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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2002

OR

[   ] 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: 0-27358

DOCUMENTUM, INC.

(exact name of registrant as
specified in its charter)


|                                                                                         |  |                                               
|---------------------------------------------------------------------------------------- |  | ----------------------------------------------
|Delaware(State or other jurisdiction of
incorporation or organization)                   |  | 95-4261421(I.R.S. Employer Identification No.)
|                                                                                        
|6801 Koll
Center Parkway, Pleasanton, California(Address of principal executive offices) |  | 94566-7047(Zip Code)                          

(Registrants telephone number, including area code): (925) 600-6800

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

Securities registered pursuant to Section 12(g) of the Act:
Nasdaq National Market
Common Stock, $0.001 par value(Title of Class)

Indicate by check mark whether the registrant has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes
X
   No .

The number of outstanding shares of the registrants Common Stock, par
value $0.001 per share, was
40,005,140 on October 31, 2002.





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TABLE OF CONTENTS



|                              |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                          
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEET                
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS      
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW       
|                              |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                              | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                              | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                              | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II. OTHER INFORMATION   
|                              | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURE                    
|Exhibit 99.1                 
|Exhibit 99.2                 



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FORM 10-Q

Index

|          |  |                                                                                       |  |                                                                                                                |  |        |  | 
|--------- |  | ------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------- |  | ------ |  | 
|PART I    |  | FINANCIAL INFORMATION                                                                 |  |                                                                                                                |  |       
|Item 1.   |  | Condensed Consolidated Financial Statements                                           |  | Page 3                                                                                                        
|          |  | Condensed Consolidated Balance Sheet as of September 30, 2002 and December 31, 2001   |  | Page 3                                                                                                        
|          |  |                                                                                       |  | Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2002 and 2001 |  | Page 4
|          |  |                                                                                       |  | Condensed Consolidated Statement of Cash Flow for the nine months ended September 30, 2002 and 2001            |  | Page 5
|          |  |                                                                                       |  | Notes to Condensed Consolidated Financial Statements                                                           |  | Page 6
|Item 2.   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | Page 14                                                                                                       
|Item 3.   |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | Page 32                                                                                                       
|Item 4.   |  | Controls and Procedures                                                               |  | Page 33                                                                                                       
|PART II   |  | OTHER INFORMATION                                                                     |  |                                                                                                                |  |       
|Item 6.   |  | Exhibits and Reports on Form 8-K                                                      |  | Page 34                                                                                                       
|Signature |  |                                                                                       |  | Page 34                                                                                                       

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PART I. FINANCIAL INFORMATION

ITEM 1.CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS


DOCUMENTUM, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except par value per share data; unaudited)*

|                                     |                                                                                                                          |                            |         |               |         |              |         |         |         | 
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------ | -------------------------- | ------- | ------------- | ------- | ------------ | ------- | ------- | ------- | 
|                                     |                                                                                                                          |                            |         | September 30, |         | December 31,
|                                     |                                                                                                                          |                            |         |               |         |             
|                                     |                                                                                                                          |                            |         | 2002          |         | 2001        
|                                     |                                                                                                                          |                            |         |               |         |             
|ASSETS                               |                                                                                                                          |                            |         |               |         |              |         |        
|Current assets:                      |                                                                                                                          |                            |         |               |         |              |         |        
|                                     | Cash and cash equivalents                                                                                                |                            | $       | 76,244        |         |              | $       | 48,420  |        
|                                     | Short-term investments                                                                                                   |                            |         | 97,792        |         |              |         | 37,842  |        
|                                     | Accounts receivable, net                                                                                                 |                            |         | 43,728        |         |              |         | 45,811  |        
|                                     | Other current assets                                                                                                     |                            |         | 26,904        |         |              |         | 24,664  |        
|                                     |                                                                                                                          |                            |         |               |         |              |         |        
|                                     |                                                                                                                          | Total current assets       |         |               | 244,668 |              |         |         | 156,737 | 
|Property and equipment, net          |                                                                                                                          |                            | 25,642  |               |         |              | 34,135  |        
|Long-term investments                |                                                                                                                          |                            | 60,151  |               |         |              | 6,589   |        
|Intangible assets, net               |                                                                                                                          |                            | 2,369   |               |         |              | 2,617   |        
|Goodwill                             |                                                                                                                          |                            | 8,317   |               |         |              | 7,449   |        
|Other assets                         |                                                                                                                          |                            | 11,870  |               |         |              | 8,363   |        
|                                     |                                                                                                                          |                            |         |               |         |              |         |        
|                                     |                                                                                                                          | $                          | 353,017 |               |         | $            | 215,890 |        
|                                     |                                                                                                                          |                            |         |               |         |              |         |        
|LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                                                          |                            |         |               |         |              |         |        
|Current liabilities:                 |                                                                                                                          |                            |         |               |         |              |         |        
|                                     | Accounts payable                                                                                                         |                            | $       | 3,855         |         |              | $       | 3,056   |        
|                                     | Accrued liabilities                                                                                                      |                            |         | 41,330        |         |              |         | 46,052  |        
|                                     | Deferred revenue                                                                                                         |                            |         | 29,849        |         |              |         | 27,088  |        
|                                     | Current portion of capital lease obligation                                                                              |                            |         | 47            |         |              |         | 77      |        
|                                     |                                                                                                                          |                            |         |               |         |              |         |        
|                                     |                                                                                                                          | Total current liabilities  |         |               | 75,081  |              |         |         | 76,273  | 
|                                     |                                                                                                                          |                            |         |               |         |              |         |        
|Senior convertible notes             |                                                                                                                          |                            | 125,000 |               |         |              |        |        
|Other long-term liabilities          |                                                                                                                          |                            | 661     |               |         |              | 686     |        
|                                     |                                                                                                                          |                            |         |               |         |              |         |        
|Stockholders equity:                |                                                                                                                          |                            |         |               |         |              |         |        
|                                     | Preferred stock, $0.001 par value; 5,000 shares authorized;
none issued and outstanding                                  |                            |         |              |         |              |         |        |        
|                                     | Common
stock, $0.001 par value; 100,000 shares authorized;
39,885 and 38,979 shares issued and outstanding, respectively |                            |         | 40            |         |              |         | 39      |        
|                                     | Additional paid-in capital                                                                                               |                            |         | 207,457       |         |              |         | 196,874 |        
|                                     | Accumulated other comprehensive income (loss)                                                                            |                            |         | 2,006         |         |              |         | (911    | )      
|                                     | Accumulated deficit                                                                                                      |                            |         | (57,228       | )       |              |         | (57,071 | )      
|                                     |                                                                                                                          |                            |         |               |         |              |         |        
|                                     |                                                                                                                          | Total stockholders equity |         |               | 152,275 |              |         |         | 138,931 | 
|                                     |                                                                                                                          |                            |         |               |         |              |         |        
|                                     |                                                                                                                          | $                          | 353,017 |               |         | $            | 215,890 |        
|                                     |                                                                                                                          |                            |         |               |         |              |         |        

*Certain prior year amounts have been reclassified to conform to current years presentation.

See accompanying notes to condensed consolidated financial statements.

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DOCUMENTUM, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data; unaudited)*

|                                                       |                               |                         |        |                    |        |                   |        |        |        |      |         |        |         |   |         |        |         | 
|------------------------------------------------------ | ----------------------------- | ----------------------- | ------ | ------------------ | ------ | ----------------- | ------ | ------ | ------ | ---- | ------- | ------ | ------- | - | ------- | ------ | ------- | 
|                                                       |                               |                         |        | Three Months Ended |        | Nine Months Ended
|                                                       |                               |                         |        | September 30,      |        | September 30,    
|                                                       |                               |                         |        |                    |        |                  
|                                                       |                               |                         |        | 2002               |        | 2001              |        | 2002   |        | 2001
|                                                       |                               |                         |        |                    |        |                   |        |        |        |     
|Revenue:                                               |                               |                         |        |                    |        |                   |        |        |        |      |         |        |         |   |         |       
|                                                       | License                       |                         | $      | 28,910             |        |                   | $      | 19,767 |        |      | $       | 81,039 |         |   | $       | 62,029 |        
|                                                       | Service                       |                         |        | 27,417             |        |                   |        | 25,555 |        |      |         | 79,858 |         |   |         | 75,242 |        
|                                                       |                               |                         |        |                    |        |                   |        |        |        |      |         |        |         |   |         |       
|                                                       |                               | Total revenue           |        |                    | 56,327 |                   |        |        | 45,322 |      |         |        | 160,897 |   |         |        | 137,271 | 
|                                                       |                               |                         |        |                    |        |                   |        |        |        |      |         |        |         |   |         |       
|Cost of revenue:                                       |                               |                         |        |                    |        |                   |        |        |        |      |         |        |         |   |         |       
|                                                       | License                       |                         |        | 2,347              |        |                   |        | 1,177  |        |      |         | 6,055  |         |   |         | 4,349  |        
|                                                       | Service                       |                         |        | 12,126             |        |                   |        | 12,250 |        |      |         | 37,351 |         |   |         | 38,282 |        
|                                                       |                               |                         |        |                    |        |                   |        |        |        |      |         |        |         |   |         |       
|                                                       |                               | Total cost of revenue   |        |                    | 14,473 |                   |        |        | 13,427 |      |         |        | 43,406  |   |         |        | 42,631  | 
|                                                       |                               |                         |        |                    |        |                   |        |        |        |      |         |        |         |   |         |       
|Gross profit                                           |                               |                         | 41,854 |                    |        |                   | 31,895 |        |        |      | 117,491 |        |         |   | 94,640  |       
|                                                       |                               |                         |        |                    |        |                   |        |        |        |      |         |        |         |   |         |       
|Operating expense:                                     |                               |                         |        |                    |        |                   |        |        |        |      |         |        |         |   |         |       
|                                                       | Sales and marketing           |                         |        | 23,753             |        |                   |        | 25,965 |        |      |         | 70,384 |         |   |         | 80,102 |        
|                                                       | Research and development      |                         |        | 8,905              |        |                   |        | 8,128  |        |      |         | 27,688 |         |   |         | 26,537 |        
|                                                       | General and administrative    |                         |        | 6,213              |        |                   |        | 6,121  |        |      |         | 18,727 |         |   |         | 19,069 |        
|                                                       | Restructuring/severance costs |                         |        |                   |        |                   |        |       |        |      |         | 1,043  |         |   |         | 3,817  |        
|                                                       |                               |                         |        |                    |        |                   |        |        |        |      |         |        |         |   |         |       
|                                                       |                               | Total operating expense |        |                    | 38,871 |                   |        |        | 40,214 |      |         |        | 117,842 |   |         |        | 129,525 | 
|                                                       |                               |                         |        |                    |        |                   |        |        |        |      |         |        |         |   |         |       
|Income (loss) from operations                          |                               |                         | 2,983  |                    |        |                   | (8,319 | )      |        |      | (351    | )      |         |   | (34,885 | )     
|Interest and other income (expense), net               |                               |                         | (122   | )                  |        |                   | 667    |        |        |      | 125     |        |         |   | 3,009   |       
|Permanent impairment of investment                     |                               |                         |       |                    |        |                   |       |        |        |      |        |        |         |   | (2,012  | )     
|                                                       |                               |                         |        |                    |        |                   |        |        |        |      |         |        |         |   |         |       
|Income(loss) before income tax provision               |                               |                         | 2,861  |                    |        |                   | (7,652 | )      |        |      | (226    | )      |         |   | (33,888 | )     
|Provision for (benefit from) income taxes              |                               |                         | 858    |                    |        |                   | 156    |        |        |      | (68     | )      |         |   | 2,780   |       
|                                                       |                               |                         |        |                    |        |                   |        |        |        |      |         |        |         |   |         |       
|Net income (loss)                                      |                               | $                       | 2,003  |                    |        | $                 | (7,808 | )      |        | $    | (158    | )      |         | $ | (36,668 | )     
|                                                       |                               |                         |        |                    |        |                   |        |        |        |      |         |        |         |   |         |       
|Basic income (loss) per share                          |                               | $                       | 0.05   |                    |        | $                 | (0.20  | )      |        | $    |        |        |         | $ | (0.97   | )     
|                                                       |                               |                         |        |                    |        |                   |        |        |        |      |         |        |         |   |         |       
|Diluted income (loss) per share                        |                               | $                       | 0.05   |                    |        | $                 | (0.20  | )      |        | $    |        |        |         | $ | (0.97   | )     
|                                                       |                               |                         |        |                    |        |                   |        |        |        |      |         |        |         |   |         |       
|Shares used to compute basic income (loss) per share   |                               |                         | 39,760 |                    |        |                   | 38,106 |        |        |      | 39,527  |        |         |   | 37,728  |       
|                                                       |                               |                         |        |                    |        |                   |        |        |        |      |         |        |         |   |         |       
|Shares used to compute diluted income (loss) per share |                               |                         | 41,152 |                    |        |                   | 38,106 |        |        |      | 39,527  |        |         |   | 37,728  |       
|                                                       |                               |                         |        |                    |        |                   |        |        |        |      |         |        |         |   |         |       

*Certain prior year amounts have been reclassified to conform to current years presentation.

See accompanying notes to condensed consolidated financial statements.

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DOCUMENTUM, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOW
(in thousands; unaudited)

|                                                 |                                                                                           |                                                     |                                       |                                                     |        |                   |          |          |        |        |         |  
|------------------------------------------------ | ----------------------------------------------------------------------------------------- | --------------------------------------------------- | ------------------------------------- | --------------------------------------------------- | ------ | ----------------- | -------- | -------- | ------ | ------ | ------- | -
|                                                 |                                                                                           |                                                     |                                       |                                                     |        | NINE MONTHS ENDED
|                                                 |                                                                                           |                                                     |                                       |                                                     |        | SEPTEMBER 30,    
|                                                 |                                                                                           |                                                     |                                       |                                                     |        |                  
|                                                 |                                                                                           |                                                     |                                       |                                                     |        | 2002              |          | 2001    
|                                                 |                                                                                           |                                                     |                                       |                                                     |        |                   |          |         
|Cash flows from operating activities:            |                                                                                           |                                                     |                                       |                                                     |        |                   |          |         
|                                                 | Net loss                                                                                  |                                                     | $                                     | (158                                                | )      |                   |          | (36,668  | )     
|                                                 | Adjustments to reconcile net loss to net cash provided by
(used in) operating activities: |                                                     |                                       |                                                     |        |                   |          |          |       
|                                                 |                                                                                           | Loss on sale and disposal of fixed assets           |                                       |                                                     | 1,809  |                   |          |          | 11     |       
|                                                 |                                                                                           | Depreciation                                        |                                       |                                                     | 11,027 |                   |          |          | 10,634 |       
|                                                 |                                                                                           | Amortization of intangibles and debt issuance costs |                                       |                                                     | 925    |                   |          |          |       |       
|                                                 |                                                                                           | Provision for doubtful accounts                     |                                       |                                                     | 1,870  |                   |          |          | 3,759  |       
|                                                 |                                                                                           | Permanent impairment of investment                  |                                       |                                                     |       |                   |          |          | 2,012  |       
|                                                 |                                                                                           | In process research and development                 |                                       |                                                     | 25     |                   |          |          |       |       
|                                                 |                                                                                           | Changes in assets and liabilities:                  |                                       |                                                     |        |                   |          |          |        |       
|                                                 |                                                                                           |                                                     | Accounts receivable                   |                                                     |        | 212               |          |          |        | 10,427 |        
|                                                 |                                                                                           |                                                     | Other current assets and other assets |                                                     |        | (2,422            | )        |          |        | (4,953 | )      
|                                                 |                                                                                           |                                                     | Accounts payable                      |                                                     |        | 798               |          |          |        | (3,284 | )      
|                                                 |                                                                                           |                                                     | Accrued liabilities                   |                                                     |        | (4,733            | )        |          |        | 1,614  |        
|                                                 |                                                                                           |                                                     | Deferred revenue                      |                                                     |        | 2,762             |          |          |        | 6,128  |        
|                                                 |                                                                                           |                                                     |                                       |                                                     |        |                   |          |         
|                                                 |                                                                                           |                                                     |                                       | Net cash provided by (used in) operating activities |        |                   | 12,115   |          |        |        | (10,320 | )
|                                                 |                                                                                           |                                                     |                                       |                                                     |        |                   |          |         
|Cash flows from investing activities:            |                                                                                           |                                                     |                                       |                                                     |        |                   |          |         
|                                                 | Purchases of investments                                                                  |                                                     |                                       | (320,636                                            | )      |                   |          | (171,812 | )     
|                                                 | Sales of investments                                                                      |                                                     |                                       | 208,710                                             |        |                   |          | 180,565  |       
|                                                 | Purchases of property and equipment                                                       |                                                     |                                       | (4,333                                              | )      |                   |          | (10,552  | )     
|                                                 | Cash used in acquisition of business                                                      |                                                     |                                       | (1,143                                              | )      |                   |          |         |       
|                                                 |                                                                                           |                                                     |                                       |                                                     |        |                   |          |         
|                                                 |                                                                                           |                                                     |                                       | Net cash used in investing activities               |        |                   | (117,402 | )        |        |        | (1,799  | )
|                                                 |                                                                                           |                                                     |                                       |                                                     |        |                   |          |         
|Cash flows from financing activities:            |                                                                                           |                                                     |                                       |                                                     |        |                   |          |         
|                                                 | Proceeds from issuance of common stock                                                    |                                                     |                                       | 10,584                                              |        |                   |          | 13,066   |       
|                                                 | Payments on capital lease obligations                                                     |                                                     |                                       | (55                                                 | )      |                   |          | 40       |       
|                                                 | Net proceeds from convertible debt offering                                               |                                                     |                                       | 121,250                                             |        |                   |          |         |       
|                                                 |                                                                                           |                                                     |                                       |                                                     |        |                   |          |         
|                                                 |                                                                                           |                                                     |                                       | Net cash provided by financing activities           |        |                   | 131,779  |          |        |        | 13,106  |  
|                                                 |                                                                                           |                                                     |                                       |                                                     |        |                   |          |         
|Effect of exchange rate changes on cash          |                                                                                           |                                                     | 1,332                                 |                                                     |        |                   | (70      | )       
|                                                 |                                                                                           |                                                     |                                       |                                                     |        |                   |          |         
|Net increase in cash and cash equivalents        |                                                                                           |                                                     | 27,824                                |                                                     |        |                   | 917      |         
|Cash and cash equivalents at beginning of period |                                                                                           |                                                     | 48,420                                |                                                     |        |                   | 43,918   |         
|                                                 |                                                                                           |                                                     |                                       |                                                     |        |                   |          |         
|Cash and cash equivalents at end of year         |                                                                                           |                                                     | 76,244                                |                                                     |        |                   | 44,835   |         

*Certain prior year amounts have been reclassified to conform to current years presentation.

See accompanying notes to condensed consolidated financial statements.

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DOCUMENTUM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Basis of presentation

The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States of America for interim financial information and with the instructions
in Form 10-Q and Article 10 of Regulation S-X. In the opinion of management,
all adjustments have been recorded as necessary to present
fairly Documentums (the Companys) consolidated financial position, results of
operations and cash flow for the periods presented. These financial statements
should be read in conjunction with the Companys audited consolidated financial
statements included in the Companys 2001 Annual Report on Form 10-K (as
amended on August 29, 2002). The consolidated results of operations for the
three and nine months ended September 30, 2002 and 2001 are not necessarily
indicative of the results that may be expected for any future period.

Note 2. Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Documentum International, Inc., Relevance
Technologies, Inc. (Relevance) and Documentum Canada Holdings, Inc. in the
United States, Nihon Documentum KK, in Japan, Documentum Software Europe Ltd.,
in the United Kingdom, Documentum GmbH, in Germany, Documentum FSC and
Documentum Holdings, Ltd. in Barbados, Documentum PTE, Ltd. in Singapore,
Documentum Ireland Holdings, Ltd. in Ireland, Documentum SARL in France and
Documentum Canada Company in Nova Scotia, Canada. All significant intercompany
accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of these financial statements requires that the Company make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosures of contingent
assets and liabilities. On an ongoing basis, the Company evaluates its
estimates including those related to revenue recognition, the allowance for
doubtful accounts, warranty reserves, income taxes, restructuring accruals,
sales commission accruals, and useful lives of intangible assets and property and
equipment, among others. The Company bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual amounts realized or paid could
differ from the estimates made by management with respect to these items and
other items that require managements estimates.

Revenue Recognition

The Companys revenue is derived from the sale of licenses for its enterprise
content management solutions and related services, which include maintenance
and support, consulting and education services. The Company recognizes revenue
in accordance with Statement of Position (SOP) 97-2, Software Revenue
Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions and SAB No. 101,
Revenue Recognition in Financial Statements.

The Company recognizes revenue when persuasive evidence of an arrangement
exists and delivery has occurred, provided the fee is fixed or determinable,
and collection is deemed probable. If an undelivered element in a multiple-element arrangement exists, revenue is
deferred based on vendor-specific objective evidence (VSOE) of the fair value
of the undelivered element. If VSOE of fair value does not exist for all
undelivered elements, all revenue is deferred until sufficient evidence exists
or all elements have been delivered. VSOE of fair value for the undelivered
elements is based on the price of the respective undelivered elements when sold
separately. Specifically, VSOE of fair value for maintenance and other support
is based on the price that customer pays to renew the maintenance agreement. VSOE of fair value for
professional services is based on the hourly rates that the Company charges for
these services when sold separately.

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The Company considers fees to be fixed and determinable for transactions with
payment terms that are due within 270 days from the invoice date. The
Company has determined that it has a history of successfully collecting without
providing concessions when the payment is due within 270 days from the invoice
date.

License revenue from resellers or distributors, net of fees, is recognized when
the product is shipped to the reseller, distributor or end-user and such sell
through to the end-user is reported to the Company. Amounts billed or payments
received in advance of revenue recognition are recorded as deferred revenue.

The Companys maintenance and technical support agreements are renewable on an
annual basis and provide customers with technical support and maintenance
updates and upgrades on the license products purchased, on a
when-and-if-available basis. Revenue from maintenance and support agreements
is deferred and recognized ratably over the term of the contract. The Company
offers consulting services that are generally not essential to the
functionality of the software sold by the Company. The majority of consulting
revenue is billed on a time and materials basis and the revenue is recognized
as the services are delivered, if collectibility is deemed probable. The
duration of these consulting services are generally one to three months.

Deferred Revenue

Deferred revenue primarily relates to support agreements that have been paid
for by customers prior to the performance of those services. Generally, these
services are performed during a twelve month period. Cash received that
exceeds the amount of revenue recognized for a particular arrangement is
recorded as deferred revenue.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents.

Concentrations of credit risk

Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash, short-term investments, long-term
investments, and accounts receivable. The Company deposits substantially all
of its cash with three separate financial institutions.

For the three month period ended September 30, 2002 one
customer accounted for 13% of the total Company revenue. No one
customer accounted for more than 10% of total revenue for the nine
month period ended September 30, 2002. No one customer
accounted for more than 10% of total revenue during the three and nine
month periods ended September 30, 2001.

The Company generally does not require collateral for its accounts receivable
and maintains reserves for potential credit losses. At September 30, 2002, one
customers outstanding accounts receivable balance represented 16% of the gross
accounts receivable balance and at September 30, 2001 no one customer comprised
10% or more of the gross accounts receivable balance.

Property and equipment

Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets ranging
from three to seven years. Leasehold improvements are amortized over the
estimated useful life or the life of the lease, whichever is shorter.
Depreciation expense was $3.3 million and $3.9 million for the three months
ended September 30, 2002 and 2001, respectively, and $11.0 million and $10.6
million for the nine months ended September 30, 2002 and 2001, respectively.
In accordance with SFAS No. 144, the Company evaluates long-lived assets,
including intangible assets other than goodwill, for impairment whenever events
or changes in circumstances indicate that the carrying value of an asset may
not be recoverable based on expected undiscounted cash flows attributable to
that asset.

Software development costs

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Software development costs are included in research and development and are
expensed as incurred. Statement of Financial Accounting Standards No. 86 (SFAS
86) requires the capitalization of certain software development costs once
technological feasibility is established. The capitalized cost is then
either amortized on a straight-line basis over
the estimated product life, or on the ratio of current revenue to total
projected product revenue, depending on which approach yields the
greatest amount of amortization. To
date, the period between achieving technological feasibility, which the Company
has defined as the establishment of a working model, and the general
availability of such software has been short and software development costs
qualifying for capitalization have been insignificant. Accordingly, the Company
has not capitalized any software development costs.

Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use

In accordance with the provisions of Statement of Position 98-1, Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use
(SOP 98-1), certain costs of computer software developed or obtained for
internal use have been capitalized in connection with the implementation of the
software. The estimated useful life of costs capitalized is evaluated for each
specific project and ranges from one to three years. The Company capitalized
$0.4 million for the three months ended September 30, 2002 and 2001 and $2.7
million and $1.4 million for the nine months ended September 30, 2002 and 2001,
respectively.

Advertising

The Company expenses costs of advertising as incurred. Advertising expense was
$0.1 million for the three months ended September 30, 2002 and 2001,
respectively, and $0.3 million and $0.5 million for the nine months ended
September 30, 2002 and 2001, respectively. Advertising expense is included in
sales and marketing expense in the accompanying Condensed Consolidated
Statement of Operations.

Note 3. Change in Accounting Principles

On January 1, 2002, the Company adopted Statement of Financial Accounting
Standard (SFAS) No. 142, Goodwill and Other Intangible Assets, SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, and Emerging
Issues Task Force No. 01-14 Income Statement Characterization of
Reimbursements Received for Out of Pocket Expenses Incurred, EITF 01-14, which
was issued by the Financial Accounting Standards Board (FASB) staff.

SFAS No. 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead be tested for impairment at
least annually, and more frequently upon the occurrence of certain events.
The Companys recorded goodwill and intangible assets at September 30, 2002
related solely to the acquisitions of substantially all of the assets of
Bulldog, Inc., and Boxcar, Inc, on December 5, 2001 and on January 23, 2002,
respectively. The useful lives assigned to the acquired intangibles at the time
of the respective acquisitions were considered appropriate at September 30,
2002. Intangibles not subject to amortization are considered insignificant.
The Company had gross intangible assets of $3.0 million and $2.7 million as of
September 30, 2002 and December 31, 2001, respectively. Amortization expense
of intangible assets with definite lives for the nine months ended September
30, 2002 was $0.6 million.

In connection with its transitional analysis,
the Company determined that it has two reporting units, which are identical to
its operating segments. During the quarter ended September 30,
2002 the Company completed the first step of the annual
impairment test of goodwill as of August 1, 2002. The results of the first step
indicated that the fair value of the Companys reporting units exceeded the
carrying value of the respective reporting units. Based on these results the
Company did not perform the second step of the annual impairment test
as there were no indicators of impairment.

The changes in the carrying amount of goodwill for the nine month period ended
September 30, 2002 are as follows:

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|                                  |  |         |       |         |  |       |       |  |  |   |       | 
|--------------------------------- |  | ------- | ----- | ------- |  | ----- | ----- |  |  | - | ----- | 
|(in thousands)                    |  | License |       | Service |  | Total
|                                  |  |         |       |         |  |      
|Balance as of 12/31/01            |  | $       | 1,544 |         |  | $     | 5,905 |  |  | $ | 7,449 | 
|Goodwill acquired during the year |  |         | 868   |         |  |       |      |  |  |   | 868   | 
|Balance as of 9/30/02             |  | $       | 2,412 |         |  | $     | 5,905 |  |  | $ | 8,317 | 
|                                  |  |         |       |         |  |       |       |  |  |   |       | 

EITF 01-14 requires companies to characterize reimbursements received for
out-of-pocket expenses as revenue in the condensed consolidated statement of
operations instead of as a reduction to the related expense. EITF 01-14 also
requires that comparative financial statements for prior periods must be
reclassified. The adoption of EITF 01-14 resulted in the reclassification from
cost of service revenue to service revenue of $0.5 million for the three months
ended September 30, 2002 and 2001, and $1.6 million for the nine month periods
ended September 30, 2002 and 2001.

Note 4. Foreign Currency, Derivative Financial Instruments and Hedging
Activities

The Company considers the U.S. dollar to be its functional currency for certain
of its foreign subsidiaries and the local currency for all other foreign
subsidiaries. For subsidiaries where the local currency is the functional
currency, the assets and liabilities are translated into U.S. dollars at
exchange rates in effect at the balance sheet date. Income and expense items
are translated at the daily current exchange rates. Gains and losses from
translation are included in Accumulated other comprehensive loss. Gains and
losses resulting from remeasuring monetary asset and liability accounts for
foreign subsidiaries where the U.S dollar is the functional currency are
included in Interest and other income, net. The Companys total foreign
currency gain was immaterial for the three months ended September 30, 2002.
The Company incurred a loss of $0.3 million for the three months ended
September 30, 2001 and losses of $0.1 million and $0.7 million for the nine
months ended September 30, 2002 and 2001, respectively.

As stated in the Companys 2001 Annual Report on Form 10-K (as amended on
August 29, 2002), the Company adopted SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities as amended by SFAS No. 138, effective
January 1, 2001, which requires that all derivatives that do not qualify for
hedge accounting be recorded on the balance sheet at fair value.

The Company uses foreign currency forward contracts to serve as an economic
hedge on receivables and payables denominated in foreign currency and
intercompany receivables and payables. The principal foreign currencies hedged
are the British pound and the Euro using foreign currency forward contracts
ranging in periods from one to nine months. Forward contracts are accounted for
on a mark-to-market basis, with realized and unrealized gains or losses
recognized in the current period. Gains or losses arising from forward
contracts that were effective as an accounting hedge are included in the basis
of the designated transactions. Foreign currency forward contracts
totaling $4.5 million were outstanding at September 30, 2002.

Note 5. Business Acquisitions

On January 23, 2002, the Company acquired privately-held Boxcar Software, Inc.
in exchange for total consideration of $1.4 million; $1.3 million represented cash
consideration and $0.1 million represented acquisition costs. The acquisition
was accounted for using the purchase method of accounting on the date of
acquisition.

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Boxcar was a provider of content aggregation and distribution technology
allowing companies to gather content from any source, including Web sites,
public folders, file systems and legacy applications, and distribute the
content in any format and to any destination. In connection with the purchase,
the Company recorded goodwill of $0.9 million and various intangible and other
assets totaling $0.5 million. Intangible assets relating to the value of
existing technology and non-compete agreements are being amortized on a
straight-line basis over the estimated useful lives of five years and three
years, respectively. Pro forma disclosures, as if the business had been
acquired on January 1, 2002 and 2001, respectively, and transitional
disclosures required by SFAS No. 142, have been omitted as revenue, operating
loss, net loss and loss per share would not differ materially from the amounts
reported.

The following tables summarize the Companys intangible assets as of September
30, 2002 and the estimated amortization expense through fiscal year 2006:

(in thousands)

|                                   |  |             |       |              |  |             |      |     |  |   |       | 
|---------------------------------- |  | ----------- | ----- | ------------ |  | ----------- | ---- | --- |  | - | ----- | 
|                                   |  |             |       |              |  | Accumulated |      | Net
|                                   |  | Gross Costs |       | Amortization |  | Intangibles
|                                   |  |             |       |              |  |            
|Amortized intangibles              |  |             |       |              |  |             |      |     |  |   |       | 
|Existing technology                |  | $           | 2,150 |              |  | $           | (384 | )   |  | $ | 1,766 | 
|Non-compete agreements             |  |             | 225   |              |  |             | (60  | )   |  |   | 165   | 
|In-place contracts                 |  |             | 500   |              |  |             | (188 | )   |  |   | 312   | 
|                                   |  |             |       |              |  |             |      |     |  |   |       | 
|Total                              |  |             | 2,875 |              |  |             | (632 | )   |  |   | 2,243 | 
|Unamortized intangibles            |  |             |       |              |  |             |      |     |  |   |       | 
|Trademark                          |  |             | 125   |              |  |             |     |     |  |   | 125   | 
|                                   |  |             |       |              |  |             |      |     |  |   |       | 
|Total intangibles                  |  | $           | 3,000 |              |  | $           | (632 | )   |  | $ | 2,368 | 
|                                   |  |             |       |              |  |             |      |     |  |   |       | 
|Amortization
in fiscal year ending |  |             |       |              |  |             |      |     |  |   |       | 
|2002                               |  |             |       |              |  |             |      |     |  | $ | 760   | 
|2003                               |  |             |       |              |  |             |      |     |  |   | 757   | 
|2004                               |  |             |       |              |  |             |      |     |  |   | 588   | 
|2005                               |  |             |       |              |  |             |      |     |  |   | 474   | 
|2006                               |  |             |       |              |  |             |      |     |  |   | 229   | 
|                                   |  |             |       |              |  |             |      |     |  |   |       | 
|Total amortization expense         |  |             |       |              |  |             |      |     |  | $ | 2,808 | 
|                                   |  |             |       |              |  |             |      |     |  |   |       | 

Note 6. Convertible Debt

On April 5, 2002, the Company sold $125 million (the face value) in senior
convertible notes that mature on April 1, 2007 (the Notes). The Notes bear
interest at a rate of 4.5% per annum. The
Company received proceeds of $121.3 million, net of underwriter debt issuance
costs of $3.7 million. The Company also incurred debt issuance costs totaling
$0.4 million comprising of legal, accounting, and various other fees relating
to the offering. Holders of the Notes are entitled at any time after April 5,
2002, and before the close of business on April 1, 2007, subject to prior
redemption or repurchase of the Notes, to convert the Notes into shares of
common stock at a conversion price of $30.02 per share. The Notes may be redeemed
by the Company on or after April 5, 2005. The Notes will effectively rank
behind all other secured debt to the extent of the value of the assets securing
those debts. The Notes do not contain any restrictive financial covenants.

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The Company recognized $1.6 million and $3.1 million of interest expense for
the three and nine month periods ended September 30, 2002, respectively. Debt
issuance costs are being amortized over five years based on the effective
interest rate method and are included in other assets. Amortization of debt
issuance costs was $0.2 million and $0.3 million for the three and nine month
periods ended September 31, 2002, respectively. As of September 30, 2002, the
Companys debt obligation totaled $125.0 million.

Note 7. Restructuring Charges

In fiscal 2001, and in the second quarter of fiscal 2002, the Company incurred
restructuring costs to reduce its world-wide work force, and to consolidate
excess facilities. The following table details the restructuring activity
through September 30, 2002:

|                                  |  |           |           |         |  |       |         |   |  |   |           |  
|--------------------------------- |  | --------- | --------- | ------- |  | ----- | ------- | - |  | - | --------- | -
|                                  |  | Severance |           |         |  |       |         |   |  |  
|                                  |  | and       |           | Other   |  |       |         |  
|                                  |  | Benefits  |           | Charges |  | Total
|                                  |  |           |           |         |  |      
|Balance at December 31, 2001:     |  | $         | 943,444   |         |  | $     | 252,929 |   |  | $ | 1,196,373 |  
|Total charge to operating expense |  |           |          |         |  |       |        |   |  |   |          |  
|Cash paid                         |  |           | (467,832  | )       |  |       | (8,430  | ) |  |   | (476,262  | )
|Balance at March 31, 2002         |  |           | 475,612   |         |  |       | 244,499 |   |  |   | 720,111   |  
|                                  |  |           |           |         |  |       |         |   |  |   |           |  
|Total charge to operating expense |  |           | 1,339,206 |         |  |       |        |   |  |   | 1,339,206 |  
|Cash paid                         |  |           | (232,914  | )       |  |       | (29,961 | ) |  |   | (262,875  | )
|Adjustments                       |  |           | (294,998  | )       |  |       |        |   |  |   | (294,998  | )
|Balance at June 30, 2002          |  | $         | 1,286,906 |         |  | $     | 214,538 |   |  | $ | 1,501,444 |  
|                                  |  |           |           |         |  |       |         |   |  |   |           |  
|Total charge to operating expense |  |           |          |         |  |       |        |   |  |   |          |  
|Cash paid                         |  |           | (773,675  | )       |  |       | (34,713 | ) |  |   | (808,388  | )
|Balance at September 30, 2002     |  | $         | 513,231   |         |  | $     | 179,825 |   |  | $ | 693,056   |  
|                                  |  |           |           |         |  |       |         |   |  |   |           |  

In connection with the Companys restructuring plans, the Company recognized restructuring charges
that were comprised of estimated severance and benefits costs
related to the involuntary termination or cancellation of offers of
approximately 240 employees, of which 220 employees were based in the United
States and the remaining employees were based in Europe, Canada, and throughout
Asia Pacific. The cost estimates were made based on the remaining amounts due
under various contractual agreements and managements best estimates of the
expected obligations. During the three months ended June 30,
2002 the Company decreased the severance and benefits accrual by a
net $0.3 million. These adjustments were the result of the Company settling certain severance and benefit obligations for an amount less than originally estimated. The Companys remaining accrual of approximately $0.5
million will be paid to remaining employees during fiscal 2002 and the
first half of fiscal 2003.

The remaining other charges that were recognized in connection with the
Companys restructuring plan include costs that the Company estimated it would
incur to exit certain facilities, net of estimated sub-lease income.
The Company worked with external real estate experts in each of the markets
where the properties are located to determine the best estimate of the accrual.
The remaining accrued liability as of September 30, 2002 relates to both
miscellaneous restructuring costs which will be paid out over the remainder of
fiscal 2002 and the first half of fiscal 2003, and facilities lease
obligations, net of estimated sub-lease income, which will be paid through fiscal 2005.

Note 8. Comprehensive income (loss)

Comprehensive income (loss) is comprised of net loss and other non-owner
changes in stockholders equity, including foreign currency translation
gains/losses and unrealized gains or losses on available-for-sale marketable
securities. The Company recorded an unrealized gain on available-for-sale
marketable securities of $1.1 million for

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the three months ended September 30, 2002. The unrealized gain or loss on available-for-sale marketable
securities was insignificant for all other periods presented. The Companys
total comprehensive income (loss) was as follows (in thousands):

|                                                              |                             |   |                                  |       |                                 |   |        |        |      |   |       |       |  |   |         |         |  
|------------------------------------------------------------- | --------------------------- | - | -------------------------------- | ----- | ------------------------------- | - | ------ | ------ | ---- | - | ----- | ----- |  | - | ------- | ------- | -
|                                                              |                             |   | Three Months Ended September 30, |       | Nine Months Ended September 30,
|                                                              |                             |   |                                  |       |                                
|                                                              |                             |   | 2002                             |       | 2001                            |   | 2002   |        | 2001
|                                                              |                             |   |                                  |       |                                 |   |        |        |     
|Net income (loss)                                             |                             | $ | 2,003                            |       |                                 | $ | (7,808 | )      |      | $ | (158  | )     |  | $ | (36,668 | )      
|Other comprehensive income (loss):                            |                             |   |                                  |       |                                 |   |        |        |      |   |       |       |  |   |         |        
|Unrealized gain on available for sale investments, net of tax |                             |   | 745                              |       |                                 |   |       |        |      |   | 1,266 |       |  |   |        |        
|Foreign currency translation adjustment, net of tax           |                             |   | 132                              |       |                                 |   | 644    |        |      |   | 1,275 |       |  |   | (70     | )      
|                                                              |                             |   |                                  |       |                                 |   |        |        |      |   |       |       |  |   |         |        
|                                                              | Comprehensive income (loss) |   | $                                | 2,880 |                                 |   | $      | (7,164 | )    |   | $     | 2,383 |  |   | $       | (36,738 | )
|                                                              |                             |   |                                  |       |                                 |   |        |        |      |   |       |       |  |   |         |        

Note 9. Net Income (Loss) Per Share

The following table sets forth the computation of basic and diluted net income (loss) per common share:

|                                           |                                                          |      |                                 |        |                                |      |       |        |   |   |   |        |   |   |       |         |  
|------------------------------------------ | -------------------------------------------------------- | ---- | ------------------------------- | ------ | ------------------------------ | ---- | ----- | ------ | - | - | - | ------ | - | - | ----- | ------- | -
|                                           |                                                          |      | Three
Months EndedSeptember 30, |        | Nine
Months EndedSeptember 30,
|                                           |                                                          |      |                                 |        |                               
|(In thousands, except per
share data)      |                                                          | 2002 |                                 | 2001   |                                | 2002 |       | 2001  
|                                           |                                                          |      |                                 |        |                                |      |       |        |  
|                                           | Net income (loss)                                        |      | $                               | 2,003  |                                |      | $     | (7,808 | ) |   | $ | (158   | ) |   | $     | (36,668 | )
|                                           | Weighted
average shares outstanding                      |      |                                 | 39,760 |                                |      |       | 38,106 |   |   |   | 39,527 |   |   |       | 37,728  |  
|                                           |                                                          |      |                                 |        |                                |      |       |        |   |   |   |        |   |   |       |        
|                                           | Effect of dilutive securities                            |      |                                 |        |                                |      |       |        |   |   |   |        |   |   |       |         |  
|                                           | Employee stock options                                   |      |                                 | 1,392  |                                |      |       |       |   |   |   |       |   |   |       |        |  
|                                           | Adjusted weighted-average shares and assumed conversions |      |                                 | 41,152 |                                |      |       | 38,106 |   |   |   | 39,527 |   |   |       | 37,728  |  
|                                           |                                                          |      |                                 |        |                                |      |       |        |   |   |   |        |   |   |       |        
|Basic net income (loss) per common share   |                                                          | $    | 0.05                            |        |                                | $    | (0.20 | )      |   | $ |  |        |   | $ | (0.97 | )      
|                                           |                                                          |      |                                 |        |                                |      |       |        |   |   |   |        |   |   |       |        
|Diluted net income (loss) per common share |                                                          | $    | 0.05                            |        |                                | $    | (0.20 | )      |   | $ |  |        |   | $ | (0.97 | )      
|                                           |                                                          |      |                                 |        |                                |      |       |        |   |   |   |        |   |   |       |        

The Company excluded potentially dilutive
securities for each period presented from its diluted net income
(loss) per share computation because either the exercise price of the
securities exceeded the average fair value of the common stock or the
Company had net losses, and, therefore, these securities were
anti-dilutive. Potentially dilutive securities totaling 8,034,205 and
6,360,154 were excluded for three month periods ended
September 30, 2002 and 2001, respectively, and 9,343,311 and
8,562,433 for the nine month periods ended September 30, 2002 and 2001, respectively. The potentially dilutive stock options had per share exercise prices ranging from $0.50 to $56.50.

Note 10. Segment Reporting

The Companys management considers its business activities to be focused on the
license of its products and related services to customers. Since managements
primary form of internal reporting is aligned with the offering of products and
services, the Company believes it operates in these two segments. The Company
does not track operating results by segment below the gross profit line nor
does the Company track long-lived assets by segment.

Internationally, the Company markets and supports its products and services
segments through its subsidiaries and various distributors. Service revenue
consists of customer maintenance, consulting and education services. Revenues
are generally attributed to geographic areas based on the country in which the
customer is
domiciled. Long-lived assets are attributed to geographic areas based on the
country where the assets are located.

The following table presents a breakdown of revenue, cost of revenue, and
long-lived assets by geographic region for the three and nine months ended
September 30, 2002 and 2001 (in thousands):

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|                               |  |         |        |         |  |         |        |                 |  |                 |        |               |  |            |       |  |  |  |        |  |  |  |        |  |  |  |        | 
|------------------------------ |  | ------- | ------ | ------- |  | ------- | ------ | --------------- |  | --------------- | ------ | ------------- |  | ---------- | ----- |  |  |  | ------ |  |  |  | ------ |  |  |  | ------ | 
|As of and for the three months |  | License |        | Service |  | Total   |        | Cost
of License |  | Cost of Service |        | Total Cost of |  | Long-Lived
|ended September 30, 2002       |  | Revenue |        | Revenue |  | Revenue |        | Revenue         |  | Revenue         |        | Revenue       |  | Assets    
|                               |  |         |        |         |  |         |        |                 |  |                 |        |               |  |           
|                               |  | $       |        | $       |  | $       |        | $               |  | $               |        | $             |  | $         
|North America                  |  |         | 15,943 |         |  |         | 17,104 |                 |  |                 | 33,047 |               |  |            | 1,294 |  |  |  | 7,553  |  |  |  | 8,847  |  |  |  | 33,195 | 
|Europe                         |  |         | 8,947  |         |  |         | 9,647  |                 |  |                 | 18,594 |               |  |            | 726   |  |  |  | 3,979  |  |  |  | 4,705  |  |  |  | 2,404  | 
|Asia/Pacific                   |  |         | 3,317  |         |  |         | 666    |                 |  |                 | 3,983  |               |  |            | 269   |  |  |  | 594    |  |  |  | 863    |  |  |  | 729    | 
|Other                          |  |         | 703    |         |  |         |       |                 |  |                 | 703    |               |  |            | 57    |  |  |  |       |  |  |  | 57     |  |  |  |       | 
|                               |  |         |        |         |  |         |        |                 |  |                 |        |               |  |            |       |  |  |  |        |  |  |  |        |  |  |  |        | 
|Total                          |  |         | 28,910 |         |  |         | 27,417 |                 |  |                 | 56,327 |               |  |            | 2,347 |  |  |  | 12,126 |  |  |  | 14,473 |  |  |  | 36,328 | 
|                               |  |         |        |         |  |         |        |                 |  |                 |        |               |  |            |       |  |  |  |        |  |  |  |        |  |  |  |        | 

|                               |  |         |        |         |  |         |        |                 |  |                 |        |               |  |            |       |  |  |  |        |  |  |  |        |  |  |  |        | 
|------------------------------ |  | ------- | ------ | ------- |  | ------- | ------ | --------------- |  | --------------- | ------ | ------------- |  | ---------- | ----- |  |  |  | ------ |  |  |  | ------ |  |  |  | ------ | 
|As of and for the three months |  | License |        | Service |  | Total   |        | Cost
of License |  | Cost of Service |        | Total Cost of |  | Long-Lived
|ended September 30, 2001       |  | Revenue |        | Revenue |  | Revenue |        | Revenue         |  | Revenue         |        | Revenue       |  | Assets    
|                               |  |         |        |         |  |         |        |                 |  |                 |        |               |  |           
|                               |  | $       |        | $       |  | $       |        | $               |  | $               |        | $             |  | $         
|North America                  |  |         | 12,265 |         |  |         | 21,423 |                 |  |                 | 33,688 |               |  |            | 730   |  |  |  | 8,225  |  |  |  | 8,955  |  |  |  | 31,768 | 
|Europe                         |  |         | 6,100  |         |  |         | 3,928  |                 |  |                 | 10,028 |               |  |            | 363   |  |  |  | 3,684  |  |  |  | 4,047  |  |  |  | 2,978  | 
|Asia/Pacific                   |  |         | 176    |         |  |         | 204    |                 |  |                 | 380    |               |  |            | 10    |  |  |  | 341    |  |  |  | 351    |  |  |  | 828    | 
|Other                          |  |         | 1,226  |         |  |         |       |                 |  |                 | 1,226  |               |  |            | 73    |  |  |  |       |  |  |  | 73     |  |  |  |       | 
|                               |  |         |        |         |  |         |        |                 |  |                 |        |               |  |            |       |  |  |  |        |  |  |  |        |  |  |  |        | 
|Total                          |  |         | 19,767 |         |  |         | 25,555 |                 |  |                 | 45,322 |               |  |            | 1,177 |  |  |  | 12,250 |  |  |  | 13,427 |  |  |  | 35,574 | 
|                               |  |         |        |         |  |         |        |                 |  |                 |        |               |  |            |       |  |  |  |        |  |  |  |        |  |  |  |        | 

|                              |  |         |        |         |  |         |        |                 |  |                 |         |               |  |            |       |  |  |  |        |  |  |  |        |  |  |  |        | 
|----------------------------- |  | ------- | ------ | ------- |  | ------- | ------ | --------------- |  | --------------- | ------- | ------------- |  | ---------- | ----- |  |  |  | ------ |  |  |  | ------ |  |  |  | ------ | 
|As of and for the nine months |  | License |        | Service |  | Total   |        | Cost
of License |  | Cost of Service |         | Total Cost of |  | Long-Lived
|ended September 30, 2002      |  | Revenue |        | Revenue |  | Revenue |        | Revenue         |  | Revenue         |         | Revenue       |  | Assets    
|                              |  |         |        |         |  |         |        |                 |  |                 |         |               |  |           
|                              |  | $       |        | $       |  | $       |        | $               |  | $               |         | $             |  | $         
|North America                 |  |         | 44,164 |         |  |         | 54,109 |                 |  |                 | 98,273  |               |  |            | 3,300 |  |  |  | 24,347 |  |  |  | 27,647 |  |  |  | 33,195 | 
|Europe                        |  |         | 27,077 |         |  |         | 24,431 |                 |  |                 | 51,508  |               |  |            | 2,023 |  |  |  | 11,442 |  |  |  | 13,465 |  |  |  | 2,404  | 
|Asia/Pacific                  |  |         | 5,927  |         |  |         | 1,318  |                 |  |                 | 7,245   |               |  |            | 443   |  |  |  | 1,562  |  |  |  | 2,005  |  |  |  | 729    | 
|Other                         |  |         | 3,871  |         |  |         |       |                 |  |                 | 3,871   |               |  |            | 289   |  |  |  |       |  |  |  | 289    |  |  |  |       | 
|                              |  |         |        |         |  |         |        |                 |  |                 |         |               |  |            |       |  |  |  |        |  |  |  |        |  |  |  |        | 
|Total                         |  |         | 81,039 |         |  |         | 79,858 |                 |  |                 | 160,897 |               |  |            | 6,055 |  |  |  | 37,351 |  |  |  | 43,406 |  |  |  | 36,328 | 
|                              |  |         |        |         |  |         |        |                 |  |                 |         |               |  |            |       |  |  |  |        |  |  |  |        |  |  |  |        | 

|                              |  |         |        |         |  |         |        |                 |  |                 |         |               |  |            |       |  |  |  |        |  |  |  |        |  |  |  |        | 
|----------------------------- |  | ------- | ------ | ------- |  | ------- | ------ | --------------- |  | --------------- | ------- | ------------- |  | ---------- | ----- |  |  |  | ------ |  |  |  | ------ |  |  |  | ------ | 
|As of and for the nine months |  | License |        | Service |  | Total   |        | Cost
of License |  | Cost of Service |         | Total Cost of |  | Long-Lived
|ended September 30, 2001      |  | Revenue |        | Revenue |  | Revenue |        | Revenue         |  | Revenue         |         | Revenue       |  | Assets    
|                              |  |         |        |         |  |         |        |                 |  |                 |         |               |  |           
|                              |  | $       |        | $       |  | $       |        | $               |  | $               |         | $             |  | $         
|North America                 |  |         | 34,385 |         |  |         | 62,216 |                 |  |                 | 96,601  |               |  |            | 2,411 |  |  |  | 25,681 |  |  |  | 28,092 |  |  |  | 31,768 | 
|Europe                        |  |         | 21,926 |         |  |         | 12,457 |                 |  |                 | 34,383  |               |  |            | 1,537 |  |  |  | 11,621 |  |  |  | 13,158 |  |  |  | 2,978  | 
|Asia/Pacific                  |  |         | 3,939  |         |  |         | 569    |                 |  |                 | 4,508   |               |  |            | 276   |  |  |  | 980    |  |  |  | 1,256  |  |  |  | 828    | 
|Other                         |  |         | 1,779  |         |  |         |       |                 |  |                 | 1,779   |               |  |            | 125   |  |  |  |       |  |  |  | 125    |  |  |  |       | 
|                              |  |         |        |         |  |         |        |                 |  |                 |         |               |  |            |       |  |  |  |        |  |  |  |        |  |  |  |        | 
|Total                         |  |         | 62,029 |         |  |         | 75,242 |                 |  |                 | 137,271 |               |  |            | 4,349 |  |  |  | 38,282 |  |  |  | 42,631 |  |  |  | 35,574 | 
|                              |  |         |        |         |  |         |        |                 |  |                 |         |               |  |            |       |  |  |  |        |  |  |  |        |  |  |  |        | 

Note 11. Subsequent Events

Pending Business Combinations

On October 3, 2002, the Company entered into a definitive agreement to acquire
eRoom Technology, Inc, a privately held company. eRoom is a provider of
extended enterprise collaborative software and services focusing exclusively on
providing internet collaboration solutions to the extended enterprise. Upon
closing of the acquisition, the Company will issue approximately 7.7 million
shares of its common stock, valued at $90.0 million, and pay approximately $12.6 million in cash for all
outstanding shares of eRooms capital stock, based upon eRooms capitalization
as of October 3, 2002. In addition, the Company will reserve approximately 1.7
million shares of common stock, valued at $10.7 million, for issuance upon exercise of stock options that
are being assumed by the Company in the acquisition. Upon closing of the
acquisition, approximately 15% of the total consideration will be placed in
escrow for one year to secure eRooms customary representations and warranties.

On November 4, 2002, the Company announced the signing of a definitive
agreement to acquire TrueArc Corporation, a privately held company, for $3.6
million. TrueArc is a provider of electronic records management and digital
preservation software. Consideration for the purchase will be paid in cash.

These acquisitions are expected to close in the fourth quarter of fiscal 2002.

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ITEM 2. MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Forward-Looking Statements

The following discussion contains forward-looking statements regarding the
Company, its business, prospects and results of operations that are subject to
certain risks and uncertainties posed by many factors and events that could
cause the Companys actual business, prospects and results of operations to
differ materially from those that may be anticipated by such forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed herein as well as those discussed under
the caption Risk Factors. Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date of this
report. The Company undertakes no obligation to revise any forward-looking
statements in order to reflect events or circumstances that may subsequently
arise. Readers are urged to carefully review and consider the various
disclosures made by the Company in this report and in the Companys other
reports filed with the Securities and Exchange Commission that attempt to
advise interested parties of the risks and factors that may affect the
Companys business.

Overview

Documentum provides enterprise content management (ECM) software solutions that
bring intelligence and automation to the creation, management, personalization,
and distribution of vast quantities and types of content -documents, Web pages,
XML files, and rich media  in one common content platform and repository.
Documentums platform makes it possible for companies to distribute content
globally across all internal and external systems, applications, and user
communities. From its inception in 1990 through December 1992, the Companys
activities consisted primarily of developing its products, establishing its
infrastructure and conducting market research. The Company shipped the first
commercial version of its Documentum Server product in late 1992, and since
that time substantially all of the Companys revenue has been from licensing
its family of enterprise content management system products and related
services, which include maintenance and support, education and consulting
services.

The Company continues to invest in research and development in order to update
its family of products and expand its market focus to deliver products to
support content management for customers, partners, and employees. In 1999, the
Company introduced Documentum 4i, an open, standards-based content management
platform. An open, standards-based platform provides developers outside the
organization with the standard set of tools that enable them to integrate the
product, resulting in a larger number of developers working to build
applications on top of Documentums platform. This platform allows for the
creation, delivery, management and personalization of content and the delivery
of that content to an information device, including the Web, cellular phone,
pager, fax machine, printer, CD or PDA device. In 2000 and 2001, the Company
introduced four packaged Editions based on the Documentum 4i
platform. These Editions  Web Content Management, Portal Content Management, B2B Content
Management, and Compliance  offer a tailored mix of core technology from
Documentum 4i that can manage volumes of content. In 2002, a fifth Edition 
Digital Asset Management Edition  was released.

During the quarter ended September 30, 2002, the Company released its next
generation ECM platform, Documentum 5. Documentum 5 is built upon the Companys
flagship ECM platform providing a unified platform for Enterprise Document
Management, Web Content Management, Digital Asset Management and Fixed Content
Management. The Companys development of Documentum 5 focused on five key
areas: (1) ease of use and improved product quality, (2) collaboration  which
allows for users to share information and collaborate over documents and
business processes, (3) compliance and security  which enables the platform to
fulfill the compliance obligations of regulated business functions, (4) unified
content services  which is the ability to pool and organize different forms of
content in the core of the business operation, thus making it easier for
businesses to automate business processes across departments, and (5) support
of new content forms, including rich media and electronic forms, records, and
reports generated from disparate enterprise applications, such as enterprise
resource planning and customer relations management systems.

The Company expects that license and service revenue from Documentum 5 and
newer product offerings will account for substantially all of the Companys
revenue for the foreseeable future. As a result, the Companys future operating
results are dependent upon continued market acceptance of these products as
well as the successful

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integration of both the eRoom and TrueArc acquisitions. Assuming that both
acquisitions close in December of 2002 (see Business Acquisitionsfor further
details), the Company expects combined total revenue of $62.5 to $64.5 million
and diluted earnings per share of $.07 to $.09 for the quarter ending
December 31, 2002.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Certain of our accounting policies are particularly important to develop an
understanding of our financial position and results of operations. Application
of many of these policies requires management to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses
and related disclosures. In general, these estimates or judgments are based on
the historical experience of our management, prevailing industry trends,
information provided by our customers, and information available from other
outside sources, each as appropriate. Actual results may differ from these
estimates. The Company believes the following critical accounting policies
relate to the more significant judgments and estimates used in the preparation
of its consolidated financial statements.

Revenue Recognition
The Companys revenue is derived from the sale of licenses for its enterprise
content management solutions and related services, which include maintenance
and support, consulting and education services. The Company recognizes revenue
in accordance with Statement of Position (SOP) 97-2, Software Revenue
Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions and SAB No. 101,
Revenue Recognition in Financial Statements.

The Company recognizes revenue when persuasive evidence of an arrangement
exists and delivery has occurred, provided the fee is fixed or determinable,
and collection is deemed probable. If an undelivered element in a multiple-element arrangement exists, revenue is
deferred based on vendor-specific objective evidence (VSOE) of the fair value
of the undelivered element. If VSOE of fair value does not exist for all
undelivered elements, all revenue is deferred until sufficient evidence exists
or all elements have been delivered. VSOE of fair value for the undelivered
elements is based on the price of the respective undelivered elements when sold
separately. Specifically, VSOE of fair value for maintenance and other support
is based on the price that customer pays to renew the maintenance agreement.
VSOE of fair value for professional services is based on the hourly rates that
the Company charges for these services when sold separately.

The Company considers fees to be fixed and determinable for transactions with
payment terms that are due within 270 days from the invoice date. The
Company has determined that it has a history of successfully collecting without
providing concessions when the payment is due within 270 days from the invoice
date.

License revenue from resellers or distributors, net of fees, is recognized when
the product is shipped to the reseller, distributor or end user and such sell
through to the end-user is reported to the Company. Amounts billed or payments
received in advance of revenue recognition are recorded as deferred revenue.

The Companys maintenance and technical support agreements are renewable on an
annual basis and provide customers with technical support and maintenance
updates and upgrades on the license products purchased, on a
when-and-if-available basis. Revenue from maintenance and support agreements
is deferred and recognized ratably over the term of the contract. The Company
offers consulting services that are generally not essential to the
functionality of the software sold by the Company. The majority of consulting
revenue is billed on a time and materials basis and the revenue is recognized
as the services are delivered, if collectibility is deemed probable. The
duration of these consulting services is generally one to three months.

Allowance for Doubtful Accounts
The Company maintains an allowance for doubtful accounts that is based on
estimated losses resulting from the inability of our customers to make required
payments. If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required, which would result in additional operating expense
in the period such determination was made.

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Warranty Reserves
The Company maintains reserves for costs associated with future product
warranty obligations. With the release of Documentum 5, and the anticipated
future introduction of Documentum 5 add-on modules, the Company may
significantly increase the reserve if the new products contain undetected
errors, or bugs, or performance problems, which are discovered only after the
product is installed and used by customers.

Accounting for Income Taxes
The Company records a valuation allowance to reduce its deferred tax assets to
an amount that is more likely than not to be realized. If the Companys
assessment of the deferred tax asset or the corresponding valuation allowance
were to change, the related adjustment would be charged to income in the period
such determination was made. The effective tax rate may vary by quarter based on the
Companys results, the mix of domestic and international
income, as well as the potential effect of the acquisitions of eRoom and TrueArc.

Sales Commission Expense
The Company uses estimates to determine the accrual for expenses that are
incurred in connection with commission accelerators that are paid to sales
personnel. Commission accelerators that are above and beyond their
typical commission rate are typically paid to sales personnel that
have exceeded quota for a given period of time. In general, these estimates are based on the
historical experience of our sales personnel, sales forecasts and the
recent performance of the sales personnel based upon the most current information
available to management. However, because of the multiplier effect of the
commission accelerators actual results may differ from the period-end accruals.

Impairment of Goodwill and Long-Lived Assets
SFAS 142, Goodwill and Other Intangible Assets (SFAS 142) requires that
goodwill be tested for impairment at least annually and more frequently upon
the occurrence of certain events, as defined by SFAS 142. Goodwill will be
tested for impairment annually on August 1. The Company performed the impairment test as of August 1, 2002. The results of this test indicated that
the fair value of the Companys reporting units were greater than the carrying
amounts of the respective reporting units. Accordingly, the Company
did not record an impairment charge.

The Company evaluates all of its long-lived assets, including intangible assets
other than goodwill, for impairment in accordance with the provisions of SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
144). SFAS 144 requires that long-lived assets and intangible assets other than
goodwill be evaluated for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable based on expected undiscounted cash flows attributable to that
asset. Should events indicate that any of the Companys assets are impaired,
the amount of such impairment will be measured as the difference between the
carrying value and the fair value of the impaired asset and recorded in
earnings during the period of such impairment.

Results of Operations

The following table sets forth the condensed consolidated statement of
operations expressed as a percentage of total revenue for the periods
indicated:

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|                                          |                               |                         |    |                    |     |                   |     |      |     |      |    |    |     |   |     |    |     |  
|----------------------------------------- | ----------------------------- | ----------------------- | -- | ------------------ | --- | ----------------- | --- | ---- | --- | ---- | -- | -- | --- | - | --- | -- | --- | -
|                                          |                               |                         |    | Three Months Ended |     | Nine Months Ended
|                                          |                               |                         |    | September 30,      |     | September 30,    
|                                          |                               |                         |    |                    |     |                  
|                                          |                               |                         |    | 2002               |     | 2001              |     | 2002 |     | 2001
|                                          |                               |                         |    |                    |     |                   |     |      |     |     
|Revenue:                                  |                               |                         |    |                    |     |                   |     |      |     |      |    |    |     |   |     |   
|                                          | License                       |                         |    | 51                 | %   |                   |     | 44   | %   |      |    | 50 | %   |   |     | 45 | %  
|                                          | Service                       |                         |    | 49                 | %   |                   |     | 56   | %   |      |    | 50 | %   |   |     | 55 | %  
|                                          |                               |                         |    |                    |     |                   |     |      |     |      |    |    |     |   |     |   
|                                          |                               | Total revenue           |    |                    | 100 | %                 |     |      | 100 | %    |    |    | 100 | % |     |    | 100 | %
|                                          |                               |                         |    |                    |     |                   |     |      |     |      |    |    |     |   |     |   
|Cost of revenue:                          |                               |                         |    |                    |     |                   |     |      |     |      |    |    |     |   |     |   
|                                          | License                       |                         |    | 4                  | %   |                   |     | 3    | %   |      |    | 4  | %   |   |     | 3  | %  
|                                          | Service                       |                         |    | 22                 | %   |                   |     | 27   | %   |      |    | 23 | %   |   |     | 28 | %  
|                                          |                               |                         |    |                    |     |                   |     |      |     |      |    |    |     |   |     |   
|                                          |                               | Total cost of revenue   |    |                    | 26  | %                 |     |      | 30  | %    |    |    | 27  | % |     |    | 31  | %
|                                          |                               |                         |    |                    |     |                   |     |      |     |      |    |    |     |   |     |   
|Gross profit                              |                               |                         | 74 | %                  |     |                   | 70  | %    |     |      | 73 | %  |     |   | 69  | % 
|                                          |                               |                         |    |                    |     |                   |     |      |     |      |    |    |     |   |     |   
|Operating expense:                        |                               |                         |    |                    |     |                   |     |      |     |      |    |    |     |   |     |   
|                                          | Sales and marketing           |                         |    | 42                 | %   |                   |     | 57   | %   |      |    | 44 | %   |   |     | 58 | %  
|                                          | Research and development      |                         |    | 16                 | %   |                   |     | 18   | %   |      |    | 17 | %   |   |     | 19 | %  
|                                          | General and administrative    |                         |    | 11                 | %   |                   |     | 13   | %   |      |    | 12 | %   |   |     | 14 | %  
|                                          | Restructuring/severance costs |                         |    |                   |     |                   |     |     |     |      |    |   |     |   |     | 3  | %  
|                                          |                               |                         |    |                    |     |                   |     |      |     |      |    |    |     |   |     |   
|                                          |                               | Total operating expense |    |                    | 69  | %                 |     |      | 88  | %    |    |    | 73  | % |     |    | 94  | %
|                                          |                               |                         |    |                    |     |                   |     |      |     |      |    |    |     |   |     |   
|Income (loss) from operations             |                               |                         | 5  | %                  |     |                   | (18 | %)   |     |      |   |    |     |   | (25 | %)
|Interest and other income, net            |                               |                         |   |                    |     |                   | 1   | %    |     |      |   |    |     |   | 2   | % 
|Permanent impairment of investment        |                               |                         |   |                    |     |                   |    |      |     |      |   |    |     |   | (2  | %)
|                                          |                               |                         |    |                    |     |                   |     |      |     |      |    |    |     |   |     |   
|Income (loss) before income tax provision |                               |                         | 5  | %                  |     |                   | (17 | %)   |     |      |   |    |     |   | (25 | %)
|Provision for income taxes                |                               |                         | 1  | %                  |     |                   |    |      |     |      |   |    |     |   | 2   | % 
|                                          |                               |                         |    |                    |     |                   |     |      |     |      |    |    |     |   |     |   
|Net income (loss)                         |                               |                         | 4  | %                  |     |                   | (17 | %)   |     |      |   |    |     |   | (27 | %)
|                                          |                               |                         |    |                    |     |                   |     |      |     |      |    |    |     |   |     |   
|As a Percentage of Related Revenue:       |                               |                         |    |                    |     |                   |     |      |     |      |    |    |     |   |     |   
|Cost of license revenue                   |                               |                         | 8  | %                  |     |                   | 6   | %    |     |      | 7  | %  |     |   | 7   | % 
|Cost of service revenue                   |                               |                         | 44 | %                  |     |                   | 48  | %    |     |      | 47 | %  |     |   | 51  | % 

Revenue

During the current quarter, the Company saw revenue growth increase slightly as
a result of continued demand for its products. The Companys success in the
growing enterprise content management space was attributed to several factors,
including the Companys ability to address enterprise content management needs
as a result of heightened compliance and regulatory standards across several
industries and the Companys success in offering a comprehensive suite of
content management products. Additionally, the Company was successful in
up-selling to existing customers as customers expanded their use of Documentum
products, adding additional licenses and deploying the licenses within
different departments and divisions, and in many cases standardizing on
Documentums platform throughout their global organizations. The Company closed
five deals over $1.0 million and had license revenue from one customer that
accounted for 25% of total license revenue and 13% of total revenue for the
quarter ended September 30, 2002. As a result, average deal size
increased by $0.1 million to $0.3 million for the quarter ended September 30, 2002 from $0.2
million in the comparable prior period. These factors, combined with the
Companys stream-lined cost structure, resulted in improved operating results in
the quarter ended September 30, 2002, as compared to the same period a year
ago. The Companys revenue was driven by solid growth in both its international
and domestic regions. North America drove the Companys license revenue growth,
validating a strengthening demand for products in the U.S. The Company also saw
positive license revenue growth within its Asia Pacific and Europe, Middle East and Africa
(EMEA) regions. The third quarter typically represents a slow
quarter within the EMEA region. For the three months ended September 30, 2002,
license revenue in North America increased 30% or $3.7 million and in the EMEA
region increased 47% or $2.8 million, over the comparable period a year ago.
The Companys EMEA and North America sales regions drove the Companys service
revenue growth as well. For the three months ended September 30, 2002, service
revenue in these two regions increased 6% or $1.4 million over the comparable
quarter in the previous year. Service revenue growth is driven by the
Companys maintenance and the renewal rates realized.

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The Companys revenue growth and profitability depend in large part on the
overall global economic and business conditions and the demand for information
technology. Although recent economic data indicate that macroeconomic
conditions may be stabilizing, capital spending by corporations, and more
specifically technology spending, appears to be lagging behind the overall
economic recovery. International and domestic economic conditions showed
noticeable signs of improvement during the current quarter, however visibility
of an extended recovery remains uncertain. The Company plans to continue
monitoring the economic conditions of the United States, European and
Asia/Pacific economies and will adjust its operating plan accordingly.

License revenue increased by 46% to $28.9 million for the three months ended
September 30, 2002 from $19.8 million for the three months ended September 30,
2001, representing 51% and 44% of total revenue in the respective periods and
increased by 31% to $81.0 million for the nine months ended September 30, 2002
from $62.0 million for the nine months ended September 30, 2001, representing
50% and 45% of total revenue in the respective periods. The growth in license
revenue in absolute dollars and as a percentage of total revenue for the
periods presented was due to an increase in licenses sold. The increase in
licenses sold was driven by increased traction in key vertical markets
including telecommunications, retail, and chemicals, the Companys up-sell and
cross-sell penetration into its existing customer base, and increased world
wide demand in response to enterprise requirements for a comprehensive content
management solution needed to meet both regulatory standards and manage massive
amounts of content. In addition, the Company believes that the growth in
licenses sold reflects widespread customer standardization on the Documentum
platform. Further validating the Companys success was $8.2 million in license
revenue from new customers as compared to $7.1 million during the comparable
quarter in the prior year. During the three months ended September 30, 2002,
the Company had one sale accounting for $7.2 million or 25% of total license
revenue. No customer accounted for greater than 10% of total license revenue
for the nine months ended September 30, 2002. For the three months ended
September 30, 2001, the Company had sales to a single customer which accounted for
$2.2 million or 11% of license revenue. The Company did not have
sales to a single customer that accounted for greater than 10% of license revenue for the nine
months ended September 30, 2001. The Company anticipates that the demand for
its products will continue to increase as the overall economic conditions
strengthen and the overall demand for enterprise content management increases;
more specifically, the Company expects license demand to increase as the Company
sees a growing trend of customers need for a common enterprise-wide approach to
content management and a platform suitable for fulfilling the compliance
obligations of regulated business functions. Furthermore, with the release of
Documentum 5, the future release of add-on modules and the integration of the
eRoom and TrueArc acquisitions, the Company should see increased license
revenue opportunities as more user seats are deployed throughout customer
enterprises and the Company makes additional sales to new customers.

The Companys customers include a number of its suppliers and, on occasion, the
Company has purchased goods or services for the Companys operations from these
vendors at or about the same time the Company has licensed its software to
these organizations. These transactions are separately negotiated, settled in
cash and recorded at terms the Company considers to be arms-length. During the
quarter ended September 30, 2002, the Company recognized revenue of $0.2
million from the sale of software to a leading e-business software
infrastructure company. During the same period, the Company purchased $0.1
million of software from the e-business software infrastructure company. During the second quarter of fiscal 2002,
the Company recognized revenue of $1.1 million from the sale of software
licenses to a leading financial services organization and in the same period
the Company paid the financial services organization $3.7 million in
commissions in connection with the convertible debt offering that was completed
on April 5, 2002. During the first quarter of fiscal 2002, the Company
recognized revenue of $1.0 million from the sale of software licenses to one of
the worlds largest enterprise software companies. During the same period, the
Company purchased $0.4 million of software from the enterprise software company
for use in managing its internal corporate portal. During the quarter
ended September 30, 2001, the Company recognized revenue of
$0.4 million from a provider of application and database management
software products. During the same period, the Company purchased $0.5
million of software from the application and database management
software company.

Service revenue increased by 7% to $27.4 million for the three months ended
September 30, 2002 from $25.6 million for the three months ended September 30,
2001, representing 49% and 56% of total revenue in the respective periods, and
increased by 6% to $79.9 million for the nine months ended September 30, 2002
from $75.2 million for the nine months ended September 30, 2001, representing
50% and 55% of total revenue in the respective periods. Specifically, the
Companys maintenance revenue increased by $2.6 million and $7.5 million for
the three and nine months ended September 30, 2002, respectively, over the
comparable periods presented, and consulting and education service revenue
decreased by $0.8 million and $2.8 million for the three and nine months ended
September 30, 2002, respectively, over the comparable periods presented. The
increase in maintenance revenue was attributable to a larger installed base of
customers receiving ongoing maintenance and support services, maintenance
renewals of approximately 90% of customers making first time product license
purchases, and a growth in back-

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maintenance. In the event a customer renews a maintenance agreement after the
maintenance term has expired, the Company will immediately recognize revenue
for the back-maintenance period after receiving a commitment from the
customer. The back-maintenance period represents the
period of time that begins on the expiration date of the maintenance agreement
and extends through the date the maintenance agreement was renewed. Back
maintenance was $0.5 million and $0.3 million for the three months ended
September 30, 2002 and 2001, respectively, and was $2.2 million and $1.6
million for the nine months ended September 30, 2002 and 2001, respectively.
The Company believes that the decrease in consulting and education service
revenues for the periods noted is due to adverse macro-economic factors
associated with customer purchases and software deployment methodologies.
Customers have increased their use of internal resources to deploy purchased
licenses and are limiting the number of attendees to the Companys education
seminars. The decrease of service revenue as a percentage of total revenue
was due to the increase in license revenue for the three and nine month periods
ended September 30, 2002 over the comparable prior year, as described above.
The continued growth of the Companys service revenue depends on the growth of
the Companys software license revenues. With the release of Documentum 5
during the three months ended September 30, 2002, the Company expects that
demand from its installed base and new customers for consulting, education and
maintenance services may increase over the next several quarters. Furthermore,
the Company continues to expand its array of service offerings through
innovative on-line training courses. However, the Company cannot
give assurance that it will be successful in expanding its consulting and
education services.

The Company markets its products through its direct sales force and its
indirect channel partners. While historically the Company has generated the
majority of its revenue from its direct sales force, the Company has also
focused on complementing its direct sales channel with indirect channels,
consisting of systems integrators, technology partners, original equipment
manufacturers, distributors, and application service providers. While
a small portion of the Companys sales result directly from these indirect channel partners without
participation by the Companys direct sales force, indirect channel partners play a
significant role in identifying sales prospects and complementing the
efforts of our direct sales force. Revenue from
transactions that involved indirect channel partners comprised 84% and 66% of
license revenue for the three months ended September 30, 2002 and 2001,
respectively, and 76% and 46% of license revenue for the nine months ended
September 30, 2002 and 2001, respectively. The increase in indirect channel
revenue is due to the Companys continued investment in channel programs, as
evidenced by a restructured compensation program that was implemented to incent
the direct sales force to include indirect channel partners in transactions.
Revenue from indirect channel partners for any period is subject to significant
variations. As a result, the Company believes that period-to-period
comparisons of indirect revenue are not necessarily meaningful and should not
be relied upon as an indication of future performance.

International revenue represented 46% and 38% of license revenue for the three
months ended September 30, 2002 and 2001, respectively, and 46% and 45% of
license revenue for the nine months ended September 30, 2002 and 2001,
respectively. The increase over the three month periods presented is driven by
the rate of license revenue growth seen in Europe and Asia/Pacific regions as
compared to domestic growth. Europe license revenue increased by $2.8 million
and Asia/Pacific license growth increased by $3.1 million while domestic
license growth increased by $3.7 million for the three months ended September
30, 2002 over the same period a year ago. Both Europe and Asia/Pacific license
revenue growth was impacted by a world-wide sale to one customer in the amount of
$7.2 million. This transaction contributed $3.6 million and $1.6 million to the Europe and
Asia/Pacific regions, respectively. The increase in total revenue over the comparable nine
month periods presented is driven by an increase in absolute dollar revenue
growth for EMEA and Asia/Pacific combined over domestic revenue streams. In
many instances, especially with large purchases by multinational companies, the
customer has the right to deploy the licenses anywhere in the world. Thus, the
percentages discussed herein are based on where licenses were sold, and may or
may not represent where the products are used. As a result, the Company
believes the period-to-period comparisons of international revenue are not
necessarily meaningful and should not be relied upon as an indication of future
performance.

Cost of revenue

Cost of license revenue consists of royalties paid to third-party vendors,
packaging, documentation, production, and freight costs. Royalties, which are
paid to third parties for selected products, include both fixed and variable
fees. Cost of license revenue increased by 92% to $2.3 million for the three
months ended September 30, 2002 from $1.2 million for the three months ended
September 30, 2001 and increased by 42% to $6.1 million for the nine months
ended September 30, 2002 from $4.3 million for the nine months ended September
30, 2001, representing 8% and 6% of the related license revenue for the three
months ended September 30, 2002 and 2001, respectively, and 7% of the related
license revenue for the nine months ended September 30, 2002 and 2001. The
absolute dollar increase in cost of license revenue for both the three and the
nine months ended September 30, 2002 over the comparable

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periods in 2001 is due to the increased license revenue. Cost of license
revenue increased as a percentage of license revenue for the three months ended
September 30, 2002 over the comparable period in 2001 due to a change in the
mix of products being sold as the Company sold more royalty-bearing products as
a percentage of license revenue as compared to the same period a year ago. The
Company expects the cost of license revenue to fluctuate in absolute dollar
amount and as a percentage of total license revenue as the related license
revenue fluctuates.

Cost of service revenue consists of personnel-related costs incurred in
providing consulting services, education to customers and maintenance services,
which includes telephone support. Cost of service revenue decreased by 2% to
$12.1 million for the three months ended September 30, 2002 from $12.3 million
for the three months ended September 30, 2001 and decreased by 2% to $37.4
million for the nine months ended September 30, 2002 from $38.3 million for the
nine months ended September 30, 2001, representing 44% and 48% of the related
service revenue for the three months ended September 30, 2002 and 2001,
respectively, and 47% and 51% of the related service revenue for the nine
months ended September 30, 2002 and 2001, respectively. The decrease in cost of
service revenue in absolute dollar amounts and as a percentage of service
revenue is due to a decrease in consulting and education revenues, as described
above. The Companys service gross profit increased by 15% to $15.3 million
for the three months ended September 30, 2002 from $13.3 million for the three
months ended September 30, 2001 and increased by 15% to $42.5 million for the
nine months ended September 30, 2002 from $37.0 million for the nine months ended
September 30, 2001. The improvements in margin can be attributed to growth in
higher margin maintenance revenue, greater use of on-line and on-site training
courses, and cost efficiencies realized within the consulting organization.
The Company expects that this trend will continue to the extent that it can
maintain and implement effective cost models for its consulting and training
organization and sustain its maintenance revenue margins.

Operating expenses

Sales and marketing.Sales and marketing expenses consist of salaries,
benefits, sales commissions and other expenses related to the direct sales
force, various marketing expenses and costs of other market development
programs. Sales and marketing expense decreased by 8% to $23.8 million for the
three months ended September 30, 2002 from $26.0 million for the three months
ended September 30, 2001 and decreased by 12% to $70.4 million for the nine
months ended September 20, 2002 from $80.1 million for the nine months ended
September 30, 2001, representing 42% and 57% of total revenue for the three
months ended September 30, 2002 and 2001, respectively, and 44% and 58% of
total revenue for the nine months ended September 30, 2002 and 2001,
respectively. The decrease in absolute dollar amounts and as a percentage of
total revenue was due to a decrease in sales compensation mostly driven by
restructuring activities. Sales headcount was reduced by 9% to 356 employees
for the period ending September 30, 2002 from 391 employees in the comparable
period one year ago. Adding to the decrease was managements further
implementation of cost control initiatives, and a redesign of the Companys
compensation plan that resulted in lower commissions. Commission expense
decreased by $0.9 million and $5.0 million for the three and nine month periods
ended September 30, 2002, over the comparable periods in the prior year. These
decreases were partially off-set by increased costs associated with the
Companys expansion of sales offices in Italy, Sweden, Mexico, and office
relocation efforts in the Companys New York sales region. The Company expects
to monitor sales capacity worldwide in order to pursue global revenue and
market opportunities. Sales and marketing expense will increase in absolute
dollar amounts as the Company expands its sales and marketing efforts and incurs
additional personnel costs related to the acquisitions of eRoom and
TrueArc, however sales and marketing costs are expected to continue to decrease as a percentage of total revenue.

Research and development.Research and development expenses consist of salaries
and benefits for software developers, contracted development efforts and
related facilities costs. Research and development expenses increased by 10% to
$8.9 million for the three months ended September 30, 2002 from $8.1 million
for the three months ended September 30, 2001, and increased by 5% to $27.7
million for the nine months ended September 30, 2002 from $26.5 million for the
nine months ended September 30, 2001, representing 16% and 18% of total revenue
for the three months ended September 30, 2002 and 2001, respectively, and 17%
and 19% of total revenue for the nine months ended September 30, 2002 and 2001,
respectively. The increase in absolute dollars for the periods presented is due
to increased spending on product integration costs incurred as a result of the
Bulldog, Inc. and Boxcar Software, Inc. acquisitions and costs attributed to
the launch of Documentum 5 during the quarter ended September 30, 2002. For the
three and nine month periods ended September 30, 2002, the Company incurred $0.6
million and $2.0 million, respectively, in integration and product related
costs. The nature of these costs related to the integration of the Digital
Asset Management technology acquired in the Bulldog acquisition and content
distribution and aggregation technology acquired in the Boxcar acquisition.
Based on the Companys research and

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development process, costs incurred between the establishment of technological
feasibility and general release have been insignificant and therefore all costs
relating to research and development are expensed as incurred. The Company
expects research and development costs to increase in
absolute dollar amount as a result of additional personnel and
integration costs that will be incurred in connection
with the eRoom and TrueArc acquisitions, and in order to continue the development of both existing and new products.

General and Administrative.General and administrative expenses consist of
personnel costs for finance, information technology, legal, human resources and
general management, as well as outside professional services.
General and administrative expenses were relatively consistent for the
three-months ended September 30, 2002 and 2001, and decreased by 2% to $18.7
million for the nine months ended September 30, 2002 from $19.1 million for the
nine months ended September 30, 2001, representing 11% and 13% of total revenue
for the three months ended September 30, 2002 and 2001, respectively, and 12%
and 14% of total revenue for the nine months ended September 30, 2002 and 2001,
respectively. The decrease in the amount of general and administrative
expenses for the nine months ended September 30, 2002 over the nine months
ended September 30, 2001 is due to the Companys restructuring efforts,
specifically the decreased use of out-sourced staffing and consultants,
professional fees and a reduction in discretionary costs as a result of the
Companys cost control initiatives. The decrease in costs as a percentage of
total revenue for the periods presented is due to an increase in total revenue.
The Company believes that general and administrative expenses will increase in
terms of absolute dollar amount as a result of personnel costs incurred in
connection with the eRoom and TrueArc acquisitions, but will decrease as a
percentage of total revenue in the fourth quarter of fiscal 2002 compared to
the levels in the third quarter of fiscal 2002.

Restructuring Charges

In fiscal 2001, and in the second quarter ended June 30, 2002, the
Company incurred restructuring costs to reduce its world-wide work force, and
to consolidate excess facilities. The following table details the
restructuring activity through September 30, 2002:

|                                                          |  |           |           |         |  |       |         |   |  |   |           |  
|--------------------------------------------------------- |  | --------- | --------- | ------- |  | ----- | ------- | - |  | - | --------- | -
|                                                          |  | Severance |           |         |  |       |         |   |  |  
|                                                          |  | and       |           | Other   |  |       |         |  
|                                                          |  | Benefits  |           | Charges |  | Total
|                                                          |  |           |           |         |  |      
|Balance at December 31, 2001:                             |  | $         | 943,444   |         |  | $     | 252,929 |   |  | $ | 1,196,373 |  
|Total charge to operating expense                         |  |           |          |         |  |       |        |   |  |   |          |  
|Cash paid                                                 |  |           | (467,832  | )       |  |       | (8,430  | ) |  |   | (476,262  | )
|Balance at March 31, 2002                                 |  |           | 475,612   |         |  |       | 244,499 |   |  |   | 720,111   |  
|                                                          |  |           |           |         |  |       |         |   |  |   |           |  
|Total charge to operating expense                         |  |           | 1,339,206 |         |  |       |        |   |  |   | 1,339,206 |  
|Cash paid                                                 |  |           | (232,914  | )       |  |       | (29,961 | ) |  |   | (262,875  | )
|Adjustments                                               |  |           | (294,998  | )       |  |       |        |   |  |   | (294,998  | )
|Balance at June 30, 2002                                  |  | $         | 1,286,906 |         |  | $     | 214,538 |   |  | $ | 1,501,444 |  
|                                                          |  |           |           |         |  |       |         |   |  |   |           |  
|Total charge to operating expense                         |  |           |          |         |  |       |        |   |  |   |          |  
|Cash paid                                                 |  |           | (773,675  | )       |  |       | (34,713 | ) |  |   | (808,388  | )
|Balance at September 30, 2002 through September 30, 2002: |  | $         | 513,231   |         |  | $     | 179,825 |   |  | $ | 693,056   |  
|                                                          |  |           |           |         |  |       |         |   |  |   |           |  

In connection with the Companys restructuring
plans, the Company recognized restructuring charges
that were comprised of estimated severance and benefits costs
related to the involuntary termination or cancellation of offers of
approximately 240 employees, of which 220 employees were based in the United
States and the remainder of the employees were based in Europe, Canada, and
throughout Asia Pacific. The cost estimates were made based on the remaining
amounts due under various contractual agreements and managements best
estimates of the expected obligations. During the three months ended
June 30, 2002 the Company decreased the severance and benefits
accrual by a net $0.3 million. These adjustments were the result of the Company
settling certain severance and benefit obligations for an amount less
than originally estimated. The Companys remaining
accrual of
approximately $0.5 million will be paid to remaining employees during
fiscal 2002 and the first half of fiscal 2003.

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The remaining other charges which were recognized in connection with the
Companys restructuring plan includes costs that the Company estimated it would
incur to exit certain facilities, net of estimated sub-lease income.
The Company worked with external real estate experts in each of the markets
where the properties are located to determine the best estimate of the accrual.
The remaining accrued liability as of September 30, 2002 relates to both
miscellaneous restructuring costs which will be paid out over the remainder of
fiscal 2002 and the first half of fiscal 2003, and facilities lease obligations,
net of estimated sub-lease income, which will be paid through fiscal 2005.

The Company does not believe that the restructuring activities have had or will
have a material effect on its ongoing operations.

The Company has a facility in the United Kingdom
that is not fully utilized. The Company is currently evaluating its capacity
requirements for the facility in light of its proposed acquisition of eRoom
(see further details under Business Acquisitions) and other operational needs.
If the Company determines that the space will not be utilized, the
Company estimates that it will incur a charge ranging from $1.6 million to $3.6
million.

Interest and other income (expense), net

Interest and other income (expense), net, consists of interest income earned on
the Companys cash, cash equivalents, short-term investments, long-term
investments, and other items including foreign exchange gains and losses,
losses on the sale of fixed assets and interest expense. Interest and other
income (expense), net decreased by $0.8 million for the three months ended
September 30, 2002 to an expense of $0.1 million from income of $0.7 million
for the three months ended September 30, 2001 and decreased by $2.9 million for
the nine months ended September 30, 2002 to income of $0.1 million from income
of $3.0 million for the nine months ended September 30,
2001. Specifically, interest income increased by $0.6 million
for the three months ended September 30, 2002 to
$1.6 million from $1.0 million during the comparable period
in the prior year. Interest income decreased by $0.3 million for
the nine months ended September 30, 2002 to $3.5 million
from $3.8 million during the comparable prior period. The
increase for the three month period is primarily due to increased
cash, cash equivalents, short-term and long-term investments mostly
due to the proceeds received from the convertible debt offering,
whereas the decrease for the nine month period is due to a prolonged
reduction in interest rates earned on these investments. Interest
expense increased to $1.6 million for the three months ended
September 30, 2002 from an insignificant amount during the
comparable period in the prior year. Interest expense increased to
$3.2 million for the nine months ended September 30, 2002
from an insignificant amount during the comparable prior period. The
increase in interest expense for the periods being discussed is
due to fixed interest obligations related to the Companys outstanding convertible debt
balance.

To date, the Companys international sales are made mostly from the Companys
foreign sales subsidiaries in the local countries and are typically denominated
in the local currency of each subsidiary. However, for transactions that are
initiated in the United States that are denominated in a foreign currency, the
Company has engaged in economic hedging activities as the exposure to currency
fluctuations has been significant. In the future, as the Company expands its
international operations, the Company may have an increased amount of non-U.S.
dollar denominated contracts.

Income taxes

Income tax provision (benefit) for the interim
periods is based on an estimated
effective income tax rates for the year. The Companys effective rate for the three months and
nine months ended September 30, 2002 was 30% and was 2% and 8% for the three
and nine months ended September 30, 2001, respectively. The tax rate may vary
by quarter based on the Companys results, the mix of domestic and
international income, as well as the potential effect of the acquisitions of
eRoom and TrueArc.

Business Acquisitions

On January 23, 2002, the Company acquired privately-held Boxcar Software, Inc.
in exchange for total consideration of $1.4 million; $1.3 million represented cash
consideration and $0.1 million represented acquisition costs. The acquisition
was accounted for using the purchase method of accounting on the date of
acquisition. Boxcar was a provider of content aggregation and distribution technology
allowing companies to gather content from any source, including Web sites,
public folders, file systems and legacy applications, and distribute the
content in any format and to any destination. In connection with the purchase,
the Company recorded goodwill of $0.9 million and various intangible and other
assets totaling $0.5 million. Intangible assets relating to the value of
existing technology and non-compete agreements are being amortized on a
straight-line basis over the estimated useful lives of five years and three
years, respectively.

On October 3, 2002, the Company entered into a definitive agreement to acquire
eRoom Technology, Inc., a privately held company. eRoom is a provider of
extended enterprise collaborative software and services focusing exclusively on
providing internet collaboration solutions to the extended enterprise. Upon
closing of the acquisition, the Company will issue approximately 7.7 million
shares of its common stock, valued at $90.0 million, and pay approximately $12.6 million

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in cash for all outstanding shares of eRooms capital stock, based upon eRooms
capitalization as of October 3, 2002. In addition, the Company will reserve
approximately 1.7 million shares of common stock, valued at
$10.7 million, for issuance upon exercise of
stock options that are being assumed by the Company in the acquisition. Upon
closing of the acquisition, approximately 15% of the total consideration will
be placed in escrow for one year to secure eRooms customary representations and warranties.

On November 4, 2002, the Company announced the signing of a definitive
agreement to acquire TrueArc Corporation, a privately held company,
for $3.6 million. TrueArc is a provider of electronic records management and digital
preservation software. Consideration for the purchase will be paid in cash.

The eRoom and TrueArc acquisitions are expected to close in the fourth quarter of fiscal 2002.

Liquidity and Capital Resources

The Companys cash, cash equivalents,
long-term, and short-term investments totaled $234.2
million at September 30, 2002, representing 66% of total assets. Cash that is
in excess of current operating requirements is invested in investment grade
securities. The investments have variable and fixed interest rates and
short-term maturities. In accordance with SFAS 115, Accounting for Certain
Investments in Debt and Equity Securities, such investments are classified as
available-for sale.

Pending Acquisitions

On October 3, 2002, the Company entered into a definitive agreement to acquire
eRoom Technology, Inc, a privately held company. eRoom is a provider of
extended enterprise collaborative software and services focusing exclusively on
providing internet collaboration solutions to the extended enterprise. Upon
closing of the acquisition, the Company will issue approximately 7.7 million
shares of its common stock, valued at $90.0 million, and pay approximately $12.6 million in cash for all
outstanding shares of eRooms capital stock, based upon eRooms capitalization
as of October 3, 2002. In addition, the Company will reserve approximately 1.7
million shares of common stock, valued at $10.7 million, for issuance upon exercise of stock options that
are being assumed by the Company in the acquisition. Upon closing of the
acquisition, approximately 15% of the total consideration will be placed in
escrow for one year to secure eRooms customary representations and warranties.

On November 4, 2002, the Company announced the signing of a definitive
agreement to acquire TrueArc Corporation, a privately held company, for $3.6
million. TrueArc is a provider of electronic records management and digital
preservation software. Consideration for the purchase will be paid in cash.

These acquisitions are expected to close in the fourth quarter of fiscal 2002.
In addition to the cash commitments incurred in these transactions, the Company
may also incur substantial costs related to the integration of eRoom and
TrueArc. These costs will be incurred in subsequent quarters and may affect the
Companys overall operating cash flow.

Convertible Debt

On April 5, 2002, the Company sold $125 million (the face value) in senior
convertible notes that mature on April 1, 2007 (the Notes). The Notes bear
interest at a rate of 4.5% per annum. The
Company received proceeds of $121.3 million, net of underwriter debt issuance
costs of $3.7 million. The Company also incurred debt issuance costs totaling
$0.4 million comprising of legal, accounting, and various other fees relating
to the debt offering. Holders of the Notes are entitled at any time after
April 5, 2002, and before the close of business on April 1, 2007, subject to
prior redemption or repurchase of the Notes, to convert the Notes into shares
of common stock at a conversion price of $30.02 per share. The Notes will be
limited to $125 million aggregate principal amount. The Notes may be redeemed
by the Company on or after April 5, 2005. The Notes will effectively rank
behind all other secured debt to the extent of the value of the assets securing
those debts. The Notes do not contain any restrictive financial covenants. The
Company recognized $1.6 million and $3.1 million of interest expense for the
three and nine month periods ended September 30, 2002, respectively.
Amortization of debt issuance costs, incurred in connection with the issuance
of the Notes, totaled $0.2 million and $0.3 million for the three and nine
month periods ended September 30, 2002, respectively. As of September 30, 2002,
the Companys debt obligation totaled $125.0 million.

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The indenture under which the Notes were issued provides that an event of
default will occur if (i) we fail to pay principal or premium on the Notes,
(ii) we fail to pay interest on the notes and fail to cure such non-payment
within 30 days, (iii) we fail to perform any other covenant that is required of
us in the indenture and the failure is not cured or waived within 60 days, or
(iv) we or one of our significant subsidiaries fails to pay, at final maturity
or upon acceleration, any indebtedness for money borrowed in an outstanding
principal amount in excess of $10 million, and the indebtedness is not
discharged, or the default is not cured, waived or rescinded within 30 days
after notice is provided in accordance with the terms of the indenture. If any
of these events of default occurs, either the trustee or the holders of at
least 25% of the outstanding notes may declare the principal amount of the
Notes to be due and payable. In addition, an event of bankruptcy, insolvency or
reorganization (involving us or any of our significant subsidiaries) will
constitute an event of default under the indenture and, in that case, the
principal amount of the Notes will automatically become due and payable. To the
extent the Company is required to repay the Notes prior to the maturity date as
a result of an event of default, such repayment will negatively impact the
Companys liquidity.

As a result of the above and other commitments as of September 30, 2002, our
total future commitments for the remainder of fiscal year ended December 31,
2002 will be
$18.9 million and for the fiscal year ended December 31, 2003
will be
$21.3 million, assuming that none of our obligations is
accelerated.

Cash provided by operating activities was $12.1 million for the nine month
period ended September 30, 2002 as compared to cash used in operations of $10.3
million for the comparable period last year. The inflow of cash from operations
in 2002 was driven by the Companys reduced net loss, cash collection on
outstanding trade accounts receivable, and non-cash charges related to
depreciation and provision for bad debts. The reduction in net loss during the
period was due to increased total revenue and reduction in operating expense.

At September 30, 2002, the Company had net working capital of $169.6 million,
as compared with $80.5 million at December 31, 2001. The working capital
increase was driven by increases in short-term investments of $60.0 million,
cash and cash equivalents of $27.8 million, other current assets of $2.2
million, and a reduction in accrued liabilities of $4.8 million, all of which
were off-set by decreases in accounts receivable of
$2.1 million, and increases in deferred revenue of
$2.8 million and accounts payable of $0.8 million.

In addition to its purchases, sales and maturities of investments, and
activities related to the convertible note proceeds described herein, the
Companys investing activities during the nine months ended September 30, 2002
also consisted of the acquisition of Boxcar Software, Inc. and purchases of
property, plant and equipment. The above activities combined
represented $117.4 million of cash used in investing activities in 2002, compared to $1.8 million
of cash used by investing activities in the comparable period last year.

Historically, the Company has financed its operations through the sale of
stock, however, during the period ended September 30, 2002, the Company
complemented its stock sales with the completion of a convertible debt offering
raising gross proceeds of $125.0 million. In addition, during the nine months
ended September 30, 2002 the Company received $4.5 million and $6.1 million in
proceeds from option exercises and employee stock purchase plans, respectively.
These activities represented substantially all of the Companys $131.8 million
provided by financing activities for the nine months ended September 30, 2002
as compared to $13.1 million for the comparable period in 2001. The increase
was mostly due to the sale of the Notes.

In June 1998, the Company signed and made a deposit of $2.5 million to lease
approximately 122,000 square feet and 63,000 square feet in Pleasanton,
California beginning in June 1999 and November 1999, respectively, and expiring
in May 2005 and March 2006, respectively. In January 2000, the Company signed
an amendment to the existing leases, which provides for the rental of an
additional 37,138 square feet of space, beginning July 2000 and expiring in
March 2006. In July 2001, the Company signed an amendment to the existing
leases, which provides for the rental of an additional 13,975 square feet of
space, beginning July 2001 and expiring in March 2005. The Pleasanton,
California space serves as the Companys headquarters and contains the
principal administrative, engineering, marketing and sales facilities.

In October 1997, the Company signed an agreement to
lease approximately 24,000 square feet in Middlesex, United Kingdom
beginning in October 1997 and expiring in April 2013. In September
2001, the Company signed an agreement to lease an additional 35,000
square feet in Middlesex, United Kingdom beginning in September 2001
and expiring in December 2007. These facilities serve as the
Companys principal European administrative, engineering,
marketing and sales facilities.

The Company has made and may continue to make
significant capital purchases related to leasehold improvements and
office furniture for new facilities. The Company currently has no
other significant capital spending or purchase commitments other than
normal purchase commitments and commitments under facilities leases.

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In August 2001, the Company entered into a capital lease arrangement for the
rental of computer equipment in the amount of $108,000. The lease agreement
requires quarterly principal and interest payments in the amount of $12,000.
During the quarter ended September 30, 2002, the Company made principal
payments totaling $11,000 and interest payments of $1,000. Through September
30, 2002, the Company had made principal and interest payments in the amount of
$56,000 related to this lease and had recorded the current portion of this
capital lease obligation in the amount of $47,000. The lease has an interest
rate of 5.77% and has a maturity date of December 2003. Also, in connection
with the acquisition of substantially all of the assets of Bulldog, Inc. the
Company acquired capital assets under capital leases totaling $32,000 (see
Companys 2001 Annual Report on Form 10-K (as amended on August 29, 2002) for
further details surrounding the Bulldog acquisition). During the nine months
ended September 30, 2002, the Company settled all payment obligations
surrounding the acquired capital leases.

Our liquidity is affected by many factors, some of which are based on the
normal ongoing operations of our businesses and some of which arise from
fluctuations related to global economies and markets. Some of those factors
include, but are not limited to, the Companys lengthy sales and implementation
cycles, a reliance on one family of products and related services, intense
competition that could cause an inability to compete successfully, and an
industry that is characterized by vigorous protection and pursuit of
intellectual property rights. The Company believes that its existing cash, cash
equivalents and short-term investment balances, its available bank financing
and the cash flows generated from operations, if any, will be sufficient to
meet its anticipated cash needs for working capital and capital expenditures
for at least the next twelve months. However, if we are not successful in
generating sufficient cash flow from operations, we may need to raise
additional capital at the end of such period. We cannot provide assurance that
additional financing, if needed, will be available on favorable terms, if at
all. Even if our cash is sufficient to fund our needs, we may elect to sell
additional equity or debt securities, or obtain credit facilities to further
enhance our liquidity position. The sale of additional securities could result
in additional dilution to our stockholders. A portion of the Companys cash
could be used to acquire or invest in complementary businesses or products or
obtain the right to use complementary technologies. The Company periodically
evaluates, in the ordinary course of business, potential investments such as
businesses, products or technologies. See Risk Factors  Risks Associated
with Acquisitions.

Risk Factors

Our operating results are difficult to predict and fluctuate substantially from
quarter to quarter, which may increase the difficulty of financial planning and
forecasting and may result in decreases in our available cash and declines in
our stock price.Our future operating results may vary from our past operating
results, are difficult to predict and may vary from quarter to quarter due to a
number of factors. Many of these factors are beyond our control. These
factors include:



| |  | the potential delay in recognizing revenue from license transactions due to revenue recognition rules which we must follow;                                                                                                           
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the tendency to realize a substantial amount of revenue in the last weeks, or even days, of each quarter due to the
tendency of some of our customers to wait until quarter or year end in the hope of obtaining more favorable terms;
| |  | customer decisions to delay implementation of our products;                                                                                                                                                                           
| |  | the size and complexity of our license transactions;                                                                                                                                                                                  
| |  | any seasonality of technology purchases;                                                                                                                                                                                              
| |  | demand for our products, which can fluctuate significantly;                                                                                                                                                                           
| |  | the timing of new product introductions and product enhancements by both us and our competitors;                                                                                                                                      
| |  | changes in our pricing policy;                                                                                                                                                                                                        
| |  | the publication of opinions concerning us, our products or technology by industry analysts;                                                                                                                                           
| |  | changes in foreign currency exchange rates; and                                                                                                                                                                                       
| |  | domestic and international economic and political conditions.                                                                                                                                                                         

One or more of these factors may cause our operating expenses to be
disproportionately high or our gross revenues to be disproportionately low
during any given period, which could cause our net revenue and operating
results to fluctuate significantly. Our operating results have fluctuated
significantly in the past. Our earnings per share was $0.07 in the third
quarter of 2000, but we had a loss per share of $0.20 in the third quarter of
2001 and earnings per

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share of $0.05 in the third quarter of 2002. You should not rely on our
quarterly operating results to predict our future results because of the
significant fluctuations to which our results are subject.

As a result of these and other factors, operating results 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 in
terms of their relation to future performance. You should not rely upon these
comparisons as indications of future performance. It is likely that our future
quarterly operating results from time to time will not meet the expectations of
public market analysts or investors, which could cause a drop in the price of
our common stock.

The United States, Europe and Asia/Pacific have experienced a general decline
in economic conditions over the past six quarters, leading to reduced demand
for goods and services, including those that we offer.Each of our customers
makes a discretionary decision to implement our products that is subject to its
resources and budget cycles. Many of our customers have experienced budgeting
constraints, causing them to defer or cancel projects. Revenue from sales of
our products decreased in fiscal year 2001 compared to fiscal year 2000. While
we have experienced a slight increase in demand for our products in the first
three quarters of 2002, demand for our products may decrease again. Decreased
demand for our products would result in decreased revenues, which could harm
our operating results, causing the price of our common stock to fall.

We cannot predict how long or severe this economic downturn will be or whether
any actions taken or proposed by the government will be effective to bolster
the economy. As a result of this uncertainty, forecasting and financial and
strategic planning are more difficult than usual. If the downturn continues for
an extended period or becomes more severe, our business will suffer and we may
experience declines in sales as our customers attempt to limit their spending.
In addition, the adverse impact of the downturn on the capital markets could
impair our ability to raise capital as needed and could impede our ability to
expand our business.

You may have no effective remedy against Arthur Andersen LLP in connection with
a material misstatement or omission in our financial
statements. Our consolidated financial statements for each of the three years ending December 31, 2001 were audited by Arthur Andersen LLP. On March
14, 2002, Andersen was indicted on federal obstruction of justice charges
arising from the governments investigation of Enron Corporation and on June
15, 2002, Andersen was found guilty. Andersen has informed the SEC that it will
cease practicing before the SEC. On March 14, 2002, we dismissed Andersen and
retained KPMG LLP as our independent auditors for our current fiscal year
ending December 31, 2002. SEC rules require us to present historical audited
financial statements in various SEC filings, such as registration statements,
along with Andersens consent to our inclusion of its audit report in those
filings. Since our former engagement partner and audit manager have left
Andersen, and in light of the announced cessation of Andersens SEC practice,
we will not be able to obtain the consent of Andersen to the inclusion of its
audit report in our relevant current and future filings. The SEC recently has
provided regulatory relief designed to allow companies that file reports with
the SEC to dispense with the requirement to file a consent of Andersen in
certain circumstances, but purchasers of securities sold under our registration
statements, that were not filed with the consent of Andersen to the inclusion
of its audit report, will not be able to sue Andersen pursuant to Section
11(a)(4) of the Securities Act and therefore their right of recovery under that
section may be limited as a result of our inability to obtain Andersens
consent.

We have borrowed a significant amount of money, which could make it difficult
to obtain additional financing; if we cannot obtain additional financing, our
cash reserves could be depleted.Our debt payments and other commitments could
impair our liquidity and cash reserves and make it difficult for us to obtain
additional financing for working capital or acquisitions, should we need to do
so. As of September 30, 2002, we had $125.0 million in outstanding indebtedness
under our 4.5% senior convertible notes. As a result of this and other smaller
debt commitments as of September 30, 2002, our debt-related future commitments for the
remainder of fiscal year ended December 31, 2002 will be $1.4 million and for
the fiscal year ended December 31, 2003 will be $5.7 million, assuming that
none of our obligations are accelerated. Our obligations under the senior
convertible notes may be accelerated if we default under the terms of the
senior convertible notes. If our obligations are accelerated, the entire
principal amount of our outstanding indebtedness under our senior convertible
notes could become immediately payable. This would have a significant impact
on our liquidity position. As of September 30, 2002, we had cash and cash
equivalents of $76 million, short-term investments of $98 million, and
investments with maturities greater

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than one year of $60 million. We intend to fulfill our debt service obligations
both from cash generated by our operations and from our existing cash and
investments.

Our indebtedness could have the following negative consequences:



| |  | limit our ability to obtain additional financing;                                                                                                                                                                            
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | increase our vulnerability to general adverse economic and industry conditions;                                                                                                                                              
| |  | require the dedication of a portion of our expected cash flow from operations to service our
indebtedness thereby reducing the amount of our expected cash flow available for other
purposes, including capital expenditures;
| |  | limit our flexibility in planning for, or reacting to, changes in our business and the
industry in which we compete; and                                                                                                     
| |  | place us at a possible disadvantage to competitors that do not owe as much money as we do or
that have better access to capital resources.                                                                                   

Our sales and implementation cycles are long and difficult to predict.The
time that it takes to sell and implement our products is usually long and
difficult to accurately predict. Our prospective customers usually involve
their entire enterprise in deciding whether to buy our products, which is time
consuming. This lengthy decision making process requires us to engage in a
lengthy sales cycle, which is usually between three and nine months. As part
of the sales cycle, we educate prospective customers about the use and benefits
of our products. A larger or more complex transaction often has a longer sales
cycle. You should not rely on the length of prior sales and implementation
cycles as an indication of the length of future cycles.

The implementation of our products involves a significant commitment of
resources by customers over an extended period of time, and is commonly a part
of major information system changes or upgrades by the customer. Because of
the significant customer commitment required over an extended time, sales and
customer implementation cycles can be delayed indefinitely for reasons beyond
our control should a customer fail to commit required resources. If the sale
of even a limited number of software licenses is delayed, then our revenue
could be lower than expected, our operating results could be harmed and we may
experience significant fluctuations in results from quarter to quarter.

A substantial portion of our revenue is generated by sales of a single family
of products and related services.To date, substantially all of our revenue
has been generated by sales of licenses of the Documentum EDMS and Documentum
4i family of products and related services. We expect that this same family of
products and services will continue to account for the majority of our future
revenue, making us highly dependent on continued sales of this single product
family. In addition during the third quarter of 2002 we released a new version
of this product line, Documentum 5. If the price of this product family
declines, or if demand for this product family declines, then our revenues may
decrease. Demand for this product family could decline for a number of
reasons, including the introduction of new products by our competitors, general
business and economic conditions and changing industry standards. If our
revenues decrease, then our operating results could be lower than expected and
our common stock price may fall.

If we fail to identify new product opportunities or to develop new products,
then our business could be harmed.We compete in the content management
software and services market, which is characterized by (A) rapid technological
change, (B) frequent introduction of new products and enhancements, (C)
changing customer needs, and (D) evolving industry standards. Our future
success depends in part on our ability to integrate web content management
capabilities and business to business solutions into our products. The
introduction of products embodying new technologies and the emergence of new
industry standards can render existing products obsolete and unmarketable. We
may be unable to develop, market and release new products or new versions of
our products that respond to technological developments, evolving industry
standards or changing customer requirements in a timely manner. These new
products, even if introduced in a timely manner, may not adequately meet the
requirements of the marketplace and may not achieve any significant degree of
market acceptance.

Most of our revenues are generated by sales of a single family of products and
related services. If this single product family is rendered obsolete and
unmarketable by technological change or new industry standards, then our
revenues from sales of this product family will decrease. It is difficult to
predict the life cycles of our products because of the rapid technological
changes which can occur in our industry. If we do not correctly predict the
life

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cycle of our primary product family and develop new products to replace
obsolete products, then our gross revenues will decrease, our operating results
could be lower than expected and our common stock price may fall.

We sell content management solutions; the market for content management
solutions may not continue to grow, and may decline.The market for content
management software and services is intensely competitive, highly fragmented
and rapidly changing. Our future financial performance depends primarily on
the continued growth of the market for content management software and services
and the adoption of our products by customers in this market. If the content
management software and services market fails to grow or grows more slowly than
we currently anticipate, our business, financial condition and operating
results would be harmed, which could cause the price of our common stock to
fall.

We face intense competition from several competitors and may be unable to
compete successfully.Our products target the emerging market for Web-based
and client/server software solutions. There are many factors that may increase
competition in the market for Web-based and client/server software solutions,
including (A) entry of new competitors, (B) alliances among existing
competitors and (C) consolidation in the software industry. This market is
intensely competitive, rapidly changing and significantly affected by new
product introductions and other market activities of industry participants. As
a result of this competition, we face competitive pricing pressures in many of
our deals, particularly with respect to our web content management products.

We encounter direct competition from a number of public and private companies
that offer a variety of products and services addressing this market. These
companies include FileNet, OpenText, Interwoven, Stellent and Vignette.
Additionally, several other enterprise software vendors, such as Microsoft,
Oracle and Lotus, a division of IBM, are potential competitors in the future if
they acquire competitive technology or otherwise expand their current product
offerings. Many of these current and potential competitors have longer
operating histories, significantly greater financial, technical, marketing and
other resources, significantly greater name recognition and a larger installed
base of customers than we do. Several of these companies, including Microsoft,
Oracle, Lotus and others, have well-established relationships with our current
and potential customers and strategic partners, as well as extensive resources
and knowledge of the enterprise software industry that may enable them to offer
a single-vendor solution more easily than we can. In addition, our
competitors may be able to respond more quickly to new or emerging technologies
and changes in customer requirements, or to devote greater resources to the
development, promotion and sale of their products than we can. If we cannot
respond to our competitors adequately and in a timely manner, then we may be
required to reduce prices for our products and could suffer reduced gross
margins and loss of market share, any of which could harm our business,
financial condition and operating results, causing the price of our common
stock to fall.

We rely on relationships with systems integrators, and may face direct
competition from them.We rely on a number of systems consulting and systems
integration firms to implement our products and provide customer support
services. We also rely on these firms to recommend our products to prospective
customers during the evaluation stage of the purchase process. Although we
seek to maintain close relationships with these service providers, many of them
have similar, and often more established, relationships with our competitors.
If we are unable to develop and maintain effective, long-term relationships
with these systems consulting and systems integration firms then they may not
recommend our products to prospective customers and we may not be able to rely
on them to implement our products and provide customer support services. In
addition, many of these firms possess industry-specific expertise and have
significantly greater resources than we do, and may market software products
that compete with us in the future. If we fail to develop and maintain good
relationships with these systems consulting and systems integration firms, or
if they become our competitors, then our competitive position would be
materially and adversely affected, which could result in price reductions,
reduced gross margins and loss of market share. Any of these effects could
harm our business, financial condition and operating results and cause the
price of our common stock to fall.

We are dependent on a relatively small number of customers and those customers
are concentrated in a small number of industries.Our success depends on
maintaining relationships with our existing customers. At certain times in the
past, a relatively small number of our customers have accounted for a
significant percentage of our revenue. For example, during the three month
period ended September 30, 2002, the top 5% of our customers accounted for
approximately 53% of our total software license revenue. In addition, our
customers are concentrated in the process and discrete manufacturing,
pharmaceutical, financial services and high technology industries. We may not
be successful in obtaining significant new customers in different industry
segments and we expect that sales of our products to a limited number of
customers in a limited number of industry segments will continue to account

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for a large portion of our revenue in the future. If we are not successful at
obtaining significant new customers or if a small number of customers cancel or
delay their orders for our products, then our business and our prospects could
be harmed. As many of our significant customers are concentrated in a small
number of industry segments, if business conditions in one of those industry
segments decline, then orders for our products from that segment may decrease,
which could negatively impact our business, financial condition and operating
results and cause the price of our common stock to fall.

We rely on a number of relationships with third parties for sales, distribution
and integration; failure to maintain these relationships, or establish new
relationships, could harm our business.We have established strategic
relationships with a number of organizations that we believe are important to
our sales, marketing and support activities and the implementation of our
products. We believe that our relationships with these organizations,
including indirect channel partners and other consultants, provide marketing
and sales opportunities for our direct sales force, expand the distribution of
our products and broaden our product offerings through product bundling. These
relationships allow us to keep pace with the technological and marketing
developments of major software vendors and provide us with technical assistance
for our product development efforts. We have entered into contractual
relationships with these organizations, but these contracts generally do not
require the organizations to continue to work with us. The termination of
such relationships in the past has not had a material impact on our revenues.
Revenue from transactions that involved indirect channel partners comprised a
significant portion of our total license revenue in 2001 and the first three
quarters of 2002. If we fail to maintain these relationships, or to establish
new relationships in the future, then our ability to sell and integrate our
products would be impaired, which would harm our business.

We must also maintain and enhance our relations with technology partners,
including Relational Data Base Management Systems vendors, to provide our
customers with integrated product solutions incorporating our products and
products of third parties. In some cases our technology is incorporated into
product solutions sold by other parties and in some case we incorporate the
technology of third parties into our products. If we are not successful at
maintaining and enhancing our technology partner relationships, then we may be
unable to offer these integrated product solutions, which could harm our
business.

We depend on the service of key personnel.Our future performance depends on
the continued service of our key technical, sales and senior management
personnel, none of whom is bound by an employment agreement with us. Our key
personnel include:



| |  |  | David G. DeWalt, our President and Chief Executive Officer;                            
| | - |  | ---------------------------------------------------------------------------------------
| |  |  | Mike DeCesare, our Executive Vice President, Worldwide Field Operations;               
| |  |  | Mark Garrett, our Executive Vice President and Chief Financial Officer;                
| |  |  | David Milam, our Executive Vice President and Chief Marketing Officer;                 
| |  |  | Howard I. Shao, our Executive Vice President, Founder and Chief Technology Officer; and
| |  |  | Robert Tarkoff, our Executive Vice President, Chief Strategy Officer.                  

Any of our key personnel could terminate their employment with us at any time
and provide their services to one of our competitors. The loss of services
from one or more of our executive officers or key technical personnel could
harm our business, operating results and financial condition. Part of our
total compensation program includes stock options. The volatility or lack of
positive performance of our stock price could decrease the value of stock
options, which may over time adversely affect our ability to retain or attract
key employees.

Our future success also depends on our continuing ability to attract and retain
highly qualified technical, sales and managerial personnel. Competition for
such personnel is intense, and there can be no assurance that we can retain key
employees or that we can attract, assimilate or retain other highly qualified
personnel in the future. If we fail to do so, then our business, operating
results and financial condition could be harmed.

We are subject to risks associated with international operations.Our revenue
is primarily derived from large multi-national companies. To service the needs
of these companies, we must provide worldwide product support services. We
have offices in London, Paris, Munich, Tokyo, Melbourne, Hong Kong, Singapore,
Taipei, and Seoul. We operate our international technical support operations in
the London, Munich and Melbourne offices. We have expanded, and intend to
continue expanding, our international operations and enter additional
international markets. This will require significant management attention and
financial resources that could adversely affect our operating margins and
earnings. Despite the planned increase in our international presence, we may
not be able to maintain or

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increase international market demand for our products. If we do not, then our
international sales will be limited, and operating results could suffer. Our
international operations are subject to a variety of risks, including:



| |  | foreign currency fluctuations;                                                                                                                                
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | economic or political instability;                                                                                                                            
| |  | shipping delays;                                                                                                                                              
| |  | trade restrictions;                                                                                                                                           
| |  | our limited experience in, and the costs of, localizing products for foreign countries;                                                                       
| |  | political unrest or terrorism;                                                                                                                                
| |  | reduced protection for intellectual property rights in some countries;                                                                                        
| |  | longer accounts receivable payment cycles; and                                                                                                                
| |  | difficulties in managing international operations, including, among other things, the burden of complying
with a wide variety of foreign laws and tax regimes.

Our success depends, in part, on our ability to anticipate and address these
risks. We cannot guarantee that these or other factors will not adversely
affect our business or operating results

Our industry is characterized by vigorous protection and pursuit of
intellectual property rights that could result in substantial costs to us.We
rely primarily on a combination of copyright, trademark and trade secret laws,
confidentiality procedures and contractual provisions to protect our
proprietary rights. We also believe that factors such as the technological and
creative skills of our personnel, new product developments, frequent product
enhancements, name recognition and reliable product maintenance are essential
to establishing and maintaining a technology leadership position. We seek to
protect our software, documentation and other written materials under trade
secret and copyright laws, which afford only limited protection. From time to
time, we have explored and resolved potential infringement claims against third
parties. To date, we have not become aware of any material infringement of our
intellectual property.

Despite our efforts to protect our intellectual property rights, unauthorized
parties may attempt to copy aspects of our products or to obtain and use
information that we regard as proprietary. Policing unauthorized use of our
products is difficult. We are unable to determine the extent to which piracy
of our products exists, but expect software piracy to be a persistent problem.
In addition, the laws of some foreign countries do not protect our intellectual
property rights as fully as do the laws of the United States. Our means of
protecting our intellectual property rights in the United States or abroad may
not be adequate. Even if our intellectual property protection is adequate, our
competition may independently develop similar technology which does not violate
our intellectual property rights, but which nonetheless competes with our
products.

From time to time, third parties have explored potential infringement claims
against us and we have resolved these potential claim. To date, we have not
become aware of our material infringement of any intellectual property rights
of others. Although we do not believe that we are infringing on any
intellectual property rights of others, third parties may claim that we have
infringed their intellectual property rights. Furthermore, former employers
of our former, current or future employees may claim that these employees have
improperly disclosed to us the confidential or proprietary information of these
former employers. Any claims, with or without merit, could (A) be
time-consuming to defend, (B) result in costly litigation, (C) divert
managements attention and resources, (D) cause product shipment delays, and
(E) require us to pay money damages or enter into royalty or licensing
agreements. A successful claim of intellectual property infringement against
us and our failure or inability to license the infringed technology or create a
similar technology to work around the infringed technology may result in
substantial damages, payments or termination of sales of infringing products,
any of which could harm our business, operating results and financial
condition.

We license software from third parties, including software that is integrated
with internally developed software and used in our products to perform key
functions. These third-party software licenses may not be available to us on
acceptable terms in the future. The loss of any of these software licenses
could result in shipment delays or reductions, resulting in lower than expected
operating results.

We may face product liability claims from our customers.Our license
agreements with our customers usually contain provisions designed to limit our
exposure to potential product liability claims. It is possible, however, that
the limitation of liability provisions contained in our license agreements may
not be effective under the laws of some

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jurisdictions. A successful product liability claim brought against us could
result in payment by us of substantial damages, which would harm our business,
operating results and financial condition and cause the price of our common
stock to fall.

We face risks associated with product defects and incompatibilities.Software
products frequently contain errors or failures, especially when first
introduced or when new versions are released. Also, new products or
enhancements may contain undetected errors, or bugs, or performance problems
that, despite testing, are discovered only after a product has been installed
and used by customers. Errors or performance problems could cause delays in
product introduction and shipments or require design modifications, either of
which could lead to a loss in or delay in recognition of revenue. In the past,
we have had delays of less than six months in the shipment of products as a
result of errors or performance problems. However, we generally do not book
orders or recognize revenue until a product is available for shipment and we do
not believe that we have lost orders as a result of any shipping delays.

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 will have a greater sensitivity to product defects than
the market for software products generally. Despite extensive testing by us
and by current and potential customers, errors may be found in new products or
releases after we begin commercial shipments, resulting in loss of revenue or
delay in market acceptance, damage to our reputation, diversion of development
resources, the payment of monetary damages or increased service or warranty
costs, any of which could harm our business, operating results and financial
condition.

The costs of software development can be high, and we may not realize revenues
from our development efforts for a substantial period of time.Introducing
new products that rapidly address changing market demands requires a continued
high level of investment in research and development. Our product development
and engineering expenses were $35 million, or 19% of total revenues for the
year ended December 31, 2001, and $28 million, or 17% of total revenue, for the
nine months ended September 30, 2002. As we undertake the extensive capital
outlays to develop new products, we may be unable to realize revenue as soon as
we expect. The costs associated with software development are increasing,
including the costs of recruiting and retaining engineering talent and
acquiring or licensing new technologies. Our investment in new and existing
market opportunities prior to our ability to generate revenue from these new
opportunities may adversely affect our operating results.

We are subject to risks associated with acquisitions.As part of our business
strategy, we frequently evaluate strategic opportunities available to us and
expect to make acquisitions of, or significant investments in, businesses that
offer complementary products and technologies. For example, we
recently announced the signing of definitive agreements relating to
the acquisitions of eRoom Technology, Inc. and TrueArc Corporation
(see above Managements Discussion and Analysis of Financial
Conditions and Results of Operations  Operating Expenses 
Business Acquisitions). We expect these transactions to close in
the fourth quarter of 2002, although we cannot provide any assurance
that the transactions will in fact close or will be successful. These
acquisitions as well as any future acquisitions or investments, expose us to the risks
commonly encountered in acquisitions
of business, which include the following:



| |  |  | we may find that the acquired company or assets do not further our
business strategy or that we paid more than what the company or assets are worth;      
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | we may have difficulty integrating the operations and personnel of the acquired businesses;                                                               
| |  |  | we may have difficulty incorporating the acquired technologies or
products with our existing product lines;                                               
| |  |  | we may have product liability associated with the sale of the acquired companys products;                                                                
| |  |  | our ongoing business may be disrupted by transition or integration issues;                                                                                
| |  |  | our managements attention may be diverted from other business concerns;                                                                                  
| |  |  | we may have difficulty maintaining uniform standards, controls, procedures and policies;                                                                  
| |  |  | our relationship with current and new employees and clients could be impaired;                                                                            
| |  |  | the acquisition may result in litigation from terminated employees or third parties who believe a claim against us would be valuable to pursue; and       
| |  |  | our due diligence process may fail to identify significant issues
with product quality, product architecture and legal contingencies, among other matters.

Our failure to successfully manage these risks associated with any past or
future acquisition may harm our business, results of operations and financial
condition. If we pay for an acquisition by issuing shares of stock or other
rights to purchase stock, including stock options, existing stockholders may be
diluted and earnings per share may decrease. Our investments in other
businesses involve risks similar to those involved in an acquisition.

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Our stock price is extremely volatile.The trading price of our common stock
is subject to significant fluctuations in response to variations in quarterly
operating results, the gain or loss of significant orders, changes in earning
estimates by analysts, announcements of technological innovations or new
products by us or our competitors, general conditions in the software and
computer industries and other factors. During the 2001 fiscal year, our stock
had a high sales price of $55.75 and a low sales price of $5.88, as reported on
the Nasdaq National Market. During the nine months ended September 30, 2002,
our stock had a high sales price of $27.18 and a low sales price of $8.67. In
addition, the stock market in general has experienced extreme price and volume
fluctuations that have affected the market price for many companies in
industries similar or related to ours and which have been unrelated to the
operating performance of these companies. These market fluctuations may
decrease the market price of our common stock.

Some provisions in our certificate of incorporation and our bylaws could delay
or prevent a change in control.Our Board of Directors is authorized to issue
up to 5,000,000 shares of preferred stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further approval by our stockholders. The preferred stock
could be issued with voting, liquidation, dividend and other rights superior to
those of our common stock. The rights of the holders of common stock will be
subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. The issuance of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could make it more difficult for a
third party to acquire a majority of our outstanding voting stock.

We have a classified Board of Directors under our Amended and Restated
Certificate of Incorporation, which means that our Board is divided into three
staggered classes, each of which is elected to the Board for a three year
period. We have also implemented a Share Purchase Plan, or a Rights Plan,
under which all stockholders of record as of February 24, 1999 received rights
to purchase shares of a new series of preferred stock. The rights are
exercisable only if a person or group acquires 20% or more of our common stock
or announces a tender offer for 20% or more of the common stock. These
provisions and certain other provisions of our Amended and Restated Certificate
of Incorporation and certain provisions of our Amended and Restated Bylaws and
of Delaware law, could delay or make more difficult a merger, tender offer or
proxy contest by increasing the cost of effecting these types of transactions,
which could have an adverse impact on stockholders who might want to vote in
favor of a merger or participate in a tender offer.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

The Companys exposure to market risk is due to changes in the general level of
U.S. interest rates and relates to our cash and cash equivalents, short-term,
and long-term investment portfolios (the securities). The securities are
maintained at three major financial institutions in the United States. These
securities, like all fixed instruments, are subject to interest rate risk and
will decline if market interest rates increase. The Company manages interest
rate risk by maintaining an investment portfolio with debt instruments of high
credit quality and relatively short maturities and also maintaining sufficient
cash and cash equivalent balances such that we are typically able to hold the
investments to maturity. The primary objective of the Companys investment
activities is the preservation of principal while maximizing investment income
and minimizing risk. The short-term and long-term investments consist of U.S.
government securities and investment grade corporate debentures. The short-term
investments have original maturities between three months to a year and
long-term investments with original maturities over one year. The following
summarizes the Companys securities and the weighted average yields, as of
September 30, 2002 (in thousands):

|                                  |  |                        |        |      |  |      |        |      |  |               |        |   |  |  |        |   |  |  |         | 
|--------------------------------- |  | ---------------------- | ------ | ---- |  | ---- | ------ | ---- |  | ------------- | ------ | - |  |  | ------ | - |  |  | ------- | 
|September 30, 2002                |  | Expected Maturity Date |        |      |  |     
|                                  |  |                        |        |      |  |     
|                                  |  | 2002                   |        | 2003 |  | 2004 |        | 2005 |  | Total ($000s)
|                                  |  |                        |        |      |  |      |        |      |  |              
|U.S. Treasury & Agency Securities |  |                        | 11,468 |      |  |      | 24,085 |      |  |               | 23,520 |   |  |  | 15,696 |   |  |  | 74,769  | 
|Wtd. Avg. Yield                   |  |                        | 2.50   | %    |  |      | 2.42   | %    |  |               | 2.83   | % |  |  | 2.22   | % |  |  |         | 
|Corporate Bonds                   |  |                        | 26,944 |      |  |      | 43,544 |      |  |               | 12,686 |   |  |  |       |   |  |  | 83,174  | 
|Wtd. Avg. Yield                   |  |                        | 2.14   | %    |  |      | 2.61   | %    |  |               | 2.93   | % |  |  |       |   |  |  |         | 
|Total ($000s)                     |  |                        |        |      |  |      |        |      |  |               |        |   |  |  |        |   |  |  | 157,943 | 

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As of September 30, 2002, the Company had an investment portfolio of fixed
income securities, excluding those classified as cash and cash equivalents, of
$158 million. These securities, like all fixed income instruments, are subject
to interest rate risk and will decline in value if market interest rates
increase. If market interest rates were to increase immediately and uniformly
by 100 basis points from levels as of September 30, 2002, the fair value of the
portfolio would decline by $1.7 million.

The fair value of our convertible subordinated debenture fluctuates based upon
changes in the price of our common stock, changes in interest rates and changes
in our credit worthiness. The fair market value of the convertible subordinated
debenture as of September 30, 2002, was $99.6 million.

Foreign Currency Exchange Risk

The Companys revenue originating outside the United States was 41% and 26% of
total revenue for the three months ended September 30, 2002 and 2001,
respectively, and 39% and 30% of total revenue for the nine months ended
September 30, 2002 and 2001, respectively. International sales are made mostly
from the Companys foreign sales subsidiaries in the local countries and are
typically denominated in the local currency of each country. These subsidiaries
incur most of their expenses in the local currency as well.

The Companys international business is subject to risks typical of an
international business, including, but not limited to the following: differing
economic conditions, changes in political climate, differing tax structures,
other regulations and restrictions, and foreign exchange rate volatility.
Accordingly, the Companys future results could be materially adversely
impacted by changes in these or other factors.

The Companys exposure to foreign exchange fluctuations arise from intercompany
accounts which are typically denominated in the functional currency of the
foreign subsidiary, from receivables and payables denominated in foreign
currency, and from transactions initiated in the United States that are
denominated in a foreign currency. The Company is also exposed to foreign
exchange rate fluctuations as the financial results of foreign subsidiaries are
translated into U.S. dollars in consolidation. As exchange rates vary, these
results, when translated, may vary from expectations and adversely impact
overall expected profitability.

The Company considers the U.S. dollar to be its functional currency for certain
of its foreign subsidiaries and the local currency for all other foreign
subsidiaries. For subsidiaries where the local currency is the functional
currency, the assets and liabilities are translated into U.S. dollars at
exchange rates in effect at the balance sheet date. Income and expense items
are translated at the daily current exchange rates. Gains and losses from
translation are included in Accumulated other comprehensive loss. Gains and
losses resulting from remeasuring monetary asset and liability accounts for
foreign subsidiaries where the U.S. dollar is the functional currency are
included in Interest and other income, net. The Companys total foreign
currency gain was immaterial for the three months ended September 30, 2002.
The Company incurred a loss of $0.3 million for the three months ended
September 30, 2001 and losses of $0.1 million and $0.7 million for the nine
months ended September 30, 2002 and 2001, respectively.

As indicated in the Companys 2001 Annual Report on Form 10-K (as amended on
August 29, 2002), the Company adopted SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities as amended by SFAS No. 138, effective
January 1, 2001, which requires that all derivatives be recorded on the balance
sheet at fair value.

The Company uses foreign currency forward contracts to hedge receivables and
payables denominated in foreign currency, intercompany receivables and
payables, and transactions initiated in the United States that are denominated
in foreign currency. The principal foreign currencies hedged are the British
pound and the Euro using foreign currency forward contracts ranging in periods
from one to nine months. Forward contracts are accounted for on a
mark-to-market basis, with realized and unrealized gains or losses recognized
in the current period. Gains or losses arising from forward contracts that were
effective as a hedge are included in the basis of the designated transactions.
Foreign currency forward contracts totaling $4.5 million were
outstanding at September 30, 2002.




ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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Based on their evaluation of our disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 (c) and 15d-14 (c)) conducted within 90 days of
the date of filing this quarterly report, the Companys Chief Executive Officer
and Executive Vice President and Chief Financial Officer have concluded that
the Companys disclosure controls and procedures were adequate and effective to
ensure that material information relating to the Company, including its
consolidated subsidiaries, was made known to them by others within those
entities, particularly during the period in which this quarterly report was
prepared.

Changes in Internal Controls

There were no significant changes in the Companys internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation, nor were there any significant deficiencies or
material weaknesses in the Companys internal controls.




PART II. OTHER INFORMATION




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



| | (a) |  | Exhibits:
| | --- |  | ---------

|             |  |                                                                                                                                             
|------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 99.1 |  | Certification of Chief Financial Officer pursuant to Section 906
of the Public Company Accounting Reform and Investor Protection Act
of 2002
|            
|Exhibit 99.2 |  | Certification of Chief Financial Officer pursuant to Section 906
of the Public Company Accounting Reform and Investor Protection Act
of 2002




SIGNATURE

Pursuant to the requirements of Securities Exchange Act of 1934, the registrant
has duly caused this report on Form 10-Q to be signed on its behalf by the
undersigned, thereunto duly authorized, on this 14th day of November, 2002.

|                                                                  | 
|----------------------------------------------------------------- | 
|DOCUMENTUM, INC.
(Registrant)                                    
|                                                                 
|                                                                 
|By: /s/ Mark Garrett                                              | 
|Mark Garrett
Executive Vice President and Chief Financial Officer

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I, David DeWalt, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Documentum, Inc.;

2.     Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
|
| | b) evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants ability
to record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; and
|
| | b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants internal
controls; and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002

|                                   
|-----------------------------------
|/s/David DeWalt                    
|David DeWaltChief Executive Officer

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##### Table of Contents



I, Mark Garrett, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Documentum, Inc.;

2.     Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
|
| | b) evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants ability
to record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; and
|
| | b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants internal
controls; and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002

|                                   
|-----------------------------------
|/s/Mark Garrett                    
|Mark GarrettChief Financial Officer

36