolving markets, particularly those companies whose businesses depend on the Internet and corporate information technology spending. These risks and difficulties, as they apply to us in particular, include:

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

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

We have incurred net losses from operations in each quarter since our inception through the quarter ended December 31, 2002. Our net losses amounted to $6.3 million in 1998, $15.7 million in 1999, $32.1 million in 2000, $129.2 million in 2001 and $148.6 million in 2002. As of December 31, 2002, we had an accumulated deficit of approximately $335.8 million. We

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anticipate that we will continue to invest in order to expand our customer base and increase brand awareness. To achieve and sustain operating profitability on a quarterly and annual basis, we will need to increase our revenues significantly, particularly our license revenues. We cannot predict when we will become profitable, if at all. Furthermore, we have generally made business decisions with reference to net profit metrics excluding non-cash charges, such as acquisition and stock-based compensation charges. We expect to continue to make acquisitions, which are likely to cause us to incur certain non-cash charges such as stock-based compensation and intangible amortization charges, which will increase our losses.

Reduced demand and increased competition may cause our services revenue to decline and our results to fluctuate unpredictably.

Our services revenues represent a significant component of our total revenues—45% and 55% of total revenues in 2001 and 2002, respectively. We anticipate that services revenues will continue to represent a significant percentage of total revenues in the future, and the actual percentage that it represents will have an impact on our results of operations. To a large extent, the level of services revenues depends upon our ability to license products that generate follow-on services revenues, such as maintenance. Services revenue also depends on demand for professional services, which is subject to fluctuation in response to economic slowdowns. The current economic slowdown has and may continue to reduce demand for our professional services. As systems integrators and other third parties, many of whom are our partners, become proficient in installing and servicing our products, our services revenues have declined and will continue to decline. Whether we will be able to successfully manage our professional services capacity during the current economic slowdown is difficult to predict. If our professional services capacity is too low, we may not be able to capitalize on future increases in demand for our services, but if our capacity is too high, our gross margin on services revenue will be harmed.

Our operating results fluctuate widely and are difficult to predict, so we may fail to satisfy the expectations of investors or market analysts and our stock price may decline.

Our quarterly operating results have fluctuated significantly in the past, and we expect them to continue to fluctuate unpredictably in the future. However, we anticipate flat revenues, on average, for the next few quarters due to the current economic slowdown. The main factors affecting these fluctuations are:

It is possible that in some future periods our results of operations may not meet the forecasts periodically disclosed by management or the expectations of securities analysts and investors. If this occurs, the price of our common stock is likely to decline.

The continuing economic slowdown has reduced our sales and will cause us to experience operating losses.

The current widespread economic slowdowns in the markets we serve have harmed our sales. Capital spending on information technology in general and capital spending on web initiatives in particular appears to have declined. We expect this trend to continue for the foreseeable future. In addition, since many of our customers are also suffering adverse effects of the general economic slowdown, we may find that collecting accounts receivable from existing or new customers will take longer than we expect or that some accounts receivable will become uncollectible.

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We face significant competition, which could make it difficult to acquire and retain customers and inhibit any future growth.

We expect market competition to persist and intensify. Competitive pressures may seriously harm our business and results of operations if they inhibit our future growth, or require us to hold down or reduce prices, or increase our operating costs. Our competitors include, but are not limited to:

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

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

If we fail to establish and maintain strategic relationships, the market acceptance of our products, and our profitability, may decline.

To offer products and services to a larger customer base, our direct sales force depends on strategic partnerships and marketing alliances to obtain customer leads, referrals and distribution. For example, the majority of our revenues are associated with referrals from our strategic partners. If we are unable to maintain our existing strategic relationships or fail to enter into additional strategic relationships, our ability to increase our sales and reduce expenses will be harmed. We would also lose anticipated customer introductions and co-marketing benefits. Our success depends in part on the success of our strategic partners and their ability to market our products and services successfully. We also rely on our strategic partnerships to aid in the development of our products. Should our strategic partners not regard us as significant for their own businesses, they could reduce their commitment to us or terminate their respective relationships with us, pursue other partnerships or relationships, or attempt to develop or acquire products or services that compete with our products and services. Even if we succeed in establishing these relationships, they may not result in additional customers or revenues.

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

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

We may be required to write-off all or a portion of the value of assets we acquired in our recent business combinations.

Accounting principles require companies to review the value of assets from time to time to determine whether those values have been impaired. Because of the decline of our stock price in recent periods, we have begun a process of determining whether the value on our balance sheet that those acquired companies represent should be adjusted downward.

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This process will include an analysis of the carrying value of the assets acquired as compared to the fair value of such assets through the use of valuation models. If as a result of this analysis we determine there has been an impairment of goodwill and other intangible assets, the carrying value of those assets will be written down to fair value as a charge against operating results in the period that the determination is made. Any significant impairment would harm our operating results for that period and our financial position, and could harm the price of our stock.

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

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

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

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

We rely heavily on sales of one product, so if it does not continue to achieve market acceptance we will continue to experience operating losses.

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

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

The market for our products is characterized by rapid technological change, frequent new product introductions and technology-related enhancements, uncertain product life cycles, changes in customer demands and evolving industry standards. We expect to add new content management functionality to our product offerings by internal development, and possibly by acquisition. Content management technology is more complex than most software and new products or product enhancements can require long development and testing periods. Any delays in developing and releasing new products could harm our business. New products or upgrades may not be released according to schedule or may contain defects when released. Either situation could result in adverse publicity, loss of sales, delay in market acceptance of our products or customer claims against us, any of which could harm our business. If we do not develop, license or acquire new software products, or deliver enhancements to existing products on a timely and cost-effective basis, our business will be harmed.

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

In connection with our acquisitions, we allocated a portion of the purchase price to intangible assets such as goodwill, in-process research and development, acquired technology, acquired workforce and covenants not to compete. We have also

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recorded deferred compensation related to options assumed and shares issued to effect business combinations, as well as options granted below fair market value associated with our initial public offering in October 1999. The future amortization expense related to the acquisitions and deferred stock-based compensation may be accelerated as we assess the value and useful life of the intangible assets, and accelerated expense would reduce our earnings.

In addition, our stock option repricing program requires us to record a compensation charge on a quarterly basis as a result of variable plan accounting treatment, which will lower our earnings. This charge will be evaluated on a quarterly basis and additional charges will be recorded if the market price of our stock exceeds the price of the repriced options. Since the variable component of this charge is computed based on the current market price of our stock, such charges may vary significantly from period to period. For example, for every dollar in value that our stock price exceeds the adjusted exercise price of these options, we will recognize an additional $2.6 million in deferred stock compensation.

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

Our products currently operate on the Microsoft Windows NT, Microsoft Windows 2000, Linux, IBM AIX, Hewlett Packard UX and Sun Solaris operating systems. In addition, our products are required to interoperate with leading content authoring tools and application servers. We must continually modify and enhance our products to keep pace with changes in these applications and operating systems. If our products were to be incompatible with a popular new operating system or business application, our business would be harmed. In addition, uncertainties related to the timing and nature of new product announcements, introductions or modifications by vendors of operating systems, browsers, back-office applications, and other technology-related applications, could also harm our business.

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

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

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

We depend on our international operations for a substantial portion of our revenues.

Sales to customers located outside the North America have historically accounted for a significant percentage of our revenues and we anticipate that such sales will continue to represent a significant percentage of our revenues. As a percentage of our total revenues, sales to international customers were 19%, 32% and 34% in 2000, 2001 and 2002, respectively. We face risks associated with our international operations, including:

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Any of these risks could harm our international operations and cause lower international sales. For example, some European countries already have laws and regulations related to technologies used on the Internet that are more strict than those currently in force in North America. Any or all of these factors could cause our business to be harmed.

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

We depend upon our proprietary technology, and rely on a combination of patent, copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect it. We currently have three issued United States patents and one foreign patent, as well as several U.S. and foreign patents pending approval. It is possible that patents will not be issued from our currently pending patent applications or any future patent application we may file. We have also restricted customer access to our source code and required all employees to enter into confidentiality and invention assignment agreements. Despite our efforts to protect our proprietary technology, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. In addition, the laws of some foreign countries do not protect our proprietary rights as effectively as the laws of the United States, and we expect that it will become more difficult to monitor use of our products as we increase our international presence. In addition, third parties may claim that our products infringe theirs.

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

We restructured our operations in 2001 and 2002, resulting in substantial workforce reductions of 68 personnel in 2001 and 304 personnel in 2002. These reductions were effected worldwide, in all functional areas. In addition to direct economic costs, these personnel reductions may hurt morale among continuing employees, or create concerns about job security. These morale issues may lower productivity or make it more likely that some of our key employees will seek new employment and require us to hire replacements. These reductions may also make the management of our business more difficult, subject us to increased risk of litigation and make it harder for us to attract employees in the future.

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

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

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

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

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Defects in our products may result in customer claims against us that could cause unanticipated losses.

Because customers rely on our products for business critical processes, defects or errors in our products or services might result in tort or warranty claims. It is possible that the limitation of liability provisions in our contracts will not be effective as a result of existing or future federal, state or local laws or ordinances or unfavorable judicial decisions. We have not experienced any product liability claims like this to date, but we could in the future. Further, although we maintain errors and omissions insurance, this insurance coverage may not be adequate to cover us. A successful product liability claim could harm our business. Even defending a product liability suit, regardless of its merits, could harm our business because it entails substantial expense and diverts the time and attention of key management personnel.

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

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

Fluctuations in the exchange rates of foreign currency may harm our business.

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

Defense of class action lawsuits could be costly.

We have been notified of the commencement of a purported class action litigation alleging violations of federal securities laws by us. While we believe the litigation is without merit, our defense of this litigation could result in substantial costs and diversion of our management’s attention and resources, which could have a material adverse effect on our operating results and financial condition in future periods.

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