INTERWOVEN INC, 10-Q, 2000-08-10

INTERWOVEN INC
10-Q, 2000-08-10
PREPACKAGED SOFTWARE

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________________________________________________________________________________

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

FORM 10-Q

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

For the quarterly period ended June 30, 2000

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

For the transition period from _____ to _____

Commission File Number 000-27389

INTERWOVEN, INC.
(Exact name of Registrant as specified in its charter)

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

1195 West Fremont Avenue, Suite 2000, 94087
Sunnyvale, CA
(Address of principal executive offices) (Zip Code)

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

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 ___
---

There were 49,378,279 shares of the Company's Common Stock, par value $0.001,
outstanding on August 7, 2000.

________________________________________________________________________________

1
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I FINANCIAL INFORMATION

Item 1 - Financial Statements:

Condensed Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999........................................................ 3

Condensed Consolidated Statements of Operations for the Three
and Six Months Ended June 30, 2000 and 1999.................................. 4

Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2000 and 1999.......................................... 5

Notes to Condensed Consolidated Financial Statements........................... 6

Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................... 10

Item 3 - Quantitative and Qualitative Disclosures about Market Risk.............................. 24

PART II OTHER INFORMATION

Item 1 - Legal Proceedings....................................................................... 26

Item 2 - Changes in Securities and Use of Proceeds............................................... 26

Item 3 - Defaults upon Senior Securities.......................................................... 26

Item 4 - Submission of Matters to a Vote of Securities Holders................................... 27

Item 5 - Other Information....................................................................... 27

Item 6 - Exhibits and Reports on Form 8-K........................................................ 27

SIGNATURE........................................................................................ 28
</TABLE>

2
<PAGE>

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

INTERWOVEN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)

<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------------- ----------------
(unaudited) (audited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ..................................................... $ 47,393 $ 10,983
Short-term investments ........................................................ 119,300 44,665
Accounts receivable, net of allowance for doubtful
accounts of $500 and $288, respectively...................................... 23,723 5,158
Prepaid expenses............................................................... 2,319 787
Other current assets........................................................... 872 559
--------- ---------
Total current assets................................................... 193,607 62,152
Investments...................................................................... 58,297 16,464
Property and equipment, net...................................................... 6,191 3,145
Intangible assets, net........................................................... 313 416
Restricted cash.................................................................. 605 605
Other assets..................................................................... 149 297
--------- ---------
$ 259,162 $ 83,079
========= =========

Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable .............................................................. $ 2,129 $ 834
Accrued liabilities............................................................ 13,369 4,966
Deferred revenue............................................................... 16,117 1,939
--------- ---------
Total current liabilities.............................................. 31,615 7,739

Stockholders' Equity:
Preferred Stock, $0.001 par value,
no shares authorized, issued or outstanding.................................... - -
Common Stock, 100,000 shares authorized,
48,272 (unaudited) and 45,773 issued and outstanding........................ 24 23
Additional paid-in capital....................................................... 261,341 106,214
Notes receivable from stockholders............................................... (105) (202)
Deferred stock-based compensation................................................ (3,282) (4,732)
Accumulated deficit.............................................................. (30,431) (25,963)
--------- ---------
Total stockholders' equity.............................................. 227,547 75,340
--------- ---------
$ 259,162 $ 83,079
========= =========
</TABLE>

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

3
<PAGE>

INTERWOVEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ---------------------------
2000 1999 2000 1999
-------- ------- -------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues:
License .................................................... $15,421 $ 1,898 $24,809 $ 3,258
Services ................................................... 8,840 1,004 13,312 1,746
-------- -------- -------- --------
Total revenues ..................................... 24,261 2,902 38,121 5,004

Cost of revenues:
License .................................................... 201 104 267 119
Services ................................................... 7,908 880 12,562 1,429
-------- -------- -------- --------
Total cost of revenues ............................. 8,109 984 12,829 1,548

Gross profit ................................................. 16,152 1,918 25,292 3,456

Operating expenses:
Research and development ................................... 3,188 922 5,396 1,701
Sales and marketing ........................................ 14,249 2,938 23,918 5,225
General and administrative ................................. 2,808 646 4,768 1,244
Amortization of deferred stock-based compensation .......... 617 1,028 1,450 1,668
Amortization of acquired intangible assets ................. 51 - 103 -
-------- -------- -------- --------
Total operating expenses ........................... 20,913 5,534 35,635 9,838

Loss from operations ......................................... (4,761) (3,616) (10,343) (6,382)

Interest income and other income (expense), net .............. 3,338 89 5,875 154
-------- -------- -------- --------
Net loss ..................................................... (1,423) (3,527) (4,468) (6,228)
======== ======== ======== ========

Accretion of mandatorily redeemable convertible preferred
stock to redemption value ................................. - (4,224) - (6,350)

-------- -------- -------- --------
Net loss attributable to common stockholders ................. ($ 1,423) ($ 7,751) ($ 4,468) ($12,578)
======== ======== ======== ========

Basic and diluted net loss per share (Note 1) ................ ($ 0.03) ($ 1.08) ($ 0.10) ($ 1.83)
======== ======== ======== ========

Shares used in computing basic and diluted net loss
per share ................................................. 44,910 7,182 44,215 6,869
======== ======== ======== ========

Pro forma basic and diluted net loss per share (Note 1) ...... ($ 0.03) ($ 0.12) ($ 0.10) ($ 0.22)
======== ======== ======== ========

Shares used in computing pro forma basic and diluted
net loss per share ........................................ 44,910 29,002 44,215 28,000
======== ======== ======== ========
</TABLE>

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

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INTERWOVEN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------
2000 1999
--------- ---------
(unaudited)
<S> <C> <C>
Cash flows used in operating activities:
Net loss..................................................................... $ (4,468) $ (6,228)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization.............................................. 916 296
Amortization of deferred stock-based compensation.......................... 1,450 1,668
Amortization of acquired intangible assets................................. 103 -
Issuance of Common Stock for services...................................... - 27
Provisions for doubtful accounts........................................... 212 18
Changes in assets and liabilities:
Accounts receivable....................................................... (18,777) 502
Prepaid expenses and other assets......................................... (1,697) (114)
Accounts payable.......................................................... 1,295 1,005
Accrued liabilities....................................................... 8,403 182
Deferred revenue.......................................................... 14,178 448
--------- ---------
Net cash provided by (used in) operating activities...................... 1,615 (2,196)
--------- ---------

Cash flows from investing activities:
Purchase of property and equipment........................................... (3,962) (561)
Purchases of investments..................................................... (145,586) -
Maturities of investments.................................................... 29,118 -
--------- ---------
Net cash used in investing activities.................................... (120,430) (561)

Cash flows from financing activities:
Proceeds from exercise of Series B warrants into Common Stock................ 10 -
Proceeds from Series E Preferred Stock, net.................................. - 18,462
Proceeds from issuance of Common Stock through stock option & ESPP plan...... 2,730 245
Proceeds from issuance of Common Stock for follow-on offering................ 152,388 -
Repayment of stockholders loans.............................................. 97 240
Repurchase of Common Stock................................................... - (5)
Principal payments of debt and leases........................................ - (4)
--------- ---------
Net cash provided by financing activities................................ 155,225 18,938
--------- ---------

Net increase in cash and cash equivalents..................................... 36,410 16,181

Cash and cash equivalents at beginning of period.............................. 10,983 9,022
--------- ---------

Cash and cash equivalents at end of period.................................... $ 47,393 $ 25,203
--------- ---------

Supplemental cash flow disclosures:
Cash paid for interest....................................................... $ - $ 64
--------- ---------
</TABLE>

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

5
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INTERWOVEN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. The Company and Summary of Significant Accounting Policies:

The Company

Interwoven, Inc. (the "Company") is a leading provider of software
products and services that help businesses and other organizations manage the
information that makes up the content of their web sites. In the Internet
industry this is often referred to as "web content management." The Company's
flagship software product, TeamSite, is designed to help customers develop,
maintain and extend large web sites that are essential to their businesses. The
Company also markets and sells its software products and services through its
wholly-owned subsidiaries in the United Kingdom and Australia. In the quarter
ended June 30, 2000, the Company incorporated wholly-owned subsidiaries in
Germany, Singapore and Hong Kong.

Basis of Presentation

The unaudited interim condensed consolidated financial statements have
been prepared on the same basis as the annual consolidated financial statements
and, in the opinion of management, reflect all adjustments, which include only
normal recurring adjustments, necessary to present fairly the Company's
financial position, results of operations and cash flows as of June 30, 2000 and
1999. These condensed consolidated financial statements and notes thereto are
unaudited and should be read in conjunction with the Company's audited financial
statements and related notes included in the Company's 1999 Annual Report on
Form 10-K. The results of operations for the six months ended June 30, 2000 are
not necessarily indicative of results that may be expected for any other interim
period or for the full fiscal year.

Revenue recognition

In October 1997 and March 1998, the American Institute of Certified
Public Accountants ("AICPA") issued Statement of Position No. 97-2, "Software
Revenue Recognition" ("SOP No. 97-2") and Statement of Position No. 98-4,
"Deferral of the Effective Date of a Provision of SOP No. 97-2" ("SOP No. 98-
4"). SOP 98-4 deferred for one year the application of certain provisions of SOP
97-2. In December 1998, the AICPA issued Statement of Position No. 98-9,
"Modification of SOP No. 97-2 with Respect to Certain Transactions" ("SOP No.
98-9"), which is effective for transactions entered into beginning April 1,
1999. SOP 98-9 extends the effective date of SOP 98-4 and provides additional
interpretive guidance. The adoption of SOP 97-2, SOP 98-4 and SOP 98-9 have not
had and are not expected to have a material impact on the Company's results of
operations, financial position or cash flows.

The Company's revenues are derived from licenses of its software
products and from services the Company provides to its customers. Revenues are
recognized for the various contract elements based upon vendor-specific
objective evidence of fair value of each element.

License revenues are recognized when persuasive evidence of an
agreement exists, the product has been delivered, no significant post-delivery
obligations remain, the license fee is fixed or determinable and collection of
the fee is probable. The Company does not offer product return rights to
resellers or end users.

Services revenues consist of professional services and maintenance
fees. Professional services primarily consists of software installation and
integration, business process consulting and training. Professional services are
billed on a time and materials basis and revenues are recognized as the services
are performed. Maintenance agreements are typically priced based on a percentage
of the product license fee and have a one-year term, renewable annually.
Services provided to customers under maintenance agreements include technical
product support and unspecified product upgrades. Deferred revenues from
advanced payments for maintenance agreements are recognized ratably over the
term of the agreement, which is typically one year.

Principles of consolidation

The condensed consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries after elimination of all
significant intercompany accounts and transactions.

6
<PAGE>

INTERWOVEN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Use of estimates

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

Fair value of instruments

The Company's financial instruments, including cash and cash
equivalents, short-term investments, long-term investments, accounts receivable
and accounts payable, are carried at cost, which approximates fair value due to
the short-term maturity of these instruments. Debt and capital lease obligations
are carried at cost, which approximates fair value due to the proximity of the
implicit rates of these financial instruments and the prevailing market rates
for similar instruments.

Comprehensive income

Effective January 1, 1998, the Company adopted the provisions of SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards
for reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. As of June 30, 2000 and 1999, the
Company had not had any transactions that are required to be reported in
comprehensive income.

Segment information

Effective January 1, 1998, the Company adopted the provisions of SFAS
No. 131, "Disclosure About Segments of an Enterprise and Related Information."
The Company identifies its operating segment based on business activities,
management responsibility and geographic location. During all periods presented,
the Company operated in a single business segment. Through June 30, 2000,
foreign operation revenues or investments in foreign operation long-lived assets
have not been significant.

Cash, cash equivalents and investments

The Company considers all highly liquid investments with a maturity
from date of purchase of three months or less to be cash equivalents. Cash and
cash equivalents consist primarily of cash on deposit with banks and high
quality money market instruments. All other liquid investments are classified as
short-term investments and long-term investments. Short-term investments and
long-term investments consist of commercial paper and corporate bonds.

The Company determines the appropriate classification of investment
securities at the time of purchase and reevaluates such designation as of each
balance sheet date. At June 30, 2000, all investment securities were designated
as available-for-sale. Available-for-sale securities are carried at fair value,
using available market information and appropriate valuation methodologies, with
unrealized gains and losses reported in stockholders' equity.

Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in the
statement of operations. There were no such transactions in the six months
ended June 30, 2000. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in interest income within the consolidated
statement of operations.

At June 30, 2000, the Company's available-for-sale securities consisted
of commercial paper $55.5 million, corporate notes $7.1 million, corporate bonds
$40.6 million, foreign debt securities $4.7 million, municipal bonds $7.5
million, medium term notes $9.3 million, United States government agencies
$81.4 million and money market funds $15.1 million. Of these securities, $43.6
million, $119.3 million and $58.3 million was classified as cash equivalents,
short-term investments and long-term

7
<PAGE>

investments, respectively. The estimated fair value of investments classified by
the date of contractual maturity due within one year is $162.9 million and due
after one year is $58.3 million.

As of June 30, 2000 the difference between the fair value and the
amortized cost of available-for-sale securities was insignificant; therefore, no
unrealized gains or losses were recorded in stockholders' equity. For the six
months ended June 30, 2000, there were no realized gains and losses.

Note 2. Net loss per share

The Company computes net loss per share in accordance with SFAS No.
128, "Earnings per Share" and SEC Staff Accounting Bulletin ("SAB") No. 98.
Under the provisions of SFAS No. 128 and SAB No. 98, basic net loss per share is
computed by dividing the net loss attributed to common stockholders for the
period by the weighted average number of shares of common stock outstanding
during the period excluding shares of common stock subject to repurchase. Such
shares of common stock subject to repurchase aggregated 3,242,534 (unaudited)
and 4,872,646 (unaudited) as of June 30, 2000 and 1999, respectively.

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

<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------------------------------
2000 1999 2000 1999
----------------------- --------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Numerator:
Net loss attributable to common stockholders..... (1,423) (7,751) (4,468) (12,578)
Denominator:
Weighted average shares.......................... 48,153 12,055 47,721 11,097
Weighted average unvested common stock subject to
repurchase................................... (3,243) (4,873) (3,506) (4,228)
------- ------- ------- -------
Denominator for basic and diluted calculation.... 44,910 7,182 44,215 6,869
Net loss per share:
Basic and diluted................................ ($ 0.03) ($ 1.08) ($ 0.10) ($ 1.83)
====== ======= ======= =======
</TABLE>

Note 3. Pro forma net loss per share

Pro forma net loss per share is computed using the weighted average
number of shares of common stock outstanding, including the pro forma effects of
the exercise of warrants and automatic conversion of the Company's Series A, B,
C, D and E Preferred Stock into shares of common stock effective upon the
closing of the Company's initial public offering as if such conversion occurred
at the beginning of the period, or at the date of issuance, if later. The
resulting pro forma adjustment for the three months ended June 30, 2000 and 1999
and the six months ended June 30, 2000 and 1999 includes (i) an increase in the
weighted average shares used to compute the basic net loss per share of 0
(unaudited), 21,818,732 (unaudited), 0 (unaudited) and 21,130,161 (unaudited),
respectively, and (ii) a decrease in the net loss attributable to common
stockholders for the accretion of mandatorily redeemable convertible preferred
stock of $0, $4,224,000 (unaudited), $0 and $6,350,000 (unaudited),
respectively. The calculation of diluted net loss per share excludes potential
shares of common stock as their effect would be antidilutive. Pro forma
potential common stock consists of common stock subject to repurchase rights
shares of common stock issuable upon the exercise of stock options.

8
<PAGE>

Note 4. Follow-on offering

In February 2000, the Company completed its follow-on offering of
6,000,000 shares of common stock at $80.50. The Company sold 2,000,000 shares in
this offering and selling stockholders sold 4,000,000 shares. Realized net
proceeds to the Company were $152.4 million.

Note 5. Stock Split

On June 1, 2000 the Company's Board of Directors effected a two-for-one
stock split of the outstanding shares of common stock in the form of a stock
dividend. These shares were distributed on July 13, 2000. All share and per
share information included in these consolidated financial statements have been
retroactively adjusted to reflect this stock split.

Note 6. 2000 Stock Incentive Plan

In May 2000, the Company's Board of Directors adopted the 2000 Stock
Incentive Plan and reserved 2,000,000 shares of common stock for issuance upon
exercise of stock options granted thereunder.

Note 7. Recent Pronouncements

In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging
Activity", which was subsequently amended by Statement No. 137 (SFAS 137),
"Accounting for Derivative Instruments and Hedging Activities: Deferral of
Effective Date of FASB 133" and Statement No.138 (SFAS 138), "Accounting for
Certain Derivative Instruments and Certain Hedging Activities: an amendment of
FASB Statement No. 133". SFAS 137 requires adoption of SFAS 133 in years
beginning after June 15, 2000. SFAS 138 establishes accounting and reporting
standards for derivative instruments and addresses a limited number of issues
causing implementation difficulties for numerous entities. The Statement
requires the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be recorded at fair value through
earnings. If the derivative qualifies as a hedge, depending on the nature of the
exposure being hedged, changes in the fair value of derivatives are either
offset against the change in fair value of hedged assets, liabilities, or firm
commitments through earnings or are recognized in other comprehensive income
until the hedged cash flow is recognized in earnings. The ineffective portion of
a derivative's change in fair value is recognized in earnings. The Statement
permits early adoption as of the beginning of any fiscal quarter. SFAS 133 will
become effective for the Company's first fiscal quarter in 2001 and the Company
does not expect adoption to have a material effect on its financial statements.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements". SAB 101 summarizes certain aspects of the staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. On June 26, 2000, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 A (SAB 101 A), which extends the transition
provision of SAB 101 to December 31, 2000 for a calendar year company. The
Company does not expect the adoption of SAB 101 will have a material impact on
its consolidated financial statements.

In March 2000, the FASB issued Interpretation No. 44, (FIN 44),
"Accounting for Certain Transactions Involving Stock Compensation - an
Interpretation of APB 25". This Interpretation clarifies (a) the definition of
employee for purposes of applying Opinion 25, (b) the criteria for determining
whether a plan qualifies as a noncompensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 is effective July 1, 2000, however
certain conclusions in this Interpretation cover specific events that occur
after either December 15, 1998, or January 12, 2000. To the extent that this
Interpretation covers events occurring during the period after December 15,
1998, or January 12, 2000, but before the effective date of July 1, 2000, the
effects of applying this Interpretation are recognized on a prospective basis
from July 1, 2000. Interwoven is currently assessing the impact, if any, of
adopting this interpretation.

Note 8. Subsequent Event

In July 2000, the Company acquired Neonyoyo, Inc. ("Neonyoyo"), a
leading developer of wireless technology which delivers targeted XML content to
handheld devices. The Company issued approximately 1.1 million shares of its
common stock and agreed to pay up to approximately $9.9 million cash in
exchange for the assets, liabilities and capital stock of Neonyoyo. Also, in
connection with this acquisition, the Company assumed all outstanding options to
purchase common stock of Neonyoyo and reserved 16,929 shares of its common stock
and approximately $150,000 for issuance or payment upon exercise of these
options. This transaction will be accounted for as a purchase with any excess of
the purchase price over the fair value of tangible net assets being allocated to
intangible assets that will be amortized over appropriate useful lives.

9
<PAGE>

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

This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, including statements regarding our expectations, beliefs,
intentions or strategies regarding the future. Forward-looking statements are
identified by words such as "believes", "anticipates", "expects", "intends",
"will", "may", and other similar expressions. All forward-looking statements
included in this document are based on the information available to us on the
date hereof, and we assume no obligation to update any such forward-looking
statements. Actual results may differ materially from the results discussed on
this report. Factors that might cause such a difference include, but are not
limited to, those discussed in "Factors That May Affect Future Results". Readers
are urged to review and consider carefully the various disclosures made by us in
this report and in our other reports filed with the Securities and Exchange
Commission, including our 1999 Annual Report on Form 10-K, that advise
interested parties of risks and uncertainties that affect our business.

The following discussion and analysis of the financial condition and
results of operations should be read in conjunction with our Financial
Statements and Notes appearing elsewhere in this Form 10-Q.

Overview

Interwoven was incorporated in March 1995 to provide software products
and services for web content management. Designed specifically for the web, our
products allow large teams of people across an enterprise to contribute and edit
web content on a collaborative basis, reducing the time-to-web for critical
eBusiness initiatives. From March 1995 through March 1997, we were a development
stage company conducting research and development for our initial products. In
May 1997, we shipped the first version of our principal product, TeamSite. We
subsequently developed and released enhanced versions of TeamSite and have
introduced related products. 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. We are headquartered in
Sunnyvale, California. We have domestic offices in the metropolitan area of ten
states. We also have international offices in 7 countries from the Pacific Rim
to Western Europe and Canada. Our revenues to date have been derived primarily
from accounts in North America.

We derive revenues from the license of our software products and from
services we provide to our customers. To date, we have derived virtually all of
our license revenues from licenses of TeamSite. License revenues are recognized
when persuasive evidence of an agreement exists, the product has been delivered,
no significant post-delivery obligations remain, the license fee is fixed or
determinable and collection of the fee is probable. Services revenues consist of
professional services and maintenance fees. Professional services primarily
consist of software installation and integration, business process consulting
and training. We generally bill our professional services customers on a time
and materials basis and recognize revenues as the services are performed.
Maintenance agreements are typically priced based on a percentage of the product
license fee, and typically have a one-year term that is renewable annually.
Services provided to customers under maintenance agreements include technical
product support and an unspecified number of product upgrades as released by us
during the term of a maintenance agreement. Revenues from maintenance support
agreements are recognized ratably over the term of the agreement.

Since inception, 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 an
administrative organization. As a result, we have incurred net losses in each
quarter since inception and, as of June 30, 2000, had an accumulated deficit of
$30.4 million. We anticipate that our cost of services revenues and operating
expenses will increase substantially in future quarters as we grow our service
organization to support an increased level and expanded number of services
offered, increase our sales and marketing operations, develop new distribution
channels, fund greater levels of research and development, and improve
operational and financial systems. Accordingly, we expect to incur additional
losses for the foreseeable future as we continue to expand our operations. In
addition, our limited operating history makes the prediction of future results
of operations difficult and, accordingly, there can be no assurance that we will
achieve or sustain profitability.

In July 2000, we acquired Neonyoyo, Inc. ("Neonyoyo"), a leading
developer of wireless technology which delivers targeted XML content to handheld
devices. We issued approximately 1.1 million shares of common stock and agreed
to pay up to approximately $9.9 million cash in exchange for the assets,
liabilities and capital stock of Neonyoyo. Also, in connection with this
acquisition, we assumed all outstanding options to purchase common stock of
Neonyoyo and reserved 16,929 shares of common stock and approximately $150,000
for issuance or payment upon exercise of these options. This transaction will
be accounted for as a purchase with any excess of the purchase price over the
fair value of tangible net assets being allocated to intangible assets that will
be amortized over appropriate useful lives.

On June 1, 2000 our Board of Directors effected a two-for-one stock
split of the outstanding shares of common stock. These shares were distributed
on July 13, 2000. All share and per share information included in this report
on Form 10-Q have been retroactively adjusted to reflect this stock split.

10
<PAGE>

Results of Operations

Our license and services revenues have grown in each of the last ten
quarters, and in the six months ended June 30, 2000, except that our license
revenues declined in the three months ended March 31, 1999 from that in the
three months ended December 31, 1998. The decline in that period reflected the
unusually high revenues in the prior period, due in part to a few large license
sales in that period.

The increase in services revenues in the three and six months ended
June 30, 2000 reflects an increase in both professional services and maintenance
fees, generated from a greater number of customers which licensed our products
in prior periods, and it reflects an increase in the number of professional
services staff and a higher effective staff utilization rate.

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

o the size of customer orders and the timing of product and service
deliveries;

o variability in the mix of products and services sold;

o our ability to retain our current customers and attract new
customers;

o the amount and timing of operating costs relating to expansion of
our business, including our planned international expansion;

o the announcement or introduction of new products or services by us
or our competitors;

o our ability to attract and retain personnel, particularly
management, engineering and sales personnel and technical
consultants;

o our ability to upgrade and develop our systems and infrastructure
to accommodate our growth; and

o costs related to acquisition of technologies or businesses.

As a result of these and other factors, we believe that period-to-period
comparisons of our results of operations may not be meaningful and should not be
relied upon as indicators of our future performance.

11
<PAGE>

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

<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
June 30, June 30,
-------------------------- --------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
License 64 % 65 % 65 % 65
Services 36 35 35 35
---------- --------- --------- -------
Total revenues 100 100 100 100

Cost of revenues:
License 1 4 1 2
Services 32 30 33 29
---------- --------- --------- -------
Total cost of revenues 33 34 34 31

Gross profit 67 66 66 69

Operating expenses:
Research and development 13 32 14 34
Sales and marketing 59 101 63 104
General and administrative 12 22 12 25
Amortization of deferred stock-based compensation 3 36 4 33
Amortization of acquired intangible assets 0 0 0 0
---------- --------- --------- -------
Total operating expenses 87 191 93 196
---------- --------- --------- --------

Loss from operations (20) (125) (27) (127)
Interest income and other income (expenses), net 14 3 15 3
---------- --------- --------- --------

---------- --------- --------- -------
Net loss (6) (122) (12) (124)
========== ========= ========= =======
</TABLE>

Three months ended June 30, 1999 and 2000

Revenues

Total revenues increased 736% from $2.9 million for the three months
ended June 30, 1999 to $24.3 million for the three months ended June 30, 2000.
This increase reflects sales to a larger number of new customers and at a higher
average sales price. The number of new customers increased from 23 in the three
months ended June 30, 1999 to 108 in the three months ended June 30, 2000, and
the average sales price increased from $148,000 to $325,000. Our ability to
attract new customers was a result of our developing a larger and more
experienced sales and marketing staff, which numbered 57 persons in the three
months ended June 30, 1999 and 180 persons in the three months ended June 30,
2000. The increase in average sales price was a result of larger numbers of user
seats being licensed in the average new order, expanded product configurations,
and price increases between the comparable periods.

License. License revenues increased 712% from $1.9 million for the
three months ended June 30, 1999 to $15.4 million for the three months ended
June 30, 2000. License revenues represented 65% and 64% of total revenues,
respectively, in those periods. This increase in license revenues in absolute
dollars reflects the same factors that caused total revenues to increase from
period to period.

Services. Services revenues increased 780% from $1.0 million for the
three months ended June 30, 1999 to $8.8 million for the three months ended June
30, 2000. Services revenues represented 35% and 36% of total revenues,
respectively, in those periods. The increase in services revenues reflects a
$5.0 million increase in professional services fees, a $1.9 million increase in
maintenance fees and a $938,000 increase in training fees. The increased
<PAGE>

professional services and maintenance fees were generated by an expanded number
of customers which licensed our products.

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 93%
from $104,000 for the three months ended June 30, 1999 to $201,000 for the three
months ended June 30, 2000. Cost of license revenues represented 5% and 1% of
license revenues in the three months ended June 30, 1999 and June 30, 2000,
respectively. The increase in cost of license revenues was attributable to an
increase in royalties paid to third party software vendors as well as an
increase in the volume of products shipped. The decrease in cost of license
revenues as a percentage of license revenues relates to a small variable cost
component of cost of license revenues that increases to a lesser extent than the
license revenue growth.

We expect cost of license revenues to increase in absolute dollar
amounts in the future. We expect cost of license revenues as a percentage of
license revenue to vary from period to period depending upon the timing of
payments to third party software vendors and amounts of license revenue
recognized in each period.

Services. Cost of services revenues consists primarily of salary and
related costs of our professional services, training, maintenance and support
personnel, as well as subcontractor expenses. Cost of services revenues
increased 799% from $880,000 for the three months ended June 30, 1999 to $7.9
million for the three months ended June 30, 2000. Cost of services revenues
represented 88% and 89% of services revenues, respectively, in those periods.
This increase in cost of services revenues was attributable to an increase in
the number of in-house services personnel from 21 to 137, and a $2.6 million
increase in subcontractor expenses.

We expect our cost of services revenues to increase for the foreseeable
future as we continue to expand our services staff and consulting organizations.
Since services revenues have lower gross margins than license revenues, this
expansion will reduce our gross margins if our license revenues do not increase
significantly. We expect cost of services revenues as a percentage of services
revenues to vary from period to period depending on whether the services are
performed by our in-house staff or by subcontractors, and on the overall
utilization rates of our in-house professional services staff. Furthermore, the
utilization of in-house staff or sub-contractors is affected by the mix of
services we provide.

Gross Profit

Gross profit increased 742% from $1.9 million for the three months
ended June 30, 1999 to $16.2 million for the three months ended June 30, 2000.
Gross profit represented 66% and 67% of total revenues, respectively, in those
periods. This increase in absolute dollar amounts reflects increased license and
services revenues from a growing customer base. The increase in gross profit
percentage was a result of an improvement in gross margin of our professional
services organization. We have made and we will continue to make investments in
our professional services organization to increase the capacity of that
organization to meet the demand for services from our customers. We expect gross
profit as a percentage of total revenues to fluctuate from period to period
primarily as a result of changes in the relative proportion of license and
services revenues.

Operating Expenses

Research and Development. Research and development expenses consist
primarily of personnel and related costs to support product development
activities. Research and development expenses increased 246% from $922,000 for
the three months ended June 30, 1999 to $3.2 million for the three months ended
June 30, 2000, representing 32% and 13% of total revenues in those periods,
respectively. This increase in absolute dollar amounts was due to increases in
the number of our product development personnel, which grew from 25 to 52
persons, to increased use of subcontractors, and higher associated wages,
salaries and recruitment costs. The decrease in research and development
expenses as a percentage of total revenues relates to a higher growth rate in
total revenues, attributable to our rapidly increasing revenue base, when
compared to the growth rate in research and development expenses. We believe
that continued investment in research and development is critical to our
strategic objectives, and we expect that the dollar amounts of research and
development expenses will increase in future periods. We expect that the
percentage of total revenues represented by research and development expenses
will fluctuate from period to period depending primarily on when we hire new
research and development personnel as well as the size and timing of product
development projects. To date, all software development costs have been expensed
in the period incurred.

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 increased 385% from
$2.9 million for the three months ended June 30, 1999 to $14.2 million for the
three months ended June 30, 2000, representing 101% and 59% of total revenues,
respectively, in those periods. This increase in absolute dollar amounts
reflects increases in sales and marketing personnel costs of $5.7 million,
higher sales commissions and bonuses of $4.9 million and increased marketing-
related costs of $660,000. The decrease in sales and marketing expenses as a
percentage of total revenues relates to a higher growth rate in total revenues,
attributable to our rapidly increasing revenue base, when compared to the growth
rate in sales and marketing expenses. We expect that the dollar amounts of sales
and marketing expenses will increase in future periods as we continue to invest
heavily in order to expand our customer base and increase brand awareness. We
also anticipate that the percentage of total revenues represented by sales and
marketing expenses will

13
<PAGE>

fluctuate from period to period depending primarily on when we hire new sales
personnel, the timing of new marketing programs and the levels of revenues in
each period.

General and Administrative. General and administrative expenses consist
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 increased 335% from $646,000 for the three
months ended June 30, 1999 to $2.8 million for the three months ended June 30,
2000, representing 22% and 12% of total revenues, respectively. This increase in
dollar amounts was due to additional staffing of these functions to support
expanded operations during this same period. The decrease in general and
administrative expenses as a percentage of total revenues relates to a higher
growth rate in total revenues, attributable to our rapidly increasing revenue
base, when compared to the growth rate in general and administrative expenses.
We expect general and administrative expenses to increase in absolute dollars in
2000 as we add personnel to support expanding operations, incur additional costs
related to the growth of our business, and continue the reporting requirements
of a public company. We expect that the percentage of total revenues represented
by general and administrative expenses will fluctuate from period to period
depending primarily on when we hire new general and administrative personnel to
support expanding operations as well as the size and timing of expansion
projects.

Amortization of Deferred Stock-Based Compensation. In 1998 and 1999, we
recorded deferred stock-based compensation of $1.9 million and $7.3 million in
connection with stock options granted during 1998 and 1999, respectively. These
amounts represent the difference between the exercise price of stock options
granted during those periods and the deemed fair value of our common stock at
the time of the grants. Amortization of deferred stock-based compensation was
$1.0 million and $617,000 for the three months ended June 30, 1999 and 2000,
respectively.

Amortization of Acquired Intangible Assets. In July 1999, we recorded
intangible assets of approximately $800,000 in connection with the acquisition
of Lexington Software Associates Incorporated. Goodwill related to this
transaction approximated $300,000 and intangible assets related to the workforce
of Lexington Software approximated $500,000 of the purchase price. The total
purchase price for this acquisition was approximately $800,000. 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. Amortization of acquired intangible assets was $51,000 for the three
months ended June 30, 2000.

Interest Income and Other Expenses, Net

Interest income and other expenses, net, increased from $89,000 for the
three months ended June 30, 1999 to $3.3 million for the three months ended June
30, 2000 due to increased interest income earned, proceeds from our initial
public offering in October 1999 and our subsequent public offering in February
2000.

Six months ended June 30, 1999 and 2000

Revenues

Total revenues increased 662% from $5.0 million for the six months
ended June 30, 1999 to $38.1 million for the six months ended June 30, 2000.
This increase reflects sales to a larger number of new customers and at a higher
average sales price. The number of new customers increased from 39 in the six
months ended June 30, 1999 to 188 in the six months ended June 30, 2000, and the
average sales price increased from $151,000 to $311,000. Our ability to attract
new customers was a result of our developing a larger and more experienced sales
and marketing staff, which numbered 57 persons in the six months ended June 30,
1999 and 180 persons in the six months ended June 30, 2000. The increase in
average sales price was a result of larger numbers of user seats being licensed
in the average new order, expanded product configurations and price increases
between the comparable periods.

License. License revenues increased 661% from $3.3 million for the six
months ended June 30, 1999 to $24.8 million for the six months ended June 30,
2000. License revenues represented 65% of total revenues, in both periods. This
increase in license revenues in absolute dollars reflects the same factors that
caused total revenues to increase from period to period.

Services. Services revenues increased 662% from $1.7 million for the

14
<PAGE>

of total revenues in both periods. The increase in services revenues reflects a
$7.2 million increase in professional services fees, a $2.9 million increase in
maintenance fees and a $1.4 million increase in training fees. The increased
professional services and maintenance fees were generated by an expanded number
of customers which licensed our products.

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 124%
from $119,000 for the six months ended June 30, 1999 to $267,000 for the six
months ended June 30, 2000. Cost of license revenues represented 4% and 1% of
license revenues in the six months ended June 30, 1999 and June 30, 2000,
respectively. The increase in cost of license revenues was attributable to an
increase in royalties paid to third party software vendors as well as an
increase in the volume of products shipped. The decrease in cost of license
revenues as a percentage of license revenues relates to a small variable cost
component of cost of license revenues that increases to a lesser extent than the
license revenue growth.

Services. Cost of services revenues consists primarily of salary and
related costs of our professional services, training, maintenance and support
personnel, as well as subcontractor expenses. Cost of services revenues
increased 779% from $1.4 million for the six months ended June 30, 1999 to $12.6
million for the six months ended June 30, 2000. Cost of services revenues
represented 82% and 94% of services revenues, respectively, in those periods.
This increase in cost of services revenues was attributable to an increase in
the number of in-house services personnel from 21 to 137, and a $4.0 million
increase in subcontractor expenses.

Gross Profit

Gross profit increased 632% from $3.5 million for the six months ended
June 30, 1999 to $25.3 million for the six months ended June 30, 2000. Gross
profit represented 69% and 66% of total revenues, respectively, in those
periods. This increase in absolute dollar amounts reflects increased license and
services revenues from a growing customer base. The decrease in gross profit
percentage was a result of the expansion of our professional services
organization. We have made and we will continue to make investments in our
professional services organization to increase the capacity of that organization
to meet the demand for services from our customers. We expect gross profit as a
percentage of total revenues to fluctuate from period to period primarily as a
result of changes in the relative proportion of license and services revenues.

Operating Expenses

Research and Development. Research and development expenses consist
primarily of personnel and related costs to support product development
activities. Research and development expenses increased 217% from $1.7 million
for the six months ended June 30, 1999 to $5.4 million for the six months ended
June 30, 2000, representing 34% and 14% of total revenues in those periods,
respectively. This increase in absolute dollar amounts was due to increases in
the number of our product development personnel, which grew from 25 to 52
persons, to increased use of subcontractors and to higher associated wages,
salaries and recruitment costs. The decrease in research and development
expenses as a percentage of total revenues relates to a higher growth rate in
total revenues, attributable to our rapidly increasing revenue base, when
compared to the growth rate in research and development expenses. We believe
that continued investment in research and development is critical to our
strategic objectives, and we expect that the dollar amounts of research and
development expenses will increase in future periods. We expect that the
percentage of total revenues represented by research and development expenses
will fluctuate from period to period depending primarily on when we hire new
research and development personnel as well as the size and timing of product
development projects. To date, all software development costs have been expensed
in the period incurred.

15
<PAGE>

million and increased marketing-related costs of $1.0 million. The decrease in
sales and marketing expenses as a percentage of total revenues relates to a
higher growth rate in total revenues, attributable to our rapidly increasing
revenue base, when compared to the growth rate in sales and marketing expenses.
We expect that the dollar amounts of sales and marketing expenses will increase
in future periods as we continue to invest heavily in order to expand our
customer base and increase brand awareness. We also anticipate that the
percentage of total revenues represented by sales and marketing expenses will
fluctuate from period to period depending primarily on when we hire new sales
personnel, the timing of new marketing programs and the levels of revenues in
each period.

General and Administrative. General and administrative expenses consist
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 increased 283% from $1.2 million for the six
months ended June 30, 1999 to $4.8 million for the six months ended June 30,
2000, representing 25% and 12% of total revenues, respectively. This increase in
dollar amounts was due to additional staffing of these functions to support
expanded operations during this same period. The decrease in general and
administrative expenses as a percentage of total revenues relates to a higher
growth rate in total revenues, attributable to our rapidly increasing revenue
base, when compared to the growth rate in general and administrative expenses.
We expect general and administrative expenses to increase in absolute dollars in
2000 as we add personnel to support expanding operations, incur additional costs
related to the growth of our business, and continue the reporting requirements
of a public company. We expect that the percentage of total revenues represented
by general and administrative expenses will fluctuate from period to period
depending primarily on when we hire new general and administrative personnel to
support expanding operations as well as the size and timing of expansion
projects.

Amortization of Deferred Stock-Based Compensation. In 1998 and 1999, we
recorded deferred stock-based compensation of $1.9 million and $7.3 million in
connection with stock options granted during 1998 and 1999, respectively. These
amounts represent the difference between the exercise price of stock options
granted during those periods and the deemed fair value of our common stock at
the time of the grants. Amortization of deferred stock-based compensation was
$1.7 million and $1.5 million for the six months ended June 30, 1999 and 2000,
respectively.

Interest Income and Other Expenses, Net

Interest income and other expenses, net, increased from $154,000 for
the six months ended June 30, 1999 to $5.9 million for the six months ended June
30, 2000 due to increased interest income earned, proceeds from our initial
public offering in October 1999 and our subsequent public offering in February
2000.

Liquidity and Capital Resources

Net cash used in operating activities was $2.2 million in the six
months ended June 30, 1999 and net cash provided by operating activities was
$1.6 million in the six months ended June 30, 2000. Net cash provided by
operating activities reflected decreasing net losses offset in part by an
increase in accounts receivable, accrued liabilities and deferred revenue. Net
cash used in operating activities in prior periods primarily reflected net
losses.

16
<PAGE>

During the three months ended June 30, 1999 and June 30, 2000 investing
activities have included purchases of property and equipment, principally
computer hardware and software for our growing number of employees. Cash used to
purchase property and equipment was $561,000 and $4.0 million during the six
months ended June 30, 1999 and June 30, 2000, respectively. We expect that
capital expenditures will increase with our anticipated growth in operations,
infrastructure and personnel. As of June 30, 2000 we had no material capital
expenditure commitments.

During the six months ended June 30, 2000, our investing activities
included purchases and maturities of short-term and long-term investments. As of
June 30, 2000, we have not invested in derivative securities or any other
financial instruments that involve a high level of complexity or risk. We expect
that, in the future, cash in excess of current requirements will continue to be
invested in high credit quality, interest-bearing securities.

Net cash provided by financing activities in the six months ended June
30, 1999 and 2000 was $18.9 million and $155.2 million, respectively. Net cash
provided by financing activities reflected primarily the proceeds of issuances
of preferred stock and common stock, respectively, in each of these periods.

Prior to our initial public offering we raised a total of $37.0 million
from the sale of preferred stock, net of issuance costs, which was the primary
source of financing for our operations.

In October 1999, we completed our initial public offering of 7,245,000
shares of our common stock, including the exercise of the underwriters'
overallotment option, at $8.50 per share. Realized net proceeds to us were
approximately $56.2 million.

At June 30, 2000, our sources of liquidity consisted of $225.6 million
in cash, cash equivalents and investments and $162.0 million in working capital.
We have a $5.0 million line of credit with Silicon Valley Bank, which bears
interest at the bank's prime rate, which was 9.00% at June 30, 2000. At June 30,
2000, the line of credit was unused. The line of credit is secured by all of our
tangible and intangible assets, and maintains minimum quarterly unrestricted
cash and equivalents of $75,000,000 as the financial covenants. We intend to
maintain the line of credit. As of June 30, 2000, we were in compliance with all
related financial covenants and restrictions under the line of credit.

We believe that the current cash, cash equivalents, investments and
funds available under existing credit facilities and the net proceeds from the
sale of the common stock in our initial public offering and follow-on offering,
will be sufficient to meet our working capital requirements for at least the
next 12 months. Thereafter, we may require additional funds to support our
working capital requirements or for other purposes and may seek to raise
additional funds through public or private equity financing or from other
sources. There can be no assurance that additional financing will be available
on acceptable terms, if 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 have a material adverse
effect on our business, financial condition and operating results.

17
<PAGE>

FACTORS THAT MAY AFFECT FUTURE RESULTS

Some of the statements under "Factors That May Affect Future Results,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and elsewhere in this Form 10-Q constitute forward-looking
statements. In some cases, you can identify forward-looking statements by terms
such as "may," "will," "should," "expect," "plan," "anticipate," "believe,"
"estimate," "predict," "potential," "continue" or the negative of these terms or
other comparable terminology. The forward-looking statements contained in this
Form 10-Q involve known and unknown risks, uncertainties and other factors that
may cause industry trends or our 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.
These factors include those listed under "Factors That May Affect Future
Results" and elsewhere in this Form 10-Q.

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. We are under no duty to update any of the
forward-looking statements after the date of this Form 10-Q to conform these
statements to actual results. You should not place undue reliance on these
forward-looking statements, which apply only as of the date of this Form 10-Q.

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 risks 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.

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

We were incorporated in March 1995 and have a limited operating
history. We 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 services. In
evaluating our common stock, you should consider the risks and difficulties
frequently encountered by early stage companies in new and rapidly evolving
markets, particularly those companies whose businesses depend on the Internet.
These risks and difficulties, as they apply to us in particular, include:

. potential fluctuations in operating results and uncertain growth
rates;

. limited market acceptance of our products;

. concentration of our revenues in a single product;

. our dependence on a small number of orders for most of our revenue;

. our need to expand our direct sales forces and indirect sales
channels;

. our need to manage rapidly expanding operations; and

. our need to attract and train qualified personnel.

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

We have incurred net losses in each quarter since our inception, and we
expect our net losses to increase. We incurred net losses of $2.9 million in
1997, $6.3 million in 1998, $15.7 million in 1999 and $4.5 million for the six
months ended June 30, 2000. As of June 30, 2000, we had an accumulated deficit
of approximately $30.4 million. To compete effectively, we plan to continue to
invest aggressively to expand our sales and marketing, research and development,
and professional services organizations.

18
<PAGE>

As a result, if we are to achieve profitability we will need to increase our
revenues significantly, particularly our license revenues. We cannot predict
when we will become profitable, if at all.

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.
It is possible that in some future periods our results of operations may not
meet or exceed the expectations of public market analysts and investors. If this
occurs, the price of our common stock is likely to decline.

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

We expect the competition in the market in which we operate to persist
and intensify in the future. 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:

. potential customers that utilize in-house development efforts; and

. developers of software that directly addresses the need for web
content management, such as Vignette.

In addition, other enterprise software companies such as Documentum and
Eprise have announced plans to enter our market. We also face potential
competition from companies--for example, Microsoft and IBM--that may decide in
the future to enter our market. Many 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. Barriers to entering the web content management software market are
relatively low.

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 web content management software in which we sell is new
and rapidly evolving. We expect that we will continue to need intensive
marketing and sales efforts 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 a viable market for our products will emerge, or if it
does emerge, that it will be sustainable.

Our lengthy sales cycle makes it particularly difficult for us to forecast
revenue, requires us to incur high costs of sales, and aggravates the
variability of quarterly fluctuations.

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. 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 achieve market
acceptance we are likely to experience larger 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,

19
<PAGE>

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.

We depend on our direct sales force to sell our products, so future growth will
be constrained by our ability to hire and train new sales personnel.

We sell our products primarily through our direct sales force, and we
expect to continue to do so in the future. Our ability to sell more products is
limited by our ability to hire and train direct sales personnel, and we believe
that there is significant competition for direct sales personnel with the
advanced sales skills and technical knowledge that we need. Some of our
competitors may have greater resources to hire personnel with that skill and
knowledge. If we are not able to hire experienced and competent sales personnel,
our business would be harmed. Furthermore, because we depend on our direct sales
force, any turnover in our sales force can significantly harm our operating
results. Sales force turnover tends to slow sales efforts until replacement
personnel can be recruited and trained to become productive. See "--We must
attract and retain qualified personnel, which is particularly difficult for us
because we compete with other Internet-related software companies and are
located in the San Francisco Bay area where competition for personnel is
extremely intense."

If we do not continue to develop and maintain our indirect sales channels, we
will be less likely to increase our revenues.

If we do not develop indirect sales channels, we may miss sales
opportunities that might be available through these other channels. For example,
domestic and international resellers may be able to reach new customers more
quickly or more effectively than our direct sales force. Although we are
currently investing and plan to continue to invest significant resources to
develop and maintain these indirect sales channels, we may not succeed in
establishing a channel that can market our products effectively and provide
timely and cost-effective customer support and services. In addition, we may not
be able to manage conflicts across our various sales channels, and our focus on
increasing sales through our indirect channel may divert management resources
and attention from direct sales.

We must attract and retain qualified personnel, which is particularly difficult
for us because we compete with other Internet-related software companies and are
located in the San Francisco Bay area where competition for personnel is
extremely intense.

Our success depends on our ability to attract and retain qualified,
experienced employees. We compete for experienced engineering, sales and
consulting personnel with Internet professional services firms, software
vendors, consulting and professional services companies. It is also particularly
difficult to recruit and retain personnel in the San Francisco Bay area, where
we are located. Although we provide compensation packages that include incentive
stock options, cash incentives and other employee benefits, the volatility and
current market price of our common stock may make it difficult for us to
attract, assimilate and retain highly qualified employees in the future. In
addition, our customers generally purchase consulting and implementation
services. While we have recently established relationships with some third-party
service providers, we continue to be the primary provider of these services. It
is difficult and expensive to recruit, train and retain qualified personnel to
perform these services, and we may from time to time have inadequate levels of
staffing to perform these services. As a result, our growth could be limited due
to our lack of capacity to provide those services, or we could experience
deterioration in service levels or decreased customer satisfaction, any of which
would harm our business.

If we do not improve our operational systems on a timely basis, we will be more
likely to fail to manage our growth properly.

We have expanded our operations rapidly in recent years. We intend to
continue to expand our operational systems for the foreseeable future to pursue
existing and potential market opportunities. This rapid growth places a
significant demand on management and operational resources. In order to manage
our growth, we need to implement and improve our operational systems, procedures
and controls on a timely basis. If we fail to implement and improve these
systems in a timely manner, our business will be seriously harmed.

20
<PAGE>

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

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

Our products currently operate on the Sun Solaris operating system and
Microsoft NT and Windows 2000 Platforms. In addition, our products are required
to interoperate with leading web content authoring tools and web 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 Internet 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 Internet-related applications, could also harm our
business.

We have no significant experience conducting operations internationally, which
may make it more difficult than we expect to expand overseas and may increase
the costs of doing so.

We derive substantially all of our revenues from sales to North
American customers. We are expanding our international operations and plan to do
so for the foreseeable future. There are many barriers to competing successfully
in the international arena, including:

. costs of customizing products for foreign countries;

. restrictions on the use of software encryption technology;

. dependence on local vendors;

. compliance with multiple, conflicting and changing governmental
laws and regulations;

. longer sales cycles; and

. import and export restrictions and tariffs.

As a result of these competitive barriers, we cannot assure you that we
will be able to market, sell and deliver our products and services in
international markets.

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

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. 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. In addition,
our strategic partners may not regard us as significant for their own
businesses. Therefore, 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

21
<PAGE>

products and services. Even if we succeed in establishing these relationships,
they may not result in additional customers or revenues.

If our services revenues do not grow substantially, our total revenues are
unlikely to increase.

Our services revenues represent a significant component of our total
revenues: 21% of total revenues for 1998, 36% of total revenues for 1999 and 35%
of total revenues for the six months ended June 30, 2000. We anticipate that
services revenues will continue to represent a significant percentage of total
revenues in the future. To a large extent, the level of services revenues
depends upon our ability to license products which generate follow-on services
revenue. Additionally, services revenues growth depends on ongoing renewals of
maintenance and service contracts. Moreover, if third-party organizations such
as systems integrators become proficient in installing or servicing our
products, our services revenues could decline. Our ability to increase services
revenues will depend in large part on our ability to increase the capacity of
our professional services organization, including our ability to recruit, train
and retain a sufficient number of qualified personnel.

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 do not have any issued
United States or foreign patents, but we have applied for U.S. patents. It is
possible that a patent will not issue 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 require 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 failure to deliver defect-free software could result in greater 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 revenue 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 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.

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.

22
<PAGE>

Acquisitions may harm our business by being more difficult than expected to
integrate or by diverting management's attention.

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, 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, would divert management time and other resources. We
may have to use a substantial portion of our available cash 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.

If widespread Internet adoption does not continue, or if the Internet cannot
accommodate continued growth, our business will be harmed because it depends on
growth in the use of the Internet.

Acceptance of our products depends upon continued adoption of the
Internet for commerce. As is typical in the case of an emerging industry
characterized by rapidly changing technology, evolving industry standards and
frequent new product and service introductions, demand for and acceptance of
recently introduced products and services are subject to a high level of
uncertainty. To the extent that businesses do not consider the Internet a viable
commercial medium, our customer base may not grow. In addition, critical issues
concerning the commercial use of the Internet remain unresolved and may affect
the growth of Internet use. The adoption of the Internet for commerce,
communications and access to content, particularly by those who have
historically relied upon alternative methods, generally requires understanding
and accepting new ways of conducting business and exchanging information. In
particular, companies that have already invested substantial resources in other
means of conducting commerce and exchanging information may be particularly
reluctant or slow to adopt a new, Internet-based strategy that may render their
existing infrastructure obsolete. If the use of the Internet fails to develop or
develops more slowly than expected, our business may be seriously harmed.

To the extent that there is an increase in Internet use, an increase in
frequency of use or an increase in the required bandwidth of users, the Internet
infrastructure may not be able to support the demands placed upon it. In
addition, the Internet could lose its viability as a commercial medium due to
delays in development or adoption of new standards or protocols required to
handle increased levels of Internet activity. Changes in, or insufficient
availability of, telecommunications or similar services to support the Internet
also could result in slower response times and could adversely impact use of the
Internet generally. If use of the Internet does not continue to grow or grows
more slowly than expected, or if the Internet infrastructure, standards,
protocols or complementary products, services or facilities do not effectively
support any growth that may occur, our business would be seriously harmed.

There is substantial risk that future regulations could be enacted that either
directly restrict our business or indirectly impact our business by limiting the
growth of Internet commerce.

As Internet commerce evolves, we expect that federal, state or foreign
agencies will adopt new legislation or regulations covering issues such as user
privacy, pricing, content and quality of products and services. If enacted,
these laws, rules or regulations could indirectly harm us to the extent that
they impact our customers and potential customers. We cannot predict if or how
any future legislation or regulations would impact our business. Although many
of these regulations may not apply to our business directly, we expect that laws
regulating or affecting commerce on the Internet could indirectly harm our
business.

23
<PAGE>

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

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

. we are authorized to issue "blank check" preferred stock, which
could be issued by our board of directors to increase the number of
outstanding shares and thwart a takeover attempt;

. we provide for the election of only one-third of our directors at
each annual meeting of stockholders, which slows turnover on the
board of directors;

. we limit who may call special meetings of stockholders;

. we prohibit stockholder action by written consent, so all
stockholder actions must be taken at a meeting of our stockholders;
and

. we require advance notice for nominations for election to the board
of directors or for proposing matters that can be acted upon by
stockholders at stockholder meetings.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We develop products in the United States and market our products in
North America, and, to a lesser extent in Europe and the Pacific Rim. As a
result, our financial results could be affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in foreign markets.
Since all of our revenue is currently denominated in U.S. Dollars, a
strengthening of the Dollar could make our products less competitive in foreign
markets. Our interest income and expense is sensitive to changes in the general
level of U.S. interest rates, particularly since the majority of our financial
investments are in cash equivalents and investments. Due to the nature of our
financial investments, we believe that there is no material risk exposure.

Interest Rate Risk

The primary objective of our investment activities is to preserve
principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, we maintain our portfolio of cash
equivalents and short-term and long-term investments in a variety of securities,
including both government and corporate obligations and money market funds. As
of June 30, 2000, approximately 74% of our total portfolio matures in one year
or less, with the reminder maturing in less than two years. See Note 1 of Notes
to Condensed Consolidated Financial Statements. For a tabular presentation of
interest rate risk sensitive instruments by year of maturity, including the
market value and average interest rates for the Company's investment portfolio
as of December 31, 1999, see the Company's 1999 Form 10-K filed with the
Securities and Exchange Commission in March 2000.

We did not hold derivative financial instruments as of June 30, 2000,
and have never held such instruments in the past. In addition, we had no
outstanding debt as of June 30, 2000.

24
<PAGE>

Foreign Currency Risk

Currently the majority of our sales and expenses are denominated in U.S.
Dollars, as a result we have experienced no significant foreign exchange gains
and losses to date. While we do expect to effect some transactions in foreign
currencies in 2000, we do not anticipate that foreign exchange gains or losses
will be significant. We have not engaged in foreign currency hedging activities
to date.

25
<PAGE>

PART II
OTHER INFORMATION

Item 1. Legal Proceedings

Not applicable.

Item 2. Changes in Securities and Use of Proceeds

During the period of this report, we issued to certain former
stockholders of Lexington Software Associates, Inc. ("LSA") 593 shares of common
stock upon net exercise of warrants to purchase Series E Preferred Stock issued
in connection with our acquisition of LSA in July 1999.

The warrants described under this heading became exercisable for common
stock upon the closing of our initial public offering on October 14, 1999, when
all of our preferred stock converted into common stock. These securities were
not registered under the Securities Act of 1933, as amended, in reliance upon
the exemption provided by Section 4(2) of the Securities Act and/or Regulation D
promulgated thereunder for transactions by an issuer not involving a public
offering.

Item 3. Defaults upon Senior Securities

Not applicable.

26
<PAGE>

Item 4. Submission of Matters to a Vote of Securities Holders

We held our Annual Meeting of Stockholders on June 1, 2000.
Descriptions of the matters voted upon and the results of such meeting are set
forth below:

<TABLE>
<CAPTION>
Votes Votes Votes Votes Broker
For Against Withheld Abstained Non-votes
<S> <C> <C> <C> <C> <C>
1. Election of Class 1 directors:
Martin W. Brauns.................. 36,515,906 -- 177,030 -- --
Anthony Zingale................... 36,672,570 -- 20,366 -- --

2. Amendment of the Company's 1999 Equity
Incentive Plan to increase the
number of shares of Common Stock
reserved for issuance thereunder by
2,000,000..................................... 27,140,588 7,296,284 -- 16,480 2,239,584

3. Ratification of the appointment of
PricewaterhouseCoopers as the
Company's independent accountants
for the fiscal year ending
December 31, 2000............................. 36,525,348 152,976 -- 14,612 --
</TABLE>

Item 5. OTHER INFORMATION

On June 1, 2000, our Board of Directors approved a two-for-one Common
Stock split, which is to be effected in the form of a stock dividend.
Stockholders of record on June 22, 2000 (the record date) received one
additional share for every share held on that date. The shares were distributed
on or about July 13, 2000.

In May 2000, our Board of Directors adopted the 2000 Stock Incentive
Plan and reserved 2,000,000 shares of our common stock for issuance upon
exercise of stock options granted thereunder.

Item 6. Exhibits and Reports on Form 8-K

(a) List of Exhibits
Number Exhibit Description
------ -------------------
21.1 Subsidiaries of the Registrant
27.1 Financial Data Schedule (Filed
Electronically)

(b) Reports on Form 8-K : None

27
<PAGE>

SIGNATURE
---------

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

INTERWOVEN, INC.

Dated: August 10, 2000 By: /s/ Martin W. Brauns
--------------------------------------
Martin W. Brauns
President and Chief Executive Officer
(Duly Authorized Officer)

Dated: August 10, 2000 By: /s/ David M. Allen
--------------------------------------
David M. Allen
Senior Vice President and Chief Financial
Officer
(Principal Financial and Accounting
Officer)

28
<PAGE>

EXHIBIT INDEX
-------------

Exhibit
-------

21.1 Subsidiaries of the Registrant.

27.1 Financial Data Schedule.