##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

Form 10-K



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|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the year ended December 31,
    2002                                                    
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 0-28041

iMANAGE, INC.

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                           |  | 36-4043595                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification No.)

950 Tower Lane

Foster City, California 94404


(Address of principal executive
offices)


Telephone Number (650) 577-6500

(Registrants telephone number, including
area code)


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

None


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

Common Stock, $.001 par value


(Title of Class)


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

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

Indicate by check mark whether the registrant is
an accelerated filer as defined in Rule 12b-2 of the
Act.     Yes o          No þ

The aggregate market value of the voting stock
held by non-affiliates of the registrant, based on the closing
sale price of the registrants common stock on
June 28, 2002 as reported on the Nasdaq National Market was
approximately $49,289,000. Shares of common stock held by each
then current executive officer and director and by each person
who is known by the registrant to own 5% or more of the
outstanding common stock have been excluded from this
computation in that such persons may be deemed to have been
affiliates of the Company. This determination of affiliate
status is not a conclusive determination for other purposes.

The number of shares outstanding of the
registrants common stock as of March 14, 2003 was
approximately 24,246,000.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the Proxy Statement for
Registrants 2003 Annual Meeting of Stockholders to be held
June 12, 2003 are incorporated by reference in
Part III of this Annual Report on Form 10-K.



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TABLE OF CONTENTS



|                                    |                                                                                                         |  |  |  |  |  |  | 
|----------------------------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                             
|                                    | Item 1. Business                                                                                       
|                                    | Item 2. Properties                                                                                     
|                                    | Item 3. Legal Proceedings                                                                              
|                                    | Item 4. Submission of Matters to a Vote of Security Holders                                            
|PART II                            
|                                    | Item 5. Market for the Registrants Common Equity and Related Stockholder Matters                      
|                                    | Item 6. Selected Consolidated Financial Data                                                           
|                                    | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations          
|                                    | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                                    
|                                    | Item 8. Financial Statements and Supplementary Data                                                    
|                                    | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           
|                                    | Item 10. Directors and Executive Officers of the Registrant                                            
|                                    | Item 11. Executive Compensation                                                                        
|                                    | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|                                    | Item 13. Certain Relationships and Related Transactions                                                
|                                    | Item 14. Controls and Procedures                                                                       
|PART IV                            
|                                    | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                               
|SIGNATURES                         
|EXHIBITS TO FORM 10-K ANNUAL REPORT
|EXHIBIT 10.17                      
|EXHIBIT 10.18                      
|EXHIBIT 21                         
|EXHIBIT 23.1                       
|EXHIBIT 99.1                       
|EXHIBIT 99.2                       



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##### Table of Contents



iMANAGE, INC.

TABLE OF CONTENTS

|               |  |                                                                                                    |    |      |    | 
|-------------- |  | -------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|               |  |                                                                                                    |    | Page
|               |  |                                                                                                    |    | No. 
|               |  |                                                                                                    |    |     
|PART I        
|Item 1.        |  | Business                                                                                           |    |      | 2  | 
|Item 2.        |  | Properties                                                                                         |    |      | 7  | 
|Item 3.        |  | Legal Proceedings                                                                                  |    |      | 7  | 
|Item 4.        |  | Submission of Matters to a Vote of Security
    Holders                                            |    |      | 8  | 
|PART II       
|Item 5.        |  | Market for the Registrants Common Equity
    and Related Stockholder Matters                      |    |      | 9  | 
|Item 6.        |  | Selected Consolidated Financial Data                                                               |    |      | 9  | 
|Item 7.        |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations          |    |      | 10 | 
|Item 7A.       |  | Quantitative and Qualitative Disclosures About
    Market Risk                                     |    |      | 33 | 
|Item 8.        |  | Financial Statements and Supplementary
    Data                                                    |    |      | 33 | 
|Item 9.        |  | Changes in and Disagreements with Accountants
    on Accounting and Financial Disclosure           |    |      | 35 | 
|PART III      
|Item 10.       |  | Directors and Executive Officers of the
    Registrant                                             |    |      | 35 | 
|Item 11.       |  | Executive Compensation                                                                             |    |      | 35 | 
|Item 12.       |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters |    |      | 35 | 
|Item 13.       |  | Certain Relationships and Related
    Transactions                                                 |    |      | 35 | 
|Item 14.       |  | Controls and Procedures                                                                            |    |      | 35 | 
|PART IV       
|Item 15.       |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                                |    |      | 36 | 
|Signatures     |  |                                                                                                    | 64 |     
|Certifications |  |                                                                                                    | 65 |     

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PART I

This Annual Report on Form 10-K contains
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended, including statements using terminology such as
can, may, believe,
designed to, will, expect,
plan, anticipate, estimate,
potential or continue or the negative
thereof or other comparable terminology regarding beliefs,
plans, expectations or intentions regarding the future.
Forward-looking statements involve risks and uncertainties and
actual results could differ materially from those discussed in
the forward-looking statements. All forward-looking statements
and risk factors included in this document are made as of the
date hereof, based on information available to us as of the date
hereof, and we assume no obligation to update any
forward-looking statement or risk factors.

iManage, Inc. is hereinafter sometimes referred
to as the Registrant, the Company,
iManage, we, and us.




Item 1.     Business

Overview

iManage, Inc. provides collaborative content
management software that enables businesses to manage and
collaborate efficiently on critical business content across the
extended enterprise. Our product suite, iManage WorkSite,
delivers document management, collaboration, workflow and
knowledge management accessible through a portal in a single
integrated Internet solution. We believe that iManage WorkSite
improves communication and process efficiency, providing faster
response times and a rapid return on investment for our
customers. More than 500,000 users in over 1,200 businesses are
utilizing iManage WorkSite.

We were incorporated in Illinois in October 1995
under the name NetRight Technologies, Inc. and we reincorporated
in Delaware in December 1996. In April 1999, we changed our name
to iManage, Inc. Our principal offices are located at
950 Tower Lane, Suite 500, Foster City, California
94404, and our telephone number at that location is
(650) 577-6500. We maintain a website at
www.iManage.com. Investors can obtain copies of our
filings with the Securities and Exchange Commission from this
site free of charge, as well as from the Securities and Exchange
Commission website at www.sec.gov.

The iManage Solution

iManage WorkSite is an integrated application
suite that combines document management, collaboration, workflow
and knowledge management accessible through a portal in a single
integrated Internet solution. Our solution provides a
comprehensive set of applications that work in concert with each
other and the same underlying server, the iManage WorkSite
Server.

Our application suite provides the following key
features:



| |   |                                                                                  
| | - | ---------------------------------------------------------------------------------
| |  | Comprehensive and integrated, out-of-the-box
    solution                        
|
| |  | Robust security for globally distributed
    enterprise repositories             
|
| |  | Reliable and highly scalable enterprise-class
    server with multilevel security
|
| |  | Easy access via standard Web browser or Microsoft
    Windows client interfaces  
|
| |  | Rapid application development environment and
    tools                          

Initially, we targeted our software solution to
the legal industry, but in the last two years, we have extended
our comprehensive collaborative content management suite of
applications to other vertical markets. In addition to the legal
industry, we are targeting prospects in financial services,
manufacturing, government and professional services.

2



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Products

We offer two primary application
suites  both offer similar core functionality with
one focusing on Windows-based businesses and the other focusing
on enterprise companies that work on multiple platforms. The
primary iManage WorkSite applications consist of Web
applications and desktop applications. The iManage WorkSite Web
applications provide a central workspace in which an
organization can discuss, share and collaborate on business
content in a secure environment. Using the Web applications,
users can capture, store, reuse and share information and
processes with their customers, partners and employees through
an intranet, extranet, or the Internet. Instead of recreating
content, employees save time and money by leveraging existing
data and business processes. By streamlining the retrieval and
delivery of information, we believe that iManage WorkSite
reduces operating costs while improving overall productivity and
project delivery for our customers. The WorkSite Web
applications are comprised of the following modules:

iManage WorkDocs.iManage WorkDocs is a Web-based document management system that
provides secure access to enterprise-wide business content
stored in scalable, distributed repositories. With iManage
WorkDocs, users can capture, organize, reuse and share business
content with customers, partners and employees around the world
using an intranet, extranet or Internet solution. iManage
WorkDocs provides for document check-in/check-out, version
control, audit trails, archiving, categorization, full text,
meta-data searches and other document management functions.

iManage WorkTeam.iManage WorkTeam provides virtual workspaces to members of a
project team, wherever they may be located, to discuss and
collaborate on all facets of a project quickly and efficiently
through the Web. With iManage WorkTeam, an organization can
streamline business processes, cut unnecessary travel costs,
improve overall employee productivity and accelerate project
completion. WorkTeam also enables online meetings within
WorkSite.

iManage WorkRoute.iManage WorkRoute automates key business processes and routes
critical business documents to geographically dispersed project
teams for review, approval and publishing through an
enterprises intranet or extranet, or the Internet with a
standard Web browser. With iManage WorkRoute, an organization
can simplify and track workflow and project status, identify
bottlenecks, analyze key metrics and detect exceptions, enabling
informed decisions and actions.

iManage
WorkKnowledge.iManage WorkKnowledge
enables businesses to capture, store, reuse and leverage
organizational knowledge, best practices, proven methodologies
and competencies through sophisticated, unified concept searches
across all iManage repositories, as well as other internal and
external information sources. With iManage WorkKnowledge, an
organization can become more intelligent  delivering
knowledge and expertise to the entire enterprise on demand.

iManage WorkPortal.iManage WorkPortal provides each member of the extended
enterprise a secure, consolidated view of business content from
multiple data sources and applications, including the iManage
repositories. By aggregating enterprise data, business
intelligence, news feeds, documents and Web content, iManage
WorkPortal provides quick and easy access to all relevant
content and its context from a single portal page. This can save
time, increase productivity and allow for more informed
decisions and actions.

iManage DeskSite and iManage
MailSite.In addition to the Web-based
applications, iManage WorkSite includes two, full-featured
desktop document management clients that offer out-of-the-box
integration with popular Windows applications:



| |   |                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | iManage DeskSite is a desktop document management
    system that integrates with popular Windows applications such as
    Microsoft Office and WordPerfect.                                                                                                            
|
| |  | iManage MailSite is a desktop application that
    integrates with popular email systems, including Microsoft
    Outlook, Lotus Notes and Novell GroupWise. Access of content and
    document management functionality is available from within
    Microsoft Outlook.

By combining the familiar user interface of
frequently used applications with document management
functionality, iManage DeskSite and iManage MailSite enable
rapid adoption of document management functions with minimal
training.

3



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Additionally, we offer iManage WorkSite Server
and a software developer toolkit:

iManage WorkSite
Server.iManage WorkSite is powered by
a highly flexible and robust enterprise-class server that scales
to handle millions of documents and tens of thousands of
geographically dispersed users. iManage WorkSite Server features
include:



| |   |                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | geographically distributed repositories, enhanced
    system response time and minimized network traffic;                                                                                                                                                                                                                
|
| |  | built-in fault tolerance, load balancing and
    clustering features that ensure iManage WorkSite applications
    are available at all times;                                                                                                                                                                           
|
| |  | a powerful, flexible security model that provides
    controlled access to system functionality and data at the
    document, user and task level so that only authorized users have
    access to relevant content; and                                                                                                 
|
| |  | comprehensive administrative tools that allow
    integration with multiple Light-weight Directory Access Protocol
    servers and enable central control or delegation of
    administrative tasks to specific roles and users, simplifying
    the management and maintenance of all iManage WorkSite
    applications.

iManage WorkSite Development
iToolKit.Our applications can be
customized with the flexible, standards-based iManage WorkSite
Development iToolKit. Software developers with Visual Basic or
Common Object Model (COM) experience can create new
applications with the software development kit to meet an
organizations specific requirements. By supporting open
standards such as XML/ XSL, J2EE and COM, we believe the iManage
WorkSite Development iToolKit leverages the security,
scalability and functionality of the entire iManage WorkSite
infrastructure.

Service and Support

While we focus on licensing our software, we also
offer a comprehensive selection of services to our customers,
including consulting, customer support and training services.

Consulting.We offer
standardized professional services to our customers for the
deployment of our application suite and the integration of our
applications with third-party software. Our service
professionals work directly with our customers as well as with
resellers and strategic partners. Our consulting services are
generally offered on a time and materials basis.

Customer Support.We
offer comprehensive customer support, designed to allow our
customers to quickly and effectively address technical issues as
they arise. Our customer support personnel provide resolution of
customer technical inquiries and are available to customers by
telephone, email and through our website. We use a customer
service automation system to track each customers inquiry
until it is resolved. Our technical support is generally offered
on an annual subscription basis.

Training.We offer a
comprehensive training curriculum designed for partners and
customers to provide the knowledge and skills to successfully
deploy, use and maintain our products. These classes focus on
the technical aspects of our products as well as related
business issues and processes. We regularly hold our classes in
various locations, including our training facilities in Chicago,
Illinois and in Europe. We generally charge a daily fee for such
classes.

Customers, Sales and Marketing

To date, we have licensed our iManage WorkSite
software to over 1,200 customers with more than 500,000 users.
We have focused our sales and marketing efforts primarily on the
legal, financial services, manufacturing, government and
professional services markets. For 2002, 2001 and 2000, we
derived 71%, 79% and 77% of our license revenues, respectively,
from law firms and professional service firms. No single
customer accounted for more than 10% of our revenues during
2002, 2001 or 2000.

Our sales strategy consists of engaging senior
business and information technology managers at our customer
prospects to explain the benefits of our application suite. We
emphasize to our prospects the ease of deployment and rapid
return on investment of our suite of applications. We hire sales
associates that have an understanding of end user needs in our
targeted vertical markets.

4



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As of December 31, 2002, our sales
organization consisted of 53 managers, account executives,
product consultants and business development professionals. We
have sales representatives throughout the United States and
Europe. A distribution network of over 150 strategic
resellers and partners in Australia, Brazil, Canada, France,
Germany, New Zealand, the United Kingdom and the United States
augments our direct sales force. These partners license our
products to end user customers. International partners may also
provide the first line of customer support. A number of these
partners have built add-on software products to extend the
functionality of iManage WorkSite  more than
60 add-on products are available today. In February of
2003, we announced an agreement with Interwoven, an enterprise
content management vendor that will integrate iManage
WorkSites document management and collaboration
capabilities into its solution. Interwoven will resell the
combined solution.

As of December 31, 2002, our marketing
organization consisted of 17 professionals. Our marketing
programs focus on creating overall awareness of our
collaborative content management software products and services.
To generate market awareness, we participate in market research,
industry analyst product and strategy updates, press meetings,
trade shows, seminars and online webinars, and engage in
marketing through our Website to generate qualified sales leads.
We use feedback from our customers and market research to
determine specific industry segment needs and to define and
direct our product development efforts.

Research and Development

Since our inception, we have devoted significant
resources to develop our products and technology. We believe
that our future success will depend, in large part, on a strong
development effort that enhances and extends the features of our
application suite. Our product development organization is
responsible for product architecture, core technology, product
testing, quality assurance, documentation and expanding the
ability of our products to operate with leading hardware
platforms, operating systems, database management systems and
key electronic commerce transaction processing standards.

As of December 31, 2002, we had
69 employees engaged in research, development and quality
assurance. Our research and development expenditures were
$8.8 million for 2002, $10.4 million for 2001 and
$9.1 million for 2000, respectively. All research and
development expenditures have been expensed as incurred. We
expect to continue to devote substantial resources to our
research and development activities.

Competition

We have experienced and expect to continue to
experience increased competition from current and potential
competitors. Many of these companies have greater name
recognition, longer operating histories, larger customer bases
and significantly greater financial, technical, marketing,
sales, distribution and other resources than we have. Our
current competitors include:



| |   |                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Companies addressing segments of our market
    including Documentum, Inc., FileNet Corporation, Hummingbird
    Ltd., Intraspect Software, Inc., Microsoft Corporation, Open
    Text Corporation, Stellent, Inc. and NetDocuments, Inc.;
|
| |  | Web content management companies such as Vignette
    Corporation;                                                                                                                                                                        
|
| |  | Enterprise Web portal companies such as Plumtree;                                                                                                                                                                                         
|
| |  | Intranet and groupware companies such as
    BroadVision, Inc., IBM, Microsoft Corporation and Novell, Inc.;
    and                                                                                                                      
|
| |  | In-house development efforts by our customers and
    partners.                                                                                                                                                                           

We believe that we may face additional
competition from operating system vendors, online service
providers and client/ server applications and tools vendors. If
any of our competitors were to become the industry standard or
were to enter into or expand relationships with significantly
larger companies through mergers, acquisitions or other similar
transactions, our business could be seriously harmed. In
addition, potential competitors may bundle their products or
incorporate functionality into existing products in a manner
that discourages users from purchasing our products.

5



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We believe that the principal competitive factors
in the collaborative content management market are:



| |   |                                                                          
| | - | -------------------------------------------------------------------------
| |  | product functionality and features;                                      
|
| |  | availability of global support;                                          
|
| |  | coverage of direct sales force;                                          
|
| |  | ease and speed of product implementation;                                
|
| |  | vendor and product reputation;                                           
|
| |  | financial condition of document management and
    collaboration vendors;
|
| |  | ability of products to support large numbers of
    concurrent users;    
|
| |  | price;                                                                   
|
| |  | security;                                                                
|
| |  | integration capability with established software;                        
|
| |  | scalability; and                                                         
|
| |  | ease of access and use.                                                  

Although we believe that we currently compete
favorably with respect to most of these factors, our market is
relatively new and is evolving rapidly. We may not be able to
maintain our competitive position against current and potential
competitors.

Intellectual Property and Other Proprietary
Rights

Our success depends in part on the development
and protection of the proprietary aspects of our technology as
well as our ability to operate without infringing on the
proprietary rights of others. To protect our proprietary
technology, we rely primarily on patent, trademark, service
mark, trade secret and copyright laws and contractual
restrictions.

We require our customers to enter into license
agreements that impose restrictions on their ability to
reproduce, distribute and use our software. In addition, we seek
to avoid disclosure of our trade secrets through a number of
means, including restricting access to our source code and
object code and requiring those entities and persons with access
to agree to confidentiality terms that restrict their use and
disclosure. We seek to protect our software, documentation and
other written materials under trade secret and copyright laws,
which afford only limited protection.

We currently have one U.S. patent issued. We
have applied for two others in the United States and we have
three pending foreign patent applications. It is possible that
no patents will be issued from our currently pending patent
applications and that our potential future patents may be found
invalid or unenforceable, or may be successfully challenged. It
is also possible that any patent issued to us may not provide us
with competitive advantages or that we may not develop future
proprietary products or technologies that are patentable.
Additionally, we have not performed comprehensive analysis of
the patents of others that may limit our ability to do business.

We license technologies from several software
providers that are embedded into our product. We license
Application Builder® from Autonomy, Inc. and Search
97® from Verity, Inc. for search functionality in the
iManage WorkSite Server. These agreements expire in March 2005
and January 2007, respectively, and are renewable with written
consent of the parties. Either party may terminate the agreement
for cause before the expiration date with 90 days written
notice. In addition, we license Outside In Viewer
Technology® and Outside In HTML Export® from Stellent,
Inc. for file viewing functionality. This agreement expires in
December 2004 and is renewable with written consent of the
parties. If we cannot renew these licenses, shipments of our
products could be delayed until equivalent software could be
developed or licensed and integrated into our products. These
types of delays could seriously harm our business.

6



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Despite our efforts to protect our proprietary
rights and technology, unauthorized parties may attempt to copy
aspects of our products or obtain the source code to our
software or use other information that we regard as proprietary
or could develop software competitive to ours. Policing
unauthorized use of our products is difficult, and while we are
unable to determine the extent to which piracy of our software
exists, software piracy may become a problem. Our means of
protecting our proprietary rights may not be adequate.
Litigation may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets, to
determine the validity and scope of the proprietary rights of
others or to defend against claims of infringement or
invalidity. Any such litigation could result in substantial
costs and diversion of resources, which could have a material
adverse effect on our business, operating results and financial
condition.

It is possible that in the future, a third party
may file lawsuits claiming that our products infringe its
patents or copyrights or misappropriate its trade secrets. Any
claims, with or without merit, could be costly and
time-consuming to defend, divert our managements attention
or cause product delays. We have only one patent that we could
use defensively against any company bringing such a claim. If
our product was found to infringe a third partys
proprietary rights, we may be required to enter into royalty or
licensing agreements to be able to sell our product. Royalty and
licensing agreements, if required, may not be available on terms
acceptable to us, if at all, which could harm our business.

Employees

As of December 31, 2002, we had 207
full-time employees, of which less than 10% were based outside
the United States. Of these employees, 70 were in sales and
marketing, 69 were in product development, 42 were in
professional services, customer support and training and
26 were in finance, human resources, legal, information
systems and administrative functions. Our employees are not
represented by any collective bargaining agreements, and we have
never experienced a work stoppage. Our future success depends on
our ability to attract, motivate and retain highly qualified
technical and management personnel.






|        |           
|------- | ----------
|Item 2. | Properties

In February 2002, we moved our principal offices
to a leased facility in Foster City, California, which consists
of 21,415 square feet under a lease that will expire on
September 30, 2008. Our engineering and customer support
personnel and our training facility are located in approximately
30,000 square feet of leased facilities in Chicago, Illinois.

On March 21, 2003, we exercised an option to
terminate the lease for our facility in Chicago, which as a
result will expire on April 30, 2004 and entered into a new
facilities lease for approximately 39,000 square feet in the
Chicago area on March 17, 2003. In connection with the
lease termination, we incurred a lease termination fee of
$986,000, which will be charged to expense in the first quarter
of 2003. The new facilities lease commences no later than
August 1, 2003, is non-cancelable and expires in 2016. Our
research and development, customer support, training and certain
sales and marketing personnel are expected to relocate to this
new facility in August 2003. We expect to charge to expense,
upon vacating the facility subject to the terminated lease, the
remaining lease payments due under the terminated lease
agreement from the date of our occupancy of the new facility to
April 30, 2004, which we currently estimate to be $650,000.
The new lease agreement provides for cash payments from the
landlord sufficient to offset the lease termination fee and
provides for a free rent for the initial 12 months of the
lease agreement including operating costs, and an additional
2 months of free rent, excluding operating costs, in each
of the second, third and fourth years of the lease agreement.
The free rent period and the cash payments from the landlord
will reduce rental expenses for the new facility on a ratable
basis over the term of the new lease.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

Beginning in July 2001, several securities class
action complaints were filed against the Company, the
underwriters of the Companys initial public offering, its
directors and certain officers in the United States District
Court for the Southern District of New York. The cases were
consolidated and the litigation is now captioned as In re
iManage, Inc. Initial Public Offering Securities Litigation,
Civ. No. 01-6277 (SAS)

7



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(S.D.N.Y.), related to In re Initial Public
Offering Securities Litigation, 21 MC 92 (SAS)
(S.D.N.Y.). On or about April 19, 2002, plaintiffs served
an amended complaint. The amended complaint is brought
purportedly on behalf of all persons who purchased the
Companys common stock from November 17, 1999 through
December 6, 2000. It names as defendants the Company; five
of the Companys present and former officers; and several
investment banking firms that served as underwriters of the
Companys initial public offering. The complaint alleges
liability under Sections 11 and 15 of the Securities Act of
1933 and Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 on the grounds that the registration
statement for the offering did not disclose that: (1) the
underwriters had agreed to allow certain customers to purchase
shares in the offering in exchange for excess commissions paid
to the underwriters; and (2) the underwriters had arranged
for certain customers to purchase additional shares in the
aftermarket at predetermined prices. The amended complaint also
alleges that false analyst reports were issued. Plaintiffs seek
unspecified monetary damages, attorneys fees and other
costs.


The Company is aware that similar allegations
have been made in lawsuits challenging over 300 other public
offerings conducted in 1999, 2000 and 2001. All of these cases
have been consolidated for pretrial purposes before Judge Shira
A. Scheindlin of the Southern District of New York. On
July 15, 2002, the Company and its related individual
defendants (as well as the other issuers named as defendants)
filed a motion to dismiss. Subsequently, the individual
defendants stipulated with plaintiffs to dismissal from the case
without prejudice, subject to a tolling agreement. On
February 19, 2003, the Court ruled on the motions to
dismiss. The Court denied the motions to dismiss claims under
the Securities Act of 1933 in all but 10 of the cases, including
the case involving the Company. The Court denied the motion to
dismiss the claim under Section 10(a) of the Securities
Exchange Act of 1934 against the Company and 184 other issuer
defendants on the basis that the amended complaints in these
cases alleged that the respective issuers had acquired companies
or conducted follow-on offerings after their initial public
offerings.

The Company and certain executive officers are
defendants in a complaint filed by a former employee alleging
ownership of 18,000 shares of the Companys common
stock that were never issued. The complaint alleges, among other
claims, breach of contract, and the plaintiff is seeking damages
of approximately $700,000 plus punitive damages of
$10 million. While the Company believes that the claims are
without merit and intends to vigorously defend the matter, there
can be no assurances that this matter will be resolved without
costly litigation or in a manner that is not adverse to the
Companys financial position, results of operation or cash
flows.

While we believe that the allegations against our
officers, directors and us are without merit and intend to
contest them vigorously, there can be no assurance that these
matters will be resolved without costly litigation or in a
manner that is not adverse to our consolidated financial
position, results of operations or cash flows. No estimate can
be made of the possible loss or range of loss associated with
the resolution of these matters.






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

We held our Annual Meeting of Stockholders in
Foster City, California on November 21, 2002. Of the
24,073,644 shares outstanding as of the record date,
18,819,369 were present or represented by proxy at the meeting
on November 21, 2002. At this meeting, the following
actions were voted upon:



| |    |                                                                                                                                                                          
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | To elect one Class III director to serve for
    a three-year term until our Annual Meeting of Stockholders in
    2005, or until his successor is elected and qualified:

|             |  |     |            |           |  |  |        | 
|------------ |  | --- | ---------- | --------- |  |  | ------ | 
|             |  |     |            | Authority
|             |  | For |            | Withheld 
|             |  |     |            |          
|Bob L. Corey |  |     | 18,788,713 |           |  |  | 30,656 | 



| |    |                                                                                                                                      
| | -- | -------------------------------------------------------------------------------------------------------------------------------------
| | 2. | To ratify the appointment of
    PricewaterhouseCoopers LLP as our independent accountants for
    the year ending December 31, 2002.

|           |  |         |        |         |  |  |       | 
|---------- |  | ------- | ------ | ------- |  |  | ----- | 
|For        |  | Against |        | Abstain
|           |  |         |        |        
|18,806,963 |  |         | 10,274 |         |  |  | 2,132 | 

8



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##### Table of Contents






PART II






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

Our common stock is listed on the Nasdaq National
Market under the symbol IMAN.

The following table sets forth, for the periods
indicated, the high and low closing sales prices for our common
stock for the last eight quarters, all as reported by Nasdaq.

|                              |                |      |   |      |  |  |   |      | 
|----------------------------- | -------------- | ---- | - | ---- |  |  | - | ---- | 
|                              |                | High |   | Low 
|                              |                |      |   |     
|Year ended December 31, 2002: |                |      |   |      |  |  |   |     
|                              | Fourth quarter |      | $ | 3.20 |  |  | $ | 1.95 | 
|                              | Third quarter  |      | $ | 3.00 |  |  | $ | 1.75 | 
|                              | Second quarter |      | $ | 7.00 |  |  | $ | 2.65 | 
|                              | First quarter  |      | $ | 8.19 |  |  | $ | 5.82 | 
|Year ended December 31, 2001: |                |      |   |      |  |  |   |     
|                              | Fourth quarter |      | $ | 7.89 |  |  | $ | 3.90 | 
|                              | Third quarter  |      | $ | 5.43 |  |  | $ | 3.70 | 
|                              | Second quarter |      | $ | 4.40 |  |  | $ | 1.50 | 
|                              | First quarter  |      | $ | 7.44 |  |  | $ | 1.97 | 

The approximate number of holders of record of
the shares of our common stock was 232 as of March 14,
2003. This number does not include stockholders whose shares are
held by other entities. The actual number of holders is greater
than the number of holders of record. We estimate that there
were approximately 2,500 beneficial stockholders of the shares
of our common stock as of March 14, 2003.

We have not declared or paid any cash dividends
on our capital stock since our incorporation in October 1995,
and our current debt facilities prevent us from declaring or
paying any dividends. We currently intend to retain future
earnings, if any, for use in our business and, therefore, do not
anticipate paying any cash dividends in the foreseeable future.
See Item 7., Managements Discussion and
Analysis of Financial Condition and Results of
Operations  Liquidity and Capital Resources.






|        |                                         
|------- | ----------------------------------------
|Item 6. | Selected Consolidated Financial
    Data

The selected consolidated statement of operations
data set forth below for the years ended December 31, 2002,
2001 and 2000 and the selected consolidated balance sheet data
as of December 31, 2002, 2001 and 2000 are derived from our
consolidated financial statements, which have been audited by
PricewaterhouseCoopers LLP, independent accountants, and are
included elsewhere in this Annual Report on Form 10-K. The
selected consolidated statement of operations data for the years
ended December 31, 1999 and 1998 and the selected
consolidated balance sheet data as of December 31, 1999 and
1998 are derived from our audited consolidated financial
statements that are not included in this Annual Report on
Form 10-K.

This data should be read in conjunction with
Item 7., Managements Discussion and Analysis of
Financial Condition and Results of Operations and the
consolidated financial statements of iManage, Inc. and the notes
thereto appearing in Item 15. in this Annual Report on
Form 10-K.

9



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##### Table of Contents



|                                                        |                                                                          |                                          |   |        |   |      |   |         |   |      |   |         |   |  |   |        |   |  |   |        |  
|------------------------------------------------------- | ------------------------------------------------------------------------ | ---------------------------------------- | - | ------ | - | ---- | - | ------- | - | ---- | - | ------- | - |  | - | ------ | - |  | - | ------ | -
|                                                        |                                                                          |                                         
|                                                        |                                                                          | Years Ended December 31,                
|                                                        |                                                                          |                                         
|                                                        |                                                                          | 2002                                     |   | 2001   |   | 2000 |   | 1999    |   | 1998
|                                                        |                                                                          |                                          |   |        |   |      |   |         |   |     
|                                                        |                                                                          |                                         
|                                                        |                                                                          | (In thousands, except per share amounts)
|Selected Consolidated Statement of
    Operations Data: |                                                                          |                                          |   |        |   |      |   |         |   |      |   |         |   |  |   |        |   |  |   |       
|                                                        | Total revenues                                                           |                                          | $ | 41,326 |   |      | $ | 38,862  |   |      | $ | 30,008  |   |  | $ | 18,570 |   |  | $ | 7,741  |  
|                                                        | Loss from operations                                                     |                                          |   | (7,598 | ) |      |   | (21,310 | ) |      |   | (11,611 | ) |  |   | (3,461 | ) |  |   | (2,979 | )
|                                                        | Net loss                                                                 |                                          |   | (6,664 | ) |      |   | (19,750 | ) |      |   | (9,114  | ) |  |   | (2,775 | ) |  |   | (2,840 | )
|                                                        | Basic and diluted net loss per common share                              |                                          |   | (0.28  | ) |      |   | (0.85   | ) |      |   | (0.41   | ) |  |   | (0.28  | ) |  |   | (0.38  | )
|                                                        | Shares used in computing basic and diluted net
    loss per common share |                                          |   | 23,988 |   |      |   | 23,288  |   |      |   | 22,130  |   |  |   | 9,988  |   |  |   | 7,455  |  

|                                              |                                                   |                |   |        |  |      |   |        |  |      |   |        |  |  |   |        |  |  |   |        | 
|--------------------------------------------- | ------------------------------------------------- | -------------- | - | ------ |  | ---- | - | ------ |  | ---- | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                              |                                                   |               
|                                              |                                                   | December 31,  
|                                              |                                                   |               
|                                              |                                                   | 2002           |   | 2001   |  | 2000 |   | 1999   |  | 1998
|                                              |                                                   |                |   |        |  |      |   |        |  |     
|                                              |                                                   |               
|                                              |                                                   | (In thousands)
|Selected Consolidated Balance Sheet
    Data: |                                                   |                |   |        |  |      |   |        |  |      |   |        |  |  |   |        |  |  |   |       
|                                              | Cash, cash equivalents and short-term investments |                | $ | 38,156 |  |      | $ | 33,607 |  |      | $ | 35,696 |  |  | $ | 51,013 |  |  | $ | 7,617  | 
|                                              | Working capital                                   |                |   | 24,274 |  |      |   | 22,980 |  |      |   | 31,127 |  |  |   | 43,843 |  |  |   | 6,119  | 
|                                              | Total assets                                      |                |   | 57,669 |  |      |   | 60,858 |  |      |   | 73,347 |  |  |   | 63,921 |  |  |   | 13,495 | 
|                                              | Bank lines of credit, less current portion        |                |   | 1,010  |  |      |   | 1,412  |  |      |   | 2,345  |  |  |   | 1,388  |  |  |   |       | 
|                                              | Total stockholders equity                        |                |   | 31,688 |  |      |   | 36,963 |  |      |   | 53,737 |  |  |   | 48,828 |  |  |   | 7,360  | 

Working capital is defined as the excess of total
current assets over total current liabilities.






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

The following contains forward-looking statements
within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Words such as
anticipates, expects,
intends, plans, believes,
seeks, estimates and similar expressions
identify such forward-looking statements. These forward-looking
statements are subject to risks and uncertainties that could
cause actual results to differ materially from those indicated
in the forward-looking statements. Factors, which could cause
actual results to differ materially, include those set forth in
the following discussion, and, in particular, the risks
discussed below under the subheading Factors That May
Impact Future Operating Results and in other documents we
file with the Securities and Exchange Commission. Unless
required by law, we do not undertake any obligation to update
any forward-looking statements or risk factors.

Overview

We provide collaborative content management
software that enables businesses to manage and collaborate
effectively on critical business content across the extended
enterprise. Our product suite, iManage WorkSite, delivers
document management, collaboration, workflow and knowledge
management accessible through a portal in a single integrated
Internet solution. We believe that iManage WorkSite improves
communication and process efficiency, providing faster response
times and a rapid return on investment for our customers. More
than 500,000 users in over 1,200 businesses are utilizing
iManage WorkSite.

10



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##### Table of Contents



Results of Operations

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

|                               |                                   |                                        |   |      |     |      |   |    |     |    |   |    |     |   
|------------------------------ | --------------------------------- | -------------------------------------- | - | ---- | --- | ---- | - | -- | --- | -- | - | -- | --- | --
|                               |                                   |                                       
|                               |                                   | Years Ended December 31,              
|                               |                                   |                                       
|                               |                                   | 2002                                   |   | 2001 |     | 2000
|                               |                                   |                                        |   |      |     |     
|Revenues:                      |                                   |                                        |   |      |     |      |   |    |     |    |   |   
|                               | License                           |                                        |   | 49   | %   |      |   | 63 | %   |    |   | 67 | %  
|                               | Support and service               |                                        |   | 51   |     |      |   | 37 |     |    |   | 33 |    
|                               |                                   |                                        |   |      |     |      |   |    |     |    |   |   
|                               |                                   | Total revenues                         |   |      | 100 |      |   |    | 100 |    |   |    | 100 |   
|                               |                                   |                                        |   |      |     |      |   |    |     |    |   |   
|Cost of revenues:              |                                   |                                        |   |      |     |      |   |    |     |    |   |   
|                               | License                           |                                        |   | 3    |     |      |   | 3  |     |    |   | 4  |    
|                               | Support and service               |                                        |   | 17   |     |      |   | 15 |     |    |   | 16 |    
|                               |                                   |                                        |   |      |     |      |   |    |     |    |   |   
|                               |                                   | Total cost of revenues                 |   |      | 20  |      |   |    | 18  |    |   |    | 20  |   
|                               |                                   |                                        |   |      |     |      |   |    |     |    |   |   
|                               |                                   | Gross margin                           |   |      | 80  |      |   |    | 82  |    |   |    | 80  |   
|Operating expenses:            |                                   |                                        |   |      |     |      |   |    |     |    |   |   
|                               | Sales and marketing               |                                        |   | 64   |     |      |   | 74 |     |    |   | 60 |    
|                               | Research and development          |                                        |   | 21   |     |      |   | 27 |     |    |   | 30 |    
|                               | General and administrative        |                                        |   | 11   |     |      |   | 11 |     |    |   | 14 |    
|                               | Amortization of intangible assets |                                        |   | 2    |     |      |   | 22 |     |    |   | 15 |    
|                               | Restructuring charge              |                                        |   |     |     |      |   | 3  |     |    |   |   |    
|                               |                                   |                                        |   |      |     |      |   |    |     |    |   |   
|                               |                                   | Total operating expenses               |   |      | 98  |      |   |    | 137 |    |   |    | 119 |   
|                               |                                   |                                        |   |      |     |      |   |    |     |    |   |   
|                               |                                   | Loss from operations                   |   |      | (18 | )    |   |    | (55 | )  |   |    | (39 | ) 
|Interest income and other, net |                                   |                                        | 2 |      |     |      | 4 |    |     |    | 9 |   
|                               |                                   |                                        |   |      |     |      |   |    |     |    |   |   
|                               |                                   | Loss before provision for income taxes |   |      | (16 | )    |   |    | (51 | )  |   |    | (30 | ) 
|Provision for income taxes     |                                   |                                        |  |      |     |      |  |    |     |    |  |   
|                               |                                   |                                        |   |      |     |      |   |    |     |    |   |   
|                               |                                   | Net loss                               |   |      | (16 | )%   |   |    | (51 | )% |   |    | (30 | )%
|                               |                                   |                                        |   |      |     |      |   |    |     |    |   |   

Revenues

The following sets forth, for the periods
indicated, our revenues (in thousands):

|                    |  |                          |        |      |  |      |        |  |  |   |        | 
|------------------- |  | ------------------------ | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                    |  |                         
|                    |  | Years Ended December 31,
|                    |  |                         
|                    |  | 2002                     |        | 2001 |  | 2000
|                    |  |                          |        |      |  |     
|License             |  | $                        | 20,349 |      |  | $    | 24,545 |  |  | $ | 20,213 | 
|Support and service |  |                          | 20,977 |      |  |      | 14,317 |  |  |   | 9,795  | 
|                    |  |                          |        |      |  |      |        |  |  |   |        | 
|                    |  | $                        | 41,326 |      |  | $    | 38,862 |  |  | $ | 30,008 | 
|                    |  |                          |        |      |  |      |        |  |  |   |        | 

License.License
revenues decreased $4.2 million, or 17%, from 2001 to 2002.
This decrease was due primarily to lengthening sales cycles and
lower information technology spending as our customers and
prospects responded to continuing weak economic conditions both
domestically and internationally. License revenues increased
$4.3 million, or 21%, from 2000 to 2001. This increase was
due primarily to the increased volume of sales to both new and
existing customers and the successful introduction of our new
WorkSite product suite. License revenues accounted for 49%, 63%
and 67% of total revenue in 2002, 2001 and 2000, respectively.
The decrease in license revenues as a percentage of total
revenues in 2002 from 2001 was due to a decline in license
revenues, an increase in annual support revenues from our
customer installed base associated with the renewal of annual
support contracts and our strategy to increase our professional
consulting services.

11



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##### Table of Contents



The decrease in license revenues as a percentage
of total revenues in 2001 from 2000 was due to the increase in
support and service revenues from the growth in our customer
installed base associated with the renewal of annual support
contracts. We anticipate that license revenues in 2003 as a
percentage of total revenues will remain generally consistent
with 2002.


Support and Service.Support and service revenues consisted
primarily of customer support and, to a lesser extent, training
and consulting services. Support and service revenues increased
$6.7 million, or 47%, in 2002 from 2001 and
$4.5 million, or 46%, in 2001 from 2000. These increases
were primarily due to increased customer support revenues from
our installed base associated with the renewal of annual support
contracts. Support and service revenue was 51%, 37% and 33% of
total revenues in 2002, 2001 and 2000, respectively. The
increase in support and service revenue as a percentage of total
revenues was primarily due to increased customer support
revenues associated with the renewal of annual support
contracts, an increase in professional consulting services and,
in 2002, declining license revenues. We anticipate that support
and services revenues will increase in 2003 over 2002 primarily
due to higher customer support revenues.

Cost of Revenues

The following sets forth, for the periods
indicated, our cost of revenues (in thousands):

|                    |  |                          |       |      |  |      |       |  |  |   |       | 
|------------------- |  | ------------------------ | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                    |  |                         
|                    |  | Years Ended December 31,
|                    |  |                         
|                    |  | 2002                     |       | 2001 |  | 2000
|                    |  |                          |       |      |  |     
|License             |  | $                        | 1,389 |      |  | $    | 1,376 |  |  | $ | 1,165 | 
|Support and service |  |                          | 7,008 |      |  |      | 5,757 |  |  |   | 4,841 | 
|                    |  |                          |       |      |  |      |       |  |  |   |       | 
|                    |  | $                        | 8,397 |      |  | $    | 7,133 |  |  | $ | 6,006 | 
|                    |  |                          |       |      |  |      |       |  |  |   |       | 

License.Cost of
license revenues primarily consisted of royalties payable to
third parties for software that was either embedded in or
bundled with our software products. Cost of license revenues
increased $13,000, or 1%, in 2002 from 2001 and $211,000, or
18%, in 2001 from 2000. The increase in cost of license revenues
in absolute dollars in 2002 and 2001 was primarily due to the
amount of third party software products embedded or bundled with
our products. As a percentage of related license revenues, cost
of license revenues were 7%, 6% and 6% in 2002, 2001 and 2000,
respectively. In 2002 and 2001, our royalty payments to third
parties were primarily fixed in nature and were generally not
impacted by fluctuations in license revenues. We expect that
cost of license revenues in 2003 will remain generally
consistent as a percent of related license revenues with 2002.
Cost of license revenues as a percentage of related license
revenues may fluctuate in the future, however, due to the mix of
software products sold, the extent to which third party software
products are bundled with our products and amount of license
revenues, as many of the third party software products embedded
with our software are under fixed fee arrangements.

Support and Service.Cost of support and service revenues
primarily consisted of salaries and other personnel-related
expenses, costs associated with providing product updates to our
customers with active support contracts and depreciation of
equipment used in providing customer support, consulting
services and training. Cost of support and service revenues
increased $1.3 million, or 22%, in 2002 from 2001 and
$916,000, or 19%, in 2001 from 2000. These increases were
primarily due to personnel-related expenses required by our
growing customer installed base and our strategy to increase our
consulting services revenues. As a percentage of related
revenues, cost of support and service revenue were 33%, 40% and
49% in 2002, 2001 and 2000, respectively. The decrease in cost
of support and service revenues as a percentage of the related
revenues for the periods prescribed is due to economies of scale
associated with supporting our growing customer installed base.
We anticipate that cost of support and services will increase in
absolute dollars in 2003 to support our growing installed base
of customers and remain relatively consistent as a percentage of
support and service revenues.

12



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##### Table of Contents



Operating Expenses

The following sets forth, for the periods
indicated, our operating expenses (in thousands):

|                                  |  |                          |        |      |  |      |        |  |  |   |        | 
|--------------------------------- |  | ------------------------ | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                  |  |                         
|                                  |  | Years Ended December 31,
|                                  |  |                         
|                                  |  | 2002                     |        | 2001 |  | 2000
|                                  |  |                          |        |      |  |     
|Sales and marketing               |  | $                        | 26,580 |      |  | $    | 28,574 |  |  | $ | 17,845 | 
|Research and development          |  |                          | 8,776  |      |  |      | 10,374 |  |  |   | 9,094  | 
|General and administrative        |  |                          | 4,378  |      |  |      | 4,448  |  |  |   | 4,222  | 
|Amortization of intangible assets |  |                          | 793    |      |  |      | 8,449  |  |  |   | 4,452  | 
|Restructuring charge              |  |                          |       |      |  |      | 1,194  |  |  |   |       | 
|                                  |  |                          |        |      |  |      |        |  |  |   |        | 
|                                  |  | $                        | 40,527 |      |  | $    | 53,039 |  |  | $ | 35,613 | 
|                                  |  |                          |        |      |  |      |        |  |  |   |        | 

Sales and Marketing.Sales and marketing expenses consisted
primarily of salaries, commissions, benefits and amortization of
stock-based compensation for sales and marketing personnel,
travel and marketing programs, including customer conferences,
promotional materials, trade shows and advertising. Sales and
marketing expenses decreased $2.0 million, or 7%, in 2002
from 2001. This decrease was due primarily to a $755,000
reduction in personnel-related costs including salary,
commissions and bonuses as a result of decreased license
revenues, a $503,000 decrease in stock-based compensation
charges, a $470,000 decrease in travel expenses and a $401,000
reduction in seminars and training expenses, which were
partially offset by a $104,000 increase in facilities related
expenses. Sales and marketing expenses increased
$10.7 million, or 60%, in 2001 from 2000. This increase was
primarily related to an increase of $8.6 million in our
domestic and international sales and marketing personnel
expense, $1.3 million in facility charges and $671,000 in
travel expense. As a percentage of revenues, sales and marketing
expenses were 64%, 74% and 60% in 2002, 2001 and 2000,
respectively. We anticipate that sales and marketing expense as
a percentage of total revenues will decrease slightly in 2003
from levels posted in 2002.

Research and Development.Research and development expenses
consisted primarily of personnel, third party contractors,
facilities and related overhead costs associated with our
product development and quality assurance activities. Research
and development expenses decreased $1.6 million, or 15%, in
2002 from 2001. This decrease was due primarily to a $505,000
decrease in facilities costs associated with the closure of our
Utah facility during the third quarter of 2001, a $470,000
decrease in stock-based compensation charges and a $365,000
reduction in consulting services. Research and development
expenses increased $1.3 million, or 14%, in 2001 from 2000.
This increase was primarily due to an increase in development
personnel expense of $972,000 and an increase in facilities and
related overhead expense of $512,000 partially offset by a
decrease in stock-based compensation charges of $180,000. As a
percentage of revenues, research and development expenses were
21%, 27% and 30% in 2002, 2001 and 2000. We expect that research
and development expense in 2003 will increase slightly in
absolute dollars over 2002.

General and Administrative.General and administrative expenses
consisted primarily of personnel and related costs for general
corporate functions, including legal, finance, accounting,
information technology and human resources as well as insurance
and facilities costs. General and administrative expenses
decreased $70,000, or 2%, in 2002 from 2001. This decrease was
due primarily to a reduction in general office expenses. General
and administrative expenses increased $226,000, or 5%, in 2001
from 2000. The increase in 2001 was primarily a result of
increased staffing and costs related to building our general and
administrative infrastructure. As a percentage of revenues,
general and administrative expenses were 11%, 11% and 14% in
2002, 2001 and 2000, respectively. We expect that general and
administrative expense will decrease slightly as a percentage of
total revenues in 2003 when compared to 2002.

Amortization of Intangible Assets.Intangible assets consist of goodwill,
purchased technology and non-compete agreements associated with
our acquisition of ThoughtStar, Inc. (ThoughtStar)
in June 2000 and the acquisition of technologies in 2001.
Goodwill and other acquired intangibles of $17.0 million
were recorded in connection with the ThoughtStar acquisition and
were amortized, prior to adopting Statement of Financial
Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets, over their
estimated useful

13



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##### Table of Contents



lives of two years to five years except those
related to the assembled workforce, which were written off in
the third quarter of 2001 in connection with closing of the Utah
facilities.


We adopted SFAS No. 142 as of
January 1, 2002, and as a result, ceased amortizing the
remaining unamortized balance of goodwill of $3.4 million.
In lieu of amortization, we were required to perform an initial
review to determine whether the value of our remaining goodwill
asset was impaired and periodic impairment reviews annually
thereafter. We completed our initial review during the first
quarter of 2002 and a year-end review in October 2002. Upon
completion of these reviews, no impairment charge was recorded.
However, there can be no assurance that a future evaluation will
not require an impairment charge to be recorded. We expect to
record $35,000 of amortization related to other intangible
assets each quarter through September 30, 2003.

Restructuring
Charge.In September 2001, we implemented a
plan to consolidate our operations and close a facility in Utah.
Our restructuring action consisted primarily of the termination
of approximately 20 positions in engineering, sales, marketing
and administration in the Utah location and exiting the related
facility. The functions performed in the Utah facility were
combined with our Chicago, Illinois operations. As a result of
the restructuring, we recognized a charge of $1.2 million
in the third quarter of 2001. The restructuring charge included
$694,000 for employee severance, $150,000 for the write-off of
intangible assets related to the acquisition of ThoughtStar,
$93,000 for the write-off of certain property and equipment and
$257,000 related to facility closing costs. There was no
remaining restructuring charge accrued at December 31,
2002. At the time of the restructuring, we expected to achieve
an annual operating expense savings of approximately $800,000,
which were realized in 2002.

Stock-based Compensation.Stock-based compensation charges
relate to the options granted to employees prior to our initial
public offering, options granted on the acquisition date to
ThoughtStar employees, compensation charges related to executive
compensation and non-employee consultants. We expensed $544,000,
$1.4 million and $2.1 million in 2002, 2001 and 2000,
respectively, related to stock-based compensation.

Stock-based compensation charges relate to the
following expense classifications in the accompanying
consolidated statement of operations (in thousands):

|                           |  |                          |     |      |  |      |       |  |  |   |       | 
|-------------------------- |  | ------------------------ | --- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                           |  |                         
|                           |  | Years Ended December 31,
|                           |  |                         
|                           |  | 2002                     |     | 2001 |  | 2000
|                           |  |                          |     |      |  |     
|Cost of revenues           |  | $                        | 23  |      |  | $    | 46    |  |  | $ | 127   | 
|Sales and marketing        |  |                          | 264 |      |  |      | 767   |  |  |   | 951   | 
|Research and development   |  |                          | 34  |      |  |      | 504   |  |  |   | 684   | 
|General and administrative |  |                          | 223 |      |  |      | 132   |  |  |   | 372   | 
|                           |  |                          |     |      |  |      |       |  |  |   |       | 
|                           |  | $                        | 544 |      |  | $    | 1,449 |  |  | $ | 2,134 | 
|                           |  |                          |     |      |  |      |       |  |  |   |       | 

Amortization of stock-based compensation is
estimated to total $220,000 for 2003, $71,000 for 2004 and
$15,000 for 2005. Amortization of stock-based compensation will
be reduced in future periods to the extent options are
terminated prior to vesting.

During 2002, 2001 and 2000, we issued options to
purchase shares of our common stock to certain employees
totaling 300,000, 460,000 and 89,000, respectively, with
weighted average exercise prices of $6.27, $0.70 and $0.01 per
share, respectively, which were below the fair value of our
common stock at the dates of grant. The weighted average fair
value of our common stock was $7.65, $2.88 and $11.00 in 2002,
2001 and 2000, respectively. In accordance with the requirements
of Accounting Principles Board Opinion (APB)
No. 25 Accounting for Stock Issued to Employees, we
have recorded deferred stock-based compensation for the
difference between the exercise price of the stock options and
the fair value of our stock on the date of grant. This deferred
compensation is amortized to expense over the period during
which our right to repurchase the stock lapses or options become
exercisable, generally four or five years consistent with the
method described in Financial Accounting Standards Board
Interpretation (FIN) No. 28, Accounting for
Stock Appreciation Rights and Other Variable Stock Option or
Awards Plans. At December 31, 2002, we have

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recorded deferred stock-based compensation
related to these options in an amount of $12.6 million, of
which $612,000, $1.5 million and $2.9 million had been
amortized to expense during 2002, 2001 and 2000, respectively.


During 2001, we granted options to purchase
28,000 shares of our common stock at exercise prices ranging
from $0.01 to $5.09 per share to non-employee engineers for
consulting services, when the fair market value of our common
stock ranged from $4.40 to $5.09 per share. These options were
fully vested upon grant and were valued at a total of $157,000
using the Black-Scholes pricing model with the following
assumptions: 10 year terms, volatility ranging from 102% to
132%, discount rate ranging from 4.97% to 5.11% and 0% dividend
rate. The value of these options was expensed on the date of
grant.

In conjunction with the acquisition of
ThoughtStar in June 2000, we granted 89,000 common stock options
with an exercise price of $0.01 to former ThoughtStar employees
in exchange for 1,648,000 fully vested and exercisable
ThoughtStar stock options. On the date of grant, these options
had an intrinsic value of $982,000, which was recorded as
deferred stock-based compensation and was amortized over the
option vesting period of two years. There was no deferred
stock-based compensation expense related to these options in
2002 and aggregate compensation expense of $249,000 and
$646,000, in 2001 and 2000, respectively. During September 2001,
the remaining $87,000 deferred compensation was charged to
expense in connection with a restructuring of operations.

Deferred stock-based compensation charges are
comprised of the following (in thousands):

|                                         |  |                          |      |      |  |      |       |   |  |   |       |  
|---------------------------------------- |  | ------------------------ | ---- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                                         |  |                         
|                                         |  | Years Ended December 31,
|                                         |  |                         
|                                         |  | 2002                     |      | 2001 |  | 2000
|                                         |  |                          |      |      |  |     
|Employee stock-based compensation        |  | $                        | 612  |      |  | $    | 1,541 |   |  | $ | 2,911 |  
|Non-employee stock-based compensation    |  |                          |     |      |  |      | 157   |   |  |   |      |  
|Cancellation of options upon termination |  |                          | (170 | )    |  |      | (249  | ) |  |   | (777  | )
|                                         |  |                          |      |      |  |      |       |   |  |   |       |  
|                                         |  | $                        | 442  |      |  | $    | 1,449 |   |  | $ | 2,134 |  
|                                         |  |                          |      |      |  |      |       |   |  |   |       |  

Interest Income and Other, Net

Interest income and other was $1.0 million,
$1.7 million and $2.6 million in 2002, 2001 and 2000,
respectively. Interest income and other decreased $656,000, or
39%, in 2002 from 2001 and $939,000, or 36%, in 2001 from 2000.
These decreases were primarily due to lower interest rates on
our cash investments and a lower average balance of cash, cash
equivalents and short-and long-term investments during the
period.

Provision for Income Taxes

The provision for income taxes recorded in 2002,
2001 and 2000 related primarily to international taxes. As of
December 31, 2002, we had approximately $23.7 million
of federal and $20.9 million of state net operating loss
carryforwards to offset future taxable income. The federal and
state tax net operating loss carryforwards are available to
reduce future taxable income and expire at various dates through
2022 and 2013, respectively. Management periodically evaluates
the recoverability of the deferred tax assets and recognizes the
tax benefit only as reassessment demonstrates that these assets
are realizable. At such time, it is determined that it is not
likely that the assets will be realized. Therefore, we have
recorded a full valuation allowance against the deferred income
tax assets.

Liquidity and Capital Resources

At December 31, 2002, we had cash, cash
equivalents and short-term investments of $38.2 million.

Operating Activities.Net cash used in operating activities
in 2002 was primarily the result of our net loss of
$6.7 million. After excluding the effects of non-cash
charges including depreciation and amortization of
$2.8 million, deferred stock-based compensation of
$442,000, provision for doubtful accounts and sales returns of
$523,000 and common stock issued for services of $151,000, the
adjusted cash usage was $2.8 million

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during 2002. Additional cash was generated from
an increase of $1.5 million in deferred revenues, a
decrease of $730,000 in accounts receivable and an increase in
accounts payable and accrued liabilities of $423,000, partially
offset by an increase of $1.5 million in prepaid expenses
and other assets.


Net cash used in operating activities in 2001 was
primarily the result of our net loss of $19.8 million.
After excluding the effects of non-cash charges including
depreciation and amortization of $10.6 million, deferred
stock-based compensation of $1.3 million, a restructuring
charge of $1.2 million, provision for doubtful accounts and
sales returns of $574,000 and common stock issued for services
of $157,000, the adjusted cash usage was $6.0 million
during 2001. Additional cash was generated from an increase in
accounts payable and accrued liabilities of $2.3 million,
an increase of $1.8 million in deferred revenues, a
decrease of $469,000 in accounts receivable and a decrease of
$849,000 in prepaid expenses and other assets.

Net cash used in operating activities in 2000
resulted primarily from our net loss of $9.1 million. After
excluding the effects of non-cash charges for depreciation and
amortization of $6.3 million, deferred stock-based
compensation of $2.1 million and the provision for doubtful
accounts and sales returns of $264,000, the adjusted cash usage
was $424,000 during 2000. Additional cash was used from an
increase of $5.3 million in accounts receivable and an
increase of $3.0 million in our prepaid expenses and other
assets.

A number of non-cash items have been charged to
expense and increased our net loss. These items include
depreciation and amortization of property and equipment and
intangible assets, amortization of deferred stock-based
compensation and provisions for doubtful accounts and sales
returns. The extent to which these non-cash items increase or
decrease in amount and increase or decrease our future operating
results will have no corresponding impact on our cash flows.

Our primary source of operating cash flow is the
collection of accounts receivable from our customers and the
timing of payments to our vendors and service providers. We
measure the effectiveness of our collection efforts by an
analysis of average accounts receivable days outstanding
(days outstanding). Days outstanding were
74 days, 90 days and 130 days on
December 31, 2002, 2001 and 2000. Our days outstanding
decreased in 2002 and 2001 from the prior years results
due primarily to our focus on customer collection efforts and
the change in quarterly revenues throughout the year.
Collections of accounts receivable and related days outstanding
will fluctuate in future periods due to the timing and amount of
our future revenues, payment terms on customer contracts and the
effectiveness of our collection efforts.

Our operating cash flows will be impacted in the
future based on the timing of payments to our vendors for
accounts payable. We endeavor to pay our vendors and service
providers in accordance with invoice terms and conditions. The
timing of cash payments in future periods will be impacted by
the nature of accounts payable arrangements and
managements assessment of our cash inflows.

Investing Activities.Net cash provided by investing
activities was $13.6 million in 2002. This primarily
resulted from $18.7 million of proceeds received from the
maturity and sale of investments, partially offset by
$3.2 million to purchase investment securities and
$1.9 million to purchase property and equipment.

Net cash used in investing activities was
$7.1 million in 2001. This primarily resulted from
purchases of investments of $24.8 million and the purchase
of property and equipment of $1.0 million, partially offset
by $18.7 million in proceeds received from the maturity and
sale of investment securities.

Net cash used in investing activities was
$20.7 million in 2000. This primarily resulted from
purchases of investments of $30.0 million, the acquisition
of ThoughtStar, which used $6.1 million, and the purchase
of property and equipment of $3.3 million, partially offset
by $18.7 million in proceeds received from the maturity and
sale of investment securities.

We anticipate that we will continue to purchase
property and equipment necessary in the normal course of our
business. The amount and timing of these purchases and the
related cash outflows in future periods is difficult to predict
and is dependent on a number of factors including our hiring of
employees, the rate of change of computer hardware and software
used in our business and our business outlook.

We have classified our investment portfolio as
available for sale, and our investments are made
with capital preservation and liquidity as our primary
objectives. We generally hold investments in commercial

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paper, corporate bonds and U.S. government
agency securities to maturity; however, we may sell an
investment at any time if the quality rating of the investment
declines, the yield on the investment is no longer attractive or
we are in need of cash. Because we invest only in investment
securities that are highly liquid with a ready market, we
believe that the purchase, maturity or sale of our investments
has no material impact on our overall liquidity.


Financing Activities.Net cash provided by financing
activities of $1.0 million in 2002 included
$14.5 million of proceeds from bank lines of credit and
$1.5 million from the proceeds from issuance of common
stock, partially offset by repayments of bank lines of credit of
$14.4 million and the repurchase of common stock of
$641,000.

Net cash provided by financing activities of
$349,000 in 2001 included $12.3 million of proceeds from
bank lines of credit and $1.0 million of proceeds from the
issuance of common stock, partially offset by repayments of bank
lines of credit of $13.0 million.

Net cash provided by financing activities of
$5.4 million in 2000 included $4.8 million of proceeds
from bank lines of credit, $724,000 of proceeds from the
issuance of common stock and $501,000 of proceeds from the
payment of notes receivable from stockholders. Partially
offsetting these proceeds were repayments of bank lines of
credit of $444,000 and repurchases of common stock of $134,000.

Our cash flows from financing activities are
primarily the result of borrowing under our lines of credit,
cash receipts from the issuance of common stock and our
repurchases of common stock. We have used our lines of credit
primarily to finance purchases of property and equipment. We
anticipate that we will continue to use lines of credit to
finance our equipment purchases in the future to the extent that
such financing is available to us on acceptable terms.

We receive cash from the exercise of stock
options and the sale of stock under our Employee Stock Purchase
Plan. While we expect to continue to receive these proceeds in
future periods, the timing and amount of such proceeds is
difficult to predict and is contingent on a number of factors
including the price of our common stock, the number of employees
participating in the stock option plans and our Employee Stock
Purchase Plan and general market conditions.

In July 2002, we instituted a common stock
repurchase program, which terminated on December 31, 2002.
Under this program, we repurchased 232,300 shares of our
common stock for $581,000. While we have not renewed this
program, we may institute a new program if the Board of
Directors determines that such a program is appropriate.

Lines of Credit.As
of December 31, 2002, we had a revolving line of credit
with a bank for $4.0 million, which bears interest at the
banks prime rate plus 0.50%. Borrowings were limited to
$4.0 million minus the amount outstanding under the
revolving line of credit and outstanding letters of credit. This
line of credit is collateralized by substantially all of our
assets. As of December 31, 2002, we borrowed
$3.4 million under this facility. In addition, as of
December 31, 2002, we had an equipment line of credit with
a bank for $6.0 million, which bears interest at the
greater of the lending banks prime rate plus 0.50% or
4.75%. As of December 31, 2002, we had $2.4 million
outstanding under the equipment line of credit.

Both lines of credit contain various restrictive
covenants and these restrictions require us to:

(a) maintain unrestricted cash balances
including short- and long-term investments greater than
$25.0 million;

(b) not incur a net loss, as defined, in any
quarter greater than:

$2.0 million for any one quarter; or

$3.7 million for any two sequential quarters.

Net loss is defined as loss after taxes excluding
amortization and depreciation expense.

We were in compliance with all of these financial
covenants as of December 31, 2002.

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We currently anticipate that our cash, cash
equivalents and short-term investments, together with our
existing lines of credit, will be sufficient to meet our
anticipated needs for working capital and capital expenditures
for the next 12 months. However, we may be required, or
could elect, to seek additional funding at any time. We cannot
provide assurance that additional equity or debt financing, if
required, will be available on acceptable terms, if at all.

On March 21, 2003, we exercised an option to
terminate the lease for our facility in Chicago, Illinois, which
as a result will expire on April 30, 2004 and entered into
a new facilities lease for approximately 39,000 square feet in
the Chicago area on March 17, 2003. In connection with the
lease termination, we incurred a lease termination fee of
$986,000, which will be charged to expense in the first quarter
of 2003. The new facilities lease commences no later than
August 1, 2003, is non-cancelable and expires in 2016. Our
research and development, customer support, training and certain
sales and marketing personnel are expected to relocate to this
new facility in August 2003. We expect to charge to expense,
upon vacating the facility subject to the terminated lease, the
remaining lease payments due under the terminated lease
agreement from the date of our occupancy of the new facility to
April 30, 2004, which we currently estimate to be $650,000.
The new lease agreement provides for cash payments from the
landlord sufficient to offset the lease termination fee and
provides for a period of free rent for the initial
12 months of the lease agreement including operating costs,
and an additional 2 months of free rent, excluding
operating costs, in each of the second, third and fourth years
of the lease agreement. The free rent period and the cash
payments from the landlord will reduce rental expenses for the
new facility on a ratable basis over the term of the new lease.

Including the effects of the lease transactions
in March 2003, future minimum payments under non-cancelable
operating leases and bank lines of credit as of December 31
are as follows (in thousands):

|           |  |                 |       |                |  |       |        |  |  |   |        | 
|---------- |  | --------------- | ----- | -------------- |  | ----- | ------ |  |  | - | ------ | 
|           |  | Borrowing       |       | Non Cancelable |  |      
|           |  | Under Bank      |       | Operating      |  |      
|           |  | Lines of Credit |       | Leases         |  | Total
|           |  |                 |       |                |  |      
|2002       |  | $               | 4,808 |                |  | $     | 1,497  |  |  | $ | 6,305  | 
|2003       |  |                 | 666   |                |  |       | 1,144  |  |  |   | 1,810  | 
|2004       |  |                 | 344   |                |  |       | 1,382  |  |  |   | 1,726  | 
|2005       |  |                 |      |                |  |       | 1,424  |  |  |   | 1,424  | 
|2006       |  |                 |      |                |  |       | 1,466  |  |  |   | 1,466  | 
|Thereafter |  |                 |      |                |  |       | 7,082  |  |  |   | 7,082  | 
|           |  |                 |       |                |  |       |        |  |  |   |        | 
|           |  | $               | 5,818 |                |  | $     | 13,995 |  |  | $ | 19,813 | 
|           |  |                 |       |                |  |       |        |  |  |   |        | 

Contingencies.At
December 31, 2002, we are the target of several securities
class action complaints and other litigation. See
Item 3.  Legal Proceedings. Because of
uncertainties related to both the amount and range of loss in
these matters, we are unable to make a reasonable estimate of
the liability and associated cash flow impact that could result
from unfavorable outcomes in these actions. We will assess the
potential liability and cash flow impact related to these
litigation matters as additional information becomes available.
The ultimate resolution of these matters could have a material
impact on our cash flows.

Financial Risk Management

As a global concern, we face exposure to adverse
movements in foreign currency exchange rates. These exposures
may change over time as business practices evolve and could have
a material adverse impact on our consolidated financial results.
Our primary exposures relate to non-U.S. dollar-denominated
revenues and operating expenses in Europe, Australia and Canada.
At the present time, the exposure is not significant; therefore,
we are not currently engaged in hedging activity. We do not
anticipate significant currency gains or losses in the near term.

We maintain investment portfolio holdings of
various issuers, types and maturities. These securities are
classified as available-for-sale and, consequently, are recorded
on the consolidated balance sheet at fair value

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with unrealized gains and losses reported as a
separate component of accumulated other comprehensive income
(loss). These securities are not leveraged and are held for
purposes other than trading.


Critical Accounting Policies

In preparing our consolidated financial
statements, we make estimates, assumptions and judgments that
can have a significant impact on our revenues, loss from
operations and net loss, as well as on the value of certain
assets and liabilities on our consolidated balance sheet. We
believe that there are several accounting policies that are
critical to an understanding of our historical and future
performance, as these policies affect the reported amounts of
revenues, expenses and significant estimates and judgments
applied by management. While there are a number of accounting
policies, methods and estimates affecting our financial
statements, areas that are particularly significant include:



| |   |                                                                            
| | - | ---------------------------------------------------------------------------
| |  | revenue recognition;                                                       
|
| |  | estimating the allowance for doubtful accounts;                            
|
| |  | assessment of the probability of the outcome of
    our current litigation;
|
| |  | accounting for income taxes; and                                           
|
| |  | valuation of long-lived assets, intangible assets
    and goodwill.        

Revenue Recognition.Our revenue recognition policy is
defined in Note 2, Summary of Significant Accounting
Policies, to our consolidated financial statements included in
Item 15 of this Annual Report on Form 10-K.

The majority of our software license transactions
are executed with our standard software license agreement. From
time to time, customers may request that we amend certain terms
of our standard agreement or negotiate a software license
contract separate from our standard software license agreement.
While these software license contracts are few in number in
relation to our standard license agreement, these contracts may
be material in relation to our total revenues. Negotiation of
contractual terms with customers may be protracted, and any
deviation from our standard terms can impact our ability to
recognize revenues.

Several factors have required us to defer
recognition of revenue for a significant period of time after
entering into a license agreement. These factors include:



| |   |                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | contractual requirements to deliver either
    unspecified additional products or specified product upgrades
    for which we do not have vendor-specific objective evidence of
    fair value;
|
| |  | payment terms due after our normal payment terms;                                                                                                                                              
|
| |  | contracts in which collectibility from the
    customer is not reasonably assured; and                                                                                                         
|
| |  | contracts involving acceptance clauses.                                                                                                                                                        

Our contracts may contain multiple elements or
may require us to develop additional features or functionality
for our customers. In cases where vendor-specific objective
evidence exists for all undelivered elements, we account for the
delivered elements in accordance with the residual method
prescribed by SOP 98-9. This means that we defer revenue
equivalent to the fair value of the undelivered elements until
such time as the element is delivered to the customer. Fair
values for ongoing support obligations are based on separate
sales of support renewals sold to customers or on renewal rates
quoted in the contracts. Fair value of services, such as
training or consulting, is based on the value of stand-alone
sales of these services to customers. To the extent that we do
not have vendor-specific evidence for undelivered contract
elements, revenue is deferred until the undelivered elements are
delivered to the customer.

Our customers may request payment terms beyond
our normal terms. We evaluate the payment terms associated with
each transaction. If a portion of the fee is due after normal
payment terms, which range from 30 days to 180 days
from invoice date for legal customers and 30 days to
120 days for all others, we recognize the revenue on the
payment due date, assuming collection is reasonably assured.

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We assess collectibility based on a number of
factors, including past transaction history, our previous bad
debt experience and the overall credit-worthiness of the
customer. We use various financial reporting and rating services
to review customer financial viability and request, from time to
time, financial statements from our customers. We generally do
not require collateral from our customers, and our bad debt
experience has not been significant in relation to our overall
revenues. If collection is not reasonably assured, revenue is
deferred and recognized at the time collection becomes
reasonably assured, which is generally upon receipt of cash.

Our license arrangements do not generally include
acceptance clauses. However, if an arrangement includes an
acceptance provision, acceptance occurs on the earlier of
receipt of a written customer acceptance or expiration of the
acceptance period.

Substantially all of our customers purchase
support contracts at the time they enter into a license
arrangement, and some customers may request that we provide
training and consulting services. We recognize revenue for
support services ratably over the contract term. Training and
consulting services are billed based on hourly rates, and
generally recognized as revenue as these services are performed.
However, at the time of a transaction, we assess whether any
services included in the arrangement require us to perform
significant work either to alter the underlying software or to
build complex interfaces so that the software performs as
requested. If these services are included as part of an
arrangement, we recognize the entire fee exclusive of the
support services, using the percentage of completion method. We
estimate the percentage of completion based on an estimate of
the total costs estimated to complete the project as a
percentage of the costs incurred to date and the estimated costs
to complete.

We derived a significant portion of our revenues
from resellers of our products under our standard software
license agreement. Revenue on shipments to resellers is
generally recognized when the resellers sell the product to the
end-user customer. We assess the collectibility from resellers
based on factors including past transaction history, previous
bad debt experience and the overall financial condition and
credit worthiness of the reseller. If collection from the
reseller is not reasonably assured, revenue is deferred and
recognized at the time collection becomes reasonably assured,
which is generally upon receipt of cash.

Allowance for Doubtful Accounts.The preparation of our consolidated
financial statements requires management to make estimates and
assumptions that affect the reported amount of assets and
disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts
of revenues and expenses during the reported period.
Specifically, our management must make estimates as to the
overall collectibility of accounts receivable and provide an
allowance for amounts deemed to be uncollectible. Management
specifically analyzes its accounts receivable and historical bad
debt pattern, customer concentrations, customer
credit-worthiness, current economic trends and changes in its
customer payment terms when evaluating the adequacy of the
allowance for doubtful accounts. At December 31, 2002 and
2001, our allowance for doubtful accounts balance, which related
primarily to specific accounts where we believe collection is
not probable and to a lesser extent our historical experience
applied to accounts receivable not specifically reserved, was
$322,000 and $277,000, respectively. These amounts represent 4%
and 3% of total accounts receivable at December 31, 2002
and 2001.

Allowance for Sales Returns.From time to time, a customer may
return to us some or all of the software purchased. While our
software and reseller agreements generally do not provide for a
specific right of return, we may accept product returns in
certain circumstances. To date, sales returns have been
infrequent and not significant in relation to our total
revenues. We make an estimate of our expected returns and
provide an allowance for sales returns in accordance with SFAS
No. 48, Revenue Recognition When Right of Return
Exists. In determining the amount of the allowance required,
management specifically analyzes its revenue transactions,
customer software installation patterns, historical return
pattern, current economic trends and changes in its customer
payment terms when evaluating the adequacy of the allowance for
sales return account. During 2002 and 2001, sales returns as a
percentage of license revenues were approximately 2% and 2%,
respectively, and generally related to revenues recognized in
the prior 90 to 180 days. Our historical estimates of
product returns have approximated actual returns. If our sales
returns experience were to increase by an additional 1% of
license revenues, our allowance for sales returns at
December 31, 2002 would increase

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by approximately $100,000. At December 31,
2002 and 2001, our allowance for sales return account was
$191,000 and $142,000, respectively.


Litigation.We are
the target of several securities class action complaints and
other litigation. Because of uncertainties related to both the
amount and range of loss in these matters, our management is
unable to make a reasonable estimate of the liability that could
result from unfavorable outcomes in these actions. As additional
information becomes available, we will assess the potential
liability related to our pending litigation and may revise our
estimates. Any such assessments and estimation could materially
impact our consolidated results of operations and financial
position.

Accounting for Income Taxes.As part of the process of preparing
our consolidated financial statements, we are required to
estimate our income tax liability in each of the jurisdictions
in which we do business. This process involves estimating our
actual current tax expense together with assessing temporary
differences resulting from differing treatment of items, such as
deferred revenues, for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which
are included in our consolidated balance sheet. We must then
assess the likelihood that these deferred tax assets will be
recovered from future taxable income and, to the extent we
believe that recovery is not more likely than not or unknown, we
must establish a valuation allowance.

Significant management judgment is required in
determining our provision for income taxes, our deferred tax
assets and liabilities and any valuation allowance recorded
against our deferred tax assets. At December 31, 2002, we
have recorded a full valuation allowance of $12.2 million
against our deferred tax assets, due to uncertainties related to
our ability to utilize our deferred tax assets, primarily
consisting of certain net operating losses carried forward. The
valuation allowance is based on our estimates of taxable income
by jurisdiction and the period over which our deferred tax
assets will be recoverable.

Valuation of Long-lived Assets, Intangible
Assets and Goodwill.We assess the
impairment of long-lived assets and intangible assets whenever
events or changes in circumstances indicate that the carrying
value of these assets may not be recoverable. Factors we
consider important that could trigger impairment include, but
are not limited to, the following:



| |   |                                                                                               
| | - | ----------------------------------------------------------------------------------------------
| |  | significant underperformance relative to
    historical or projected future operating results;
|
| |  | changes in the use of the assets or the strategy
    for our overall business;                
|
| |  | negative industry or general economic trends;                                                 
|
| |  | significant decline in our stock price for a
    sustained period; and                        
|
| |  | our market capitalization relative to net book
    value.                                     

When one or more of the above indicators of
impairment occurs we estimate the value of property and
equipment, long-lived assets and intangible assets to determine
whether there is impairment. We measure any impairment based on
a projected discounted cash flow method, which requires us to
make several estimates including the estimated cash flows
associated with the asset, the period over which these cash
flows will be generated and a discount rate commensurate with
the risk inherent in our business model. These estimates are
subjective. If we made different estimates, it could materially
impact the estimated fair value of these assets and the
conclusions we reached regarding any impairment. To date, we
have not identified any triggering events that would require us
to perform this analysis.

We are required to perform an impairment review
of goodwill on at least an annual basis. This impairment review
involves a two-step process as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Step 1
    We compare the fair value of our reporting units to their
    carrying value, including goodwill. For each reporting unit for
    which the carrying value, including goodwill, exceeds the
    units fair value, we move on to Step 2. If a
    units fair value exceeds the carrying value, no further
    work is performed and no impairment charge is necessary.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Step 2
    We perform an allocation of the fair value of the reporting unit
    to its identifiable tangible and non-goodwill intangible assets
    and liabilities. This derives an implied fair value for the
    reporting units goodwill. We then compare the implied fair
    value of the reporting units goodwill with the carrying
    amount of the reporting units goodwill. If the carrying
    amount of the reporting units goodwill is greater than the
    implied fair value of its goodwill, an impairment charge would
    be recognized for the excess.

We have determined that we have one reporting
unit. We performed Step 1 of the goodwill impairment
analysis required by SFAS No. 142 as of January 1,
2002. We compared the carrying value of total stockholders
equity to our market capitalization and concluded that goodwill
was not impaired, as our market capitalization exceeded total
stockholders equity, including goodwill. Accordingly,
Step 2 was not performed. We also performed our annual
analysis of goodwill on October 1, 2002 and concluded that
goodwill was not impaired as our market capitalization exceeded
our total stockholders equity. We will continue to test
for impairment on an annual basis and on an interim basis if an
event occurs or circumstances change that would more likely than
not reduce the fair value of our reporting unit below its
carrying amount. Also, see Note 2 and Note 4 of Notes to
Consolidated Financial Statements.

Factors That May Impact Future Operating
Results

We
have incurred losses throughout our operating history and may
not be able to achieve profitability.

We have incurred operating losses on a quarterly
and annual basis throughout our history. As of December 31,
2002, we had an accumulated deficit of $45.5 million. We
must increase our revenues to achieve profitable operations and
positive cash flow. If our revenues do not grow, we will not be
profitable. In fact, our revenues may decline over corresponding
periods resulting in greater operating losses and significant
negative cash flows.

Our
future success depends on our ability to continue to sell to law
firms and other professional service firms.

We derived 71%, 79% and 77% of our license
revenues for the year ended December 31, 2002, 2001 and
2000, respectively, from sales to law firms and professional
service firms. In order for us to sustain and grow our business,
we must continue to successfully sell our software products and
services into this vertical market. Failure to successfully sell
to law firms and professional service firms will have a
significant and adverse affect on our consolidated financial
condition and results of operation.

If
we do not expand sales of our products to customers other than
professional service firms, we may not be able to grow our
revenues and our operating results will suffer.

Our future success is dependent on our ability to
sell software licenses and services to customers outside of
professional service firms, particularly large multi-national
corporations in financial services, manufacturing and
government. To sell to multi-national corporations, we must
devote time and resources to hire and train sales employees to
work in industries other than legal and professional service
firms. Even if we are successful in hiring and training sales
teams, customers in other industries may not perceive the value
in or require our collaborative content management software
applications.

Our
product has a long and unpredictable sales cycle, which makes it
difficult to forecast our future results and may cause our
operating results to vary significantly.

The period between initial contact with a
prospective customer and the licensing of our application suite
varies and can range from three to more than twelve months.
Additionally, our sales cycle is long and complex as customers
consider a number of factors before committing to purchase our
application suite. Factors considered by customers when
evaluating our application suite include product benefits, cost
and time of implementation, return on investment, ability to
operate with existing and future computer systems and the
ability to accommodate increased transaction volume and product
reliability. Customer evaluation, purchasing and budgeting
processes vary significantly from company to company. As a
result, we spend significant time and resources informing
prospective customers about our software products, which may not
result in a

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completed transaction and may negatively impact
our operating margins. Even if iManage WorkSite has been chosen
by the customer, completion of the sales transaction is subject
to a number of factors, which make our quarterly revenues
difficult to forecast. These factors include but are not limited
to:




| |   |                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Because the licensing of our software products is
    often an enterprise-wide decision by our customers that involves
    many factors, our ability to license our product may be impacted
    by changes in the strategic importance of collaborative content
    management projects to our customers, budgetary constraints or
    changes in customer personnel.
|
| |  | A customers internal approval and
    expenditure authorization process can be difficult and time
    consuming. Delays in approvals, even after selection of a
    vendor, could impact the timing and amount of revenues
    recognized in a quarterly period.                                                                                                    
|
| |  | Changes in our sales incentive plans may have an
    unpredictable impact on our sales cycle and contracting
    activities.                                                                                                                                                                                                                                         
|
| |  | The number, timing and significance of
    enhancements to our software products and the introduction of
    new software by our competitors and us may affect
    customer-purchasing decisions.                                                                                                                                                                    

Specifically, throughout 2002, we continued to
experience lengthening sales cycles due to increased
organizational reviews by sales prospects of software purchases,
regardless of transaction size. A continued lengthening in sales
cycles and our inability to predict these trends could result in
future revenue shortfalls from expectations, which would have a
material impact on our operating results and, correspondingly,
our stock price.

Declining
economic conditions and significant world events, such as the
events of September 11, 2001, and the threat of war have
affected and could continue to negatively impact our revenues
and profits.

Our revenue growth and profitability depend on
the overall demand for collaborative content management software
platforms and applications. The recession in the United States
and declining economic conditions worldwide have, and may
continue to, resulted in cutbacks by our customers in the
purchase of our software products and services, longer sales
cycles and lower average selling prices and postponed or
canceled orders. Specifically, we experienced a shortfall in our
anticipated revenues for the quarter ended June 30, 2002,
which we believe was in part due to slowing information
technology spending in reaction to declining economic
conditions. To the extent that the current economic downturn
continues or increases in severity, we believe demand for our
products and services, and therefore future revenues, could be
further impacted.

Our financial results could also be significantly
impacted by world events. Specifically, our revenues for the
third quarter ended September 30, 2001 were negatively
impacted by delays in customer orders and longer sales cycles
resulting from terrorist attacks on the World Trade Center
buildings and the Pentagon. Our revenues and financial results
could be negatively impacted to the extent similar events occur
or are anticipated to occur, such as the war in the Middle East.

Our
revenues will decline significantly if the market does not
continue to accept our iManage suite of products.

We derive substantially all of our license and
associated service revenues from the WorkSite suite of products.
We currently expect to continue to derive a majority of our
revenues from these products. If the market does not continue to
accept our products, our revenues will decline significantly and
negatively affect our operating results. Factors that may affect
the market acceptance of these products include the performance,
price and total cost of ownership of our products and the
availability, functionality and price of competing products and
technologies. Many of these factors are beyond our control.

In addition, a significant portion of our
revenues is derived from annual support contracts purchased by
our existing customers. If our customers do not renew their
support contracts or our current renewal rate experience
declines, our revenues will decline and negatively affect our
operating results.

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| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our costs are relatively fixed in the near
    term. Therefore, any shortfall in anticipated revenues will
    adversely affect our operating results.

Because our operating expenses are based on our
expectations for future revenues and are relatively fixed in the
short term, any revenue shortfall below expectations, such as
the shortfall we experienced for the quarter ended June 30,
2002, will have an immediate and significant adverse effect on
our consolidated results of operations and financial condition.



| |                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Contractual issues may arise during the
    negotiation process that may delay the anticipated closure of
    license transactions and our ability to recognize revenue as
    anticipated.

Because our solution is mission-critical to many
of our customers, the process of contractual negotiation may be
protracted. The additional time needed to negotiate mutually
acceptable terms that culminate in an agreement to license our
products could extend the sales cycle.

Several factors may also require us to defer
recognition of license revenue for a significant period of time
after entering into a license agreement, including instances in
which we are required to deliver either unspecified additional
products or specified product upgrades for which we do not have
vendor-specific objective evidence of fair value. While we have
a standard software license agreement that provides for revenue
recognition provided that delivery has taken place,
collectibility from the customer is reasonably assured and
assuming no significant future obligations or customer
acceptance rights exist, customer negotiations and revisions to
these terms could impact our ability to recognize revenue at the
time of delivery.

In addition, slowdowns or variances from internal
expectations in our quarterly license contracting activities may
impact our service offerings and may result in lower revenues
from our customer training, consulting services and customer
support organizations. Our ability to maintain or increase
service revenues is highly dependent on our ability to increase
the number of license agreements we enter into with customers.



| |                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Delays in the signing of one or more large
    license agreements or the loss of a significant customer order
    could have a material impact on our revenues and results of
    operations.

The contract value of individual license
agreements can vary significantly. Because a substantial portion
of our quarterly revenues is derived from a relatively small
number of customers, delays in the signing of one or more large
license agreements or the loss of a significant customer order
could have a material impact on our revenues and results of
operations.



| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | Lack of quarterly bookings linearity and
    seasonality make it difficult for us to predict operating
    results.

A significant portion of our license agreements
are completed within the final few weeks of each quarter as many
customers delay completion of a transaction until the end of a
quarter to extract more favorable terms. In addition, our sales
cycle is impacted by seasonal factors. Specifically, our
historical experience indicates that our sales process and
revenues are negatively impacted by the summer season in the
third quarter. Additionally, our consulting services are
negatively impacted in the fourth quarter due to the holiday
season.



| |                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Competition from providers of software
    enabling content and collaboration management among businesses
    is increasing, which could cause us to reduce our prices and
    result in reduced gross margins or loss of market
    share.

The market for products that enable companies to
manage and share content and collaborate throughout an extended
enterprise is new, highly fragmented, rapidly changing and
increasingly competitive. We expect competition to continue to
intensify, which could result in price reductions for our
products, reduced gross

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margins, increased sales cycles and loss of
market share, any of which would have a material adverse effect
on our business and financial condition. Our current competitors
include:




| |   |                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | companies addressing segments of our market
    including Documentum, Inc., FileNet Corporation, Hummingbird
    Ltd., Intraspect Software, Inc., Microsoft Corporation, Open
    Text Corporation; Stellent, Inc. and NetDocuments, Inc.;
|
| |  | Web content management companies such as Vignette
    Corporation;                                                                                                                                                                        
|
| |  | enterprise Web portal companies such as Plumtree;                                                                                                                                                                                         
|
| |  | intranet and groupware companies such as IBM,
    Microsoft Corporation, and Novell, Inc.; and                                                                                                                                            
|
| |  | in-house development efforts by our customers and
    partners.                                                                                                                                                                           

When compared to us, many of these competitors
have longer operating histories, greater name recognition,
larger customer bases and significantly greater financial
resources. This may place us at a disadvantage in responding to
our competitors strategies, technological advances,
advertising campaigns, strategic partnerships and other
initiatives. Competitive pressures and our perceived viability
in this market may make it difficult for us to acquire and
retain customers, which could reduce our revenues and result in
increased operating losses. Competitive pressures may also
increase with the consolidation of competitors within our
market, such as the recently announced acquisition of eRoom
Technology, Inc. by Documentum, Inc. and the acquisition of
Epicentric, Inc. by Vignette Corporation.

In recent quarters, some of our competitors have
drastically reduced their price proposals in an effort to
strengthen their bids and expand their customer bases. Such
tactics, even if unsuccessful, could delay decisions by some
customers that would otherwise purchase the iManage solution and
may reduce the ultimate selling price of our software and
services.



| |                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our revenues from international operations
    are a significant part of our overall operating results. We may
    not successfully develop these international markets, which
    could harm our business.

We have established sales offices in
international locations. For the year ended December 31,
2002, revenues from these international operations constituted
approximately 20% of our total revenues. We anticipate devoting
significant resources and management attention to expanding
international opportunities, which subjects us to a number of
risks including:



| |   |                                                                                            
| | - | -------------------------------------------------------------------------------------------
| |  | greater difficulty in staffing and managing
    foreign operations;                        
|
| |  | expenses associated with foreign operations and
    compliance with applicable laws;       
|
| |  | changes in a specific countrys or
    regions political or economic conditions;          
|
| |  | expenses associated with localizing our product
    for foreign countries;                 
|
| |  | differing intellectual property rights;                                                    
|
| |  | protectionist laws and business practices that
    favor local competitors;                
|
| |  | longer sales cycles and collection periods or
    seasonal reductions in business activity;
|
| |  | multiple, conflicting and changing governmental
    laws and regulations; and              
|
| |  | foreign currency restrictions and exchange rate
    fluctuations.                          



| |                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------
| | If we do not maintain and expand our
    reseller network, we may not be able to grow our revenues and
    our operating results will suffer.

We derived 50%, 43% and 54% of our license
bookings from resellers of our application suite for the year
ended December 31, 2002, 2001 and 2000. Therefore, our
future success depends on our ability to attract, retain,
motivate and train resellers of our products. Similarly, the
financial failure of any of our resellers could result in lower
revenues and the write-off of amounts due from the failed
reseller.

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| |                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our failure to develop and maintain strong
    relationships with consulting and system integrator firms and
    our customers would harm our ability to market our application
    suite, which could reduce future revenues and increase our
    expenses.

A portion of our revenues is influenced by the
recommendation of our collaborative content management software
platform and applications by systems integrators, consulting
firms and other third parties that help deploy our application
suite for our customers. Losing the support of these third
parties may limit our ability to penetrate our existing and
potential markets. These third parties are under no obligation
to recommend or support our application suite and could
recommend or give higher priority to the products and services
of other companies or to their own products. Our inability to
gain the support of consulting and systems integrator firms or a
shift by these companies toward favoring competing products
could negatively affect our software license and service
revenues.

Some systems integrators also engage in joint
marketing and sales efforts with us. If our relationship with
these systems integrators fails, we will have to devote
substantially more resources to the sales and marketing of our
application suite. In many cases, these parties have extensive
relationships with our existing and potential customers and
influence the decisions of these customers. A number of our
competitors have longer and more established relationships with
these systems integrators than we do and, as a result, these
systems integrators may be more likely to recommend
competitors products and services and increase our
expenses.

We may also be unable to grow our revenues if we
do not successfully obtain leads and referrals from our
customers. If we are unable to maintain these existing customer
relationships or fail to establish additional relationships, we
will be required to devote substantially more resources to the
sales and marketing of our products. As a result, we are
dependent on the willingness of our customers to provide us with
introductions, referrals and leads. Our current customer
relationships do not afford us any exclusive marketing and
distribution rights. In addition, our customers may terminate
their relationship with us at any time, pursue relationships
with our competitors or develop or acquire products that compete
with our products. Even if our customers act as references and
provide us with leads and introductions, we may not penetrate
additional markets or grow our revenues.



| |                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our failure to develop and maintain strong
    relationships with consulting and system integrator firms would
    harm our ability to implement our application
    suite.

Consulting and system integrators assist our
customers with the installation and deployment of our
application suite, in addition to competitive products, and
perform integration of computer systems and software. If we are
unable to develop and maintain relationships with system
integrators, we would be required to hire additional personnel
to install and maintain our application suite, which would
result in higher expense levels and delays in our ability to
recognize revenue.



| |                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------
| | If the emerging market for collaborative
    content management software does not develop as quickly as we
    expect, our business will suffer.

The market for our collaborative content
management software platform and applications has only recently
begun to develop, is rapidly evolving and will likely have an
increasing number of competitors. We cannot be certain that a
viable market for our products will emerge or be sustainable. If
the collaborative content management software market fails to
develop, or develops more slowly than expected, demand for our
products will be less than anticipated and our business and
operating results would be seriously harmed.

Furthermore, to be successful in this emerging
market, we must be able to differentiate our business from our
competitors through our product and service offerings and brand
name recognition. We may not be successful in differentiating
our business or achieving widespread market acceptance of our
products and services. In addition, enterprises that have
already invested substantial resources in other methods of
managing their content and collaborative process may be
reluctant or slow to adopt a new approach that may replace,
limit or compete with their existing systems.

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| |                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If our efforts to enhance existing products
    and introduce new products in a timely manner are not
    successful, we may not be able to generate demand for our
    products.

Our future success depends on our ability to
provide a comprehensive collaborative content management
software solution. To provide this comprehensive solution, we
must continually develop and introduce high quality,
cost-effective products as well as product enhancements on a
timely basis. If the market does not accept our new products,
our business will suffer and our stock price will likely fall.

Our WorkSite server for Windows-based operating
environments, and our compatible applications for this server,
became commercially available in June 2001. In addition, the
Java-based iManage WorkSite Server MP that supports Windows,
Solaris and Linux operating environments, and a compatible
version of the iManage WorkSite Web application, became
commercially available in the first quarter of 2002. Enhanced
features and functionality are expected to be developed, but
delays in introducing these enhancements would have a material
adverse effect on our business and financial condition.

In the past, we have experienced delays in the
commencement of commercial shipments of enhancements to our
application suite. To date, these delays have not had a material
impact on our revenues. If we are unable to ship or implement
new products or enhancements to our application suite when
planned or at all, or fail to achieve timely market acceptance
of these new products or enhancements, we may suffer lost
revenues. Our future operating results will depend on demand for
our application suite, including new and enhanced releases that
are subsequently introduced.



| |                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If our products cannot scale to meet the
    demands of tens of thousands of concurrent users, our targeted
    customers may not license our solutions, which will cause our
    revenue to decline.

Our strategy is to target large organizations
that require our collaborative content management software
solution because of the significant amounts of information and
content that they generate and use. For this strategy to
succeed, our software products must be highly scalable and
accommodate tens of thousands of concurrent users. If our
products cannot scale to accommodate a large number of
concurrent users, our target markets will not accept our
products and our business and operating results will suffer.

While we have tested the scalability of our
products in simulations, we have not observed the performance of
our products in the context of a large-scale customer
implementation. If our customers cannot successfully implement
large-scale deployments, or if they determine that our products
cannot accommodate large-scale deployments, our customers will
not license our solutions, and this will materially adversely
affect our financial condition and operating results.



| |                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If our product does not operate with a wide
    variety of hardware, software and operating systems used by our
    customers, our revenues would be harmed.

We currently serve a customer base that uses a
wide variety of constantly changing hardware, software
applications and operating systems. For example, we have
designed our products to work with databases and servers
developed by Microsoft Corporation, Sun Microsystems, Inc.,
Oracle Corporation and IBM and software applications including
Microsoft Office, WordPerfect, Lotus Notes and Novell GroupWise.
We must continually modify and enhance our software products to
keep pace with changes in computer hardware and software and
database technology as well as emerging technical standards in
the software industry. We further believe that our application
suite will gain broad market acceptance only if it can support a
wide variety of hardware, software applications and systems. If
our product is unable to support a variety of these products,
our revenues would be harmed. Additionally, customers could
delay purchases of our application suite until they determine
how our products will operate with these updated platforms or
applications.

Currently, our iManage WorkSite suite of products
supports Windows, Solaris and Linux operating environments. If
other platforms become more widely used, we could be required to
convert our server application products to those platforms. We
may not succeed in these efforts, and even if we do, potential
customers may not choose to license our product.

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Defects
in our software products could diminish demand for our
products.

Our software products are complex and may contain
errors that may be detected at any point in the life cycle of
the product. We cannot assure you that, despite testing by us,
our implementation partners and our current and potential
customers, errors will not be found in our products or releases
after commencement of commercial shipment, resulting in loss of
revenues, delay in market acceptance and sales, product returns,
diversion of development resources, injury to our reputation or
increased service and warranty costs.

Errors in our application suite may be caused by
defects in third-party software incorporated into our
application suite. If so, we may not be able to fix these
defects without the cooperation of these software providers.
Since these defects may not be as significant to our software
providers as they are to us, we may not receive the rapid
cooperation that we may require. We may not have the contractual
right to access the source code of third-party software and,
even if we access the source code, we may not be able to fix the
defect.

Since our customers use our application suite for
critical business applications, any errors, defects or other
performance problems of our application suite could result in
damage to the businesses of our customers. Consequently, these
customers could delay or withhold payment to us for our software
and services, which could result in an increase in our provision
for doubtful accounts or an increase in collection cycles for
accounts receivable, both of which could disappoint investors
and result in a significant decline in our stock price. In
addition, these customers could seek significant compensation
from us for their losses. Even if unsuccessful, a product
liability claim brought against us would likely be time
consuming and costly and harm our reputation, and thus our
ability to license new customers. Even if a suit is not brought,
correcting errors in our application suite could increase our
expenses.



| |                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to respond to rapid market
    changes due to changing technology and evolving industry
    standards, our future success will be adversely
    affected.

The market for our products is characterized by
rapidly changing technology, evolving industry standards and
product introductions and changes in customer demands. Our
future success will depend to a substantial degree on our
ability to offer products and services that incorporate leading
technology and respond to technological advances and emerging
industry standards and practices on a timely and cost-effective
basis. You should be aware that (i) our technology or
systems may become obsolete upon the introduction of alternative
technologies, such as products that better manage various types
of content and enable collaboration; and (ii) we may not
have sufficient resources to develop or acquire new technologies
or to introduce new products or services capable of competing
with future technologies or service offerings.



| |                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------
| | Our products may lack essential
    functionality if we are unable to obtain and maintain licenses
    to third-party software and applications.

We rely on software that we license from third
parties, including software that is integrated with our
internally developed software and used in our products to
perform key functions. For example, we license Application
Builder from Autonomy, Inc., Search 97® from Verity,
Inc. and Outside In Viewer Technology® and Outside In HTML
Export® from Stellent, Inc. The functionality of our
iManage WorkSite suite products, therefore, depends on our
ability to integrate these third-party technologies into our
products. Furthermore, we may license additional software from
third parties in the future to add functionality to our
products. If our efforts to integrate this third-party software
into our products are not successful, our customers may not
license our products and our business will suffer.

In addition, we would be seriously harmed if the
providers from whom we license software ceased to deliver and
support reliable products, enhance their current products or
respond to emerging industry standards. Moreover, the
third-party software may not continue to be available to us on
commercially reasonable terms or at all. Each of these license
agreements may be renewed only with the other partys
written consent. The loss of, or inability to maintain or obtain
licensed software, could result in shipment delays or
reductions. Furthermore, we may be forced to limit the features
available in our current or future product offerings. Either
alternative could seriously harm our business and operating
results.

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| |                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Legislative actions, higher insurance cost
    and potential new accounting pronouncements are likely to impact
    our future financial position and results of
    operations.

There have recently been significant regulatory
changes, including the Sarbanes-Oxley Act of 2002, and there may
be potential new accounting pronouncements or regulatory rulings
that will have an impact on our future financial position and
results of operations. The Sarbanes-Oxley Act of 2002 and other
rule changes and proposed legislative initiatives following
several highly publicized corporate accounting and corporate
governance failures are likely to increase general and
administrative costs. In addition, insurance companies
significantly increased insurance rates as a result of high
claims over the past year, and our rates for our various
insurance policies increased substantially. Further, proposed
initiatives may result in changes in accounting rules, including
legislative and other proposals to account for employee stock
options as an expense. These and other potential changes could
materially increase the expenses we report under accounting
principles generally accepted in the United States of America
and adversely affect our operating results.



| |                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are the target of several securities
    class action complaints and other litigation, which could result
    in substantial costs and divert management attention and
    resources.

Beginning in July 2001, several securities class
action complaints were filed against the Company, the
underwriters of the Companys initial public offering, its
directors and certain officers in the United States District
Court for the Southern District of New York. The cases were
consolidated and the litigation is now captioned as In re
iManage, Inc. Initial Public Offering Securities Litigation,
Civ. No. 01-6277 (SAS) (S.D.N.Y.), related to In re Initial
Public Offering Securities Litigation, 21 MC 92 (SAS)
(S.D.N.Y.). On or about April 19, 2002, plaintiffs served
an amended complaint. The amended complaint is brought
purportedly on behalf of all persons who purchased the
Companys common stock from November 17, 1999 through
December 6, 2000. It names as defendants the Company; five
of the Companys present and former officers; and several
investment banking firms that served as underwriters of the
Companys initial public offering. The complaint alleges
liability under Sections 11 and 15 of the Securities Act of
1933 and Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 on the grounds that the registration
statement for the offering did not disclose that: (1) the
underwriters had agreed to allow certain customers to purchase
shares in the offering in exchange for excess commissions paid
to the underwriters; and (2) the underwriters had arranged
for certain customers to purchase additional shares in the
aftermarket at predetermined prices. The amended complaint also
alleges that false analyst reports were issued. Plaintiffs seek
unspecified monetary damages, attorneys fees and other
costs.

The Company is aware that similar allegations
have been made in lawsuits challenging over 300 other public
offerings conducted in 1999, 2000 and 2001. All of these cases
have been consolidated for pretrial purposes before Judge Shira
A. Scheindlin of the Southern District of New York. On
July 15, 2002, the Company and its related individual
defendants (as well as the other issuers named as defendants)
filed a motion to dismiss. Subsequently, the individual
defendants stipulated with plaintiffs to dismissal from the case
without prejudice, subject to a tolling agreement. On
February 19, 2003, the Court ruled on the motions to
dismiss. The Court denied the motions to dismiss claims under
the Securities Act of 1933 in all but 10 of the cases, including
the case involving the Company. The Court denied the motion to
dismiss the claim under Section 10(a) of the Securities
Exchange Act of 1934 against the Company and 184 other issuer
defendants on the basis that the amended complaints in these
cases alleged that the respective issuers had acquired companies
or conducted follow-on offerings after their initial public
offerings.

The Company and certain executive officers are
defendants in a complaint filed by a former employee alleging
ownership of 18,000 shares of the Companys common
stock that were never issued. The complaint alleges, among other
claims, breach of contract, and the plaintiff is seeking damages
of approximately $700,000 plus punitive damages of
$10 million. While the Company believes that the claims are
without merit and intends to vigorously defend the matter, there
can be no assurances that this matter will be resolved without
costly litigation or in a manner that is not adverse to the
Companys financial position, results of operation or cash
flows.

29



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##### Table of Contents



While we believe that the allegations against our
officers/ directors and us are without merit, and intend to
contest them vigorously, there can be no assurance that this
matter will be resolved without costly litigation or in a manner
that is not adverse to our consolidated financial position,
results of operations or cash flows.



| |                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to protect our
    intellectual property or become subject to intellectual property
    infringement claims, we may lose a valuable asset or incur
    costly and time-consuming litigation.

Our success depends in part on the development
and protection of the proprietary aspects of our technology as
well as our ability to operate without infringing on the
proprietary rights of others. To protect our proprietary
technology, we rely primarily on a combination of trade secret,
copyright, trademark and patent laws, as well as confidentiality
procedures and contractual restrictions.

To date, we have only one issued patent. We
presently have additional United States and foreign patent
applications pending. It is possible that some or all of the
patents that we have applied for will not be issued, and even if
issued, that some or all may be successfully defended. It is
also possible that we may not develop proprietary products or
technologies that are patentable, that any patent issued to us
may not provide us with any competitive advantages or that the
patents of others will harm our ability to do business.

Despite our efforts to protect our proprietary
rights and technology, unauthorized parties may attempt to copy
aspects of our products or obtain the source code to our
software or use other information that we regard as proprietary
or could develop software competitive to ours. Our means of
protecting our proprietary rights may not be adequate, and our
competitors may independently develop similar technology or
duplicate our product. Litigation may be necessary in the future
to enforce our intellectual property rights, to protect our
trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of
infringement or invalidity. Any such resulting litigation could
result in substantial costs and diversion of resources that
could have a material adverse effect on our business, operating
results and financial condition.

It is possible that in the future, a third party
may bring suit claiming that we or our current or future
products infringe their patents, trade secrets or copyrights.
Any claims, with or without merit, could be costly and
time-consuming to defend, divert our managements attention
or cause product delays. We have only one patent that we could
use defensively against any company bringing such a claim. If
our product was found to infringe a third partys
proprietary rights, we could be required to enter into royalty
or licensing agreements to be able to sell our product. Royalty
and licensing agreements, if required, may not be available on
terms acceptable to us, if at all, which could harm our business.



| |                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------
| | We may be unable to retain our key
    personnel and attract additional qualified personnel to operate
    and expand our business.

Our success depends largely on the skills,
experience and performance of the members of our senior
management and other key personnel, such as Mahmood M. Panjwani,
our President and Chief Executive Officer, Rafiq R. Mohammadi,
our Chief Technology Officer, and Joseph S. Campbell, our Chief
Operating Officer. We may not be successful in attracting or
retaining qualified personnel in the future. None of our senior
management or other key personnel is bound by an employment
agreement setting forth a term of employment. If we lose one or
more of these key employees, our business and operating results
could be seriously harmed. In addition, our future success will
depend largely on our ability to continue attracting and
retaining highly skilled personnel. Like other high technology
companies, we face intense competition for qualified personnel.



| |                                                                                               
| | ----------------------------------------------------------------------------------------------
| | Our revenues will not increase if we fail
    to successfully manage our growth and expansion.

Our historical growth has placed, and is likely
to continue to place, a significant strain on our limited
resources. To be successful, we will need to implement
additional management information systems, improve our
operating, administrative, financial and accounting systems and
controls, train new employees and maintain close coordination
among our executive, research and development, finance,
marketing, sales and operations organizations. Any failure to
manage growth effectively could seriously harm our business and
operating results.

30



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##### Table of Contents





| |                                                                                                         
| | --------------------------------------------------------------------------------------------------------
| | We may be unable to meet our future capital
    requirements, which would limit our ability to
    grow.

We may need to seek additional funding in the
future. We do not know if we will be able to obtain additional
financing on favorable terms, if at all. In addition, if we
issue equity securities, stockholders may experience additional
dilution or the new equity securities may have rights,
preferences or privileges senior to those of existing holders of
our common stock. If we cannot raise funds on acceptable terms,
if and when needed, we may not be able to develop or enhance our
products, take advantage of future opportunities or respond to
competitive pressures or unanticipated requirements, which could
seriously harm our business.



| |                        
| | -----------------------
| | Intangible assets risk.

We have $3.4 million in goodwill, $104,000
of intangible assets and $1.7 million of prepaid license
royalties. At December 31, 2002, we believe our goodwill,
intangible assets and prepaid license royalties are recoverable.
However, changes in the economy, the business in which we
operate and our own relative performance could change the
assumptions used to evaluate the recoverability of these assets.
We must continue to monitor those assumptions and their effect
on the estimated recoverability of our intangible assets. Any
adverse change in our recoverability assumptions could result in
the writing down of our intangible assets, which could
materially impact our consolidated results of operation and
financial position.



| |                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------
| | There may be sales of a substantial amount
    of our common stock in the near future that could cause our
    stock price to fall.

Some of our current stockholders hold a
substantial number of shares, which they are able to sell in the
public market, subject to restrictions under the securities laws
and regulations. Sales of a substantial number of shares of our
common stock within a short period of time could cause our stock
price to fall. Moreover, three of our executive officers have
established systematic plans under which they will sell a
pre-determined number of shares per quarter, provided that a
certain minimum price is obtained. These plans may be perceived
poorly in the market, and together with the increased number of
shares being made available on the market, these plans may have
an adverse effect on our share price. Executive officers and
board members may also sell stock outside of the systematic plan
at their election. In addition, a fall in our stock price could
impair our ability to raise capital through the sale of
additional stock.

Recent Accounting Pronouncements

In October 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which requires that long-lived assets to
be disposed of by sale 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. SFAS
No. 144 also expands the reporting of discontinued
operations to include components of an entity that have been or
will be disposed of rather than limiting such discontinuance to
a segment of a business. SFAS No. 144 excludes from the
definition of long-lived assets goodwill and other intangibles
that are not amortized in accordance with SFAS No. 142.
SFAS No. 144 is effective for our year beginning
January 1, 2003. The adoption of SFAS No. 144 is not
expected to have a material impact on our consolidated financial
statements.

In May 2001, the FASB issued SFAS No. 145,
which rescinds SFAS No. 4, Reporting Gains and Losses
from Extinguishment of Debt, SFAS No. 44, Accounting
for Intangible Assets of Motor Carriers, and SFAS
No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. SFAS No. 145 also amends
SFAS No. 13, Accounting for Leases, to eliminate an
inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease
modifications that have economic effects that are similar to
sale-leaseback transactions. As a result of the rescission of
SFAS No. 4 and SFAS No. 64, the criteria in APB
No. 30, Reporting the Results of Operations, will be
used to classify gains and losses from debt extinguishment.
SFAS 145 also amends other existing authoritative
pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed
conditions. SFAS No. 145 is effective for our year
beginning January 1, 2003 with the exception of the lease
provisions of the

31



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##### Table of Contents



statement that are effective for leases entered
into after May 15, 2002. The adoption of SFAS No. 145
is not expected to have a material impact on our consolidated
financial statements.


In June 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities, which addresses financial accounting and
reporting for costs associated with exit or disposal activities,
and nullifies Emerging Issues Task Force Issue No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)which previously governed
the accounting treatment for restructuring activities. SFAS
No. 146 applies to costs associated with an exit activity
that does not involve an entity newly acquired in a business
combination or with a disposal activity covered by SFAS
No. 144. Those costs include, but are not limited to, the
following:



| |                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) termination benefits provided to current
    employees who are involuntarily terminated under the terms of a
    benefit arrangement that, in substance, is not an ongoing
    benefit arrangement or an individual deferred-compensation
    contract;
|
| | (ii) costs to terminate a contract that is
    not a capital lease; and                                                                                                                                                                                    
|
| | (iii) costs to consolidate facilities or
    relocate employees.                                                                                                                                                                                           

SFAS No. 146 does not apply to costs
associated with the retirement of long-lived assets covered by
SFAS No. 143. SFAS No. 146 will be applied
prospectively and is effective for exit or disposal activities
initiated after December 31, 2002. Early adoption is
permitted. The adoption of SFAS No. 146 is not expected to
have a material impact on our consolidated financial statements.

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure 
an amendment of FASB Statement No.123.SFAS No. 148
provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for
stock-based employee compensation. SFAS No. 148 also
requires that disclosures of the pro forma effect of using the
fair value method of accounting for stock-based employee
compensation be displayed more prominently and in a tabular
format. Additionally, SFAS No. 148 requires disclosure of
the pro forma effect in interim financial statements. The
transition and interim disclosure requirements of SFAS
No. 148 are effective for fiscal years ended and interim
periods beginning after December 15, 2002. We have chosen
to continue to account for stock-based compensation using the
intrinsic value method prescribed in APB Opinion No. 25 and
related interpretations. Accordingly, compensation expense for
stock options is measured as the excess, if any, of the estimate
of the market value of our stock at the date of the grant over
the amount an employee must pay to acquire our stock. We have
adopted the annual disclosure provisions of SFAS No. 148 in
our financial reports for the year ended December 31, 2003
and will adopt the interim disclosure provisions for our
financial report for the quarter ended March 31, 2003. As
the adoption of this standard involves disclosures only, we do
not expect a material impact on our consolidated financial
statements.

In November 2002, the FASB issued FASB
Interpretation (FIN) No. 45,
Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others. FIN No. 45 elaborates on the existing
disclosure requirements for most guarantees and
indemnifications, including loan guarantees such as standby
letters of credit. It also clarifies that at the time a company
issues a guarantee or indemnification, the company must
recognize an initial liability for the fair market value of the
obligations it assumes under that guarantee or indemnification
and must disclose that information in its interim and annual
financial statements. Certain disclosure provisions are
effective for our year ended December 31, 2002. The initial
recognition and measurement provisions of FIN No. 45 apply
on a prospective basis to guarantees and indemnifications issued
or modified after December 31, 2002. We have adopted the
required disclosure provisions of FIN No. 45 as of
December 31, 2002 and are currently assessing the impact of
the remaining requirements on our consolidated financial
statements.

In January 2003, the FASB issued FIN No. 46,
Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51. FIN No. 46 requires
certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the
entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for
the entity to finance its activities

32



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##### Table of Contents



without additional subordinated financial support
from other parties. FIN No. 46 is effective immediately for
all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of FIN
No. 46 must be applied for the first interim or annual
period beginning after June 15, 2003. In addition, FIN
No. 46 requires that we make disclosures in our
consolidated financial statements for the year ended
December 31, 2002 when we believe it is reasonably possible
that we will consolidate or disclose information about variable
interest entities after FIN No. 46 becomes effective. At
this time, we do not believe it is reasonably possible that we
will consolidate or disclose information about variable interest
entities. However, we continue to assess the impact of FIN
No. 46 on our consolidated financial statements.







|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

Our investment portfolio consisted of fixed
income securities of $36.8 million as of December 31,
2002 and $39.8 million as of December 31, 2001. These
investment securities are subject to interest rate risk and will
decline in value if market interest rates increase. If market
interest rates were to increase immediately and uniformly by 10%
from levels as of December 31, 2002 and December 31,
2001, the decline in the fair value of the portfolio would not
be material. Additionally, we have the ability to hold our fixed
income investments until maturity and, therefore, we would not
expect to recognize an adverse impact on income or cash flows. A
summary of our portfolio investments is included in
Note 5  Investments to the consolidated
financial statements.

Quantitative and qualitative disclosure about
market risk is set forth in Managements Discussion
and Analysis of Financial Condition and Results of
Operations under Item 7.






|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

Quarterly Financial Information(Unaudited)

|                                                                         |  |                                          |        |               |  |          |        |           |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------ |  | ---------------------------------------- | ------ | ------------- |  | -------- | ------ | --------- |  | - | ------ | - |  | - | ------ | -
|                                                                         |  |                                         
|                                                                         |  | Three Months Ended                      
|                                                                         |  |                                         
|                                                                         |  | December 31,                             |        | September 30, |  | June 30, |        | March 31,
|                                                                         |  | 2002                                     |        | 2002          |  | 2002     |        | 2002     
|                                                                         |  |                                          |        |               |  |          |        |          
|                                                                         |  |                                         
|                                                                         |  | (In thousands, except per share amounts)
|Total revenues                                                           |  | $                                        | 10,338 |               |  | $        | 9,591  |           |  | $ | 9,620  |   |  | $ | 11,777 |  
|Gross profit                                                             |  |                                          | 8,225  |               |  |          | 7,466  |           |  |   | 7,410  |   |  |   | 9,828  |  
|Total operating expenses                                                 |  |                                          | 9,590  |               |  |          | 10,202 |           |  |   | 10,371 |   |  |   | 10,364 |  
|Loss from operations                                                     |  |                                          | (1,365 | )             |  |          | (2,736 | )         |  |   | (2,961 | ) |  |   | (536   | )
|Net loss                                                                 |  |                                          | (1,222 | )             |  |          | (2,479 | )         |  |   | (2,656 | ) |  |   | (307   | )
|Basic and diluted net loss per common share                              |  |                                          | (0.05  | )             |  |          | (0.10  | )         |  |   | (0.11  | ) |  |   | (0.01  | )
|Shares used in computing basic and diluted net
    loss per common share |  |                                          | 24,110 |               |  |          | 24,161 |           |  |   | 23,961 |   |  |   | 23,706 |  

|                                                                         |  |                                          |        |               |  |          |        |           |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------ |  | ---------------------------------------- | ------ | ------------- |  | -------- | ------ | --------- |  | - | ------ | - |  | - | ------ | -
|                                                                         |  |                                         
|                                                                         |  | Three Months Ended                      
|                                                                         |  |                                         
|                                                                         |  | December 31,                             |        | September 30, |  | June 30, |        | March 31,
|                                                                         |  | 2001                                     |        | 2001          |  | 2001     |        | 2001     
|                                                                         |  |                                          |        |               |  |          |        |          
|                                                                         |  |                                         
|                                                                         |  | (In thousands, except per share amounts)
|Total revenues                                                           |  | $                                        | 11,265 |               |  | $        | 9,113  |           |  | $ | 9,822  |   |  | $ | 8,662  |  
|Gross profit                                                             |  |                                          | 9,438  |               |  |          | 7,271  |           |  |   | 7,984  |   |  |   | 7,036  |  
|Total operating expenses                                                 |  |                                          | 12,365 |               |  |          | 14,637 |           |  |   | 13,574 |   |  |   | 12,463 |  
|Loss from operations                                                     |  |                                          | (2,927 | )             |  |          | (7,366 | )         |  |   | (5,590 | ) |  |   | (5,427 | )
|Net loss                                                                 |  |                                          | (2,614 | )             |  |          | (6,950 | )         |  |   | (5,178 | ) |  |   | (5,008 | )
|Basic and diluted net loss per common share                              |  |                                          | (0.11  | )             |  |          | (0.30  | )         |  |   | (0.22  | ) |  |   | (0.22  | )
|Shares used in computing basic and diluted net
    loss per common share |  |                                          | 23,538 |               |  |          | 23,412 |           |  |   | 23,263 |   |  |   | 23,071 |  

33



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##### Table of Contents



We believe that period-to-period comparisons of
our consolidated financial results should not be relied upon as
an indication of future performance. The operating results of
many software companies reflect seasonal trends, and our
business, financial condition and results of operations may be
affected by such trends in the future. These trends may include
higher revenues in the fourth quarter as many customers complete
annual budgetary cycles and lower revenues in the summer months
when many businesses experience lower sales, particularly in the
European market.

The consolidated financial statements required by
this item are submitted as a separate section of this Annual
Report on Form 10-K. See Item 15.

34



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##### Table of Contents








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

None.

PART III

Certain information required by Part III is
omitted from this Annual Report on Form 10-K since we will
file a definitive Proxy Statement for our Annual Meeting of
Stockholders to be held on June 12, 2003, pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as
amended (the Proxy Statement), not later than
120 days after the end of the year covered by this Annual
Report, and certain information included in the definitive Proxy
Statement is incorporated herein by reference.






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

The information required by this Item is
incorporated by reference to the section entitled
Executive Compensation and Other Matters in our
definitive Proxy Statement.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required by this Item is
incorporated by reference to the section entitled Proposal
Number One  Election of Directors and
Executive Compensation and Other Matters in our
definitive Proxy Statement.






|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related
    Stockholder Matters

The information required by this Item is
incorporated by reference to the sections entitled
Security Ownership of Certain Beneficial Owners and
Management and Equity Compensation Plan
Information in our definitive Proxy Statement.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The information required by this Item is
incorporated by reference to the section entitled Certain
Relationships and Related Transactions in our definitive
Proxy Statement.






|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

(a) Under the supervision and with the
participation of our management, including our principal
executive officer and principal financial officer, we conducted
an evaluation of our disclosure controls and procedures, as such
term is defined under Rule 13a-14(c) promulgated under the
Securities Exchange Act of 1934, as amended (the Exchange
Act), within 90 days of the filing date of this
report. Based on their evaluation, our principal executive
officer and principal accounting officer concluded that our
disclosure controls and procedures are effective.

(b) There have been no significant changes
(including corrective actions with regard to significant
deficiencies or material weaknesses) in our internal controls or
in other factors that could significantly affect these controls
subsequent to the date of the evaluation referenced in
paragraph (a) above.

35



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##### Table of Contents






PART IV






|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K

(a) The following documents are filed as
part of this Annual Report:

1.     Consolidated
Financial Statements:



| |                                   
| | ----------------------------------
| | Independent Accountants Report   
|
| | Consolidated Financial Statements:



| |                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------
| | Consolidated Balance Sheets at December 31,
    2002 and 2001                                                                      
|
| | Consolidated Statements of Operations for the
    years ended December 31, 2002, 2001 and 2000                                     
|
| | Consolidated Statements of Stockholders
    Equity and Comprehensive Loss for the years ended
    December 31, 2002, 2001 and 2000
|
| | Consolidated Statements of Cash Flows for the
    years ended December 31, 2002, 2001 and 2000                                     



| |                                           
| | ------------------------------------------
| | Notes to Consolidated Financial Statements



| |                                         
| | ----------------------------------------
| | 2.     Financial
    Statement Schedule:

Schedule II  Valuation and
Qualifying Accounts

|                                  |                              |                |   |            |  |            |   |           |  |  |   |     |  |  |   |        | 
|--------------------------------- | ---------------------------- | -------------- | - | ---------- |  | ---------- | - | --------- |  |  | - | --- |  |  | - | ------ | 
|                                  |                              | Balance at     |   | Additions  |  |            |   | Balance  
|                                  |                              | Beginning      |   | Charged to |  |            |   | at End   
|Description                       |                              | of Period      |   | Expenses   |  | Write-offs |   | of Period
|                                  |                              |                |   |            |  |            |   |          
|                                  |                              |               
|                                  |                              | (In thousands)
|Allowance for doubtful accounts:  |                              |                |   |            |  |            |   |           |  |  |   |     |  |  |   |       
|                                  | Year ended December 31, 2002 |                | $ | 277        |  |            | $ | 155       |  |  | $ | 110 |  |  | $ | 322    | 
|                                  | Year ended December 31, 2001 |                | $ | 248        |  |            | $ | 91        |  |  | $ | 62  |  |  | $ | 277    | 
|                                  | Year ended December 31, 2000 |                | $ | 135        |  |            | $ | 164       |  |  | $ | 51  |  |  | $ | 248    | 
|Allowance for sales returns:      |                              |                |   |            |  |            |   |           |  |  |   |     |  |  |   |       
|                                  | Year ended December 31, 2002 |                | $ | 142        |  |            | $ | 368       |  |  | $ | 319 |  |  | $ | 191    | 
|                                  | Year ended December 31, 2001 |                | $ | 134        |  |            | $ | 483       |  |  | $ | 475 |  |  | $ | 142    | 
|                                  | Year ended December 31, 2000 |                | $ | 77         |  |            | $ | 100       |  |  | $ | 43  |  |  | $ | 134    | 
|Deferred tax valuation allowance: |                              |                |   |            |  |            |   |           |  |  |   |     |  |  |   |       
|                                  | Year ended December 31, 2002 |                | $ | 8,536      |  |            | $ | 3,667     |  |  | $ |    |  |  | $ | 12,203 | 
|                                  | Year ended December 31, 2001 |                | $ | 3,403      |  |            | $ | 5,133     |  |  | $ |    |  |  | $ | 8,536  | 
|                                  | Year ended December 31, 2000 |                | $ | 2,237      |  |            | $ | 1,166     |  |  | $ |    |  |  | $ | 3,403  | 



| |    |         
| | -- | --------
| | 3. | Exhibits

See Index to Exhibits. The exhibits listed in the
accompanying Index to Exhibits are filed as part of this Annual
Report.

(b) Reports on Form 8-K

No reports on Form 8-K were filed during the
fourth quarter ended December 31, 2002.

36



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##### Table of Contents



INDEPENDENT ACCOUNTANTS REPORT

To the Board of Directors and Stockholders

of iManage, Inc.


In our opinion, the consolidated financial
statements listed in the index appearing under
Item 15(a)(1) on page 36 present fairly, in all
material respects, the financial position of iManage, Inc. and
its subsidiaries at December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002 in
conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the
financial statement schedule listed in the index appearing under
Item 15(a)(2) on page 36 presents fairly, in all material
respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
These consolidated financial statements and financial statement
schedule are the responsibility of the Companys
management; our responsibility is to express an opinion on these
consolidated financial statements and financial statement
schedule based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally
accepted in the United States of America, which require that we
plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
consolidated financial statements, assessing the accounting
principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the
opinion expressed above.

As discussed, in Note 4 to the consolidated
financial statements, effective January 1, 2002, the
Company changed its method of accounting for goodwill in
accordance with Statement of Financial Accounting Standard
No. 142, Goodwill and Other Intangible Assets.

PRICEWATERHOUSECOOPERS LLP

San Jose, California

January 16, 2003 except for Note 17,
which is as of March 19, 2003


37



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iMANAGE, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share
data)


|                                           |                                                                                                                                                                                                         |                                            |       |         |        |  |       |         |        | 
|------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----- | ------- | ------ |  | ----- | ------- | ------ | 
|                                           |                                                                                                                                                                                                         |                                           
|                                           |                                                                                                                                                                                                         | December 31,                              
|                                           |                                                                                                                                                                                                         |                                           
|                                           |                                                                                                                                                                                                         | 2002                                       |       | 2001   
|                                           |                                                                                                                                                                                                         |                                            |       |        
|ASSETS                                    
|Current assets:                            |                                                                                                                                                                                                         |                                            |       |         |        |  |       |        
|                                           | Cash and cash equivalents                                                                                                                                                                               |                                            | $     | 29,920  |        |  | $     | 16,780  |       
|                                           | Short-term investments                                                                                                                                                                                  |                                            |       | 8,236   |        |  |       | 16,827  |       
|                                           | Accounts receivable, net of allowance for
    doubtful accounts of $322 and $277 in 2002 and 2001, respectively                                                                                         |                                            |       | 8,386   |        |  |       | 9,577   |       
|                                           | Prepaid expenses and other current assets                                                                                                                                                               |                                            |       | 2,703   |        |  |       | 2,279   |       
|                                           |                                                                                                                                                                                                         |                                            |       |         |        |  |       |        
|                                           |                                                                                                                                                                                                         | Total current assets                       |       |         | 49,245 |  |       |         | 45,463 | 
|Long-term investments                      |                                                                                                                                                                                                         |                                            |      |         |        |  | 7,166 |        
|Property and equipment, net                |                                                                                                                                                                                                         |                                            | 2,319 |         |        |  | 2,423 |        
|Goodwill and other intangible assets, net  |                                                                                                                                                                                                         |                                            | 3,495 |         |        |  | 4,240 |        
|Other assets                               |                                                                                                                                                                                                         |                                            | 2,610 |         |        |  | 1,566 |        
|                                           |                                                                                                                                                                                                         |                                            |       |         |        |  |       |        
|                                           |                                                                                                                                                                                                         | Total assets                               |       | $       | 57,669 |  |       | $       | 60,858 | 
|                                           |                                                                                                                                                                                                         |                                            |       |         |        |  |       |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY  
|Current liabilities:                       |                                                                                                                                                                                                         |                                            |       |         |        |  |       |        
|                                           | Bank lines of credit, current portion                                                                                                                                                                   |                                            | $     | 4,808   |        |  | $     | 4,288   |       
|                                           | Accounts payable                                                                                                                                                                                        |                                            |       | 2,535   |        |  |       | 2,421   |       
|                                           | Accrued liabilities                                                                                                                                                                                     |                                            |       | 5,352   |        |  |       | 5,043   |       
|                                           | Deferred revenues                                                                                                                                                                                       |                                            |       | 12,276  |        |  |       | 10,731  |       
|                                           |                                                                                                                                                                                                         |                                            |       |         |        |  |       |        
|                                           |                                                                                                                                                                                                         | Total current liabilities                  |       |         | 24,971 |  |       |         | 22,483 | 
|Bank lines of credit, less current portion |                                                                                                                                                                                                         |                                            | 1,010 |         |        |  | 1,412 |        
|                                           |                                                                                                                                                                                                         |                                            |       |         |        |  |       |        
|                                           |                                                                                                                                                                                                         | Total liabilities                          |       |         | 25,981 |  |       |         | 23,895 | 
|                                           |                                                                                                                                                                                                         |                                            |       |         |        |  |       |        
|Commitments and contingencies              |                                                                                                                                                                                                         |                                            |       |         |        |  |       |        
|Stockholders equity:                      |                                                                                                                                                                                                         |                                            |       |         |        |  |       |        
|                                           | Common stock, $0.001 par value, 100,000 shares
    authorized at December 31, 2002 and 2001; 24,090 shares and
    23,607 shares issued and outstanding at December 31, 2002 and
    2001, respectively |                                            |       | 24      |        |  |       | 24      |       
|                                           | Additional paid-in capital                                                                                                                                                                              |                                            |       | 77,773  |        |  |       | 76,619  |       
|                                           | Deferred stock-based compensation                                                                                                                                                                       |                                            |       | (306    | )      |  |       | (555    | )     
|                                           | Notes receivable for common stock                                                                                                                                                                       |                                            |       | (330    | )      |  |       | (430    | )     
|                                           | Accumulated comprehensive income                                                                                                                                                                        |                                            |       | 22      |        |  |       | 136     |       
|                                           | Accumulated deficit                                                                                                                                                                                     |                                            |       | (45,495 | )      |  |       | (38,831 | )     
|                                           |                                                                                                                                                                                                         |                                            |       |         |        |  |       |        
|                                           |                                                                                                                                                                                                         | Total stockholders equity                 |       |         | 31,688 |  |       |         | 36,963 | 
|                                           |                                                                                                                                                                                                         |                                            |       |         |        |  |       |        
|                                           |                                                                                                                                                                                                         | Total liabilities and stockholders equity |       | $       | 57,669 |  |       | $       | 60,858 | 
|                                           |                                                                                                                                                                                                         |                                            |       |         |        |  |       |        

See accompanying notes to consolidated financial
statements.

38



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iMANAGE, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except per share
data)


|                                                                         |                                   |                                        |        |        |        |      |        |        |         |   |        |        |         |  
|------------------------------------------------------------------------ | --------------------------------- | -------------------------------------- | ------ | ------ | ------ | ---- | ------ | ------ | ------- | - | ------ | ------ | ------- | -
|                                                                         |                                   |                                       
|                                                                         |                                   | Years Ended December 31,              
|                                                                         |                                   |                                       
|                                                                         |                                   | 2002                                   |        | 2001   |        | 2000
|                                                                         |                                   |                                        |        |        |        |     
|Revenues:                                                                |                                   |                                        |        |        |        |      |        |        |         |   |        |       
|                                                                         | License                           |                                        | $      | 20,349 |        |      | $      | 24,545 |         |   | $      | 20,213 |        
|                                                                         | Support and service               |                                        |        | 20,977 |        |      |        | 14,317 |         |   |        | 9,795  |        
|                                                                         |                                   |                                        |        |        |        |      |        |        |         |   |        |       
|                                                                         |                                   | Total revenues                         |        |        | 41,326 |      |        |        | 38,862  |   |        |        | 30,008  |  
|                                                                         |                                   |                                        |        |        |        |      |        |        |         |   |        |       
|Cost of revenues:                                                        |                                   |                                        |        |        |        |      |        |        |         |   |        |       
|                                                                         | License                           |                                        |        | 1,389  |        |      |        | 1,376  |         |   |        | 1,165  |        
|                                                                         | Support and service               |                                        |        | 7,008  |        |      |        | 5,757  |         |   |        | 4,841  |        
|                                                                         |                                   |                                        |        |        |        |      |        |        |         |   |        |       
|                                                                         |                                   | Total cost of revenues                 |        |        | 8,397  |      |        |        | 7,133   |   |        |        | 6,006   |  
|                                                                         |                                   |                                        |        |        |        |      |        |        |         |   |        |       
|                                                                         |                                   | Gross profit                           |        |        | 32,929 |      |        |        | 31,729  |   |        |        | 24,002  |  
|Operating expenses:                                                      |                                   |                                        |        |        |        |      |        |        |         |   |        |       
|                                                                         | Sales and marketing               |                                        |        | 26,580 |        |      |        | 28,574 |         |   |        | 17,845 |        
|                                                                         | Research and development          |                                        |        | 8,776  |        |      |        | 10,374 |         |   |        | 9,094  |        
|                                                                         | General and administrative        |                                        |        | 4,378  |        |      |        | 4,448  |         |   |        | 4,222  |        
|                                                                         | Amortization of intangible assets |                                        |        | 793    |        |      |        | 8,449  |         |   |        | 4,452  |        
|                                                                         | Restructuring charge              |                                        |        |       |        |      |        | 1,194  |         |   |        |       |        
|                                                                         |                                   |                                        |        |        |        |      |        |        |         |   |        |       
|                                                                         |                                   | Total operating expenses               |        |        | 40,527 |      |        |        | 53,039  |   |        |        | 35,613  |  
|                                                                         |                                   |                                        |        |        |        |      |        |        |         |   |        |       
|                                                                         |                                   | Loss from operations                   |        |        | (7,598 | )    |        |        | (21,310 | ) |        |        | (11,611 | )
|Interest income and other, net                                           |                                   |                                        | 1,024  |        |        |      | 1,680  |        |         |   | 2,619  |       
|                                                                         |                                   |                                        |        |        |        |      |        |        |         |   |        |       
|                                                                         |                                   | Loss before provision for income taxes |        |        | (6,574 | )    |        |        | (19,630 | ) |        |        | (8,922  | )
|Provision for income taxes                                               |                                   |                                        | 90     |        |        |      | 120    |        |         |   | 122    |       
|                                                                         |                                   |                                        |        |        |        |      |        |        |         |   |        |       
|                                                                         |                                   | Net loss                               |        | $      | (6,664 | )    |        | $      | (19,750 | ) |        | $      | (9,114  | )
|                                                                         |                                   |                                        |        |        |        |      |        |        |         |   |        |       
|Basic and diluted net loss per common share                              |                                   | $                                      | (0.28  | )      |        | $    | (0.85  | )      |         | $ | (0.41  | )     
|                                                                         |                                   |                                        |        |        |        |      |        |        |         |   |        |       
|Shares used in computing basic and diluted net
    loss per common share |                                   |                                        | 23,988 |        |        |      | 23,288 |        |         |   | 22,130 |       
|                                                                         |                                   |                                        |        |        |        |      |        |        |         |   |        |       

See accompanying notes to consolidated financial
statements

39



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iMANAGE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY AND COMPREHENSIVE LOSS

For the Three Years Ended December 31,
2002


(In thousands)


|                                                  |                            |                    |        |            |   |             |    |              |   |               |        |             |   |               |        |        |   |   |        |   |   |   |     |      |   |   |         |         |   |   |        |         |         |  
|------------------------------------------------- | -------------------------- | ------------------ | ------ | ---------- | - | ----------- | -- | ------------ | - | ------------- | ------ | ----------- | - | ------------- | ------ | ------ | - | - | ------ | - | - | - | --- | ---- | - | - | ------- | ------- | - | - | ------ | ------- | ------- | -
|                                                  |                            |                    |        |            |   |             |    |              |   |               |        |             |   |              
|                                                  |                            | Common Stock       |        | Additional |   | Deferred    |    |              |   | Accumulated   |        | Total       |   |              
|                                                  |                            |                    |        | Paid-in    |   | Stock-based |    | Notes        |   | Comprehensive |        | Accumulated |   | Stockholders
|                                                  |                            | Shares             |        | Amount     |   | Capital     |    | Compensation |   | Receivable    |        | Income      |   | Deficit       |        | Equity
|                                                  |                            |                    |        |            |   |             |    |              |   |               |        |             |   |               |        |       
|Balances, December 31, 1999                       |                            |                    | 21,916 |            |   | $           | 22 |              |   | $             | 63,863 |             |   | $             | (4,046 | )      |   | $ | (1,002 | ) |   | $ | (42 | )    |   | $ | (9,967  | )       |   | $ | 48,828 |        
|Components of comprehensive loss:                 |                            |                    |        |            |   |             |    |              |   |               |        |             |   |               |        |        |   |   |        |   |   |   |     |      |   |   |         |         |   |   |        |        
|                                                  | Net loss                   |                    |        |           |   |             |    |             |   |               |        |            |   |               |        |       |   |   |        |  |   |   |     |     |   |   |         | (9,114  | ) |   |        | (9,114  | )      
|                                                  | Other comprehensive income |                    |        |           |   |             |    |             |   |               |        |            |   |               |        |       |   |   |        |  |   |   |     | 70   |   |   |         |        |   |   |        | 70      |        
|                                                  |                            |                    |        |            |   |             |    |              |   |               |        |             |   |               |        |        |   |   |        |   |   |   |     |      |   |   |         |         |   |   |        |        
|                                                  |                            | Comprehensive loss |        |            |  |             |    |              |  |               |        |             |  |               |        |        |  |   |        |   |  |   |     |      |  |   |         |         |  |   |        |         | (9,044  | )
|Exercise of common stock options                  |                            |                    | 322    |            |   |             |   |              |   |               | 149    |             |   |               |       |        |   |   | 11     |   |   |   |    |      |   |   |        |         |   |   | 160    |        
|Stock issued for acquisition, net of expenses     |                            |                    | 1,007  |            |   |             | 1  |              |   |               | 10,820 |             |   |               |       |        |   |   |       |   |   |   |    |      |   |   |        |         |   |   | 10,821 |        
|Additional expenses of initial public offering    |                            |                    |       |            |   |             |   |              |   |               | (93    | )           |   |               |       |        |   |   |       |   |   |   |    |      |   |   |        |         |   |   | (93    | )      
|Repurchase of common stock                        |                            |                    | (149   | )          |   |             |   |              |   |               | (134   | )           |   |               |       |        |   |   |       |   |   |   |    |      |   |   |        |         |   |   | (134   | )      
|Stock issued under employee stock purchase plan   |                            |                    | 69     |            |   |             |   |              |   |               | 564    |             |   |               |       |        |   |   |       |   |   |   |    |      |   |   |        |         |   |   | 564    |        
|Deferred stock-based compensation                 |                            |                    |       |            |   |             |   |              |   |               | 982    |             |   |               | (982   | )      |   |   |       |   |   |   |    |      |   |   |        |         |   |   |       |        
|Amortization of deferred stock-based compensation |                            |                    |       |            |   |             |   |              |   |               | (777   | )           |   |               | 2,911  |        |   |   |       |   |   |   |    |      |   |   |        |         |   |   | 2,134  |        
|Cancellation of options upon termination          |                            |                    |       |            |   |             |   |              |   |               | (832   | )           |   |               | 832    |        |   |   |       |   |   |   |    |      |   |   |        |         |   |   |       |        
|Repayment of notes receivable                     |                            |                    |       |            |   |             |   |              |   |               |       |             |   |               |       |        |   |   | 501    |   |   |   |    |      |   |   |        |         |   |   | 501    |        
|                                                  |                            |                    |        |            |   |             |    |              |   |               |        |             |   |               |        |        |   |   |        |   |   |   |     |      |   |   |         |         |   |   |        |        
|Balances, December 31, 2000                       |                            |                    | 23,165 |            |   |             | 23 |              |   |               | 74,542 |             |   |               | (1,285 | )      |   |   | (490   | ) |   |   | 28  |      |   |   | (19,081 | )       |   |   | 53,737 |        
|Components of comprehensive loss:                 |                            |                    |        |            |   |             |    |              |   |               |        |             |   |               |        |        |   |   |        |   |   |   |     |      |   |   |         |         |   |   |        |        
|                                                  | Net loss                   |                    |        |           |   |             |    |             |   |               |        |            |   |               |        |       |   |   |        |  |   |   |     |     |   |   |         | (19,750 | ) |   |        | (19,750 | )      
|                                                  | Other comprehensive income |                    |        |           |   |             |    |             |   |               |        |            |   |               |        |       |   |   |        |  |   |   |     | 108  |   |   |         |        |   |   |        | 108     |        
|                                                  |                            |                    |        |            |   |             |    |              |   |               |        |             |   |               |        |        |   |   |        |   |   |   |     |      |   |   |         |         |   |   |        |        
|                                                  |                            | Comprehensive loss |        |            |  |             |    |              |  |               |        |             |  |               |        |        |  |   |        |   |  |   |     |      |  |   |         |         |  |   |        |         | (19,642 | )
|Exercise of common stock options                  |                            |                    | 296    |            |   |             | 1  |              |   |               | 363    |             |   |               |       |        |   |   |       |   |   |   |    |      |   |   |        |         |   |   | 364    |        
|Stock issued for acquisition, net of expenses     |                            |                    | 67     |            |   |             |   |              |   |               | 255    |             |   |               |       |        |   |   |       |   |   |   |    |      |   |   |        |         |   |   | 255    |        
|Repurchase of common stock                        |                            |                    | (78    | )          |   |             |   |              |   |               | (33    | )           |   |               |       |        |   |   |       |   |   |   |    |      |   |   |        |         |   |   | (33    | )      
|Stock issued under employee stock purchase plan   |                            |                    | 157    |            |   |             |   |              |   |               | 686    |             |   |               |       |        |   |   |       |   |   |   |    |      |   |   |        |         |   |   | 686    |        
|Deferred stock-based compensation                 |                            |                    |       |            |   |             |   |              |   |               | 1,000  |             |   |               | (1,000 | )      |   |   |       |   |   |   |    |      |   |   |        |         |   |   |       |        
|Amortization of deferred stock-based compensation |                            |                    |       |            |   |             |   |              |   |               | (249   | )           |   |               | 1,541  |        |   |   |       |   |   |   |    |      |   |   |        |         |   |   | 1,292  |        
|Stock options issued in exchange for services     |                            |                    |       |            |   |             |   |              |   |               | 157    |             |   |               |       |        |   |   |       |   |   |   |    |      |   |   |        |         |   |   | 157    |        
|Deferred compensation related to restructuring    |                            |                    |       |            |   |             |   |              |   |               |       |             |   |               | 87     |        |   |   |       |   |   |   |    |      |   |   |        |         |   |   | 87     |        
|Cancellation of options upon termination          |                            |                    |       |            |   |             |   |              |   |               | (102   | )           |   |               | 102    |        |   |   |       |   |   |   |    |      |   |   |        |         |   |   |       |        
|Repayment of notes receivable                     |                            |                    |       |            |   |             |   |              |   |               |       |             |   |               |       |        |   |   | 60     |   |   |   |    |      |   |   |        |         |   |   | 60     |        
|                                                  |                            |                    |        |            |   |             |    |              |   |               |        |             |   |               |        |        |   |   |        |   |   |   |     |      |   |   |         |         |   |   |        |        
|Balances, December 31, 2001                       |                            |                    | 23,607 |            |   |             | 24 |              |   |               | 76,619 |             |   |               | (555   | )      |   |   | (430   | ) |   |   | 136 |      |   |   | (38,831 | )       |   |   | 36,963 |        
|Components of comprehensive loss:                 |                            |                    |        |            |   |             |    |              |   |               |        |             |   |               |        |        |   |   |        |   |   |   |     |      |   |   |         |         |   |   |        |        
|                                                  | Net loss                   |                    |        |           |   |             |    |             |   |               |        |            |   |               |        |       |   |   |        |  |   |   |     |     |   |   |         | (6,664  | ) |   |        | (6,664  | )      
|                                                  | Other comprehensive loss   |                    |        |           |   |             |    |             |   |               |        |            |   |               |        |       |   |   |        |  |   |   |     | (114 | ) |   |         |        |   |   |        | (114    | )      
|                                                  |                            |                    |        |            |   |             |    |              |   |               |        |             |   |               |        |        |   |   |        |   |   |   |     |      |   |   |         |         |   |   |        |        
|                                                  |                            | Comprehensive loss |        |            |  |             |    |              |  |               |        |             |  |               |        |        |  |   |        |   |  |   |     |      |  |   |         |         |  |   |        |         | (6,778  | )
|Exercise of common stock options                  |                            |                    | 457    |            |   |             |   |              |   |               | 794    |             |   |               |       |        |   |   |       |   |   |   |    |      |   |   |        |         |   |   | 794    |        
|Stock issued in exchange for services             |                            |                    | 38     |            |   |             |   |              |   |               | 151    |             |   |               |       |        |   |   |       |   |   |   |    |      |   |   |        |         |   |   | 151    |        
|Repurchase of common stock                        |                            |                    | (245   | )          |   |             |   |              |   |               | (641   | )           |   |               |       |        |   |   |       |   |   |   |    |      |   |   |        |         |   |   | (641   | )      
|Stock issued under employee stock purchase plan   |                            |                    | 233    |            |   |             |   |              |   |               | 657    |             |   |               |       |        |   |   |       |   |   |   |    |      |   |   |        |         |   |   | 657    |        
|Deferred stock-based compensation                 |                            |                    |       |            |   |             |   |              |   |               | 413    |             |   |               | (413   | )      |   |   |       |   |   |   |    |      |   |   |        |         |   |   |       |        
|Amortization of deferred stock-based compensation |                            |                    |       |            |   |             |   |              |   |               | (170   | )           |   |               | 612    |        |   |   |       |   |   |   |    |      |   |   |        |         |   |   | 442    |        
|Cancellation of options upon termination          |                            |                    |       |            |   |             |   |              |   |               | (50    | )           |   |               | 50     |        |   |   |       |   |   |   |    |      |   |   |        |         |   |   |       |        
|Repayment of notes receivable                     |                            |                    |       |            |   |             |   |              |   |               |       |             |   |               |       |        |   |   | 100    |   |   |   |    |      |   |   |        |         |   |   | 100    |        
|                                                  |                            |                    |        |            |   |             |    |              |   |               |        |             |   |               |        |        |   |   |        |   |   |   |     |      |   |   |         |         |   |   |        |        
|Balances, December 31, 2002                       |                            |                    | 24,090 |            |   | $           | 24 |              |   | $             | 77,773 |             |   | $             | (306   | )      |   | $ | (330   | ) |   | $ | 22  |      |   | $ | (45,495 | )       |   | $ | 31,688 |        
|                                                  |                            |                    |        |            |   |             |    |              |   |               |        |             |   |               |        |        |   |   |        |   |   |   |     |      |   |   |         |         |   |   |        |        

See accompanying notes to consolidated financial
statements

40



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##### Table of Contents



iMANAGE, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In thousands)


|                                                                             |                                                                                 |                                                    |                                                         |         |        |        |        |         |        |        |         |         |        |         |  
|---------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | -------------------------------------------------- | ------------------------------------------------------- | ------- | ------ | ------ | ------ | ------- | ------ | ------ | ------- | ------- | ------ | ------- | -
|                                                                             |                                                                                 |                                                   
|                                                                             |                                                                                 | Years Ended December 31,                          
|                                                                             |                                                                                 |                                                   
|                                                                             |                                                                                 | 2002                                               |                                                         | 2001    |        | 2000  
|                                                                             |                                                                                 |                                                    |                                                         |         |        |       
|Cash flows from operating activities:                                        |                                                                                 |                                                    |                                                         |         |        |        |        |         |        |        |         |        
|                                                                             | Net loss                                                                        |                                                    | $                                                       | (6,664  | )      |        | $      | (19,750 | )      |        | $       | (9,114  | )     
|                                                                             | Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                    |                                                         |         |        |        |        |         |        |        |         |         |       
|                                                                             |                                                                                 | Depreciation and amortization                      |                                                         |         | 2,797  |        |        |         | 10,550 |        |         |         | 6,292  |        
|                                                                             |                                                                                 | Amortization of deferred stock-based compensation  |                                                         |         | 442    |        |        |         | 1,292  |        |         |         | 2,134  |        
|                                                                             |                                                                                 | Provisions for doubtful accounts and sales returns |                                                         |         | 523    |        |        |         | 574    |        |         |         | 264    |        
|                                                                             |                                                                                 | Restructuring charge                               |                                                         |         |       |        |        |         | 1,194  |        |         |         |       |        
|                                                                             |                                                                                 | Stock issued for services                          |                                                         |         | 151    |        |        |         | 157    |        |         |         |       |        
|                                                                             |                                                                                 | Changes in operating assets and liabilities:       |                                                         |         |        |        |        |         |        |        |         |         |        |        
|                                                                             |                                                                                 | Accounts receivable                                |                                                         |         | 730    |        |        |         | 469    |        |         |         | (5,269 | )      
|                                                                             |                                                                                 | Prepaid expenses and other assets                  |                                                         |         | (1,468 | )      |        |         | 849    |        |         |         | (3,005 | )      
|                                                                             |                                                                                 | Accounts payable and accrued liabilities           |                                                         |         | 423    |        |        |         | 2,319  |        |         |         | 255    |        
|                                                                             |                                                                                 | Deferred revenues                                  |                                                         |         | 1,545  |        |        |         | 1,829  |        |         |         | (166   | )      
|                                                                             |                                                                                 |                                                    |                                                         |         |        |        |        |         |        |        |         |        
|                                                                             |                                                                                 |                                                    | Net cash used in operating activities                   |         |        | (1,521 | )      |         |        | (517   | )       |         |        | (8,609  | )
|                                                                             |                                                                                 |                                                    |                                                         |         |        |        |        |         |        |        |         |        
|Cash flows from investing activities:                                        |                                                                                 |                                                    |                                                         |         |        |        |        |         |        |        |         |        
|                                                                             | Purchases of property and equipment                                             |                                                    |                                                         | (1,948  | )      |        |        | (988    | )      |        |         | (3,251  | )     
|                                                                             | Purchases of investments                                                        |                                                    |                                                         | (3,155  | )      |        |        | (24,820 | )      |        |         | (30,022 | )     
|                                                                             | Maturities and sales of investments                                             |                                                    |                                                         | 18,736  |        |        |        | 18,700  |        |        |         | 18,667  |       
|                                                                             | Acquisition of business, net of cash acquired                                   |                                                    |                                                         |        |        |        |        |        |        |        |         | (6,140  | )     
|                                                                             |                                                                                 |                                                    |                                                         |         |        |        |        |         |        |        |         |        
|                                                                             |                                                                                 |                                                    | Net cash provided by (used in) investing
    activities |         |        | 13,633 |        |         |        | (7,108 | )       |         |        | (20,746 | )
|                                                                             |                                                                                 |                                                    |                                                         |         |        |        |        |         |        |        |         |        
|Cash flows from financing activities:                                        |                                                                                 |                                                    |                                                         |         |        |        |        |         |        |        |         |        
|                                                                             | Proceeds from bank lines of credit                                              |                                                    |                                                         | 14,482  |        |        |        | 12,274  |        |        |         | 4,872   |       
|                                                                             | Payment of bank lines of credit                                                 |                                                    |                                                         | (14,364 | )      |        |        | (13,002 | )      |        |         | (444    | )     
|                                                                             | Payment of notes receivable for common stock                                    |                                                    |                                                         | 100     |        |        |        | 60      |        |        |         | 501     |       
|                                                                             | Net proceeds from issuance of common stock                                      |                                                    |                                                         | 1,451   |        |        |        | 1,050   |        |        |         | 724     |       
|                                                                             | Repurchases of common stock                                                     |                                                    |                                                         | (641    | )      |        |        | (33     | )      |        |         | (134    | )     
|                                                                             | Other                                                                           |                                                    |                                                         |        |        |        |        |        |        |        |         | (93     | )     
|                                                                             |                                                                                 |                                                    |                                                         |         |        |        |        |         |        |        |         |        
|                                                                             |                                                                                 |                                                    | Net cash provided by financing activities               |         |        | 1,028  |        |         |        | 349    |         |         |        | 5,426   |  
|                                                                             |                                                                                 |                                                    |                                                         |         |        |        |        |         |        |        |         |        
|Net increase (decrease) in cash and cash
    equivalents                     |                                                                                 |                                                    | 13,140                                                  |         |        |        | (7,276 | )       |        |        | (23,929 | )      
|Cash and cash equivalents at beginning of period                             |                                                                                 |                                                    | 16,780                                                  |         |        |        | 24,056 |         |        |        | 47,985  |        
|                                                                             |                                                                                 |                                                    |                                                         |         |        |        |        |         |        |        |         |        
|Cash and cash equivalents at end of period                                   |                                                                                 | $                                                  | 29,920                                                  |         |        | $      | 16,780 |         |        | $      | 24,056  |        
|                                                                             |                                                                                 |                                                    |                                                         |         |        |        |        |         |        |        |         |        
|Supplemental disclosures of non-cash investing
    and financing activities: |                                                                                 |                                                    |                                                         |         |        |        |        |         |        |        |         |        
|                                                                             | Deferred stock-based compensation                                               |                                                    | $                                                       | 413     |        |        | $      | 1,000   |        |        | $       | 982     |       
|                                                                             |                                                                                 |                                                    |                                                         |         |        |        |        |         |        |        |         |        
|                                                                             | Issuance of common stock for services and
    acquisition                       |                                                    | $                                                       | 151     |        |        | $      | 255     |        |        | $       | 10,821  |       
|                                                                             |                                                                                 |                                                    |                                                         |         |        |        |        |         |        |        |         |        

See accompanying notes to consolidated financial
statements

41



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##### Table of Contents



iMANAGE, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1.     Organization
and Business

iManage, Inc. (the Company) provides
collaborative content management software that enables
businesses to manage and collaborate efficiently on critical
business content across the extended enterprise. The
Companys product suite, iManage WorkSite, delivers
document management, collaboration, workflow and knowledge
management in a single integrated Internet solution. The Company
believes that iManage WorkSite improves communication and
process efficiency, providing faster response times and a rapid
return on investment for its customers.

2.     Summary of
Significant Accounting Policies



| |                      
| | ---------------------
| | Basis of Presentation

The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been
eliminated.



| |                 
| | ----------------
| | Use of Estimates

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



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

Revenues consist primarily of license, support
and service revenues from customers, which were primarily
attributable to the iManage WorkSite suite of software
applications. In addition, the Company receives fees from its
customers for providing deployment, integration services and
training.

The Company applies the provisions of Statement
of Position (SOP) No. 97-2, Software Revenue
Recognition, as amended by SOP-98-9, Modification of
SOP-97-2, Software Revenue Recognition, With Respect to Certain
Transactions, to all transactions involving the licensing of
its software.

The Company recognizes license revenues when
persuasive evidence of an arrangement exists, the software has
been delivered, the fee is considered fixed or determinable and
collectibility is reasonably assured, assuming no significant
future obligations or customer acceptance rights exist. Revenues
from subscription license agreements, which include software,
rights to future products and maintenance, are recognized
ratably over the term of the subscription period. Revenue on
shipments to resellers is generally recognized when the
resellers sell the product to the end-user customer. For all
sales, the Company uses either a binding purchase order or
signed license agreement as persuasive evidence of an
arrangement.

At the time of the transaction, the Company
assesses whether the fee associated with each transaction is
fixed and determinable and collection is reasonably assured. The
Company evaluates the payment terms associated with each
transaction. If a portion of the fee is due after normal payment
terms, which range from 30 days to 180 days from
invoice date for legal customers and 30 days to
120 days for all others, the Company recognize the revenue
on the payment due date, assuming collection is reasonably
assured. The Company assesses collectibility based on a number
of factors, including past transaction history and the overall
credit-worthiness of the customer. The Company generally does
not require collateral from its customers. If collection is not
reasonably assured, revenue is deferred and recognized at the
time collection becomes reasonably assured, which is generally
upon receipt of cash.

When contracts contain multiple elements wherein
vendor-specific objective evidence exists for all undelivered
elements, the Company accounts for the delivered elements in
accordance with the residual

42



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##### Table of Contents



iMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

method prescribed by SOP 98-9. This means
that the Company defers revenue equivalent to the fair value of
the undelivered elements until such time as the element is
delivered to the customer. Fair values for the ongoing support
obligations are based upon separate sales of support renewals
sold to customers or upon renewal rates quoted in the contracts.
Fair value of services, such as training or consulting, is based
on the value of stand-alone sales of these services to customers.

License arrangements do not generally include
acceptance clauses. However, if an arrangement includes an
acceptance provision, acceptance occurs upon the earlier of
receipt of a written customer acceptance or expiration of the
acceptance period.

The Company recognizes revenue for support
services ratably over the contract term. Training and consulting
services are billed based on hourly rates and generally
recognized as revenue as these services are performed. However,
at the time of a transaction, the Company assesses whether any
services included in the arrangement require the performance of
significant work either to alter the underlying software or to
build complex interfaces so that the software performs as
requested. If these services are included as part of an
arrangement, the Company recognizes the entire arrangement fee
excluding amounts allocated to support services, using the
percentage of completion method. The Company estimates the
percentage of completion based on an estimate of the total costs
estimated to complete the project as a percentage of the costs
incurred to date and the estimated costs to complete.



| |                                                                
| | ---------------------------------------------------------------
| | Cash, Cash Equivalents and Short- and
    Long-Term Investments

The Company considers all highly liquid
investments with original or remaining maturities of three
months or less at the date of purchase to be cash equivalents.
Cash and cash equivalents include money market funds, commercial
paper and various deposit accounts. Cash equivalents are
recorded at cost, which approximates fair value.

The Companys investments are classified as
available-for-sale and are carried at fair value
based on quoted market prices. These investments consist of
corporate obligations that include commercial paper, corporate
bonds and notes and U.S. government agency securities. Those
investments with maturities greater than three months at the
balance sheet date and less than twelve months are considered
short-term investments and those with maturities greater than
twelve months at the balance sheet date are considered long-term
investments. Realized gains and losses are calculated using the
specific identification method. The Company incurred $36,000 of
realized gains and no realized losses in 2002 and there were no
realized gains and losses in 2001 and 2000. In 2002, 2001 and
2000, unrealized gains (losses) totaled $(176,000), $143,000 and
$125,000, respectively. Unrealized gains and losses are included
as a separate component of accumulated comprehensive income and
stockholders equity.



| |                         
| | ------------------------
| | Risks and Concentrations

Financial instruments that subject the Company to
concentrations of credit risk consist principally of cash and
cash equivalents, short-term investments, accounts receivable,
long-term investments and bank lines of credit. The Company
maintains substantially all of its cash and cash equivalents and
short- and long-term investments with two financial institutions
domiciled in the United States. The Company performs ongoing
evaluations of its customers financial condition and
generally requires no collateral from its customers on accounts
receivable.

For 2002, 2001 and 2000, the Company derived 71%,
79% and 77% of its license revenues, respectively, from law
firms and professional service firms. Also, the Company derived
50%, 43% and 54% of its license revenues from resellers of its
application suite for 2002, 2001 and 2000.

The Company relies on software licensed from
third parties, including software that is integrated with
internally developed software and used to perform key functions.
These software license agreements expire on

43



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##### Table of Contents



iMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

various dates from March 2005 to January 2007 and
are renewable with written consent of the parties. Either party
may terminate the agreement for cause before the expiration date
with written notice. If the Company cannot renew these licenses,
shipments of its products could be delayed until equivalent
software could be developed or licensed and integrated into its
products. These types of delays could seriously harm the
Companys business. In addition, the Company would be
seriously harmed if the providers from whom the Company licenses
its software ceased to deliver and support reliable products,
enhance their current products or respond to emerging industry
standards. Moreover, the third-party software may not continue
to be available to us on commercially reasonable terms or at
all. Each of these license agreements may be renewed only with
the other partys written consent.

The Company has incurred operating losses on a
quarterly and annual basis throughout its history. For the years
ended December 31, 2002, 2001 and 2000, the Companys
net losses were $6.7 million, $19.8 million and
$9.1 million and the Company has $38.2 million in
cash, cash equivalents and short-term marketable securities as
of December 31, 2002. The Company currently anticipates
that its cash and investments, together with its existing lines
of credit will be sufficient to meet anticipated needs for
working capital and capital expenditures through
December 31, 2003. However, the Company may be required, or
could elect, to seek additional funding at any time. There can
be no assurances that additional equity or debt financing, if
required, will be available on acceptable terms, if at all.



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment are recorded at cost and
depreciated using the straight-line method over estimated useful
lives of three to five years. Amortization of leasehold
improvements is recorded using the straight-line method over the
lesser of the estimated useful lives of the assets or the lease
term, generally three to five years. Upon the sale or retirement
of an asset, the cost and related accumulated depreciation are
removed from the consolidated balance sheet and the resulting
gain or loss is reflected in operations.

Repair and maintenance expenditures, which are
not considered improvements and do not extend the useful life of
an asset, are expensed as incurred.



| |                                                                          
| | -------------------------------------------------------------------------
| | Impairment of Goodwill, Other Intangible
    Assets and Long-Lived Assets

The Company assesses the impairment of
identifiable intangible assets and long-lived assets whenever
events or changes in circumstances indicate that the carrying
value may not be recoverable. Factors considered important that
could trigger an impairment review include, but are not limited
to, significant underperformance relative to historical or
projected future operating results, significant changes in the
use of the assets or the strategy for the overall business,
negative industry or economic trends, a significant decline in
the Companys stock price for a sustained period and its
market capitalization relative to net book value. The Company
measures any impairment based on a projected discounted cash
flow method using a discount rate commensurate with the risk
inherent in the Companys business model.

In July 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets, which is effective
for years beginning after December 15, 2001. SFAS
No. 142 requires, among other things, the discontinuance of
goodwill amortization. In addition, the standard includes
provisions upon adoption for the reclassification of certain
existing recognized intangible assets as goodwill, reassessment
of the useful lives of existing recognized intangible assets,
reclassification of certain intangibles out of previously
reported goodwill and the testing for impairment of existing
goodwill and other intangibles. As of January 1, 2002, the
Company adopted SFAS No. 142 and has ceased to amortize
$3.4 million of goodwill. In lieu of amortization, the
Company is required

44



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##### Table of Contents



iMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

to perform an impairment review of its goodwill
balance on at least an annual basis and upon the initial
adoption of SFAS No. 142. This impairment review involves a
two-step process as follows:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Step 1
    The Company compares the fair value of its reporting units to
    the carrying value, including goodwill. For each reporting unit
    for which the carrying value, including goodwill, exceeds the
    units fair value, the Company moves on to Step 2. If
    a units fair value exceeds the carrying value, no further
    work is performed and no impairment charge is necessary.                                                                                                                                                                                              
|
| |  | Step 2
    The Company performs an allocation of the fair value of the
    reporting unit to its identifiable tangible and non-goodwill
    intangible assets and liabilities. This derives an implied fair
    value for the reporting units goodwill. The Company then
    compares the implied fair value of the reporting units
    goodwill with the carrying amount of the reporting units
    goodwill. If the carrying amount of the reporting units
    goodwill is greater than the implied fair value of its goodwill,
    an impairment charge would be recognized for the excess.

The Company has determined that it has one
reporting unit and performed Step 1 of the goodwill
impairment analysis required by SFAS No. 142 as of
January 1, 2002. The Company compared the carrying value of
total stockholders equity to the Companys market
capitalization and concluded that goodwill was not impaired, as
its market capitalization exceeded total stockholders
equity, including goodwill. Accordingly, Step 2 was not
performed. The Company also performed its annual analysis of
goodwill on October 1, 2002 and concluded its goodwill was
not impaired as the Companys market capitalization
exceeded its total stockholders equity. The Company will
continue to test for impairment on an annual basis and on an
interim basis if an event occurs or circumstances change that
would more likely than not reduce the fair value of the
Companys reporting unit below its carrying amount. Also,
see Note 4  Goodwill and Intangible Assets.

The Company has $3.4 million in goodwill,
$104,000 of intangible assets and $1.7 million of prepaid
license royalties. At December 31, 2002, the Company
believes its goodwill, intangible assets and prepaid license
royalties are recoverable. However, changes in the economy, the
business in which the Company operates and its relative
performance could change the assumptions used to evaluate the
recoverability of these assets. The Company must continue to
monitor those assumptions and their effect on the estimated
recoverability of its intangible assets. Any adverse change in
the Companys recoverability assumptions could result in
the writing down of its intangible assets, which could
materially impact its consolidated results of operation and
financial position.



| |            
| | -----------
| | Advertising

The Company expenses advertising costs as
incurred. Advertising costs expensed for 2002, 2001 and 2000
were $1.8 million, $2.1 million and $1.9 million,
respectively.



| |                           
| | --------------------------
| | Software Development Costs

Costs incurred in the research and development of
new software products are expensed as incurred until
technological feasibility has been established at which time
such costs are capitalized, subject to a net realizable value
evaluation. Technology feasibility is established upon the
completion of an integrated working model. Costs incurred
between completion of the working model and the point at which
the product is ready for general release have not been
significant. Accordingly, the Company has charged all costs to
research and development expense in the period incurred.



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

The Company accounts for income taxes under the
provisions of SFAS No. 109, Accounting for Income
Taxes. Under this method, deferred tax assets and
liabilities are determined based on the differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases.

45



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##### Table of Contents



iMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to
be recovered or settled. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amounts to
be recovered.



| |                         
| | ------------------------
| | Stock-based Compensation

The Company accounts for stock-based compensation
using the intrinsic value method prescribed by Accounting
Principles Board Opinion (APB) No. 25,
Accounting for Stock Issued to Employees, and has elected
to adopt the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. The resulting
stock-based compensation is amortized over the estimated term of
the stock option, generally four years, using an accelerated
approach. This accelerated approach is consistent with the
method described in Financial Accounting Standards Board
Interpretation (FIN) No. 28, Accounting for
Stock Appreciation Rights and Other Variable Stock Option or
Awards Plans. Stock-based compensation to non-employees is
based on the fair value of the option estimated using the
Black-Scholes model on the date of the grant and revalued until
vested. Compensation expense resulting from non-employee options
is amortized to expense using an accelerated approach.



| |                                                    
| | ---------------------------------------------------
| | Business Segment and Major Customer
    Information

SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, establishes
standards for the manner in which public companies report
information about operating segments in annual and interim
financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and
major customers. The method for determining the information to
report is based on the way management organizes the operating
segments within the Company for making operating decisions and
assessing financial performance.

The Companys chief operating decision-maker
is considered to be the Chief Executive Officer. The Chief
Executive Officer reviews financial information presented for
purposes of making operating decisions and assessing financial
performance. The financial information is identical to the
information presented in the accompanying consolidated
statements of operations; the Company had no significant foreign
operations through December 31, 2000. For the years ended
December 31, 2002 and 2001, revenues derived from customers
outside the United States represented 20% and 9% of total
revenues, respectively, and consisted primarily of customers in
the United Kingdom. On this basis, the Company is organized and
operates in a single segment: the design, development and
marketing of software solutions.

At December 31, 2002, no customer accounted
for more than 10% of the accounts receivable balance while one
customer accounted for 16% of the accounts receivable balance at
December 31, 2001. No customer accounted for more than 10%
of the total revenues in 2002, 2001 and 2000.



| |                 
| | ----------------
| | Foreign Currency

The financial statements of foreign subsidiaries
are measured using the local currency of the subsidiary as the
functional currency. Accordingly, assets and liabilities of the
subsidiaries are translated at current rates of exchange at the
balance sheet date and all revenue and expense items are
translated using weighted-average exchange rates prevailing
during the year. The resultant gains or losses from translation
are charged or credited to accumulated comprehensive income
(loss). Foreign currency transaction gains and losses, which
have not been material to date, are included in the consolidated
statement of operations.

At December 31, 2002, the Company did not
hold any foreign currency derivative instruments.

46



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##### Table of Contents



iMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                              
| | -----------------------------
| | Comprehensive Income and Loss

Other comprehensive income and loss refers to
revenues, expenses, gains and losses that under the accounting
principles generally accepted in the United States of America
are recorded as an element of stockholders equity and are
excluded from net loss.

The comprehensive income (loss) comprises the
following items (in thousands):

|                                   |                                                              |                          |        |      |   |      |         |     |   |   |        |     |  
|---------------------------------- | ------------------------------------------------------------ | ------------------------ | ------ | ---- | - | ---- | ------- | --- | - | - | ------ | --- | -
|                                   |                                                              |                         
|                                   |                                                              | Years Ended December 31,
|                                   |                                                              |                         
|                                   |                                                              | 2002                     |        | 2001 |   | 2000
|                                   |                                                              |                          |        |      |   |     
|Net loss                           |                                                              | $                        | (6,664 | )    |   | $    | (19,750 | )   |   | $ | (9,114 | )  
|Other comprehensive income (loss): |                                                              |                          |        |      |   |      |         |     |   |   |        |    
|                                   | Unrealized gain (loss) on available-for-sale
    investments |                          |        | (176 | ) |      |         | 143 |   |   |        | 125 |  
|                                   | Translation adjustment                                       |                          |        | 62   |   |      |         | (35 | ) |   |        | (55 | )
|                                   |                                                              |                          |        |      |   |      |         |     |   |   |        |    
|                                   |                                                              |                          | (114   | )    |   |      | 108     |     |   |   | 70     |    
|                                   |                                                              |                          |        |      |   |      |         |     |   |   |        |    
|Comprehensive loss                 |                                                              | $                        | (6,778 | )    |   | $    | (19,642 | )   |   | $ | (9,044 | )  
|                                   |                                                              |                          |        |      |   |      |         |     |   |   |        |    

Accumulated other comprehensive income
(loss)»comprises the following (in thousands):

|                                                             |  |                          |     |      |  |      |     |   |  |   |     |  
|------------------------------------------------------------ |  | ------------------------ | --- | ---- |  | ---- | --- | - |  | - | --- | -
|                                                             |  |                         
|                                                             |  | Years Ended December 31,
|                                                             |  |                         
|                                                             |  | 2002                     |     | 2001 |  | 2000
|                                                             |  |                          |     |      |  |     
|Unrealized gain (loss) on available-for-sale
    investments |  | $                        | 50  |      |  | $    | 226 |   |  | $ | 83  |  
|Cumulative translation adjustment                            |  |                          | (28 | )    |  |      | (90 | ) |  |   | (55 | )
|                                                             |  |                          |     |      |  |      |     |   |  |   |     |  
|                                                             |  | $                        | 22  |      |  | $    | 136 |   |  | $ | 28  |  
|                                                             |  |                          |     |      |  |      |     |   |  |   |     |  



| |                          
| | -------------------------
| | Net Loss per Common Share

Basic net loss per common share is computed using
the weighted average number of outstanding shares of common
stock during the period, excluding shares of restricted stock
subject to repurchase. Dilutive net loss per common share is
computed using the weighted average number of common shares
outstanding during the period and, when dilutive, potential
common shares from options to purchase common stock and common
stock subject to repurchase, using the treasury stock method.

The following table reconciles net loss to basic
and diluted net loss per common share (in thousands, except per
share data):

|                                                                         |  |                          |        |      |  |      |         |   |  |   |        |  
|------------------------------------------------------------------------ |  | ------------------------ | ------ | ---- |  | ---- | ------- | - |  | - | ------ | -
|                                                                         |  |                         
|                                                                         |  | Years Ended December 31,
|                                                                         |  |                         
|                                                                         |  | 2002                     |        | 2001 |  | 2000
|                                                                         |  |                          |        |      |  |     
|Net loss                                                                 |  | $                        | (6,664 | )    |  | $    | (19,750 | ) |  | $ | (9,114 | )
|Shares used in computing basic and diluted net
    loss per common share |  |                          | 23,988 |      |  |      | 23,288  |   |  |   | 22,130 |  
|                                                                         |  |                          |        |      |  |      |         |   |  |   |        |  
|Basic and diluted net loss per common share                              |  | $                        | (0.28  | )    |  | $    | (0.85   | ) |  | $ | (0.41  | )
|                                                                         |  |                          |        |      |  |      |         |   |  |   |        |  

47



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##### Table of Contents



iMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following potential common shares have been
excluded from the calculation of diluted net loss per share for
all periods presented because the effect would have been
anti-dilutive (in thousands):

|                          |                                    |                          |       |       |  |      |       |       |  |  |       |       | 
|------------------------- | ---------------------------------- | ------------------------ | ----- | ----- |  | ---- | ----- | ----- |  |  | ----- | ----- | 
|                          |                                    |                         
|                          |                                    | Years Ended December 31,
|                          |                                    |                         
|                          |                                    | 2002                     |       | 2001  |  | 2000
|                          |                                    |                          |       |       |  |     
|Anti-dilutive securities: |                                    |                          |       |       |  |      |       |       |  |  |       |      
|                          | Options to purchase common stock   |                          |       | 5,875 |  |      |       | 5,297 |  |  |       | 3,479 | 
|                          | Common stock subject to repurchase |                          |       | 1     |  |      |       | 20    |  |  |       | 262   | 
|                          |                                    |                          |       |       |  |      |       |       |  |  |       |      
|                          |                                    |                          | 5,876 |       |  |      | 5,317 |       |  |  | 3,741 |      
|                          |                                    |                          |       |       |  |      |       |       |  |  |       |      



| |                                     
| | ------------------------------------
| | Recent Accounting
    Pronouncements

In October 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, which requires that long-lived assets to
be disposed of by sale 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. SFAS
No. 144 also expands the reporting of discontinued
operations to include components of an entity that have been or
will be disposed of rather than limiting such discontinuance to
a segment of a business. SFAS No. 144 excludes from the
definition of long-lived assets goodwill and other intangibles
that are not amortized in accordance with SFAS No. 142.
SFAS No. 144 is effective for the Companys year
beginning January 1, 2003 with the exception of the lease
provisions of SFAS No. 144, which are effective for leases
entered into after May 15, 2002. The adoption of SFAS
No. 144 is not expected to have a material impact on the
Companys consolidated financial statements.

In May 2001, the FASB issued SFAS No. 145,
which rescinds SFAS No. 4, Reporting Gains and Losses
from Extinguishment of Debt, SFAS No. 44, Accounting
for Intangible Assets of Motor Carriers, and SFAS
No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. SFAS No. 145 also amends
SFAS No. 13, Accounting for Leases, to eliminate an
inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease
modifications that have economic effects that are similar to
sale-leaseback transactions. As a result of the rescission of
SFAS No. 4 and SFAS No. 64, the criteria in APB
No. 30, Reporting the Results of Operations, will be
used to classify gains and losses from debt extinguishment.
SFAS 145 also amends other existing authoritative
pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed
conditions. SFAS No. 145 is effective for the
Companys year beginning January 1, 2003. The adoption
of SFAS No. 145 is not expected to have a material impact
on the Companys consolidated financial statements.

In June 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities, which addresses financial accounting and
reporting for costs associated with exit or disposal activities,
and nullifies Emerging Issues Task Force Issue No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)which previously governed
the accounting treatment for restructuring activities. SFAS
No. 146 applies to costs associated with an exit activity
that does not involve an entity newly acquired in a business
combination or with a disposal activity covered by SFAS
No. 144. Those costs include, but are not limited to, the
following:



| |                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) termination benefits provided to current
    employees who are involuntarily terminated under the terms of a
    benefit arrangement that, in substance, is not an ongoing
    benefit arrangement or an individual deferred-compensation
    contract;
|
| | (ii) costs to terminate a contract that is
    not a capital lease; and                                                                                                                                                                                    
|
| | (iii) costs to consolidate facilities or
    relocate employees.                                                                                                                                                                                           

48



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##### Table of Contents



iMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

SFAS No. 146 does not apply to costs
associated with the retirement of long-lived assets covered by
SFAS No. 143. SFAS No. 146 will be applied
prospectively and is effective for exit or disposal activities
initiated after December 31, 2002. Early adoption is
permitted. The adoption of SFAS No. 146 is not expected to
have a material impact on the Companys consolidated
financial statements.

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure 
an amendment of FASB Statement No. 123. SFAS
No. 148 provides alternative methods of transition for a
voluntary change to the fair value based method of accounting
for stock-based employee compensation. SFAS No. 148 also
requires that disclosures of the pro forma effect of using the
fair value method of accounting for stock-based employee
compensation be displayed more prominently and in a tabular
format. Additionally, SFAS No. 148 requires disclosure of
the pro forma effect in interim financial statements. The
transition and interim disclosure requirements of SFAS
No. 148 are effective for years ended after and interim
periods beginning after December 15, 2002. The Company has
chosen to continue to account for stock-based compensation using
the intrinsic value method prescribed in APB Opinion No. 25
and related interpretations. Accordingly, compensation expense
for stock options is measured as the excess, if any, of the
estimate of the market value of its stock at the date of the
grant over the amount an employee must pay to acquire the
Companys stock. The Company has adopted the annual
disclosure provisions of SFAS No. 148 in its financial
report for the year ended December 31, 2003 and will adopt
the interim disclosure provisions for its financial reports for
the quarter ended March 31, 2003. As the adoption of this
standard involves disclosures only, the Company does not expect
a material impact on its consolidated financial statements.

In November 2002, the FASB issued FIN
No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. FIN No. 45 elaborates on the
existing disclosure requirements for most guarantees and
indemnifications, including loan guarantees such as standby
letters of credit. It also clarifies that at the time a company
issues a guarantee or indemnification, the company must
recognize an initial liability for the fair market value of the
obligations it assumes under that guarantee or indemnification
and must disclose that information in its interim and annual
financial statements. Certain disclosure provisions are
effective for the Companys year ended December 31,
2002. The initial recognition and measurement provisions of FIN
No. 45 apply on a prospective basis to guarantees and
indemnifications issued or modified after December 31,
2002. The Company has adopted the required disclosure provision
of FIN No. 45 as of December 31, 2002 and the Company
is currently assessing the impact of the remaining requirements
on its consolidated financial statements.

In January 2003, the FASB issued FIN No. 46,
Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51. FIN No. 46 requires
certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the
entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional
subordinated financial support from other parties. FIN
No. 46 is effective immediately for all new variable
interest entities created or acquired after January 31,
2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN No. 46 must
be applied for the first interim or annual period beginning
after June 15, 2003. In addition, FIN No. 46 requires
that the Company make disclosures in its consolidated financial
statements for the year ended December 31, 2002 when the
Company believes it is reasonably possible that it will
consolidate or disclose information about variable interest
entities after FIN No. 46 becomes effective. At this time,
the Company does not believe it is reasonably possible that the
Company will consolidate or disclose information about variable
interest entities. However, the Company will continue to assess
the impact of FIN No. 46 on its consolidated financial
statements.

49



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##### Table of Contents



iMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

3.     Acquisition

In June 2000, the Company completed the
acquisition of ThoughtStar, Inc. (ThoughtStar). The
Company issued 1,007,000 shares of its common stock with a fair
market value on the closing date of $11.0 million and paid
cash consideration of $5.2 million for all of the
outstanding stock of ThoughtStar, including additional monies
loaned prior to the completion of the merger. The Company
incurred transaction costs consisting primarily of professional
fees of $725,000 and incurred stock issuance costs of $215,000,
resulting in a total purchase price of $17.0 million. The
acquisition was accounted for as a purchase and, as such, the
purchase price was allocated to the assets acquired and the
liabilities assumed based on estimated fair values on the date
of acquisition. The results of operations of ThoughtStar have
been included with the Companys results of operations
since the acquisition date.

The fair value of the assets of ThoughtStar was
determined through established valuation techniques used in the
software industry. No significant tangible assets or liabilities
were acquired. A summary of the consideration exchanged for
these assets is as follows (in thousands):

|                     |                        |   |        |        | 
|-------------------- | ---------------------- | - | ------ | ------ | 
|Total purchase price |                        | $ | 16,961 |       
|                     |                        |   |        |       
|Assets acquired:     |                        |   |        |       
|                     | Purchased technology   |   | $      | 1,900  | 
|                     | Assembled workforce    |   |        | 400    | 
|                     | Non-compete agreements |   |        | 400    | 
|                     | Goodwill               |   |        | 14,261 | 
|                     |                        |   |        |       
|                     |                        | $ | 16,961 |       
|                     |                        |   |        |       

In addition to the consideration noted above, the
Company granted 89,000 common stock options with an exercise
price of $0.01 to former ThoughtStar employees in exchange for
1,648,000 fully vested and exercisable ThoughtStar stock
options. On the date of grant, these options had an intrinsic
value of $982,000, which was recorded as deferred stock-based
compensation, and was being amortized over the option vesting
period of 2 years. At December 31, 2001 and 2000,
deferred stock-based compensation related to these stock options
totaled $249,000 and $646,000. During September 2001, the
remaining $87,000 of deferred stock-based compensation was
charged to expense in connection with a restructuring of
operations.

Pro forma results of operations for the combined
Company for the year ended December 31, 2000 as if the
transaction had consummated at the beginning of 2000 are as
follows (in thousands, except per share data):

|                                                                         |  |   |         |  
|------------------------------------------------------------------------ |  | - | ------- | -
|Revenues                                                                 |  | $ | 30,008  |  
|Cost of revenues                                                         |  |   | 6,006   |  
|                                                                         |  |   |         |  
|Gross profit                                                             |  | $ | 24,002  |  
|                                                                         |  |   |         |  
|Net loss                                                                 |  | $ | (14,876 | )
|                                                                         |  |   |         |  
|Basic and diluted net loss per common share                              |  | $ | (0.66   | )
|                                                                         |  |   |         |  
|Shares used in computing basic and diluted net
    loss per common share |  |   | 22,634  |  
|                                                                         |  |   |         |  

The above amounts are based upon certain
assumptions and estimates, which the Company believes are
reasonable and does not reflect any benefit from economies that
might be achieved from combined operations. The pro forma
financial information presented above is not necessarily
indicative of either the results of operations that would have
occurred had the acquisition taken place at the beginning of the
periods presented or of future results of operations of the
combined companies.

50



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##### Table of Contents



iMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

4.     Goodwill and
Intangible Assets

In July 2001, the FASB issued SFAS No. 142,
Goodwill and Other Intangible Assets. The Company adopted
SFAS No. 142 effective January 1, 2002 and, as a
result, ceased to amortize goodwill of $3.4 million. The
carrying amount of the goodwill and intangible assets as of
December 31, 2002 and 2001 are as follows (in thousands):

|                        |  |                |        |              |  |        |         |                |  |              |       |        |  |   |        |  |  |   |         |   |  |   |       | 
|----------------------- |  | -------------- | ------ | ------------ |  | ------ | ------- | -------------- |  | ------------ | ----- | ------ |  | - | ------ |  |  | - | ------- | - |  | - | ----- | 
|                        |  |                |        |             
|                        |  | 2002           |        | 2001        
|                        |  |                |        |             
|                        |  | Gross Carrying |        | Accumulated  |  | Net    |         | Gross Carrying |  | Accumulated  |       | Net   
|                        |  | Amount         |        | Amortization |  | Amount |         | Amount         |  | Amortization |       | Amount
|                        |  |                |        |              |  |        |         |                |  |              |       |       
|Purchased technology    |  | $              | 2,177  |              |  | $      | (2,073  | )              |  | $            | 104   |        |  | $ | 2,177  |  |  | $ | (1,427  | ) |  | $ | 750   | 
|Non-compete agreements  |  |                | 448    |              |  |        | (448    | )              |  |              |      |        |  |   | 400    |  |  |   | (301    | ) |  |   | 99    | 
|                        |  |                |        |              |  |        |         |                |  |              |       |        |  |   |        |  |  |   |         |   |  |   |       | 
|Total intangible assets |  |                | 2,625  |              |  |        | (2,521  | )              |  |              | 104   |        |  |   | 2,577  |  |  |   | (1,728  | ) |  |   | 849   | 
|Goodwill                |  |                | 14,714 |              |  |        | (11,323 | )              |  |              | 3,391 |        |  |   | 14,714 |  |  |   | (11,323 | ) |  |   | 3,391 | 
|                        |  |                |        |              |  |        |         |                |  |              |       |        |  |   |        |  |  |   |         |   |  |   |       | 
|                        |  | $              | 17,339 |              |  | $      | (13,844 | )              |  | $            | 3,495 |        |  | $ | 17,291 |  |  | $ | (13,051 | ) |  | $ | 4,240 | 
|                        |  |                |        |              |  |        |         |                |  |              |       |        |  |   |        |  |  |   |         |   |  |   |       | 

The aggregate amortization expense of intangible
assets, excluding amortization of goodwill, was $793,000,
$1,125,000 and $603,000 for 2002, 2001 and 2000, respectively.
The estimated amortization expense of acquired intangible assets
is expected to be $104,000 for 2003. At September 30, 2003,
the intangible assets will be fully amortized.

The changes in the carrying amount of goodwill
for 2002, 2001 and 2000 are as follows (in thousands):

|                               |  |                          |       |      |  |      |        |   |  |   |        |  
|------------------------------ |  | ------------------------ | ----- | ---- |  | ---- | ------ | - |  | - | ------ | -
|                               |  |                         
|                               |  | Years Ended December 31,
|                               |  |                         
|                               |  | 2002                     |       | 2001 |  | 2000
|                               |  |                          |       |      |  |     
|Beginning balance              |  | $                        | 3,391 |      |  | $    | 10,812 |   |  | $ | 14,661 |  
|Amortization during the period |  |                          |      |      |  |      | (7,421 | ) |  |   | (3,849 | )
|                               |  |                          |       |      |  |      |        |   |  |   |        |  
|Ending balance                 |  | $                        | 3,391 |      |  | $    | 3,391  |   |  | $ | 10,812 |  
|                               |  |                          |       |      |  |      |        |   |  |   |        |  

The following table presents net loss and basic
and diluted net loss per share as if the goodwill had not been
amortized during the periods presented (in thousands, except per
share data):

|                                                  |  |                          |        |      |  |      |         |   |  |   |        |  
|------------------------------------------------- |  | ------------------------ | ------ | ---- |  | ---- | ------- | - |  | - | ------ | -
|                                                  |  |                         
|                                                  |  | Years Ended December 31,
|                                                  |  |                         
|                                                  |  | 2002                     |        | 2001 |  | 2000
|                                                  |  |                          |        |      |  |     
|Reported net loss                                 |  | $                        | (6,664 | )    |  | $    | (19,750 | ) |  | $ | (9,114 | )
|Goodwill amortization                             |  |                          |       |      |  |      | 7,421   |   |  |   | 3,849  |  
|                                                  |  |                          |        |      |  |      |         |   |  |   |        |  
|Adjusted net loss                                 |  | $                        | (6,664 | )    |  | $    | (12,329 | ) |  | $ | (5,265 | )
|                                                  |  |                          |        |      |  |      |         |   |  |   |        |  
|Reported basic and diluted net loss per share     |  | $                        | (0.28  | )    |  | $    | (0.85   | ) |  | $ | (0.41  | )
|Goodwill amortization per basic and diluted share |  |                          |       |      |  |      | 0.32    |   |  |   | 0.17   |  
|                                                  |  |                          |        |      |  |      |         |   |  |   |        |  
|Adjusted basic and diluted net loss per share     |  | $                        | (0.28  | )    |  | $    | (0.53   | ) |  | $ | (0.24  | )
|                                                  |  |                          |        |      |  |      |         |   |  |   |        |  

51



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##### Table of Contents



iMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

5.     Investments

The following is a summary of the Companys
portfolio investments (in thousands):

|                          |  |                   |        |            |  |            |    |           |  |   |   |  |  |   |        | 
|------------------------- |  | ----------------- | ------ | ---------- |  | ---------- | -- | --------- |  | - | - |  |  | - | ------ | 
|                          |  |                  
|                          |  | December 31, 2002
|                          |  |                  
|                          |  |                   |        | Gross      |  | Gross      |    | Estimated
|                          |  |                   |        | Unrealized |  | Unrealized |    | Fair     
|                          |  | Cost              |        | Gains      |  | Losses     |    | Value    
|                          |  |                   |        |            |  |            |    |          
|Money market funds        |  | $                 | 11,810 |            |  | $          |   |           |  | $ |  |  |  | $ | 11,810 | 
|Government agencies       |  |                   | 9,583  |            |  |            | 3  |           |  |   |  |  |  |   | 9,586  | 
|Corporate obligations     |  |                   | 15,404 |            |  |            | 47 |           |  |   |  |  |  |   | 15,451 | 
|                          |  |                   |        |            |  |            |    |           |  |   |   |  |  |   |        | 
|                          |  | $                 | 36,797 |            |  | $          | 50 |           |  | $ |  |  |  | $ | 36,847 | 
|                          |  |                   |        |            |  |            |    |           |  |   |   |  |  |   |        | 
|Included in:              |  |                   |        |            |  |            |    |           |  |   |   |  |  |   |        | 
|Cash and cash equivalents |  | $                 | 28,611 |           
|Short-term investments    |  |                   | 8,236  |           
|                          |  |                   |        |           
|                          |  |                   |        |            |  |            |    |           |  |   |   |  |  | $ | 36,847 | 
|                          |  |                   |        |            |  |            |    |           |  |   |   |  |  |   |        | 

|                          |  |                   |        |            |  |            |     |           |  |   |   |  |  |   |        | 
|------------------------- |  | ----------------- | ------ | ---------- |  | ---------- | --- | --------- |  | - | - |  |  | - | ------ | 
|                          |  |                  
|                          |  | December 31, 2001
|                          |  |                  
|                          |  |                   |        | Gross      |  | Gross      |     | Estimated
|                          |  |                   |        | Unrealized |  | Unrealized |     | Fair     
|                          |  | Cost              |        | Gains      |  | Losses     |     | Value    
|                          |  |                   |        |            |  |            |     |          
|Money market funds        |  | $                 | 15,786 |            |  | $          |    |           |  | $ |  |  |  | $ | 15,786 | 
|Corporate obligations     |  |                   | 23,767 |            |  |            | 226 |           |  |   |  |  |  |   | 23,993 | 
|                          |  |                   |        |            |  |            |     |           |  |   |   |  |  |   |        | 
|                          |  | $                 | 39,553 |            |  | $          | 226 |           |  | $ |  |  |  | $ | 39,779 | 
|                          |  |                   |        |            |  |            |     |           |  |   |   |  |  |   |        | 
|Included in:              |  |                   |        |            |  |            |     |           |  |   |   |  |  |   |        | 
|Cash and cash equivalents |  | $                 | 15,786 |           
|Short-term investments    |  |                   | 16,827 |           
|Long-term investments     |  |                   | 7,166  |           
|                          |  |                   |        |           
|                          |  |                   |        |            |  |            |     |           |  |   |   |  |  | $ | 39,779 | 
|                          |  |                   |        |            |  |            |     |           |  |   |   |  |  |   |        | 

The following is a summary of the Companys
portfolio investments by contractual maturity (in thousands):

|                                     |  |              |        |      |  |   |        | 
|------------------------------------ |  | ------------ | ------ | ---- |  | - | ------ | 
|                                     |  |             
|                                     |  | December 31,
|                                     |  |             
|                                     |  | 2002         |        | 2001
|                                     |  |              |        |     
|Due in one year or less              |  | $            | 36,847 |      |  | $ | 32,613 | 
|Due after one year through two years |  |              |       |      |  |   | 7,166  | 
|                                     |  |              |        |      |  |   |        | 
|                                     |  | $            | 36,847 |      |  | $ | 39,779 | 
|                                     |  |              |        |      |  |   |        | 

52



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##### Table of Contents



iMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

6.     Property and
Equipment

Property and equipment consisted of the following
(in thousands):

|                                               |  |              |       |      |  |   |       | 
|---------------------------------------------- |  | ------------ | ----- | ---- |  | - | ----- | 
|                                               |  |             
|                                               |  | December 31,
|                                               |  |             
|                                               |  | 2002         |       | 2001
|                                               |  |              |       |     
|Computer software and equipment                |  | $            | 5,892 |      |  | $ | 4,792 | 
|Furniture and office equipment                 |  |              | 1,808 |      |  |   | 1,182 | 
|Leasehold improvements                         |  |              | 266   |      |  |   | 44    | 
|                                               |  |              |       |      |  |   |       | 
|                                               |  |              | 7,966 |      |  |   | 6,018 | 
|Less accumulated depreciation and amortization |  |              | 5,647 |      |  |   | 3,595 | 
|                                               |  |              |       |      |  |   |       | 
|                                               |  | $            | 2,319 |      |  | $ | 2,423 | 
|                                               |  |              |       |      |  |   |       | 

Property and equipment are carried at cost less
accumulated depreciation and amortization. Depreciation and
amortization are computed using the straight-line method. The
estimated useful lives of computer software and equipment are
three years. The estimated useful lives of furniture and office
equipment are three to five years. Amortization of leasehold
improvements is computed using the shorter of the remaining
facility lease term or the estimated useful life of the
improvements. Depreciation expense was $2.1 million,
$2.0 million and $1.6 million in 2002, 2001 and 2000,
respectively.

7.     Other
Assets

Other assets consisted of the following (in
thousands):

|                    |  |              |       |      |  |   |       | 
|------------------- |  | ------------ | ----- | ---- |  | - | ----- | 
|                    |  |             
|                    |  | December 31,
|                    |  |             
|                    |  | 2002         |       | 2001
|                    |  |              |       |     
|Technology licenses |  | $            | 908   |      |  | $ | 323   | 
|Notes receivable    |  |              | 1,641 |      |  |   | 1,000 | 
|Other               |  |              | 61    |      |  |   | 243   | 
|                    |  |              |       |      |  |   |       | 
|                    |  | $            | 2,610 |      |  | $ | 1,566 | 
|                    |  |              |       |      |  |   |       | 

In 2002 and 2001, the Company entered into
technology license agreements including non-cancelable minimum
payments. The present value of payments under these agreements
is recorded as an asset and amortized over the term of the
agreements as technological feasibility was established for the
product that included the technology. Each of these license
agreements may be renewed only with the other partys
written consent. The notes receivable are comprised of loans
made to the Companys Chief Operating Officer in 2002 and
former Chief Financial Officer in 2000. See Note 15 
Related Party Transactions.

53



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##### Table of Contents



iMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

8.     Accrued
Liabilities

Accrued liabilities consisted of the following
(in thousands):

|                      |  |              |       |      |  |   |       | 
|--------------------- |  | ------------ | ----- | ---- |  | - | ----- | 
|                      |  |             
|                      |  | December 31,
|                      |  |             
|                      |  | 2002         |       | 2001
|                      |  |              |       |     
|Accrued compensation  |  | $            | 3,194 |      |  | $ | 2,514 | 
|Technology licenses   |  |              | 66    |      |  |   | 63    | 
|Professional services |  |              | 641   |      |  |   | 598   | 
|Sales tax payable     |  |              | 415   |      |  |   | 580   | 
|Income tax payable    |  |              | 84    |      |  |   | 65    | 
|Restructuring charge  |  |              |      |      |  |   | 448   | 
|Other                 |  |              | 952   |      |  |   | 775   | 
|                      |  |              |       |      |  |   |       | 
|                      |  | $            | 5,352 |      |  | $ | 5,043 | 
|                      |  |              |       |      |  |   |       | 

9.     Restructuring
Charge

In September 2001, the Company implemented a plan
to consolidate its operations and close a facility in Utah. The
restructuring action consisted primarily of the termination of
approximately 20 positions in engineering, sales, marketing
and administration in the Utah location and exiting the related
facility. The functions performed in the Utah facility have been
combined with the Companys Chicago, Illinois operations.
As a result of the restructuring, the Company recognized a
charge of $1.2 million in the third quarter of 2001. The
restructuring charge included $694,000 for employee severance,
$150,000 for the write-off of intangible assets related to the
acquisition of ThoughtStar, $93,000 for the write-off of certain
property and equipment and $257,000 related to facility closing
costs. There is no remaining restructuring charge accrued at
December 31, 2002.

10.     Borrowings

As of December 31, 2002, the Company had a
line of credit agreement with a bank comprised of a revolving
line of credit and an equipment line of credit. The line of
credit agreement, which is collateralized by substantially all
of the Companys assets, intangible assets and intellectual
property, includes covenant restrictions requiring the Company
to maintain certain minimum profitability levels and limits the
Companys ability to declare and pay dividends.

The revolving line of credit provides for
borrowings of up to $4.0 million, which bears interest at
the banks prime rate plus 0.50%. Borrowings are limited to
$4.0 million minus the amount outstanding under the
revolving line of credit and outstanding letters of credit;
$202,000 was available at December 31, 2002. At
December 31, 2002, the Company had outstanding
$3.4 million of borrowings against this facility.

The equipment line of credit, which bears
interest at the greater of the prime plus 0.50% or 4.75%,
provides for borrowings of up to $6.0 million to finance
the purchase of property and equipment. At December 31,
2002 and 2001, amounts outstanding under the equipment line of
credit totaled $2.4 million and $2.7 million,
respectively. Principal repayment began in March 2000 and will
continue through December 2005 in monthly installments of
principal and interest. In December 2002, the Company borrowed
an additional $1.3 million against this facility. The
Company repaid $1.6 million and $1.0 million of
principal in 2002 and 2001, respectively, and, at
December 31, 2002, $3.6 million was available.

The interest expense was $136,000, $254,000 and
$260,000 in 2002, 2001 and 2000, respectively. Cash paid for
interest was $149,000, $243,000 and $260,000 in 2002, 2001 and
2000, respectively.

54



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##### Table of Contents



iMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Principal payments due under these line of credit
facilities as of December 31, 2002 are as follows (in
thousands):

|                          |  |   |       | 
|------------------------- |  | - | ----- | 
|Years Ending December 31, |  |  
|                          |  |  
|2003                      |  | $ | 4,808 | 
|2004                      |  |   | 666   | 
|2005                      |  |   | 344   | 
|                          |  |   |       | 
|                          |  | $ | 5,818 | 
|                          |  |   |       | 

11.     Commitments
and Contingencies

The Company leases its main office facilities in
Foster City, California and Chicago, Illinois and various sales
offices in the United States and Europe under non-cancelable
operating leases, which expire in September 2008 for the Foster
City facility and April 2009 for the Chicago facility. Rent
expense for 2002, 2001 and 2000 was $1.8 million,
$1.6 million and $1.1 million, respectively.

Future minimum lease payments under operating
leases as of December 31, 2002 were as follows (in
thousands):

|                          |  |   |       | 
|------------------------- |  | - | ----- | 
|Years Ending December 31, |  |  
|                          |  |  
|2003                      |  | $ | 1,497 | 
|2004                      |  |   | 1,145 | 
|2005                      |  |   | 1,160 | 
|2006                      |  |   | 1,198 | 
|2007                      |  |   | 1,236 | 
|Thereafter                |  |   | 1,174 | 
|                          |  |   |       | 
|                          |  | $ | 7,410 | 
|                          |  |   |       | 

The Company has outstanding standby letters of
credit totaling $348,000 from a financial institution, in lieu
of security deposits for the lease of its main office
facilities. No amounts have been drawn against the letter of
credit.

Beginning in July 2001, several securities class
action complaints were filed against the Company, the
underwriters of the Companys initial public offering, its
directors and certain officers in the United States District
Court for the Southern District of New York. The cases were
consolidated and the litigation is now captioned as In re
iManage, Inc. Initial Public Offering Securities Litigation,
Civ. No. 01-6277 (SAS) (S.D.N.Y.), related to In re
Initial Public Offering Securities Litigation,
21 MC 92 (SAS) (S.D.N.Y.). On or about April 19,
2002, plaintiffs served an amended complaint. The amended
complaint is brought purportedly on behalf of all persons who
purchased the Companys common stock from November 17,
1999 through December 6, 2000. It names as defendants the
Company; five of the Companys present and former officers;
and several investment banking firms that served as underwriters
of the Companys initial public offering. The complaint
alleges liability under Sections 11 and 15 of the
Securities Act of 1933 and Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 on the grounds that the
registration statement for the offering did not disclose that:
(1) the underwriters had agreed to allow certain customers
to purchase shares in the offering in exchange for excess
commissions paid to the underwriters; and (2) the
underwriters had arranged for certain customers to purchase
additional shares in the aftermarket at predetermined prices.
The amended complaint also alleges that false analyst reports
were issued. Plaintiffs seek unspecified monetary damages,
attorneys fees and other costs.

55



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##### Table of Contents



iMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company is aware that similar allegations
have been made in lawsuits challenging over 300 other public
offerings conducted in 1999, 2000 and 2001. All of these cases
have been consolidated for pretrial purposes before Judge
Shira A. Scheindlin of the Southern District of New York.
On July 15, 2002, the Company and its related individual
defendants (as well as the other issuers named as defendants)
filed a motion to dismiss. Subsequently, the individual
defendants stipulated with plaintiffs to dismissal from the case
without prejudice, subject to a tolling agreement. On
February 19, 2003, the Court ruled on the motions to
dismiss. The Court denied the motions to dismiss claims under
the Securities Act of 1933 in all but 10 of the cases, including
the case involving the Company. The Court denied the motion to
dismiss the claim under Section 10(a) of the Securities
Exchange Act of 1934 against the Company and 184 other
issuer defendants on the basis that the amended complaints in
these cases alleged that the respective issuers had acquired
companies or conducted follow-on offerings after their initial
public offerings.

The Company and certain executive officers are
defendants in a complaint filed by a former employee alleging
ownership of 18,000 shares of the Companys common
stock that were never issued. The complaint alleges, among other
claims, breach of contract, and the plaintiff is seeking damages
of approximately $700,000 plus punitive damages of
$10 million.

While the Company believe that the allegations
against its officers/ directors and the Company are without
merit, and intend to contest them vigorously, there can be no
assurance that these matters will be resolved without costly
litigation or in a manner that is not adverse to its
consolidated financial position, results of operations or cash
flows. No estimate can be made of the possible loss or range of
loss associated with the resolution of these matters.

12.     Stockholders
Equity



| |             
| | ------------
| | Common Stock

Each share of common stock has the right to one
vote. The holders of common stock are also entitled to receive
dividends whenever funds are legally available and when declared
by the Board of Directors, subject to the rights of holders of
all classes of stock having priority rights as to dividends. No
cash dividends have been declared or paid through
December 31, 2002.

On July 17, 2002, the Companys Board
of Directors authorized a common stock repurchase program. Under
the program, the Company was authorized to repurchase its common
shares on the open market from time to time at the discretion of
management. The number of shares repurchased and the timing of
purchases were based on several factors, including the trading
price of the Companys common stock and general market
conditions. The repurchase program was ceased on
December 31, 2002. A total of 232,300 shares were
repurchased and retired under the program at an aggregate cost
of $581,000.

During 2002, the Company issued
38,000 shares of common stock at fair market values of
$2.00 to $6.05 per share to an employee for services. On
the date of issuance, these shares of common stock had a fair
market value of $151,000, which was recorded and expensed as
employee stock-based compensation.

The Company preserved the right to repurchase
shares from an escrow account based on certain criteria in
conjunction with the acquisition of ThoughtStar in 2000. During
2002, the Company reacquired 13,000 shares of common stock
at its fair market value of $60,000. The escrow account was
settled and dissolved in the first quarter of 2002.

At December 31, 2002, 2001 and 2000, 1,000,
20,000 and 262,000 shares of common stock were subject to the
Companys right of repurchase at the shares original
issuance price. Weighted average original issuance price per
share of these common shares was $0.60, $0.51 and $0.55 at
December 31, 2002, 2001 and 2000 respectively. The
Companys right to repurchase these shares lapses ratably
over periods through September 2003.

56



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##### Table of Contents



iMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                
| | ---------------
| | Preferred Stock

At December 31, 2002, the Company has
2 million authorized shares of preferred stock with a
$0.001 par value, of which none were issued and outstanding.



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

At December 31, 2002, the Company had two
stock option plans and an Employee Stock Purchase Plan.



| |                             
| | ----------------------------
| | Employee Stock Purchase Plan

In November 1999, the Company adopted an Employee
Stock Purchase Plan (ESPP). Under the terms of the
ESPP, the maximum aggregate number of shares of common stock
that may be issued under the ESPP is 500,000, cumulatively
increased on January 1, 2001 and each January 1
thereafter until and including January 1, 2009 by an amount
equal to the lesser of (a) two percent (2%) of the issued
and outstanding shares of common stock as of the preceding
December 31, (b) 500,000 shares or (c) a lesser
amount of shares determined by the Board of Directors. During
each six-month offering period, employees can choose to have up
to 15% of their annual base earnings withheld to purchase the
Companys common stock. The purchase price of the common
stock is 85% of the lesser of the fair value as of the beginning
or ending of the offering period. A total of 233,000, 157,000
and 69,000 shares of common stock were issued under the
ESPP in 2002, 2001 and 2000, respectively, at an average price
of $2.82, $4.35 and $8.18 per share in 2002, 2001 and 2000,
respectively. At December 31, 2002, 976,000 shares were
available for issuance.



| |                       
| | ----------------------
| | 1997 Stock Option Plan

The Company has reserved 8,338,610 shares of
common stock for issuance under the 1997 Stock Incentive Plan
(1997 Plan). Automatic annual increases in the
shares reserved for issuance occur beginning in 2001 equal to
the lesser of 5% of the outstanding common shares of the Company
at the last day of the preceding year or a lesser amount as
determined by the Board of Directors.

The Board of Directors has the authority to
determine to whom options will be granted, the number of shares,
the term and exercise price. The options vest and are
exercisable at times and increments as specified by the Board of
Directors and expire ten years from date of grant. Options
granted under the 1997 Plan generally become exercisable 25% one
year after the date of the option holders date of
employment and thereafter ratably over three years.

Under the 1997 Plan, non-employee directors
receive an automatic grant of 30,000 options to purchase common
shares upon their initial election or re-election to the Board
of Directors. Stock option grants to non-employee directors vest
over a three-year period.



| |                                   
| | ----------------------------------
| | 2000 Non-Officer Stock Option Plan

The Company has reserved 2,150,000 shares of
common stock for issuance under the 2000 Non-Officer Stock
Option Plan (2000 Plan). Options may be granted at
the discretion of the Board of Directors to eligible employees
and consultants.

The Board of Directors has the authority to
determine to whom options will be granted, the number of shares,
the term and the exercise price. The exercise price shall
generally not be less than 85% of the fair market value of the
Companys stock on the grant date of the option. Options
granted under the 2000 Plan generally become exercisable 25% one
year after the date of the option holders date of
employment and thereafter ratably over three years and expire
ten years from the date of the grant.

57



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##### Table of Contents



iMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Activity under the Companys stock option
plans is as follows (in thousands, except per share data):

|                                                                                                             |  |                          |        |          |  |        |      |          |  |        |        |          |  |   |      |  |  |  |       |   |  |   |      | 
|------------------------------------------------------------------------------------------------------------ |  | ------------------------ | ------ | -------- |  | ------ | ---- | -------- |  | ------ | ------ | -------- |  | - | ---- |  |  |  | ----- | - |  | - | ---- | 
|                                                                                                             |  |                         
|                                                                                                             |  | Years Ended December 31,
|                                                                                                             |  |                         
|                                                                                                             |  |                          |        |          |  |       
|                                                                                                             |  | 2002                     |        | 2001     |  | 2000  
|                                                                                                             |  |                          |        |          |  |       
|                                                                                                             |  |                          |        | Weighted |  |        |      | Weighted |  |        |        | Weighted
|                                                                                                             |  | Number                   |        | Average  |  | Number |      | Average  |  | Number |        | Average 
|                                                                                                             |  | of                       |        | Exercise |  | of     |      | Exercise |  | of     |        | Exercise
|                                                                                                             |  | Shares                   |        | Price    |  | Shares |      | Price    |  | Shares |        | Price   
|                                                                                                             |  |                          |        |          |  |        |      |          |  |        |        |         
|Outstanding, beginning of period                                                                             |  |                          | 5,297  |          |  | $      | 3.40 |          |  |        | 3,479  |          |  | $ | 3.78 |  |  |  | 1,567 |   |  | $ | 3.69 | 
|Granted                                                                                                      |  |                          | 2,055  |          |  |        | 3.80 |          |  |        | 3,155  |          |  |   | 2.94 |  |  |  | 2,543 |   |  |   | 3.51 | 
|Exercised                                                                                                    |  |                          | (457   | )        |  |        | 2.10 |          |  |        | (296   | )        |  |   | 1.25 |  |  |  | (322  | ) |  |   | 0.50 | 
|Canceled                                                                                                     |  |                          | (1,020 | )        |  |        | 3.58 |          |  |        | (1,041 | )        |  |   | 3.93 |  |  |  | (309  | ) |  |   | 5.22 | 
|                                                                                                             |  |                          |        |          |  |        |      |          |  |        |        |          |  |   |      |  |  |  |       |   |  |   |      | 
|Outstanding, end of period                                                                                   |  |                          | 5,875  |          |  |        | 3.61 |          |  |        | 5,297  |          |  |   | 3.40 |  |  |  | 3,479 |   |  |   | 3.78 | 
|                                                                                                             |  |                          |        |          |  |        |      |          |  |        |        |          |  |   |      |  |  |  |       |   |  |   |      | 
|Exercisable, end of period                                                                                   |  |                          | 2,759  |          |  |        | 4.12 |          |  |        | 1,881  |          |  |   | 3.85 |  |  |  | 1,599 |   |  |   | 3.94 | 
|                                                                                                             |  |                          |        |          |  |        |      |          |  |        |        |          |  |   |      |  |  |  |       |   |  |   |      | 
|Weighted average fair value of options granted
    with exercise prices equal to fair value at date of grant |  |                          | 1,755  |          |  |        | 3.37 |          |  |        | 2,667  |          |  |   | 2.98 |  |  |  | 2,454 |   |  |   | 3.64 | 
|Weighted average fair value of options granted
    with exercise price less than fair value at date of grant |  |                          | 300    |          |  |        | 6.27 |          |  |        | 488    |          |  |   | 0.87 |  |  |  | 89    |   |  |   | 0.01 | 

The following table summarizes information about
stock options as of December 31, 2002 (option amounts in
thousands):

|                    |  |                     |       |                       |  |                  |      |           |  |                  |      |  |  |  |       |  |  |   |      | 
|------------------- |  | ------------------- | ----- | --------------------- |  | ---------------- | ---- | --------- |  | ---------------- | ---- |  |  |  | ----- |  |  | - | ---- | 
|                    |  |                    
|Options Outstanding |  | Options Exercisable
|                    |  |                    
|                    |  | Weighted Average    |       |                       |  |                 
|                    |  | Number of           |       | Remaining Contractual |  | Weighted Average |      | Number of |  | Weighted Average
|Exercise Prices     |  | Options             |       | Life (Years)          |  | Exercise Price   |      | Options   |  | Exercise Price  
|                    |  |                     |       |                       |  |                  |      |           |  |                 
|$0.20 to $2.45      |  |                     | 1,293 |                       |  |                  | 9.24 |           |  | $                | 2.29 |  |  |  | 168   |  |  | $ | 1.39 | 
|$2.51               |  |                     | 1,574 |                       |  |                  | 8.31 |           |  |                  | 2.51 |  |  |  | 734   |  |  |   | 2.51 | 
|$2.88 to $3.44      |  |                     | 1,336 |                       |  |                  | 8.24 |           |  |                  | 3.14 |  |  |  | 817   |  |  |   | 3.12 | 
|$3.81 to $7.03      |  |                     | 1,196 |                       |  |                  | 8.67 |           |  |                  | 4.87 |  |  |  | 696   |  |  |   | 5.05 | 
|$7.13 to $11.00     |  |                     | 476   |                       |  |                  | 7.50 |           |  |                  | 9.02 |  |  |  | 344   |  |  |   | 9.37 | 
|                    |  |                     |       |                       |  |                  |      |           |  |                  |      |  |  |  |       |  |  |   |      | 
|                    |  |                     | 5,875 |                       |  |                  | 8.51 |           |  |                  | 3.61 |  |  |  | 2,759 |  |  |   | 4.12 | 
|                    |  |                     |       |                       |  |                  |      |           |  |                  |      |  |  |  |       |  |  |   |      | 



| |                         
| | ------------------------
| | Stock-based Compensation

Stock-based compensation charges relate to the
following expense classifications in the accompanying
consolidated statement of operations (in thousands):

|                           |  |                          |     |      |  |      |       |  |  |   |       | 
|-------------------------- |  | ------------------------ | --- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                           |  |                         
|                           |  | Years Ended December 31,
|                           |  |                         
|                           |  | 2002                     |     | 2001 |  | 2000
|                           |  |                          |     |      |  |     
|Cost of revenues           |  | $                        | 23  |      |  | $    | 46    |  |  | $ | 127   | 
|Sales and marketing        |  |                          | 264 |      |  |      | 767   |  |  |   | 951   | 
|Research and development   |  |                          | 34  |      |  |      | 504   |  |  |   | 684   | 
|General and administrative |  |                          | 223 |      |  |      | 132   |  |  |   | 372   | 
|                           |  |                          |     |      |  |      |       |  |  |   |       | 
|                           |  | $                        | 544 |      |  | $    | 1,449 |  |  | $ | 2,134 | 
|                           |  |                          |     |      |  |      |       |  |  |   |       | 

58



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##### Table of Contents



iMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Amortization of stock-based compensation will be
reduced in future periods to the extent options are terminated
prior to full vesting.

During 2002, 2001 and 2000, the Company issued
options to purchase shares of its common stock to certain
employees totaling 300,000, 460,000 and 89,000, respectively,
under the 1997 Plan and outside the 1997 Plan with weighted
average exercise prices of $6.27, $0.70, and $0.01 per
share, respectively, which were below the fair value of the
Companys common stock at the date of grant. The weighted
average fair value of the underlying common stock was $7.65,
$2.88 and $11.00 in 2002, 2001 and 2000, respectively. In
accordance with the requirements of APB No. 25, the Company
has recorded deferred stock-based compensation for the
difference between the exercise price of the stock options and
the fair value of the Companys stock on the date of grant.
This deferred compensation is amortized to expense over the
period during which the Companys right to repurchase the
stock lapses or options become exercisable, generally four or
five years consistent with the method described in
FIN No. 28, Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Awards Plans. At
December 31, 2002, the Company had recorded deferred
stock-based compensation related to these options in an amount
of $12.6 million, of which $612,000, $1.5 million and
$2.9 million had been amortized to expense during 2002,
2001 and 2000, respectively.

During 2001, the Company granted options to
purchase 28,000 shares of its common stock at exercise
prices ranging from $0.01 to $5.09 per share to
non-employee engineers for consulting services, when the fair
market value of the Companys common stock ranged from
$4.40 to $5.09 per share. These options were fully vested upon
grant and were valued at a total of $157,000 using the
Black-Scholes pricing model with the following assumptions:
10 year terms, volatility ranging from 102% to 132%,
discount rate ranging from 4.97% to 5.11% and 0% dividend rate.
This $157,000 was expensed immediately as the options related to
services provided prior to the grant date.

Deferred stock-based compensation charges are
comprised of the following categories (in thousands):

|                                         |  |                          |      |      |  |      |       |   |  |   |       |  
|---------------------------------------- |  | ------------------------ | ---- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                                         |  |                         
|                                         |  | Years Ended December 31,
|                                         |  |                         
|                                         |  | 2002                     |      | 2001 |  | 2000
|                                         |  |                          |      |      |  |     
|Employee stock-based compensation        |  | $                        | 612  |      |  | $    | 1,541 |   |  | $ | 2,911 |  
|Non-employee stock-based compensation    |  |                          |     |      |  |      | 157   |   |  |   |      |  
|Cancellation of options upon termination |  |                          | (170 | )    |  |      | (249  | ) |  |   | (777  | )
|                                         |  |                          |      |      |  |      |       |   |  |   |       |  
|                                         |  | $                        | 442  |      |  | $    | 1,449 |   |  | $ | 2,134 |  
|                                         |  |                          |      |      |  |      |       |   |  |   |       |  



| |                                      
| | -------------------------------------
| | Notes Receivable for Common
    Stock

In August 1999, a non-officer of the Company
exercised options to purchase 77,000 common shares in
exchange for a full recourse note receivable of $33,000. The
note receivable is due in August 2003 and bears interest at
5.37%.

In June 1999, a former officer of the Company
exercised options to purchase 180,000 common shares in
exchange for a full recourse note receivable of $297,000. The
note accrues interest at the rate of 4.9% per year and was due
on July 26, 2001. The due date has been extended to
September 1, 2003. See Note 15  Related
Party Transactions.

Pro Forma Net
Loss and Net Loss per Share

The Company has adopted the disclosure only
provisions of SFAS No. 123. Had compensation cost been
determined based on the fair value at the grant date for the
awards for 2002, 2001 and 2000, the Companys

59



---



##### Table of Contents



iMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

net loss and basic and diluted net loss per
common share would have been as follows (in thousands, except
per share amounts):

|                                             |                                                                        |                          |   |         |   |      |   |         |   |  |   |         |  
|-------------------------------------------- | ---------------------------------------------------------------------- | ------------------------ | - | ------- | - | ---- | - | ------- | - |  | - | ------- | -
|                                             |                                                                        |                         
|                                             |                                                                        | Years Ended December 31,
|                                             |                                                                        |                         
|                                             |                                                                        | 2002                     |   | 2001    |   | 2000
|                                             |                                                                        |                          |   |         |   |     
|Net loss:                                    |                                                                        |                          |   |         |   |      |   |         |   |  |   |        
|                                             | As reported                                                            |                          | $ | (6,664  | ) |      | $ | (19,750 | ) |  | $ | (9,114  | )
|                                             | Stock-based employee compensation included in net
    loss as reported |                          |   | 442     |   |      |   | 1,292   |   |  |   | 2,134   |  
|                                             | Stock-based employee compensation using the fair
    value method      |                          |   | (5,394  | ) |      |   | (7,264  | ) |  |   | (7,259  | )
|                                             |                                                                        |                          |   |         |   |      |   |         |   |  |   |        
|                                             | Pro forma                                                              |                          | $ | (11,616 | ) |      | $ | (25,722 | ) |  | $ | (14,239 | )
|                                             |                                                                        |                          |   |         |   |      |   |         |   |  |   |        
|Basic and diluted net loss per common share: |                                                                        |                          |   |         |   |      |   |         |   |  |   |        
|                                             | As reported                                                            |                          | $ | (0.28   | ) |      | $ | (0.85   | ) |  | $ | (0.41   | )
|                                             | Pro forma                                                              |                          | $ | (0.48   | ) |      | $ | (1.10   | ) |  | $ | (0.64   | )

As the provisions of SFAS No. 123 have been
applied only to stock options granted since the 1997 Plans
inception, the impact of the pro forma stock-based compensation
cost will likely continue to increase, as the vesting period for
the Companys options and the period over which the
stock-based compensation is charged to expense is generally four
years.

The estimated weighted average value of options
granted under the Plan, during 2002, 2001 and 2000 was $3.75,
$2.72 and $3.77 per share, respectively. The value of each is
estimated on the date of grant using the Black-Scholes option
valuation method, with the following weighted-average
assumptions:

|                        |  |      |         |      |  |      |         |   |  |  |         |  
|----------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  |  | ------- | -
|                        |  | 2002 |         | 2001 |  | 2000
|                        |  |      |         |      |  |     
|Expected life of option |  |      | 5 years |      |  |      | 5 years |   |  |  | 5 years |  
|Risk-free interest rate |  |      | 2.94    | %    |  |      | 4.38    | % |  |  | 6.03    | %
|Dividend yield          |  |      | 0.00    | %    |  |      | 0.00    | % |  |  | 0.00    | %
|Volatility              |  |      | 115     | %    |  |      | 125     | % |  |  | 158     | %

The estimated weighted-average value of purchase
rights granted under the ESPP during 2002, 2001 and 2000 was
$1.89, $2.44 and $8.18 per share. The fair value of each stock
purchase right granted under the ESPP is estimated using the
Black-Scholes option valuation method, with the following
weighted-average assumptions:

|                        |  |      |          |      |  |      |          |   |  |  |          |  
|----------------------- |  | ---- | -------- | ---- |  | ---- | -------- | - |  |  | -------- | -
|                        |  | 2002 |          | 2001 |  | 2000
|                        |  |      |          |      |  |     
|Expected life of option |  |      | 6 months |      |  |      | 6 months |   |  |  | 6 months |  
|Risk-free interest rate |  |      | 1.17     | %    |  |      | 1.82     | % |  |  | 5.85     | %
|Dividend yield          |  |      | 0.00     | %    |  |      | 0.00     | % |  |  | 0.00     | %
|Volatility              |  |      | 115      | %    |  |      | 125      | % |  |  | 158      | %

The aggregate fair value of purchase rights
granted in 2002, 2001 and 2000 was $391,000, $332,000 and
$729,000, respectively.



|    |                       
|--- | ----------------------
|13. | 401(k) Retirement Plan

The Company sponsors an employee retirement plan
intended to qualify under Section 401(k) of the Internal
Revenue Code. Eligible employees may contribute up to 20% of
eligible compensation, subject to annual limitations, and are
fully vested in their own contributions. The Company made
matching contributions

60



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iMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

of 25% up to the first 6% of the employees
compensation, which is contributed and vests ratably over a
four-year period. Annual amounts contributed by the Company
under the plan are $222,000, $180,000 and $141,000 in 2002, 2001
and 2000, respectively.

14.     Income
Taxes

The individual components of the Companys
deferred tax assets are as follows (in thousands):

|                                 |                           |              |         |        |  |   |        |       | 
|-------------------------------- | ------------------------- | ------------ | ------- | ------ |  | - | ------ | ----- | 
|                                 |                           |             
|                                 |                           | December 31,
|                                 |                           |             
|                                 |                           | 2002         |         | 2001  
|                                 |                           |              |         |       
|Net operating loss carryforward  |                           | $            | 8,712   |        |  | $ | 5,796  |      
|Depreciation and amortization    |                           |              | 717     |        |  |   | 401    |      
|Allowance for doubtful accounts  |                           |              | 199     |        |  |   | 165    |      
|Accrued liabilities              |                           |              | 453     |        |  |   | 702    |      
|Research and development credits |                           |              | 2,122   |        |  |   | 1,472  |      
|                                 |                           |              |         |        |  |   |        |      
|                                 | Total deferred tax assets |              |         | 12,203 |  |   |        | 8,536 | 
|Less valuation allowance         |                           |              | (12,203 | )      |  |   | (8,536 | )    
|                                 |                           |              |         |        |  |   |        |      
|                                 | Net deferred tax assets   |              | $       |       |  |   | $      |      | 
|                                 |                           |              |         |        |  |   |        |      

The net increases in the valuation allowance for
2002, 2001 and 2000 were $3.7 million, $5.1 million
and $1.2 million, respectively.

The principal items accounting for the difference
between income tax provision at the U.S. statutory rate and the
provision for income taxes reflected in the consolidated
statements of operations are as follows:

|                                                        |  |                          |     |      |  |      |     |   |  |  |     |  
|------------------------------------------------------- |  | ------------------------ | --- | ---- |  | ---- | --- | - |  |  | --- | -
|                                                        |  |                         
|                                                        |  | Years Ended December 31,
|                                                        |  |                         
|                                                        |  | 2002                     |     | 2001 |  | 2000
|                                                        |  |                          |     |      |  |     
|Federal statutory rate                                  |  |                          | 34  | %    |  |      | 34  | % |  |  | 34  | %
|State taxes                                             |  |                          | 4   |      |  |      | 5   |   |  |  | 5   |  
|Tax credits                                             |  |                          | 10  |      |  |      | 3   |   |  |  |    |  
|Amortization                                            |  |                          |    |      |  |      | (15 | ) |  |  | (17 | )
|Deferred compensation                                   |  |                          | (3  | )    |  |      | (3  | ) |  |  | (8  | )
|Foreign income taxes                                    |  |                          | 1   |      |  |      | 1   |   |  |  | 1   |  
|Other                                                   |  |                          | 5   |      |  |      | 1   |   |  |  | (2  | )
|Net operating losses and tax credits, not
    benefited |  |                          | (50 | )    |  |      | (25 | ) |  |  | (12 | )
|                                                        |  |                          |     |      |  |      |     |   |  |  |     |  
|                                                        |  |                          | 1   | %    |  |      | 1   | % |  |  | 1   | %
|                                                        |  |                          |     |      |  |      |     |   |  |  |     |  

At December 31, 2002, the Company has net
operating loss carryforwards available to reduce future income
subject to income taxes for federal and state income tax
purposes of approximately $23.7 million and
$20.9 million, respectively. Deferred tax assets and the
related valuation allowance include approximately
$1.1 million related to certain U.S. operating loss
carryforwards resulting from the exercise of stock options; the
tax benefit, if recognized, will be accounted for as a credit to
additional paid-in capital rather than a reduction of income tax
expense.

Net operating loss carryforwards expire from 2003
to 2022. In addition, the Company has research and development
tax credit carryforwards of approximately $1.5 million for
federal income tax purposes and $1.0 million for state
income tax purposes at December 31, 2002, which expire from
2013 to 2022.

61



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##### Table of Contents



iMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Pursuant to the provisions of Section 382 of
the Internal Revenue Code, utilization of net operating losses
is subject to annual limitations due to a greater than 50%
change in ownership of the Company which occurred during 1998
and 1999.

Cash paid for income taxes was $82,000, $62,000
and $122,000 in 2002, 2001 and 2000, respectively.



|    |                           
|--- | --------------------------
|15. | Related Party Transactions

The Companys Chief Executive Officer is the
owner of a consulting company, which subleased space from the
Company and provided recruiting services to the Company. In
addition, the Company reimbursed the consulting company for
certain travel expenses and other services incurred on its
behalf and for the use of certain assets. The Company
discontinued the sublease and recruiting activities during the
third quarter of 2002. Additionally, the Company engaged certain
of the consulting companys consultants to provide software
development services. In 2002 and 2001, the charges related to
consulting and other service expense were limited to the salary,
employer taxes and travel expenses of the related consultant,
who was hired by the Company in December of 2002.

Amounts included in net loss which were paid,
received or due to or from this related party are as follows (in
thousands):

|                                      |  |                          |     |      |  |      |     |  |  |   |     | 
|------------------------------------- |  | ------------------------ | --- | ---- |  | ---- | --- |  |  | - | --- | 
|                                      |  |                         
|                                      |  | Years Ended December 31,
|                                      |  |                         
|                                      |  | 2002                     |     | 2001 |  | 2000
|                                      |  |                          |     |      |  |     
|Sublease rent income                  |  | $                        | 15  |      |  | $    | 52  |  |  | $ | 92  | 
|Consulting and other services expense |  |                          | 292 |      |  |      | 129 |  |  |   | 439 | 

On April 2, 2002, the Company made a loan of
$750,000 to its Chief Operating Officer for the purchase of his
primary residence. The loan bears interest at 5% per annum and
principal and interest are due on the earlier of
(i) April 2, 2007, (ii) the date six months
following his voluntary resignation or termination for cause or
(iii) any event of default under the collateralized note
evidencing the loan. If the Chief Operating Officer exercises
common stock options and sells the related common stock, 50% of
the proceeds of the sale must be applied to the amount due under
the loan. The loan is collateralized by (i) the shares or
proceeds realized by the Chief Operating Officer upon the
exercise of options to purchase the Companys common stock,
and (ii) a second deed of trust on the personal residence
of the Chief Operating Officer. As of December 31, 2002,
the principal balance of the loan was $641,000 and was included
in Other Assets in the Companys consolidated balance
sheet. See Note 7  Other Assets

On April 5, 2000, the Company made a loan to
its former Chief Financial Officer of $1.0 million. The
loan bears interest at 5% per annum and principal and interest
will become due on the earlier of December 31, 2008 or the
date upon which the former Chief Financial Officer will have the
ability to sell common stock, subject to Company policy, if
applicable, at a price of $20 per share or higher. The loan is
collateralized by 165,000 shares of the Companys common
stock currently beneficially owned by the former Chief Financial
Officer. As of December 31, 2002, the principal balance of
the loan was $1.0 million and was included in Other Assets in
the Companys consolidated financial statements. See Note
7  Other Assets.

In June 1999, the Company granted its former Vice
President of Business Development an option to purchase 180,000
shares of the Companys common stock at an exercise price
of $1.65 per share. In July 1999, the former officer exercised
the option in full with funds the Company loaned her under a
full recourse promissory note approved by the Board of
Directors. The promissory note accrues interest at the rate of
4.9% per year and was due on July 26, 2001. The due date
has been extended to September 1, 2003. See Note
12  Stockholders Equity.

62



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##### Table of Contents



iMANAGE, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                           
|--- | ----------------------------------------------------------
|16. | Significant Customer Information and Segment
    Reporting

The Companys chief operating decision-maker
is considered to be the Chief Executive Officer. The Chief
Executive Officer reviews financial information presented for
purposes of making operating decisions and assessing financial
performance. The financial information is identical to the
information presented in the accompanying consolidated
statements of operations and the Company had no significant
foreign operations through December 31, 2000. For 2002 and
2001, revenues derived from customers outside the United States
represented 20% and 9% of total revenues, respectively, and
consisted primarily of customers in the United Kingdom. On this
basis, the Company is organized and operates in a single
segment: the design, development and marketing of software
solutions.

At December 31, 2002, no customer accounted
for more than 10% of the Companys accounts receivable
balance, while one customer accounted for 16% of the accounts
receivable balance at December 31, 2001. No customer
accounted for more than 10% of total revenues in 2002, 2001 and
2000.



|    |                 
|--- | ----------------
|17. | Subsequent Event

On March 21, 2003, the Company exercised an
option to terminate the lease for its facility in Chicago,
Illinois which as a result will expire on April 30, 2004 and
entered into a new facilities lease for approximately 39,000
square feet in the Chicago area on March 17, 2003. In
connection with the lease termination, the Company incurred a
lease termination fee of $986,000, which will be charged to
expense in the first quarter of 2003. The new facilities lease
commences no later than August 1, 2003, is non-cancelable
and expires in 2016. The Companys research and
development, customer support, training and certain sales and
marketing personnel are expected to relocate to this new
facility in August 2003. The Company expects to charge to
expense, upon vacating the facility subject to the terminated
lease, the remaining lease payments due under the terminated
lease agreement from the date of occupancy of the new facility
to April 30, 2004, which is currently estimated to be
$650,000. The new lease agreement provides for cash payments
from the landlord sufficient to offset the lease termination fee
and provides for a period of free rent for the initial
12 months of the lease agreement including operating costs,
and an additional 2 months of free rent, excluding
operating costs, in each of the second, third and fourth years
of the lease agreement. The free rent period and the cash
payments from the landlord will reduce rental expenses for the
new facility on a ratable basis over the term of the new lease

Future minimum lease payments, including the
effects of these transactions are as follows (in thousands):

|                          |  |   |        | 
|------------------------- |  | - | ------ | 
|Years Ending December 31, |  |  
|                          |  |  
|2003                      |  | $ | 1,497  | 
|2004                      |  |   | 1,144  | 
|2005                      |  |   | 1,382  | 
|2006                      |  |   | 1,424  | 
|2007                      |  |   | 1,466  | 
|Thereafter                |  |   | 7,082  | 
|                          |  |   |        | 
|                          |  | $ | 13,995 | 
|                          |  |   |        | 

The Company obtained a $1.0 million standby
letter of credit from a financial institution on March 17,
2003, in lieu of security deposits for lease office space. No
amounts have been drawn against the letter of credit.

63



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on March 26, 2003.



| |              
| | -------------
| | iMANAGE, INC.



| |     |                        
| | --- | -----------------------
| | By: | /s/ MAHMOOD M. PANJWANI

| |                                   
| | ----------------------------------
| |                                   
| | Mahmood M. Panjwani               
| | President, Chief Executive Officer
| | and Chairman of the Board         

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE
PRESENTS,that each person whose
signature appears below constitutes and appoints Mahmood M.
Panjwani and John E. Calonico, Jr., and each or any one of them,
his true and lawful attorney-in-fact and agent, with full power
of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all
amendments to this Annual Report on Form 10-K, and to file
the same, with all exhibits thereto, and other documents in
connection therewith, with the Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as
fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming our signatures as they
may be signed by ours said attorney-in-fact and any and all
amendments to this Annual Report on Form 10-K.

Pursuant to the requirements of the Securities
Exchange Act of 1934, this Annual Report on Form 10-K has
been signed by the following persons in the capacities and on
the dates indicated.

|                                               |  |                                                                                                             |  |                |  | 
|---------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|                                               |  |                                                                                                             |  |               
|Signature                                      |  | Title                                                                                                       |  | Date          
|                                               |  |                                                                                                             |  |               
|/s/ MAHMOOD M. PANJWANIMahmood M. Panjwani     |  | Chairman of the Board of Directors, President and
    Chief Executive Officer (Principal Executive Officer) |  | March 26, 2003
|                                              
|/s/ JOHN E. CALONICO, JR.John E. Calonico, Jr. |  | Vice President and Chief Financial Officer
    (Principal Financial and Accounting Officer)                 |  | March 26, 2003
|                                              
|/s/ RAFIQ R. MOHAMMADIRafiq R. Mohammadi       |  | Chief Technology Officer, Vice President of
    Engineering and Director                                    |  | March 26, 2003
|                                              
|/s/ BOB L. COREYBob L. Corey                   |  | Director                                                                                                    |  | March 26, 2003
|                                              
|/s/ THOMAS L. THOMASThomas L. Thomas           |  | Director                                                                                                    |  | March 26, 2003
|                                              
|/s/ MOEZ R. VIRANIMoez R. Virani               |  | Director                                                                                                    |  | March 26, 2003

64



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##### Table of Contents



CERTIFICATIONS

I, Mahmood M. Panjwani, Chief Executive Officer
of the registrant, certify that:



| |    |                                                                                                                                                                                                                                                                                                                                                      
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this Annual Report on
    Form 10-K of iManage, Inc.;                                                                                                                                                                                                                                                                                
|
| | 2. | Based on my knowledge, this Annual Report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary in order to make the statements
    made, in light of the circumstances under which such statements
    were made, not misleading with respect to the period covered by
    this Annual Report;
|
| | 3. | Based on my knowledge, the consolidated financial
    statements, and other financial information included in this
    Annual Report, fairly present in all material respects the
    financial condition, results of operations and cash flows of the
    registrant as of, and for, the periods presented in this Annual
    Report;               
|
| | 4. | The registrants other certifying officer
    and I am responsible for establishing and maintaining disclosure
    controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                                  



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



| |    |                                                                                                                                                                                                                                                                  
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officer
    and I have disclosed, based on our most recent evaluation, to
    the registrants auditors and the Audit Committee of the
    registrants Board of Directors (or persons performing the
    equivalent function):



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



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



| |                        
| | -----------------------
| | /s/ MAHMOOD M. PANJWANI
| |                        
| | Mahmood M. Panjwani    
| | Chief Executive Officer

Dated: March 26, 2003

65



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##### Table of Contents



CERTIFICATIONS

I, John E. Calonico, Jr., Chief Financial Officer
of the registrant, certify that:



| |    |                                                                                                                                                                                                                                                                                                                                                      
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this Annual Report on
    Form 10-K of iManage, Inc.;                                                                                                                                                                                                                                                                                
|
| | 2. | Based on my knowledge, this Annual Report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary in order to make the statements
    made, in light of the circumstances under which such statements
    were made, not misleading with respect to the period covered by
    this Annual Report;
|
| | 3. | Based on my knowledge, the consolidated financial
    statements, and other financial information included in this
    Annual Report, fairly present in all material respects the
    financial condition, results of operations and cash flows of the
    registrant as of, and for, the periods presented in this Annual
    Report;               
|
| | 4. | The registrants other certifying officer
    and I am responsible for establishing and maintaining disclosure
    controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                                  



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



| |    |                                                                                                                                                                                                                                                                  
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officer
    and I have disclosed, based on our most recent evaluation, to
    the registrants auditors and the Audit Committee of the
    registrants Board of Directors (or persons performing the
    equivalent function):



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



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



| |                          
| | -------------------------
| | /s/ JOHN E. CALONICO, JR.
| |                          
| | John E. Calonico, Jr.    
| | Chief Financial Officer  

Dated: March 26, 2003

66



---



##### Table of Contents



iMANAGE, INC.






EXHIBITS TO FORM 10-K ANNUAL REPORT


For the Year Ended December 31,
2002


|        |    |                         |  |                                                                                                                                                                                                                                                                                        
|------- | -- | ----------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |                        
|Number  |    | Description of Document
|        |    |                        
|        | 2  | .1*                     |  | Agreement and Plan of Reorganization, dated as of
    April 11, 2000 by and among iManage, Inc., a Delaware
    corporation, NetRight Technologies, Inc., a Delaware corporation
    and a wholly owned subsidiary of iManage, Inc., and ThoughtStar,
    Inc., a Delaware corporation.
|        | 3  | .1**                    |  | Restated Certificate of Incorporation of iManage,
    Inc.                                                                                                                                                                                                                             
|        | 3  | .2**                    |  | Amended and Restated Bylaws of iManage, Inc.                                                                                                                                                                                                                                           
|        | 4  | .1***                   |  | Amended and Restated Rights Agreement as of
    May 5, 2000.                                                                                                                                                                                                                           
|        | 10 | .1**                    |  | Form of Indemnification Agreement for directors
    and executive officers.                                                                                                                                                                                                            
|        | 10 | .2**                    |  | 1997 Stock Option Plan and forms of Incentive
    Stock Option Agreement and Nonstatutory Stock Option Agreement
    thereunder.                                                                                                                                                       
|        | 10 | .3**                    |  | 1999 Employee Stock Purchase Plan and form of
    subscription agreement thereunder.                                                                                                                                                                                                   
|        | 10 | .7**                    |  | Office Building Lease for 55 East Monroe Street
    between TST 55 East Monroe, LLC and the Company dated
    January 1999, as amended to date.                                                                                                                                        
|        | 10 | .8**                    |  | Sublease between the Company and Q-Image
    Corporation dated December 5, 1998.                                                                                                                                                                                                       
|        | 10 | .10***                  |  | Employment Agreement dated September 7,
    2000, between iManage, Inc. and Joseph Campbell.                                                                                                                                                                                           
|        | 10 | .11***                  |  | Secured Promissory Note dated April 5, 2000
    by Mark Culhane to iManage, Inc.                                                                                                                                                                                                       
|        | 10 | .12***                  |  | Stock Pledge Agreement dated April 5, 2000
    by and between Mark Culhane, the Culhane Family Revocable Trust
    and iManage, Inc.                                                                                                                                                   
|        | 10 | .13                    |  | Sublease between Hyperion Solutions Corporation
    and iManage, Inc. dated January 17, 2002.                                                                                                                                                                                          
|        | 10 | .14                   |  | Secured Promissory Note dated April 2, 2002
    by Joseph Campbell to iManage, Inc.                                                                                                                                                                                                    
|        | 10 | .15                    |  | Stock Pledge Agreement dated April 2, 2002
    by and between Joseph Campbell and iManage, Inc.                                                                                                                                                                                        
|        | 10 | .16                    |  | Deed of Trust dated April 2, 2002 by Joseph
    Campbell and Teresa B. Campbell in favor of iManage, Inc.                                                                                                                                                                              
|        | 10 | .17                     |  | Amended and Restated Loan and Security Agreement
    by and between Silicon Valley Bank and iManage, Inc. dated
    December 16, 2002                                                                                                                                                  
|        | 10 | .18                     |  | Office Lease for 303 East Wacker, Chicago,
    Illinois between 303 Wacker Realty LLC and iManage, Inc. dated
    March, 17, 2003                                                                                                                                                      
|        | 21 |                         |  | Subsidiaries of iManage, Inc.                                                                                                                                                                                                                                                          
|        | 23 | .1                      |  | Consent of Independent Accountants                                                                                                                                                                                                                                                     
|        | 24 | .1                    |  | Power of Attorney (see signature page).                                                                                                                                                                                                                                                
|        | 99 | .1                      |  | Certification of Chief Executive Officer under
    Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                       
|        | 99 | .2                      |  | Certification of Chief Financial Officer under
    Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                       



---



| |   |                                                                      
| | - | ---------------------------------------------------------------------
| | * | Filed with the Registrants Report on
    Form 8-K for June 21, 2000.



| |    |                                                                                                                              
| | -- | -----------------------------------------------------------------------------------------------------------------------------
| | ** | Filed with the Registrants Registration
    Statement on Form S-1 (File No. 333-86353) on
    September 1, 1999, as amended.



|    |                                                                                          
|--- | -----------------------------------------------------------------------------------------
|*** | Filed with the Registrants Report on
    Form 10-K for the year ended December 31, 2000.



| |   |                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------
| |  | Filed with the Registrants Report on
    Form 10-K for the year ended December 31, 2001 filed
    on March 29, 2002.



| |    |                                                                                                                         
| | -- | ------------------------------------------------------------------------------------------------------------------------
| |  | Filed with the Registrants Report on
    Form 10-K/ A for the year ended December 31, 2001
    filed on April 30, 2002.