##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


FORM 10-Q

|       |                                                                                         
|------ | ----------------------------------------------------------------------------------------
|[X]    | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|       |                                                                                         
|       | For the quarterly period ended September 30, 2001                                       
|       |                                                                                         
|       | 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
38,279,177 on September 30, 2001.





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TABLE OF CONTENTS



|                              |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                          
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS 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                           
|PART II. OTHER INFORMATION   
|                              | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURE                    



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##### Table of Contents



FORM 10-QIndex

|          |         |                                                                                                                 |                                                                                       |        |         |         |  |  | 
|--------- | ------- | --------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | ------ | ------- | ------- |  |  | 
|PART I    |         | FINANCIAL INFORMATION                                                                                           |                                                                                       |        |         |        
|          | Item 1. |                                                                                                                 | Condensed Consolidated Financial Statements                                           |        |         |         | 
|          |         | Condensed Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000                            |                                                                                       | Page 3
|          |         | Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2001 and 2000 |                                                                                       | Page 4
|          |         | Condensed Consolidated Statements of Cash Flow for the nine months ended September 30, 2001 and 2000            |                                                                                       | 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 13
|          | Item 3. |                                                                                                                 | Quantitative and Qualitative Disclosures About Market Risk                            |        | Page 26
|PART II   |         | OTHER INFORMATION                                                                                               |                                                                                       |        |         |        
|          | Item 6. |                                                                                                                 | Exhibits and Reports on Form 8-K                                                      |        | Page 26
|Signature |         |                                                                                                                 |                                                                                       |        |         | Page 26

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PART I. FINANCIAL INFORMATION




ITEM 1.CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




DOCUMENTUM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data; unaudited)

|                                     |                                                                                                            |                            |         |               |         |              |         |         |         | 
|------------------------------------ | ---------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | ------------- | ------- | ------------ | ------- | ------- | ------- | 
|                                     |                                                                                                            |                            |         | September 30, |         | December 31,
|                                     |                                                                                                            |                            |         | 2001          |         | 2000        
|                                     |                                                                                                            |                            |         |               |         |             
|ASSETS                               |                                                                                                            |                            |         |               |         |              |         |        
|Current assets:                      |                                                                                                            |                            |         |               |         |              |         |        
|                                     | Cash and cash equivalents                                                                                  |                            | $       | 44,835        |         |              | $       | 43,918  |        
|                                     | Short-term investments                                                                                     |                            |         | 43,302        |         |              |         | 59,217  |        
|                                     | Accounts receivable, net                                                                                   |                            |         | 42,970        |         |              |         | 57,156  |        
|                                     | Other current assets                                                                                       |                            |         | 16,538        |         |              |         | 13,920  |        
|                                     |                                                                                                            |                            |         |               |         |              |         |        
|                                     |                                                                                                            | Total current assets       |         |               | 147,645 |              |         |         | 174,211 | 
|Property and equipment, net          |                                                                                                            |                            | 35,574  |               |         |              | 35,667  |        
|Long-term cash investments           |                                                                                                            |                            | 8,175   |               |         |              | 1,013   |        
|Other assets                         |                                                                                                            |                            | 7,892   |               |         |              | 7,569   |        
|                                     |                                                                                                            |                            |         |               |         |              |         |        
|                                     |                                                                                                            | $                          | 199,286 |               |         | $            | 218,460 |        
|                                     |                                                                                                            |                            |         |               |         |              |         |        
|LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                                            |                            |         |               |         |              |         |        
|Current liabilities:                 |                                                                                                            |                            |         |               |         |              |         |        
|                                     | Accounts payable                                                                                           |                            | $       | 2,467         |         |              | $       | 5,751   |        
|                                     | Accrued liabilities                                                                                        |                            |         | 43,245        |         |              |         | 42,281  |        
|                                     | Deferred revenue                                                                                           |                            |         | 27,201        |         |              |         | 21,073  |        
|                                     | Current portion of capital lease obligation                                                                |                            |         | 45            |         |              |         | 65      |        
|                                     |                                                                                                            |                            |         |               |         |              |         |        
|                                     |                                                                                                            | Total current liabilities  |         |               | 72,958  |              |         |         | 69,170  | 
|                                     |                                                                                                            |                            |         |               |         |              |         |        
|Other long-term liabilities          |                                                                                                            |                            | 710     |               |         |              |        |        
|                                     |                                                                                                            |                            |         |               |         |              |         |        
|Stockholders equity:                |                                                                                                            |                            |         |               |         |              |         |        
|                                     | Preferred stock, $0.001 par value; 10,000 shares authorized;
none issued and outstanding                   |                            |         |              |         |              |         |        |        
|                                     | Common stock, $0.001 par value; 200,000 shares authorized;
38,279 and 36,847 shares issued and outstanding |                            |         | 38            |         |              |         | 37      |        
|                                     | Additional paid-in capital                                                                                 |                            |         | 181,798       |         |              |         | 168,733 |        
|                                     | Accumulated other comprehensive loss                                                                       |                            |         | (772          | )       |              |         | (702    | )      
|                                     | Accumulated deficit                                                                                        |                            |         | (55,446       | )       |              |         | (18,778 | )      
|                                     |                                                                                                            |                            |         |               |         |              |         |        
|                                     |                                                                                                            | Total stockholders equity |         |               | 125,618 |              |         |         | 149,290 | 
|                                     |                                                                                                            |                            |         |               |         |              |         |        
|                                     |                                                                                                            | $                          | 199,286 |               |         | $            | 218,460 |        
|                                     |                                                                                                            |                            |         |               |         |              |         |        

See accompanying notes to condensed consolidated financial statements.

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

|                                                 |                            |                         |        |                    |        |                   |        |        |        |      |         |        |         |   |         |        |         | 
|------------------------------------------------ | -------------------------- | ----------------------- | ------ | ------------------ | ------ | ----------------- | ------ | ------ | ------ | ---- | ------- | ------ | ------- | - | ------- | ------ | ------- | 
|                                                 |                            |                         |        | Three Months Ended |        | Nine Months Ended
|                                                 |                            |                         |        | September 30,      |        | September 30,    
|                                                 |                            |                         |        |                    |        |                  
|                                                 |                            |                         |        | 2001               |        | 2000              |        | 2001   |        | 2000
|                                                 |                            |                         |        |                    |        |                   |        |        |        |     
|Revenue:                                         |                            |                         |        |                    |        |                   |        |        |        |      |         |        |         |   |         |       
|                                                 | License                    |                         | $      | 19,767             |        |                   | $      | 31,368 |        |      | $       | 62,029 |         |   | $       | 81,824 |        
|                                                 | Service                    |                         |        | 25,060             |        |                   |        | 20,342 |        |      |         | 73,665 |         |   |         | 56,778 |        
|                                                 |                            |                         |        |                    |        |                   |        |        |        |      |         |        |         |   |         |       
|                                                 |                            | Total revenue           |        |                    | 44,827 |                   |        |        | 51,710 |      |         |        | 135,694 |   |         |        | 138,602 | 
|                                                 |                            |                         |        |                    |        |                   |        |        |        |      |         |        |         |   |         |       
|Cost of revenue:                                 |                            |                         |        |                    |        |                   |        |        |        |      |         |        |         |   |         |       
|                                                 | License                    |                         |        | 1,177              |        |                   |        | 2,301  |        |      |         | 4,349  |         |   |         | 5,726  |        
|                                                 | Service                    |                         |        | 11,755             |        |                   |        | 9,617  |        |      |         | 36,705 |         |   |         | 27,467 |        
|                                                 |                            |                         |        |                    |        |                   |        |        |        |      |         |        |         |   |         |       
|                                                 |                            | Total cost of revenue   |        |                    | 12,932 |                   |        |        | 11,918 |      |         |        | 41,054  |   |         |        | 33,193  | 
|                                                 |                            |                         |        |                    |        |                   |        |        |        |      |         |        |         |   |         |       
|Gross profit                                     |                            |                         | 31,895 |                    |        |                   | 39,792 |        |        |      | 94,640  |        |         |   | 105,409 |       
|                                                 |                            |                         |        |                    |        |                   |        |        |        |      |         |        |         |   |         |       
|Operating expense:                               |                            |                         |        |                    |        |                   |        |        |        |      |         |        |         |   |         |       
|                                                 | Sales and marketing        |                         |        | 25,965             |        |                   |        | 22,044 |        |      |         | 80,102 |         |   |         | 59,591 |        
|                                                 | Research and development   |                         |        | 8,128              |        |                   |        | 9,172  |        |      |         | 26,537 |         |   |         | 25,647 |        
|                                                 | General and administrative |                         |        | 6,121              |        |                   |        | 5,846  |        |      |         | 19,069 |         |   |         | 16,878 |        
|                                                 | Restructuring costs        |                         |        |                   |        |                   |        |       |        |      |         | 3,817  |         |   |         |       |        
|                                                 |                            |                         |        |                    |        |                   |        |        |        |      |         |        |         |   |         |       
|                                                 |                            | Total operating expense |        |                    | 40,214 |                   |        |        | 37,062 |      |         |        | 129,525 |   |         |        | 102,116 | 
|                                                 |                            |                         |        |                    |        |                   |        |        |        |      |         |        |         |   |         |       
|Income (loss) from operations                    |                            |                         | (8,319 | )                  |        |                   | 2,730  |        |        |      | (34,885 | )      |         |   | 3,293   |       
|Interest and other income, net                   |                            |                         | 667    |                    |        |                   | 1,104  |        |        |      | 3,009   |        |         |   | 3,303   |       
|Permanent impairment of investment               |                            |                         |       |                    |        |                   |       |        |        |      | (2,012  | )      |         |   |        |       
|                                                 |                            |                         |        |                    |        |                   |        |        |        |      |         |        |         |   |         |       
|Income (loss) before income tax provision        |                            |                         | (7,652 | )                  |        |                   | 3,834  |        |        |      | (33,888 | )      |         |   | 6,596   |       
|Provision for income taxes                       |                            |                         | 156    |                    |        |                   | 1,265  |        |        |      | 2,780   |        |         |   | 2,177   |       
|                                                 |                            |                         |        |                    |        |                   |        |        |        |      |         |        |         |   |         |       
|Net income (loss)                                |                            | $                       | (7,808 | )                  |        | $                 | 2,569  |        |        | $    | (36,668 | )      |         | $ | 4,419   |       
|                                                 |                            |                         |        |                    |        |                   |        |        |        |      |         |        |         |   |         |       
|Basic earnings (loss) per share                  |                            | $                       | (0.20  | )                  |        | $                 | 0.07   |        |        | $    | (0.97   | )      |         | $ | 0.12    |       
|Diluted earnings (loss) per share                |                            | $                       | (0.20  | )                  |        | $                 | 0.06   |        |        | $    | (0.97   | )      |         | $ | 0.11    |       
|Shares used to compute earnings (loss) per share |                            |                         |        |                    |        |                   |        |        |        |      |         |        |         |   |         |       
|Basic                                            |                            |                         | 38,106 |                    |        |                   | 36,056 |        |        |      | 37,728  |        |         |   | 35,236  |       
|Diluted                                          |                            |                         | 38,106 |                    |        |                   | 39,948 |        |        |      | 37,728  |        |         |   | 39,246  |       

See accompanying notes to condensed consolidated financial statements.

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

|                                                 |                                                                                                    |                                    |                                         |                                                     |        |                   |         |          |       |         |         |  
|------------------------------------------------ | -------------------------------------------------------------------------------------------------- | ---------------------------------- | --------------------------------------- | --------------------------------------------------- | ------ | ----------------- | ------- | -------- | ----- | ------- | ------- | -
|                                                 |                                                                                                    |                                    |                                         |                                                     |        | Nine Months Ended
|                                                 |                                                                                                    |                                    |                                         |                                                     |        | September 30,    
|                                                 |                                                                                                    |                                    |                                         |                                                     |        |                  
|                                                 |                                                                                                    |                                    |                                         |                                                     |        | 2001              |         | 2000    
|                                                 |                                                                                                    |                                    |                                         |                                                     |        |                   |         |         
|Cash flow from operating activities:             |                                                                                                    |                                    |                                         |                                                     |        |                   |         |         
|                                                 | Net income (loss)                                                                                  |                                    | $                                       | (36,668                                             | )      |                   | $       | 4,419    |      
|                                                 | Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities: |                                    |                                         |                                                     |        |                   |         |          |      
|                                                 |                                                                                                    | Depreciation and amortization      |                                         |                                                     | 10,634 |                   |         |          | 7,670 |        
|                                                 |                                                                                                    | Provision for doubtful accounts    |                                         |                                                     | 3,759  |                   |         |          | 818   |        
|                                                 |                                                                                                    | Permanent impairment of investment |                                         |                                                     | 2,012  |                   |         |          |      |        
|                                                 |                                                                                                    | Loss on disposal of fixed assets   |                                         |                                                     | 11     |                   |         |          | 554   |        
|                                                 |                                                                                                    | Deferred tax asset                 |                                         |                                                     |       |                   |         |          | 3,655 |        
|                                                 |                                                                                                    | Changes in assets and liabilities: |                                         |                                                     |        |                   |         |          |       |        
|                                                 |                                                                                                    |                                    | Accounts receivable                     |                                                     |        | 10,427            |         |          |       | (11,939 | )      
|                                                 |                                                                                                    |                                    | Other current assets and other assets   |                                                     |        | (4,953            | )       |          |       | (1,229  | )      
|                                                 |                                                                                                    |                                    | Accounts payable                        |                                                     |        | (3,284            | )       |          |       | (1,996  | )      
|                                                 |                                                                                                    |                                    | Accrued and other long-term liabilities |                                                     |        | 1,614             |         |          |       | 3,672   |        
|                                                 |                                                                                                    |                                    | Deferred revenue                        |                                                     |        | 6,128             |         |          |       | 3,022   |        
|                                                 |                                                                                                    |                                    |                                         |                                                     |        |                   |         |         
|                                                 |                                                                                                    |                                    |                                         | Net cash provided by (used in) operating activities |        |                   | (10,320 | )        |       |         | 8,646   |  
|                                                 |                                                                                                    |                                    |                                         |                                                     |        |                   |         |         
|Cash flow from investing activities:             |                                                                                                    |                                    |                                         |                                                     |        |                   |         |         
|                                                 | Purchases of investments                                                                           |                                    |                                         | (171,812                                            | )      |                   |         | (222,835 | )    
|                                                 | Sales of investments                                                                               |                                    |                                         | 180,565                                             |        |                   |         | 207,390  |      
|                                                 | Net purchases of property and equipment                                                            |                                    |                                         | (10,552                                             | )      |                   |         | (12,597  | )    
|                                                 |                                                                                                    |                                    |                                         |                                                     |        |                   |         |         
|                                                 |                                                                                                    |                                    |                                         | Net cash used in investing activities               |        |                   | (1,799  | )        |       |         | (28,042 | )
|                                                 |                                                                                                    |                                    |                                         |                                                     |        |                   |         |         
|Cash flow from financing activities:             |                                                                                                    |                                    |                                         |                                                     |        |                   |         |         
|                                                 | Issuance of common stock                                                                           |                                    |                                         | 13,066                                              |        |                   |         | 24,403   |      
|                                                 | Proceeds
on capital lease obligations, net                                                         |                                    |                                         | 105                                                 |        |                   |         |         |      
|                                                 | Payments
on capital lease obligations                                                              |                                    |                                         | (65                                                 | )      |                   |         | (180     | )    
|                                                 |                                                                                                    |                                    |                                         |                                                     |        |                   |         |         
|                                                 |                                                                                                    |                                    |                                         | Net cash provided by financing activities           |        |                   | 13,106  |          |       |         | 24,223  |  
|                                                 |                                                                                                    |                                    |                                         |                                                     |        |                   |         |         
|Effect of exchange rate changes on cash          |                                                                                                    |                                    | (70                                     | )                                                   |        |                   | (755    | )       
|                                                 |                                                                                                    |                                    |                                         |                                                     |        |                   |         |         
|Net increase in cash and cash equivalents        |                                                                                                    |                                    | 917                                     |                                                     |        |                   | 4,072   |         
|Cash and cash equivalents at beginning of period |                                                                                                    |                                    | 43,918                                  |                                                     |        |                   | 18,286  |         
|                                                 |                                                                                                    |                                    |                                         |                                                     |        |                   |         |         
|Cash and cash equivalents at end of period       |                                                                                                    | $                                  | 44,835                                  |                                                     |        | $                 | 22,358  |         
|                                                 |                                                                                                    |                                    |                                         |                                                     |        |                   |         |         

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 unaudited condensed consolidated financial statements of Documentum
included herein reflect all adjustments, consisting only of normal recurring
adjustments except as described in Notes 4 and 5, which in the opinion of
management are necessary to present fairly 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 2000 Annual Report
on Form 10-K. The consolidated results of operations for the period ended
September 30, 2001 are not necessarily indicative of the results to be expected
for any subsequent quarter or for the fiscal year ending December 31, 2001.

Note 2. New Accounting Standards

In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141 Business Combinations and
SFAS No. 142 Goodwill and Other Intangible Assets. SFAS No. 141 requires
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method of accounting, and broadens the criteria for recording
intangible assets separate from goodwill. SFAS No. 142 requires the use of a
nonamortization approach to account for purchased goodwill and certain
intangibles. Under a nonamortization approach, goodwill and certain intangibles
will not be amortized into results of operations, but instead would be reviewed
for impairment and written down and charged to results of operations only in
the periods in which the recorded value of goodwill and certain intangibles is
more than its fair value. As of September 30, 2001, the Company had no
recorded goodwill or intangibles.

In August 2001, the FASB issued SFAS No. 143 Accounting for Asset Retirement
Obligations and SFAS No. 144 Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 143 requires that obligations associated with the
retirement of tangible long-lived assets be recorded as a liability when those
obligations are incurred, with the amount of the liability measured at fair
value. SFAS No. 143 which is effective for fiscal years beginning after June
15, 2002, requires an entity to capitalize the cost by recognizing an increase
in the carrying amount of the related long-lived asset. Over time, the
liability is accreted to its present value each period, and the capitalized
cost is depreciated over the useful life of the related asset. SFAS No. 144
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of.SFAS No. 144 requires the long-lived
assets to be disposed of to be measured at the lower of the carrying amount or
fair value less cost to sell, whether reported in continuing operations or in
discontinued operations. The statement establishes a single accounting model
based on the framework established by SFAS No. 121. The provisions of this
Statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. As of September 30, 2001, the Company had
no asset impairments or significant disposals.

Note 3. Derivative Financial Instruments

On January 1, 2001, the Company adopted SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities as amended by SFAS No. 138, which requires
that all derivatives be recorded on the balance sheet at fair value. The
accounting for changes in the fair value of derivatives depends on the intended
use and resulting designation. The Company designates its derivatives based
upon the criteria established by SFAS 133. For derivatives designated as a fair
value hedge, the gain or loss is recognized in earnings in the period of change
together with the offsetting gain or loss on the hedged item attributed to the
risk being hedged. For a derivative designated as a cash flow hedge, the
effective portion of the derivatives gain or loss is initially reported as a
component of other comprehensive income (OCI) and subsequently classified
into earnings when the hedged exposure affects earnings. The ineffective
portion of the gain or loss is recognized immediately into earnings. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in earnings in the period of change. The Company classifies the cash
flows from hedging transactions in the same category as the cash flows from the

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

respective hedged items. The adoption of SFAS 133 did not have a material
impact on the Companys consolidated results of operations, financial position
or cash flows.

The Company implemented a hedging policy to manage exposure to foreign currency
risk within the consolidated financial statements. As part of that policy, the
Company may engage in transactions involving various derivative instruments,
with maturities not longer than five years to hedge assets, liabilities,
revenues and purchases denominated in foreign currencies.

During the third quarter of fiscal 2001, the Company entered into forward
exchange contracts that qualify as fair value hedges under SFAS 133 to hedge
foreign currency accounts receivable. These contracts expire within 12
months and are intended to minimize certain foreign currency exposures that can
be confidently identified and quantified.

In accordance with SFAS 133, fair value hedges related to anticipated
transactions are designated and documented at the inception of each hedge by
matching the terms of the contract to the underlying transaction. Once
established, fair value hedges are generally not removed until maturity.

The impact of the derivative transactions described above was immaterial for
the nine months ended September 30, 2001.

Note 4. Restructuring Costs

In the second quarter of fiscal 2001, in connection with managements plan to
reduce costs and improve operating efficiencies, the Company recorded a
restructuring charge of $3.8 million. The restructuring charge was comprised
primarily of severance and benefits related to the involuntary termination of
approximately 124 employees and cancellation of outstanding accepted offers of
employment, of which approximately 86% were based in the United States and the
remainder were based in Europe.

The Companys remaining reserve balance of $0.6 million consists of $0.5
million of current liabilities to be substantially paid out during the
remainder of 2001 and within the first nine months of 2002, and $0.1 million of
long-term liabilities related to excess facilities primarily with
non-cancelable leases (payments, unless sublet by the Company, will continue
until fiscal 2005).

The following table sets forth an analysis of the components of the
restructuring charge recorded in the second quarter of fiscal 2001:

|                             |  |           |           |         |  |       |         |  |  |   |           | 
|---------------------------- |  | --------- | --------- | ------- |  | ----- | ------- |  |  | - | --------- | 
|                             |  | Severance |           |         |  |       |         |  |  |  
|                             |  | and       |           | Other   |  |       |         | 
|                             |  | Benefits  |           | Charges |  | Total
|                             |  |           |           |         |  |      
|Severance and benefits       |  | $         | 3,359,837 |         |  | $     |        |  |  | $ | 3,359,837 | 
|Accrued facility lease costs |  |           |          |         |  |       | 355,728 |  |  |   | 355,728   | 
|Other                        |  |           |          |         |  |       | 101,863 |  |  |   | 101,863   | 
|                             |  |           |           |         |  |       |         |  |  |   |           | 
|Total restructuring charge   |  | $         | 3,359,837 |         |  | $     | 457,591 |  |  | $ | 3,817,428 | 
|                             |  |           |           |         |  |       |         |  |  |   |           | 

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

The following table sets forth the Companys restructuring reserve as of
September 30, 2001:

|                                 |  |           |            |         |  |       |          |   |  |   |            |  
|-------------------------------- |  | --------- | ---------- | ------- |  | ----- | -------- | - |  | - | ---------- | -
|                                 |  | Severance |            |         |  |       |          |   |  |  
|                                 |  | and       |            | Other   |  |       |          |  
|                                 |  | Benefits  |            | Charges |  | Total
|                                 |  |           |            |         |  |      
|Restructuring charges            |  | $         | 3,359,837  |         |  | $     | 457,591  |   |  | $ | 3,817,428  |  
|Cash paid                        |  |           | (3,046,436 | )       |  |       | (195,965 | ) |  |   | (3,242,401 | )
|                                 |  |           |            |         |  |       |          |   |  |   |            |  
|Balance of restructuring reserve |  | $         | 313,401    |         |  | $     | 261,626  |   |  | $ | 575,027    |  
|                                 |  |           |            |         |  |       |          |   |  |   |            |  

On October 18, 2001 the Company announced a plan to further reduce the
Companys expense structure and improve operating efficiencies. Accordingly,
the Company expects to record a restructuring charge in the range of $1.5 to
2.5 million during the fourth quarter of 2001.

Note 5. Stock Option Exchange

On April 19, 2001, the Company announced a voluntary stock option exchange
program for its employees. Under the program, employees were given the
opportunity to elect to cancel outstanding stock options held by them in
exchange for an equal number of replacement options to be granted at a future
date. The elections to cancel options were effective on June 6, 2001. The
exchange resulted in the voluntary cancellation by 216 employees of 2,048,850
employee stock options with varying exercise prices in exchange for the same
number of replacement options to be granted at a future date. The replacement
options will have the same terms and conditions as each optionees cancelled
options, including the vesting schedule and expiration date of the cancelled
options, except that: (1) the replacement options will be granted no earlier
than December 7, 2001 and no later than December 11, 2001, (2) the replacement
options will have an exercise price equal to the fair market value of the
common stock on the date of the grant, (3) the replacement options will be
nonstatutory stock options, and (4) the optionee must be an employee of the
Company on the date of grant of the replacement options in order to receive
replacement options. All employees were eligible to participate in the program.
The Company believes it will not incur any compensation charge in connection
with the program.

Note 6. Investment Impairment

During the second quarter of fiscal 2001, the Company recorded an impairment
loss of $2.0 million relating to an other-than temporary decline in the fair
value of its private equity investment. The impairment was recorded to reflect
the investment at fair value. As of September 30, 2001, the Companys recorded
basis in the investment was reduced to zero as the investee had fallen behind
in all of its key financial metrics and had limited working capital. The
Company does not expect to recover any portion of its investment.

Note 7. Comprehensive income (loss)

Comprehensive income (loss) is comprised of net income (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s unrealized gains and losses on
available-for-sale marketable securities have

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

been insignificant for all periods presented. The Companys total
comprehensive income (loss) was as follows (in thousands):

|                          |                                         |                             |        |                                  |        |                                 |       |      |       |      |         |     |         |   |       |      |       | 
|------------------------- | --------------------------------------- | --------------------------- | ------ | -------------------------------- | ------ | ------------------------------- | ----- | ---- | ----- | ---- | ------- | --- | ------- | - | ----- | ---- | ----- | 
|                          |                                         |                             |        | Three Months Ended September 30, |        | Nine Months Ended September 30,
|                          |                                         |                             |        |                                  |        |                                
|                          |                                         |                             |        | 2001                             |        | 2000                            |       | 2001 |       | 2000
|                          |                                         |                             |        |                                  |        |                                 |       |      |       |     
|Net income (loss)         |                                         | $                           | (7,808 | )                                |        | $                               | 2,569 |      |       | $    | (36,668 | )   |         | $ | 4,419 |     
|Other comprehensive loss: |                                         |                             |        |                                  |        |                                 |       |      |       |      |         |     |         |   |       |     
|                          | Foreign currency translation adjustment |                             |        | 644                              |        |                                 |       | (328 | )     |      |         | (70 | )       |   |       | (755 | )    
|                          |                                         |                             |        |                                  |        |                                 |       |      |       |      |         |     |         |   |       |     
|                          |                                         | Comprehensive income (loss) |        | $                                | (7,164 | )                               |       | $    | 2,241 |      |         | $   | (36,738 | ) |       | $    | 3,664 | 
|                          |                                         |                             |        |                                  |        |                                 |       |      |       |      |         |     |         |   |       |     

Note 8. Basic and Diluted Net Income (Loss) Per Share

|                                |                                     |                                                         |        |                                  |        |                                 |       |        |        |      |         |        |        |   |       |        |        | 
|------------------------------- | ----------------------------------- | ------------------------------------------------------- | ------ | -------------------------------- | ------ | ------------------------------- | ----- | ------ | ------ | ---- | ------- | ------ | ------ | - | ----- | ------ | ------ | 
|                                |                                     |                                                         |        | Three Months Ended September 30, |        | Nine Months Ended September 30,
|                                |                                     |                                                         |        |                                  |        |                                
|                                |                                     |                                                         |        | 2001                             |        | 2000                            |       | 2001   |        | 2000
|                                |                                     |                                                         |        |                                  |        |                                 |       |        |        |     
|Net income (loss)               |                                     | $                                                       | (7,808 | )                                |        | $                               | 2,569 |        |        | $    | (36,668 | )      |        | $ | 4,419 |       
|                                |                                     |                                                         |        |                                  |        |                                 |       |        |        |      |         |        |        |   |       |       
|Shares calculation:             |                                     |                                                         |        |                                  |        |                                 |       |        |        |      |         |        |        |   |       |       
|                                | Weighted average shares outstanding |                                                         |        | 38,106                           |        |                                 |       | 36,056 |        |      |         | 37,728 |        |   |       | 35,236 |       
|                                | Stock options                       |                                                         |        |                                 |        |                                 |       | 3,892  |        |      |         |       |        |   |       | 4,010  |       
|                                |                                     |                                                         |        |                                  |        |                                 |       |        |        |      |         |        |        |   |       |       
|                                |                                     | Total shares used to compute
diluted earnings per share |        |                                  | 38,106 |                                 |       |        | 39,948 |      |         |        | 37,728 |   |       |        | 39,246 | 
|                                |                                     |                                                         |        |                                  |        |                                 |       |        |        |      |         |        |        |   |       |       
|Income (loss) per basic share   |                                     | $                                                       | (0.20  | )                                |        | $                               | 0.07  |        |        | $    | (0.97   | )      |        | $ | 0.12  |       
|                                |                                     |                                                         |        |                                  |        |                                 |       |        |        |      |         |        |        |   |       |       
|Income (loss) per diluted share |                                     | $                                                       | (0.20  | )                                |        | $                               | 0.06  |        |        | $    | (0.97   | )      |        | $ | 0.11  |       
|                                |                                     |                                                         |        |                                  |        |                                 |       |        |        |      |         |        |        |   |       |       

Basic net income (loss) per share is computed using the weighted average number
of shares of common stock. Diluted net income (loss) per share is computed
using the weighted average number of shares of common stock and common
equivalent shares outstanding during the period. Common equivalent shares
consist of stock options (using
the treasury stock method). Common equivalent shares are excluded from the
computation if their effect is anti-dilutive.

Options to purchase 1,604,786 and 506,736 shares of common stock were
outstanding during the three months ended September 30, 2001 and 2000,
respectively, and options to purchase 2,827,985 and 336,056 shares of common
stock were outstanding during the nine months ended September 30, 2001 and
2000, respectively, but were not included in the computation of diluted
earnings (loss) per share because either the options exercise price was
greater than the average market price of the common shares during the period or
inclusion of such options would have been anti-dilutive.

Note 9. 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.

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

Internationally, the Company markets and supports its products and services
primarily through its subsidiaries and various distributors. Service revenue
consists of customer maintenance and consulting and training services. Revenue
is generally attributed to geographic areas based upon the billing location of
the customer. Maintenance
revenue, however, is currently recorded in its entirety in North America. For
the three and nine month periods ended September 30, 2001 and 2000, no one
customer accounted for more than 10% of total revenue. Long-lived assets are
attributed to geographic areas based on the country where the assets are
located.

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

The following table presents a breakdown of revenue and long-lived assets by
geographic region for the three and nine months ended September 30, 2001 and
2000 (in thousands):

|                                              |  |         |        |         |  |         |        |            |  |  |        |  |  |  |        | 
|--------------------------------------------- |  | ------- | ------ | ------- |  | ------- | ------ | ---------- |  |  | ------ |  |  |  | ------ | 
|                                              |  | License |        | Service |  | Total   |        | Long-Lived
|For the three months ended September 30, 2001 |  | Revenue |        | Revenue |  | Revenue |        | Assets    
|                                              |  | $       |        | $       |  | $       |        | $         
|                                              |  |         |        |         |  |         |        |           
|North America                                 |  |         | 12,265 |         |  |         | 21,116 |            |  |  | 33,381 |  |  |  | 31,768 | 
|Europe                                        |  |         | 6,100  |         |  |         | 3,740  |            |  |  | 9,840  |  |  |  | 2,978  | 
|Asia/Pacific                                  |  |         | 176    |         |  |         | 204    |            |  |  | 380    |  |  |  | 828    | 
|Other                                         |  |         | 1,226  |         |  |         |       |            |  |  | 1,226  |  |  |  |       | 
|                                              |  |         |        |         |  |         |        |            |  |  |        |  |  |  |        | 
|Total                                         |  |         | 19,767 |         |  |         | 25,060 |            |  |  | 44,827 |  |  |  | 35,574 | 
|                                              |  |         |        |         |  |         |        |            |  |  |        |  |  |  |        | 

|                                              |  |         |        |         |  |         |        |            |  |  |        |  |  |  |        | 
|--------------------------------------------- |  | ------- | ------ | ------- |  | ------- | ------ | ---------- |  |  | ------ |  |  |  | ------ | 
|                                              |  | License |        | Service |  | Total   |        | Long-Lived
|For the three months ended September 30, 2000 |  | Revenue |        | Revenue |  | Revenue |        | Assets    
|                                              |  | $       |        | $       |  | $       |        | $         
|                                              |  |         |        |         |  |         |        |           
|North America                                 |  |         | 20,851 |         |  |         | 17,137 |            |  |  | 37,988 |  |  |  | 28,756 | 
|Europe                                        |  |         | 8,350  |         |  |         | 3,146  |            |  |  | 11,496 |  |  |  | 2,886  | 
|Asia/Pacific                                  |  |         | 1,107  |         |  |         | 59     |            |  |  | 1,166  |  |  |  | 761    | 
|Other                                         |  |         | 1,060  |         |  |         |       |            |  |  | 1,060  |  |  |  |       | 
|                                              |  |         |        |         |  |         |        |            |  |  |        |  |  |  |        | 
|Total                                         |  |         | 31,368 |         |  |         | 20,342 |            |  |  | 51,710 |  |  |  | 32,403 | 
|                                              |  |         |        |         |  |         |        |            |  |  |        |  |  |  |        | 

|                                             |  |         |        |         |  |         |        |            |  |  |         |  |  |  |        | 
|-------------------------------------------- |  | ------- | ------ | ------- |  | ------- | ------ | ---------- |  |  | ------- |  |  |  | ------ | 
|                                             |  | License |        | Service |  | Total   |        | Long-Lived
|For the nine months ended September 30, 2001 |  | Revenue |        | Revenue |  | Revenue |        | Assets    
|                                             |  | $       |        | $       |  | $       |        | $         
|                                             |  |         |        |         |  |         |        |           
|North America                                |  |         | 34,385 |         |  |         | 61,183 |            |  |  | 95,568  |  |  |  | 31,768 | 
|Europe                                       |  |         | 21,926 |         |  |         | 11,913 |            |  |  | 33,839  |  |  |  | 2,978  | 
|Asia/Pacific                                 |  |         | 3,939  |         |  |         | 569    |            |  |  | 4,508   |  |  |  | 828    | 
|Other                                        |  |         | 1,779  |         |  |         |       |            |  |  | 1,779   |  |  |  |       | 
|                                             |  |         |        |         |  |         |        |            |  |  |         |  |  |  |        | 
|Total                                        |  |         | 62,029 |         |  |         | 73,665 |            |  |  | 135,694 |  |  |  | 35,574 | 
|                                             |  |         |        |         |  |         |        |            |  |  |         |  |  |  |        | 

|                                             |  |         |        |         |  |         |        |            |  |  |         |  |  |  |        | 
|-------------------------------------------- |  | ------- | ------ | ------- |  | ------- | ------ | ---------- |  |  | ------- |  |  |  | ------ | 
|                                             |  | License |        | Service |  | Total   |        | Long-Lived
|For the nine months ended September 30, 2000 |  | Revenue |        | Revenue |  | Revenue |        | Assets    
|                                             |  | $       |        | $       |  | $       |        | $         
|                                             |  |         |        |         |  |         |        |           
|North America                                |  |         | 50,795 |         |  |         | 48,306 |            |  |  | 99,101  |  |  |  | 28,756 | 
|Europe                                       |  |         | 27,608 |         |  |         | 8,414  |            |  |  | 36,022  |  |  |  | 2,886  | 
|Asia/Pacific                                 |  |         | 1,958  |         |  |         | 58     |            |  |  | 2,016   |  |  |  | 761    | 
|Other                                        |  |         | 1,463  |         |  |         |       |            |  |  | 1,463   |  |  |  |       | 
|                                             |  |         |        |         |  |         |        |            |  |  |         |  |  |  |        | 
|Total                                        |  |         | 81,824 |         |  |         | 56,778 |            |  |  | 138,602 |  |  |  | 32,403 | 
|                                             |  |         |        |         |  |         |        |            |  |  |         |  |  |  |        | 

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

Note 10. Related Party Transactions

During the three months ended September 30, 2001, the Company recognized net
revenues of approximately $0.5 million on license arrangements with The Capital
Group. As of June 30, 2001, The Capital Group owned approximately 14% of the
Companys Common Stock. The Companys management believes that prices charged
by the Company on the arrangements were comparable to those given to other
customers of the Company.

Note 11. Subsequent Events

On October 18, 2001 the Company announced a plan to further reduce the
Companys expense structure and improve operating efficiencies. Accordingly,
the Company expects to record a restructuring charge in the range of $1.5 to
2.5 million during the fourth quarter of 2001.

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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.

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##### Table of Contents



Results of Operations

The following table sets forth certain items from the Companys condensed
consolidated statements of operations as a percentage of total revenue for the
periods indicated:

|                                          |                            |                         |     |                    |     |                   |    |      |     |      |     |    |     |   |    |    |     |  
|----------------------------------------- | -------------------------- | ----------------------- | --- | ------------------ | --- | ----------------- | -- | ---- | --- | ---- | --- | -- | --- | - | -- | -- | --- | -
|                                          |                            |                         |     | Three
Months Ended |     | Nine
Months Ended
|                                          |                            |                         |     | September
30,      |     | September 30,    
|                                          |                            |                         |     |                    |     |                  
|                                          |                            |                         |     | 2001               |     | 2000              |    | 2001 |     | 2000
|                                          |                            |                         |     |                    |     |                   |    |      |     |     
|Revenue:                                  |                            |                         |     |                    |     |                   |    |      |     |      |     |    |     |   |    |   
|                                          | License                    |                         |     | 44                 | %   |                   |    | 61   | %   |      |     | 46 | %   |   |    | 59 | %  
|                                          | Service                    |                         |     | 56                 | %   |                   |    | 39   | %   |      |     | 54 | %   |   |    | 41 | %  
|                                          |                            |                         |     |                    |     |                   |    |      |     |      |     |    |     |   |    |   
|                                          |                            | Total revenue           |     |                    | 100 | %                 |    |      | 100 | %    |     |    | 100 | % |    |    | 100 | %
|                                          |                            |                         |     |                    |     |                   |    |      |     |      |     |    |     |   |    |   
|Cost of revenue:                          |                            |                         |     |                    |     |                   |    |      |     |      |     |    |     |   |    |   
|                                          | License                    |                         |     | 3                  | %   |                   |    | 4    | %   |      |     | 3  | %   |   |    | 4  | %  
|                                          | Service                    |                         |     | 26                 | %   |                   |    | 19   | %   |      |     | 27 | %   |   |    | 20 | %  
|                                          |                            |                         |     |                    |     |                   |    |      |     |      |     |    |     |   |    |   
|                                          |                            | Total cost of revenue   |     |                    | 29  | %                 |    |      | 23  | %    |     |    | 30  | % |    |    | 24  | %
|                                          |                            |                         |     |                    |     |                   |    |      |     |      |     |    |     |   |    |   
|Gross profit                              |                            |                         | 71  | %                  |     |                   | 77 | %    |     |      | 70  | %  |     |   | 76 | % 
|                                          |                            |                         |     |                    |     |                   |    |      |     |      |     |    |     |   |    |   
|Operating expense:                        |                            |                         |     |                    |     |                   |    |      |     |      |     |    |     |   |    |   
|                                          | Sales and marketing        |                         |     | 58                 | %   |                   |    | 43   | %   |      |     | 59 | %   |   |    | 43 | %  
|                                          | Research and development   |                         |     | 18                 | %   |                   |    | 18   | %   |      |     | 20 | %   |   |    | 19 | %  
|                                          | General and administrative |                         |     | 14                 | %   |                   |    | 11   | %   |      |     | 14 | %   |   |    | 12 | %  
|                                          | Restructuring costs        |                         |     |                   |     |                   |    |     |     |      |     | 3  | %   |   |    |   |    
|                                          |                            |                         |     |                    |     |                   |    |      |     |      |     |    |     |   |    |   
|                                          |                            | Total operating expense |     |                    | 90  | %                 |    |      | 72  | %    |     |    | 96  | % |    |    | 74  | %
|                                          |                            |                         |     |                    |     |                   |    |      |     |      |     |    |     |   |    |   
|Income (Loss) from operations             |                            |                         | (19 | %)                 |     |                   | 5  | %    |     |      | (26 | %) |     |   | 2  | % 
|Interest and other income, net            |                            |                         | 2   | %                  |     |                   | 2  | %    |     |      | 2   | %  |     |   | 2  | % 
|Permanent impairment of investment        |                            |                         |    |                    |     |                   |   |      |     |      | (1  | %) |     |   |   |   
|                                          |                            |                         |     |                    |     |                   |    |      |     |      |     |    |     |   |    |   
|Income (loss) before income tax provision |                            |                         | (17 | %)                 |     |                   | 7  | %    |     |      | (25 | %) |     |   | 5  | % 
|Provision for income taxes                |                            |                         |    |                    |     |                   | 2  | %    |     |      | 2   | %  |     |   | 2  | % 
|                                          |                            |                         |     |                    |     |                   |    |      |     |      |     |    |     |   |    |   
|Net income (loss)                         |                            |                         | (17 | %)                 |     |                   | 5  | %    |     |      | (27 | %) |     |   | 3  | % 
|                                          |                            |                         |     |                    |     |                   |    |      |     |      |     |    |     |   |    |   
|As a Percentage of Related Revenue:       |                            |                         |     |                    |     |                   |    |      |     |      |     |    |     |   |    |   
|Cost of license revenue                   |                            |                         | 6   | %                  |     |                   | 7  | %    |     |      | 7   | %  |     |   | 7  | % 
|Cost of service revenue                   |                            |                         | 47  | %                  |     |                   | 47 | %    |     |      | 50  | %  |     |   | 48 | % 

Revenue

The Companys revenue is derived from the sale of licenses for its
internet-scale content management solutions and related services, which include
maintenance and support, consulting and training services. Revenue from license
arrangements is recognized upon contract execution, provided all shipment
obligations have been met, fees are fixed or determinable, and collection is
probable. The Company uses the residual method to recognize revenue when a
license agreement includes one or more elements to be delivered at a future
date if evidence of the fair value of all undelivered elements exists. If an
undelivered element of the arrangement exists under the license arrangement,
revenue is deferred based on vendor-specific objective evidence of the fair
value of the undelivered element. If vendor-specific objective evidence of
fair value does not exist for all undelivered elements, all revenue is deferred
until sufficient evidence exists or all elements have been delivered.
Allowances for estimated future returns are provided upon shipment. Amounts
billed or payments received in advance of revenue recognition are recorded as
deferred revenue. Revenue from annual maintenance and support agreements is
deferred and recognized ratably

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over the term of the contract. Revenue from consulting and training is deferred and
recognized when the services are performed and collectibility is deemed
probable.

The United States and Europe have been experiencing a general decline in
economic conditions. The downturn in the world economy was exacerbated in the
second half of September, resulting in reduced spending for a variety of goods
and services, including many technology products. During the three and nine
months ended September 30, 2001, the Company experienced the direct impact of a
weakening world-wide economy as evidenced by a reduction in the average
customer purchase, yet saw an increase in product demand as seen by an increase
in the number of orders and new customers. The reduction in average customer
orders resulted in lower than anticipated license revenue and a net loss. The
Company plans to monitor the status of the United States and European economies
and, specifically, demand for its products in the United States and Europe. As
a result of the continued downturn in the world economy, the Company has
developed measures to further reduce the existing expense structure through a
second restructuring.

License revenue decreased by 37% or $11.6 million to $19.8 million for the
three months ended September 30, 2001 from $31.4 million for the three months
ended September 30, 2000 and decreased by 24% or $19.8 million to $62.0 million
for the nine months ended September 30, 2001 from $81.8 million for the nine
months ended September 30, 2000. The decrease in license revenue in absolute
dollar amount and as a percentage of total revenue for both periods discussed
is a result of continued softness in overall demand for enterprise wide
software licenses. The Company continues to see a shift from larger,
enterprise-wide transactions to an increased volume of lower-dollar point
solutions as evidenced by an increase in number of transactions and reduction
in average revenue per deal. In addition to the weakness in the United States
economy that has been prevalent over the last nine months, the Company
continues to experience the effects of an economic downturn in its European
market and began to see a downturn in its Asia/Pacific market as well for the
three months ended September 30, 2001. The events of September 11th resulted in
a number of delays to orders in the pipeline and will continue to impact demand
for the Companys products in certain industries such as airlines and travel
and entertainment. The Company had sales to one customer which accounted for
$2.2 million or 11% of license revenue for the three months ended September 30,
2001. The Company did not have any sales to a single customer that accounted
for greater than 10% of license revenue for the nine months ended September 30,
2001. For the three months ended September 30, 2000, the Company had sales to
two customers which accounted for $5.6 million and $3.2 million of license
revenue, respectively, or 18% and 10% of license revenue, respectively. The
Company did not have any sales to a single customer that accounted for greater
than 10% of license revenue for the nine months ended September 30, 2000.

Service revenue increased by 24% to $25.1 million for the three months ended
September 30, 2001 from $20.3 million for the three months ended September 30,
2000, representing 56% and 39% of total revenues in the respective periods and
increased by 30% to $73.7 million for the nine moths ended September 30, 2001
from $56.8 million for the nine months ended September 30, 2000 representing
54% and 41% of total revenues in the respective periods. The increase in
absolute dollar amount was attributable to a larger installed base of customers
receiving ongoing maintenance, training and support services and increases in
the Companys professional services staff in conjunction with the Companys
focus to expand solution offerings to customers. The increase as a percentage
of revenue was due to the decrease in license revenue, as described above.

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. Revenues from
indirect channel partners comprised 66% and 34% of license revenues for the
three months ended September 30, 2001 and 2000, respectively, and 46% and 40%
of license revenue for the nine months ended September 30, 2001 and 2000,
respectively. The Company has continued to invest in channel programs and will
continue to emphasize partner relationships to expand its channels of
distribution. Revenue from indirect 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 38% and 34% of license revenue for the three
months ended September 30, 2001 and 2000, respectively, and 45% and 38% of
license revenues for the nine months ended September 30, 2001 and 2000,
respectively. The increase in international revenue as a percentage of license
revenue in 2001 was primarily

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due to a decrease in total license revenue. In addition, the Company had
enterprise-wide sales to two customers in Europe totaling $4.1 million during
the nine months ended September 30, 2001, which increased international revenue
as a percentage of overall worldwide sales. The general industry slowdown
during the first nine months of 2001 negatively impacted domestic revenue to a
greater extent than international revenue. However, the Company has experienced
softness in its European market and began to see softness in its Asia/Pacific
markets for the three months ended September 30, 2001 as customers are
scrutinizing their budgets more closely in light of the global economic
weakness. The Company classifies license revenues as domestic or international
based upon the billing location of the customer. In many instances, especially
with large purchases from multinational companies, the customer has the right
to deploy the licenses anywhere in the world. Thus, the percentages discussed
herein represents where licenses were sold, and may or may not represent where
the products are used. As a result, the Company believes that 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 primarily 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 decreased by 48% to $1.2 million for the
three months ended September 30, 2001 from $2.3 million for the three months
ended September 30, 2000 and decreased by 25% to $4.3 million for the nine
months ended September 30, 2001 from $5.7 million for the nine months September
30, 2000, representing 6% and 7% for the related license revenue for the three
months ended September 30, 2001 and 2000, and 7% for the nine months ended
September 30, 2001 and 2000. The decrease in cost of license revenue for the
nine months ended September 30, 2001, in absolute dollar amount, was related to
lower license sales for the nine months ended September 30, 2001 over the
comparable period, as well as continued shift in the mix of products being
sold. Cost of revenue decreased as a percentage of license revenues for the
three months ended September 30, 2001 over the comparable period in 2000 and
remained the same for the nine months ended September 30, 2001 over the
comparable period in 2000. The decrease for the three months ended September
30, 2001 over the comparable period reflects that sales of royalty bearing
revenue did not grow proportionately to sales of non-royalty bearing license
revenue. The Company currently carries and integrates into its products more
third-party products and is selling a greater number of those products than it
had in the same period in the prior year. 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 primarily of personnel-related costs incurred
in providing consulting services, training to customers and maintenance
services, which includes telephone support. Cost of service revenue increased
by 23% to $11.8 million for the three months ended September 30, 2001 from $9.6
million for the three months ended September 30, 2000 and increased by 33% to
$36.7 million for the nine months ended September 30, 2001 from $27.5 million
for the nine months ended September 30, 2000, representing 47% of the related
service revenue for the three months ended September 30, 2001 and 2000,
respectively, and 50% and 48% of the related service revenue for the nine
months ended September 30, 2001 and 2000, respectively. The increase in cost of
service revenue in absolute dollar amount and as a percentage of service
revenue for the nine months ended September 30, 2001 was a result of increased
personnel-related costs as the Company expanded its consulting, training and
maintenance operations to support its larger installed customer base, as well
as an increase in solutions offered to customers. The Company expects the cost
of service revenue to increase in absolute dollar amount as the related service
revenue increases.

Operating expenses

Sales and marketing.Sales and marketing expenses consist primarily 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 expenses increased by 18% to $26.0 million for
the three months ended September 30, 2001 from $22.0 million for the three
months ended September 30, 2000 and increased 34% to $80.1 million for the nine
months ended September 30, 2001 from $59.6 million for the nine months ended
September 30, 2000 representing 58% and 43% of total revenues for the three
months ended September 30, 2001 and 2000, respectively, and 59% and 43% of
total revenue for the nine months ended September 30, 2001 and 2000,
respectively. The increase in absolute dollar amount in 2001 over the
comparable period in 2000 was the result of the Companys

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strategy to continue
to invest in
its sales and marketing infrastructure, including an increase in the number of
sales teams and marketing programs in order to create awareness and solidify
its position as the leader in the content management market. In addition, in
September 2001 the Company incurred a loss of $1.2 million associated with its
annual Momentum trade event as opposed to near break-even results recorded for
such an event during the fourth quarter of 2000. This loss in 2001 was
attributed to last-minute cancellation of attendee registrations in light of
travel restrictions imposed by many of the Companys customers following the
events of September 11th.

Research and development.Research and development expenses consist primarily
of salaries and benefits for software developers, contracted development
efforts and related facilities costs. Research and development expenses
decreased 12% to $8.1 million for the three months ended September 30, 2001
from $9.2 million for the three months ended September 30, 2000, and increased
by 3% to $26.5 million for the nine months ended September 30, 2001 from $25.6
million for the nine months ended September 30, 2000, representing 18% of total
revenues for the three months ended September 30, 2001 and 2000, respectively
and 20% and 19% of total revenues for the nine months ended September 30, 2001
and 2000, respectively. The increase in absolute dollar amount for the nine
months ended September 30, 2001 reflects the expansion of the Companys
engineering staff and related costs required to support the development of new
products, as well as localization and enhancements to existing products. The
proportionate decrease in absolute dollar amount for the three months ended
September 30, 2001, reflects the Companys focus on cost-reduction efforts
undertaken during the period. Based on the Companys research and development
process, costs incurred between the establishment of technological feasibility
and general release have been insignificant and therefore have been expensed as
incurred. The Company expects research and development costs will continue to
remain constant in absolute dollar amount in order to maintain a consistent
level of development of both existing and new products.

General and Administrative.General and administrative expenses consist
primarily of personnel costs for finance, information technology, legal, human
resources and general management, as well as outside professional services.
General and administrative expenses increased by 5% to $6.1 million for the
three months ended September 30, 2001 from $5.8 million for the three months
ended September 30, 2000, and increased 13% to $19.1 million for the nine
months ended September 30, 2001 from $16.9 million for the nine months ended
September 30, 2000, representing 14% and 11% of total revenues for the three
months ended September 30, 2001 and 2000, respectively, and 14% and 12% of
total revenues for the nine months ended September 30, 2001 and 2000,
respectively. The increase in absolute dollar amount for the three and nine
months ended September 30, 2001 over the comparable periods in 2000 was
primarily due to increased staffing and professional fees necessary to manage
and support the Companys planned growth, as well as consulting costs
associated with changes to the Companys information systems. The increase as a
percentage of total revenue was due to the decrease in license revenues for
both the three and nine months ended September 30, 2001 over the comparable
periods in 2000, as described above.

Restructuring Costs.In the second quarter of fiscal 2001, in connection with
managements plan to reduce costs and improve operating efficiencies, the
Company recorded a restructuring charge of $3.8 million. The restructuring
charge was comprised primarily of severance and benefits related to the
involuntary termination of approximately 124 employees and cancellation of
outstanding accepted offers of employment, of which approximately 86% were
based in the United States and the remainder were based in Europe.

The Companys remaining reserve balance of $0.6 million consists of $0.5
million of current liabilities to be substantially paid out during the
remainder of 2001 and within the first nine months of 2002, and $0.1 million of
long-term liabilities related to excess facilities primarily with
non-cancelable leases (payments, unless sublet by the Company, will continue
until fiscal 2005).

The following table sets forth an analysis of the components of the
restructuring charge recorded in the second quarter of fiscal 2001:

|                             |  |           |           |         |  |       |         |  |  |   |           | 
|---------------------------- |  | --------- | --------- | ------- |  | ----- | ------- |  |  | - | --------- | 
|                             |  | Severance |           |         |  |       |         |  |  |  
|                             |  | and       |           | Other   |  |       |         | 
|                             |  | Benefits  |           | Charges |  | Total
|                             |  |           |           |         |  |      
|Severance and benefits       |  | $         | 3,359,837 |         |  | $     |        |  |  | $ | 3,359,837 | 
|Accrued facility lease costs |  |           |          |         |  |       | 355,728 |  |  |   | 355,728   | 

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|                           |  |           |           |         |  |       |         |  |  |   |           | 
|-------------------------- |  | --------- | --------- | ------- |  | ----- | ------- |  |  | - | --------- | 
|                           |  | Severance |           |         |  |       |         |  |  |  
|                           |  | and       |           | Other   |  |       |         | 
|                           |  | Benefits  |           | Charges |  | Total
|                           |  |           |           |         |  |      
|Other                      |  |           |          |         |  |       | 101,863 |  |  |   | 101,863   | 
|                           |  |           |           |         |  |       |         |  |  |   |           | 
|Total restructuring charge |  | $         | 3,359,837 |         |  | $     | 457,591 |  |  | $ | 3,817,428 | 
|                           |  |           |           |         |  |       |         |  |  |   |           | 

The following table sets forth the Companys restructuring reserve as of
September 30, 2001:

|                                 |  |           |            |         |  |       |          |   |  |   |            |  
|-------------------------------- |  | --------- | ---------- | ------- |  | ----- | -------- | - |  | - | ---------- | -
|                                 |  | Severance |            |         |  |       |          |   |  |  
|                                 |  | and       |            | Other   |  |       |          |  
|                                 |  | Benefits  |            | Charges |  | Total
|                                 |  |           |            |         |  |      
|Restructuring charges            |  | $         | 3,359,837  |         |  | $     | 457,591  |   |  | $ | 3,817,428  |  
|Cash paid                        |  |           | (3,046,436 | )       |  |       | (195,965 | ) |  |   | (3,242,401 | )
|                                 |  |           |            |         |  |       |          |   |  |   |            |  
|Balance of restructuring reserve |  | $         | 313,401    |         |  | $     | 261,626  |   |  | $ | 575,027    |  
|                                 |  |           |            |         |  |       |          |   |  |   |            |  

On October 18, 2001 the Company announced that primarily due to a continued
downturn in the United States and world-wide economies and the effects of the
September 11th events a significant number of orders which were expected to
close in September 2001 had been delayed. Consequently, the Company reported a
net loss for the three-month period ended September 30, 2001. As a result of
the aforementioned, management developed a plan to further reduce the Companys
expense structure and improve operating efficiencies. The Company expects to
record a restructuring charge in the range of $1.5 to 2.5 million during the
fourth quarter of 2001.

Interest and other income, net

Interest and other income, net, consists primarily 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, the
loss on sale of fixed assets and interest expense. Interest and other income,
net decreased by $0.4 million for the three months ended September 30, 2001 to
$0.7 million from $1.1 million for the three months ended September 30, 2000
and decreased by $0.3 million for the nine months ended September 30, 2001 to
$3.0 million from $3.3 million for the nine months ended September 30, 2000.
The decrease for the three and nine months ended September 30, 2001 over the
same period in 2000 was due to a significant reduction in interest rates. To
date, the Companys international sales have been generally denominated in U.S.
dollars however, when denominated in a foreign currency the Company has engaged
in 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. Unexpected changes in exchange rates for these foreign
currencies could result in significant fluctuation in the foreign currency
translation gains and losses in future periods.

Income taxes

Income tax provision (benefit) for the interim periods is based on estimated
annual income tax rates. The Companys effective rate for the three and nine
months ended September 30, 2001 was 2% and 8%, respectively, and was 33% for
the three and nine months ended September 30, 2000. The decrease in the
Companys effective tax rate is a result of its loss position during the nine
months ended September 30, 2001. The Companys 2001 tax rate represents tax on
projected international income. The tax rate may vary by quarter based on the
Companys results and the mix of domestic and international income.

Derivative Financial Instruments

On January 1, 2001, the Company adopted SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities as amended by SFAS No. 138, which requires
that all derivatives be recorded on the balance sheet at fair value. The
accounting for changes in the fair value of derivatives depends on the intended
use and resulting designation. The Company designates its derivatives based
upon the criteria established by SFAS 133. For

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derivatives designated as a fair
value hedge, the gain or loss is recognized in earnings in the period of change
together with the offsetting gain or loss on the hedged item attributed to the
risk being hedged. For a derivative designated as a cash flow hedge, the
effective portion of the derivatives gain or loss is initially reported as a
component of other comprehensive income (OCI) and subsequently classified
into earnings when the hedged exposure affects earnings. The ineffective
portion of the gain or loss is recognized immediately into earnings. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in earnings in the period of change. The Company classifies the cash
flows from hedging transactions in the same category as the cash flows from the
respective hedged items. The adoption of SFAS 133 did not have a material
impact on the Companys consolidated results of operations, financial position
or cash flows.

The Company implemented a hedging policy to manage exposure to foreign currency
risk within the consolidated financial statements. As part of that policy, the
Company may engage in transactions involving various derivative instruments,
with maturities not longer than five years to hedge assets, liabilities,
revenues and purchases denominated in foreign currencies.

During the third quarter of fiscal 2001, the Company entered into forward
exchange contracts that qualify as fair value hedges under SFAS 133 to hedge
foreign currency accounts receivable. These contracts expire within 12
months and are intended to minimize certain foreign currency exposures that can
be confidently identified and quantified.

In accordance with SFAS 133, fair value hedges related to anticipated
transactions are designated and documented at the inception of each hedge by
matching the terms of the contract to the underlying transaction. Once
established, fair value hedges are generally not removed until maturity.

The impact of the derivative transactions described above was immaterial for
the nine months ended September 30, 2001.

The Company is in the process of implementing a new billing process. As a
result, the Company anticipates a greater number of foreign currency
receivables and an increase in the number of transactions involving derivative
instruments.

Stock Option Exchange

On April 19, 2001, the Company announced a voluntary stock option exchange
program for its employees. Under the program, employees were given the
opportunity to elect to cancel outstanding stock options held by them in
exchange for an equal number of replacement options to be granted at a future
date. The elections to cancel options were effective on June 6, 2001. The
exchange resulted in the voluntary cancellation by 216 employees of 2,048,850
employee stock options with varying exercise prices in exchange for the same
number of replacement options to be granted at a future date. The replacement
options will have the same terms and conditions as each optionees cancelled
options, including the vesting schedule and expiration date of the cancelled
options, except that: (1) the replacement options will be granted no earlier
than December 7, 2001 and no later than December 11, 2001, (2) the replacement
options will have an exercise price equal to the fair market value of the
common stock on the date of the grant, (3) the replacement options will be
nonstatutory stock options, and (4) the optionee must be an employee of the
Company on the date of grant of the replacement options in order to receive
replacement options. All employees were eligible to participate in the program.
The Company believes it will not incur any compensation charge in connection
with the program.

Liquidity and Capital Resources

The Companys cash, cash equivalents and short-term investments totaled $88.1
million at September 30, 2001 representing 44% of total assets. The Company has
invested its cash in excess of current operating requirements in investment
grade securities. The investments have variable and fixed interest rates and
primarily 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.

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Net cash used in operating activities was $10.3 million for the nine months
ended September 30, 2001 as compared with net cash provided by operating
activities of $8.6 million for the nine months ended September 30, 2000. For
the
nine months ended September 30, 2001, cash used in operations was primarily
attributable to a net loss of $36.7 million, adjusted for depreciation and
amortization of $10.6 million, provision for doubtful accounts of $3.8
million, permanent impairment of investment of $2.0 million, as discussed
below, a decrease in accounts receivable of $10.4 million, an increase in
accrued liabilities and deferred revenue of $1.6 million and $6.1 million,
respectively, offset by an increase in other current assets and other assets of
$4.9 million and a decrease in accounts payable of $3.2 million. For the nine
months ended September 30, 2000, cash generated by operations was primarily
attributable to net income of $4.4 million, adjusted for depreciation and
amortization of $7.7 million, provision for doubtful accounts of $0.8 million
and loss on the disposal of fixed assets of $0.5 million, a decrease in
deferred tax assets of $3.6 million, an increase in accrued liabilities and
deferred revenue of $3.7 million and $3.0 million, respectively, offset by an
increase in accounts receivable of $11.9 million and decreases in accounts
payable and other assets of $2.0 million and $1.2 million, respectively.

The Company regularly evaluates the recoverability of long-term securities and
other long-lived assets by measuring the carrying amount of the assets against
the estimated future cash flows associated with them. At the time such
evaluations indicate that the future undiscounted cash flows are not sufficient
to recover the carrying value of such assets, the assets are deemed to be
impaired and adjusted to their fair values. During the second quarter of fiscal
2001, the Company recorded an impairment loss of $2.0 million related to an
other-than temporary decline in the fair value of its private equity
investment. The impairment was recorded to reflect the investment at fair
value. As of September 30, 2001, the Companys recorded basis in the investment
was reduced to zero as the investee had fallen behind in all of its key
financial metrics and had limited working capital. The Company does not expect
to recover any portion of its investment.

For the nine months ended September 30, 2001 and 2000, capital expenditures
were $10.6 million and $12.6 million, respectively. Capital expenditures for
the nine months ended September 30, 2001 and 2000, were primarily for computer
equipment and computer software applications related to the changes and
improvements made in the Companys information systems. Additionally, for the
nine months ended September 30, 2000, expenditures were made for office
furniture and leasehold improvements related to the new office facility
described below.

For the nine months ended September 30, 2001, the Company received $7.4 million
and $5.6 million in proceeds from employee stock option exercises and employee
stock purchase plan purchases, respectively.

In 1999, the Company entered into two capital lease agreements under a
sale-leaseback arrangement for the rental of computer equipment in the amount
of $292,000 and $171,000. The lease agreements required quarterly principal and
interest payments in the amount of $37,000 and $22,000, respectively. The
leases had interest rates of 1.66% and 2.605% and maturity dates of July 2001
and September 2001, respectively. The remaining amounts related to these
leases at December 31, 2000 were paid in the first quarter of fiscal year 2001.

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.
The lease has an interest rate of 5.77% and has a maturity date of December
2003.

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. The Pleasanton, California space serves as the Companys
headquarters and contains the principal administrative, engineering, marketing
and sales facilities. The Company has made and will 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.

The Company believes that its existing cash, cash equivalents, short-term
investment balances 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. A portion of the
Companys cash could be used to acquire

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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. 

Risk Factors

The Companys operating results are unpredictable and may vary.Our future
operating results may vary significantly and are difficult to predict due to a
number of factors, of which many are beyond our control. These factors
include:



| |  | demand for our products;                                                                                          
|- |  | ------------------------------------------------------------------------------------------------------------------
| 
| |  | the level of product and price competition;                                                                       
| 
| |  | the length of our sales cycle;                                                                                    
| 
| |  | the size and timing of individual license transactions;                                                           
| 
| |  | the delay or deferral of customer implementations;                                                                
| 
| |  | our success in expanding our customer support organization, direct sales force and indirect distribution channels;
| 
| |  | the timing of new product introductions and product enhancements;                                                 
| 
| |  | changes in our pricing policy;                                                                                    
| 
| |  | the publication of opinions concerning us, our products or technology by industry analysts;                       
| 
| |  | the mix of products and services sold;                                                                            
| 
| |  | levels of international sales;                                                                                    
| 
| |  | activities of and acquisitions by competitors;                                                                    
| 
| |  | the timing of new hires;                                                                                          
| 
| |  | changes in foreign currency exchange rates;                                                                       
| 
| |  | our ability to develop and market new products and control costs; and                                             
| 
| |  | domestic and international economic and political conditions.                                                     

One or more of the foregoing factors may cause our operating expenses to be
disproportionately high during any given period or may cause our net revenue
and operating results to fluctuate significantly.

Readers should not rely on our quarterly operating results as an indication of
our future results because they are subject to significant fluctuations.Our
net revenue and operating results may vary drastically from quarter to quarter
because of numerous factors largely beyond our control, including the
following:



| |  | the potential delay in recognizing revenue from license transactions;                                    
|- |  | ---------------------------------------------------------------------------------------------------------
| 
| |  | the discretionary nature of our customers budget and purchase cycles;                                   
| 
| |  | variations in our customers fiscal or quarterly cycles;                                                 
| 
| |  | the size and complexity of our license transactions;                                                     
| 
| |  | the timing of new product releases;                                                                      
| 
| |  | seasonal variations in operating results; and                                                            
| 
| |  | the tendency to realize a substantial amount of revenue in the last weeks, or even days, of each quarter.

The United States and Europe have continued to experience a general decline in
economic conditions, which worsened as a result of the events of September
11th. The downturn in general economic conditions has led to reduced demand for
a variety of goods and services, including many technology products. During the
three and nine months ended September 30, 2001, the Company saw a significant
decrease in the overall demand for its products and services that resulted in
lower than anticipated license revenue and a net loss.

Each customer makes a discretionary decision to implement our products that is
subject to its resources and budget cycles. Additionally, our license sales
generally reflect a relatively high amount of revenue per order, and as a
result, the loss or delay of individual orders could have a significant impact
on quarterly operating results and revenue. Furthermore, the timing of license
revenue is difficult to predict because of the length of our sales cycle,

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which typically ranges from three to nine months from initial contact. Also, our
strategy of providing customers with complete content management solutions
typically results in software licenses being bundled with services. In these
cases, the delivery of services may delay recognition of license revenue.
Because our operating expenses are based on anticipated revenue trends and
because a high percentage of these expenses is relatively fixed, any shortfall
from anticipated revenue or a delay in the recognition of revenue from license
transactions could cause significant variations in operating results from
quarter to quarter and could result in operating losses. If these expenses
precede, or are not followed by, increased revenue, our operating results could
be lower than expected and our common stock price may fall.

As a result of the foregoing 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. Furthermore,
it is likely that our future quarterly operating results from time to time will
not meet the expectations of public market analysts or investors, in which case
there would likely be a drop in the price of our common stock.

The Companys sales and implementation cycles are lengthy and difficult to
predict.In general, the timing of the sales and implementation of our
products is lengthy and not predictable with any degree of certainty. You
should not rely on prior sales and implementation cycles as an indication of
future cycles.

The licensing of our software products is often an enterprise-wide decision by
prospective customers and generally requires us to engage in a lengthy sales
cycle (generally between three and nine months) to provide a significant level
of education to prospective customers regarding the use and benefits of our
products. Additionally, the size and complexity of any particular transaction
can also cause delays in the sales cycle. The implementation of our products
can involve a significant commitment of resources by customers over an extended
period of time and is commonly associated with substantial reengineering
efforts by the customer. For these and other reasons, the sales and customer
implementation cycles are subject to a number of significant delays over which
we have little or no control. A delay in the sale or customer implementation
of even a limited number of license transactions could result in lower than
expected revenue and cause our operating results to vary significantly from
quarter to quarter.

A substantial portion of the Companys revenue is attributable to one family of
products and related services.To date, substantially all of our revenue has
been attributable to sales of licenses of the Documentum EDMS and Documentum 4i
family of products and related services. We expect that Documentum 4i and
related products and services will account for a substantial majority of our
future revenue. As a result, factors adversely affecting the pricing of or
demand for such products, such as competition or technological change, could
harm our business, financial condition and results of operations.

The Companys failure to identify new product opportunities or to develop new
products or versions could harm the business.The content management software
and services market in which we compete is characterized by (1) rapid
technological change, (2) frequent introduction of new products and
enhancements, (3) changing customer needs, and (4) evolving industry standards.
The introduction of products embodying new technologies and the emergence of
new industry standards can render existing products obsolete and unmarketable.
Accordingly, the life cycles of our products are difficult to estimate. To
keep pace with technological developments, evolving industry standards and
changing customer needs, we must support existing products and develop new
products. Our future success also depends in part on our abilities to execute
on our strategy of developing web content management and business-to-business
solutions and to maintain and enhance relations with technology partners,
including RDBMS vendors, in order to provide our customers with integrated
product solutions.

The Company may not be successful in maintaining and enhancing the
aforementioned relationships or in developing, marketing and releasing new
products or new versions of our products that respond to technological
developments, evolving industry standards or changing customer requirements.
We may also experience difficulties that could delay or prevent the successful
development, introduction and sale of these enhancements. In addition, these
enhancements may not adequately meet the requirements of the marketplace and
may not achieve any significant degree of market acceptance. If we fail to
successfully maintain or enhance relationships with our technology partners or
to execute on our integrated product solution strategy, or if release dates of
any future
products or enhancements are delayed, or if these products or enhancements fail
to achieve market acceptance when

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released, our business, operating results and
financial condition could be harmed. We have in the past experienced delays in
the release dates of enhancements to our products. While the delays we have
experienced to date have been minor (not exceeding six months), there can be no
assurance that we will not experience significant future delays in product
introduction.

The Company is dependent on the market for content management solutions, which
may not continue to grow.The market for content management software and
services is intensely competitive, highly fragmented and rapidly changing. Our
future financial performance will depend primarily on the continued growth of
the market for content management software and services and the adoption of our
products by organizations 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.

The Company faces intense competition from several competitors and may be
unable to compete.Our products target the emerging market for Web-based and
client/server software solutions. This market is intensely competitive,
rapidly changing and significantly affected by new product introductions and
other market activities of industry participants. 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. 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.
In addition, 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 more easily offer a
single-vendor solution. As a result, these 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.

We also face indirect competition from systems integrators. We rely on a
number of systems consulting and systems integration firms for implementation
and other customer support services, as well as for recommendations of our
products 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
were unable to develop and maintain effective, long-term relationships with
these third parties, our competitive position would be materially and adversely
affected. Further, many of these third parties possess industry-specific
expertise and have significantly greater resources than we do, and may market
software products that compete with us in the future.

There are many factors that may increase competition in the market for
Web-based and client/server software solutions, including (1) entry of new
competitors, (2) alliances among existing competitors and (3) consolidation in
the software industry. Increased competition may result in price reductions,
reduced gross margins and loss of market share, any of which could harm our
business, financial condition and operating results. If we cannot compete
successfully against current and future competitors or overcome competitive
pressures, our business, operating results and financial condition may be
harmed.

The Company is dependent on a relatively small number of customers and those
customers tend to be concentrated in several industries.Our success depends
on maintaining relationships with our existing customers. A relatively small
number of customers have accounted for a significant percentage of our revenue.
Additionally, our customers are somewhat concentrated in the process and
discrete manufacturing, pharmaceutical, financial services and high technology
industries. We expect that sales of our products to a limited number of
customers and industry segments will continue to account for a significant
percentage of revenue for the foreseeable future. The loss of a small number
of customers or any reduction or delay in orders by any such customer, or our
failure to market successfully our products to new customers and new industry
segments could harm our business and our prospects.

The Company relies on a number of relationships with third parties for sales,
distribution and integration.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

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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. Our failure to maintain these
relationships, or to establish new relationships in the future, could harm our
business.

The Company depends on the service of key personnel.Our future performance
depends in significant part on the continued service of our key technical,
sales and senior management personnel, none of whom is bound by an employment
agreement with us. The loss of services of one or more of our executive
officers or key technical personnel could harm our business, operating results
and financial condition.

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.

The Company is 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. The Company has offices in London, Paris, Munich, Tokyo, Melbourne,
Hong Kong, Singapore, Taipei, and Seoul. The Company operates its 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. We may not be able to maintain or increase
international market demand for our products. If we do not, our international
sales will be limited, and operating results could suffer.

Our international operations are subject to a variety of risks, including (1)
foreign currency fluctuations, (2) economic or political instability, (3)
shipping delays, (4) various trade restrictions, (5) our limited experience in,
and the costs of, localizing products for foreign countries, (6) longer
accounts receivable payment cycles, and (7) difficulties in managing
international operations, including, among other things, the burden of
complying with a wide variety of foreign laws.

The Companys industry is characterized by vigorous protection and pursuit of
intellectual property rights that could result in substantial cost to the
Company.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.

Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our products or to obtain and use information that
we regard as proprietary. Policing unauthorized use of our products is
difficult, and while we are unable to determine the extent to which piracy of
our products exists, software piracy can be expected to be a persistent
problem. In addition, the laws of some foreign countries do not protect our
proprietary rights as fully as do the laws of the United States. Our means of
protecting our proprietary rights in the United States or abroad may not be
adequate. Additionally, our competition may independently develop similar
technology.

Although we do not believe that we are infringing on any proprietary 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 assert claims that such employees have improperly
disclosed to us the confidential or proprietary information of such former
employers. Any such claims, with or without merit, could (1) be time-consuming
to defend, (2) result in costly litigation, (3) divert managements attention
and resources, (4) cause product shipment delays, and (5) 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 or create a workaround for

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such
infringed or similar technology may result in substantial damages, payments or
termination of sales of infringing products.

We license certain 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 continue to
be available to us on acceptable terms. The loss of, or inability to maintain,
any of these software licenses could result in shipment delays or reductions,
resulting in lower than expected operating results.

The Company may face product liability claims from our customers.Our license
agreements with our customers typically 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 certain jurisdictions. A successful
product liability claim brought against us could result in payment of
substantial damages.

The Company is subject to the 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.

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 commencement of 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 Company is 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. Any future
acquisitions or investments would expose us to the risks commonly encountered
in acquisitions of businesses. Future acquisitions of complementary
technologies, products or businesses will result in the diversion of
managements attention from the day-to-day operations of our business and the
potential disruption of our ongoing business. Additionally, such acquisitions
may include numerous other risks, including difficulties in the integration of
the operations, products and personnel of the acquired companies. Future
acquisitions may also result in dilutive issuances of equity securities, the
incurrence of debt and write-down or impairment expenses related to goodwill
and other intangible assets. Our failure to successfully manage future
acquisitions may harm our business and financial results.

The Companys 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 events or factors. In addition, the stock market
in general has experienced extreme price and volume fluctuations which 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 10,000,000 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 the 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 instituted a classified Board of Directors in our Amended and Restated
Certificate of Incorporation. We have

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also implemented a Share Purchase Plan
(or 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.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

As of September 30, 2001, the Companys investment portfolio includes $23.8
million of short-term corporate and municipal bonds which are subject to no
interest rate risk when held to maturity but may increase or decrease in value
if interest rates change prior to maturity. The remaining $19.5 million of
short-term investments are held in short-term securities bearing stated
interest rates and are therefore subject to no interest rate risk. An immediate
10% change in interest rates would be immaterial to the Companys financial
condition or results of operations.

Foreign Currency Exchange Risk

The majority of the Companys revenue, expense and capital purchasing
activities are transacted in United States dollars. However, because a portion
of the Companys operations consists of activities outside of the United
States, the Company has transactions in other currencies. As part of its risk
management strategy, the Company frequently evaluates its foreign currency
exchange risk by monitoring market data and external factors that may influence
exchange rate fluctuations. As a result, the Company may engage in transactions
involving various derivative instruments, with maturities not to exceed five
years, to hedge assets, liabilities, revenues and purchases denominated in
foreign currencies. During the three month period ended September 30, 2001, the
Company entered into forward exchange contracts that qualify as fair value
hedges under SFAS 133 to hedge a portion of international accounts receivable.
These contracts expire within 12 months.




PART II. OTHER INFORMATION




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  No reports on Form 8-K were filed during the quarter ended September
30, 2001.




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 13th day of November, 2001.

| |                                                                 |                 
| | --------------------------------------------------------------- | ----------------
| | DOCUMENTUM, INC.(Registrant)                                   
|
| | By:                                                             | /s/ Bob L. Corey
| |                                                                
| | Bob L. Corey
Executive Vice President & Chief Financial Officer

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