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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 10-K

|           |  |                                                                                            
|---------- |  | -------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                            
|          
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
	15(d)
	 OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31,
	2001                                               
|          
|or        
|          
|o          |  | 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: 0-20981

Document Sciences Corporation

(Exact name of registrant as specified in its
charter)


|                                                                |  |                                      
|--------------------------------------------------------------- |  | -------------------------------------
|Delaware                                                        |  | 33-0485994                           
|(State or other jurisdiction of
	incorporation or organization) |  | (I.R.S. Employer
	Identification No.)
|                                                               
|6339 Paseo del Lago, Carlsbad,
	California                      |  | 92009                                
|(Address of principal executive
	offices)                       |  | (Zip code)                           

Registrants telephone number, including
area code: (760) 602-1400



---

Securities registered pursuant to
Section 12(b) of the Act: None

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


Common Stock, $.001 par value per
share


(Title of Class)


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

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of
Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.    o

As of February 28, 2002, there were
3,869,364 shares of the Registrants common stock
outstanding and the aggregate market value of such shares held
by non-affiliates of the Registrant (based upon the closing sale
price of such shares on The Nasdaq National Market on
February 28, 2002) was $7,375,355. Shares of common stock
held by each executive officer and director and by each entity
that owns 5% or more of the outstanding common stock have been
excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily a
conclusive determination for other purposes.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates certain information by
reference from Registrants definitive proxy statement
pursuant to Schedule 14A for its 2001 Annual Meeting of
Stockholders to be held on April 23, 2002, which proxy
statement will be filed no later than 120 days after the
close of Registrants fiscal year ended December 31,
2001.



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TABLE OF CONTENTS



|                                           |                                                                                               |  |  |  |  |  |  | 
|------------------------------------------ | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|TABLE OF CONTENTS                         
|A WARNING ABOUT FORWARD-LOOKING STATEMENTS
|PART I                                    
|                                           | Item 1. Business                                                                             
|                                           | Item 2. Properties                                                                           
|                                           | Item 3. Legal Proceedings                                                                    
|                                           | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II                                   
|                                           | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                
|                                           | Item 6. Selected Financial Data                                                              
|                                           | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                           | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|                                           | Item 8. Financial Statements and Supplementary Data                                          
|                                           | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
|PART III                                  
|                                           | Item 10. Directors and Executive Officers of the Registrant                                  
|                                           | Item 11. Executive Compensation                                                              
|                                           | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                                           | Item 13. Certain Relationships and Related Transactions                                      
|PART IV                                   
|                                           | Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|SIGNATURES                                
|EXHIBIT 4.2                               
|EXHIBIT 10.14                             
|EXHIBIT 10.15                             
|EXHIBIT 10.16                             
|EXHIBIT 10.17                             
|EXHIBIT 23.1                              



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TABLE OF CONTENTS

|                                           |  |                                                                                         |   |      |     | 
|------------------------------------------ |  | --------------------------------------------------------------------------------------- | - | ---- | --- | 
|                                           |  |                                                                                         |   | Page
|                                           |  |                                                                                         |   |     
|A Warning About Forward-Looking Statements |  |                                                                                         | 1 |     
|PART I                                    
|Item 1                                     |  | Business                                                                                |   |      | 1   | 
|Item 2                                     |  | Properties                                                                              |   |      | 12  | 
|Item 3                                     |  | Legal Proceedings                                                                       |   |      | 12  | 
|Item 4                                     |  | Submission of Matters to a Vote of Security
	Holders                                    |   |      | 12  | 
|PART II                                   
|Item 5                                     |  | Market for Registrants Common Equity and
	Related Stockholder Matters                  |   |      | 13  | 
|Item 6                                     |  | Selected Financial Data                                                                 |   |      | 13  | 
|Item 7                                     |  | Managements Discussion and Analysis of
	Financial Condition and Results
	of Operations |   |      | 14  | 
|Item 7A                                    |  | Quantitative and Qualitative Disclosures About
	Market Risk                             |   |      | 18  | 
|Item 8                                     |  | Financial Statements and Supplementary Data                                             |   |      | 18  | 
|Item 9                                     |  | Changes in and Disagreements with Accountants on
	Accounting and Financial Disclosures  |   |      | 19  | 
|PART III                                  
|Item 10                                    |  | Directors and Executive Officers of the Registrant                                      |   |      | 19  | 
|Item 11                                    |  | Executive Compensation                                                                  |   |      | 20  | 
|Item 12                                    |  | Security Ownership of Certain Beneficial Owners
	and Management                         |   |      | 20  | 
|Item 13                                    |  | Certain Relationships and Related Transactions                                          |   |      | 20  | 
|PART IV                                   
|Item 14                                    |  | Exhibits, Financial Statement Schedules and
	Reports on Form 8-K                        |   |      | 20  | 
|                                           |  | Signatures                                                                              |   |      | 21  | 
|                                           |  | Financial Statements                                                                    |   |      | F-1 | 

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A WARNING ABOUT FORWARD-LOOKING
STATEMENTS

We make forward-looking statements in this Annual
Report that are subject to risks and uncertainties. These
forward-looking statements include information about possible or
assumed future results of our financial condition, operations,
plans, objectives and performance. Additionally, when we use the
words believe, expect,
anticipate, estimate or similar
expressions, we are making forward-looking statements. Many
possible events or factors could affect our future financial
results and performance. This could cause our results or
performance to differ materially from those expressed in our
forward-looking statements. You should consider these risks when
you review this document, along with the following possible
events or factors:



| |   |                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------
| |  | national, international, regional and local
	economic, competitive and regulatory conditions and developments;
|
| |  | the market for document automation software;                                                                  
|
| |  | market acceptance of enhancements to our existing
	products and introduction of new products;                 
|
| |  | continued expansion of our professional services;                                                             
|
| |  | maintaining our relationships with Xerox
	Corporation; and                                                    
|
| |  | other uncertainties, all of which are difficult
	to predict and many of which are beyond our control.         

Foreseeable risks and uncertainties are described
elsewhere in this report and in detail under Item 1.
Business  Risk Factors. You are cautioned not
to place undue reliance on these forward-looking statements,
which reflect managements analysis only as of the date of
this Annual Report. We undertake no obligation to publicly
release the results of any revision of the forward-looking
statements.




PART I




Item
1.     Business

Document Sciences Corporation develops, markets
and supports a family of document automation software used in
high volume print and transactional electronic publishing
applications. Document automation has become increasingly
important as more companies realize the benefits of producing
personalized documents that include the precise layout of
regulated content, personal financial data and in-context,
one-to-one marketing information. Our document automation
software (our Autographfamily of products) enables
personalized publishing solutions for many industries including
insurance, managed healthcare, financial services, commercial
print services, government, telecommunications and
manufacturing. Our products facilitate an important form of
communication between organizations and their customers by
employing enterprise database assets to produce high-quality,
highly-personalized documents that are ready to print on demand,
to email or to distribute over the web using HTML or Adobe
Systems (Adobe) PDF® technology. Our Autographproducts are licensed to approximately 600 customers
worldwide who collectively produce over one billion customized
pages per month. Our highly portable Autographsoftware
platform enables cost-effective, just-in-time, on demand, high
volume or transactional publishing that is high quality and
fully automated. Our software products are used across a wide
array of computing environments from client/server PC and Unix
configurations to large mainframe computer systems.

Company Formation

We were incorporated in Delaware in October 1991
as a wholly owned subsidiary of Xerox Corporation (Xerox).
Following our initial public offering of stock in September
1996, Xerox ownership was reduced to approximately 62%. As a
result of our tender offer and our exercise of an option to
purchase additional shares from Xerox in April 2001,
Xeroxs ownership interest has been reduced to 19.9%. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Liquidity and
Capital Resources.

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Products

Our Autographfamily of products currently
addresses two major functional areas within the enterprise
content and document automation arena: Document Composition and
Assembly and Regulated Content Management. All of our software
products can be complemented by our professional services
organization.

We generally license our products for one year,
for an initial license fee, after which an annual renewal
license and support fee, usually 15% of the initial license fee,
is required for continued use. We have two additional licensing
models whereby we offer perpetual licenses for our products, as
well as three-year term licenses, after which the license may be
renewed for additional three-year terms, or converted for
perpetual use. We also provide three-year maintenance agreements
that are usually in an amount equal to 15% per year of the
initial license fee. The list price for a three-year license fee
for CompuSet, our core product, is currently $90,000 for a
mainframe installation and ranges down to $45,000 for a PC NT
server installation. Options currently range from $2,000 to
$50,000. A typical new account sale through our direct channel
is approximately $100,000 for software licenses and $75,000 for
professional services.

Document
Composition and Assembly

Composition and Assembly.CompuSet software automates document
composition and assembly using corporate data and variable
content. CompuSet consists of a rule-based language and a robust
composition engine that provides high-speed content composition
and assembly of complex personalized documents at a high level
of quality. Corporate data and variable content are marked with
CompuSet tags which, in turn, are defined in logically separate
CompuSet style specifications. The CompuSet tags are
conceptually and syntactically similar to HTML or XML tags, the
current web standards for content tagging, and the CompuSet
style specifications are conceptually similar to CSS and XSL,
the current web standards for style definition. Without
requiring any real-time user interaction, CompuSet transforms
the tagged data, the style specifications and the variable
content into high-quality electronic documents that are
assembled and composed at rates in excess of 50 pages per
second, depending on the computing platform configuration and
the complexity of the document. The document composition
features are rich and extensive, including the automatic
generation of multi-dimensional dynamic data driven graphics and
the support of full color text and images. The composition and
assembly process can be optimized for print, email and/or web
presentation media for multi-channel distribution.

Document Output and Merge.The CompuSet Emitters transform
CompuSet generated output into a number of popular Page
Description Languages (PDLs) for subsequent printing, electronic
distribution and/or archive storage for future retrieval and
viewing. These PDLs provide device-specific instructions for
rendering text, forms, images and graphics into finished
documents. The Emitters also condition the PDLs for transport
over a variety of high-speed printing interfaces and for support
of various finishing devices. The PDL formats currently
supported are Xerox Metacode®, International Business
Machines Corporations (IBM) AFPDS®,
Hewlett-Packard Companys PCL® and Adobes
PostScript® and PDF. This part of the Autographarchitecture is extensible and new Emitters can be developed
as necessary. In 2001, we significantly extended our
architecture with the release of Output Processing. Output
Processing enables inline output stream manipulation including
stream splitting, merging, resequencing, sorting, bundling and
barcoding. These features are necessary for postal optimization,
for the support of finishing equipment without further
post-processing and for multi-channel applications that require
both print and electronic (email) distribution. In addition,
several additional Emitter extensions were released, including
support for Creos Variable Print Specification®
(VPS), enabling high-volume full-color production on Xerox
DocuColor products, as well as additional extensions for
IBMs AFPDS® and Adobes PDF®.

Rapid Application Development Tools.The Visual CompuSet application
development tools run on Microsoft Corporations
(Microsoft) Windows® and simplify variable document
application design and prototyping. Visual CompuSet uses a
Windows® version of CompuSet that supports all of the
composition features of the NT, Unix and mainframe CompuSet
production engines to ensure exact design for all supported
production platforms. Visual CompuSet includes a variety of
content Importer, Merge, Font and Emitter tools necessary for
basic application development. The content Importers accept
externally generated

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document content, including text and forms,
static graphics and scanned images, and converts them into
CompuSet compatible formats. The content Importers currently
support merge content in Xerox Metacode®, Adobe
PostScript® and EPS® and in the TIFF and JPEG
standards for scanned images. This part of the Autographarchitecture is extensible and new content Importers can be
developed as necessary. Visual CompuSet also provides an
extensible and easy-to-use Graphical User Interface
(GUI) platform for our optional Data Preparation Tool and
Professional Edition product options as described below.


Data Preparation Tool.The Data Preparation Tool
(DPT) is a Visual CompuSet product extension that enables
users to map, capture, edit and tag corporate data and variable
content from a wide variety of sources, including flat files and
popular relational databases. It provides an easy-to-use GUI
that enables the description of a complex variable data
environment including any related data processing and tagging
instructions. Using a data description, it automatically
generates a COBOL data-tagging program that is compatible with
mainframe COBOL compilers and with Acucorps AcuCobol®
runtime products on Unix and NT platforms. DPT eliminates the
need to manually develop and maintain custom programs for
capturing, processing and tagging corporate data used to drive
personalized document assembly and composition. DPT is the
production engine for applications that are developed using our
fully integrated design tool, Visual CompuSet Professional
Edition.

Visual CompuSet Professional
Edition.Visual CompuSet Professional
Edition (VCPro) significantly augments the capabilities of the
Visual CompuSet and DPT products through the addition of an
interactive Document Designer component that is tightly
integrated with the DPT GUI. VCPro users can define their data
environment with DPT and can directly associate their data and
variable content elements with CompuSet style specifications
such as sections, paragraphs, tabular elements, images,
photographs and data-driven graphics. The VCPro Document
Designer GUI features WYSIWYG interaction and drag-and-drop
operability. The feature set is optimized for the generation of
high-value investment and financial statements. In 2001, we
released VCPro Web Designer, a new product option that enables
the parallel development of HTML portal applications using the
same DPT data environment as a related print application. In a
single GUI, users are able to design an application for both
print and real-time web distribution. For example, an investment
statement designed for traditional print distribution can be
easily web-enabled for on-demand interactive web access. The
web-enabled application can be integrated into a corporate web
portal that provides personalized customer access to individual
account information. VCPro Web Designer eliminates the need to
develop and maintain duplicate application development
environments for both web and print.

Regulated
Content Management

Our Autographregulated content management
products provide solutions for the creation, revision and
management of document content used in several types of
regulated document automation applications. They consist of the
Document Library Service (DLS) Server and Client products,
DLS Express, DLS eCor and DLSCOM. Unlike other general-purpose
content management products, our AutographDLS products
are tailored for regulated document applications.

DLS Server and Client.DLS Server manages the document
content creation process required in complex, regulated
text-intensive documents, such as proposals, contracts, policies
and customer correspondence. Our DLS products use a client
server architecture for accessing data and files stored on
mainframes or NT network servers. DLS Client manages the text
content created with Microsoft Word® and stored in HTML.
The DLS text content is tracked and managed in a multi-authoring
environment that supports access security, content searching,
revision control and approval workflow. In addition to content
creation and management, DLS Client enables the definition of
complex assembly and business rules required for interactive or
automated document assembly and composition using Microsoft
Word® and/or CompuSet. DLS supports a criteria-based
content selection mechanism for generating a Microsoft
Word® document or a CompuSet tagged file, based on
application volume requirements. The personalized document
assembly can occur in a high volume fashion on a server or in a
just in time, on-demand fashion on a local DLS Client computer.

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DLS Express.DLS
Express augments the flexibility of our DLS product line by
incorporating web support. DLS Express enables the dynamic
creation and fulfillment of web-ready documents using HTML
and/or Adobes PDF®. These web documents can be
created on-demand through a variety of web server applications
including Advanced Server Pages (ASP). Dynamic web browser form
input can be routed to the DLS Express server to automatically
assemble and generate a customized web-ready document for local
browser viewing or for local printing. Target web fulfillment
applications for DLS Express include sales proposal and contract
automation for insurance and other financial agents.

DLS eCor and DLSCOM.DLS eCor and DLSCOM further augment our DLS technology
capabilities by providing a rich feature-set that is targeted at
enterprise-wide correspondence applications. DLS eCor enables
the on-demand generation of customer correspondence through
corporate call centers. DLS eCor is web-based and features an
integrated Java editor that can be used to make additional
manual or exception changes to pre-assembled customer
correspondence. DLS eCor supports an email-based change
tracking, approval and workflow process to ensure document
integrity and compliance. DLSCOM is a component product version
that enables the deployment of our DLS technology in a Microsoft
COM/ DCOM environment. With DLS eCor and/or DLSCOM, customers
can integrate our DLS products into a Customer Relationship
Management (CRM) system or electronic CRM system of their
choice.

Autograph for
the Enterprise

Our products generally are licensed initially for
a single document automation application. Regulated content
applications such as policies and contracts are typically
implemented using our DLS products whereas statement
applications are typically implemented using our VCPro products.
In each case, document production is driven through our CompuSet
products. A growing number of customers are licensing our entire
Autographproduct suite for use across multiple
applications throughout their enterprise.

Professional Services

In addition to our software products, we provide
a comprehensive suite of professional services that can assist
customers in the implementation of mission-critical document
automation applications. Our professional services include
on-site software installation, consulting services, customer
training programs and telephone support. Our consulting services
focus on assisting in the sale of high margin initial software
licenses by providing project management, requirements analysis,
application design and application development services. In
addition to consulting services, we provide introductory and
advanced-level education classes in CompuSet, Visual CompuSet,
DPT, VCPro and DLS at our headquarters in San Diego, our offices
in Milwaukee and Washington DC and at customer sites. We believe
our professional services enable customers to use our document
automation products rapidly and effectively. Our professional
services and support organizations employed a staff of 41 as of
December 31, 2001.

Sales and Marketing

Our sales and marketing organization targets
vertical industry markets that require document automation and
high volume, high quality document personalization. We currently
license our products using a combination of direct sales and
alternative channels. In the United States, we market our
products primarily through a direct sales force that manages our
existing base of corporate accounts, as well as targets new
accounts in select market segments. Our sales account executives
are provided with pre-sales technical support through qualified
solution analysts. Account executives and solution analysts are
located throughout the United States to provide optimal
coverage. Outside of the United States, we distribute our
software products through value added resellers (VARs) such as
Xerox Canada, Ltd. in Canada, Fuji Xerox Co., Ltd. in Australia
and Xerox do Brazil, Ltd. in Brazil. Our subsidiary, Document
Sciences Europe, markets our products in Europe, Africa and the
Middle East by providing VAR channel management and support and
by defining European market and product requirements. Our
European VARs are principally Xerox Europe affiliates who
re-market our products. Our revenues from export transactions
with Xerox affiliates were $4.6 million, $4.7 million
and $3.7 million in 1999, 2000 and 2001, respectively. Our
sales and marketing organization employed a staff of 36 as of
December 31, 2001.

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We intend to increase both our product offerings
and markets through joint marketing, sales and distribution and
development relationships with other major companies. Current
relationships include formal and informal marketing and sales
alliances with IBM, Xerox, American Management Systems, Inc. and
Edgewater Technology, Inc. These relationships provide qualified
sales leads for our products and extend our sales coverage and
networking capabilities. In addition, we also support partner
relationships with complimentary technology companies such as
Siebel Systems, Inc., Sybase, Inc. and Oracle Corporation. We
participate in joint marketing events with our key partners
whenever appropriate and feasible. Furthermore, we actively
market our products and solutions at major trade shows, through
focused regional seminars and through a variety of web marketing
mechanisms, including webinars.

Research and Development

We are continuing to enhance our web
functionality across all of our major product offerings. We
engage customers in a formal requirements analysis that is based
on the Quality Function Deployment (QFD) process. The QFD
process is a formal procedure for interviewing customers,
identifying their needs and prioritizing specific product
features. As a result, we have identified a number of customer
requirements for the production of regulated, electronic
documents for the future. Our major development initiatives in
2002 address several of these key requirements brought to our
attention through our QFD process.

In general, our product development strategy is
based on delivering document automation solutions for specific
types of documents in one or more vertical markets or
industries. A cross-functional team is responsible for
delivering each focused offering. We use a documented business
planning and product delivery process to guide our product
development and delivery activities. We also employ iterative
and rapid prototyping development methodologies.

Our recent product offerings continue to build on
our existing Autographfamily of products. These
well-established products are maintained by teams that respond
to customer requests for defect corrections and feature
enhancements. By building on our existing products, we maximize
our reuse of existing software and expertise and we enable our
customers to purchase these new offerings as upgrades to their
existing product configurations.

Future new product offerings are being developed
as components that adhere to open standards for large-scale
systems integration. Furthermore, these product offerings will
be supporting open tagged data and content standards such as
XML. By developing products using open standards, we can expand
the delivery of our products through large systems integrators
and other channels.

We can make no assurance that we will be
successful in developing, introducing and marketing future new
products on a timely and cost-effective basis, if at all, or
that such future new products will achieve market acceptance.
SeeRisk Factors  Our growth depends on
market acceptance of enhancements to our existing products and
our introduction of new products.

We expect to continue enhancing our existing
products and to develop future new products, particularly as
they relate to multi-channel content automation applications.
Our research and development expenditures have grown
substantially since our inception. Such expenditures, not
including amounts capitalized, were $5.3 million,
$5.3 million and $5.9 million in 1999, 2000 and 2001,
respectively. Our development organization employed a staff of
40 as of December 31, 2000. We also utilize outside
consulting and development firms and employ independent
contractors as needed to supplement our permanent development
staff.

Competition

The market for document automation products is
intensely competitive, subject to rapid change and significantly
affected by new product introductions and other market
activities of industry participants. We target document
intensive organizations that require the ability to produce
large quantities of personalized documents in paper or
electronic form. We face direct and indirect competition from a
broad range of competitors who offer a variety of products and
solutions to our current and potential customers. Our principal
competition currently comes from systems developed in-house by
the internal MIS departments of large

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organizations where there is a reluctance to
commit the time and effort necessary to convert their existing
document automation processes to our document automation
software. We also face competition from Docucorp International,
Inc., in the insurance industry, Metavante in banking and
financial services, Group 1 Software, Inc. in commercial direct
mailing and marketing, as well as numerous other smaller
competitors. Several of our competitors have longer operating
histories, significantly greater financial, technical and
marketing resources, greater name recognition and a larger base
of established customers. We believe that the principal
competitive factors affecting our market include product
performance and functionality, ease of use, scalability,
operating across multiple computer and operating system
platforms, product and company reputation, client service and
support and price.


It is also possible that we will face competition
from new competitors. These include large independent software
companies offering personal computer-based application software
solutions, such as Microsoft and Adobe, and from large
corporations providing database and content management software
solutions, such as Oracle Corporation. In addition, Xerox or
IBM, either directly or through affiliated entities, could
become large competitors. Moreover, as the market for document
automation software develops, a number of these or other
companies with significantly greater resources could attempt to
enter or increase their presence in the document automation
market by either acquiring or forming strategic alliances with
our competitors or by increasing their focus on the industry. In
addition, current and potential competitors have established or
may establish cooperative relationships among themselves or with
third parties to increase the ability of their products to
address the needs of our current and prospective customers. It
is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share.
Increased competition may result in price reductions, reduced
gross margins and loss of market share, any of which could have
a material adverse effect on our business, operating results and
financial condition.

Patents and Proprietary Rights

Our success is dependent, in part, on our ability
to protect our proprietary technology. We rely primarily on a
combination of copyright and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect
our proprietary rights. We seek to protect our software,
documentation and other written materials under trade secret and
copyright laws. However, these afford only limited protection.
We presently have no patents or patent applications pending.
Despite our efforts to protect our proprietary rights,
unauthorized parties may attempt to copy aspects of our products
or to obtain and use information that we regard as proprietary.
See Risk Factors  Our growth is
dependent upon successfully protecting our proprietary
rights.

In addition, we also rely on certain software
that we license from third parties, including software that is
integrated with internally developed software and used in our
products to perform key functions. There can be no assurances
that such firms will remain in business, that they will continue
to support their products or that their products will otherwise
continue to be available to us on commercially reasonable terms.
The loss or inability to maintain any of these software licenses
could result in delays or reductions in product shipments until
equivalent software can be developed, identified, licensed and
integrated, which would adversely affect our business, operating
results and financial condition.

Customers

We derived 19% of our revenues through Xerox and
its affiliates in 2001. As a result, discontinuation of
agreements and other business transactions that may adversely
impact our relationship with Xerox could have a material adverse
effect on our business, operating results and financial
condition.

Employees

As of December 31, 2001, we had 130
employees including 41 in professional services, 36 in sales and
marketing, 40 in research and development and 13 in finance and
administration. None of our employees are represented by labor
unions. We have experienced no work stoppages and believe our
relationship with our employees is good. Competition for
qualified personnel in the industry in which we compete is
intense. We

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believe that our future success will depend in
part on our continued ability to attract, hire and retain
qualified personnel.


Financial Information about Segments and
Geographic Areas

The information regarding revenues and operating
profit by reportable segments and revenues from unaffiliated
customers by geographic region is set forth at the end of the
Annual Report under the heading Notes to Consolidated
Financial Statements  3. Segment Information,
and is incorporated herein by reference.

RISK FACTORS

The following is a discussion of certain
factors which currently impact or may impact our business,
operating results and/or financial condition. Anyone making an
investment decision with respect to our common stock or other
securities is cautioned to carefully consider these factors. If
any of the following risks actually occur, our business, future
operating results and financial condition could be materially
adversely affected. In such case, the trading price of our
common stock could decline and you may lose all or part of your
investment.

Our quarterly results fluctuate significantly
and we may not be able to grow our business.

Our total revenues and operating results can
vary, sometimes substantially, from quarter to quarter, and we
expect them to vary significantly in the future. Our revenues
and operating results are difficult to forecast, and our future
results will depend upon many factors, including the following:



| |   |                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------
| |  | the demand for our products;                                                                       
|
| |  | the level of product and price competition we
	face;                                               
|
| |  | the length of our sales cycle;                                                                     
|
| |  | the size and timing of individual license
	transactions;                                           
|
| |  | the delay or deferral of customer implementations;                                                 
|
| |  | the budget cycles of our customers;                                                                
|
| |  | our success in expanding our direct sales force
	or indirect distribution channels;                
|
| |  | the timing of our new product introductions and
	enhancements, as well as those of our competitors;
|
| |  | our mix of products and services;                                                                  
|
| |  | our level of international sales;                                                                  
|
| |  | the activities of and acquisitions by our
	competitors;                                            
|
| |  | our timing of new hires;                                                                           
|
| |  | changes in foreign currency exchange rates;                                                        
|
| |  | our ability to develop and market new products
	and to control costs; and                          
|
| |  | general domestic and international economic
	conditions.                                           

Our initial license fee revenue mainly depends on
when orders are received and shipped. However, because of our
sales model, our customers implementation schedule and the
complexity of the implementation process, revenue from some
software shipments may not be recognized in the same quarter as
when shipment occurs. Our operating expenses are primarily based
on anticipated revenue levels. Since a high percentage of those
expenses are relatively fixed, a delay in the recognition of
revenue from license transactions could cause significant
variations in operating results from quarter to quarter and we
may sustain losses as a result. If such expenses precede
increased revenues, our operating results would be materially
adversely affected.

As a result of these factors, results from
operations for any quarter are subject to significant variation,
and we believe that period-to-period comparisons of our results
of operations are not necessarily meaningful and

7



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should not be relied upon as an indication of our
future performance. Furthermore, our operating results in some
future quarter may fall below the expectations of public market
analysts and investors. If this occurs, the price of our common
stock would likely be materially adversely affected.


We currently derive a significant portion of
our revenues through Xerox.

We currently have a variety of contractual and
informal relationships with Xerox and its affiliates, including
a cooperative marketing agreement, a transfer and license
agreement and various distribution agreements. We rely on these
relationships and agreements for a significant portion of our
total revenues. In 2001, revenues derived from relationships
with Xerox and affiliates of Xerox accounted for approximately
$5.2 million, $5.2 million and $4.1 million in
1999, 2000 and 2001, respectively, representing 21%, 23% and 19%
of our total revenues, respectively.

Furthermore, there can be no assurance that
existing and potential customers will continue to do business
with us because of these relationships or our historical ties
with Xerox and its affiliates. Although we intend to continue
our existing business relationships with Xerox, our strategy is
to lessen our dependence on Xerox. However, there can be no
assurance that we will be able to do so and, because of our
current level of dependence on Xerox, there can be no assurance
that our move to become more independent will not adversely
affect our business, operating results and financial condition.
Our failure to maintain these relationships, particularly with
Xerox and its affiliates, or to establish new relationships in
the future, could have a material adverse effect on our
business, operating results and financial condition.

Xerox has strategic alliances and other business
relationships with other companies who supply software and
services used in high volume electronic publishing applications
and who now or in the future may be our competitors. There can
be no assurance that Xerox or one of its affiliated companies
will not engage in business that directly competes with us. In
addition, Xerox has ongoing internal development activities that
could in the future lead to products that compete with us. Xerox
could in the future expand these relationships or enter into
additional ones and, as a result, our business could be
materially adversely affected.

Our growth is dependent upon successfully
protecting our proprietary rights.

We rely on a combination of copyright and
trademark laws, trade secrets, confidentiality procedures and
contractual provisions to protect our proprietary rights.
Despite these precautions, it may be possible for unauthorized
third parties to copy portions of our products or use
information we consider proprietary. Policing unauthorized use
of our products is difficult and, while we are unable to
determine the extent to which piracy of our software products
exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not
protect our proprietary rights to as great an extent as do the
laws of the United States. We cannot assure you that our means
of protecting our proprietary rights will be adequate or that
our competitors will not independently develop similar
technology.

We are not aware of any infringement of our
products upon the proprietary rights of third parties. However,
we cannot assure you that third parties will not claim
infringement by us with respect to current or future products.
We expect that software product developers will increasingly be
subject to infringement claims as the number of products and
competitors in our industry segment grows and the functionality
of products in different industry segments overlaps. Any such
claims, with or without merit, could be time consuming, result
in costly litigation, cause product shipment delays or require
us to enter into royalty or licensing agreements. Such royalty
or licensing agreements, if required, may not be available on
terms acceptable to us or at all, which could have a material
adverse effect upon our business, operating results and
financial condition.

Our growth is dependent upon successfully
focusing our distribution channels.

We intend to streamline our worldwide sales and
distribution channels by focusing on key target industry market
segments where our current and planned products enjoy a
significant competitive advantage and a current, high market
demand. We also plan on leveraging our existing relationships
with Xerox, IBM and their channels and affiliates by launching
targeted joint marketing and value added reseller programs and by

8



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introducing new product offerings that are
optimized for selected target markets and marketing channels. In
addition, we intend to form additional partnerships with system
integrators and consultants in order to broaden our capacity to
deliver complete document automation solutions that incorporate
significant services content, while also maintaining our core
domain expertise. We cannot assure you that we will be able to
successfully streamline and focus our worldwide channels,
leverage our existing relationships or form new alliances. If we
fail to do so, it will have a material adverse effect on our
business, operating results and financial condition.


Maintaining our professional services
expertise is necessary for our future growth.

We are continuing our focus on the consulting
services component of our professional services to assist
customers in the planning and implementation of enterprise-wide,
mission-critical document automation applications. This strategy
is dependent on retaining and hiring professionals to perform
these consulting services. Should we be unable to maintain the
necessary services workforce, our business and financial
condition could be materially adversely affected.

Our growth depends on our ability to compete
successfully against current and future competitors.

The market for document automation products is
intensely competitive. We face competition from a broad range of
competitors, many of whom have greater financial, technical and
marketing resources than we do. Our principal competition
currently comes from systems developed in-house by the internal
MIS departments of large organizations and direct competition
from numerous software vendors, including Docucorp
International, Inc., Metavente and Group 1 Software, Inc. We
believe that the principal competitive factors affecting our
market include product performance and functionality, ease of
use, scalability, operating across multiple computer and
operating system platforms, product and company reputation,
client service and support and price. Although we believe that
we currently compete favorably with respect to such factors, we
cannot assure you that we will be able to maintain our
competitive position against current and future competitors,
especially those with greater financial, technical and marketing
resources than us, or that we will be successful in the face of
increasing competition from new products, new solutions
introduced by existing competitors or by new companies entering
the market.

Our growth depends on market acceptance of
enhancements to our existing products and our introduction of
new products.

Our future business, operating results and
financial condition will depend upon market acceptance of our
existing products, as well as our ability to respond to emerging
industry standards and practices and to develop new products
that address the future needs of our target markets. Our
Autograph family of products has been applied mainly to
document automation applications producing paper-based
documents. We have started to extend our core technology to the
Internet, intranets and commercial on-line services. However, we
cannot assure you that we will be successful in developing,
introducing and marketing new products or product enhancements,
including new products or the extension of existing products for
the Internet, intranets and commercial on-line services, on a
timely and cost effective basis, if at all. In addition, we
cannot assure you that our new products and product enhancements
will adequately meet the requirements of the marketplace or
achieve market acceptance. Delays in our commercial shipments of
new products or enhancements may result in client
dissatisfaction and a delay or loss of product revenues.

If for technological or other reasons we are
unable to develop and introduce new products or enhancements of
existing products in a timely manner in response to changing
market conditions or client requirements, then our business,
operating results and financial condition will be materially
adversely affected. In addition, we cannot assure you that our
existing products, new products or new versions of our existing
products will achieve market acceptance. In order to provide our
customers with integrated product solutions, our future success
will also depend in part upon our ability to maintain and
enhance relationships with our technology partners.

9



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A longer than expected sales cycle may affect
our revenues and operating results.

The licensing of our software products often
involves an enterprise-wide decision making process by potential
customers. Sales cycles generally range from three to twelve
months in order to educate potential customers regarding the use
and benefits of our products. In addition, the implementation of
our products by customers involves a significant commitment of
their resources over an extended period of time and is commonly
associated with substantial customer business process
reengineering efforts. For these and other reasons, our sales
and customer implementation cycles are subject to a number of
significant delays over which we have little or no control. Any
delay in the sale or customer implementation of a limited number
of license transactions could have a material adverse effect on
our business and financial condition and cause our operating
results to vary significantly from quarter to quarter.

Our operating results are substantially
dependent on sales of a small number of products in highly
concentrated industries.

We derived 66% of our initial license revenue
from CompuSet and related CompuSet option products in 2001. In
2001, our initial license fees from DLS and Electronic Document
Viewing products comprised 33% and 1%, respectively. As a
result, factors that may adversely impact the pricing of or
demand for CompuSet and related products, such as competition
from other products, negative publicity or obsolescence of the
hardware or software environments in which our products run,
could have a material adverse effect on our business, operating
results and financial condition. Our financial performance will
continue to depend significantly on the successful development,
introduction and customer acceptance of new and enhanced
versions of our CompuSet software and related products.

Our revenues are derived from sales to a small
number of industries. Licenses to end users in the insurance,
finance and commercial print services industries accounted for
82%, 90% and 97% of initial license revenues in 1999, 2000 and
2001, respectively.

Our future success will depend on our ability to
continue to successfully market our products in these and other
industries. We cannot assure you that we will continue to be
successful in developing and marketing CompuSet products and
related services. Our failure to do so would have a material
adverse effect on our business, operating results and financial
condition.

We may be exposed to risks associated with
international operations.

Our revenues from export sales, including sales
through our foreign subsidiary, accounted for 25%, 28% and 21%
of our total revenues in 1999, 2000 and 2001, respectively.

Our wholly owned subsidiary, Document Sciences
Europe, markets and supports our products in Europe. We license
our products in Europe through VARs and to a much lesser
extent, direct sales. Our VARs are principally Xerox affiliates
who re-market our products. Revenues generated through European
resellers were $3.7 million, $3.9 million and
$2.7 million in 1999, 2000 and 2001, respectively. In
Canada, Australia and Brazil, we distribute our products through
Xerox Canada, Ltd., Fuji Xerox Co., Ltd. and Xerox do Brazil,
Ltd., respectively. Revenues generated by these Xerox affiliates
were $2.4 million, $2.4 million and $2.1 million
in 1999, 2000 and 2001, respectively. In order to successfully
expand export sales, we may need to establish additional foreign
operations, hire additional personnel and develop relationships
with additional international resellers. If we are unable to do
so in a timely manner, our growth in international export sales
could be limited and our business, operating results and
financial condition could be materially adversely affected. In
addition, we cannot assure you that we will be able to maintain
or increase international market demand for our products.

Additional risks inherent in our international
business activities include:



| |   |                                               
| | - | ----------------------------------------------
| |  | currency fluctuations;                        
|
| |  | unexpected changes in regulatory requirements;
|
| |  | tariffs and other trade barriers;             

10



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| |   |                                                                                                  
| | - | -------------------------------------------------------------------------------------------------
| |  | our limited experience in localizing products for
	foreign countries;                            
|
| |  | lack of acceptance of our localized products in
	foreign countries;                              
|
| |  | longer accounts receivable payment cycles;                                                       
|
| |  | difficulties in managing our international
	operations;                                          
|
| |  | potentially adverse tax consequences including
	restrictions on the repatriation of earnings; and
|
| |  | the burdens of complying with a wide variety of
	foreign laws.                                   

A portion of our business is conducted in
currencies other than the U.S. Dollar, primarily the Euro.
Although exchange rate fluctuations have not had a significant
impact on us, fluctuations in the value of the currencies in
which we conduct our business relative to the U.S. Dollar could
cause currency transaction gains and losses in future periods.
We do not currently engage in currency hedging transactions, and
we cannot assure you that fluctuations in currency exchange
rates in the future will not have a material adverse impact on
our international revenues, business, operating results and
financial condition.

Our business is dependent on the market for
document automation software.

The market for document automation software is
intensely competitive, highly fragmented and subject to rapid
change. We cannot assure you that the market for document
automation software will grow or that, if it does grow,
organizations will adopt our products. We have spent, and intend
to continue to spend, significant resources educating potential
customers about the benefits of our products. However, we cannot
assure you that such expenditures will enable our products to
achieve further market acceptance. Moreover, if the document
automation software market fails to grow or grows more slowly
than we currently anticipate, our business, operating results
and financial condition would be materially adversely affected.

In addition, the commercial market for document
automation of electronic documents designed for use with the
Internet, intranets and commercial on-line services has only
recently begun to develop, and the success of our products
designed for these markets will depend in part on the
compatibility of our products with such services. It is
difficult to predict whether the demand for related products and
services will increase or decrease in the future. Since the
increased commercial use of the Internet, intranets and
commercial on-line services could require substantial
modification and customization of certain of our products and
services as well as the introduction of new products and
services, we cannot assure you that we will be able to
effectively or successfully compete in this market.

Our ability to manage future change will
affect our business.

Our ability to compete effectively and to manage
future change will require us to continue to improve our
financial and management controls, reporting systems and
procedures on a timely basis and to expand, train and manage our
work force. We cannot assure you that we will be able to do so
successfully. Our failure to do so could have a material adverse
effect on our business, operating results and financial
condition.

Our executive officers and certain key
personnel are critical to our business, and these officers and
key personnel may not remain with us in the future.

Our future performance depends significantly upon
the continued service of our key technical, sales and senior
management personnel. Only our President and Chief Executive
Officer and our Chief Scientist have signed employment
agreements with us. The loss of the services of one or more of
our executive officers or key personnel could have a material
adverse effect on our business, operating results and financial
condition. Our future success also depends on our continuing
ability to attract and retain highly qualified product
development, sales and management personnel. Competition for
such personnel is intense, and there can be no assurance that we
will be able to retain our key employees or that we will be able
to attract, assimilate or retain other highly qualified product
development, sales and managerial personnel in the future.

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Our failure to adequately limit our exposure
to product liability claims may adversely affect us.

Our license agreements with our customers
typically contain provisions designed to limit our exposure to
potential product liability claims. However, it is possible that
the limitation of liability provisions contained in our license
agreements may not be effective under the laws of certain
jurisdictions. Although we have not experienced any product
liability claims to date, sale and support of our products may
entail the risk of such claims in the future. A successful
product liability claim brought against us or a claim arising as
a result of our professional services could have a material
adverse effect upon our business, operating results and
financial condition.

Our products may suffer from defects or
errors.

Our software products are complex and may contain
undetected defects or errors when first introduced or as new
versions are released. As a result, we could lose or delay
recognition of revenues as a result of software errors or
defects. In addition, our products are typically intended for
use in applications that may be critical to a customers
business. As a result, we expect that our customers and
potential customers have a greater sensitivity to product
defects than the general market for software products. Although
our business has not been adversely affected by any such errors
to date, we cannot assure you that, despite testing by us and by
current and potential customers, errors will not be found in our
new products or releases. If these errors are discovered after
the commencement of commercial shipments, it could result in any
of the following:



| |   |                                               
| | - | ----------------------------------------------
| |  | loss of revenue or delay in market acceptance;
|
| |  | diversion of our development resources;       
|
| |  | damage to our reputation; or                  
|
| |  | increased service and warranty costs.         

If any of these events occur, it would have a
material adverse effect upon our business, operating results and
financial condition.




Item
2.     Properties

We lease approximately 21,300 square feet for our
principal administrative, sales, marketing, training and
research and development facility in Carlsbad, California. This
lease expires on February 28, 2005. Our subsidiary in
France occupies approximately 2,200 square feet of office space
with a renewable lease expiring on April 15, 2004. In
addition, our regional office in Milwaukee, Wisconsin occupies
approximately 7,500 square feet of office space pursuant to a
lease expiring on March 31, 2003. Sales representatives and
field technical support personnel operate from their homes.




Item 3.     Legal
Proceedings

In the ordinary course of business, we may become
involved in legal proceedings from time to time. As of
February 22, 2002, we were not a party, nor was our
property subject, to any material pending legal proceedings.




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

No matters were submitted to a vote of security
holders during the fourth quarter of fiscal year 2001.

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PART II




Item 5.     Market
for Registrants Common Equity and Related Stockholder
Matters

Our common stock is traded on The Nasdaq National
Market under the symbol DOCX. The following table
sets forth the range of high and low sales prices of our common
stock for the periods indicated, as reported on The Nasdaq
National Market System. Such quotations represent inter-dealer
prices without retail markup, markdown or commission and may not
necessarily represent actual transactions.

|                                       |  |             |      |     |  |   |      | 
|-------------------------------------- |  | ----------- | ---- | --- |  | - | ---- | 
|                                       |  |            
|                                       |  | Price Range
|                                       |  |            
|                                       |  | High        |      | Low
|                                       |  |             |      |    
|Fiscal 2000                            |  |             |      |     |  |   |      | 
|First quarter ended March 31, 2000     |  | $           | 6.25 |     |  | $ | 2.94 | 
|Second quarter ended June 30, 2000     |  | $           | 4.34 |     |  | $ | 2.06 | 
|Third quarter ended September 30, 2000 |  | $           | 2.50 |     |  | $ | 1.34 | 
|Fourth quarter ended December 31, 2000 |  | $           | 1.50 |     |  | $ | 0.59 | 
|Fiscal 2001                            |  |             |      |     |  |   |      | 
|First quarter ended March 31, 2001     |  | $           | 1.88 |     |  | $ | 0.75 | 
|Second quarter ended June 30, 2001     |  | $           | 2.11 |     |  | $ | 1.30 | 
|Third quarter ended September 30, 2001 |  | $           | 4.49 |     |  | $ | 1.43 | 
|Fourth quarter ended December 31, 2001 |  | $           | 3.40 |     |  | $ | 2.30 | 

We had 3,867,906 shares outstanding and 103
record holders of our common stock as of February 27, 2002.
We did not make any sales of unregistered stock in 1999, 2000 or
2001. We have not paid dividends on our common stock and do not
anticipate paying dividends in the foreseeable future.




Item
6.     Selected Financial
Data

The following table presents selected financial
data of Document Sciences Corporation. This historical data
should be read in conjunction with the Consolidated Financial
Statements and the related notes thereto in Item 8 and
Managements Discussion and Analysis of Financial
Condition and Results of Operations in Item 7.

|                                                |  |                                       |        |      |  |      |         |      |  |      |        |  |  |   |        |   |  |   |        | 
|----------------------------------------------- |  | ------------------------------------- | ------ | ---- |  | ---- | ------- | ---- |  | ---- | ------ |  |  | - | ------ | - |  | - | ------ | 
|                                                |  |                                      
|                                                |  | Years Ended December 31,             
|                                                |  |                                      
|                                                |  | 1997                                  |        | 1998 |  | 1999 |         | 2000 |  | 2001
|                                                |  |                                       |        |      |  |      |         |      |  |     
|                                                |  |                                      
|                                                |  | (In thousands, except per share data)
|Statement of Operations                         |  |                                       |        |      |  |      |         |      |  |      |        |  |  |   |        |   |  |   |        | 
|Net revenues                                    |  | $                                     | 19,740 |      |  | $    | 20,107  |      |  | $    | 24,305 |  |  | $ | 22,579 |   |  | $ | 22,120 | 
|Income (loss) from operations                   |  |                                       | (58    | )    |  |      | (10,361 | )    |  |      | 1,366  |  |  |   | (416   | ) |  |   | 359    | 
|Net income (loss)                               |  |                                       | 838    |      |  |      | (9,154  | )    |  |      | 2,111  |  |  |   | 531    |   |  |   | 638    | 
|Net income (loss) per share                     |  |                                       | 0.08   |      |  |      | (0.86   | )    |  |      | 0.20   |  |  |   | 0.05   |   |  |   | 0.11   | 
|Shares used in per share calculations           |  |                                       | 11,013 |      |  |      | 10,690  |      |  |      | 10,817 |  |  |   | 11,153 |   |  |   | 5,831  | 
|Balance Sheet                                   |  |                                       |        |      |  |      |         |      |  |      |        |  |  |   |        |   |  |   |        | 
|Working capital                                 |  | $                                     | 23,896 |      |  | $    | 14,883  |      |  | $    | 16,611 |  |  | $ | 17,151 |   |  | $ | 5,036  | 
|Total assets                                    |  |                                       | 34,229 |      |  |      | 30,989  |      |  |      | 30,423 |  |  |   | 31,496 |   |  |   | 19,706 | 
|Capital lease obligations, less current portion |  |                                       | 52     |      |  |      | 13      |      |  |      | 1      |  |  |   |       |   |  |   |       | 
|Stockholders equity                            |  |                                       | 27,691 |      |  |      | 18,410  |      |  |      | 20,280 |  |  |   | 21,134 |   |  |   | 7,700  | 

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Item
7.     Managements Discussion
and Analysis of Financial Condition and Results of
Operations

Overview

We develop, market and support a family of
document automation software used in high volume electronic
publishing applications. We were incorporated in Delaware in
October 1991 as a wholly owned subsidiary of Xerox Corporation.
Following our initial public offering of stock in September
1996, Xerox ownership was reduced to approximately 62%. As a
result of our tender offer and our exercise of an option to
purchase additional shares from Xerox in April 2001,
Xeroxs ownership interest has been reduced to 19.9%.

Critical Accounting Policies

We believe the following represent our critical
accounting policies:

Revenue Recognition.We recognize revenue in accordance
with SOP 97-2, Software Revenue Recognitionand SAB
No. 101, Revenue Recognition in Financial Statements.Initial license fees are recognized when a contract exists,
the fee is fixed and determinable, software delivery has
occurred and collection of the receivable is deemed probable.
Revenues generated from consulting services are recognized as
the related services are performed. However, when such
consulting services are deemed to be essential to the
functionality of the delivered software product, revenue from
the entire arrangement is recognized on a percentage of
completion method or not until the contract is completed in
accordance with SOP 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts, and
ARB No. 45, Long-Term Construction-Type Contracts.

Our operating expenses are primarily based on
anticipated revenue levels. Since a high percentage of those
expenses are relatively fixed, a delay in the recognition of
revenue from license transactions could cause significant
variations in operating results from quarter to quarter and we
may sustain losses as a result. Since revenue may not be
recognized in the same quarter as when shipment occurs and if
such fixed expenses precede these revenues, our operating
results would be materially adversely affected.

Computer Software Costs.In accordance with SFAS No. 86,
Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed, costs incurred in the research
and development of new software products and significant
enhancements to existing software products are expensed as
incurred until the technological feasibility of the product has
been established. After technological feasibility has been
established, direct production costs, including programming and
testing, are capitalized until general release of the product.

Capitalized costs of software to be sold,
licensed or otherwise marketed are amortized using the greater
of the amount computed using the ratio of current period product
revenues to estimated total product revenues or the
straight-line method over the remaining estimated economic lives
of the products. It is possible that estimated total product
revenues, the estimated economic life of the product, or both,
will be reduced in the future. As a result, the carrying amount
of capitalized software costs may be reduced in the future,
which could cause our operating results in future periods to be
adversely affected.

Results of Operations for the Years Ended
December 31, 1999, 2000 and 2001

Revenues

Total revenues were $24.3 million,
$22.6 million and $22.1 million in 1999, 2000 and
2001, respectively, representing decreases of 7% from 1999 to
2000 and 2% from 2000 to 2001. Our revenues are divided into
three categories based upon the sources from which they are
derived: initial license fees, annual renewal license and
support fees, and services and other revenues. Initial license
fees consist primarily of license fees for the first year of use
of our products. Annual renewal license and support fees consist
of license fees for the continued use and support of our
licensed products. Services and other revenues consist of fees
for consulting, application development and training services
performed by us as well as miscellaneous other operational
revenues.

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We sell our products principally through our
direct sales force domestically, and internationally through
distributors and value added resellers (VARs). Revenues from
export sales and sales through our foreign subsidiary were
$6.1 million, $6.3 million and $4.7 million in
1999, 2000 and 2001, respectively, representing an increase of
3% from 1999 to 2000 and a decrease of 25% from 2000 to 2001.
Revenue from export sales were 25%, 28% and 21% of total
revenues in 1999, 2000 and 2001, respectively. The decrease from
2000 to 2001 was the result of lower initial license fees in all
regions. The increase from 1999 to 2000 was primarily the result
of increased revenues through our Xerox affiliates in Australia
and Europe.

We have entered into distributorship agreements
with various Xerox foreign affiliates to remarket our products
internationally. Our revenues from these agreements were
$4.6 million, $4.7 million and $3.7 million in
1999, 2000 and 2001, respectively. The decrease from 2000 to
2001 was the result of lower initial license fees in all
regions. The increase from 1999 to 2000 was primarily the result
of increased revenues through our Xerox affiliates in Australia
and Europe.

Initial license fees.Initial license fees were
$10.4 million, $10.3 million and $8.2 million in
1999, 2000 and 2001, respectively, representing decreases of 1%
from 1999 to 2000 and 20% from 2000 to 2001. The decreases in
2001 and 2000 were largely the result of fewer sales and fewer
new customers from our foreign resellers. Initial license
revenues were 43%, 46% and 37% of total revenues in 1999, 2000
and 2001, respectively.

Annual renewal license and support fees.Annual renewal license fees were
$7.6 million, $8.6 million and $8.7 million in
1999, 2000 and 2001, respectively, representing increases of 13%
from 1999 to 2000 and 1% from 2000 to 2001. The increase in 2001
was largely offset by the impact of discontinuing support for
certain products and platforms. These increases in license
renewal and support fees were principally due to an increase in
the installed base of users of our software products. Annual
license fees were 31%, 38% and 39% of total revenues in 1999,
2000 and 2001, respectively.

Services and other.Revenues from services and other were
$6.3 million, $3.7 million and $5.2 million in
1999, 2000 and 2001, respectively, representing a decrease of
41% from 1999 to 2000 and an increase of 41% from 2000 to 2001.
The increase in 2001 is due to the delivery of consulting
services needed to implement new product sales made since the
fourth quarter of 2000 as well as significant services to
existing customers. The decrease in 2000 was principally due to
the mix of software sold, which only required minimal consulting
services at implementation. Revenues from services and other
were 26%, 16% and 24% of total revenues in 1999, 2000 and 2001,
respectively.

Cost of
Revenues and Operating Expenses

Cost of initial license fees.Costs of initial license fees were
$1.4 million, $1.6 million and $1.5 million in
1999, 2000 and 2001, respectively, representing 13%, 16% and 18%
of initial license fees in 1999, 2000 and 2001, respectively.
Cost of initial license fees includes documentation,
reproduction costs, product packaging and media, employment
costs for installation and distribution personnel, the cost of
third party software and amortization of previously capitalized
software development costs. The decrease in 2001 compared to
2000 was due to lower sales and a decrease in the amortization
of software. The increase in 2000 compared to 1999 was primarily
the result of expensing the remainder of the capitalized
software costs of VCPro 2.0 due to the 4th quarter 2000 release
of VCPro 3.0.

Cost of annual renewal license and support
fees.Costs of annual license fees
were $947,000, $1.3 million and $1.5 million 1999,
2000 and 2001, respectively, representing 13%, 15% and 17% of
annual license fees in 1999, 2000 and 2001, respectively. Costs
of annual renewal license fees consist principally of the
employment-related costs for our technical support staff. The
increase in 2001 compared to 2000 was due to additional
technical support personnel necessary to support our increasing
customer base. The increase in 2000 compared to 1999 was due to
the implementation of a new technical support database and
additional technical support personnel necessary to support our
increasing customer base.

Cost of services and other.Costs of services and other were
$3.6 million, $2.5 million and $3.0 million in
1999, 2000 and 2001, respectively, representing 58%, 68% and 58%
of services and other revenue in 1999, 2000

15



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and 2001, respectively. Costs of services and
other consist principally of the employment-related costs of our
consulting and training staff. The increase in 2001 compared to
2000 was primarily due to additional personnel costs and the
greater use of outside consultants to complete our increased
consulting work in 2001. The decrease in 2000 compared to 1999
was primarily due to attrition and transferring underutilized
personnel to other departments.


Research and development.Research and development expenses were
$4.7 million, $4.2 million and $5.2 million in
1999, 2000 and 2001, respectively, representing a decrease of
11% from 1999 to 2000 and an increase of 24% from 2000 to 2001.
Research and development expenses consist primarily of the
employment-related costs of personnel associated with developing
new products, enhancing existing products, testing software
products and developing product documentation. As a percentage
of total revenue, research and development expenses were 19%,
18% and 24% in 1999, 2000 and 2001, respectively. We anticipate
that we will continue to direct significant resources to the
development and enhancement of our products. In connection with
a development services and referral agreement effective
January 16, 2002, we have signed a two-year agreement with
Objectiva Software Solutions, Inc. to provide us development
services, which could range up to $3.1 million.

We capitalized software development costs of
$643,000, $1.2 million and $717,000 in 1999, 2000 and 2001,
respectively. Some of the new products started in 2001 have yet
to reach technological feasibility. The amount of software
development costs to be capitalized in the future may change if
the time between the establishment of technological feasibility
of a product and its general release changes.

Selling and marketing.Selling and marketing expenses were
$7.7 million, $8.4 million and $7.2 million in
1999, 2000 and 2001, respectively, representing an increase of
9% from 1999 to 2000 and a decrease of 14% from 2000 to 2001.
Selling and marketing expenses consist primarily of salaries,
commissions, marketing programs and related costs for pre- and
post-sales activity. The decrease in 2001 was primarily due to
fewer personnel and decreased commissions due to decreased
initial license fees. The increase in 2000 was primarily due to
increased marketing expenditures on advertising, promotion
activities and trade shows. Selling and marketing expenses were
32%, 37% and 32% of total revenues in 1999, 2000 and 2001,
respectively.

General and administrative.General and administrative expenses
were $4.6 million, $5.0 million and $3.4 million
in 1999, 2000 and 2001, respectively, representing an increase
of 9% from 1999 to 2000 and a decrease of 32% from 2000 to 2001.
General and administrative expenses consist of
employment-related costs for finance, administration and human
resources, allowance for doubtful accounts and general corporate
management expenses, including legal and audit fees. The
decrease in 2001 was primarily due to decreased personnel and
outside consultant costs. The increase in 2000 was primarily due
to an increase in the allowance for doubtful accounts and higher
professional fees. General and administrative expenses were 19%,
22% and 15% of total revenues in 1999, 2000 and 2001,
respectively.

Other income (expense).Other income (expense) is
composed of interest income from cash and cash equivalents and
short-term investments offset by interest expense related to
notes to Xerox and losses on disposal of fixed assets. Other
income was $745,000, $961,000 and $281,000 in 1999, 2000 and
2001, respectively. The decrease in 2001 was the result of less
interest income following a large decrease in our cash balances
as a result of our tender offer which was completed in April
2001. The increase in 2000 was from higher cash balances which
generated higher interest income.

Provision for income taxes.The provision for income taxes in 2000
and 2001 was for taxes under the alternative minimum tax.
Effective tax rates were approximately 0%, 3% and 0% in 1999,
2000 and 2001, respectively. These rates differ from the federal
statutory rate primarily due to the change in the valuation
allowances offsetting deferred tax assets.

Factors That May Affect Future Operating
Results

Our total revenues and operating results can
vary, sometimes substantially, from quarter to quarter and are
expected to vary significantly in the future. Our revenues and
operating results are difficult to forecast. Future results will
depend upon many factors, including the demand for our products,
the level of product and

16



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price competition, the length of our sales cycle,
the size and timing of individual license transactions, the
delay or deferral of customer implementations, the budget cycles
of our customers, our success in expanding our direct sales
force and indirect distribution channels, the timing of new
product introductions and product enhancements by us and our
competitors, the mix of products and services sold, levels of
international sales, activities of and acquisitions by
competitors, the timing of new hires, changes in foreign
currency exchange rates, our ability to develop and market new
products, controlling costs and general domestic and
international economic conditions. In addition, our sales
generally reflect a relatively high amount of revenue per order,
and, therefore, the loss or delay of individual orders could
have a significant impact on our revenues and quarterly
operating results. In addition, a significant amount of our
revenues occur predominantly in the third month of each fiscal
quarter and tend to be concentrated in the latter half of that
third month.


Our software products generally are shipped as
orders are received. As a result, initial license fees in any
quarter are substantially dependent on orders booked and shipped
in that quarter. The timing of receipt of initial license fees
is difficult to predict because of the length of our sales
cycle, typically three to twelve months from the initial
contact. Because our operating expenses are based on anticipated
revenue trends and because a high percentage of our expenses are
relatively fixed, a delay in the recognition of revenue from a
limited number of initial license transactions could cause
significant variations in operating results from quarter to
quarter and could result in losses. To the extent such expenses
precede, or are not subsequently followed by, increased
revenues, our operating results could be materially adversely
affected.

Due to the foregoing factors, revenues and
operating results for any quarter are subject to significant
variation, and we believe that period-to-period comparisons are
not necessarily meaningful and should not be relied upon as
indications of future performance.

Liquidity and Capital Resources

At December 31, 2001, we had
$8.9 million in cash, cash equivalents and short-term
investments. This is a decrease of $9.6 million from
December 31, 2000, which was used primarily to purchase
6,000,000 shares of our common stock at $2.00 per share pursuant
to our tender offer. On April 16, 2001, we executed two
promissory notes payable to Xerox to purchase an additional
1,139,600 shares of our common stock owned by Xerox at $2.00 per
share. The principal amount of the first note was $2,000,000 and
accrued interest at 9%. This note was due on March 23,
2002. The principal amount of the second note was $279,200 and
accrued interest at 9%. This note was due on March 23,
2003. Both of these notes were paid in full on February 15,
2002.

We believe that our existing cash balances and
anticipated cash flows from operations will be sufficient to
meet our anticipated cash needs for working capital and capital
expenditures at least through the next twelve months. A portion
of our remaining cash could be used to acquire or invest in
complementary businesses or products or obtain the right to use
complementary technologies. We are currently evaluating, in our
ordinary course of business, potential investments such as
businesses, products or technologies. We have no material
current understandings, commitments or agreements with respect
to any acquisition in whole of other businesses, products or
technologies.

As of December 31, 2000 and 2001, we did not
have any other relationships with unconsolidated entities or
financial partners, such as entities often referred to as
structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited
purposes. As such, we are not materially exposed to any
financing, liquidity, market or credit risk that could arise if
we had engaged in such relationships.

Recently Issued Accounting Standards

In July 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 141, Business Combinationsand No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires all business combinations
initiated after June 30, 2001 to be accounted for by the
purchase method. Under SFAS No. 142, goodwill and
intangible assets with indefinite lives are no longer amortized
but are reviewed annually (or more frequently if impairment
indicators arise) for impairment.

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Separate intangible assets that are not deemed to
have an indefinite life will continue to be amortized over their
useful lives (but with no maximum life). The amortization
provisions of SFAS No. 142 apply to goodwill and intangible
assets acquired after June 30, 2001. With respect to
goodwill and intangible assets acquired prior to July 1,
2001, we are required to adopt SFAS No. 142 effective
January 1, 2002. Effective January 1, 2002, we will
discontinue amortization of goodwill, which will reduce annual
operating expenses by approximately $70,000.


In August 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which addresses financial accounting and
reporting for the impairment of long-lived assets and supercedes
SFAS No. 121, Accounting for the Impairment or Disposal
of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, and the accounting and reporting provisions of APB
Opinion No. 30, Reporting the Results of Operations for
a Disposal of a Segment of a Business. We are required to
adopt SFAS No. 144 effective January 1, 2002. We do
not expect the adoption of SFAS No. 144 will have a
significant impact on our operating results and financial
condition.

Euro Conversion

In January 1999, a new currency called the
Euro was introduced in certain Economic and Monetary
Union (EMU) countries. Our subsidiary, Document Sciences
Europe, is based in one of these countries, France. During 2002,
most EMU countries converted to the Euro as their single
currency. Although the conversion has gone smoothly, we cannot
assure you that there will not be any future material adverse
effects on our financial position.




Item
7A.     Quantitative and Qualitative
Disclosures About Market Risk

Foreign Currency Exchange Risk

Our earnings and cash flows are subject to
fluctuations due to changes in foreign currency exchange rates.
To a certain extent, foreign currency exchange rate movements
also affect our competitive position, as exchange rate changes
may affect business practices and/or pricing strategies on
non-U.S. based competitors. The primary foreign currency risk
exposure is related to U.S. Dollar to Euro conversions.
Considering both the anticipated cash flows from firm sales
commitments and anticipated sales for the next quarter, a
hypothetical 10% weakening of the U.S. Dollar relative to all
other currencies would not materially adversely affect expected
first quarter 2002 earnings or cash flows. This analysis is
dependent on actual export sales during the next quarter
occurring within 90% of budgeted forecasts. The effect of the
hypothetical change in exchange rates ignores the affect this
movement may have on other variables including competitive risk.
If it were possible to quantify this competitive impact, the
results could well be different than the sensitivity effects
described above. In addition, it is unlikely that all currencies
would uniformly strengthen or weaken relative to the U.S.
Dollar. In reality, some currencies may weaken while others may
strengthen. Each month we review our position for expected
currency exchange rate movements.

Interest Rate Risk

We are exposed to changes in interest rates
primarily from our short-term available-for-sale investments.
Under our current policies, we do not use interest rate
derivative instruments to manage exposure to interest rate
changes. A hypothetical 100 basis point adverse move in interest
rates along the entire interest rate yield curve would not
materially affect the fair value of our interest sensitive
financial instruments at December 31, 2001. Declines in
interest rates over time will, however, reduce our interest
income.




Item
8.     Financial Statements and
Supplementary Data

The financial statements and supplementary data
required by this item are set forth at the end of this Annual
Report on Form 10-K beginning on page F-1 and is
incorporated into this item by reference.

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Item
9.     Changes in and Disagreements
with Accountants on Accounting and Financial
Disclosure.

None.




PART III




Item
10.     Directors and Executive
Officers of the Registrant

The information required by this item concerning
our directors and certain information regarding our executive
officers is incorporated by reference to the information set
forth in the sections entitled Election of Directors
 Nominees, Compensation of Executive
Officers and Section 16(a) Beneficial Ownership
Reporting Compliance in our Proxy Statement for the 2002
Annual Meeting of Stockholders.

Executive Officers of Document
Sciences

The executive officers of Document Sciences and
their ages, as of March 1, 2002, are as follows:

|                  |  |     |    |          |  |                                                                
|----------------- |  | --- | -- | -------- |  | ---------------------------------------------------------------
|Name              |  | Age |    | Position
|                  |  |     |    |         
|John L. McGannon  |  |     | 41 |          |  | President, Chief Executive Officer and Chief
	Financial Officer
|Daniel J. Fregeau |  |     | 45 |          |  | Executive Vice President                                       
|J. Douglas Pike   |  |     | 46 |          |  | Vice President, Worldwide Sales                                
|Lisa L. Sutrick   |  |     | 38 |          |  | Vice President, Product Planning and Development               

John L. McGannonhas
served as President and Chief Executive Officer since January
2001 and Chief Financial Officer since December 1999. He has
also served as Vice President, Chief Administrative Officer and
Controller since joining Document Sciences in September 1998.
From June 1997 through August 1998, Mr. McGannon served as
the Manager of Financial Analysis and Planning for Simulation
Sciences, Inc., a California-based software developer for the
oil and chemical engineering industries. Mr. McGannon
worked for Chevron Corporation from 1988 to 1997 in a variety of
financial management positions. Mr. McGannon holds a BA
degree from Stanford University and an MBA from Carnegie Mellon
University.

Daniel J. Fregeauhas served as Executive Vice President
since January 2001. From 1998 to 2001, he served as Vice
President of Worldwide Sales and Business Development, from 1997
to 1998, he served as Vice President, Business Development, from
1994 to 1997, he served as Vice President, Marketing and from
1992 to 1994, he served as Vice President, Sales. Prior to
joining Document Sciences, Mr. Fregeau was Marketing
Manager for the Networking Division of Sears Business Centers,
San Diego, from 1990 to 1992. Mr. Fregeau was a founder and
principal of MicroAge in San Diego from 1988 to 1990. From 1982
to 1988, Mr. Fregeau held several positions with Xerox
Corporations Electronic Publishing Business Unit including
Manager of Systems Engineering and Integration, Technical
Program Manager and Project Manager. While at Xerox, Mr. Fregeau
designed and directed the development of several publishing
products and was a key contributor to the launch of the XICS
(now CompuSet) product in the U.S. and Canada.

J. Douglas Pikehas served as Vice President,
Worldwide Sales since January 2001. He had previously served as
Director of US Sales and Area Sales Manager since joining
Document Sciences in January 1995. From 1990 to 1994, Mr. Pike
was employed by Xerox Corporation to provide digital printing
solutions to major accounts in the insurance and finance
industries. Mr. Pike also worked for Unisys Corporation for
seven years providing custom software application and database
solutions as an account executive. Mr. Pike holds a B.S.
degree in Industrial Technology from the State University of New
York.

Lisa L. Sutrickhas
served as Vice President, Product Planning and Development since
January 2002. She had previously served in the capacities of
Director of Product Planning and Development, Director of
Product Marketing, Product Marketing Manager for Document
Library Services and Program Manager in Development since
joining Document Sciences in May 1997. From 1987 to 1997, Ms.
Sutrick worked for Data Retrieval Corporation, a Wisconsin
software company purchased by Document Sciences in May 1997, in a

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variety of customer focused software development
positions. Ms. Sutrick holds a B.S. degree in Applied
Mathematics from the University of Wisconsin, Stout.


Executive officers are appointed by the Board of
Directors and serve at the discretion of the Board. There are no
family relationships among any directors or executive officers
of Document Sciences.




Item
11.     Executive
Compensation

The information required by this item regarding
executive compensation is incorporated by reference to the
information set forth in the sections entitled Executive
Officer Compensation and Compensation of
Directors in our Proxy Statement for the 2002 Annual
Meeting of Stockholders.




Item
12.     Security Ownership of
Certain Beneficial Owners and Management

The information required by this item regarding
security ownership of certain beneficial owners and management
is incorporated by reference to the information set forth in the
section entitled Security Ownership of Management and
Certain Beneficial Owners in our Proxy Statement for the
2002 Annual Meeting of Stockholders.




Item
13.     Certain Relationships and
Related Transactions

The information required by this item regarding
certain relationships and related transactions is incorporated
by reference to the information set forth in the section
entitled Certain Transactions in our Proxy Statement
for the 2002 Annual Meeting of Stockholders.




PART IV




Item
14.     Exhibits, Financial
Statement Schedules and Reports on Form 8-K

(a) The following documents are filed as
part of this Form 10-K:



| |                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. Financial Statements.The
	financial statements, related notes thereto and the Report of
	Independent Auditors required hereunder are set forth at the end
	of this Annual Report beginning on the page F-1.                                                                       
|
| | 2. Financial Statement Schedule.The
	following financial statement schedule for the fiscal years
	ended December 31, 1999, 2000 and 2001 is filed as part of
	this Form 10-K and should be read in conjunction with our
	consolidated financial statements and related notes thereto.
|
| | Schedule II Valuation and Qualifying Accounts                                                                                                                                                                                                                                        
|
| | Schedules other than those listed above have been
	omitted since they are either not required, not applicable or
	the information is otherwise included.                                                                                                                             
|
| | 3. Exhibits.See Item 14(c)
	below.                                                                                                                                                                                                                                                   

(b) Reports on Form 8-K.No
reports on Form 8-K were filed by us during the fiscal
quarter ended December 31, 2001.

(c) Exhibits.The exhibits listed on
the accompanying index to exhibits immediately following the
financial statement schedules are filed as part of, or
incorporated by reference into, this Form 10-K.

(d) Financial Statement Schedules.See Item 14(a) above.

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SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this Form 10-K to be signed on its behalf
by the undersigned, thereunto duly authorized on this 1st day of
March 2002.



| |                              
| | -----------------------------
| | DOCUMENT SCIENCES CORPORATION





| |     |                     
| | --- | --------------------
| | By: | /s/ JOHN L. MCGANNON

| |                                       
| | --------------------------------------
| |                                       
| | John L. McGannon                      
| | President and Chief Executive
	Officer

Dated: March 1, 2002

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below constitutes and appoints
John L. McGannon his attorney-in-fact, with full power of
substitution, for him in any and all capacities, to sign any and
all amendments to this Form 10-K, and to file the same,
with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that said attorney-in-fact or his
substitute, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities
Exchange Act of 1934, this Form 10-K has been signed below
by the following persons on behalf of the Registrant on
March 1, 2002 in the capacities indicated:

|                                       |  |                                                                                                                                   
|-------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------
|Signatures                             |  | Title                                                                                                                             
|                                       |  |                                                                                                                                   
|/s/ JOHN L. MCGANNONJohn L. McGannon   |  | President, Chief Executive Officer, Chief
	Financial Officer and Director (principal executive, financial
	and accounting officer)
|/s/ THOMAS L. RINGERThomas L. Ringer   |  | Chairman of the Board of Directors                                                                                                
|/s/ BARTON L. FABERBarton L. Faber     |  | Director                                                                                                                          
|/s/ COLIN J. OBRIENColin J. OBrien   |  | Director                                                                                                                          
|/s/ JAMES J. COSTELLOJames J. Costello |  | Director                                                                                                                          

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DOCUMENT SCIENCES CORPORATION

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                   |  |      |     | 
|-------------------------------------------------- |  | ---- | --- | 
|                                                   |  | Page
|                                                   |  |     
|Report of Ernst & Young LLP, Independent
	Auditors |  |      | F-2 | 
|Consolidated Balance Sheets                        |  |      | F-3 | 
|Consolidated Statements of Income                  |  |      | F-4 | 
|Consolidated Statements of Stockholders
	Equity   |  |      | F-5 | 
|Consolidated Statements of Cash Flows              |  |      | F-6 | 
|Notes to Consolidated Financial Statements         |  |      | F-7 | 

F-1



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##### Table of Contents



REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS

The Board of Directors and Stockholders

Document Sciences Corporation


We have audited the accompanying consolidated
balance sheets of Document Sciences Corporation (the
Company) as of December 31, 2000 and 2001, and
the related consolidated statements of income,
stockholders equity and cash flows for each of the three
years in the period ended December 31, 2001. Our audits
also included the financial statement schedule listed in the
Index at Item 14(a). These financial statements and
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Document Sciences Corporation
at December 31, 2000 and 2001, and the consolidated results
of its operations and its cash flows for each of the three years
in the period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the
information set forth therein.



| |                       
| | ----------------------
| | /s/  ERNST & YOUNG LLP

San Diego, California

January 18, 2002


F-2



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##### Table of Contents



DOCUMENT SCIENCES CORPORATION

CONSOLIDATED BALANCE SHEETS

|                                                                                                                       |                                                                                                                       |              |            |            |   |   |            |            |  
|---------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------- | ------------ | ---------- | ---------- | - | - | ---------- | ---------- | -
|                                                                                                                       |                                                                                                                       |             
|                                                                                                                       |                                                                                                                       | December 31,
|                                                                                                                       |                                                                                                                       |             
|                                                                                                                       |                                                                                                                       | 2000         |            | 2001      
|                                                                                                                       |                                                                                                                       |              |            |           
|ASSETS                                                                                                                
|Current assets:                                                                                                        |                                                                                                                       |              |            |            |   |   |            |           
|                                                                                                                       | Cash and cash equivalents                                                                                             |              | $          | 4,768,520  |   |   | $          | 3,187,229  |  
|                                                                                                                       | Short-term investments                                                                                                |              |            | 13,783,595 |   |   |            | 5,736,200  |  
|                                                                                                                       | Accounts receivable, less allowance for doubtful
	accounts of $1,012,177 and $427,683 in 2000 and 2001,
	respectively |              |            | 6,084,249  |   |   |            | 5,028,059  |  
|                                                                                                                       | Due from affiliates                                                                                                   |              |            | 1,604,097  |   |   |            | 1,739,739  |  
|                                                                                                                       | Unbilled revenue                                                                                                      |              |            | 269,428    |   |   |            | 400,164    |  
|                                                                                                                       | Other current assets                                                                                                  |              |            | 779,018    |   |   |            | 519,163    |  
|                                                                                                                       |                                                                                                                       |              |            |            |   |   |            |           
|Total current assets                                                                                                   |                                                                                                                       |              | 27,288,907 |            |   |   | 16,610,554 |           
|Property and equipment, net                                                                                            |                                                                                                                       |              | 1,930,699  |            |   |   | 1,178,600  |           
|Computer software costs, net of accumulated
	amortization of $2,706,041 and $1,288,326 in 2000 and 2001,
	respectively |                                                                                                                       |              | 1,364,636  |            |   |   | 1,143,618  |           
|Goodwill, net of accumulated amortization of
	$257,121 and $327,246 in 2000 and 2001, respectively                     |                                                                                                                       |              | 794,739    |            |   |   | 724,615    |           
|Other assets                                                                                                           |                                                                                                                       |              | 117,413    |            |   |   | 48,785     |           
|                                                                                                                       |                                                                                                                       |              |            |            |   |   |            |           
|                                                                                                                       |                                                                                                                       | $            | 31,496,394 |            |   | $ | 19,706,172 |           
|                                                                                                                       |                                                                                                                       |              |            |            |   |   |            |           
|LIABILITIES AND STOCKHOLDERS
	EQUITY                                                                                 
|Current liabilities:                                                                                                   |                                                                                                                       |              |            |            |   |   |            |           
|                                                                                                                       | Accounts payable                                                                                                      |              | $          | 332,893    |   |   | $          | 191,919    |  
|                                                                                                                       | Accrued compensation                                                                                                  |              |            | 953,195    |   |   |            | 881,791    |  
|                                                                                                                       | Other accrued liabilities                                                                                             |              |            | 532,858    |   |   |            | 520,599    |  
|                                                                                                                       | Deferred revenue                                                                                                      |              |            | 8,319,390  |   |   |            | 7,851,670  |  
|                                                                                                                       | Short-term notes                                                                                                      |              |            |           |   |   |            | 2,128,219  |  
|                                                                                                                       |                                                                                                                       |              |            |            |   |   |            |           
|Total current liabilities                                                                                              |                                                                                                                       |              | 10,138,336 |            |   |   | 11,574,198 |           
|Long-term notes                                                                                                        |                                                                                                                       |              |           |            |   |   | 297,099    |           
|Deferred revenue  long-term                                                                                           |                                                                                                                       |              | 224,049    |            |   |   | 134,430    |           
|Commitments                                                                                                            |                                                                                                                       |              |            |            |   |   |            |           
|Stockholders equity:                                                                                                  |                                                                                                                       |              |            |            |   |   |            |           
|                                                                                                                       | Common stock, $.001 par value; Authorized
	shares  30,000,000;                                                       |              |            |            |   |   |            |            |  
|                                                                                                                       | Issued shares  10,923,101 in 2000 and
	3,824,896 in 2001                                                             |              |            | 10,923     |   |   |            | 3,825      |  
|                                                                                                                       | Treasury stock  87,962 and 0 in 2000
	and 2001                                                                       |              |            | (503,273   | ) |   |            |           |  
|                                                                                                                       | Additional paid-in capital                                                                                            |              |            | 25,436,306 |   |   |            | 10,781,055 |  
|                                                                                                                       | Accumulated comprehensive income                                                                                      |              |            | 8,462      |   |   |            | 95,514     |  
|                                                                                                                       | Retained deficit                                                                                                      |              |            | (3,818,409 | ) |   |            | (3,179,949 | )
|                                                                                                                       |                                                                                                                       |              |            |            |   |   |            |           
|Total stockholders equity                                                                                             |                                                                                                                       |              | 21,134,009 |            |   |   | 7,700,445  |           
|                                                                                                                       |                                                                                                                       |              |            |            |   |   |            |           
|                                                                                                                       |                                                                                                                       | $            | 31,496,394 |            |   | $ | 19,706,172 |           
|                                                                                                                       |                                                                                                                       |              |            |            |   |   |            |           

See accompanying notes.

F-3



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##### Table of Contents



DOCUMENT SCIENCES CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

|                                                     |                                                                                                                                                  |                          |            |            |  |      |            |            |  |   |            |           | 
|---------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------ | ---------- | ---------- |  | ---- | ---------- | ---------- |  | - | ---------- | --------- | 
|                                                     |                                                                                                                                                  |                         
|                                                     |                                                                                                                                                  | Years Ended December 31,
|                                                     |                                                                                                                                                  |                         
|                                                     |                                                                                                                                                  | 1999                     |            | 2000       |  | 2001
|                                                     |                                                                                                                                                  |                          |            |            |  |     
|Revenues:                                            |                                                                                                                                                  |                          |            |            |  |      |            |            |  |   |            |          
|                                                     | Initial license fees (including $3,138,700,
	$2,671,800 and $1,717,700 from affiliates in 1999, 2000 and
	2001, respectively)                    |                          | $          | 10,405,839 |  |      | $          | 10,257,633 |  |   | $          | 8,200,159 | 
|                                                     | Annual renewal license and support fees
	(including $1,604,600, $2,235,700 and $2,182,500 from affiliates
	in 1999, 2000 and 2001, respectively) |                          |            | 7,607,077  |  |      |            | 8,620,958  |  |   |            | 8,707,247 | 
|                                                     | Services and other (including $430,300, $279,900
	and $224,500 from affiliates in 1999, 2000 and 2001,
	respectively)                            |                          |            | 6,292,324  |  |      |            | 3,700,336  |  |   |            | 5,212,231 | 
|                                                     |                                                                                                                                                  |                          |            |            |  |      |            |            |  |   |            |          
|Total revenues                                       |                                                                                                                                                  |                          | 24,305,240 |            |  |      | 22,578,927 |            |  |   | 22,119,637 |          
|Cost of revenues:                                    |                                                                                                                                                  |                          |            |            |  |      |            |            |  |   |            |          
|                                                     | Initial license fees                                                                                                                             |                          |            | 1,375,892  |  |      |            | 1,643,617  |  |   |            | 1,495,073 | 
|                                                     | Annual renewal license and support fees                                                                                                          |                          |            | 947,445    |  |      |            | 1,311,196  |  |   |            | 1,498,664 | 
|                                                     | Services and other                                                                                                                               |                          |            | 3,628,909  |  |      |            | 2,501,372  |  |   |            | 2,992,555 | 
|                                                     |                                                                                                                                                  |                          |            |            |  |      |            |            |  |   |            |          
|Total cost of revenues                               |                                                                                                                                                  |                          | 5,952,246  |            |  |      | 5,456,185  |            |  |   | 5,986,292  |          
|                                                     |                                                                                                                                                  |                          |            |            |  |      |            |            |  |   |            |          
|Gross profit                                         |                                                                                                                                                  |                          | 18,352,994 |            |  |      | 17,122,742 |            |  |   | 16,133,345 |          
|Operating expenses:                                  |                                                                                                                                                  |                          |            |            |  |      |            |            |  |   |            |          
|                                                     | Research and development                                                                                                                         |                          |            | 4,679,067  |  |      |            | 4,154,364  |  |   |            | 5,203,525 | 
|                                                     | Selling and marketing                                                                                                                            |                          |            | 7,680,764  |  |      |            | 8,358,577  |  |   |            | 7,151,651 | 
|                                                     | General and administrative                                                                                                                       |                          |            | 4,626,854  |  |      |            | 5,025,417  |  |   |            | 3,418,823 | 
|                                                     |                                                                                                                                                  |                          |            |            |  |      |            |            |  |   |            |          
|Total operating expenses                             |                                                                                                                                                  |                          | 16,986,685 |            |  |      | 17,538,358 |            |  |   | 15,773,999 |          
|                                                     |                                                                                                                                                  |                          |            |            |  |      |            |            |  |   |            |          
|Income (loss) from operations                        |                                                                                                                                                  |                          | 1,366,309  |            |  |      | (415,616   | )          |  |   | 359,346    |          
|Interest and other income, net                       |                                                                                                                                                  |                          | 744,566    |            |  |      | 960,581    |            |  |   | 280,921    |          
|                                                     |                                                                                                                                                  |                          |            |            |  |      |            |            |  |   |            |          
|Income before provision for income taxes             |                                                                                                                                                  |                          | 2,110,875  |            |  |      | 544,965    |            |  |   | 640,267    |          
|Provision for income taxes                           |                                                                                                                                                  |                          |           |            |  |      | 14,026     |            |  |   | 1,807      |          
|                                                     |                                                                                                                                                  |                          |            |            |  |      |            |            |  |   |            |          
|Net income                                           |                                                                                                                                                  | $                        | 2,110,875  |            |  | $    | 530,939    |            |  | $ | 638,460    |          
|                                                     |                                                                                                                                                  |                          |            |            |  |      |            |            |  |   |            |          
|Net income per share  basic                         |                                                                                                                                                  | $                        | 0.20       |            |  | $    | 0.05       |            |  | $ | 0.12       |          
|                                                     |                                                                                                                                                  |                          |            |            |  |      |            |            |  |   |            |          
|Weighted average shares used in basic calculation    |                                                                                                                                                  |                          | 10,693,888 |            |  |      | 10,771,588 |            |  |   | 5,547,872  |          
|                                                     |                                                                                                                                                  |                          |            |            |  |      |            |            |  |   |            |          
|Net income per share  diluted                       |                                                                                                                                                  | $                        | 0.20       |            |  | $    | 0.05       |            |  | $ | 0.11       |          
|                                                     |                                                                                                                                                  |                          |            |            |  |      |            |            |  |   |            |          
|Weighted average shares used in diluted
	calculation |                                                                                                                                                  |                          | 10,816,948 |            |  |      | 11,153,893 |            |  |   | 5,830,728  |          
|                                                     |                                                                                                                                                  |                          |            |            |  |      |            |            |  |   |            |          

See accompanying notes.

F-4



---



##### Table of Contents



DOCUMENT SCIENCES CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                                                  |                                                          |              |            |                |  |            |        |          |  |               |            |              |  |               |             |           |  |        |             |   |  |   |         |   |  |   |          |          |   |   |            |           |  |   |             |           |  
|------------------------------------------------- | -------------------------------------------------------- | ------------ | ---------- | -------------- |  | ---------- | ------ | -------- |  | ------------- | ---------- | ------------ |  | ------------- | ----------- | --------- |  | ------ | ----------- | - |  | - | ------- | - |  | - | -------- | -------- | - | - | ---------- | --------- |  | - | ----------- | --------- | -
|                                                  |                                                          |              |            |                |  |            |        |          |  | Accumulated   |            |              |  |              
|                                                  |                                                          | Common Stock |            | Treasury Stock |  | Additional |        |          |  | Comprehensive |            |              |  | Total        
|                                                  |                                                          |              |            |                |  | Paid-in    |        | Deferred |  | Income        |            | Retained     |  | Stockholders
|                                                  |                                                          | Shares       |            | Amount         |  | Shares     |        | Amount   |  | Capital       |            | Compensation |  | (Loss)        |             | (Deficit) |  | Equity
|                                                  |                                                          |              |            |                |  |            |        |          |  |               |            |              |  |               |             |           |  |       
|Balance at December 31, 1998                      |                                                          |              | 10,857,958 |                |  | $          | 10,858 |          |  |               | 223,158    |              |  | $             | (686,989    | )         |  | $      | 25,409,399  |   |  | $ | (67,326 | ) |  | $ | 204,071  |          |   | $ | (6,460,223 | )         |  | $ | 18,409,790  |          
|Issuance of common stock upon exercise of options |                                                          |              | 61,093     |                |  |            | 61     |          |  |               |           |              |  |               |            |           |  |        | 16,410      |   |  |   |        |   |  |   |         |          |   |   |           |           |  |   | 16,471      |          
|Sale of treasury stock                            |                                                          |              |           |                |  |            |       |          |  |               | (48,276    | )            |  |               | 77,006      |           |  |        |            |   |  |   |        |   |  |   |         |          |   |   |           |           |  |   | 77,006      |          
|Amortization of deferred compensation             |                                                          |              |           |                |  |            |       |          |  |               |           |              |  |               |            |           |  |        |            |   |  |   | 56,532  |   |  |   |         |          |   |   |           |           |  |   | 56,532      |          
|Comprehensive income (loss):                      |                                                          |              |            |                |  |            |        |          |  |               |            |              |  |               |             |           |  |        |             |   |  |   |         |   |  |   |          |          |   |   |            |           |  |   |             |          
|                                                  | Net change in unrealized loss on short-term
	investments |              |            |               |  |            |        |         |  |               |            |             |  |               |             |          |  |        |             |  |  |   |         |  |  |   |          | (271,098 | ) |   |            |          |  |   |             | (271,098  | )
|                                                  | Foreign currency translation adjustment                  |              |            |               |  |            |        |         |  |               |            |             |  |               |             |          |  |        |             |  |  |   |         |  |  |   |          | (119,473 | ) |   |            |          |  |   |             | (119,473  | )
|                                                  | Net loss                                                 |              |            |               |  |            |        |         |  |               |            |             |  |               |             |          |  |        |             |  |  |   |         |  |  |   |          |         |   |   |            | 2,110,875 |  |   |             | 2,110,875 |  
|                                                  |                                                          |              |            |                |  |            |        |          |  |               |            |              |  |               |             |           |  |        |             |   |  |   |         |   |  |   |          |          |   |   |            |           |  |   |             |          
|                                                  | Comprehensive income                                     |              |            |                |  |            |        |          |  |               |            |              |  |               |             |           |  |        |             |   |  |   |         |   |  |   |          |          |   |   |            |           |  |   |             | 1,720,304 |  
|                                                  |                                                          |              |            |                |  |            |        |          |  |               |            |              |  |               |             |           |  |        |             |   |  |   |         |   |  |   |          |          |   |   |            |           |  |   |             |          
|Balance at December 31, 1999                      |                                                          |              | 10,919,051 |                |  |            | 10,919 |          |  |               | 174,882    |              |  |               | (609,983    | )         |  |        | 25,425,809  |   |  |   | (10,794 | ) |  |   | (186,500 | )        |   |   | (4,349,348 | )         |  |   | 20,280,103  |          
|Issuance of common stock upon exercise of options |                                                          |              | 4,050      |                |  |            | 4      |          |  |               |           |              |  |               |            |           |  |        | 10,497      |   |  |   |        |   |  |   |         |          |   |   |           |           |  |   | 10,501      |          
|Sale of treasury stock                            |                                                          |              |           |                |  |            |       |          |  |               | (86,920    | )            |  |               | 106,710     |           |  |        |            |   |  |   |        |   |  |   |         |          |   |   |           |           |  |   | 106,710     |          
|Amortization of deferred compensation             |                                                          |              |           |                |  |            |       |          |  |               |           |              |  |               |            |           |  |        |            |   |  |   | 10,794  |   |  |   |         |          |   |   |           |           |  |   | 10,794      |          
|Comprehensive income (loss):                      |                                                          |              |            |                |  |            |        |          |  |               |            |              |  |               |             |           |  |        |             |   |  |   |         |   |  |   |          |          |   |   |            |           |  |   |             |          
|                                                  | Net change in unrealized gain on short-term
	investments |              |            |               |  |            |        |         |  |               |            |             |  |               |             |          |  |        |             |  |  |   |         |  |  |   |          | 212,916  |   |   |            |          |  |   |             | 212,916   |  
|                                                  | Foreign currency translation adjustment                  |              |            |               |  |            |        |         |  |               |            |             |  |               |             |          |  |        |             |  |  |   |         |  |  |   |          | (17,954  | ) |   |            |          |  |   |             | (17,954   | )
|                                                  | Net income                                               |              |            |               |  |            |        |         |  |               |            |             |  |               |             |          |  |        |             |  |  |   |         |  |  |   |          |         |   |   |            | 530,939   |  |   |             | 530,939   |  
|                                                  |                                                          |              |            |                |  |            |        |          |  |               |            |              |  |               |             |           |  |        |             |   |  |   |         |   |  |   |          |          |   |   |            |           |  |   |             |          
|                                                  | Comprehensive income                                     |              |            |                |  |            |        |          |  |               |            |              |  |               |             |           |  |        |             |   |  |   |         |   |  |   |          |          |   |   |            |           |  |   |             | 725,901   |  
|                                                  |                                                          |              |            |                |  |            |        |          |  |               |            |              |  |               |             |           |  |        |             |   |  |   |         |   |  |   |          |          |   |   |            |           |  |   |             |          
|Balance at December 31, 2000                      |                                                          |              | 10,923,101 |                |  |            | 10,923 |          |  |               | 87,962     |              |  |               | (503,273    | )         |  |        | 25,436,306  |   |  |   |        |   |  |   | 8,462    |          |   |   | (3,818,409 | )         |  |   | 21,134,009  |          
|Issuance of common stock upon exercise of options |                                                          |              | 44,406     |                |  |            | 44     |          |  |               |           |              |  |               |            |           |  |        | 11,939      |   |  |   |        |   |  |   |         |          |   |   |           |           |  |   | 11,983      |          
|Warrants issued to non-employee                   |                                                          |              |           |                |  |            |       |          |  |               |           |              |  |               |            |           |  |        | 30,600      |   |  |   |        |   |  |   |         |          |   |   |           |           |  |   | 30,600      |          
|Purchase of treasury stock                        |                                                          |              |           |                |  |            |       |          |  |               | 7,144,854  |              |  |               | (14,294,972 | )         |  |        |            |   |  |   |        |   |  |   |         |          |   |   |           |           |  |   | (14,294,972 | )        
|Sale of treasury stock                            |                                                          |              |           |                |  |            |       |          |  |               | (90,204    | )            |  |               | 93,313      |           |  |        |            |   |  |   |        |   |  |   |         |          |   |   |           |           |  |   | 93,313      |          
|Retirement of treasury stock                      |                                                          |              | (7,142,611 | )              |  |            | (7,142 | )        |  |               | (7,142,612 | )            |  |               | 14,704,932  |           |  |        | (14,697,790 | ) |  |   |        |   |  |   |         |          |   |   |           |           |  |   |            |          
|Comprehensive income (loss):                      |                                                          |              |            |                |  |            |        |          |  |               |            |              |  |               |             |           |  |        |             |   |  |   |         |   |  |   |          |          |   |   |            |           |  |   |             |          
|                                                  | Net change in unrealized gain on short-term
	investments |              |            |               |  |            |        |         |  |               |            |             |  |               |             |          |  |        |             |  |  |   |         |  |  |   |          | 82,686   |   |   |            |          |  |   |             | 82,686    |  
|                                                  | Foreign currency translation adjustment                  |              |            |               |  |            |        |         |  |               |            |             |  |               |             |          |  |        |             |  |  |   |         |  |  |   |          | 4,366    |   |   |            |          |  |   |             | 4,366     |  
|                                                  | Net income                                               |              |            |               |  |            |        |         |  |               |            |             |  |               |             |          |  |        |             |  |  |   |         |  |  |   |          |         |   |   |            | 638,460   |  |   |             | 638,460   |  
|                                                  |                                                          |              |            |                |  |            |        |          |  |               |            |              |  |               |             |           |  |        |             |   |  |   |         |   |  |   |          |          |   |   |            |           |  |   |             |          
|                                                  | Comprehensive income                                     |              |            |                |  |            |        |          |  |               |            |              |  |               |             |           |  |        |             |   |  |   |         |   |  |   |          |          |   |   |            |           |  |   |             | 725,512   |  
|                                                  |                                                          |              |            |                |  |            |        |          |  |               |            |              |  |               |             |           |  |        |             |   |  |   |         |   |  |   |          |          |   |   |            |           |  |   |             |          
|Balance at December 31, 2001                      |                                                          |              | 3,824,896  |                |  | $          | 3,825  |          |  |               |           |              |  | $             |            |           |  | $      | 10,781,055  |   |  | $ |        |   |  | $ | 95,514   |          |   | $ | (3,179,949 | )         |  | $ | 7,700,445   |          
|                                                  |                                                          |              |            |                |  |            |        |          |  |               |            |              |  |               |             |           |  |        |             |   |  |   |         |   |  |   |          |          |   |   |            |           |  |   |             |          

See accompanying notes.

F-5



---



##### Table of Contents



DOCUMENT SCIENCES CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                             |                                                                                    |                          |             |         |            |      |            |           |           |   |             |          |           |  
|-------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | ------------------------ | ----------- | ------- | ---------- | ---- | ---------- | --------- | --------- | - | ----------- | -------- | --------- | -
|                                                                                             |                                                                                    |                         
|                                                                                             |                                                                                    | Years Ended December 31,
|                                                                                             |                                                                                    |                         
|                                                                                             |                                                                                    | 1999                     |             | 2000    |            | 2001
|                                                                                             |                                                                                    |                          |             |         |            |     
|Operating activities                                                                         |                                                                                    |                          |             |         |            |      |            |           |           |   |             |         
|Net income                                                                                   |                                                                                    | $                        | 2,110,875   |         |            | $    | 530,939    |           |           | $ | 638,460     |         
|Adjustments to reconcile net income to net cash
	provided by (used in) operating activities: |                                                                                    |                          |             |         |            |      |            |           |           |   |             |         
|                                                                                             | Depreciation and amortization                                                      |                          |             | 529,188 |            |      |            | 652,837   |           |   |             | 700,666  |          
|                                                                                             | Amortization of goodwill                                                           |                          |             | 70,124  |            |      |            | 70,124    |           |   |             | 70,124   |          
|                                                                                             | Loss on disposal of fixed assets                                                   |                          |             | 25,881  |            |      |            | 36,534    |           |   |             | 176,378  |          
|                                                                                             | Amortization of computer software costs                                            |                          |             | 694,362 |            |      |            | 1,158,170 |           |   |             | 937,774  |          
|                                                                                             | Amortization of deferred compensation                                              |                          |             | 56,532  |            |      |            | 10,794    |           |   |             |         |          
|                                                                                             | Provision for doubtful accounts                                                    |                          |             | 44,510  |            |      |            | 245,170   |           |   |             | (584,312 | )        
|                                                                                             | Changes in operating assets and liabilities, net
	of effects of acquired business: |                          |             |         |            |      |            |           |           |   |             |          |          
|                                                                                             |                                                                                    | Accounts receivable      |             |         | (1,885,316 | )    |            |           | (264,438  | ) |             |          | 1,640,037 |  
|                                                                                             |                                                                                    | Due from affiliates      |             |         | (283,754   | )    |            |           | 280,251   |   |             |          | (139,683  | )
|                                                                                             |                                                                                    | Unbilled revenue         |             |         | 83,538     |      |            |           | 38,635    |   |             |          | (130,736  | )
|                                                                                             |                                                                                    | Income tax receivable    |             |         | 331,337    |      |            |           |          |   |             |          |          |  
|                                                                                             |                                                                                    | Other assets             |             |         | (395,671   | )    |            |           | 17,411    |   |             |          | 328,341   |  
|                                                                                             |                                                                                    | Accounts payable         |             |         | (456,309   | )    |            |           | (272,146  | ) |             |          | (140,974  | )
|                                                                                             |                                                                                    | Accrued compensation     |             |         | 7,935      |      |            |           | (923,771  | ) |             |          | (71,255   | )
|                                                                                             |                                                                                    | Accrued liabilities      |             |         | (1,075,860 | )    |            |           | (163,976  | ) |             |          | 134,622   |  
|                                                                                             |                                                                                    | Deferred revenue         |             |         | (844,986   | )    |            |           | 1,589,169 |   |             |          | (556,618  | )
|                                                                                             |                                                                                    |                          |             |         |            |      |            |           |           |   |             |         
|Net cash provided by (used in) operating
	activities                                         |                                                                                    |                          | (987,614    | )       |            |      | 3,005,703  |           |           |   | 3,002,824   |         
|Investing activities                                                                         |                                                                                    |                          |             |         |            |      |            |           |           |   |             |         
|Purchases of short-term investments                                                          |                                                                                    |                          | (16,298,225 | )       |            |      | (7,280,780 | )         |           |   | (4,705,851  | )       
|Sales of short-term investments                                                              |                                                                                    |                          | 12,784,046  |         |            |      | 340,284    |           |           |   | 11,014,139  |         
|Maturities of short-term investments                                                         |                                                                                    |                          | 2,935,000   |         |            |      | 6,900,000  |           |           |   | 1,850,000   |         
|Purchases of property and equipment, net                                                     |                                                                                    |                          | (709,568    | )       |            |      | (905,449   | )         |           |   | (132,963    | )       
|Proceeds from disposal of assets                                                             |                                                                                    |                          | 29,640      |         |            |      | 73,044     |           |           |   | 7,747       |         
|Additions to computer software costs                                                         |                                                                                    |                          | (642,820    | )       |            |      | (1,190,758 | )         |           |   | (716,756    | )       
|                                                                                             |                                                                                    |                          |             |         |            |      |            |           |           |   |             |         
|Net cash provided by (used in) investing
	activities                                         |                                                                                    |                          | (1,901,927  | )       |            |      | (2,063,659 | )         |           |   | 7,316,316   |         
|Financing activities                                                                         |                                                                                    |                          |             |         |            |      |            |           |           |   |             |         
|Principal payments under capital lease obligations                                           |                                                                                    |                          | (41,566     | )       |            |      | (12,620    | )         |           |   |            |         
|Purchase of treasury stock                                                                   |                                                                                    |                          |            |         |            |      |           |           |           |   | (12,015,772 | )       
|Sale of treasury stock                                                                       |                                                                                    |                          | 77,006      |         |            |      | 106,710    |           |           |   | 93,313      |         
|Proceeds from issuance of common stock                                                       |                                                                                    |                          | 16,471      |         |            |      | 10,501     |           |           |   | 42,583      |         
|                                                                                             |                                                                                    |                          |             |         |            |      |            |           |           |   |             |         
|Net cash provided by (used in) financing
	activities                                         |                                                                                    |                          | 51,911      |         |            |      | 104,591    |           |           |   | (11,879,876 | )       
|                                                                                             |                                                                                    |                          |             |         |            |      |            |           |           |   |             |         
|Increase (decrease) in cash and cash
	equivalents                                            |                                                                                    |                          | (2,837,630  | )       |            |      | 1,046,635  |           |           |   | (1,560,736  | )       
|Effect of foreign currency on cash                                                           |                                                                                    |                          | (110,433    | )       |            |      | (24,472    | )         |           |   | (20,555     | )       
|Cash and cash equivalents at beginning of year                                               |                                                                                    |                          | 6,694,420   |         |            |      | 3,746,357  |           |           |   | 4,768,520   |         
|                                                                                             |                                                                                    |                          |             |         |            |      |            |           |           |   |             |         
|Cash and cash equivalents at end of year                                                     |                                                                                    | $                        | 3,746,357   |         |            | $    | 4,768,520  |           |           | $ | 3,187,229   |         
|                                                                                             |                                                                                    |                          |             |         |            |      |            |           |           |   |             |         
|Supplemental disclosure of cash flow
	information:                                           |                                                                                    |                          |             |         |            |      |            |           |           |   |             |         
|Interest paid                                                                                |                                                                                    | $                        | 3,108       |         |            | $    | 1,040      |           |           | $ |            |         
|                                                                                             |                                                                                    |                          |             |         |            |      |            |           |           |   |             |         
|Notes issued for purchase of treasury stock                                                  |                                                                                    | $                        |            |         |            | $    |           |           |           | $ | 2,279,200   |         
|                                                                                             |                                                                                    |                          |             |         |            |      |            |           |           |   |             |         

See accompanying notes.

F-6



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##### Table of Contents



DOCUMENT SCIENCES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1.     Organization
and Summary of Significant Accounting Policies

Organization

Document Sciences Corporation was incorporated on
October 18, 1991 in Delaware as a subsidiary of Xerox
Corporation (Xerox). We develop, market and support a family of
document automation software products and services used in high
volume electronic publishing applications. Autograph, our
document automation software architecture, enables personalized
publishing solutions for many industries including insurance,
managed healthcare, financial services, commercial print
services, government, telecommunications and manufacturing.

We currently derive substantially all of our
license revenues from licenses of CompuSet, Autographsflagship product, and related products and from fees for
services related to the CompuSet software. Our financial
performance will continue to depend, in significant part, on the
successful development, introduction and customer acceptance of
new and enhanced versions of the CompuSet software and related
products. There can be no assurance that we will continue to be
successful in developing and marketing CompuSet products and
related services.

We currently have a variety of contractual and
informal relationships with Xerox and affiliates of Xerox,
including a cooperative marketing agreement, a transfer and
license agreement and various distribution agreements. There can
be no assurance that Xerox or its affiliates will continue these
relationships. Our failure to maintain these relationships with
Xerox and its affiliates could have a material adverse effect on
our financial statements.

Basis of
Presentation

In 1994, we established a wholly owned
subsidiary, Document Sciences Europe, in France, in order to
market and support our products to the European community. The
accompanying consolidated financial statements include the
accounts of all our operations. Significant intercompany
accounts and transactions have been eliminated in consolidation.

Use of
Estimates in the Preparation of Financial
Statements

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

Foreign
Operations

The functional currency of our French subsidiary
in 2001 was the French Franc. Beginning January 1, 2002,
the functional currency became the Euro. The balance sheet
accounts of our subsidiary are translated into U.S. Dollars at
exchange rates prevailing at the balance sheet dates. Revenues
and expenses are translated into U.S. Dollars at the average
rates of exchange during the period. Foreign currency
translation gains are recorded as a separate component of
stockholders equity. Foreign currency transaction gains
and losses are included in selling and marketing expenses in the
consolidated statements of operations and were not significant
during the years ended December 31, 1999, 2000 and 2001.

Cash, Cash
Equivalents and Short-term Investments

Cash and cash equivalents consist of cash and
highly liquid investments that include debt securities with
remaining maturities when acquired of three months or less and
are stated at fair market value. We evaluate

F-7



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##### Table of Contents



DOCUMENT SCIENCES CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the financial strength of institutions at which
significant investments are made and believe the related credit
risk is limited to an acceptable level.

In accordance with Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for
Certain Investments in Debt and Equity Securities, we have
classified our investments as available-for-sale.
Available-for-sale securities are carried at fair value.
Unrealized gains and losses, net of tax, are reported in
stockholders equity. Realized gains and losses and
declines in value judged to be other-than-temporary, if any, on
available-for-sale securities will be included in investment
income. The cost of securities sold is based on the specific
identification method.



| |                             
| | ----------------------------
| | Concentration of Credit Risk

We sell our products primarily to large,
multinational customers in the United States, Europe, Canada,
Australia and Brazil. We derived 25%, 28% and 21% of our total
revenues from customers outside the United States for the years
ended December 31, 1999, 2000 and 2001, respectively. A
significant concentration of our customers is in the insurance,
finance and commercial print service industries. Xerox was the
only customer that accounted for more than 10% of our revenue in
any one year. They accounted for 21%, 23% and 19% for the years
ended December 31, 1999, 2000 and 2001, respectively.

Credit is extended based on an evaluation of the
customers financial condition and a cash deposit is
generally not required. We estimate our potential losses on
trade receivables on an ongoing basis and provide for
anticipated losses in the period in which the revenues are
recognized.



| |                                 
| | --------------------------------
| | Impairment of Long-Lived
	Assets

In accordance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, we record impairment
losses on long-lived assets used in operations when indicators
of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the
assets carrying amount. SFAS No. 121 also addresses
the accounting for long-lived assets that are expected to be
disposed of. To date, no such impairments have been identified.



| |                        
| | -----------------------
| | Computer Software Costs

In accordance with SFAS No. 86,
Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed, costs incurred in the research
and development of new software products and significant
enhancements to existing software products are expensed as
incurred until the technological feasibility of the product has
been established. After technological feasibility has been
established, direct production costs, including programming and
testing, are capitalized until general release of the product.

Capitalized costs of software to be sold,
licensed or otherwise marketed are amortized using the greater
of the amount computed using the ratio of current period product
revenues to estimated total product revenues or the
straight-line method over the remaining estimated economic lives
of the products. It is possible that estimated total product
revenues, the estimated economic life of the product, or both,
will be reduced in the future. As a result, the carrying amount
of capitalized software costs may be reduced in the future,
which could cause our operating results in future periods to be
adversely affected.



| |                              
| | -----------------------------
| | Depreciation and Amortization

Depreciation is provided on a straight-line
method over the estimated useful lives of the assets (generally
three to seven years). Amortization of leasehold improvements is
provided over the lesser of the remaining lease term or the
estimated useful life of the improvements. Prior to 2002,
amortization of goodwill was provided over an estimated life of
15 years. Beginning in 2002, we will adopt SFAS
No. 142, Goodwill and Other Intangible Assets, which
states that we annually review goodwill for impairment.

F-8



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##### Table of Contents



DOCUMENT SCIENCES CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                    
| | -------------------
| | Revenue Recognition

We recognize revenue in accordance with SOP 97-2,
Software Revenue Recognitionand SAB No. 101,
Revenue Recognition in Financial Statements.Initial
license fees are recognized when a contract exists, the fee is
fixed and determinable, software delivery has occurred and
collection of the receivable is deemed probable. The fair value
of the initial license fee representing the software support for
the first year is deferred and recognized ratably over the
period of support. Annual renewal license and support fees are
recognized ratably over the contract period. Revenues generated
from consulting services are recognized as the related services
are performed. However, when such consulting services are deemed
to be essential to the functionality of the delivered software
product, revenue from the entire arrangement is recognized on a
percentage of completion method or not until the contract is
completed in accordance with SOP 81-1, Accounting for
Performance of Construction-Type and Certain Production-Type
Contracts, and ARB No. 45, Long-Term
Construction-Type Contracts.



| |                                     
| | ------------------------------------
| | Computation of Net Income Per
	Share

In accordance with SFAS No. 128, Earnings
per Share, Basic EPS includes no dilution and is
based on weighted-average common shares outstanding for the
period. SFAS No. 128 also requires companies with complex
capital structures to present Diluted EPS that
reflects the potential dilution of securities such as employee
stock options.

In 1999, 2000 and 2001, the difference between
weighted-average shares used in determining Basic EPS versus
Diluted EPS related to dilutive common stock options totaled
123,060, 382,305 and 282,856 shares, respectively. Common stock
options to purchase 448,908, 227,722 and 282,274 shares were
excluded from the calculation of weighted-average shares used in
determining Diluted EPS for 1999, 2000 and 2001, respectively,
as their effect would have been antidilutive.



| |              
| | -------------
| | Stock Options

As permitted by SFAS No. 123, Accounting
for Stock-based Compensation, we have elected to follow APB
No. 25, Accounting for Stock Issued to Employees,and related interpretations in accounting for its employee
stock options. Under APB Opinion No. 25, among other
things, when the exercise price of our employee stock options is
not less than the market price of the underlying stock on the
date of grant, no compensation expense is recognized.



| |             
| | ------------
| | Income Taxes

We follow the liability method of accounting for
income taxes, as set forth in SFAS No. 109, Accounting
for Income Taxes.



| |                     
| | --------------------
| | Comprehensive Income

In 1998, we adopted SFAS No. 130,
Reporting Comprehensive Income.SFAS No. 130
requires that all components of comprehensive income, including
net income, be reported in the financial statements in the
period they are recognized. Comprehensive income is defined as
the change in equity during a period from transactions and other
events and circumstances from non-owner sources. Net income and
other comprehensive income, including foreign currency
translation adjustments and unrealized gains and losses on
investments, shall be reported, net of their related tax effect,
to arrive at comprehensive income. We have disclosed
comprehensive income in our financial statements accordingly.

F-9



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##### Table of Contents



DOCUMENT SCIENCES CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                    
| | -------------------
| | Segment Information

In 1998, we adopted SFAS No. 131,
Disclosures about Segments of an Enterprise and Related
Information.SFAS No. 131 amends the requirements for
public enterprises to report financial and descriptive
information about their reportable operating segments. Operating
segments, as defined in SFAS No. 131, are components of an
enterprise for which separate financial information is available
and is evaluated regularly by a company in deciding how to
allocate resources and in assessing performance. This financial
information is required to be reported on the basis that is used
internally for evaluating the segment performance. The chief
operating decision maker does not evaluate our operation based
on geographic location, and, therefore, we operate in one
business segment, the software business. Geographic information,
however, has been disclosed in accordance with the provisions of
SFAS No. 131.



| |                                           
| | ------------------------------------------
| | Recently Issued Accounting
	Pronouncements

In July 2001, the FASB issued SFAS No. 141,
Business Combinationsand No. 142, Goodwill and
Other Intangible Assets.SFAS No. 141 requires all
business combinations initiated after June 30, 2001 to be
accounted for by the purchase method. Under SFAS No. 142,
goodwill and intangible assets with indefinite lives are no
longer amortized but are reviewed annually (or more frequently
if impairment indicators arise) for impairment. Separate
intangible assets that are not deemed to have an indefinite life
will continue to be amortized over their useful lives (but with
no maximum life). The amortization provisions of SFAS
No. 142 apply to goodwill and intangible assets acquired
after June 30, 2001. With respect to goodwill and
intangible assets acquired prior to July 1, 2001, we are
required to adopt SFAS No. 142 effective January 1,
2002. Effective January 1, 2002, we will discontinue
amortization of goodwill, which will reduce annual operating
expenses by approximately $70,000.

In August 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which addresses financial accounting and
reporting for the impairment of long-lived assets and supercedes
SFAS No. 121, Accounting for the Impairment or Disposal
of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, and the accounting and reporting provisions of APB
Opinion No. 30, Reporting the Results of Operations for
a Disposal of a Segment of a Business.We are required to
adopt SFAS No. 144 effective January 1, 2002. We do
not expect the adoption of SFAS No. 144 will have a
significant impact on our operating results and financial
condition.

2.     Financial
Statement Information

Investments

We have classified all of our investment
securities as available-for-sale. The following table summarizes
available-for-sale securities at December 31, 2000 and 2001:

|                                   |  |      |            |            |  |            |        |            |  |   |        |  |  |   |            | 
|---------------------------------- |  | ---- | ---------- | ---------- |  | ---------- | ------ | ---------- |  | - | ------ |  |  | - | ---------- | 
|                                   |  |      |            | Gross      |  | Gross      |        |           
|                                   |  |      |            | Unrealized |  | Unrealized |        | Estimated 
|                                   |  | Cost |            | Gains      |  | Losses     |        | Fair Value
|                                   |  |      |            |            |  |            |        |           
|December 31, 2000                  |  |      |            |            |  |            |        |            |  |   |        |  |  |   |            | 
|U.S. treasury securities           |  | $    | 3,827,316  |            |  | $          | 3,403  |            |  | $ | 11,395 |  |  | $ | 3,819,324  | 
|U.S. government agency obligations |  |      | 4,123,255  |            |  |            | 6,406  |            |  |   | 2,890  |  |  |   | 4,126,771  | 
|U.S. corporate securities          |  |      | 5,844,037  |            |  |            | 31,933 |            |  |   | 38,470 |  |  |   | 5,837,500  | 
|                                   |  |      |            |            |  |            |        |            |  |   |        |  |  |   |            | 
|                                   |  | $    | 13,794,608 |            |  | $          | 41,742 |            |  | $ | 52,755 |  |  | $ | 13,783,595 | 
|                                   |  |      |            |            |  |            |        |            |  |   |        |  |  |   |            | 
|December 31, 2001                  |  |      |            |            |  |            |        |            |  |   |        |  |  |   |            | 
|U.S. government agency obligations |  | $    | 5,664,527  |            |  | $          | 73,139 |            |  | $ | 1,466  |  |  | $ | 5,736,200  | 
|                                   |  |      |            |            |  |            |        |            |  |   |        |  |  |   |            | 

F-10



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##### Table of Contents



DOCUMENT SCIENCES CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The amortized cost and estimated fair value of
available-for-sale securities at December 31, 2001, by
contractual maturity, are shown below:

|                                     |  |      |           |            |  |   |           | 
|------------------------------------ |  | ---- | --------- | ---------- |  | - | --------- | 
|                                     |  |      |           | Estimated 
|                                     |  | Cost |           | Fair Value
|                                     |  |      |           |           
|Due in one year or less              |  | $    | 2,254,900 |            |  | $ | 2,271,419 | 
|Due after one year through ten years |  |      | 3,409,627 |            |  |   | 3,464,781 | 
|                                     |  |      |           |            |  |   |           | 
|                                     |  | $    | 5,664,527 |            |  | $ | 5,736,200 | 
|                                     |  |      |           |            |  |   |           | 

Property and
Equipment

Property and equipment are stated at cost and
consist of the following at December 31:

|                                               |  |      |            |      |  |   |            |  
|---------------------------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | -
|                                               |  | 2000 |            | 2001
|                                               |  |      |            |     
|Computer equipment                             |  | $    | 2,177,786  |      |  | $ | 1,358,695  |  
|Office equipment                               |  |      | 328,249    |      |  |   | 311,889    |  
|Office furniture and fixtures                  |  |      | 426,830    |      |  |   | 448,175    |  
|Leasehold improvements                         |  |      | 567,649    |      |  |   | 523,423    |  
|                                               |  |      |            |      |  |   |            |  
|                                               |  |      | 3,500,514  |      |  |   | 2,642,182  |  
|Less accumulated depreciation and amortization |  |      | (1,569,815 | )    |  |   | (1,463,582 | )
|                                               |  |      |            |      |  |   |            |  
|                                               |  | $    | 1,930,699  |      |  | $ | 1,178,600  |  
|                                               |  |      |            |      |  |   |            |  

The cost of equipment acquired under capital
leases totaled $203,853 and $176,715 at December 31, 2000
and 2001, respectively, with accumulated depreciation of
$188,879 and $173,773 at December 31, 2000 and 2001,
respectively.

3.     Segment
Information

The tables below summarize our operating results
by our major geographic locations in the United States and
Europe:

|                                |  |               |            |        |  |              |           |        |  |   |         |   |  |   |            | 
|------------------------------- |  | ------------- | ---------- | ------ |  | ------------ | --------- | ------ |  | - | ------- | - |  | - | ---------- | 
|                                |  | United States |            | Europe |  | Eliminations |           | Totals
|                                |  |               |            |        |  |              |           |       
|Year ended December 31, 1999    |  |               |            |        |  |              |           |        |  |   |         |   |  |   |            | 
|Sales to unaffiliated customers |  | $             | 17,641,284 |        |  | $            | 1,490,348 |        |  | $ |        |   |  | $ | 19,131,632 | 
|Sales to affiliates             |  |               | 2,972,985  |        |  |              | 2,200,623 |        |  |   |        |   |  |   | 5,173,608  | 
|                                |  |               |            |        |  |              |           |        |  |   |         |   |  |   |            | 
|Revenues                        |  | $             | 20,614,269 |        |  | $            | 3,690,971 |        |  | $ |        |   |  | $ | 24,305,240 | 
|                                |  |               |            |        |  |              |           |        |  |   |         |   |  |   |            | 
|Operating income (loss)         |  | $             | 1,549,879  |        |  | $            | (183,570  | )      |  | $ |        |   |  | $ | 1,366,309  | 
|                                |  |               |            |        |  |              |           |        |  |   |         |   |  |   |            | 
|Identifiable assets             |  | $             | 30,106,425 |        |  | $            | 332,919   |        |  | $ | (16,666 | ) |  | $ | 30,422,678 | 
|                                |  |               |            |        |  |              |           |        |  |   |         |   |  |   |            | 

F-11



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##### Table of Contents



DOCUMENT SCIENCES CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                |  |               |            |        |  |              |           |        |  |   |         |   |  |   |            |  
|------------------------------- |  | ------------- | ---------- | ------ |  | ------------ | --------- | ------ |  | - | ------- | - |  | - | ---------- | -
|                                |  | United States |            | Europe |  | Eliminations |           | Totals
|                                |  |               |            |        |  |              |           |       
|Year ended December 31, 2000    |  |               |            |        |  |              |           |        |  |   |         |   |  |   |            |  
|Sales to unaffiliated customers |  | $             | 15,859,272 |        |  | $            | 1,532,215 |        |  | $ |        |   |  | $ | 17,391,487 |  
|Sales to affiliates             |  |               | 2,859,786  |        |  |              | 2,327,654 |        |  |   |        |   |  |   | 5,187,440  |  
|                                |  |               |            |        |  |              |           |        |  |   |         |   |  |   |            |  
|Revenues                        |  | $             | 18,719,058 |        |  | $            | 3,859,869 |        |  | $ |        |   |  | $ | 22,578,927 |  
|                                |  |               |            |        |  |              |           |        |  |   |         |   |  |   |            |  
|Operating income (loss)         |  | $             | (551,081   | )      |  | $            | 135,465   |        |  | $ |        |   |  | $ | (415,616   | )
|                                |  |               |            |        |  |              |           |        |  |   |         |   |  |   |            |  
|Identifiable assets             |  | $             | 31,264,827 |        |  | $            | 248,233   |        |  | $ | (16,666 | ) |  | $ | 31,496,394 |  
|                                |  |               |            |        |  |              |           |        |  |   |         |   |  |   |            |  

|                                |  |               |            |        |  |              |           |        |  |   |         |   |  |   |            | 
|------------------------------- |  | ------------- | ---------- | ------ |  | ------------ | --------- | ------ |  | - | ------- | - |  | - | ---------- | 
|                                |  | United States |            | Europe |  | Eliminations |           | Totals
|                                |  |               |            |        |  |              |           |       
|Year ended December 31, 2001    |  |               |            |        |  |              |           |        |  |   |         |   |  |   |            | 
|Sales to unaffiliated customers |  | $             | 16,949,144 |        |  | $            | 1,045,804 |        |  | $ |        |   |  | $ | 17,994,948 | 
|Sales to affiliates             |  |               | 2,495,863  |        |  |              | 1,628,826 |        |  |   |        |   |  |   | 4,124,689  | 
|                                |  |               |            |        |  |              |           |        |  |   |         |   |  |   |            | 
|Revenues                        |  | $             | 19,445,007 |        |  | $            | 2,674,630 |        |  | $ |        |   |  | $ | 22,119,637 | 
|                                |  |               |            |        |  |              |           |        |  |   |         |   |  |   |            | 
|Operating income (loss)         |  | $             | 320,977    |        |  | $            | 38,369    |        |  | $ |        |   |  | $ | 359,346    | 
|                                |  |               |            |        |  |              |           |        |  |   |         |   |  |   |            | 
|Identifiable assets             |  | $             | 19,530,350 |        |  | $            | 192,488   |        |  | $ | (16,666 | ) |  | $ | 19,706,172 | 
|                                |  |               |            |        |  |              |           |        |  |   |         |   |  |   |            | 

Sales attributable to the United States were made
to customers located in North America, South America and
Australia. Sales attributable to Europe are based on those sales
generated by our French subsidiary. These sales were made to
customers located in Europe, the Middle East and Africa.

4.     Leases

We lease our headquarters in Carlsbad, California
under an operating lease expiring on February 28, 2005.
Under the terms of the lease, effective March 1, 1999,
monthly rental payments will be increased annually by 4%. The
lease provides us with an option to extend the lease term for an
additional five years at the base rent in effect for the last
year of the initial lease term plus 4%. Our offices in France
and Milwaukee, Wisconsin are under operating leases expiring on
April 15, 2004 and March 31, 2003, respectively.
Annual future minimum lease payments as of December 31,
2001 are as follows:

|                          |  |   |           | 
|------------------------- |  | - | --------- | 
|Years ending December 31, |  |  
|                          |  |  
|2002                      |  | $ | 428,221   | 
|2003                      |  |   | 298,006   | 
|2004                      |  |   | 268,815   | 
|2005                      |  |   | 45,092    | 
|                          |  |   |           | 
|                          |  | $ | 1,040,134 | 
|                          |  |   |           | 

Rent expense for the years ended
December 31, 1999, 2000 and 2001 was $451,871, $492,886 and
$545,202, respectively.

5.     Stockholders
Equity



| |      
| | -----
| | Stock

As of December 31, 2001, authorized capital
stock consisted of 30,000,000 shares of common stock and
2,000,000 shares of preferred stock.

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DOCUMENT SCIENCES CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                      
| | ---------------------
| | Stock Incentive Plans

Our stock incentive plans provide for the
issuance of incentive and nonstatutory options to purchase
common shares to eligible employees, officers, directors and
consultants. Our 1993 Stock Option Plan (the 1993
Plan) provided for the issuance of up to 1,500,000 shares.
In October 1995, the Board of Directors approved the 1995 Stock
Incentive Plan (the 1995 Plan), which provided for
the issuance of an additional 779,250 shares which included
29,250 shares previously reserved for issuance under the 1993
Plan. In 1998, 1999 and 2000, this plan was amended to provide
for the issuance of an additional 750,000, 350,000 and 1,000,000
shares, respectively. The 1995 Plan replaced the 1993 Plan. All
outstanding options under the 1993 Plan remain exercisable in
accordance with their original terms. Terms of stock purchase or
stock option agreements, including vesting requirements, are
determined by the Board of Directors, subject to the provisions
of the 1995 Plan. The maximum term of the options granted under
the 1995 Plan is ten years. The exercise price of incentive
stock options must equal at least the fair market value on the
date of grant. The exercise price of nonstatutory stock options
and stock issued under purchase rights must equal at least 85%
of the fair market value on the date of grant or time of
issuance.

The following table summarizes stock option
activity under the stock incentive plans:

|                             |           |           |           |              |   |                |            |             |  |   |      |      | 
|---------------------------- | --------- | --------- | --------- | ------------ | - | -------------- | ---------- | ----------- |  | - | ---- | ---- | 
|                             |           |           |           |              |   | Weighted      
|                             |           |           |           |              |   | Average       
|                             |           | Number    |           | Option Price |   | Exercise Price
|                             |           | of Shares |           | Per Share    |   | Per Share     
|                             |           |           |           |              |   |               
|Balance at December 31, 1999 |           |           | 1,646,679 |              |   | $              | .03-$10.00 |             |  | $ | 2.10 |     
|                             | Granted   |           |           | 161,500      |   |                | $          | 1.13-$ 5.00 |  |   | $    | 2.65 | 
|                             | Exercised |           |           | (4,050       | ) |                |            | $  .67      |  |   | $    | .67  | 
|                             | Canceled  |           |           | (169,215     | ) |                | $          | .67-$10.00  |  |   | $    | 2.05 | 
|                             |           |           |           |              |   |                |            |             |  |   |      |     
|Balance at December 31, 2000 |           |           | 1,634,914 |              |   | $              | .03-$10.00 |             |  | $ | 2.17 |     
|                             | Granted   |           |           | 520,150      |   |                | $          | .91-$ 2.64  |  |   | $    | 1.50 | 
|                             | Exercised |           |           | (44,406      | ) |                | $          | .03-$ 1.97  |  |   | $    | .27  | 
|                             | Canceled  |           |           | (395,943     | ) |                | $          | 1.13-$10.00 |  |   | $    | 2.27 | 
|                             |           |           |           |              |   |                |            |             |  |   |      |     
|Balance at December 31, 2001 |           |           | 1,714,715 |              |   | $              | .17-$10.00 |             |  | $ | 1.98 |     
|                             |           |           |           |              |   |                |            |             |  |   |      |     

As of December 31, 2001, 1,025,964 shares
were available for future grant. Following is a breakdown of the
options outstanding and exercisable as of December 31, 2001:

|                         |                  |             |  |               |           |                  |  |             |      |                  |  |   |      |  |  |  |         |  |  |   |      | 
|------------------------ | ---------------- | ----------- |  | ------------- | --------- | ---------------- |  | ----------- | ---- | ---------------- |  | - | ---- |  |  |  | ------- |  |  | - | ---- | 
|                         |                  |             |  | Weighted      |           | Weighted Average |  |             |      | Weighted Average
|                         |                  |             |  | Average       |           | Exercise Price   |  |             |      | Exercise Price  
|                         |                  | Options     |  | Remaining     |           | of Options       |  | Options     |      | of Options      
|Range of Exercise Prices |                  | Outstanding |  | Life in Years |           | Outstanding      |  | Exercisable |      | Exercisable     
|                         |                  |             |  |               |           |                  |  |             |      |                 
|                         | $ .17-$1.75      |             |  |               | 796,383   |                  |  |             | 8.37 |                  |  | $ | 1.39 |  |  |  | 286,078 |  |  | $ | 1.28 | 
|                         | $1.97            |             |  |               | 536,597   |                  |  |             | 7.70 |                  |  | $ | 1.97 |  |  |  | 304,092 |  |  | $ | 1.97 | 
|                         | $2.00-$10.00     |             |  |               | 381,735   |                  |  |             | 7.09 |                  |  | $ | 3.18 |  |  |  | 296,969 |  |  | $ | 3.33 | 
|                         |                  |             |  |               |           |                  |  |             |      |                  |  |   |      |  |  |  |         |  |  |   |      | 
|                         | Total or Average |             |  |               | 1,714,715 |                  |  |             | 7.87 |                  |  | $ | 1.98 |  |  |  | 887,139 |  |  | $ | 2.20 | 
|                         |                  |             |  |               |           |                  |  |             |      |                  |  |   |      |  |  |  |         |  |  |   |      | 

Adjusted pro forma information regarding our
operating results is required by SFAS No. 123, and has been
determined as if we had accounted for our employee stock options
under the fair value method of that Statement. The fair value of
options was estimated at the date of grant using the
Black-Scholes method for option pricing with the
following weighted-average assumptions: risk-free interest rates
of 5.5%-6%, dividend yields of 0%, expected volatility of .69 to
1.43 and a weighted-average expected life of the option of seven
years.

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DOCUMENT SCIENCES CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For purposes of adjusted pro forma disclosures,
the estimated fair value of the options is amortized to expense
over the options vesting period. The effect of applying
SFAS No. 123 for purposes of providing pro forma
disclosures is not likely to be representative of the effects on
our operating results for future years because changes in the
subjective input assumptions can materially affect future value
estimates. Our pro forma information is as follows:

|                                                        |  |                          |           |      |  |      |          |   |  |   |         | 
|------------------------------------------------------- |  | ------------------------ | --------- | ---- |  | ---- | -------- | - |  | - | ------- | 
|                                                        |  |                         
|                                                        |  | Years Ended December 31,
|                                                        |  |                         
|                                                        |  | 1999                     |           | 2000 |  | 2001
|                                                        |  |                          |           |      |  |     
|Adjusted pro forma basic net income (loss)              |  | $                        | 1,466,003 |      |  | $    | (292,321 | ) |  | $ | 541,356 | 
|Adjusted pro forma basic net income
	(loss) per share   |  | $                        | 0.14      |      |  | $    | (0.03    | ) |  | $ | 0.10    | 
|Adjusted pro forma diluted net income
	(loss) per share |  | $                        | 0.14      |      |  | $    | (0.03    | ) |  | $ | 0.09    | 

Our 1997 Employee Stock Purchase Plan provides
for the issuance of shares of our common stock, up to a total of
350,000 shares, to eligible employees. The price of the common
shares purchased under the Plan is equal to 85% of the fair
market value of the common shares on the first or last day of
the offering period, whichever is lower. Employees who choose to
participate in the plan can withhold between one and ten percent
of their wages. However, an employee cannot purchase more than
5,000 shares in any one offering period. As of December 31,
2001, 59,791 shares were available for issuance.

6.     Income
Taxes

For financial reporting purposes, income
(loss) before income taxes includes the following
components:

|              |  |                          |           |      |  |      |         |  |  |   |         | 
|------------- |  | ------------------------ | --------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|              |  |                         
|              |  | Years Ended December 31,
|              |  |                         
|              |  | 1999                     |           | 2000 |  | 2001
|              |  |                          |           |      |  |     
|United States |  | $                        | 2,294,445 |      |  | $    | 409,500 |  |  | $ | 601,898 | 
|Foreign       |  |                          | (183,570  | )    |  |      | 135,465 |  |  |   | 38,369  | 
|              |  |                          |           |      |  |      |         |  |  |   |         | 
|              |  | $                        | 2,110,875 |      |  | $    | 544,965 |  |  | $ | 640,267 | 
|              |  |                          |           |      |  |      |         |  |  |   |         | 

The provision for income taxes (benefit) is
as follows:

|         |         |                          |   |      |  |      |   |        |  |  |   |       | 
|-------- | ------- | ------------------------ | - | ---- |  | ---- | - | ------ |  |  | - | ----- | 
|         |         |                         
|         |         | Years Ended December 31,
|         |         |                         
|         |         | 1999                     |   | 2000 |  | 2001
|         |         |                          |   |      |  |     
|Current: |         |                          |   |      |  |      |   |        |  |  |   |      
|         | Federal |                          | $ |     |  |      | $ | 14,026 |  |  | $ | 1,807 | 
|         |         |                          |   |      |  |      |   |        |  |  |   |      

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##### Table of Contents



DOCUMENT SCIENCES CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Deferred income taxes reflect the net effect of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
deferred tax assets and liabilities are as follows:

|                                   |                                          |              |           |           |   |      |           |           |   |   |           |           |  
|---------------------------------- | ---------------------------------------- | ------------ | --------- | --------- | - | ---- | --------- | --------- | - | - | --------- | --------- | -
|                                   |                                          |             
|                                   |                                          | December 31,
|                                   |                                          |             
|                                   |                                          |              |           |           |   |     
|                                   |                                          | 1999         |           | 2000      |   | 2001
|                                   |                                          |              |           |           |   |     
|Deferred tax liabilities:          |                                          |              |           |           |   |      |           |           |   |   |           |          
|                                   | Computer software costs expensed for tax |              | $         | (490,200  | ) |      | $         | (502,200  | ) |   | $         | (421,200  | )
|                                   | Excess tax depreciation                  |              |           | (149,600  | ) |      |           | (138,800  | ) |   |           | (80,800   | )
|                                   |                                          |              |           |           |   |      |           |           |   |   |           |          
|Total deferred tax liabilities     |                                          |              | (639,800  | )         |   |      | (641,000  | )         |   |   | (502,000  | )        
|                                   |                                          |              |           |           |   |      |           |           |   |   |           |          
|Deferred tax assets:               |                                          |              |           |           |   |      |           |           |   |   |           |          
|                                   | Operating loss carryforwards             |              |           | 2,362,700 |   |      |           | 1,921,300 |   |   |           | 1,853,600 |  
|                                   | Accrued liabilities                      |              |           | 413,000   |   |      |           | 552,300   |   |   |           | 355,200   |  
|                                   | Tax credits                              |              |           | 231,900   |   |      |           | 431,600   |   |   |           | 490,800   |  
|                                   |                                          |              |           |           |   |      |           |           |   |   |           |          
|Total deferred tax assets          |                                          |              | 3,007,600 |           |   |      | 2,905,200 |           |   |   | 2,699,600 |          
|Valuation allowance                |                                          |              | 2,367,800 |           |   |      | 2,264,200 |           |   |   | 2,197,600 |          
|                                   |                                          |              |           |           |   |      |           |           |   |   |           |          
|Net deferred tax assets            |                                          |              | 639,800   |           |   |      | 641,000   |           |   |   | 502,000   |          
|                                   |                                          |              |           |           |   |      |           |           |   |   |           |          
|Net deferred tax asset (liability) |                                          | $            | 0         |           |   | $    | 0         |           |   | $ | 0         |          
|                                   |                                          |              |           |           |   |      |           |           |   |   |           |          

A valuation allowance has been recognized to
offset deferred tax assets as of December 31, 1999, 2000
and 2001 as realization of such assets is uncertain.

At December 31, 2001, we have federal net
operating loss carryforwards of approximately $5.4 million
that will begin expiring in 2018 unless previously utilized. At
December 31, 2001, we have federal and state research and
development tax credit carryforwards of approximately $419,000
and $71,800, respectively, that will begin expiring in 2012
unless previously utilized.

Pursuant to Sections 382 and 383 of the
Internal Revenue Code, annual use of our net operating loss
carryforwards may be limited in the event of a cumulative change
in ownership of more than 50% within a three-year period.

The differences between our income tax provision
and the amounts computed by applying the statutory Federal
income tax rate of 35% in 1999, 2000 and 2001 to income before
income taxes are as follows:

|                                           |  |              |          |      |  |      |          |   |  |   |          |  
|------------------------------------------ |  | ------------ | -------- | ---- |  | ---- | -------- | - |  | - | -------- | -
|                                           |  |             
|                                           |  | December 31,
|                                           |  |             
|                                           |  | 1999         |          | 2000 |  | 2001
|                                           |  |              |          |      |  |     
|Provision at statutory rate                |  | $            | 738,806  |      |  | $    | 185,829  |   |  | $ | 224,093  |  
|Benefit for graduated rates                |  |              | (21,109  | )    |  |      | (5,309   | ) |  |   | (6,402   | )
|Increase (decrease) in valuation allowance |  |              | (820,300 | )    |  |      | (103,600 | ) |  |   | (66,600  | )
|Permanent differences and other            |  |              | (102,603 | )    |  |      | (62,894  | ) |  |   | (149,284 | )
|                                           |  |              |          |      |  |      |          |   |  |   |          |  
|Provision for income taxes                 |  | $            |         |      |  | $    | 14,026   |   |  | $ | 1,807    |  
|                                           |  |              |          |      |  |      |          |   |  |   |          |  

7.     Transactions
with Affiliates

We have distribution agreements with affiliates
providing the non-exclusive right to sub-license our software in
Canada, Australia and Brazil. The terms of the distributor
agreements provide that the affiliates receive a discount from
the list price of our licensed products and annual license fees.
Revenues from the affiliates under these agreements, net of
discounts, were $2.4 million, $2.4 million and
$2.1 million in 1999,

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##### Table of Contents



DOCUMENT SCIENCES CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

2000 and 2001, respectively. Included in accounts
receivable are $900,500, $707,000 and $762,600 from these
revenues at December 31, 1999, 2000 and 2001, respectively.

We have distribution agreements with affiliates
providing the non-exclusive right to sub-license our software in
Europe. Revenues under these agreements were $2.2 million,
$2.3 million and $1.6 million in 1999, 2000 and 2001,
respectively. Related accounts receivable are $663,300, $564,500
and $660,400 at December 31, 1999, 2000 and 2001,
respectively.

We also license software to Xerox and affiliates
of Xerox in the United States. These revenues were $263,600,
$443,700 and $430,300 in 1999, 2000 and 2001, respectively.
Related accounts receivable are $221,400, $332,600 and $316,800
at December 31, 1999, 2000 and 2001, respectively.

On February 16, 2001, we commenced a self
tender offer for 6,000,000 shares of our outstanding common
stock. Xerox tendered all of its shares of Document Sciences
common stock in the offer. The tender offer expired on March 23,
2001. In April 2001, we completed our tender offer and purchased
6,000,000 shares of our outstanding common stock for $2.00 per
share.

On February 16, 2001, Xerox also granted us
an option to purchase up to 2,000,000 additional shares of our
stock it owned after completion of the tender offer at the
tender offer price. On April 16, 2001, we executed two
promissory notes payable to Xerox pursuant to our exercise of
the option to purchase 1,139,600 shares of our common stock
owned by Xerox at $2.00 per share. The principal amount of the
first note is $2,000,000 and accrues interest at 9%. This note
is due on March 23, 2002. The principal amount of the
second note is $279,200 and accrues interest at 9%. This note is
due on March 23, 2003.

As a result of our tender offer and our exercise
of the option to purchase additional shares of Xerox, Xerox
presently owns 19.9% of our outstanding shares.

8.     Sales
Commitments

Since 1999, we have been licensing software for
non-cancelable three-year terms. Where we provide extended
payment terms to customers (allowing them to make payments on a
quarterly or annual basis), we recognize license revenue when
invoices come due, as SOP 97-2 precludes us from
recognizing the portion of these licenses that is not currently
due from the customer. Amounts not currently due from customers
on these agreements are not reflected on our Balance Sheet and
are identified below.

We also began signing customers to non-cancelable
three-year maintenance agreements, which we recognize ratably
over the service period. As we invoice these agreements, the
amounts are recorded initially as deferred revenue. Amounts to
be invoiced are not reflected on our Balance Sheet and are
identified below.

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##### Table of Contents



DOCUMENT SCIENCES CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes these multi-year
license and maintenance agreement activities showing ending
balances not reflected on our Balance Sheet at December 31,
2001:

|                                          |  |                      |           |            |  |        |            |   |  |   |            |  
|----------------------------------------- |  | -------------------- | --------- | ---------- |  | ------ | ---------- | - |  | - | ---------- | -
|                                          |  |                     
|                                          |  | Unrecognized Revenue
|                                          |  | Backlog Maintenance 
|                                          |  |                     
|                                          |  | Licenses             |           | Agreements |  | Totals
|                                          |  |                      |           |            |  |       
|Balances at December 31, 1998             |  | $                    | -0-       |            |  | $      | -0-        |   |  | $ | -0-        |  
|1999 additions                            |  |                      | 1,083,008 |            |  |        | 3,876,105  |   |  |   | 4,959,113  |  
|Invoiced and included in deferred revenue |  |                      | (241,978  | )          |  |        | (950,588   | ) |  |   | (1,192,566 | )
|                                          |  |                      |           |            |  |        |            |   |  |   |            |  
|Balances at December 31, 1999             |  |                      | 841,030   |            |  |        | 2,925,517  |   |  |   | 3,766,547  |  
|2000 additions                            |  |                      | 66,329    |            |  |        | 3,171,475  |   |  |   | 3,237,804  |  
|Invoiced and included in deferred revenue |  |                      | (419,295  | )          |  |        | (2,674,323 | ) |  |   | (3,093,618 | )
|                                          |  |                      |           |            |  |        |            |   |  |   |            |  
|Balances at December 31, 2000             |  |                      | 488,064   |            |  |        | 3,422,669  |   |  |   | 3,910,733  |  
|2001 additions                            |  |                      | 23,334    |            |  |        | 2,830,831  |   |  |   | 2,854,165  |  
|Invoiced and included in deferred revenue |  |                      | (484,257  | )          |  |        | (3,193,020 | ) |  |   | (3,677,277 | )
|                                          |  |                      |           |            |  |        |            |   |  |   |            |  
|Balances at December 31, 2001             |  | $                    | 27,141    |            |  | $      | 3,060,480  |   |  | $ | 3,087,621  |  
|                                          |  |                      |           |            |  |        |            |   |  |   |            |  

All revenue from the unrecognized revenue backlog
will have been recognized by the end of the third quarter of
2005.

9.     Employee
Retirement Plan

401(k)
Plan

We have an employee savings and retirement plan
(the 401(k) Plan) that is intended to be
tax-qualified covering substantially all employees. Under the
terms of the 401(k) Plan, employees may elect to contribute up
to 15% of their compensation, or the statutory prescribed limit,
if less, to the 401(k) Plan as a savings contribution. We may,
in our discretion, match employee contributions, at such rate as
we determine, up to a maximum of $3,000 or 10% of the
employees compensation. The 401(k) Plan has a profit
sharing element whereby we can contribute annually an amount
determined by the Board of Directors. An employees
interest in matching contributions and profit sharing
contributions generally vest over four years from the date of
employment. For the years ended December 31, 1999, 2000 and
2001, we made discretionary contributions of $346,200, $349,500
and $202,900, respectively.

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##### Table of Contents



DOCUMENT SCIENCES CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

10.     Financial
Statements and Supplementary Data

Supplementary interim financial information is
presented as follows (unaudited):

|                                |  |                |           |          |  |               |           |              |  |   |           |   |  |   |           | 
|------------------------------- |  | -------------- | --------- | -------- |  | ------------- | --------- | ------------ |  | - | --------- | - |  | - | --------- | 
|                                |  |               
|                                |  | Quarters Ended
|                                |  |               
|                                |  | March 31,      |           | June 30, |  | September 30, |           | December 31,
|                                |  |                |           |          |  |               |           |             
|2000                            |  |                |           |          |  |               |           |              |  |   |           |   |  |   |           | 
|Revenues                        |  | $              | 5,669,926 |          |  | $             | 5,215,972 |              |  | $ | 4,981,821 |   |  | $ | 6,711,208 | 
|Cost of revenues                |  |                | 1,309,457 |          |  |               | 1,200,741 |              |  |   | 1,284,185 |   |  |   | 1,661,802 | 
|Net income                      |  |                | 413,912   |          |  |               | (382,875  | )            |  |   | (208,652  | ) |  |   | 708,554   | 
|Basic income per share          |  |                | .04       |          |  |               | (.04      | )            |  |   | (.02      | ) |  |   | .07       | 
|Diluted income per share        |  |                | .04       |          |  |               | (.04      | )            |  |   | (.02      | ) |  |   | .07       | 
|2001                            |  |                |           |          |  |               |           |              |  |   |           |   |  |   |           | 
|Revenues                        |  | $              | 5,257,439 |          |  | $             | 5,654,141 |              |  | $ | 5,032,409 |   |  | $ | 6,175,648 | 
|Cost of revenues                |  |                | 1,683,494 |          |  |               | 1,394,637 |              |  |   | 1,337,854 |   |  |   | 1,570,307 | 
|Net income (loss)               |  |                | (351,582  | )        |  |               | 723,488   |              |  |   | 196,118   |   |  |   | 70,436    | 
|Basic income (loss) per share   |  |                | (.03      | )        |  |               | .19       |              |  |   | .05       |   |  |   | .02       | 
|Diluted income (loss) per share |  |                | (.03      | )        |  |               | .19       |              |  |   | .05       |   |  |   | .02       | 

11.     Subsequent
Events

Effective January 16, 2002, we entered into
a formal two-year development services and referral agreement
with Objectiva Software Solutions, Inc. (Objectiva). Document
Sciences has engaged Objectiva for development services since
January 2001 and has committed to pay Objectiva
$3.1 million over the two-year term of the agreement for
development services to be provided by a dedicated team. The
agreement is cancelable within 30 days due to material
breach or with 90 days notice if all scheduled work has
been completed. We would prorate the two-year fee in the case of
early termination. Objectiva provided $750,000 worth of
development services to us during the second half of 2001.
Additionally, the parties have entered into a referral
arrangement under which Objectiva would pay us 20% of net
revenue associated with a transaction with a customer that was
referred by us.

We are also negotiating agreements whereby we
would make an equity investment to acquire approximately 25% of
Objectivas outstanding stock for approximately $550,000 in
cash consideration and would enable Objectiva to resell our
software in Asia. It is expected that these agreements would be
finalized by the end of the first quarter 2002.

F-18



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SCHEDULE II

DOCUMENT SCIENCES CORPORATION

VALUATION AND QUALIFYING ACCOUNTS

|                             |                                             |            |   |            |  |            |   |            |  |  |   |         |  |  |   |           | 
|---------------------------- | ------------------------------------------- | ---------- | - | ---------- |  | ---------- | - | ---------- |  |  | - | ------- |  |  | - | --------- | 
|                             |                                             | Balance at |   | Charged to |  |            |   | Balance at
|                             |                                             | Beginning  |   | Costs and  |  |            |   | End       
|                             |                                             | of Year    |   | Expenses   |  | Deductions |   | of Year   
|                             |                                             |            |   |            |  |            |   |           
|Year Ended December 31, 1999 |                                             |            |   |            |  |            |   |            |  |  |   |         |  |  |   |          
|                             | Allowance for doubtful accounts and returns |            | $ | 725,561    |  |            | $ | 219,482    |  |  | $ | 179,170 |  |  | $ | 765,873   | 
|Year Ended December 31, 2000 |                                             |            |   |            |  |            |   |            |  |  |   |         |  |  |   |          
|                             | Allowance for doubtful accounts and returns |            |   | 765,873    |  |            |   | 658,165    |  |  |   | 411,861 |  |  |   | 1,012,177 | 
|Year Ended December 31, 2001 |                                             |            |   |            |  |            |   |            |  |  |   |         |  |  |   |          
|                             | Allowance for doubtful accounts and returns |            |   | 1,012,177  |  |            |   | 113,000    |  |  |   | 697,494 |  |  |   | 427,683   | 

S-1



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DOCUMENT SCIENCES CORPORATION

ANNUAL REPORT ON FORM 10-K

For Year Ended December 31, 2001


INDEX TO EXHIBITS

|        |             |                     |  |                                                                                                                                                                                                                                                                                                                
|------- | ----------- | ------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |             |                    
|Number  |             | Exhibit Description
|        |             |                    
|        | 3.1(1)      |                     |  | Restated Certificate of Incorporation of the
	Registrant filed May 1, 1992.                                                                                                                                                                                                                                    
|        | 3.2(1)      |                     |  | Form of Amended and Restated Certificate of
	Incorporation of the Registrant.                                                                                                                                                                                                                                  
|        | 3.3(1)      |                     |  | Amended and Restated Bylaws of the Registrant.                                                                                                                                                                                                                                                                 
|        | 3.4(1)      |                     |  | Form of Certificate of Amendment of Certificate
	of Incorporation of the Registrant.                                                                                                                                                                                                                           
|        | 4.1(1)      |                     |  | Specimen Stock Certificate.                                                                                                                                                                                                                                                                                    
|        | 4.2(6)      |                     |  | Rights Agreement Between the Registrant and U.S.
	Stock Transfer Corporation, as Rights Agent, dated May 11,
	2001, which includes as Exhibit A thereto the form of
	Rights Certificate to be Distributed to Holders of Rights after
	the Distribution Date (as that term is defined in the Rights
	Agreement).
|        | 10.1(1, 2)  |                     |  | Form of Indemnity Agreement Between the
	Registrant and each of its Officers and Directors.                                                                                                                                                                                                                    
|        | 10.2(1, 2)  |                     |  | 1993 Stock Option Plan and Form of Agreement.                                                                                                                                                                                                                                                                  
|        | 10.3(4)     |                     |  | 1995 Stock Incentive Plan and Form of Agreement,
	as amended.                                                                                                                                                                                                                                                  
|        | 10.4(1, 2)  |                     |  | Stockholder Rights Agreement Dated September 1996
	Between the Registrant and Xerox Corporation.                                                                                                                                                                                                               
|        | 10.5(1)     |                     |  | Tax Sharing Agreement Dated August 1996 Between
	the Registrant and Xerox Corporation.                                                                                                                                                                                                                         
|        | 10.6(1)     |                     |  | Transfer and License Agreement Dated July 1,
	1992, as Amended in September 1994, Between the Registrant and
	Xerox Corporation.                                                                                                                                                                               
|        | 10.7(1)     |                     |  | Strategic Marketing Alliance Agreement Dated
	September 1, 1993, Between the Registrant and Xerox
	Corporation.                                                                                                                                                                                                
|        | 10.8(4)     |                     |  | 1997 Employee Stock Purchase Plan, as amended.                                                                                                                                                                                                                                                                 
|        | 10.9(3)     |                     |  | Xerox Cooperative Marketing Agreement.                                                                                                                                                                                                                                                                         
|        | 10.10(3)    |                     |  | Xerox Canada Cooperative Marketing and Customer
	Support Agreement.                                                                                                                                                                                                                                            
|        | 10.11(4)    |                     |  | International Business Machines Marketing
	Agreement.                                                                                                                                                                                                                                                          
|        | 10.12(4)    |                     |  | Lease for Companys new Principal
	Facilities, as Amended, and Assignment of Lease.                                                                                                                                                                                                                            
|        | 10.13(2, 5) |                     |  | John L. McGannon Employment Agreement.                                                                                                                                                                                                                                                                         
|        | 10.14(6)    |                     |  | Form of Software License and Software Support
	Agreement.                                                                                                                                                                                                                                                      
|        | 10.15(6)    |                     |  | Form of Professional Services Agreement.                                                                                                                                                                                                                                                                       
|        | 10.16(6)    |                     |  | Form of Value Added Reseller Agreement.                                                                                                                                                                                                                                                                        
|        | 10.17(6)    |                     |  | Development Services and Referral Agreement
	Between Objectiva Software Solutions, Inc. and the Registrant.                                                                                                                                                                                                    
|        | 21.1(1)     |                     |  | List of Subsidiaries.                                                                                                                                                                                                                                                                                          
|        | 23.1(6)     |                     |  | Consent of Ernst & Young LLP, Independent
	Auditors.                                                                                                                                                                                                                                                           
|        | 24.1(6)     |                     |  | Power of Attorney (See page 21)                                                                                                                                                                                                                                                                                



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|    |                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------
|(1) | Previously filed as exhibits to Registration
	Statement on Form S-1 Registration Number 333-06344.                        
|   
|(2) | Indicates management compensatory plan, contract
	or arrangement.                                                         
|   
|(3) | Previously filed as exhibits to the
	Registrants Annual Report on Form 10-K for the fiscal
	year ended December 31, 1997.
|   
|(4) | Previously filed as exhibits to the
	Registrants Annual Report on Form 10-K for the fiscal
	year ended December 31, 1998.



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|    |                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------
|(5) | Previously filed as exhibits to the
	Registrants Annual Report on Form 10-K for the fiscal
	year ended December 31, 2000
|   
|(6) | Filed herewith.